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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 0-22595
FRIEDE GOLDMAN INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
Mississippi 72-1362492
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
525 East Capitol Street, 7th Floor
Jackson, Mississippi 39201
(Address of principal executive offices) (Zip Code)
(601) 352-1107
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
Common Stock, $.01, par value
(Title of Class)
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K ( 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 1, 1999, there were 23,346,272 shares of Common
Stock, $.01 par value, of Friede Goldman International Inc. issued and
outstanding, 11,102,467 of which shares having an aggregate market
value of approximately $120.7 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 1999
annual meeting of shareholders, which proxy statement will be filed
under the Securities Exchange Act of 1934 within 90 days of the end of
the registrant's fiscal year ended December 31, 1998, are incorporated
by reference into Part III of this Form 10-K.
TABLE OF CONTENTS
Part I
Item 1. Business............................................... 3
Risk Factors...........................................13
Item 2. Properties.............................................17
Item 3. Legal Proceedings......................................18
Item 4. Submission of Matters to a Vote of Security
Holders.............................................19
Executive Officers of the Registrant...................19
Part II
Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters......................20
Item 6. Selected Financial Data................................21
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................22
Item 7a. Quantitative and Qualitative Disclosures about
Market Risk........................................29
Item 8. Financial Statements and Supplementary Data............30
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................30
Part III
Item 10. Directors and Executive Officers of the
Registrant..........................................30
Item 11. Executive Compensation.................................30
Item 12. Security Ownership of Certain Beneficial Owners
and Management......................................30
Item 13. Certain Relationships and Related Transactions.........30
Part IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K................................31
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.
ITEM 1. Business
Friede Goldman International Inc. (together with its
subsidiaries, the "Company") provides services and equipment to the
offshore drilling industry. Services provided include conversion,
retrofit, repair and modification of existing offshore drilling rigs
and the design, construction and equipping of new offshore drilling
rigs. 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. 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 its subsidiary Friede Goldman Offshore, Inc. ("FGO", formerly
HAM Marine, Inc.) 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 a subsidiary, the
Company has been continuously engaged in the business of offshore rig
design for more than 50 years.
At the time of its initial public offering in July 1997, the
Company conducted all of its conversion, retrofit and repair services
at its 32-acre shipyard, located in Pascagoula, Mississippi (the
"Pascagoula Facility" or "FGO West Facility"). As of December 31,
1998, the Company was performing conversion, retrofit and modification
work on five semisubmersible drilling units at the Pascagoula
Facility. Since the initial public offering, the Company has (i)
opened its new shipyard on Greenwood Island, Mississippi (the
"Greenwood Island" or the "FGO East" 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.
Recent Developments
OPENING OF FGO EAST (GREENWOOD ISLAND) FACILITY. In January
1998, the Company opened the FGO East Facility (formerly known as 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 shipyard, which
became fully operational in the second half of 1998, allows the
Company to simultaneously construct, in varying phases, up to six
jackup or four semisubmersible offshore drilling rigs. At December
31, 1998, the Company was performing deckwork and outfitting on one
Bingo 7000 design and two Bingo 9000 design semisubmersible drilling
units at the new shipyard.
In the fourth quarter of 1998, the company began operating the
Pascagoula Facility and the Greenwood Island Facility as a single
business unit known as Friede Goldman Offshore. The Pascagoula
Facility is now referred to as the FGO West Facility and the Greenwood
Island Facility is referred to as the FGO East Facility. HAM Marine's
wholly owned subsidiary, Friede Goldman Offshore, Inc., was merged
into HAM Marine, Inc. as of January 12, 1999 and HAM Marine's name was
changed to Friede Goldman Offshore, Inc. These changes were made to
facilitate movement of personnel between the facilities and to bring
the Company's domestic construction, retrofit, modification and repair
services under a single management structure.
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. As of
December 31, 1998, a final determination of such after-tax profits has
not been made. However, the Company expects the amount, if any, to be
immaterial. The Company met the minimum employee manhour requirement
for 1998. The Company also agreed to complete the remaining work on
contracts entered into by the Province prior to the acquisition.
Three major contracts were in progress at the Marystown Facilities at
the time of acquisition by the Company. During 1998, two of the
projects
were completed and delivered. Also, during 1998, the Marystown
Facilities were utilized to perform fabrication and construction work
on several retrofit, conversion and new construction projects in
progress at the Company's two U.S. shipyards. As of December 31, 1998,
the Marystown Facilities were completing one of the three contracts in
progress at the date of acquisition and were providing fabrication
work on two projects for the Company's U.S. shipyards.
ACQUISITION OF BLM COMPANIES. As of February 5, 1998, 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: Brissonneau & Lotz
Marine S.A. ("BLM"), Brissonneau & 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 such as deck cranes, provision cranes, and hose
handling cranes. BLM Offshore designs and manufactures
rack-and-pinion jacking systems used on offshore drilling platforms,
anchoring/mooring systems used on semisubmersible drilling rigs
(winches, windlasses, fairleads). As well, BLM Offshore designs and
manufactures offshore cranes for jackup, semisubmersibles, barges and
F.P.S.O's. 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 offshore in the Gulf of Mexico, the North Sea, 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, which allows the rig to remain on location over a
drillsite in deep waters without the use of anchors and mooring lines.
While the Company has performed some modification and repair work
on fourth generation semisubmersibles, a major portion 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
earlier generation 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 two
projects involving semisubmersibles in 1998
and at March 1, 1999 was working on the conversion of three
submersibles into semisubmersibles, the retrofit of one
semisubmersible for deep water, and the new build completion of three
semisubmersible hulls. At March 1, 1999, the Company also had entered
into contracts to convert one additional F & G Ltd. submersible into a
semisubmersible and to perform the new build construction of one F & G
Ltd. semisubmersible drilling unit.
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 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 one project involving repair of a jackup in 1998.
DRILLSHIPS. Drillships, which are typically a self-propelled
ship shape hull, are positioned over a drillsite through the use of
either a mooring system or a computer controlled 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 1998.
FLOATING PRODUCTION FACILITIES. A floating production facility
("FPF") consists of a ship or semisubmersible vessel upon which
production equipment is mounted. In many cases, the hull is a
converted tanker (often referred to as a floating, production, storage
and offloading, or FPSO, unit). In addition, semisubmersible drilling
units have been converted into floating production units. In a few
cases, a new hull has been purpose-built as an FPF. For harsh weather
locations, FPFs are designed with a mooring system that provides
weathervaning capability so that the FPF can be rotated on location to
minimize the effects of wave, wind and current actions. The
production risers in these FPFs are connected to the hull through a
swivel system that also accommodates the mooring system. The hull of
an FPF is typically used for on-board oil storage, which is an
important feature for remote locations where export pipelines are not
available and fixed oil storage availability is limited or
nonexistent. The Company did not work on any projects involving FPFs
in 1998.
DRILLING AND MARINE DECK EQUIPMENT. Every offshore drilling
unit and production unit contains various types of drilling equipment
and marine deck equipment. Drilling equipment typically consists of
the items such as derricks, rotary tables, top drive units, blow out
preventers, pipe handling equipment, mud pumps, etc. required to
conduct drilling operations. Marine deck equipment typically consists
of mooring, anchoring, and cargo handling equipment. In connection
with most major retrofit, conversion or new build projects, the owner
of the drilling unit contracts directly with the suppliers of drilling
and marine deck equipment for the purchase of such equipment for the
rig. Typically such equipment will be installed by the shipyard, and
is often referred to as Owner Furnished Equipment or "OFE". With its
acquisition of the BLM Companies, the Company has the capability to
supply marine deck equipment to its offshore drilling unit customers
and to participate in the market for the marine deck equipment on
drilling units being modified or constructed by other shipyards. The
BLM companies are also involved in the design and manufacturing of
marine equipment for marine shipyards throughout the world (for
fitting on cruise liners, bulk carriers, cargo vessels, tankers,
L.N.G.'s, etc.).
Description of Operations
In the year ended December 31, 1998, the Company's operations
consisted of several conversion, retrofit and repair projects for
offshore drilling contractors and work on the new build completion of
three semisubmersible offshore drilling units. In addition, the
company, through the BLM Companies, supplied marine deck equipment for
several offshore drilling units and to numerous customers in the
marine industry. Significant conversion or retrofit projects such as
these generally take 8 to 14 months to complete, whereas certain
repair projects may require only 1 to 3 months to complete. New rig
construction projects can require from 18 to 30 months to complete.
With the acquisition 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, including spare
parts, and after sale services.
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 an 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,
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 one conversion in 1998 and performed the
final outfitting of one other rig conversion. At March 1, 1999 the
Company was in the process of converting three submersibles into
semisubmersibles and had entered into a contract to convert one
additional submersible into a semisubmersible.
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.
At March 1, 1999, the Company was in the process of retrofitting
one semisubmersible drilling unit.
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 1998.
DESIGN AND NEW CONSTRUCTION. The FGO East Facility was designed
specifically for the efficient construction of new offshore drilling
rigs. Moreover, the combined capacity of the FGO East Facility and
the FGO West Facility allows 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, 1999, the
Company was working on the new build completion of three
semisubmersible hulls. A new build completion project involves the
design and construction of a drilling rig on an existing hull. In
February 1999, the company entered into a contract for the new build
construction of a Friede & Goldman Ltd. designed Millenimum S.A.
semisubmersible drilling unit. New build completion involves
performing the addition of deck, quarter, equipment installation and
final outfitting of an existing semisubmersible hull. New build
construction includes construction of the semisubmersible hull itself
and the new build completion of that 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 offshore handling cranes.
Marine deck equipment is typically manufactured to individual
customer specifications based on the planned application of the
equipment. Manufacture of the equipment required to complete a
customer's order may require from a few weeks to several months.
Customers and Marketing
The Company's offshore drilling unit customers are primarily
offshore drilling contractors, many of whom have been customers of the
Company for more than 15 years. 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 FGO East
and West Facilities for a tour and presentation.
The Company's customers for marine deck equipment include
offshore drilling contractors, other shipyards, cruise lines and
shipping companies. The BLM Companies marketing efforts are conducted
in concert with the other Company's domestic marketing efforts and
through sales representatives in various locations in Europe, China
and Asian countries.
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 84%, 70%, and
66% of revenue for 1996, 1997, and 1998 respectively. In 1998, the
Company derived more than 10% of its revenue from each of Noble
Drilling Corporation, Marine Drilling Corporation and Ocean Rig ASA.
Because the level of new build 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 cost-plus basis. New build construction projects
typically involve a greater portion of the work performed on a fixed
price 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 has recently 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.
Marine deck equipment is generally sold pursuant to fixed price
contracts.
Competition
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. In the
new rig construction business, the Company competes in a global market
with companies based in the United States, Europe and Asia. The
Company believes that its long-term investment 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 competes in a local market against other companies
based on the Gulf Coast for repair projects for drilling rigs that
operate in the Gulf of Mexico. The market for smaller retrofit and
conversion projects is also primarily local, but the market for larger
retrofit and conversion projects includes international competitors.
The company believes it competes favorably against companies located
in Europe or the Far East for retrofit and conversion projects
relating to drilling rigs operating in the Gulf of Mexico and, to a
lesser extent, rigs operating offshore West Africa and South America
due to, among other things, high European labor costs and the
Company's favorable geographical location. The Company believes that
the addition of the Marystown Facilities with their low costs
structure, enables the Company to compete favorably for retrofit and
conversion projects relating to drilling rigs operating in the North
Sea and offshore Canada.
The Company believes that certain barriers exist that prevent new
companies from competing with the Company for new rig construction,
conversion, retrofit and repair activities including the investment
required to establish an adequate facility, the difficulty of locating
a facility adjacent to an adequate waterway due to environmental and
wetland regulations, and the limited availability of experienced
supervisory and management personnel. Although new companies can enter
the market for repair projects and small retrofit and conversion
projects more easily, management believes these factors will likely
prevent an increase in domestic competition for larger projects,
especially major conversions and retrofits and new rig constructions.
The Company competes in a global market in the design and
manufacture of deck equipment, although several competitors are
domestically based. Prior to their acquisitions by the Company, the
BLM Companies did not actively market in the United States. The
Company began marketing its product line of anchoring winches, cranes
for jackup and semisubmersible drilling units, mooring equipment, deck
machinery, jacking equipment, mooring equipment, jacking equipment and
skidding equipment in the United States shortly after the acquisition.
Backlog
As of December 31, 1998, the Company's backlog was approximately
$364.7 million, approximately 92% of which management expects to be
performed within the 12 months ending December 31, 1999. Certain of
the contracts for BLM manufactured equipment include delivery dates up
to the end of 2000. The Company's backlog as of December 31, 1997 was
approximately $324.6 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.
In February 1999, the Company entered into a $143.2 million
contract with a Brazilian company for the new build construction of a
Friede & Goldman, Ltd. designed Millennium S.A. semisubmersible
drilling rig. The contract, which is subject to the seller's obtaining
adequate rig financing, is not included in the Company's backlog as of
December 31, 1998. The Company has 23 months from the contract date to
complete construction of the rig.
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. Similar materials are used in
the manufacture of marine deck equipment. In addition, electric motor
components, steel forgings and casting are used. 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. Similar practices are in place at the
Company's foreign facilities. The Company believes that its safety
program and commitment to quality are vital to attracting and
retaining customers and employees.
The Company's FGO East and West Facilities fabricate according to
the standards of the American Bureau of Shipping, Det Norske Veritas,
American Petroleum Institute, the American Welding Society, the
American Society of Mechanical Engineers and specific customer
specifications. The Company's 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's BLM
subsidiary is quality certified ISO 9001 by Det Norske Veritas. The
Company also maintains training pro-
grams 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 have constituted a significant portion
of the Company's revenues in some prior years. 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.
During 1998, the Company 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 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 has been started. As of March
1, 1999, the Company has not been informed of any results of the Phase
II investigation. 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.
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 $90 million limit with
respect to its U.S. and Canadian operations, and (ii) a FRF100 million
limit with respect to its French operations. Other coverages
currently in place include business income and extra expenses, 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, 1998,
the Company had approximately 4,200 employees, including 3,500 in the
United States, 500 in Canada and 200 in France. For several years
prior to May 1997, substantially all of the Company's work force had
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 is 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.
ITEM 1. 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 over the past several months and over the past several
years, oil and natural gas prices and the level of offshore drilling
and exploration activity have fluctuated substantially. As a result
of such declining prices, the level of offshore drilling activity has
declined from higher levels of activity experienced in 1997 and early
1998. A prolonged reduction in oil or natural gas prices in the
future would likely further depress offshore drilling and development
activity. A sustained reduction of offshore drilling and development
activity or additional substantial reductions 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. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Integration of Acquisitions/Management of Growth
The Company has a brief operating history with respect to the
Marystown Facilities and the BLM Companies. The acquisitions caused a
significant increase in the Company's costs due to increased labor,
lease rental and depreciation, amortization and interest expenses in
1998. In 1998, such costs directly correlated to increases in
revenues from increased construction, conversion, retrofit and repair
activity. If such activity fails to continue at the levels 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 new construction,
conversion, retrofit and repair of offshore drilling rigs and
production units and the manufacture of marine deck equipment 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 could 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 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, production unit or marine deck
equipment 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 FGO East
and West 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, 1996,
1997, and 1998, the Company's largest customers (those which
individually accounted for more than 10% of revenue in a particular
year) collectively accounted for 84%, 70%, and 66% of revenue,
respectively. For 1998, the Company derived more than 10% of its
revenue from Noble Drilling Corporation and Marine Drilling
Corporation and Ocean Rig ASA. 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, 1998 was attributable to four
projects, all of which were with one customer and 59% was attributed
to two projects with one other 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 1999. 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 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. No payments were due in 1998 under these provisions.
Obligations to Maintain Minimum Employment Levels
In connection with its acquisition of the Marystown Facilities
and the construction of the FGO East 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. The 1.2 million minimum manhour requirement was
met in 1998. In addition, the County of Jackson, Mississippi has
dredged the ship channel and constructed roads and other
infrastructure related to the FGO East 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 FGO East
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. No payments
were due in 1998 related to either of the above obligations.
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
52.7% 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
shareholders.
Business and Geographic Segments
Financial information about the Company's business and geographic
segments can be found in Note 14 of the Notes to Consolidated
Financial Statements included elsewhere in this Form 10-K.
ITEM 2. Properties
FGO West 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. The lease
was extended for an additional 2 years in December 1998.
FGO EAST FACILITY. The Company also operates a new shipyard on
85 acres located approximately six miles from the FGO West Facility.
The shipyard opened in January 1998 and all manufacturing components
were fully operational by the third quarter 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 FGO East Facility from Jackson County, Mississippi pursuant to a
long-term lease which expires in June 2017 with three additional
extensions of ten years each. The new shipyard contains 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 are under construction and expected to be in service by
mid 1999. In addition, the County of Jackson, Mississippi has dredged
the ship channel and built roads and other infrastructure related to
the FGO East 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. In January 1998, the Company acquired two
deepwater, ice-free shipyard and fabrication facilities located in
Marystown, Newfoundland, Canada. The two shipyards are located six
miles apart by land. The Shipyard facility covers a total land area of
60,000 square meters with an in-house fabrication area of 9,358 square
meters. The shipyard has a syncrolift with a maximum vessel draft of
22 feet. It is 250 feet long by 64 feet wide and has a maximum lifting
capacity of 3000 tonnes. The shipyard also has 230 meters of dock
space with a water depth of 9 meters.
The Cow Head fabrication facility covers a total land area of
81,000 square meters, 14,000 of which is in-house fabrication area.
The facility also has an L-shaped wharf, with an average depth of 16
meters at the front face. It also has 30 meter long load out quay for
skidding large assemblies onto barges. The facility has 330 meters of
dock space. 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, France; Pusan, South Korea; Shanghai, China and St.
Petersburg, Russia.
OTHER PROPERTIES. The Company leases office space in Jackson,
Mississippi, New Orleans, Louisiana and Houston, Texas.
ITEM 3. Legal Proceedings
On January 11, 1999, a subsidiary of the Company, FGO (formerly
HAM Marine, Inc.) was served with a summons by Hyundai Heary
Industries Co. Limited ("Hyundai") in an action styled Hyundai Heavy
Industries Co. Limited v. Ocean Rig ASA and HAM Marine, Inc. In the
High Court of Justice, Queen's Bench Division, Commercial Court, 1009
Folio No. 67. Hyundai alleges that FGO tortiously interfered with
Hyundai's contract (the "Hyundai Contract") with Ocean Rig ASA ("Ocean
Rig") to complete one oil and gas drilling rig for $149,913,000.00.
The Hyundai contract was signed on October 22, 1997 but was subject to
approval by the Ocean Rig Board of Directors on December 18, 1997. The
contract contained a "no shop" clause prohibiting Ocean Rig from
negotiating with any other party for the work on this one vessel while
the contract was in effect. After the Hyundai Contract was signed, but
before it was considered by the Ocean Rig Board of Directors, FGO
actively pursued a contract from Ocean Rig for the completion of 3
other drilling vessels. Ultimately, the Ocean Rig Board of Directors
did not approve the Hyundai contract and, thereafter, FGO received a
contract to complete two drilling vessels for Ocean Rig and an option
to complete 2 more. Hyundai alleges that FGO tortiously interfered
with the Hyundai Contract in order to obtain a contract from Ocean Rig
for the completion of the first drilling vessel. FGO denies all of
Ocean Rig's allegations and is vigorously defending the action. The
total potential exposure to FGO is approximately $15 million or 10
percent of the Hyundai Contract.
The Company is a party to various other 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, 1998.
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.....................54 Chairman, President and
Chief Executive Officer
Carl M. Crawford..................55 Executive Vice President
John F. Alford....................39 Executive Vice President
Jobie T. Melton, Jr...............50 Chief Financial Officer
James A. Lowe, III................41 General Counsel and Secretary
Ronald W. Schnoor.................45 Executive Vice President,
Shipyard Operations
* As of March 1, 1999
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 (now Friede Goldman
Offshore, Inc., "FGO") from its formation in 1982 until April 1997,
and from April 1997 Mr. Holloway has been the Chairman of the Board of
FGO. 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 FGO, a position he has held for more than the last
five years. Prior to joining FGO 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 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 FGO 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.
Jobie T. Melton, Jr. joined the Company as its Chief Financial
Officer on July 1, 1998. Prior to joining the company, Mr. Melton was
with Arthur Andersen LLP for twenty-seven years, the last 15 of which
he was a partner. Mr. Melton is a Certified Public Accountant.
James A. Lowe, III has served as General Counsel and Secretary
of the Company since May 1997. Mr. Lowe joined FGO on January 1, 1997
as General Counsel. He has also served as Director of FGO and
Director and Secretary of Friede & Goldman since February 1997. Prior
to joining Friede Goldman Offshore, 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.
Ronald W. Schnoor was named Executive Vice President of Shipyard
Operations for the Company in November 1998. He served as President of
FGO from April 1997 and as the Vice President, Manager of Operations
of since 1992. Mr. Schnoor joined FGO 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
During most of 1998, the Company's Common Stock was traded on the
Nasdaq National Market. On December 1, 1998, the company's Common
Stock began trading on the New York Stock Exchange. At March 1, 1999,
there were 170 stockholders of record of the Common Stock. The
Company estimates that an additional 11,462 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 through November 30, 1998 and on the New York Stock Exchange
from December 1, 1998 through December 31, 1998, for the periods
indicated.
Sales Price
------------------------
Period High Low Cash 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
Quarter ended March 31, 1998 35 1/2 20 9/16 N/A
Quarter ended June 30, 1998 41 7/8 26 N/A
Quarter ended September 30, 1998 30 10 1/4 N/A
Quarter ended December 31, 1998 18 15/16 9 3/4 N/A
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.
ITEM 6. Selected Financial Data
The following table sets forth selected historical financial data
as of the dates and for the periods indicated. The historical
financial data set forth below are derived from the audited financial
statements of the Company and the Company's predecessor companies, F&G
Ltd. and HAM Marine (collectively, 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,
---------------------------------------------------------
1994 1995 1996 1997 1998
------- ------- -------- ------- --------
(In Thousands, except per share data)
Statement of Operations Date:
Revenue.................................................. $23,891 $19,865 $21,759 $113,172 $382,913
Cost of Revenue.......................................... 18,063 13,510 15,769 75,236 293,712
------- ------- -------- ------- --------
Gross profit ....................................... 5,828 6,355 5,990 37,936 89,201
Selling, general and administrative expenses............. 2,203 3,862 6,673 12,097 32,699
------- ------- -------- ------- --------
Operating Income (loss)............................. 3,625 2,494 (684) 25,839 56,501
Net interest income (expense)............................ (346) (197) (448) 673
(201)
Gain on asset sales...................................... 808 1,869 349 3,922 --
Litigation settlement.................................... -- 750 3,467 611 --
Other.................................................... 23 6 104 165
(336)
------- ------- -------- ------- --------
Income before provision for income taxes............ 4,110 4,921 2,788 31,210 55,964
Provision for income taxes............................... -- -- -- 7,941 20,678
------- ------- -------- ------- --------
Net Income .............................................. $4,110 $4,921 $2,788 $23,269 $35,286
======= ======= ======== ======= ========
Unaudited Pro Forma Data:
Net income as reported above............................. $4,110 $4,921 $2,788 $23,269 $35,286
Pro forma provision for income taxes (1)................. (1,521) (1,821) (1,032) (3,980) --
------- ------- -------- ------- --------
Pro forma net income................................ $2,589 $3,100 $1,756 $19,289 $35,286
======= ======= ======== ======= ========
Earnings per common share:
Basic .............................................. $0.22 $0.27 $0.15 $1.10 $1.46
Diluted ............................................ $0.22 $0.27 $0.15 $1.09 $1.43
Pro Forma earnings per common share:
Basic............................................... $0.14 $0.17 $0.10 $0.92 $1.46
Diluted ............................................ $0.14 $0.17 $0.10 $0.91 $1.43
Weighted average common shares outstanding:
Basic............................................... 18,400 18,400 18,400 21,065 24,211
Diluted ............................................ 18,400 18,400 18,400 21,297 24,599
Statement of Cash Flows Data:
Cash provided by operating activities.................... $3,094 $269 $4,875 $51,122 $21,088
Cash provided by (used in) investing activities.......... 410 (2,410) (3,866) (26,541)
(77,299)
Cash provided (used in) financing........................ (3,123) 2,581 (706) 29,947 41,156
Other Financial Data:
Depreciation and amortization........................... $347 $425 $696 $1,609 5,875
Capital expenditures.................................... 1,150 2,670 2,357 26,595 60,738
EBITDA (2).............................................. 4,054 2,919 1,092 28,464 62,155
Balance Sheet Data:
Working capital......................................... $2,370 $2,714 $1,104 $45,522 $5,859
Net property, plant and equipment....................... 3,582 4,079 5,546 11,817 138,108
Total assets ........................................... 8,584 14,980 27,582 142,555 314,560
Long-term debt ......................................... 3,217 3,270 2,853 25,767 45,863
Stockholder's equity.................................... 2,681 5,255 6,219 63,805 85,290
(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 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 declines in oil and
natural gas prices over the past year, worldwide offshore drilling
activity has remained relatively high over the past few years.
According to Offshore Data Services, Inc. as of February 5, 1999, the
utilization rate of the worldwide fleet of offshore mobile drilling
units was 79.2%. While this rate represents a decline from the 96.4%
utilization rate of one year ago, it is only slightly less than the
81% utilization rate of five years ago. This level of drilling
activity is generally attributed 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
resulted in increased demand for newly constructed semisubmersible
drilling rigs and for retrofitting offshore drilling rigs.
During the second half of calendar 1998, worldwide orders for the
construction of new offshore drilling rigs declined. However, the
Company has maintained a significant contract backlog of deepwater
related projects. At December 31, 1997, the Company's backlog was
approximately $324.6 million. The Company's backlog at December 31,
1998 was approximately $364.7 million, of which over $350 million was
related to deepwater projects. In addition, in February 1999, the
Company was awarded a $143.2 million contract for the new construction
of a Friede & Goldman, Ltd. designed Millennium S.A. semisubmersible
offshore drilling rig. The contract is subject to the securing of rig
financing by the owner.
To accommodate its rapid growth, the Company has leased
additional acreage adjacent to FGO West's existing shipyard in
Pascagoula, Mississippi, that provides it with additional dock space
and covered fabrication capacity. In addition, the Company has
completed construction of a state-of-the-art shipyard, also in
Pascagoula, Mississippi, that is capable of constructing new offshore
drilling rigs and production units as well as converting, retrofitting
and repairing existing offshore drilling rigs and production units.
The new facility ("FGO East" formerly known as the "Greenwood Island
Facility") began generating revenue in the first quarter of 1998 and
became fully operational in the third quarter. Further, the Company
has increased its workforce from approximately 430 employees at
December 31, 1996 to approximately 4,200 employees at December 31,
1998.
In January 1998 the Company acquired substantially all of the
operating assets of a shipyard and fabrication facility in
Marystown, Newfoundland (the "Marystown Facility"). The Marystown
Facility expanded the Company's capacity for new construction as well
as retrofit and repair of offshore drilling rigs and production units.
Also, in February 1998, the Company acquired a company located near
Nantes, France, that designs and manufactures mooring, anchoring,
rack-and-pinion jacking systems and cargo handling equipment. This
additional capacity is expected to help the Company in meeting the
anticipated increase in demand for such equipment as components of new
and modified offshore drilling rigs.
Due to general declines in oil and gas prices during 1998, demand
for offshore drilling rigs has declined and, as a result, dayrates
earned by drilling contractors have also declined. While the
Company's backlog remains strong, it is possible that continued low
oil and gas prices could result in a further decline in demand for
deepwater drilling rigs and, as a result, dayrates for rigs could also
decline further. Substantially all of the contracts included in the
Company's backlog at December 31, 1998 relate to deepwater drilling
rigs. Some of these contracts are subject to cancellation by the
customers, however, the Company has had no indication that any of its
contracts might be cancelled.
At December 31, 1998, the Company has paid or committed
approximately $11.3 million for the manufacture of certain
jackup rig components. As noted above, demand for new construction of
jackup drilling rigs has declined. However, management of the Company
believes that contracts for new construction, modification or repairs
will be secured that will utilize these components and permit the
Company to realize its investment in the components.
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 cost-plus basis. 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 or environmental standards established by
the Coast Guard or other regulatory authorities. With respect to the
fixed-price portions of a project, the Company receives the negotiated
contract price, subject to adjustment only for change orders placed by
the customer. As a result, under fixed price arrangements, the Company
retains all cost savings but is also responsible for all cost
over-runs. Under cost-plus arrangements, the Company receives
specified amounts in excess of its direct labor and materials cost so
that it is protected against cost overruns but does not benefit from
cost savings. The cost and productivity of the Company's labor force
are primary factors affecting the Company's operating profits.
Accordingly, control by the Company of the cost and productivity of
direct labor hours worked on its projects is essential. The Company
believes that the access to information provided by its project
management system allows it to effectively manage its current projects
as well as to negotiate contracts on new projects on a profitable
basis.
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 based upon the percentage
that incurred costs to date, excluding the costs of any purchased but
uninstalled materials, bear to total estimated costs. Accordingly,
contract price and costs 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 the contract penalty provisions and final contract
settlements, are recognized in the period in which the revisions are
determined. 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.
Results of Operations
Comparison of the Years Ended December 31, 1998 and 1997
During the year ended December 31, 1998, the Company generated
revenue of $382.9 million, an increase of 238%, compared to the $113.2
million generated for the year ended December 31, 1997. This increase
was caused by (1) an increase in demand for conversion and retrofit
services related to deep water offshore drilling rigs, (2) revenues of
approximately $71.0 million attributable to the completion and
outfitting of an existing semisubmersible drilling rig hull, (3)
approximately $62.2 million of revenues attributable to the new
construction of semi-submersible drilling rigs, and (4)
revenues of approximately $113.9 million generated by the Company's
Marystown Facility and French operations.
Cost of revenue was $293.7 million for the year ended December
31, 1998 compared to $75.2 million for the year ended December 31,
1997, resulting in an increase in gross profit from $37.9 million for
the year ended December 31, 1997 to $89.2 million in the year ended
December 31, 1998. The decrease in gross profit as a percentage of
revenues can be explained as follows: (1) the new build construction
of semisubmersible offshore drilling rigs generally results in
lower gross margin percentages than those generated from repair and
retrofit work, (2) the company earned smaller margin percentages on
contracts assumed upon the acquisition of the Marystown Facility, and
(3) margin percentages earned on equipment sales from the Company's
French operations, while typically higher than margins earned on new
build construction are generally less than those earned from repair
and retrofit work. Management expects that gross margins, as a
percentage of revenues, may trend lower as a more significant portion
of the company's total revenues is derived from the new construction
of offshore drilling rigs and from sales of equipment. Such lower
gross margin percentages result from a higher dollar volume of lower
margin material and subcontract costs included in costs of revenues,
and from a greater portion of the total project being performed on a
fixed price basis. Gross margins on repair and retrofit projects also
vary based on, among other things, the size of the project undertaken.
Selling, general and administrative expenses "(SG&A expenses")
were $32.7 million in the year ended December 31, 1998 compared to
$12.1 million for the year ended December 31, 1997. The increase in
SG&A expenses reflects an increase in sales and administrative
workforce and facilities due to overall growth of the Company's
business, the additional administrative costs associated with
international activities and costs associated with being a publicly
held corporation.
Operating income increased by $30.7 million from the year ended
December 31, 1997 to $56.5 million for the year ended December 31,
1998 primarily as a result of increased revenue and gross profit
discussed in the preceding paragraphs.
Net interest income (interest income less interest expense)
declined to $0.2 million for the year ended December 31,
1998 from $0.6 million for the year ended December 31, 1997, primarily
as a result of increased interest expense attributable to borrowings
related to FGO East and equipment additions in the existing FGO West
yard.
The change in other income (expense) is primarily attributable to
miscellaneous items, none of which are individually material.
The provision for income taxes for the year ended December 31,
1998 reflects a composite income tax rate of approximately 37%
including foreign taxes of approximately $2.9 million. The actual and
proforma provision for income taxes for the year ended December 31,
1997, reflects a combined Federal and State tax rate of 38%. The
decline in the overall rate for the year ended December 31, 1998 is
the result of available state income tax credits related to increased
employment levels at the Company's Pascagoula, Mississippi locations.
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. 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 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.
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
acquired with proceeds from such borrowings. Net cash provided by
operations was $52.1 million and $21.1 million for the year ended
December 31, 1997 and 1998, respectively. Accounts receivable and
inventory related to contracts as of December 31, 1998 have increased
significantly over amounts outstanding at December 31, 1997 while, at
the same time, billing in excess of revenues and estimated profits on
several large projects being in progress have declined causing the
decline in operating cash flow.
During the year ended December 31, 1998, the Company incurred
approximately $60.7 million in capital expenditures primarily related
to the overall expansion of the Company's business activities. Of the
total, $52.3 million was expended for facilities and related
additional equipment. $0.9 million was also expended for furniture and
fixtures and $7.5 million was related to building improvements. In
addition, in February, 1998, approximately $25.0 million was
expended for the acquisition of the Company's French subsidiary. The
capital expenditures and acquisition costs were funded from operating
cash flow, proceeds from the initial public offering, the MARAD
arrangement and the $8 million and $18 million debt facilities
discussed below.
In March, 1997, FGO entered into a 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. During 1998, the borrowing capacity under the Credit
Facility was increased to $25.0 million and was extended until March
31, 1999. At December 31, 1998, $9.3 million was the outstanding
balance under the Credit Facility and $9.6 million was available.
Borrowings under the Credit Facility bear interest equal to the
lender's prime lending rate plus 1/2% per annum. At December 31, 1998,
the interest rate under the Credit Facility was 8.14% per annum. The
Credit Facility contains a number of restrictions, including a
provision that would prohibit the payment of dividends by FGO to the
Company in the event that FGO 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 has signed a commitment letter with the bank for $30
million credit facility that would provide up to $15 million in
receivable based credit and a $15 million capital expenditure and
acquisition facility that can be converted to a 3 year term loan upon
termination of the facility. Other terms and restrictions of the $30
million facility are similar to the existing facility.
As a source of borrowing for expansion, the United States
Maritime Administration ("MARAD") provided its guarantee for
$24.8 million of bonds issued by the Company. The proceeds from the
sale of MARAD guaranteed bonds were used for capital expenditures
relating to constructing and equipping the Company's FGO East
Facility. Borrowings under the MARAD facility are secured by the FGO
East Facility, bear interest at 6.35% and are repayable over 15 years.
As of December 31, 1998, approximately $24.8 million was outstanding
under the MARAD facility.
During 1998, the Company entered into an $8 million equipment
financing arrangement. Amounts borrowed bear interest at 7.05% and are
being repaid in quarterly installments of $500,000 plus interest
through March 2002. The balance outstanding at December 31, 1998 was
$6.5 million. During December 1998, the Company issued $18.0 million
of 10 year 7.99% Mississippi Business Finance Corporation Taxable
Industrial Development Revenue Bonds (the "MBFC Bonds"). The
bonds require annual principle and interest of approximately $2.6
million. The proceeds from both the $8.0 million equipment facility
and the $18.0 million MBFC Bonds were used to purchase equipment
(primarily cranes and welding related equipment) and a floating dry
dock. The borrowings are secured by the equipment purchased.
During 1998, the Board of Directors authorized a stock repurchase
plan under which the Company could repurchase shares of its common
stock in open market transactions with an aggregate fair value of up
to $30,000,000. Through December 31, 1998, the Company had repurchased
1,188,900 shares of its Common Stock for an aggregate of approximately
$15.5 million. The Company utilized a $15.0 million short-term credit
facility provided by
an investment banking firm to finance a portion of the purchases. No
amounts were outstanding under that arrangement as of December 31,
1998.
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. Proceeds from the Offering
have been used to finance a portion of the Company's expansion of its
FGO West shipyard, the new FGO East Facility, and the acquisition of
the French operations and for working capital.
At December 31, 1998, the Company had invested approximately
$12.8 million in an unconsolidated subsidiary ("Ilion LLC") in which
the Company currently owns a 50% equity interest. The Company's
ownership interest in Ilion LLC is expected to be reduced to 30%.
Ilion LLC owns a hull for a semi-submersible drilling rig that
requires substantial completion and outfitting. The Company and the
other member of Ilion LLC (who is also one of the Company's largest
customers) are considering various options for formal arrangements
related to the hull, including financing of the completion, securing
a contract for utilization or sale of the rig, or other options. The
Company's investment in Ilion LLC was financed through cash flow from
operations. Other than the initial purchase of the drilling rig hull,
Ilion LLC has had no significant activity as of December 31, 1998. The
Company's investment in Ilion LLC is accounted for using the equity
method.
Management believes that cash generated by operating activities,
and funds available under its various credit facilities will be
sufficient to fund its capital expenditure requirements and its
working capital needs at current levels of activity. Management of
the Company has historically been able to manage cash flow from
construction contracts in such a manner as to minimize the need for
short-term contract related borrowings. However, in light of the
significant increase in revenues during 1998, additional debt
financing or equity financing may be required if the Company continues
to significantly increase its conversion, retrofit and repair business
or obtains significant additional 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.
As noted above, the company has experienced rapid growth during
the past two years. During this period, construction was completed on
the FGO East Facility; an initial public offering of common stock was
completed and the Company's employment level, revenues and backlog
increased significantly. The Company has also invested in an equity
ownership in an unconsolidated subsidiary that owns a semi-submersible
drilling rig, and, 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 foreign entities in Canada
and France. These changes in and significant expansion of the
Company's operation, expose the Company to additional business and
operating risks and uncertainties.
Year 2000 ("Y2K")
Many software applications, hardware and equipment and embedded
chip systems identify dates using only the last two digits of the
year. These products may be unable to distinguish between dates in the
Year 2000 and dates in the year 1900. That inability, if not
addressed, could cause applications, equipment or systems to fail or
provide incorrect information after December 31, 1999, or when using
dates after December 31, 1999. This in turn could have an adverse
effect on the Company, due to the Company's direct dependence on its
own applications, equipment and systems and indirect dependence on
those of other entities with which the Company must interact.
COMPLIANCE PROGRAM. In order to address the Y2K issue, the
Company has implemented a Y2K compliance plan to coordinate the five
phases of Y2K remediation. Those phases include: (1) awareness, (2)
assessment, (3) remediation, (4) testing and (5) implementation of
necessary modifications. The Company has made all applicable levels
of its organization aware of the Y2K issue and of the Company's plans
to assure Y2K compliance.
In connection with the rapid expansion of the Company's business
activities, the Company, with the assistance of third-party
consultants, has conducted an overall assessment of its computer and
information systems needs. As
a result of such assessment, the Company has begun implementation of
an expanded and upgraded information system. The new system, which
will be Y2K compliant, includes upgraded software and hardware and
will involve the outsourcing of certain data processing functions.
Implementation of the new system is scheduled to be substantially
com