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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1997
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
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FRIEDE GOLDMAN INTERNATIONAL INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 72-1362492
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
525 EAST CAPITOL STREET, SUITE 402 39201
JACKSON, MISSISSIPPI (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
(601) 352-1107
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
(TITLE OF CLASS)
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. [_]
As of March 10, 1998, there were 24,492,793 shares of Common Stock, $.01 par
value, of Friede Goldman International Inc. issued and outstanding, 11,710,613
of which, having an aggregate market value of approximately $338.5 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).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement related to the registrant's 1998 annual
meeting of stockholders, which proxy statement will be filed under the
Securities Exchange Act of 1934 within 120 days of the end of the registrant's
fiscal year ended December 31, 1997, are incorporated by reference into Part
III of this Form 10-K.
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TABLE OF CONTENTS
PART I
Item 1. Business........................................................ 3
Risk Factors.................................................... 11
Item 2. Properties...................................................... 14
Item 3. Legal Proceedings............................................... 15
Item 4. Submission of Matters to A Vote of Security Holders............. 16
Executive Officers of the Registrant............................ 16
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters............................................ 17
Item 6. Selected Financial Data......................................... 17
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 18
Item 8. Financial Statements and Supplementary Data..................... 24
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................... 24
PART III
Item 10. Directors and Executive Officers of the Registrant.............. 24
Item 11. Executive Compensation.......................................... 24
Item 12. Security Ownership of Certain Beneficial Owners and Management.. 24
Item 13. Certain Relationships and Related Transactions.................. 24
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. 24
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FORWARD-LOOKING STATEMENTS
This Report on Form 10-K contains "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. All statements, other
than statements of historical facts, included in this Form 10-K, are forward-
looking statements. Such forward-looking statements are subject to certain
risks, uncertainties and assumptions, including (i) risks of reduced levels of
demand for the Company's products and services resulting from reduced levels
of capital expenditures of oil and gas companies relating to offshore drilling
and exploration activity and reduced levels of capital expenditures of
offshore drilling contractors, which levels of capital expenditures may be
affected by prevailing oil and natural gas prices, expectations about future
oil and natural gas prices, the cost of exploring for, producing and
delivering oil and gas, the sale and expiration dates of offshore leases in
the United States and overseas, the discovery rate of new oil and gas reserves
in offshore areas, local and international political and economic conditions,
the ability of oil and gas companies to access or generate capital sufficient
to fund capital expenditures for offshore exploration, development and
production activities, and other factors, (ii) risks related to expansion of
operations, either at its shipyards or one or more other locations, (iii)
operating risks relating to conversion, retrofit and repair of drilling rigs,
new construction of drilling rigs and production units and the design of new
drilling rigs, (iv) contract bidding risks, (v) risks related to dependence on
significant customers, (vi) risks related to the failure to realize the level
of backlog estimated by the Company due to determinations by one or more
customers to change or terminate all or portions of projects included in such
estimation of backlog and (vii) risks related to regulatory and environmental
matters. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary
materially from those anticipated, estimated or projected. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable, no assurance can be given that such expectations
will prove to have been correct.
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ITEM 1. BUSINESS
Friede Goldman International Inc. (together with its subsidiaries, the
"Company") provides offshore drilling services, including conversion,
retrofit, repair and modification of offshore drilling rigs. The Company also
has the capability to design, build and equip new construction offshore
drilling rigs. The Company was formed in February 1997 to hold the combined
assets of HAM Marine, Inc. ("HAM Marine") and Friede & Goldman, Ltd. ("F&G
Ltd.") and completed an initial public offering in July of 1997. Through HAM
Marine, now a subsidiary, the Company has been continuously engaged in the
business of converting, retrofitting and repairing offshore drilling rigs
since 1982. Moreover, through F&G Ltd., also now a subsidiary, the Company has
been continuously engaged in the business of offshore rig design for more than
50 years. The Company's 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 and areas offshore of West Africa and South America.
RECENT DEVELOPMENTS
At the time of its initial public offering, the Company conducted all of its
conversion, retrofit and repair services at its 32-acre shipyard, located in
Pascagoula, Mississippi (the "Pascagoula Facility"). Since that time, the
Company has (i) opened its new shipyard on Greenwood Island, Mississippi (the
"Greenwood Island Facility"), (ii) added two Canadian shipyards to its
operations and (iii) acquired a group of affiliated French companies engaged
in the design and fabrication of marine and offshore rig deck equipment.
However, as each of these developments occurred after December 31, 1997, they
had no material effect on the Company's results of operations for the year
ended on such date.
Opening of Greenwood Island Facility. In January 1998, the Company opened
the Greenwood Island Facility, a state-of-the-art shipyard on an 85-acre site
located approximately six miles from the Pascagoula Facility. The new shipyard
was specifically designed to promote efficient construction of new offshore
drilling rigs. The Company expects the shipyard to become fully operational in
the second half of 1998. Upon completion, the new shipyard will allow the
Company to simultaneously construct, in varying phases, up to six jackup and
two semisubmersible offshore drilling rigs. The Company is currently
performing deckwork and outfitting on one Bingo 7000 design semisubmersible
drilling unit at the new shipyard.
Acquisition of Marystown Facilities. On January 1, 1998, the Company
acquired two deepwater, ice-free shipyard and fabrication facilities located
in Marystown, Newfoundland, Canada (the "Marystown Facilities") from two
entities controlled by the Province of Newfoundland. The Canadian facilities
give the Company additional shipyard capacity and proximity to drilling areas
off the eastern coast of Canada and in the North Sea. The Company paid one
dollar to acquire the shipyards, but pursuant to the terms of the acquisition
agreement, the Company also agreed to (i) maintain a minimum number of
employee manhours with respect to the acquired shipyard operations through the
year 2,000, (ii) undertake certain capital improvements at the acquired
shipyards and (iii) pay fifty percent (50%) of net after-tax profits of the
acquired shipyards for the twelve-month period ending March 31, 1998 to the
Province of Newfoundland. The Company has already subcontracted to the
Marystown Facilities certain fabrication projects related to a retrofit
project and a conversion project currently ongoing in Pascagoula.
Acquisition of BLM Companies. The Company acquired Achere, S.A., a French
societe anonyme ("Achere"), its wholly owned subsidiary France Marine S.A.
("France Marine") and the four operating subsidiaries of France Marine:
Brissoneau & Lotz Marine S.A. ("BLM"), Brissoneau & Lotz Marine Offshore, S.A.
("BLM Offshore"), BOPP S.A. ("BOPP") and Kerdranvant S.A.R.L. ("Kerdranvant")
as of February 5, 1998. These entities are collectively referred to herein as
the "BLM Companies." France Marine is a holding company, and the operating
subsidiaries are engaged in the design and fabrication of deck equipment used
by offshore drilling rigs and other marine vessels. BLM and BLM Offshore are
based in Carquefou, France (near Nantes), and BOPP and Kerdranvant have
operations in Lanveoc, France (near Brest). BLM designs and manufactures deck
machinery, including mooring, anchoring and cargo handling equipment. BLM
Offshore
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designs and manufactures rack-and-pinion jacking systems used on offshore
drilling platforms. BOPP manufactures trawl and draw net winches for inshore
and ocean going fishing vessels and equipment for service vessels and
hydrographical survey ships. Kerdranvant manufactures hydraulic power and
rack-and-pinion steering systems used in all types of vessels. The Company
paid approximately $25 million to acquire the BLM Companies.
OVERVIEW OF OFFSHORE DRILLING EQUIPMENT
The Company's primary customers are drilling contractors with operations in
the Gulf of Mexico, the North Sea, offshore West Africa 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. 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 the Company is set forth below.
Semisubmersibles. Semisubmersible 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. The rig is typically anchored in position
and remains stable for drilling in the semi-submerged floating position.
There have been four generations of semisubmersible drilling rigs, with each
successive generation incorporating improvements which enable the rigs to
drill more efficiently and in increasingly harsh marine environments. Fourth
generation semisubmersibles are typically capable of operating in water depths
of up to 5,000 feet and, in some cases, greater depths. Certain fourth
generation semisubmersibles are equipped with computer controlled thrusters to
allow for dynamic positioning of the rig, which allows it to remain on
location over a drillsite in deep waters without the use of anchors.
While the Company has performed some modification and repair work on fourth
generation semisubmersibles, the majority of the Company's work to date has
involved the retrofit and repair of earlier generation semisubmersibles which
generally operate in maximum water depths of between 1,000 to 2,000 feet. The
design of many of these semisubmersible rigs, including long fatigue-life and
advantageous stress characteristics, together with increasing demand for
deepwater drilling capabilities have made them well-suited for significant
retrofitting projects. The Company completed three projects involving
semisubmersibles in 1997 and at March 1, 1998 was working on the conversion of
three submersibles into semisubmersibles, the retrofit of one semisubmersible
for deep water, the retrofit of one DP heavy lift derrick barge and the new
build completion of one semisubmersible hull. At March 1, 1998, the Company
also had entered into contracts to convert two additional submersibles into
semisubmersibles and to perform a new build completion on one additional
semisubmersible hull.
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 400 feet. Some jackup rigs have a lower hull (mat) attached to the
bottom of the rig legs, while others have independent legs.
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
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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. Many slot-design rigs have been
converted to cantilever configurations. The Company completed two projects
involving jackups in 1997.
Drillships. Drillships, which are typically self-propelled, are positioned
over a drillsite through the use of either a mooring system or a computer
controlled thruster (dynamic positioning) system similar to those used on
certain fourth generation semisubmersible rigs. Drillships are capable of
operating in water depths ranging from 200 feet to 10,000 feet. The Company
did not work on any projects involving drillships in 1997.
Floating Production Facilities. A floating production facility ("FPF")
consists of a ship or semisubmersible vessel upon which drilling and
production equipment is mounted. In most cases, the hull is a converted tanker
(often referred to as a floating, production, storage and offloading, or FPSO,
unit). In addition, semisubmersible drilling units have been converted into
floating production units. In a few cases, a new hull has been purpose-built
as a 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. The Company did not work on
any projects involving FPFs in 1997.
DESCRIPTION OF OPERATIONS
In the year ended December 31, 1997, the Company's operations consisted
primarily of conversion, retrofit and repair projects for offshore drilling
contractors. Significant conversion or retrofit projects such as these
generally take eight to 14 months to complete, whereas certain repair projects
may require only one to three months to complete. The Company has not yet
undertaken any new rig construction projects. However, with the acquisition of
the deck equipment design and fabrication operations of the BLM Companies, the
Company now offers services in all phases of new offshore rig construction
from design and engineering, to manufacturing and equipment sales.
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
semisubmersible rig, or the conversion of a drilling rig or tanker into a FPF.
FPF conversions typically require the demolition and removal of all drilling
equipment and substructure (including the derrick system, rotary system,
tubulars, mud treating and pumping units and well control systems) and the
reconfiguration of the decks to accommodate heavy skid mounted processing
modules and 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, the Company
is typically required to complete hull reinforcements and buoyancy and
stability enhancements.
The Company completed three conversions in 1997 (two involving jackups and
one involving a river barge) and at March 1, 1998 was in the process of
converting three submersibles into semisubmersibles and had entered into
contracts to convert two additional submersibles into semisubmersibles.
Retrofits. Retrofits consist generally of improvements to the technical
capabilities, tolerances and systems of drilling and production equipment.
Retrofits performed on semisubmersible 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. The
Company is 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.
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The Company completed two retrofit projects in 1997 and at March 1, 1998 was
in the process of retrofitting one semisubmersible and one DP heavy lift
derrick barge.
Repairs. The Company performs a broad range of inspection and repair work
for its clients. 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. The Company's 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.
The Company completed repair work on three rigs in 1997 and completed an
additional repair project in February of 1998.
Design and New Construction. The Greenwood Island Facility was designed
specifically for the efficient construction of new offshore drilling rigs.
Moreover, the combined capacity of the Greenwood Island Facility and the
Pascagoula Facility will allow the Company to work on new construction
projects without any significant loss in its capacity to perform conversion,
retrofit and repair projects. At March 1, 1998, the Company was working on the
new build completion of one semisubmersible hull and entered into a contract
to perform a new build completion on one additional semisubmersible hull. A
new build completion project involves the design and construction of a
drilling rig on an existing hull.
Marine Deck Equipment. With the acquisition of the BLM Companies, the
Company entered the rig equipment and rig component manufacturing market. The
BLM Companies design and manufacture mooring, anchoring, rack-and-pinion
jacking systems, cargo handling equipment and steering systems. As a result,
the Company now has 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 cranes.
CUSTOMERS AND MARKETING
The Company's customers are primarily offshore drilling contractors, many of
whom have been customers of the Company for more than 15 years, and the
Company believes that it has developed strong relationships with its customer
base. The Company's marketing efforts are conducted from its sales offices in
Pascagoula and Houston and target drilling contractors located primarily in
the Gulf Coast area and in Europe. The Company's sales staff attempts to
identify future contracts by contacting its clients on a regular basis (in
some cases weekly) in order to anticipate projects that will be competitively
bid or negotiated exclusively with the Company. The Company's sales force
often invites potential clients to the Pascagoula and Greenwood Island
Facilities for a tour and presentation.
A large portion of the Company's revenue has historically been generated by
a few customers although not necessarily the same customers from year-to-year.
For example, the Company's largest customers (those which individually
accounted for more than 10% of revenue in a particular year) collectively
accounted for 82%, 84% and 70% of revenue for 1995, 1996 and 1997,
respectively. In 1997, the Company derived more than 10% of its revenue from
each of Noble Drilling Corporation and Sedco Forex S.A. Because the level of
conversion, retrofit or repair work that the Company 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
The Company generally performs conversion, retrofit and repair services
pursuant to contracts that 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
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cost-plus basis. In many cases, the Company commences work with respect to
certain portions of a drilling rig conversion, retrofit or repair project on a
cost-plus arrangement as soon as the drilling rig arrives in the Company's
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 may
arrive in the Company's 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 many of
these cases, the portion of the project as to which no firm pricing
arrangement has been agreed to at the time the drilling rig arrives at the
Company's shipyard 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 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 portions of a project, the Company receives
the price fixed in the contract for such aspect of the project, subject to
adjustment only for change orders placed by the customer. The Company
typically receives a significant number of change orders on each of its fixed-
price projects as to which the Company and its customer negotiate a separate
charge. With respect to fixed-price contracts, the Company generally retains
the ability to capture cost savings and must absorb cost over-runs. Under
cost-plus arrangements, the Company receives specified amounts in excess of
its direct labor and materials cost and so is protected against cost overruns
but does not benefit directly from cost savings. The Company generally prices
materials at a mark-up under its contracts. The Company believes that recently
it has realized a majority of its revenue under fixed-price contracts,
although historically the percentages of revenue it has derived from fixed-
price contracts 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 its
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.
COMPETITION
The Company has two primary domestic competitors for conversion, retrofit
and repair projects for drilling rigs that operate in the Gulf of Mexico. In
international markets, the Company competes primarily with two additional
companies. The Company believes it competes favorably against companies
located in Europe or the Far East for conversion, retrofit and repair 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 the Company's favorable geographic
location. The Company believes that the addition of the Marystown Facilities
will further enable the Company to compete favorably for conversion, retrofit
and repair projects relating to drilling rigs operating in the North Sea and
offshore Canada. The Company expects that one other shipyard will compete for
fabrication projects on the eastern coast of Canada. The Company believes that
its low cost structure in Canada allows it to compete favorably in bidding for
future work in that country.
The Company believes that its reputation for quality and reliability, its
long-standing relationships with most of the large drilling contractors, its
experienced management team, its existing skilled labor force and its
extensive fabrication experience with drilling rigs are its key advantages in
competing for projects. The Company considers four domestic and five foreign
international companies to be its primary competitors in the new rig
construction business. The Company believes that its long involvement in the
design of new drilling rigs and production units will provide it with a
competitive advantage with respect to the new rig construction business.
The Company believes that certain barriers exist that prevent new companies
from competing with the Company for conversion, retrofit and repair
activities, as well as for new rig construction activity, 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
small projects more easily,
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management believes these factors will likely prevent an increase in domestic
competition for larger projects, especially major conversions and retrofits
and new rig construction.
The Company has two principal global competitors, both based in the United
States, in the design and manufacture of deck equipment. However, prior to
their acquisition by the Company, the BLM Companies did not actively market in
the United States and competed against the other two companies primarily
outside the United States. The Company plans to immediately begin marketing
its product line of anchoring winches, cranes for jackup and semisubmersible
drilling units, mooring equipment, deck machinery, jacking equipment and
skidding equipment in the United States. Plans are underway to increase the
capacity of the fabrication facilities in France and to develop production
capability in North America. The Company anticipates that products of the BLM
Companies will be produced domestically within 12 months.
BACKLOG
As of December 31, 1997, the Company's backlog was approximately $324.6
million, approximately two-thirds of which management expects to be performed
within the 12 months ending December 31, 1998. The Company's backlog as of
December 31, 1996 was approximately $15 million.
The Company's backlog is based on management's 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 the
Company to begin work or purchase materials and (ii) projects, or portions of
projects, that have been awarded to the Company as to which the Company has
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's estimate of the
total revenue for such projects is likely to change. In addition, all projects
currently included in the Company's backlog are subject to termination at the
option of the customer, although the customer in that case is generally
required to pay the Company for work performed and materials purchased.
MATERIALS
The principal materials used by the Company in its fabrication business are
standard steel shapes, steel plate, pipe, welding wire and gases, fuel oil,
gasoline and paint. The Company believes that such materials are currently
available in adequate supply from many sources. The Company does not depend
upon any single supplier or source.
SAFETY AND QUALITY ASSURANCE
Management is concerned with the safety and health of the Company's
employees and maintains a stringent safety assurance program to reduce the
possibility of accidents. The Company's safety department establishes
guidelines to ensure compliance with all applicable foreign, federal and state
safety regulations. At its Mississippi facilities, the Company provides
training and safety education through orientations for new employees and
subcontractors, weekly crew safety meetings and first aid and CPR training.
The Company also employs a registered nurse as an in-house medic. The Company
has a comprehensive drug program and conducts periodic employee health
screenings. A safety committee, whose members consist of management
representatives and field supervisors, meet monthly to discuss safety concerns
and suggestions that could prevent future accidents. The Company has
contracted with a third party safety consultant to provide training and
suggestions and a licensed emergency medical technician in its ongoing
commitment to a safe and healthy work environment. The Company expects to
institute similar practices at its foreign facilities to the extent not
already in place. The Company believes that its safety program and commitment
to quality are vital to attracting and retaining customers and employees.
The Company's Pascagoula and Greenwood Island Facilities fabricate according
to the standards of the American Bureau of Shipping, Det Norski Veritas,
American Petroleum Institute, the American Welding Society, the American
Society of Mechanical Engineers and specific customer specifications. The
Company's
8
international operations fabricate according to certain of the above standards
and certain additional standards, including those of the Lloyds Registry of
Shipping, the Canadian Welding Bureau and Bureau Veritas. All of the Company's
welding and fabrication procedures are performed in accordance with the latest
technology and industry requirements. The Company also maintains training
programs at each of its facilities to train skilled personnel and to maintain
high quality standards. Management believes that these programs enhance the
quality of its products and reduce their repair rate.
GOVERNMENT AND ENVIRONMENTAL REGULATION
Overview. Many aspects of the Company's 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
operation of vessels. For example, the Company is 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. The Company believes that its 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, the Company depends on the demand for its services from the oil
and gas industry and, therefore, is 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 constitute a significant portion of the
Company's revenues. While the Company is not aware of any proposals to reduce
the frequency or scope of such inspections, any such reduction could adversely
affect the Company's 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, the business and prospects of the Company
could be adversely affected. The Company cannot determine to what extent
future operations and earnings of the Company may be affected by new
legislation, new regulations or changes in existing regulations.
The Company has recently purchased a towable drydock vessel. Employees of
the Company who are engaged in offshore activities relating to such vessel may
be covered by the provisions of the Jones Act, the Death on the High Seas Act
and general maritime law, which laws operate to make the liability limits
established under state workers' compensation laws inapplicable to these
employees and, instead, permit them or their representatives to pursue actions
against the Company for damages or job related injuries, with generally no
limitations on the Company's potential liability.
Environmental. The Company's 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
9
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, the Company
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 the Company to liability for the conduct of or conditions
caused by others, or for acts of the Company 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, regulate air emissions, water discharges, hazardous
substances and wastes, and require public disclosure related to the use of
various hazardous substances. For example, the Company's paint operations must
comply with a number of environmental regulations. All blasting and painting
is done in accordance with the requirements of the Company's air discharge
permit and disposal of paint waste is made in accordance with the National
Pollution Discharge Elimination System storm water pollution plan. Lead based
paint is vacuum blasted and all blasting debris is contained for hazardous
waste disposal. Company 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.
The Company has been classified as a "large quantity hazardous waste
generator" and is registered with the State of Mississippi 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. The Company believes that its facilities are in
substantial compliance with current regulatory standards.
In connection with the Company's 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 that may have caused subsurface contamination on
site at one of the Marystown Facilities. The Phase II investigation is
scheduled to begin within the next several months. The Newfoundland provincial
government has agreed to bear the cost of remediation procedures associated
with the Marystown Facilities and to indemnify the Company against any
environmental liabilities associated therewith.
The Company's fabrication site in Carquefou, France was named a "classified
installation" under French environmental law. Under French law, the operator
of a "classified installation" has various obligations with respect to the
site, including compliance with certain operating activities and clean-up
obligations upon cessation of the classified activity. In addition, the French
authorities may assess fines in the event of non-performance by the operator.
As a "classified installation", the site operates under an Arrete Prefectoral,
or administrative authorization, issued by regional environmental authorities.
An administrative authorization with respect to the Carquefou site was granted
in July of 1984 and renewed in January 1991. The administrative authorization
requires, among other things, that the Company follow any instructions that
authorities may impose in the interest of public health and agriculture and
gives them the right to conduct tests on air and waste quality at the site at
any time. The Company does not believe that "classified installation" status
of the Carquefou site or the requirements of the administrative authorization
will have a material effect on its operations.
The Company's compliance with environmental laws and regulations has
entailed certain additional expenses and changes in operating procedures. The
Company believes that compliance with these laws and regulations will not have
a material adverse effect on the Company's 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 by the
Company, which expenditures may be material.
10
Health and Safety Matters. The Company's facilities and operations are
governed by laws and regulations, including the federal Occupational Safety
and Health Act, relating to worker health and workplace safety. The Company
believes that appropriate precautions are taken to protect employees and
others from workplace injuries and harmful exposure to materials handled and
managed at its facilities. While it is not anticipated that the Company will
be required in the near future to expend material amounts by reason of such
health and safety laws and regulations, the Company is unable to predict the
ultimate cost of compliance with these changing regulations.
INSURANCE
The Company maintains insurance against property damage caused by fire,
flood, explosion and similar catastrophic events that may result in physical
damage or destruction to the Company's domestic and international facilities.
The Company also maintains commercial general liability insurance including
ship repairers' legal liability coverage and builders' risk coverage if
required. The Company has workers' compensation and employers' liability
insurance with respect to its Mississippi operations that satisfies the
Mississippi Workers' Compensation Act and includes the U.S. Longshore and
Harbor Workers Act and maritime and outer continental shelf endorsements. The
Company currently maintains excess and umbrella policies in addition to
primary liability insurance for up to (i) a $20 million limit with respect to
its Mississippi operation, (ii) a $30 million limit with respect to its
Canadian operations and (iii) a FRF100 million limit with respect to its
French operations. Other coverages currently in place include water pollution,
aviation, automobile and commercial crime coverage. Although management
believes that the Company's insurance is adequate with respect to all of its
domestic and international operations there can be no assurance that the
Company 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.
EMPLOYEES
The Company's workforce varies based on the level of ongoing fabrication
activity at any particular time. As of December 31, 1997, the Company had
approximately 1,120 employees. In addition, the Company added approximately
750 employees in connection with the acquisition of the Marystown Facilities
and approximately 240 employees in connection with the acquisition of the BLM
Companies. For the last several years, substantially all of the Company's work
force has been leased to the Company by employee leasing companies serving the
Company exclusively. In exchange for its leasing services, these employee
leasing companies charged the Company an amount which covered wages paid to
such employees, together with a mark-up designed to cover health and workers'
compensation insurance, the provision of a 401(k) plan, payroll taxes, all
other required insurance and a nominal return to such companies. Payments for
contract labor totaled approximately $10.9 million in 1997. All contract
leasing arrangements were terminated as of May 18, 1997, and the Company now
directly employs its employees at levels of wages and benefits substantially
equivalent to those formerly provided by the employee leasing companies. The
Company believes that the cost of directly employing its laborers will be
essentially the same as the historic cost of the employee leasing arrangement
most recently terminated.
None of the Company's United States employees is employed pursuant to a
collective bargaining agreement. The Company entered into a five-year
collective bargaining agreement with three Canadian unions in connection with
the acquisition of the Marystown Facilities. The Company is currently subject
to two collective bargaining agreements with respect to its French employees.
The Company is a member of two employers' federations which are party to the
respective collective bargaining agreements. The collective bargaining
agreements have no expiration date and, under French law, remain in force
unless canceled or modified. The Company believes that its relationship with
its employees is good.
11
RISK FACTORS
DEPENDENCE ON CONDITIONS IN THE OFFSHORE DRILLING INDUSTRY
The Company's business and operations depend principally upon conditions
prevailing in the offshore drilling industry. In particular, the level of
demand for the Company's services is affected by the level of demand for the
services of offshore drilling contractors, which 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. These capital expenditures are influenced by prevailing oil and
natural gas prices, expectations about future 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, 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. Oil prices have declined
significantly in recent months, and over the past several years, oil and
natural gas prices and the level of offshore drilling and exploration activity
have fluctuated substantially. A significant or prolonged reduction in oil or
natural gas prices in the future would likely depress offshore drilling and
development activity. A substantial reduction of such activity would reduce
demand for the Company's services and could have a material adverse effect on
the Company's financial condition and results of operations.
INTEGRATION OF ACQUISITIONS/MANAGEMENT OF GROWTH
The Company does not have an operating history with respect to the Marystown
Facilities or the BLM Companies. The acquisitions will cause a significant
increase in the Company's costs due to increased labor, lease rental and
depreciation, amortization and interest expenses in 1998. The Company's
management expects the increase in such costs will directly correlate to
anticipated increases in revenue from increased construction, conversion,
retrofit and repair activity. If such activity fails to increase to the extent
management anticipates, the Company's financial condition and results of
operations could be materially adversely effected.
The acquisition of the Marystown Facilities and the BLM Companies as well as
the development of a new drilling rig construction business represent a
significant expansion of the Company's operations and expose the Company to
additional business and operating risks and uncertainties. Such risks and
uncertainties include, among others, the ability of management of the Company
to effectively manage the expanded activities, the ability of the Company to
realize its investment in its expanded facilities, and the ability of the
Company to meet the contract obligations included in its backlog. In addition,
there can be no assurance that the Company's systems, procedures and controls
will be adequate to support the Company's operations as they expand. If the
Company is unable to manage its growth efficiently or effectively, or if it is
unable to attract and retain additional qualified management personnel and
skilled laborers, there could be a material adverse effect on the Company's
financial condition and results of operations.
OPERATING RISKS
The Company's activities relating to conversion, retrofit and repair of
drilling rigs and its proposed activities relating to new construction of
drilling rigs and production units involve the fabrication and refurbishment
of large steel structures, the operation of cranes and other heavy machinery
and other operating hazards that can cause personal injury or loss of life,
severe damage to and destruction of property and equipment and suspension of
operations. The failure of the structure of a drilling rig after the rig
leaves the Company's shipyard can result in similar injuries and damages. In
addition, the Company's employees who are engaged in offshore operations are
covered by provisions of the Jones Act, the Death on the High Seas Act and
general maritime law, which laws operate to exempt these employees from the
limits of liability established under worker's compensation laws and, instead,
permit them or their representatives to maintain actions against the Company
for damages or job-related injuries, with no limitations on the Company's
potential liability. The operation of the Company's drydock vessel can give
rise to large and varied liability risks, such as risks of collisions with
other vessels or structures, sinkings, fires and other marine casualties,
which could result in significant claims for damages against
12
both the Company and third parties for, among other things, personal injury,
death, property damage, pollution and loss of business. The failure to
adequately design a drilling rig or production unit could also result in
personal injury, loss of life or severe damage to and destruction of property
and equipment. Litigation arising from any such occurrences may result in the
Company being named as a defendant in lawsuits asserting large claims. In
addition, due to their proximity to the Gulf of Mexico, the Company's
facilities are subject to the possibility of physical damage caused by
hurricanes or flooding.
RISKS OF INADEQUATE INSURANCE
Although the Company maintains such insurance protection as it considers
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 the Company may be subject. In particular, due to the high cost of
errors and omissions policies relating to the design of drilling rigs and
production units, the Company does not carry insurance covering claims for
personal injury, loss of life or property damage relating to such design
activity. A successful claim for which the Company is not fully insured could
have a material adverse effect on the Company. Moreover, no assurance can be
given that the Company will be able to maintain adequate insurance in the
future at rates that it considers economical.
CONTRACT BIDDING RISKS
Due to the nature of the drilling rig construction industry, the Company
generally performs a portion of the work on each project on a fixed-price
basis and a portion of the work on a cost-plus basis, particularly for
projects completed in stages. With respect to the fixed-price portions of a
project, the Company receives the price fixed for such portion, and therefore
the Company must absorb any cost overruns relating to such portion of the
project. Under cost-plus arrangements, the Company receives its direct labor
cost and material cost plus specified percentages of such labor costs and
material costs. As a result, the Company is protected against cost overruns
under these cost-plus arrangements but does not benefit directly from cost
savings. See "Business--Contract Structure and Pricing."
The revenue and costs associated with the fixed-price portion of any
particular project will often vary from the amounts originally estimated
because of variations in the cost of labor and materials and variations in
productivity of labor from the original estimates. These variations and the
risks inherent in the drilling rig construction industry may result in revenue
and gross profits different from those originally estimated and may result in
reduced profitability or losses on projects. Depending on the size of a
project, variations from estimated performance may have a significant impact
on the Company's operating results for any particular fiscal quarter or year.
PERCENTAGE-OF-COMPLETION ACCOUNTING
Most of the Company's revenue is earned on a percentage-of-completion basis
based generally on the ratio of total costs incurred to the total estimated
costs. Accordingly, contract price and cost estimates are reviewed
periodically as the work progresses, and adjustments to income proportionate
to the percentage of completion are reflected in the period when such
estimates are revised. To the extent that these adjustments result in a
reduction or elimination of previously reported profits, the Company would
have to recognize a charge against current earnings, which may be significant
depending on the size of the project or the adjustment. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
DEPENDENCE ON SIGNIFICANT CUSTOMERS
A large portion of the Company's revenue has historically been generated by
a few customers, although not necessarily the same customers from year to
year. For the years ended December 31, 1995, 1996 and 1997, the Company's
largest customers (those which individually accounted for more than 10% of
revenue in a particular year) collectively accounted for 82%, 84% and 70% of
revenue, respectively. For 1997, the Company derived
13
more than 10% of its revenue from Noble Drilling Corporation and Sedco Forex
S.A. Because the level of services that the Company may provide to any
particular customer depends on that customer's needs for drilling rig
conversion, retrofit or repairs 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. However, the loss of a
significant customer for any reason, including a sustained decline in that
customer's capital expenditure budget or competitive factors, could result in
a substantial loss of revenue and could have a material adverse effect on the
Company's operating performance. See "Business--Customers and Marketing."
BACKLOG
The Company's backlog is based on management's 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 the
Company to begin work or purchase materials and (ii) projects, or portions of
projects, that have been awarded to the Company as to which the Company has
not commenced work. All projects currently included in the Company's backlog
are subject to change and/or termination at the option of the customer, either
of which could substantially change the amount of backlog currently reported.
In the case of a termination, the customer is required to pay the Company 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 the Company's backlog could
decrease substantially if one or more of these projects were to be terminated
by one or more of the Company's customers. In particular, approximately 25% of
the Company's backlog as of December 31, 1997 was attributable to three
projects, all of which were with one customer. A termination of one or more of
these large projects or the loss of a significant customer could have a
material adverse effect on the Company's revenue, net income and cash flow for
1998. See "Business--Backlog."
REGULATORY AND ENVIRONMENTAL MATTERS
The Company's operations and properties are subject to and affected by
various types of governmental regulation, including numerous foreign, federal,
state and local environmental protection laws and regulations, compliance with
which is becoming increasingly complex, stringent and expensive. These laws
may provide for "strict liability" for damages to natural resources or threats
to public health and safety, rendering a party liable for the environmental
damage without regard to its negligence or fault. 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. In addition, companies 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
the Company to liability for the conduct of or conditions caused by others, or
for acts of the Company that were in compliance with all applicable laws at
the time such acts were performed. In addition, the Company depends on the
demand for its services from the oil and gas industry and is affected by
changing taxes, price controls and other laws and regulations relating to the
oil and gas industry generally. The adoption of laws and regulations
curtailing exploration and development drilling for oil and gas for economic,
environmental and other policy reasons would adversely affect the Company's
operations by limiting demand for its services. The Company cannot determine
to what extent future operations and earnings of the Company may be affected
by new legislation, new regulations or changes in existing regulations. See
"Business--Government and Environmental Regulation."
FRIEDE ACQUISITION DEFAULT PROVISIONS
In connection with the acquisition of F&G Ltd. in December 1996 by a
predecessor to the Company, the Company is obligated to pay the former owner
(i) certain design and licensing payments on sales by F&G Ltd. of designs for
new-build vessels and (ii) specified payments in the event the Company fails
to design at least 20% of the new-build vessels ordered by U.S.-based drilling
companies (subject to a maximum payment of $1 million per year), in each case
with respect to a 10-year period that commenced in December 1996. In the event
14
the Company fails to make such required payments, the former owner will have
the right to (i) require the Company to return all F&G Ltd. assets purchased
by the Company (including the design for drilling rigs and production units in
existence at the time of the acquisition but excluding the name Friede &
Goldman and derivatives thereof and excluding new designs developed by the
Company after the acquisition) and (ii) terminate the consulting and
noncompetition provisions of such acquisition.
OBLIGATIONS TO MAINTAIN MINIMUM EMPLOYMENT LEVELS
In connection with its acquisition of the Marystown Facilities and the
construction of the Greenwood Island Facility, the Company agreed to maintain
certain minimum levels of employment at each facility and is subject to
financial penalties if it fails to do so. Under the terms of its acquisition
of the Marystown Facilities, the Company is obligated to maintain a minimum of
1.2 million employee manhours (including manhours for management, labor,
salaried and hourly employees) with respect to the shipyard operations
acquired by the Company for each of the 1998, 1999 and 2000 calendar years.
The Company agreed to pay liquidated damages of C$10 million for 1998 and C$5
million in 1999 and 2000 if such minimum number of manhours is not attained in
such year. In addition, the County of Jackson, Mississippi has begun dredging
the ship channel and building roads and other infrastructure related to the
Greenwood Island Facility, under an economic incentive program. However, in
the event that the Company does not maintain a minimum employment level of 400
jobs at the Greenwood Island Facility for each year during the primary term of
its 20-year lease, the Company could face statutory penalties under
Mississippi law, which include the repayment of the remaining balance of the
$6 million loan incurred by the county to finance such improvements.
DEPENDENCE ON KEY PERSONNEL
The Company's operations are dependent on the continued efforts of its
executive officers. Although each of the Company's executive officers has
entered into an employment agreement with the Company, there can be no
assurance 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 the Company's
business, financial condition and results of operations. The Company does not
carry key-person life insurance on any of its employees.
CONTROL BY EXISTING MANAGEMENT AND STOCKHOLDERS
The Company's executive officers and directors beneficially own 52.2% of the
outstanding shares of Common Stock. In addition, J. L. Holloway, the Company's
Chairman of the Board, Chief Executive Officer and President, beneficially
owns 42.5% of the outstanding shares of Common Stock. Consequently, these
persons, if they were to act together, would have the ability to exercise
control over the Company's affairs, to elect the entire Board of Directors and
to control the disposition of any matter submitted to a vote of stockholders.
ITEM 2. PROPERTY
Pascagoula Facility. The Company's original shipyard is located on the
Pascagoula River in Pascagoula, Mississippi. The shipyard occupies 32 acres
and includes a 1,000 foot long concrete cap pile reinforced dock with 38 feet
of water depth dockside. The shipyard is adjacent to the port's turning basin
and has unobstructed access to the Gulf of Mexico. The shipyard includes
approximately 13,000 square feet of office space, a 20,000 square foot
building used for engineering and administrative personnel, a 4,500 square
foot pipe shop, a 7,500 square foot structural shop and 24,000 square feet of
fabrication platens. The Company leases the shipyard 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. In December 1996, the Company
entered into a two-year lease for 522.5 additional feet of dockspace and
160,000 additional square feet of covered fabrication areas adjacent to its
current facility.
15
Greenwood Island Facility. The Company also operates a new shipyard on 85
acres located approximately six miles from the Pascagoula Facility. The
shipyard opened in January 1998 and all manufacturing components are expected
to be fully operational by June of 1998. The new shipyard has approximately 35
feet of water depth dockside and unobstructed access to the Gulf of Mexico.
The new shipyard features state-of-the-art design, including automated
construction equipment, floating and dockside cranes, panel lines, launchways
and 2,000 feet of reinforced bulkhead dockspace and an additional 1,950 feet
of dockspace that could be developed in the future. The Company leases the
Greenwood Island Facility from Jackson County, Mississippi pursuant to a long-
term lease which expires in June 2017 with three additional extensions of ten
years each. Upon completion, the new shipyard will contain an assembly area
covering in excess of 300,000 square feet, an 85,000 square foot fabrication
building and pipe shop, a 15,000 square foot machinery building, a 20,000
square foot office building and a 20,000 square foot warehouse. Other planned
buildings will house a welding shop, leg shop, paint storage, bulk gas
storage, air compressor facilities, a safety building and warehouse space. The
office building is expected to be completed in the second half of 1998. In
addition, the County of Jackson, Mississippi has begun dredging the ship
channel and building roads and other infrastructure related to the Greenwood
Island Facility, under an economic incentive program. However, in the event
that the new shipyard does not maintain a minimum level of employment for each
year during the primary term of the lease, the Company could face statutory
penalties under Mississippi law.
Marystown Facilities.
The Company recently acquired two deepwater, ice-free shipyard and
fabrication facilities located in Marystown, Newfoundland, Canada. The two
shipyards are located six miles apart and cover an aggregate of 38.5 acres.
The shipyards have approximately 9 and 15 meters of minimum dockside water
depth, respectively, and unobstructed access to open water. The shipyards have
approximately 230 and 330 meters of dockspace, respectively. The Company owns
the Marystown Facilities in fee simple. The Company 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.
French Properties.
Through the BLM Companies, the Company operates two deck equipment
fabrication facilities in Carquefou and Lanveoc, France. The facilities cover
an aggregate of approximately 100,000 square meters, and the Company owns the
French fabrication facilities in fee simple. The Company also leases office
space in Carquefou.
Other Properties.
The Company leases office space in Jackson, Mississippi, New Orleans,
Louisiana and Houston, Texas.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to various routine legal proceedings primarily
involving commercial claims and workers' compensation claims. While the
outcome of these claims and legal proceedings cannot be predicted with
certainty, management believes that the outcome of all such proceedings, even
if determined adversely, would not have a material adverse effect on the
Company's business or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the quarter
ended December 31, 1997. However, on January 16, 1998, at a Special Meeting of
Stockholders called by the Board of Directors, the stockholders of the Company
approved and adopted an amendment to the Company's charter increasing the
number of authorized shares of common stock, par value $.01 ("Common Stock"),
of the Company from 25 million shares to 125 million shares.
16
EXECUTIVE OFFICERS OF THE REGISTRANT
The Executive Officers of the Company 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 of the
Company:
NAME AGE* POSITION
---- ---- --------
J. L. Holloway............. 53 Chairman, President and Chief Executive Officer
Carl M. Crawford........... 54 Executive Vice President
John F. Alford............. 38 Executive Vice President--Acquisitions
Richard L. Marler.......... 55 Vice President and Chief Operating Officer
Marshall D. Lynch.......... 43 Chief Financial Officer
James A. Lowe, III......... 40 General Counsel and Secretary
Ronald W. Schnoor.......... 44 President, HAM Marine
- --------
* As of March 10, 1998
Set forth below are descriptions of the backgrounds of the executive
officers and directors of the Company and their principal occupations for the
past five years:
J. L. Holloway has served as the Chairman of the Board, Chief Executive
Officer and President of the Company since April 1997. In addition, Mr.
Holloway has served as the Chairman of the Board, Chief Executive Officer and
President of HAM Marine from its formation in 1982 until April 1997, and from
April 1997 Mr. Holloway has been the Chairman of the Board of HAM Marine. Mr.
Holloway also serves as a Director of Delta Health Group, a company that
operates and manages health care facilities in the South and as President of
State Street Properties, Inc., a commercial real estate development firm
headquartered in Mississippi.
Carl M. Crawford has served as Executive Vice President of the Company since
May 1997. Mr. Crawford also serves as the Executive Vice President of HAM
Marine, a position he has held for more than the last five years. Prior to
joining HAM Marine in 1982, Mr. Crawford had been employed in management and
marketing positions with a number of equipment and manufacturing companies.
John F. Alford has served as Executive Vice President--Acquisitions of the
Company since December 1997. He served as Senior Vice President and Chief
Financial Officer of the Company from May 1997 to December 1997. Mr. Alford
joined HAM Marine in 1996. Mr. Alford began his career in banking and
previously served as a member of the Board of Directors and as Chief Operating
Officer of Baton Rouge Bank and Trust Company, and a related financial firm,
for more than the past five years.
Richard L. Marler joined the Company as Vice President and Chief Operating
Officer in July 1997. Prior to joining the Company, Mr. Marler was a Vice
President of Ingalls Shipbuilding, Litton Industries, where he was employed
for 23 years. At Ingalls Shipbuilding, Mr. Marler was involved in program
management, business development, contracts management, estimating and related
business activities.
Marshall D. Lynch joined the Company as Chief Financial Officer in December
1997. Prior to joining the Company, Mr. Lynch was Vice President--Financial
Operations for the Southern Region of American Medical Response, Inc. from
June 1996 through December 1997. Previously Mr. Lynch was the Chief Financial
Officer for Phillips Colleges, Inc., a national chain of proprietary colleges
from December 1991 through May 1996.
James A. Lowe, III has served as General Counsel and Secretary of the
Company since May 1997. Mr. Lowe joined HAM Marine on January 1, 1997 as
General Counsel. He has also served as Director of HAM Marine and Director and
Secretary of Friede & Goldman since February 1997. Prior to joining HAM
Marine, Mr. Lowe was an attorney with the firm of Watkins & Eager PLLC, a law
firm in Jackson, Mississippi, for seven years, the last four of which he was a
member of such firm.
17
Ronald W. Schnoor has served as President of HAM Marine since April 1997 and
a Director of the Company since May 1997. Previously, Mr. Schnoor served as
the Vice President, Manager of Operations of HAM Marine since 1992. Mr.
Schnoor joined HAM Marine in 1984 and previously served as both Senior Project
Engineer and as a Project Manager.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on the Nasdaq National Market. At March
10, 1998, there were 112 stockholders of record of the Common Stock. The
Company estimates that an additional 8,956 stockholders held the Common Stock
in street name as of such date. The Company's Common Stock was first listed
for quotation on the Nasdaq National Market on July 22, 1997. The following
table sets forth the high and low sales price per share of the Common Stock,
as quoted on the Nasdaq National Market, for the periods indicated. On October
1, 1997, the Board of Directors of the Company declared a two-for-one stock
split in the form of a stock dividend on each share of Common Stock.
SALES
PRICE(1)
-------- CASH
PERIOD HIGH LOW DIVIDEND
------ ---- --- --------
July 22, 1997 through September 30, 1997........... 30 11 13/16 N/A
Quarter ended December 31, 1997.................... 46 26 5/16 N/A
- --------
(1) Adjusted for two-for-one stock split, effective October 10, 1997.
The Company does not anticipate paying cash dividends for the foreseeable
future. The Company expects that it will retain all available earnings
generated by the Company's operations for the development and growth of its
business. Any future determination as to the payment of dividends will be made
at the discretion of the Board of Directors and will depend on the Company's
operating results, financial condition, capital requirements, general business
condition and other factors as the Board of Directors deems relevant.
18
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 for each of
the years ended December 31, 1994, 1995, 1996 and 1997 are derived from the
audited financial statements of the Company and the Company's predecessor
companies, F&G Ltd. and HAM Marine (collectively, the "Predecessors"). The
historical financial data for the year ended December 31, 1993 are derived
from unaudited financial statements of the Predecessors. 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 of the Company and the related notes thereto.
YEAR ENDED DECEMBER 31,
--------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenue.......................... $10,355 $23,891 $19,865 $21,759 $113,172
Cost of revenue.................. 6,770 18,063 13,510 15,769 75,236
------- ------- ------- ------- --------
Gross profit................... 3,585 5,828 6,355 5,990 37,936
Selling, general and
administrative expenses......... 1,699 2,203 3,862 6,673 12,097
------- ------- ------- ------- --------
Operating income (loss)........ 1,886 3,625 2,494 (684) 25,839
Net interest income (expense).... (135) (346) (197) (448) 673
Gain on asset sales.............. 11 808 1,869 349 3,922
Litigation settlement............ -- -- 750 3,467 611
Other............................ 55 23 6 104 165
------- ------- ------- ------- --------
Income before provision for
income taxes.................. 1,817 4,110 4,921 2,788 31,210
Provision for income taxes..... -- -- -- -- 7,941
------- ------- ------- ------- --------
Net income....................... $ 1,817 $ 4,110 $ 4,921 $ 2,788 $ 23,269
======= ======= ======= ======= ========
UNAUDITED PRO FORMA DATA:
Net income as reported above..... $ 1,817 $ 4,110 $ 4,921 $ 2,788 $ 23,269
Pro forma provision for income
taxes(1)........................ (672) (1,521) (1,821) (1,032) (3,980)
------- ------- ------- ------- --------
Pro forma net income........... $ 1,145 $ 2,589 $ 3,100 $ 1,756 $ 19,289
======= ======= ======= ======= ========
EARNINGS PER COMMON SHARE:
Basic............................ $ 0.10 $ 0.22 $ 0.27 $ 0.15 $ 1.10
Diluted.......................... $ 0.10 $ 0.22 $ 0.27 $ 0.15 $ 1.09
PRO FORMA EARNINGS PER COMMON
SHARE:
Basic............................ $ 0.06 $ 0.14 $ 0.17 $ 0.10 $ 0.92
Diluted.......................... $ 0.06 $ 0.14 $ 0.17 $ 0.10 $ 0.91
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING:
Basic............................ 18,400 18,400 18,400 18,400 21,065
Diluted.......................... 18,400 18,400 18,400 18,400 21,297
STATEMENT OF CASH FLOWS DATA:
Cash provided by operating
activities...................... $ 3,062 $ 3,094 $ 269 $ 4,875 $ 52,122
Cash provided by (used in)
investing activities............ (1,143) 410 (2,410) (3,866) (26,541)
Cash provided by (used in)
financing....................... (1,704) (3,123) 2,581 (706) 29,947
OTHER FINANCIAL DATA:
Depreciation and amortization.... $ 339 $ 347 $ 425 $ 696 $ 1,609
Capital expenditures............. 1,167 1,150 2,670 2,357 26,595
EBITDA(2)........................ 2,225 4,054 2,919 1,092 28,464
BALANCE SHEET DATA:
Working capital.................. $ 88 $ 2,370 $ 2,714 $ 1,104 $ 45,522
Net property, plant and equip-
ment............................ 2,952 3,582 4,079 5,546 11,817
Total assets..................... 7,069 8,584 14,980 27,582 142,555
Long-term debt................... 3,252 3,217 3,270 2,853 25,767
Stockholders' equity............. 1,980 2,681 5,255 6,219 63,805
19
- --------
(1) The pro forma provision for income taxes gives pro forma effect to the
application of federal and state income taxes to the Company as if it had
been a C Corporation for tax purposes for all periods presented. Prior to
June 1997, the Company and the Predecessors operated as S Corporations for
federal and state income tax purposes. In June 1997, the stockholders of
the Company and the Predecessors made elections terminating the S
Corporation status of the Company and the Predecessors. As a result, the
Company became subject to corporate level income taxation following the
termination of such elections.
(2) EBITDA represents operating income plus depreciation, amortization and
non-cash compensation expense related to the issuance of stock and stock
options to employees. EBITDA is not a measure of cash flow, operating
results or liquidity as determined by generally accepted accounting
principles. The Company has included information concerning EBITDA as
supplemental disclosure because management believes that EBITDA is
commonly accepted as providing useful information regarding a company's
historical ability to incur and service debt. Management of the Company
believes that factors which should be considered by investors in
evaluating EBITDA include, but are not limited to, trends in EBITDA as
compared to cash flow from operations, debt service requirements, and
capital expenditures. Management of the Company believes that the trends
depicted by the Company's historical EBITDA reflect historical
fluctuations in the Company's business and the recent increase in the
level of the Company's activities. EBITDA as defined and measured by the
Company may not be comparable to similarly titled measures of other
companies. Further EBITDA should not be considered in isolation or as an
alternative to, or more meaningful than, net income or cash flow provided
by operations as determined in accordance with generally accepted
accounting principles as an indicator of the Company's profitability or
liquidity.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
The Company's results of operations are affected primarily by conditions
affecting offshore drilling contractors, including the level of offshore
drilling activity by oil and gas companies. The level of offshore drilling
activity is affected by a number of factors, including prevailing and expected
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
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. Despite recent declines in oil prices, oil and gas
price levels have generally improved over the past five years resulting in
increased drilling activity in the Gulf of Mexico. This increase in drilling
activity is also attributable to a number of recent industry trends, including
three-dimensional seismic mapping, directional drilling and other advances in
technology that have increased drilling success rates and efficiency and have
led to the discoveries of oil and gas in subsalt geological formations (which
generally are located in depths of 300 to 800 feet of water) and deepwater
areas of the Gulf of Mexico. In the deepwater areas where larger and more
technically advanced drilling rigs are needed, increased drilling activity has
increased demand for retrofitting offshore drilling rigs and improved pricing
levels for such services. In addition, increased drilling activity in and
around more mature fields in shallower waters has contributed to the increase
in demand for conversion, retrofit and repair services for jackups and other
offshore drilling rigs.
The acquisition of the Marystown Facilities and the BLM Companies in early
1998 together with the anticipated completion of the Greenwood Island Facility
later in 1998 and the related increase in workforce will cause a significant
increase in the Company's costs due to increased labor, lease rental and
depreciation and amortization expenses. Selling, general and administrative
expense and interest expense are also expected to increase as a result of
these business growth activities. Management expects the increase in such
costs will directly correlate to anticipated increases in revenue from
increased construction, conversion, retrofit and repair activity. If such
activity does not increase to the extent management anticipates, the Company's
gross profits, operating income and net income could be adversely impacted by
such increased costs.
20
At December 31, 1997, the Company had paid approximately $3.7 million
consisting primarily of advance payments for the manufacture of certain jackup
rig components in anticipation of the Company's being awarded a contract to
build one or more new jackup rigs. Of the $3.7 million of advance payments,
approximately $2.0 million is to a French holding company that was acquired by
the Company subsequent to December 31, 1997. The remaining advance payments
are to an unrelated French company to which the Company has total commitments
of approximately $11.0 million related to the jackup rig components. As of
February 11, 1998, the Company has not been awarded a contract for the
construction of a new jackup rig, however, management of the Company believes
that the Company will be awarded contracts that will utilize the components.
As noted above, the Company has experienced rapid growth during 1997.
Contract revenues increased from $21.8 million in 1996 to $113.2 million in
1997; construction was begun on the Greenwood Island Facility; the United
States Maritime Administration ("MARAD") financing arrangement was
consummated; an initial public offering of common stock was completed and the
Company's backlog increased significantly. Also, unlike prior operations, the
Company has incurred costs related to construction or fabrication of rig
components for which no specific customer has committed. In addition, in early
1998, the Company completed the acquisition of the Marystown Facilities and
the BLM Companies. These changes in and significant expansion of the Company's
operation, expose the Company to additional business and operating risks and
uncertainties.
For the last several years, substantially all of the Company's Pascagoula
work force was leased to the Company by employee leasing companies serving the
Company exclusively. All employee leasing arrangements were terminated as of
May 18, 1997, and the Company now directly employs its employees at levels of
wages and benefits substantially equivalent to those formerly provided by the
employee leasing companies. Management of the Company believes that the costs
of directly employing its laborers will be essentially the same as the
historic cost of the employee leasing arrangement most recently terminated. In
connection with the termination of employee leasing arrangements, the Company
restructured its workmen's compensation insurance arrangements and utilizes a
different carrier from that used by the employee leasing companies. Management
of the Company believes that the change in workmen's compensation insurance
arrangements and carriers has not resulted in costs which are significantly
different than those which would have been incurred under the previous
arrangements.
The Company's operations are subject to variations from quarter to quarter
and year to year resulting from fluctuations in demand for the Company's
services and, due to the large amounts of revenue that are typically derived
from a small quantity of projects, the timing of the receipt of awards for new
projects. In addition, the Company schedules projects based on the timing of
available capacity to perform the services requested and, to the extent that
there are delays in the arrival of a drilling rig or production unit into the
shipyard, the Company generally is not able to utilize the excess capacity
created by such delays. Although the Company may be able to offset the effect
of such delays through adjustments to the size of its skilled labor force on a
temporary basis, such delays may adversely affect the Company's results of
operations in any period in which such delays occur.
The Company's revenue on contracts is earned on the percentage-of-completion
method which is generally based upon the percentage that incurred costs to
date bear to total estimated costs. Accordingly, contract price and cost
estimates are reviewed periodically as the work progresses, and adjustments
proportionate to the percentage of completion are reflected in the accounting
period in which the facts that require such adjustments become known.
Provisions for estimated losses on uncompleted contracts are made in the
period in which such losses are identified. Other changes, including those
arising from contract penalty provisions and final contract settlements, are
recognized in the period in which the revisions are identified. To the extent
that these adjustments result in a reduction or elimination of previously
reported profits, the Company would report such a change by recognizing a
charge against current earnings, which might be significant depending on the
size of the project or the adjustment. Cost of revenue includes costs
associated with the fabrication process and can be further broken down between
direct costs (such as direct labor hours and raw materials) allocated to
specific projects and indirect costs (such as supervisory labor, utilities,
welding supplies and equipment costs) that are associated with production but
are not directly related to a specific project.
21
Prior to June 15, 1997, the Predecessors had operated as S Corporations for
federal and state income tax purposes. As a result, the Predecessors paid no
federal or state income tax, and their earnings were subject to tax directly
at the stockholder level. On June 15, 1997, the stockholders of the Company
and the Predecessors terminated the S Corporation status of such entities. As
a result, the Company and each of the Predecessors became subject to corporate
level income taxation following such termination, and the Company recorded a
net deferred income tax liability through a charge to earnings of
approximately $0.8 million in the second quarter of 1997 attributable
primarily to the difference in financial reporting and tax reporting methods
of accounting for depreciation and sales-type leases.
In the past the Predecessors made distributions to their stockholders in
order to provide a cash return to them and to fund their federal and state
income tax liability that resulted from the S Corporation status of the
Predecessors. In accordance with this practice, one of the Predecessors made
distributions prior to the completion of the Offering. Such amount was based
on the estimated federal and state income taxes payable by the stockholders of
the Predecessors on the aggregate undistributed earnings of the Predecessors
through the date of their election to terminate the S Corporation status of
the Predecessors. In addition, in March 1997, one of the Predecessors made a
distribution to its stockholders of certain nonoperating assets that had a
fair market value of approximately $1.6 million in the aggregate. One of the
Predecessors also distributed to its stockholders (i) cash of approximately
$0.7 million received by such Predecessor in June 1997 in settlement of claims
for unpaid amounts related to a project completed prior to 1997 and (ii)
marketable securities having a fair value of approximately $6.4 million. In
connection with the distribution of marketable securities, such stockholders
assumed the related margin account indebtedness of approximately $2.7 million.
RESULTS OF OPERATIONS
Comparison of the Years Ended December 31, 1997 and 1996
During the year ended December 31, 1997, the Company generated revenue of
$113.2 million, an increase of 420%, compared to the $21.8 million generated
in 1996. This increase was caused primarily by an increase in demand for
conversion and retrofit services and a general increase in the size of the
conversion and modification projects in 1997 as compared to 1996.
Cost of revenue was $75.2 million in 1997 compared to $15.8 million in 1996,
resulting in an increase in gross profit from $6.0 million in 1996 to $37.9
million in 1997. The increase in gross profit as a percentage of revenue is
primarily due to the type of work being completed in 1997 compared to 1996.
During 1997, a greater portion of the projects performed consisted of
conversion and retrofit projects, compared to primarily repair and inspection
projects completed in 1996. Conversion and retrofit projects generally provide
higher profit margins than repair and inspection projects. In addition, during
1997, F&G Ltd. completed a major design project for a customer that resulted
in higher gross profits than those earned in 1996.
Selling, general and administrative expense ("SG&A expense") were $12.1
million in 1997 compared to $6.7 million in 1996. The increase in SG&A
expenses reflects an increase in administrative workforce and facilities due
to overall growth of the Company's business and costs associated with being a
publicly held corporation.
Operating income increased by $26.5 million from 1996 to 1997 primarily as a
result of increased revenue and enhanced profit margins discussed in the
preceding paragraphs.
Net interest income (interest income less interest expense) was $0.7 million
in 1997 compared to net interest expense of $0.4 million in 1996. This change
reflects the favorable cash flows of the Company which have provided capital
sufficient to sustain current operations, reducing the need to draw on its
credit facilities. Cash flow was further enhanced by the Company's initial
public offering which provided $46.7 million in cash to the Company.
During 1997, the Company realized gains of approximately $3.6 million as a
result of the distribution of certain appreciated assets not used in the
business to the stockholder of one of the Predecessors. Also, gains of
22
approximately $0.3 million resulted from the sale of real estate held for
investment. The gain on the asset sales in the year ended December 31, 1996
related primarily to the sale of marketable securities.
During 1996, the Company received approximately $3.5 million in proceeds
from the settlement of a lawsuit filed in 1992 related to a contract.
Settlement proceeds of approximately $0.6 million were received in 1997
related to another contract.
The provision for income taxes for 1997 represents income tax expense for
the period subsequent to the termination of the Predecessors' status as S
Corporations, plus a one time charge of approximately $0.8 million
attributable to the initial recording of a net deferred tax liability. The pro
forma provision for income taxes is the result of the application of a
combined federal and state tax rate of 37% to estimated taxable income for the
period prior to termination of S Corporation status.
Comparison of the Years Ended December 31, 1996 and 1995
During the year ended December 31, 1996, the Company generated revenue of
$21.8 million, an increase of 9.5%, compared to the $19.9 million generated in
1995. This increase was caused primarily by an increase in overall demand for
conversion and retrofit.
Cost of revenue was $15.8 million in 1996 compared to $13.5 million in 1995,
resulting in a decline in gross profit from $6.4 million in 1995 to $6.0
million in 1996. This decline is primarily the result of the change in nature
of the contracts performed in each year. In 1995, a much larger portion of
contract revenue was derived from contracts performed under a pooled resources
arrangement between the Company and PMB Engineering, Inc. ("PMB"), a
subsidiary of Bechtel Corporation. Under this arrangement, the Company's cost
of revenue consisted primarily of direct and indirect labor related charges.
Gross profit, as a percentage of revenue, under such arrangements was
generally higher than under contracts performed solely by the Company. For
contracts performed solely by the Company, cost of contract revenue includes
charges related to materials purchased on which the gross profit percentage
realized by the Company is generally lower, resulting in a lower overall gross
profit percentage.
SG&A expenses were $6.7 million in 1996 compared to $3.9 million in 1995.
SG&A expenses for 1996 and 1995 include bonuses of approximately $2.1 million
and $1.2 million, respectively, paid to certain employees who are also
stockholders (the "Stockholder Employees"). Cash compensation paid to the
Stockholder Employees during the year ended December 31, 1996 exceeded the
amount of compensation levels set forth in the employment contracts entered
into between the Company and the Stockholder Employees in May 1997 by
approximately $1.9 million. SG&A expenses for 1996 also include $1.1 million
of compensation expense related to the issuance of stock to an employee of one
of the Predecessors. Excluding such bonuses from both years and the
compensation expense related to the issuance of stock, SG&A expenses increased
by approximately $0.8 million. Such increase is primarily the result of costs
incurred by the Company related to increased business development activities,
including the pursuit of alternatives to increase the Company's shipyard
capacity, the opening of a Houston sales office and an increase in charitable
contributions resulting from a one-time contribution of real property to a
college.
Operating income declined by $3.2 million as a result of a slightly lower
gross profit margin combined with higher SG&A expenses. Excluding the effect
of the increase in bonuses and the issuance of stock discussed above,
operating income declined approximately $1.2 million, reflecting the change in
gross profit margin and the increase in SG&A expenses.
Net interest expense increased to $0.4 million in 1996 from $0.2 million in
1995. Interest expense increased by $0.2 million as a result of increased
borrowings to finance capital expenditures and approximately $2.1 million in
increased brokerage margin account borrowings. Interest income remained
constant at approximately $0.4 million, representing primarily interest on
certificates of deposit pledged against borrowings and interest earned on a
sales-type lease.
23
The gain on the sale of assets in 1996 relates to the disposition of certain
nonoperating assets, primarily land, and, to a lesser degree, the sale of
certain marketable securities. The 1995 gain on sale of assets relates to the
sale, under a sales-type lease, of certain land, buildings and a dock facility
formerly operated by the Company.
During 1996, the Company received approximately $3.5 million in proceeds
from the settlement of a lawsuit filed in 1992 related to a contract. In 1995,
the Company received $0.8 million in settlement proceeds related to a claim
against a general contractor for which the Company had served as contractor.
The pro forma provision for income taxes is the result of the application of
a combined federal and state tax rate of 37% to income before income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has financed its business activities through funds
generated from operations, a credit facility secured by accounts receivable,
and long-term borrowings secured by assets purchased with proceeds from such
borrowings. Net cash provided by operations was $0.3 million, $4.9 million and
$52.1 million for 1995, 1996 and 1997, respectively. Net borrowings
(repayments) from all credit arrangements, excluding the MARAD arrangement
discussed below, were $4.8 million, $4.1 million and ($8.7) million for 1995,
1996 and 1997, respectively. The Company retired substantially all of its
outstanding debt subsequent to receipt of the proceeds of its initial public
offering.
During 1997, the Company incurred approximately $26.6 million in capital
expenditures primarily related to the overall expansion of the Company's
business activities. Approximately $19.2 million was expended related to
facilities and related equipment for the new Greenwood Island Facility, $5.1
million related to expansion of existing shipyard facilities and equipment and
$2.3 million related to expanded administrative facilities. These capital
expenditures were funded from operating cash flow and proceeds from the
initial public offering. A portion of the costs incurred related to the
Greenwood Island Facility are expected to be funded from proceeds from the
MARAD arrangement discussed below.
In March 1997, HAM Marine entered into a new credit facility (the "Credit
Facility") which provided for borrowings of up to $10.0 million, subject to a
borrowing base limitation equal to 80% of eligible receivables. The Credit
Facility is secured by contract-related receivables. In connection with
obtaining the Credit Facility, HAM Marine repaid all outstanding indebtedness
under the provisions of the existing credit facility and such facility was
terminated. In November 1997, the borrowing capacity under the Credit Facility
was increased to $20.0 million. At December 31, 1997, there was no outstanding
balance under the Credit Facility and the borrowing base amount was $20.0
million. Borrowings under the Credit Facility bear interest equal to the
lender's prime lending rate plus 1/2% per annum. At December 31, 1997, the
interest rate under the Credit Facility was 8.47% per annum. The Credit
Facility contains a number of restrictions, including a provision which would
prohibit the payment of dividends by HAM Marine to the Company in the event
that HAM Marine defaults under the terms of the facility. In addition, the
Company must maintain certain minimum net worth and working capital levels and
ratios and debt to equity ratios. The Company was not in compliance with one
of the working capital ratio provisions of the Credit Facility debt agreement;
however, the Bank waived the compliance requirement for this working capital
ratio.
As an additional source of borrowing capacity, MARAD has provided its
guarantee for $24.8 million of bonds issued by the Company. The proceeds from
the sale of MARAD guaranteed bonds must be used only for capital expenditures
relating to the costs of constructing and equipping the Company's new
Greenwood Island Facility. In November 1997, $24.8 million of proceeds from
the MARAD arrangement were placed in escrow for use by the Company upon
completion of documentation that qualifying expenditures had been made. As of
December 31, 1997, the Company had incurred expenditures of approximately
$14.4 million which are eligible for reimbursement from the escrowed funds.
24
In July 1997, the Company completed an initial public offering (the
"Offering") of 6,005,042 shares of its common stock for net proceeds of
approximately $46.7 million. As of September 30, 1997 the Company had utilized
approximately $14 million of such net proceeds. The Company used approximately
$25 million of such net proceeds to acquire the BLM Companies. The Company
used the remaining $7.7 million in January of 1998 to purchase its floating
drydock and for general corporate purposes. The Company would expect to fund
the remaining portion of its anticipated capital requirements from cash flow
from operations, the MARAD financing, borrowings available under the Credit
Facility or additional borrowings. Pending the Company's use of the net
proceeds of the Offering, the Company repaid borrowings under its existing
revolving credit facility and invested the remaining net proceeds from the
Offering in short-term, investment-grade, interest-bearing instruments.
Management believes that the cash generated by operating activities, and
funds available under the Credit Facility and the MARAD financing will be
sufficient to fund the construction of the new shipyard, its other capital
expenditure requirements, and its working capital needs at current levels of
activity; however, additional debt financing or equity financing may be
required in the future if the Company increases its conversion, retrofit and
repair business or obtains orders to construct new drilling rigs or production
units. Although the Company believes that, under such circumstances, it would
be able to obtain additional financing, there can be no assurance that any
additional debt or equity financing will be available to the Company for these
purposes or, if available, will be available on terms satisfactory to the
Company.
YEAR 2000 COMPLIANCE
In connection with the rapid expansion of the Company's business activities,
the Company is reassessing the computer and information system needs of the
overall organization. Along with this reassessment, the Company is also
reviewing its computer-based systems and applications to ensure that its
computer and information systems will function properly at Year 2000. At this
time, management of the Company believes that the specific costs of achieving
Year 2000 compliance for its current systems will not have a material effect
on the Company's consolidated financial statements.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"),
"Earnings Per Share," which adopts a revised methodology for computing
earnings per share for publicly owned companies. The Company adopted the new
methodology in the fourth quarter of 1997. The adoption of SFAS No. 128 did
not change the Company's previously reported historical earnings per share.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130 ("SFAS No. 130"), "Reporting Comprehensive Income," which is effective
for fiscal years beginning after December 15, 1997. SFAS No. 130 will require
the company to (a) classify items of other comprehensive income by their
nature in a financial statement and (b) display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid in capital.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131 ("SFAS No. 131"), "Disclosures about Segments of an Enterprise and
Related Information," which is effective for periods beginning after December
15, 1997. SFAS No. 131 will require the Company to report financial and
descriptive information about its operating segments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item 8 is contained in a separate section
of this report. See "Index to Consolidated Financial Statements" on page F-1.
25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
In March 1997, the Company's Board of Directors engaged Arthur Andersen LLP,
independent public accountants (i) to audit the balance sheet of the Company
as of April 21, 1997, and the financial statements of the Predecessors as of
December 31, 1995 and 1996 and for each of the three years ended December 31,
1996 and (ii) to serve as the Company's auditors going forward. Breazeale,
Saunders & O'Neil, Ltd. of Jackson, Mississippi had previously served as
independent public accountants for HAM Marine, the Company's principal
predecessor. There were no disagreements with Breazeale, Saunders & O'Neil,
Ltd. on any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure at the time of the engagement of
Arthur Andersen LLP or with respect to the financial statements of HAM Marine
as of and for the year ended December 31, 1996. Prior to retaining Arthur
Andersen LLP, the Company had not consulted with Arthur Andersen LLP regarding
accounting principles.
PART III
ITEM 10. DIRECTOR AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 is incorporated by reference to the
Company's definitive Proxy Statement (the "Proxy Statement") to be filed with
the Securities and Exchange Commission pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended, within 120 days after the end of
the fiscal year covered by this report. See also "Executive Officers of the
Registrant" included in Part I hereof.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated by reference to the
Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is incorporated by reference to the
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is incorporated by reference to the
Proxy Statement.
26
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The Consolidated Financial Statements listed by the Registrant on the
accompanying Index to Consolidated Financial Statements are filed as part of
this Annual Report. (See page F-1).
(a)(2) Financial Statement Schedules
The required information is included in the Consolidated Financial
Statements or Notes thereto.
(a)(3) Exhibits
EXHIBIT
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*3.1 --Amended and Restated Certificate of Incorporation. (Incorporated by
reference to Exhibit 3.1 to the Company's Registration Statement on
Form S-1 (Registration No. 333-27599) declared effective on July 18,
1997).
3.2 --Certificate of Amendment to Certificate of Incorporation.
*3.3 --Bylaws. (Incorporated by reference to Exhibit 3.2 to the Company's
Registration Statement on Form S-1 (Registration No. 333-27599)
declared effective on July 18, 1997).
*4.1 --Specimen Common Stock Certificate. (Incorporated by reference to
Exhibit 4.1 to the Company's Registration Statement on Form S-1
(Registration No. 333-27599) declared effective on July 18, 1997).
*4.2 --Form of Registration Rights Agreement among Friede Goldman
International Inc., J. L. Holloway, Carl M. Crawford, Ronald W.
Schnoor, James A. Lowe, III and John F. Alford. (Incorporated by
reference to Exhibit 4.2 to the Company's Registration Statement on
Form S-1 (Registration No. 333-27599) declared effective on July 18,
1997).
*4.3 --Form of Amendment No. 1 to Registration Rights Agreement among
Friede Goldman International Inc., J. L. Holloway, Carl M. Crawford,
Ronald W. Schnoor, James A. Lowe, III, John F. Alford, Holloway
Partners, L.P., Carl Crawford Children's Trust and Bodin Children's
Trust. (Incorporated by reference to Exhibit 4.3 to the Company's
Registration Statement on Form S-1 (Registration No. 333-27599)
declared effective on July 18, 1997).
*10.1 --Form of Officer and Director Indemnification Agreement.
(Incorporated by reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-1 (Registration No. 333-27599)
declared effective on July 18, 1997).
*10.2 --Form of Employment Agreement between Friede Goldman International
Inc. and J. L. Holloway. (Incorporated by reference to Exhibit 10.2
to the Company's Registration Statement on Form S-1 (Registration No.
333-27599) declared effective on July 18, 1997).
*10.3 --Form of Amendment No. 1 to Employment Agreement between Friede
Goldman International Inc. and J. L. Holloway. (Incorporated by
reference to Exhibit 10.3 to the Company's Registration Statement on
Form S-1 (Registration No. 333-27599) declared effective on July 18,
1997).
*10.4 --Form of Employment Agreement between HAM Martine, Inc. and each of
Carl M. Crawford and Ronald W. Schnoor. (Incorporated by reference to
Exhibit 10.4 to the Company's Registration Statement on Form S-1
(Registration No. 333-27599) declared effective on July 18, 1997).
*10.5 --Form of Amendment No. 1 to Employment Agreement between HAM Martine,
Inc. and each of Carl M. Crawford and Ronald W. Schnoor.
(Incorporated by reference to Exhibit 10.5 to the Company's
Registration Statement on Form S-1 (Registration No. 333-27599)
declared effective on July 18, 1997).
*10.6 --Form of Employment Agreement between Friede Goldman International
Inc. and John F. Alford. (Incorporated by reference to Exhibit 10.6
to the Company's Registration Statement on Form S-1 (Registration No.
333-27599) declared effective on July 18, 1997).
27
*10.7 --Form of Amendment No. 1 to Employment Agreement between Friede
Goldman International Inc. and John F. Alford. (Incorporated by
reference to Exhibit 10.7 to the Company's Registration Statement on
Form S-1 (Registration No. 333-27599) declared effective on July 18,
1997).
*10.8 --Form of Employment Agreement between HAM Martine, Inc. and James A.
Lowe, III. (Incorporated by reference to Exhibit 10.8 to the Company's
Registration Statement on Form S-1 (Registration No. 333-27599)
declared effective on July 18, 1997).
*10.9 --Form of Amendment No. 1 to Employment Agreement between HAM Martine,
Inc. and James A. Lowe, III. (Incorporated by reference to Exhibit
10.9 to the Company's Registration Statement on Form S-1 (Registration
No. 333-27599) declared effective on July 18, 1997).
*10.10 --Form of Employment Agreement between Friede Goldman International
Inc. and Richard L. Marler. (Incorporated by reference to Exhibit
10.10 to the Company's Registration Statement on Form S-1
(Registration No. 333-27599) declared effective on July 18, 1997).
10.11 --Employment Agreement of Marshall D. Lynch.
10.12 --Amended and Restated 1997 Equity Incentive Plan.
*10.13 --Revolving Credit Agreement, dated as of March 20, 1997, by and among
HAM Martine, Inc., as borrower, Friede & Goldman, Ltd., J. L. Holloway
and Carl Crawford, as guarantors, and Bank One, Louisiana, National
Association, as the Bank. (Incorporated by reference to Exhibit 10.13
to the Company's Registration Statement on Form S-1 (Registration No.
333-27599) declared effective on July 18, 1997).
*10.14 --Amended Lease Agreement, dated June 22, 1995, by and among the
Jackson County Port Authority, the Board of Supervisors of Jackson
County, Mississippi and HAM Martine, Inc. (Pascagoula shipyard).
(Incorporated by reference to Exhibit 10.14 to the Company's
Registration Statement on Form S-1 (Registration No. 333-27599)
declared effective on July 18, 1997).
*10.15 --Lease Contract, dated December 12, 1996, by and among the Jackson
County Port Authority, the Board of Supervisors of Jackson County,
Mississippi and HAM Martine, Inc. (Incorporated by reference to
Exhibit 10.15 to the Company's Registration Statement on Form S-1
(Registration No. 333-27599) declared effective on July 18, 1997).
*10.16 --Memorandum of Understanding, dated December 30, 1996, by and among
the Board of Supervisors of Jackson County, Mississippi and HAM
Martine, Inc. (New shipyard). (Incorporated by reference to Exhibit
10.16 to the Company's Registration Statement on Form S-1
(Registration No. 333-27599) declared effective on July 18, 1997).
*10.17 --Form of Amended and Restated Stock Exchange Agreement by and among
Friede Goldman International Inc., HAM Martine, Inc., Friede & Goldman
Ltd., J. L. Holloway, Carl M. Crawford, Ronald W. Schnoor, James A.
Lowe, III, John F. Alford, Holloway Partners, L.P., Carl Crawford
Children's Trust and Bodin Chi