Wednesday, January 12, 2000

Dane quits as FGH announces problems with rig contracts
John Dane III has resigned as vice chairman, president and chief operating officer of Friede Goldman Halter. The news came at the same time as a warning that the company anticipates announcing a loss for the quarter ended December 31, 1999

Chairman and CEO J.L. Holloway also revealed that the company faces ongoing problems with four rig construction projects. Holloway is picking up Dane's title of of president of the company, which "does not currently anticipate filling the
office of chief operating officer. "

FGH's spin on this is that it is "taking certain steps to minimize the financial and operational impact of problems resulting from four rig construction contracts with two customers and plans to aggressively evaluate all non-strategic assets and operations for divestiture opportunities." The FGH board has approved the retention of an investment banking firm to facilitate the process.

The four rig contracts in question are two for Ocean Rig ASA and two rig for Petrodrill.

FGH says it has has notified Ocean Rig ASA regarding additional construction delays on the Bingo 9000 1 & 2 semisubmersible drilling rigs. FGH asserts that "deficiencies in the owner's design and late deliveries of owner-furnished equipment and owner-furnished information have caused FGH additional delays and cost overruns. The company has not determined feasible delivery dates due to the delays in Ocean Rig's delivery of owner-furnished equipment and owner-furnished information as well as unresolved critical issues regarding Ocean Rig's contractual obligation to commission the rigs."

FGH says that "as a result of Ocean Rig's failure to meet its obligations," it won't t the scheduled delivery dates for the two Bingos of March 31 and June 30, 2000.

FGH had previously announced that it would make a claim for $75 million in compensation for additional costs and delays in an arbitration proceeding slated to begin January 27. Now, it says, it has subsequently increased its claim in the arbitration proceeding to $95 million.

FGH anticipates an arbitration decision by the end of March. It says it believes that it has "additional claims for substantial amounts, in excess of the claims made in the pending arbitration, for additional costs and delay damages relating to the construction of the two rigs." These claims will not be considered as part of the arbitration commencing at the end of January. FGH will assert the additional claims in a subsequent arbitration proceeding, which was initiated by Ocean Rig on January 11, 2000. Ocean Rig has asserted claims against the FGH based on FGH's failure to deliver the rigs on or prior to the contractual delivery dates.

FGH has notified Petrodrill that, "as a result of ongoing delay, deficiencies and other
material defects in work by engineering subcontractors chosen by Petrodrill," FGH is entitled to extensions of the contractual delivery dates. FGH says it believes that the delays by these subcontractors constitute permissible delay under the contracts. It says Petrodrill has consistently refused to grant extensions in the delivery dates.

"These factors," says FGH, "are causing, and are expected to continue to cause, the company to incur significant additional costs in excess of the company's original anticipated costs. The company has responded by deferring additional fabrication efforts on these projects, and is proceeding with detailed engineering only in order to re-establish proper sequencing. Without the requested time extensions, the company has notified Petrodrill that the existing contract delivery dates cannot be met. In addition, the company has informed Petrodrill that it is entitled to compensation for additional costs and delay damages."

FGH says it "anticipates that Petrodrill will disagree with the company's actions."

"As a result of the continued sluggish market conditions through the fourth quarter, merger related costs and the impacts of the Ocean Rig contracts," says FGH, it "anticipates that it will report a loss for the quarter ended December 31, 1999. The amount of the loss has not been determined and is dependent ,in large part, upon the results of the Ocean Rig arbitration proceedings. The results of those proceedings could materially impact the company's financial results for the fourth quarter. However, any costs incurred by the company in excess of the original contract price on the Petrodrill contracts will not materially affect the company's income statement because such amounts will be reflected in the purchase accounting treatment of the acquisition by Friede Goldman of Halter Marine Group, Inc.

Under such accounting treatment, any such excess amount will have the impact of increasing goodwill, which will be amortized over a 25-year period.

"Our decision to become more proactive in protecting our rights and interests on both the Ocean Rig and Petrodrill projects was not arrived at easily," said Holloway. "The Friede Goldman Halter companies have a long history of meeting commitments for virtually every established operator in the offshore energy industry. We are pleased with the status of other projects in our vessel, engineered products and offshore segments."

Finally, the company announced several new construction contracts with a total value of $199 million:

  • A $110 million derrick/pipelay barge for the China National Offshore Oil Company (CNOOC). The vessel will incorporate a 3,800 metric ton AmClyde Model 60 crane and an AmClyde 8-point mooring system. The barge and many of the AmClyde components will be built at the Yantai Raffles shipyard in Yantai, China with Friede Goldman Offshore serving as prime contractor. This contract is contingent upon the Company providing a financial guarantee bond in the amount of 10% of the contract value.
  • A $70 million car carrier for Pasha Hawaii Transport Lines, a joint venture between The Pasha Group and Van Ommeren Shipping USA. The 580-foot vessel will be constructed at the company's Pascagoula, MS facility. Construction is subject to U.S. Maritime Administration financing, an application for which was applied for in December 1999.
  • A $10 million contract to build an ocean-going tank barge for Express Marine.
  • A $9 million contract to build 30 deck barges for Ingram Industries.

 

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