2001 Maritime
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April 4, 2001"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, we 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 were 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.

Operating Loss

FGH says in the 10-K that operating loss increased by $51.3 million from a $38.7 million operating loss for the year ended December 31, 1999 to an operating loss of $90.0 million for the year ended December 31, 2000. Operating income decreased by $95.2 million from $56.5 million for the year ended December 31, 1998 to an operating loss of $38.7 million for the year ended December 31, 1999. "The increased losses for these periods are a result of decreased gross profit and increased selling, general and administrative expenses."

Net interest expense (interest expense less interest income) increased to $33.0 million for the year ended December 31, 2000 from $9.2 million for the year ended December 31, 1999Extraordinary Item

During 2000, we recorded an extraordinary loss of $3.9 million related to the write-offs of deferred loan costs associated with the portion of deferred loan fees related to the previous credit facility which were written off when the agreement was re-negotiated and restated in October 2000.

Liquidity and Capital Resources

"We have incurred substantial operating losses during 2000. As we are unable to make any additional borrowings under our credit facility, our only source of working capital is from payments under our existing contracts, including Ocean Rig and Petrodrill. We do not believe that these contracts will generate a sufficient amount of working capital to meet our obligations in the ordinary course of business. As a result, there is substantial uncertainty regarding our ability to meet our obligations in the ordinary course of business.

"We are not in compliance with certain covenants in our credit agreements with our lenders under our current credit agreement and with MARAD. Also, we have not made our scheduled interest payment on the 4 1/2% Convertible Notes which was due on March 15, 2001. We have a substantial working capital deficit and have significant extended terms with our key trade creditors.

"We have undertaken certain actions during the year to provide cash funds to mitigate these uncertainties including focusing on an agreement with our surety company to fund the Petrodrill projects subsequent to February 2001, an amended agreement with Ocean Rig ASA to complete its projects on a time and materials basis subsequent to February 2001, the sale of certain non-core assets including the operations related to the marine repair and yacht businesses, our ownership interest in an unconsolidated subsidiary and the issuance of 8,750,000 million shares of common stock in an equity offering. We continue to actively market excess real estate and non-strategic investments that could provide additional cash proceeds. Additionally, we are pursuing the possible sale of one or both of our Engineered Products subsidiaries and exploring opportunities with potential investors to raise additional capital. We are also pursuing alternative lending sources in an effort to replace our credit agreement. We continue to negotiate with our creditors to extend our loan repayment terms and to secure additional available funds under the agreement; although, as of the date of this report, an agreement had not been reached. We cannot assure you that any or all of these efforts will lead to successfully completed transactions or, even if we successfully complete transactions, that such transactions will eliminate our liquidity problem.

"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."

Cash flow summary

"During the twelve months ended December 31, 2000, we financed our business activities through funds generated from cash balances, including those generated through collections of accounts receivable, income tax refunds, proceeds from the sale of certain fixed assets and our yacht and vessel repair divisions, proceeds from sale of our ownership interest in an unconsolidated subsidiary, Ilion LLC, as well as proceeds from the sale of common stock.

"Operating activities used cash in 2000 of approximately $53.8 million including a net loss of $106.4 million for the twelve months ended December 31, 2000. Funds generated through operating activities included a $56.6 million decrease in contract and other receivables and $42.3 million from cash refunds of income taxes paid in prior years. Funds used by operating activities included a $101.1 million decrease in accounts payable and accrued liabilities and a $95.5 million decrease in the reserve for uncompleted contracts.

"Net cash provided by investing activities during 2000 was $95.8 million which included $93.8 million in net proceeds from the sale of certain assets and business units including $77.8 million from the sale of the vessel repair units, $13.0 million from the sale of the ownership interest in the Illion LLC and $3.0 million from the sale of the yacht division. Also, $7.6 million was generated from the sale of other fixed assets as a result of our efforts to reduce excess production capacity. During the year 2000, we incurred approximately $5.6 million in capital expenditures.

"Net cash used in financing activities during 2000 was $31.7 million. Sources of cash included $69.5 million in net proceeds generated through the sale of 8.8 million shares of our common stock and $11.2 million in borrowings under debt facilities. We had net repayments under our line of credit of $62.0 million and we repaid $50.3 million in borrowings under other debt facilities, including $30.0 of our Mississippi Business Finance Corporation Taxable Revenue Bonds, Series 1998 and $20.3 million in miscellaneous other debt.

"During 1999, net cash used in operations was $61.1 million which included non-cash depreciation and amortization expense of $13.1 million. We incurred $7.5 million in capital expenditures. Net cash provided by financing activities was $39.6 million and was primarily associated with borrowings under our line of credit. "

Restated Credit Agreement

"Effective October 24, 2000, we entered into a $110.0 million amended and restated credit agreement, comprised of a $70.0 million line of credit and a $40.0 million term loan (collectively, the "Restated Credit Agreement"). The Restated Credit Agreement has a three-year term. The line of credit is secured by substantially all of our otherwise unencumbered assets, including accounts receivable, inventory, equipment, real property and all of the stock of our domestic subsidiaries and 67% of the stock of our Canadian subsidiary. The term loan is secured by a subordinated security interest in the line of credit collateral.

"Under the original terms of the Restated Credit Agreement, we may borrow up to $70.0 million under a senior secured revolving line of credit facility. Availability under the line of credit is based on specified percentages of our receivables, inventories, equipment and real property. The interest rate on the line of credit is based on LIBOR or the base rate (as defined), with a floor of 7.5%. During the first year of the line of credit the spread is fixed at 3.75% over LIBOR and 1.75% over the base rate; thereafter the LIBOR option ranges from 3.25% to 4.25% over LIBOR and the base rate option ranges from 1.25% to 2.25% over the base rate, (as defined). We are also obligated to pay certain fees, including a commitment fee equal to (i) during year one of the facility, 0.50% of the unused portion of the line of credit and (ii) thereafter, a range of 0.25% to 0.50% of the unused portion of the line of credit.

"The term loan is a $40.0 million interest-only three-year facility with a stated maturity of October 2003. The term loan bears interest at the base rate (as defined) plus 5.5% with a floor of 13%. At our option, we have the ability to capitalize 1.5% of the current interest charge through maturity. Interest is payable monthly. Proceeds from the term loan were used to repay the 1999 Credit Facility in its entirety. The balance of the Credit Facility at the time of the pay-off was $40.0 million, including accrued interest and fees.

"In connection with the payoff of the 1999 Credit Facility, we recognized an extraordinary loss of $3.9 million as a result of the write-off of the deferred financing costs associated with the Credit Facility.

"The Restated Credit Agreement requires that we comply with certain financial and operating covenants, including limitations on additional borrowings and capital expenditures, utilization of cash
management accounts, maintenance of certain minimum debt coverage ratios, minimum EBITDA, net worth and other requirements. Substantially as a result of the losses we incurred during the fourth quarter and difficulties encountered in resolving other requirements related to collateral, subsequent to year end, we determined that we are not in compliance with all of the requirements included in the covenants. Our failure to comply with the covenants in the Agreement constitutes an Event of Default, as defined, and provides the lenders with various remedies, which include declaring all obligations immediately due and payable, ceasing advancing money or extending additional credit, holding balances received in our Cash Management Accounts, among others. We have not obtained waivers of the violations and accordingly, have reclassified the amounts outstanding under the Restated Credit Agreement as a current liability in the consolidated financial statements. Due to the covenant violations and limitations in the calculation of the borrowing base under the agreement, we do not presently have additional borrowing capacity available to use under the line of credit. If our lenders were to declare the amounts outstanding under the Restated Credit Agreement to be payable in full, we do not anticipate that we would have sufficient funds available to make such payments when due.

"Total balances outstanding under the Restated Credit Agreement at December 31, 2000 were $73.1 million including $28.4 million in letters of credit. "

4 1/2% Convertible Notes

"We elected not pay the $4.2 million interest payment due on March 15, 2001 related to the 4 1/2% Convertible Notes. Our ability is to make this interest payment within the 30-day grace period provided for under the indenture agreement related to the Notes; however, our ability to do so may be impacted by a number of the factors discussed throughout this report. If payment is not made within the grace period, the entire balance of the Notes would become immediately callable."

Ocean Rig and Petrodrill

"As stated earlier in the report, 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 (the 'Ocean Rig" and 'Petrodrill' projects). We have taken several actions in an effort to ensure, to the best of our ability, that these projects are funded and completed...."

"However, if Ocean Rig ASA fails to make any of the payments on the Bingo projects under its agreement with us, we could incur significant legal fees which could have a material adverse impact on our cash flow and financial condition.

"With regard to the Petrodrill projects, if the surety company chooses not to make advances under our agreement with them, 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 us, the security 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."

Trade Creditors

"We are currently paying trade creditors on an untimely basis. As of March 26, 2001, we have approximately $52.0 million in indebtedness outstanding greater than 60 days to these trade creditors. Our inability to pay these trade creditors on a timely basis could make them unwilling to continue to supply us with materials necessary for us to conduct our business. Such a result would have a material adverse effect on our financial condition and results of operations."

The table below provides information about future maturities of principal for FGH's outstanding debt instruments and fair value at December 31, 2000. All instruments described are non-trading instruments ($ in thousands).


There- Fair
2001 2002 2003 2004 2005 after Value
------- ------ ------ -------- ------ ------ --------
Long-term debt:
Fixed rate............. $30,157 $4,594 $2,758 $187,433 $3,001 $7,467 $118,447
Average interest rate.. 5.07% 4.86% 4.79% 4.74% 8.29% 7.95%
Short-term debt
Variable rate:......... $44,720 $ 44,720
Average interest rate.. LIBOR
plus

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