2001 Maritime
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April 4, 2001

FGH may seek bankruptcy protection
In its annual form 10K, filed with the SEC April 2, Friede Goldman Halter management warns "If we are unsuccessful in renegotiating our credit agreement and raising additional capital, we may not be able to meet our obligations in the ordinary course of business and it may be necessary to seek protection under a petition for bankruptcy."

A.G. Edwards has downgraded FGH shares to Reduce from Buy.

Analyst is Poe Fratt commented

"We are lowering our rating on the shares of FGH to Reduce/Spec from Buy. Friede Goldman Halter-FGH released the 2000 10-K after the close yesterday and it contained some negative surprises that call into questions the company's ability to obtain financing to fund current operations: 1) FGH increased the excess estimated cost (ie to be absorbed by FGH) of the Petrodrill semisubmersible projects to $121.7 million from approximately $60 million at the end of 3Q2000. 2) FGH ended the year with negative working capital of $65 million (excluding defaulted debt of about $66 million). The negative working capital includes about $52 million owed to trade creditors that is more than 60 days outstanding. 3) An arbitration panel has made a preliminary ruling that FGH must pay Bollinger Shipyard $8.2 million as a working capital adjustment to the August 2000 sale of the vessel repair business. 4) FGH may have to pay liquidated damages to the Province of New Foundland of about $5 million ($C10 million) and liquidated damages (undisclosed amount) for the late delivery of a derrick barge/crane projects. FGH's options at this point include the sale of the equipment manufacturing operation (AmClyde and BLM), an infusion of equity or a debt/equity swap. All three of these actions would impair the value of current shareholders and would probably materially dilute existing shareholders. Due to this unforeseen situation, today's scheduled conference call has been postponed until a late date. As a result of FGH's impaired liquidity and continued losses in the rig construction business, we are downgrading FGH to Reduce/Speculative."

What has FGH in deep trouble, of course, are its contracts with Ocean Rig and Petrodrill. In the 10-K, from which the following is extracted, FGH says: "Our results of operations for 2000 and 1999 and our current financial condition have been materially and adversely impacted by contracts entered into in 1998 for the construction of four semi-submersible drilling rigs. "

"Since January 2000, when we entered into a Confidential Settlement Agreement with Ocean Rig to resolve disputes with respect to contracts to construct two Bingo design semi-submersible offshore drilling rigs, we continued to experience significant continuing cost overruns and delays in the construction of these rigs. As a result, we recorded provisions for contract losses during the second, third and fourth quarters of 2000 of approximately $24.6 million, $7.0 million and $38.2 million, respectively, related to this project. Losses for the fourth quarter include a provision for all costs we incurred through the date of the March 9, 2001 amendment to the contract, at which time the contract was converted to a 'time and materials' basis."


In the 10-K, FGH asserts that "delays and cost increases related to additional design changes initiated by Ocean Rig and the late delivery by Ocean Rig of information and equipment we were required to provide continued after the Settlement Agreement. Ocean Rig denied responsibility for these delays and cost increases."

FGH says this "post-settlement agreement dispute" was resolved pursuant to a negotiated cooperation agreement dated November 30, 2000 (the "Co-operation Agreement") that provided for additional compensation to Friede Goldman Halter from Ocean Rig and revised delivery dates of March 2001 and June 2001 and imposition of liquidated damages thereafter.

"Despite our best efforts to progress the project consistent with the terms of the cooperation agreement," says the 10-K filing, "we continued to experience additional cost overruns and delays which have had a significant adverse impact on our financial results in the fourth quarter 2000 and our current financial condition. On March 1, 2001, we stopped work on the Ocean Rig project and Ocean Rig commenced an arbitration proceeding in London. Further, on March 2, 2001, Ocean Rig commenced proceedings before the United States District Court for the Southern District of Mississippi seeking possession of the rigs. On March 9, 2001, the parties entered into a further agreement (the 'Remuneration Agreement') in order to resolve the disputes which had arisen between them since the date of the cooperation agreement, to amend certain of the provisions of the completion contracts, the settlement agreement and the cooperation agreement and to ensure the successful and timely completion of the rigs ..."

Ocean Rig was granted control over the rig projects and will pay FGH a contractually established rate for equipment, personnel and labor provided by FGH to cover the costs of completing the projects.Ocean Rig has withdrawn the arbitration and other legal proceedings. FGH also agreed to issue 2.0 million warrants to Ocean Rig ASA to purchase FGH common stock at a strike price of $5.00 per share.

FGH says it now anticipates that shipyard construction of the first rig will be completed in April 2001 and that the rig will leave for sea trials. It anticipates that shipyard construction of the second rig will be completed approximately 90 days after the completion of shipyard construction on the first rig with sea trials to follow.

Petrodrill
Turning to its problems with Petrodrill, FGH says in the 10-K that in April 1998, one of its subsidiaries ("FGOT") entered into contracts to construct two semi-submersible drilling rigs for two newly formed entities, Petrodrill IV, Ltd. and Petrodrill V, Ltd. ("Petrodrill").

After the commencement of construction, FGOT began to experience delays in the production schedule and increased costs due, asserts FGH, in whole or part, to delays caused by Petrodrill and by subcontractors nominated by Petrodrill. In addition, FGOT had to perform as the lead yard as opposed to a follow-on yard as initially anticipated by the contracting parties.

In April 1999, and in connection with a transaction whereby the U.S. Maritime Administration ("MARAD") agreed to finance the Petrodrill rigs, FGOT and Petrodrill entered into an amendment to the contracts that provided, among other things, for extensions to the delivery dates of approximately six months for each rig. Thereafter, production delays continued. Under the contracts, FGOT is entitled to extensions of the delivery dates for permissible delay as defined in the Contracts ("Permissible Delay") and for delays caused by Petrodrill breaches of contract. FGOT notified Petrodrill that, as a result of such delays, it was entitled to additional extension of the delivery dates and to additional compensation. Petrodrill refused to acknowledge FGOT's right to extension of the delivery dates. Petrodrill was also advised that the rigs could not be completed by their respective existing delivery dates.

In January 2000, FGOT notified Petrodrill that it was mitigating its and Petrodrill's damages by deferring certain fabrication efforts until engineering work could be completed so that the company could determine the ultimate cost of the project and permit construction to go forward in an efficient manner.

FGOT also notified Petrodrill that it believed it was entitled to additional monetary compensation from Petrodrill as a result of delay, disruption, inefficiencies and other direct and indirect costs caused by, among other things, delays by Petrodrill and its nominated subcontractors and by FGOT being required to perform as the lead yard. Consequently, Petrodrill and Friede Goldman Halter filed a series of actions against one another in the United States federal court and in the court of London, England.

On February 28, 2001, FGH announced an agreement in principle with the surety company which wrote the performance bonds on the Petrodrill project, pursuant to which the surety company has agreed to provide certain funding for the completion of construction of the two rigs. The agreement provides that the surety company will contract with FGOT for FGOT's completion of the project on a "time and materials" basis, including payment of all direct labor and fringe benefit costs, materials, subcontractor and other costs and an allocation for overhead and general and administrative expenses.

FGH says the terms of the final agreement have not been negotiated and inability to reach an agreement could result in the surety ceasing to provide funding. "The objective of the agreement with the surety company is to provide us sufficient funds to be able to complete the projects with a minimal amount of future delay and additional cost. The agreement with the surety company does not, however, transfer the risks associated with the additional cost overruns or delays from us as we will be ultimately liable to the surety company for all amounts advanced. "

"If the surety company chooses not to make such advances," says FGH, "and we are unable to secure alternative sources of financing, we may be unable to continue construction or otherwise perform our obligations under the Petrodrill contracts. Further, if we are unable to negotiate repayment terms which are acceptable to both the surety company and thecompany, the surety company may, within the authority of the General Indemnity Agreement demand immediate repayment of all amounts advanced. A determination by the surety company at any point not to continue to provide such advances or a decision by the surety company to seek immediate repayment of advances, could have a material adverse effect on our operating results and financial condition."

Based upon current estimates, FGH believes it will incur approximately $121.7 million in costs in excess of the amended contract price to complete the rigs. A provision for these excess costs was made in the accounting treatment of assets and liabilities acquired through the merger with Halter Marine Group.

"As of December 31, 2000, the remaining balance of such costs that will be funded through completion of the projects is approximately $61.3 million and is included in the reserve for losses on uncompleted contracts in the consolidated balance sheet. We expect the surety company to fund approximately $50.0 million of this remaining cost and such costs will be substantially expended in 2001."


Results of Operations

Our consolidated financial statements include the accounts of FGH, Inc. and its wholly-owned subsidiaries, including, among others, Friede Goldman Offshore, Inc. ("FGO"), Friede & Goldman, Ltd. ("FGL"), Friede Goldman Newfoundland Limited ("FGN"), Friede Goldman France S.A.S. ("FGF"), and Halter Marine, Inc. ("Halter") (collectively referred to as the "Company"). These consolidated statements include the accounts of FGF for all periods subsequent to February 5, 1998, HMG for all periods subsequent to November 3, 1999. All significant intercompany accounts and transactions have been eliminated.

Contract Revenue

The table below summarize our revenue by segment for the periods noted:


For the years ended December 31,
----------------------------------------
2000 % 1999 % 1998 %
------ ----- ------ ----- ------ -----
($ in millions)
Offshore:
New build............................ $223.7 31.7% $189.8 39.6% $ 67.7 17.7%
Conversion, repair and other......... 142.1 20.2 210.7 43.9 263.3 68.8
------ ----- ------ ----- ------ -----
365.8 51.9 400.5 83.5 331.0 86.5
Vessels:
Energy............................... 30.3 4.3 6.8 1.4 -- --
Government........................... 65.8 9.3 13.2 2.7 -- --
Repair............................... 49.7 7.0 11.9 2.5 -- --
Other................................ 69.4 9.9 7.0 1.5 -- --
------ ----- ------ ----- ------ -----
215.2 30.5 38.9 8.1 -- --
Engineered Products:
Energy & construction................ 124.1 17.6 40.3 8.4 51.9 13.5
------ ----- ------ ----- ------ -----
$705.1 100.0% $479.7 100.0% $382.9 100.0%
====== ===== ====== ===== ====== =====

During the year ended December 31, 2000, we generated revenue of $705.1 million, an increase of 47.0%, compared to the $479.7 million generated for the year ended December 31, 1999. The overall increase was attributable to the following:

. Vessels segment revenues increased $176.3 million in 2000 as 1999 included only two months of revenues.

. Offshore segment revenue decreased by $34.7 million or 8.7% in 2000 primarily due to:

- a decrease of approximately $49.0 million in revenues attributable to the ongoing construction of the two Ocean Rig semi-submersible drilling rigs which are nearing completion, and a $123.0 million decline related to the completion and outfitting of five conversions in 1999 and a portion of 2000 which were not replaced in 2000 due to a decrease in demand for conversion projects. The remainder of the decrease was due to the decreased demand for miscellaneous smaller projects. These decreases were offset by:

- an increase in revenues of approximately $149.7 million generated by offshore entities acquired in the HMG merger; including an increase in revenues of approximately $89.8 million attributable to the ongoing construction of the Petrodrill two semi-submersible drilling rigs and a derrick barge.

. Engineered Products segment revenue increased $83.8 million in 2000 primarily due to an increase of $82.8 million in revenues generated by the Engineered Products Group acquired in the HMG merger, as 1999 included only two months of operations.


During the year ended December 31, 1999, FGH generated revenue of $479.7 million, an increase of 25.3%, compared to the $382.9 million generated for the year ended December 31, 1998. The overall increase was attributable to the following:

. approximately $109.8 million was attributable to businesses acquired through the HMG merger.

. Offshore segment revenue increased by $69.5 million or 21.0% in 1999. This increase was primarily caused by:

- revenues of approximately $61.8 million generated by offshore entities acquired in the HMG merger, and

- approximately $90.0 million attributable to the ongoing construction of two semi-submersible drilling rigs, offset by

- an $83.2 million decline in revenue primarily related to the completion and outfitting of seven conversions in 1998 and a portion of 1999 which FGHre not replaced in 1999 due to a decrease in demand for conversion projects.

. The newly acquired Vessels segment revenue contributed $38.9 million to our overall growth in revenue in 1999; and

. Engineered Products segment revenue decreased $11.6 million or 22.4% in 1999 as result of the completion of projects which were not replaced due to a decrease in demand. Revenues in this segment include $9.1 million generated by the Engineered Products Group acquired in the HMG merger.

Gross Profit

The following table summarizes our gross profit by segment for the periods noted:


For the years ended December 31,
-------------------------------------------
2000 GP% 1999 GP% 1998 GP%
------- ----- ------ ----- ----- ----
($ in millions)
Offshore:
New build......................... $ (66.3) (27.5)% $(36.2) (19.1)% $14.7 21.7%
Conversion, repair and other...... (1.4) (1.0) 28.0 13.3 62.6 23.8
------- ------ -----
(67.7) (18.5) (8.2) (2.0) 77.3 23.4
Vessels:
Energy............................ 3.1 10.2 0.6 8.8 -- --
Government........................ 14.1 21.4 2.3 17.4 -- --
Repair............................ 4.7 9.5 2.6 21.8 -- --
Other............................. (1.3) (1.8) 0.5 5.7 -- --
------- ------ -----
20.6 9.6 6.0 15.2 -- --
Engineered Products:
Energy & Construction............. 21.5 17.3 7.5 18.6 11.9 22.9
------- ------ -----
$(25.6) (3.6)% $ 5.3 1.1% $89.2 23.3
======= ====== =====

Cost of revenue was $730.7 million for the year ended December 31, 2000 compared to $474.4 million for the year ended December 31, 1999. Gross profit decreased from $5.3 million or 1.1% of revenue in 1999 to a loss of $25.6 million or a negative margin of 3.6% of revenue in 2000. The loss in 2000 is principally the result of several factors including a lower than expected level of revenues in all of our operating segments and significant losses in the Offshore segment mainly due to losses on the Ocean Rig projects. Significant factors are as follows:


. Gross profit for the Vessels segment acquired in November 1999 was $20.6 million or 9.6% compared to $5.9 million with a margin of 15.2%. The increase in gross profit compared to 1999 is due to the inclusion of HMG for the full year of 2000 compared to two months in 1999. The gross profit percentage was adversely impacted by the sale of the repair division during the third fiscal quarter of 2000.

. Gross loss for the Offshore segment increased from a loss of $8.2 million or a negative 2.0% in 1999 to a loss of $67.7 million or negative 18.5% in 2000. This decrease was primarily due to the loss recorded on the two Ocean Rig contracts in the amount of $69.6 million, including a provision for future losses of $21.1 million.

. Gross profit for the Engineered Products segment increased from $7.5 million or 18.6% of revenue in 1999 to $21.5 million or 17.3% of revenue in 2000 primarily as result of increased revenues and margins recognized by operations acquired in the HMG merger.

Cost of revenue was $474.4 million for the year ended December 31, 1999 compared to $293.7 million for the year ended December 31, 1998. Gross profit decreased from $89.2 million or 23.3% in 1998 to $5.3 million or 1.1% in 1999. The following factors contributed to the overall decrease in gross profit from 1998 to 1999:

. Gross profit for the Offshore segment decreased from 23.4% in 1998 to a negative 2.0% in 1999. This decrease was primarily related to a shift in the mix of the segment's business to new build completion of semi- submersible drilling rigs, from the higher margin, business of repair, conversion and retrofitting of drilling rigs. We recorded a gross loss on two contracts in the amount of $37.4 million, including a provision for future losses of $16.5 million. In addition, a third contract for the completion of a semi-submersible rig experienced minimal gross profit. These decreases were offset by an $8.9 million increase in gross profit generated by offshore operations acquired in the HMG merger.

. The newly acquired Vessels segment revenue contributed $5.9 million or 15.3% to our overall growth in revenue in 1999; and

. Gross profit for the Engineered Products segment decreased from 23.0% in 1998 to 18.7% in 1999 primarily as result of the lower volume of revenue recognized by the segment in 1999 compared to 1998.

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