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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED SEPTEMBER 30, 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 000-24263
CONRAD INDUSTRIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 72-1416999
(STATE OF OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1501 FRONT STREET
P.O. BOX 790
MORGAN CITY, LOUISIANA 70381
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (504) 384-3060
----------------
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 the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
As of November 12, 1998, 7,077,723 shares of the registrant's Common Stock
were outstanding.
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FORM 10-Q
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets September 30, 1998 and December 31, 1997.. 3
Consolidated Statements of Operations Three and Nine Months Ended
September 30, 1998 and 1997.......................................... 4
Consolidated Statements of Cash Flows Nine Months Ended September 30,
1998 and 1997........................................................ 5
Notes to the Consolidated Financial Statements........................ 6
Item 2. Management's Discussion and Analysis of Financial Conditions and
Results of Operations.................................................. 9
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K................................ 16
Signature................................................................. 17
</TABLE>
FORWARD-LOOKING STATEMENTS
This Form 10-Q includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. All statements contained herein other than statements of
historical fact are forward-looking statements. When used in this Form 10-Q,
the words "anticipate", "believe", "estimate" and "expect" and similar
expressions are intended to identify forward-looking statements. Such
statements reflect the Company's current views with respect to future events
and are subject to certain risks, uncertainties and assumptions, including the
Company's reliance on cyclical industries, the Company's reliance on principal
customers and government contracts, the Company's ability to perform contracts
at costs consistent with estimated costs utilized in bidding for the projects
covered by such contracts, variations in quarterly revenues and earnings
resulting from the percentage of completion accounting method, the possible
termination of contracts included in the Company's backlog at the option of
customers, operating risks, competition for marine vessel contracts, the
Company's ability to retain key management personnel and to continue to
attract and retain skilled workers, state and federal regulations, the
availability and cost of capital, and general industry and economic
conditions. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary
materially from those anticipated, believed, estimated or expected. The
Company does not intend to update these forward-looking statements. 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 correct.
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
ASSETS ------------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents......................... $ 2,790 $ 7,551
Accounts receivable, net.......................... 7,379 4,467
Costs and estimated earnings in excess of billings
on uncompleted contracts......................... 4,044 2,499
Inventories....................................... 254 139
Other current assets.............................. 579 638
------- -------
Total current assets............................ 15,046 15,294
PROPERTY, PLANT AND EQUIPMENT, net.................. 18,422 18,304
COST IN EXCESS OF NET ASSETS ACQUIRED............... 15,139 15,294
OTHER ASSETS........................................ 367 53
------- -------
TOTAL ASSETS........................................ $48,974 $48,945
======= =======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable.................................. $ 1,793 $ 1,997
Accrued employee costs............................ 575 448
Accrued expenses.................................. 2,079 725
Current maturities of long-term debt.............. 2,813 1,801
Billing in excess of costs and estimated earnings
on uncompleted contracts......................... 397 2,563
Revolving credit facility......................... -- --
------- -------
Total current liabilities....................... 7,657 7,534
LONG-TERM DEBT, less current maturities............. 7,946 23,537
DEFERRED INCOME TAXES............................... 3,249 2,595
------- -------
Total liabilities............................... 18,852 33,666
------- -------
COMMITMENTS AND CONTINGENCIES (Note 4).............. -- --
STOCKHOLDERS' EQUITY:
Common stock, $0.01 par value, 20,000,000 shares
authorized, 7,077,723 shares outstanding in 1998
and 4,660,486 shares outstanding in 1997......... 71 47
Additional paid-in capital........................ 27,830 156
Retained earnings................................. 2,221 15,076
------- -------
Total stockholders' equity...................... 30,122 15,279
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......... $48,974 $48,945
======= =======
</TABLE>
See notes to unaudited consolidated financial statements.
3
<PAGE>
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
THREE MONTHS ENDED SEPTEMBER
SEPTEMBER 30, 30,
--------------- ----------------
1998 1997 1998 1997
------- ------ ------- -------
<S> <C> <C> <C> <C>
REVENUE..................................... $12,794 $5,903 $36,781 $16,454
COST OF REVENUE............................. 9,710 3,981 26,519 11,266
------- ------ ------- -------
GROSS PROFIT................................ 3,084 1,922 10,262 5,188
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES................................... 741 608 2,514 1,625
EXECUTIVE COMPENSATION EXPENSE.............. -- -- 4,676 --
------- ------ ------- -------
INCOME FROM OPERATIONS...................... 2,343 1,314 3,072 3,563
INTEREST EXPENSE............................ (222) (12) (1,227) (30)
OTHER INCOME................................ 67 64 247 92
------- ------ ------- -------
INCOME BEFORE INCOME TAXES.................. 2,188 1,366 2,092 3,625
PROVISION FOR INCOME TAXES.................. 871 -- 1,574 --
PROVISION FOR CUMULATIVE DEFERRED TAXES..... -- -- 675 --
------- ------ ------- -------
NET INCOME (LOSS)........................... $ 1,317 $1,366 $ (157) $ 3,625
======= ====== ======= =======
Net income (loss) per common share:
Basic and diluted......................... $ 0.18 $ 0.29 $ (0.03) $ 0.78
======= ====== ======= =======
Weighted average common shares outstanding:
Basic and diluted......................... 7,225 4,660 5,861 4,660
======= ====== ======= =======
Pro forma data (Note 3):
Income before income taxes reported above. $ 2,188 $1,366 $ 2,092 $ 3,625
Pro forma provision for income taxes...... 871 505 2,238 1,341
------- ------ ------- -------
Pro forma net income (loss)............... $ 1,317 $ 861 $ (146) $ 2,284
======= ====== ======= =======
Pro forma net income (loss) per share..... $ 0.18 $ 0.15 $ (0.02) $ 0.41
======= ====== ======= =======
Common and equivalent shares outstanding.. 7,225 5,577 6,398 5,577
======= ====== ======= =======
</TABLE>
See notes to unaudited consolidated financial statements.
4
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CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1998 1997
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................ $ (157) $ 3,625
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization.......................... 1,678 635
Deferred income tax expense............................ 654 --
Executive compensation expense......................... 4,676 --
Changes in assets and liabilities, net of effect of
acquisition:
Accounts receivable................................... (2,912) 439
Net change in billings related to cost and estimated
earnings on uncompleted contracts.................... (4,144) (1,494)
Inventory and other assets............................ (384) 73
Accounts payable and accrued expenses................. 1,277 (222)
--------- --------
Net cash provided by operating activities........... 688 3,056
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for plant and equipment............. (1,601) (374)
--------- --------
Net cash used in investing activities............... (1,601) (374)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt........................... 10,687 --
Principal repayments of debt............................. (25,266) (937)
Distributions to stockholders............................ (12,292) (2,005)
Proceeds from sale of common stock, net.................. 23,023 --
--------- --------
Net cash used in financing activities............... (3,848) (2,942)
--------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS................. (4,761) (260)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............ 7,551 3,209
--------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................. $ 2,790 $ 2,949
========= ========
SUPPLEMENTAL DISCLOSURES CASH FLOW INFORMATION:
Interest paid............................................ $ 1,333 $ 30
========= ========
Taxes paid............................................... $ 340 $ --
========= ========
NONCASH ACTIVITIES:
Issuance of stock to executives.......................... $ 4,676 $ --
========= ========
Distributions of assets to stockholders.................. $ 406 $ --
========= ========
</TABLE>
See notes to unaudited consolidated financial statements.
5
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CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1.ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements include the
accounts of Conrad Industries, Inc. and its wholly-owned subsidiaries (the
"Company"). In the opinion of the management of the Company, the interim
financial statements included herein have been prepared in accordance with
generally accepted accounting principles and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and disclosures
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (such adjustments
consisting only of a normal recurring nature) considered necessary for a fair
presentation have been included in the interim financial statements. These
interim financial statements should be read in conjunction with the Company's
audited financial statements and related notes for the year ended December 31,
1997, which were included as part of the Company's Registration Statement on
Form S-1 (Registration No. 333-49773), as declared effective by the Securities
and Exchange Commission on June 10, 1998.
The results of operations for the three-month and nine-month periods ended
September 30, 1998 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1998.
The Company was incorporated in March 1998 to serve as the holding company
for Conrad Shipyard, Inc. ("Conrad") and Orange Shipbuilding Company, Inc.
("Orange Shipbuilding"). The shareholders of Conrad entered into an exchange
agreement pursuant to which they have exchanged their shares of common stock
of Conrad for shares of common stock of the Company (the "Reorganization"). In
accordance with the terms of the Exchange Agreement, the shareholders of
Conrad received a number of shares of common stock in direct proportion to
their relative shareholdings in Conrad. As a result of the Reorganization, the
Company is a holding company whose only assets consist of all the outstanding
shares of capital stock of Conrad. Conrad continues to own all of the
outstanding stock of Orange Shipbuilding.
On December 12, 1997, Conrad acquired all of the outstanding shares of
Orange Shipbuilding for $25,817,000. The acquisition has been accounted for by
the purchase method. Accordingly, the operations of Orange Shipbuilding are
included in the Company's operations for the three-month and nine-month
periods ended September 30, 1998. The acquisition was funded with a $25.0
million short-term promissory note and existing cash.
Subsequent to December 31, 1997, Conrad refinanced the $25.0 million
promissory note into a term loan. The term loan bears interest at LIBOR rate
plus 2.0% until March 18, 1999. Conrad will then have the option to convert
the interest rate to either the lender's prime rate less 0.5% or LIBOR rate
plus 2.0%. Interest only was payable until May 1998. Thereafter, the term loan
is payable in seventy monthly principal payments of $209,000 plus interest
with a final payment due in April 2004.
Prior to the Reorganization and the completion of its initial public
offering, Conrad made an election to terminate their S corporation status and
became subject to federal and state tax thereafter. As a result of its
conversion from an S corporation to a C corporation, Conrad was required to
record a one-time charge to earnings a deferred tax liability of $675,000 in
the second quarter of 1998. Prior to the completion of the Offering, Conrad
made a $10.0 million distribution to its stockholders, which represented
undistributed earnings of Conrad, estimated through the date of the
termination of the S corporation status, on which Conrad's current
stockholders would have incurred federal and state income taxes. The
distribution was funded with borrowings under a $10.0 million revolving credit
facility. The facility bears interest on the same terms as the term loan
referred to above and matures on April 30, 1999.
On June 15, 1998, the Company completed its initial public offering (the
"Offering") in which it sold 2.0 million shares of common stock, increasing
the total shares outstanding to 7.2 million. The Company received net proceeds
from the Offering of $22.3 million. The net proceeds were used to repay $12.3
million of indebtedness under the term loan and $10.0 million of indebtedness
under the revolving credit facility.
6
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CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On July 13, 1998, the underwriters of the Offering exercised 125,000 shares
of common stock of their over-allotment option. The net proceeds for the over-
allotment exercise of $1,395,000 were used to repay indebtedness on the term
loan.
2.RECEIVABLES
Receivables consisted of the following at September 30, 1998 and December
31, 1997 (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- ------
<S> <C> <C>
U.S. Government:
Amounts billed............................................. $ 2,876 $ 26
Unbilled costs and estimated earnings on uncompleted
contracts................................................. 1,353 542
------- ------
4,229 568
Commercial:
Amounts billed............................................. 4,503 4,441
Unbilled costs and estimated earnings on uncompleted
contracts................................................. 2,691 1,957
------- ------
Total.................................................... $11,423 $6,966
======= ======
</TABLE>
Included above in amounts billed is an allowance for doubtful accounts of
$6,000 and $16,000 at September 30, 1998 and December 31, 1997, respectively.
During 1998 and 1997 there were no significant transactions recorded in the
allowance for doubtful accounts.
Unbilled costs and estimated earnings on uncompleted contracts were not
billable to customers at the balance sheet dates under terms of the respective
contracts. Of the unbilled costs and estimated earnings at September 30, 1998,
substantially all is expected to be collected within the next twelve months.
Information with respect to uncompleted contracts as of September 30, 1998
and December 31, 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Costs incurred on uncompleted contracts.................... $24,298 $11,040
Estimated earnings ........................................ 9,155 4,633
------- -------
33,453 15,673
Less billings to date...................................... 29,806 15,737
------- -------
$ 3,647 $ (64)
======= =======
</TABLE>
The above amounts are included in the accompanying balance sheets under the
following captions (in thousands):
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Costs and estimated earnings in excess of billings on
uncompleted contracts...................................... $4,044 $2,499
Billings in excess of cost and estimated earnings on
uncompleted contracts...................................... 397 2,563
------ ------
Total..................................................... $3,647 $ (64)
====== ======
</TABLE>
3.INCOME PER SHARE
In 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 128, "Earnings Per Share" ("SFAS 128"). SFAS
128 requires the replacement of previously reported primary
7
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CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
and fully diluted earnings per share required by Accounting Principles Board
Opinion No. 15 with basic earnings per share and diluted earnings per share.
The calculation of basic earnings per share excludes any dilutive effect of
stock options, while diluted earnings per share includes the dilutive effect
of stock options. Per share and weighted average share amounts for all prior
periods presented have been restated to conform to the requirements of SFAS
128. The number of weighted average shares outstanding for "basic" and
"diluted" income per share was 7,225,374 and 4,660,486 for the three months
ended September 30, 1998 and 1997, respectively and 5,860,504 and 4,660,486
for the nine months ended September 30, 1998 and 1997, respectively.
Proforma income per share consists of the Company's historical income as an
S corporation, adjusted for income taxes that would have been recorded had the
Company operated as a C corporation and excludes the one-time charge of
$675,000 to record the cumulative deferred income tax provision. This amount
is divided by the weighted average shares of common stock outstanding which
are increased to reflect sufficient additional shares to pay the $10.0 million
distribution of estimated undistributed earnings to shareholders (916,591
shares). All such additional shares are based on the offering price of $12.00
per share, net of offering expenses.
4.COMMITMENTS AND CONTINGENCIES
At September 30, 1998, the Company had outstanding a contract performance
bond issued by a third party in the amount of $3,660,000.
The Company has employment agreements with certain of its executive officers
which generally provide for an initial term of three years and minimum annual
total compensation of $851,000.
The Company is a party to various 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 financial
statements.
5.NEW ACCOUNTING PRONOUNCEMENTS
During 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS 130") and Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131"). SFAS 130 provides guidance for the presentation and display of
comprehensive income. SFAS 131 establishes standards for disclosure of
operating segments, products, services, geographic areas and major customers.
The Company is required to adopt both standards for its fiscal year ending
December 31, 1998. Management believes that the implementation of SFAS 130 and
SFAS 131 will not have a material impact on the presentation of the Company's
financial statements, but may require additional disclosure.
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards Number 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits" ("SFAS 132"). SFAS 132 revises the
standards for disclosure of pension and other postretirement benefit plans by
standardizing the disclosure requirements, requiring additional information on
changes in the benefit obligations and fair values of plan assets and
eliminating certain disclosures requirements no longer considered to be
useful. These new disclosure requirements are designed to improve the
understandability of benefit disclosures for financial analysis. The Company
is required to adopt this standard for its fiscal year ending December 31,
1998. Management believes that the implementation of SFAS 132 will not have a
material impact on the presentation of the Company's financial statements but
may require additional disclosure.
8
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
unaudited financial statements and the related disclosures included elsewhere
herein and Management's Discussion and Analysis of Financial Condition and
Results of Operations included as part of Conrad Industries, Inc. (the
"Company") Registration Statement on Form S-1 (Registration No. 333-49773), as
declared effective by the Securities and Exchange Commission on June 10, 1998.
OVERVIEW
The Company was incorporated in March 1998 to serve as the holding company
for Conrad Shipyard, Inc. ("Conrad") and Orange Shipbuilding Company, Inc.
("Orange Shipbuilding"). The shareholders of Conrad entered into an exchange
agreement pursuant to which they have exchanged their shares of common stock
of Conrad for shares of common stock of the Company (the "Reorganization"). In
accordance with the terms of the Exchange Agreement, the shareholders of
Conrad received a number of shares of common stock in direct proportion to
their relative shareholdings in Conrad. As a result of the Reorganization, the
Company is a holding company whose only assets consist of all of the
outstanding shares of capital stock of Conrad. Conrad continues to own all of
the outstanding stock of Orange Shipbuilding.
Conrad has operated since 1948 at its shipyard in Morgan City, Louisiana,
and specializes in the construction, conversion and repair of large and small
deck barges, single and double hull tank barges, lift boats, push boats, tow
boats and offshore tug boats. In December 1997, Conrad acquired Orange
Shipbuilding to increase its capacity to serve Conrad's existing markets and
to expand its product capability into the construction of additional types of
marine vessels, including offshore tug boats, push boats and double hull
barges, and the fabrication of modular components for offshore drilling rigs
and floating, production, storage and offloading vessels ("FPSOs"). In
February 1998, Conrad commenced operations at a conversion and repair facility
in Amelia, Louisiana, thereby expanding its capacity to provide conversion and
repair services for marine vessels.
The Company completed its initial public offering (the "Offering") on June
15, 1998 in which it sold 2.1 million shares of common stock for net proceeds
of $23.7 million ($1.4 million was received in July 1998) after underwriting
discounts of $1.8 million. The Company used all of the proceeds to repay $10
million of indebtedness under the Company's Revolving Credit Facility and the
remaining net proceeds were used to repay $13.7 million of the approximately
$25 million of indebtedness under the term loan.
The demand for the Company's products and services is dependent upon a
number of factors, including the economic condition of the Company's customers
and markets, the age and state of repair of the vessels operated by the
Company's customers and the relative cost to construct a new vessel as
compared with repairing an older vessel. Demand for the Company's products and
services has been favorably impacted recently by increased activity in the
offshore oil and gas industry and by determinations by commercial and
government customers to construct new vessels to replace older vessels and
upgrade the capacity or functionality of existing vessels. In addition, the
Orange Acquisition has enabled the Company to capitalize on the demand for new
vessel construction by government customers such as the U.S. Army, U.S. Navy,
U.S. Coast Guard and Corps of Engineers. The age of barges and other vessels
operated by the Company's customers has also led to an increase in repair
activities.
The Company is engaged in various types of construction under contracts that
generally range from one month to 36 months in duration. The Company uses the
percentage-of-completion method of accounting and therefore, takes into
account the estimated costs, estimated earnings and revenue to date on fixed-
price contracts not yet completed. The amount of revenue recognized is equal
to the portion of the total contract price that the labor hours incurred to
date bears to the estimated total labor hours, based on current estimates to
complete. This method is used because management considers expended labor
hours to be the best available measure of progress on these contracts.
Revenues from cost-plus-fee contracts are recognized on the basis of cost
incurred during the period plus the fee earned.
9
<PAGE>
Most of the contracts entered into by the Company for new vessel
construction, whether commercial or governmental, are fixed-price contracts
under which the Company retains all cost savings on completed contracts but is
liable for all cost overruns. The Company develops its bids for a fixed price
project by estimating the amount of labor hours and the cost of materials
necessary to complete the project and then bids such projects in order to
achieve a sufficient profit margin to justify the allocation of its resources
to such project. The Company's revenues therefore may fluctuate from period to
period based on, among other things, the aggregate amount of materials used in
projects during a period and whether the customer provides materials and
equipment. For projects in which the customer provides material or equipment,
the Company generally charges material handling and warehousing fees,
resulting in higher profit margins than for projects in which the Company
provides the materials and equipment. The Company generally performs
conversion and repair services on the basis of cost-plus-fee arrangements
pursuant to which the customer pays a negotiated labor rate for labor hours
spent on the project as well as the cost of materials plus a margin on
materials purchased.
RECENT EVENTS
On December 12, 1997, Conrad acquired all of the outstanding shares of
common stock of Orange Shipbuilding, a shipyard located in Orange, Texas, for
a cash purchase price and related acquisition cost of $25.8 million. The cash
purchase price and related acquisition cost were funded with $25.0 million of
borrowings and the remainder with existing cash. At the purchase date, Orange
Shipbuilding had $3.0 million in cash, resulting in a net purchase price of
$22.8 million. The Orange Acquisition has been accounted for under the
purchase method. The purchase price was allocated based on estimated fair
market values at the date of acquisition. This resulted in an excess of
purchase price over fair value of assets acquired of approximately $15.7
million, which excess amount will be amortized over 20 years on a straight-
line basis. Due to the close proximity of the acquisition date to Conrad's
fiscal year end, results of operations subsequent to the acquisition of Orange
Shipbuilding are not included in Conrad's operating results for the year ended
December 31, 1997. The results of operation of Orange Shipbuilding from the
date of acquisition to the end of Conrad's fiscal year were insignificant.
Conrad has operated as an S corporation for federal and state income tax
purposes since April 1, 1990. As a result, Conrad was not subject to federal
or state income tax until after May 1998, and the entire earnings of Conrad
were subject to tax directly at the shareholder level. In May 1998, Conrad's S
election was terminated and thereafter Conrad became subject to corporate
level income taxation. A one-time deferred tax liability charge to earnings of
$675,000 was made during the second quarter of 1998 in connection with the
termination of its S Corporation status. Orange Shipbuilding was also taxed as
an S corporation from April 1, 1995 to October 1, 1997, when it elected to
terminate its S corporation status, and as a result became subject to
corporate income taxes for periods commencing on or after such date. Orange
Shipbuilding recorded a one time net deferred tax liability of approximately
$200,000 in the fourth quarter ended December 31, 1997.
In the past, Conrad made distributions to its shareholders in order to fund
their federal and state income tax liabilities that resulted from Conrad's S
corporation status. In accordance with this practice, during the first quarter
of 1998, Conrad distributed approximately $506,000 to its current shareholders
and distributed an additional $1.8 million prior to the effective date of the
Offering to fund the shareholders' federal and state income tax liabilities
estimated through the date of termination of its S corporation status.
On May 22, 1998, prior to the Reorganization, Conrad made an additional $10
million distribution ("Shareholder Distribution") to its shareholders which
amount represents undistributed earnings of Conrad, estimated through the date
of the termination of Conrad's S corporation status, on which Conrad's current
shareholders have incurred federal and state income taxes. Conrad also made a
distribution of certain nonoperating assets with a fair market value of
approximately $406,000 to its shareholders prior to the completion of the
Offering. The distributions of cash and non-operating assets were made prior
to the completion of the Offering, and Conrad funded the Shareholder
Distribution with borrowings under its Revolving Credit Facility, which
borrowings were repaid with proceeds of the Offering.
10
<PAGE>
In the first quarter of 1998, Conrad issued shares of common stock to
William H. Hidalgo, the President and Chief Executive Officer, and Cecil A.
Hernandez, the Vice President-Finance and Administration and Chief Financial
Officer, in consideration of past services rendered. The agreements related to
such restricted stock provide that fifty percent of the shares of common stock
issued to each such executive would be subject to forfeiture in the event of
the voluntary termination of employment by such executive for other than "good
reason" prior to the expiration of the initial three-year term of employment
specified in the employment agreement of such executive, provided that such
restriction would lapse in the event of (i) the termination by the Company of
such executive's employment for reasons other than "cause" (as defined) or
(ii) the death, disability or retirement (at or after the age of 65) of such
executive and will also lapse with respect to 33 1/3% of such restricted
shares on each of the first three anniversaries of the completion of the
Offering. The shares of common stock of Conrad issued to Mr. Hidalgo and Mr.
Hernandez were exchanged, respectively, for 385,695 and 153,819 shares of
Common Stock of the Company pursuant to the Reorganization. In connection with
the issuance of shares of Conrad common stock, Mr. Hidalgo and Mr. Hernandez,
executed promissory notes in the amounts of $239,870 and $97,400,
respectively, representing their tax liabilities paid by the Company. These
tax notes were repaid in full by Mr. Hidalgo and Mr. Hernandez in July 1998.
In connection with the issuance of these shares to Messrs. Hidalgo and
Hernandez, the Company estimated it would recognize aggregate compensation
expense of $8.6 million, of which $4.3 million was recognized in the first
quarter of 1998 and the remainder was estimated to be recognized over a three-
year vesting period, of which $359,000 was expensed in the second quarter of
1998. During the third quarter of 1998 the executives surrendered and the
Company cancelled 247,277 of their restricted shares in order to eliminate the
recurring compensation expense associated with the lapse of the restrictions.
As a result of the cancellation of the shares, the remainder of the estimated
compensation expense of $4.0 million will not be recognized in the future. On
November 3, 1998, the executives were awarded options to purchase an aggregate
of 400,000 shares of Company stock at the market price of the stock on the
date of the award.
11
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain historical data of the Company and
percentage of revenues for the periods presented.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER
SEPTEMBER 30, 30,
----------------------------- ------------------------------
1998 1997 1998 1997
-------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL DATA:
Revenues
Vessel construction... $8,003 62.6% $2,599 44.0% $22,106 60.1% $8,052 48.9%
Modular component
fabrication.......... 352 2.7% 0 0.0% 2,809 7.6% 0 0.0%
Repair and
conversions.......... 4,439 34.7% 3,304 56.0% 11,866 32.3% 8,402 51.1%
------ ------ ------- ------
Total revenues...... 12,794 100.0% 5,903 100.0% 36,781 100.0% 16,454 100.0%
------ ------ ------- ------
Cost of revenue......... 9,710 75.9% 3,981 67.4% 26,519 72.1% 11,266 68.5%
------ ------ ------- ------
Gross profit............ 3,084 24.1% 1,922 32.6% 10,262 27.9% 5,188 31.5%
S G & A expenses........ 741 5.8% 608 10.3% 2,514 6.8% 1,625 9.9%
Non-Cash Executive
Compensation........... -- 0.0% -- 0.0% 4,676 12.7% -- 0.0%
------ ------ ------- ------
Income from operations.. 2,343 18.3% 1,314 22.3% 3,072 8.4% 3,563 21.7%
Interest Expense........ 222 1.7% 12 0.2% 1,227 3.3% 30 0.2%
Other expenses (income),
net.................... (67) -0.5% (64) -1.1% (247) -0.7% (92) -0.6%
------ ------ ------- ------
Income before income
taxes.................. 2,188 17.1% 1,366 23.1% 2,092 5.7% 3,625 22.0%
Income taxes............ 871 6.8% -- 0.0% 1,574 4.3% -- 0.0%
Cumulative deferred tax
provision.............. -- 0.0% -- 0.0% 675 1.8% -- 0.0%
------ ------ ------- ------
Net Income (loss)....... $1,317 10.3% $1,366 23.1% $ (157) -0.4% $3,625 22.0%
====== ====== ======= ======
PRO FORMA DATA:
Income before income
taxes.................. $2,188 17.1% $1,366 23.1% $ 2,092 5.7% $3,625 22.0%
Pro forma provision for
income taxes........... 871 6.8% 505 8.6% 2,238 6.1% 1,341 8.2%
------ ------ ------- ------
Pro forma net income
(loss)................. $1,317 10.3% $ 861 14.6% $ (146) -0.4% $2,284 13.9%
====== ====== ======= ======
EBITDA (1).............. $2,908 22.7% $1,526 25.9% $ 9,426 25.6% $4,198 25.5%
====== ====== ======= ======
OPERATING DATA:
Labor Hours........... 177 106 509 288
</TABLE>
- --------
(1) Represents income from operations before deduction of 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
provides meaningful information regarding a company's historical ability
to incur and service debt. EBITDA as defined and measured by the Company
may not be comparable to similarly titled measures reported by other
companies. 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.
Three Months and Nine Months Ended September 30, 1998 Compared with Three
Months and Nine Months Ended September 30, 1997
The Company's results of operations for the three and nine months ended
September 30, 1997 does not include information relative to Orange
Shipbuilding and thus only presents Conrad's result of operations for those
periods.
12
<PAGE>
The Company's revenues for the three months and nine months ended September
30, 1998, were $12.8 million and $36.8 million, respectively, an increase of
116.7% and 123.5% compared to $5.9 million and $16.5 million in revenues for
the three months and nine months ended September 30, 1997. The increase for
the three months was due to a $4.6. million increase in vessel construction
and a $352,000 increase in modular component fabrication attributable to the
inclusion of the activities of Orange Shipbuilding in the results of
operations of the Company for such period, and a $795,000 increase in vessel
construction and a $1.1 million increase in repair and conversion revenue at
Conrad for such period. The increase for the nine months was due to a $11.4
million increase in vessel construction and a $2.8 million increase in modular
component fabrication attributable to the inclusion of the activities of
Orange Shipbuilding in the results of operations of the Company for such
period and a $2.6 million increase in vessel construction and a $3.5 million
increase in repair and conversion revenue at Conrad for such period.
Gross profit increased $1.2 million, or 60.5%, to $3.1 million (24.1% of
revenue) for the three months ended September 30, 1998 as compared to $1.9
million (32.6% of revenue) for the three months ended September 30, 1997.
Gross profit increased $5.1 million, or 97.8%, to $10.3 million (27.9% of
revenue) for the nine months ended September 30, 1998 as compared to $5.2
million (31.5% of revenue) for the nine months ended September 30, 1997. The
increases were due primarily to the increase in revenue items described above.
The decrease in gross profit margin percentage was primarily due to an
increase in the actual hours incurred to complete various jobs at Orange
compared to original estimates. This resulted in increased costs being
recognized in the current quarter thus reducing the gross profit for the
quarter.
Selling, general and administrative expenses increased $133,000 to $741,000
(5.8% of revenue) for the three months ended September 30, 1998 as compared to
$608,000 (10.3% of revenue) for the three months ended September 30, 1997
primarily due to $204,000 increase in goodwill and loan cost amortization in
connection with the Orange acquisition, $97,000 increase in salary and wages
attributable to additional personnel and a decrease of $223,000 in bonus
expenses due to decision during the third quarter of 1998 not to pay executive
bonuses. Selling, general and administrative expenses increased $889,000 to
$2.5 million (6.8% of revenue) for the nine months ended September 30, 1998 as
compared to $1.6 million (9.9% of revenue) for the nine months ended September
30, 1997 primarily due to $601,000 increase in goodwill and loan cost
amortization, $297,000 increase in salary and wages and an increase of
$112,000 in legal and accounting fees and a decrease of $211,000 in bonus
expense.
Income before income taxes increased $822,000 to $2.2 million for the three
months ended September 30, 1998 as compared to $1.4 million for the three
months ended September 30, 1997. This increase resulted primarily from the
factors discussed above. Income before income taxes decreased $1.5 million to
income of $2.1 million for the nine months ended September 30, 1998 as
compared to $3.6 million for the nine months ended September 30, 1997
primarily due to the non cash executive compensation charge of $4.7 million
(described in "Recent Events") and interest expense of $1.2 million.
The Company's had net income of $1.3 million for the three months ended
September 30, 1998 compared to $1.4 million for the three months ended
September 30, 1997. Net income for the three months was impacted by income tax
expense of $871,000 for the period. The Company had a net loss of $157,000 for
the nine months ended September 30, 1998 compared to net income of $3.6
million for the nine months ended September 30, 1997. The net loss for the
nine months ended September 30, 1998 was due to the non-cash compensation
charge of $4.7 million, interest expense of $1.2 million, a one time deferred
income tax charge of $675,000 for such period related to the Company's
conversion from an S corporation to a C corporation and income taxes of $1.6
million. The Company was an S corporation during 1997 and not subject to
income taxes at the corporate level.
Pro forma net income increased $456,000 to $1.3 million for the three months
ended September 30, 1998 as compared to $861,000 for the three months ended
September 30, 1997. This increase resulted primarily from the factors
discussed above. Pro forma net income decreased $2.4 million to a loss of
$146,000 for the nine months ended September 30, 1998 as compared to pro forma
net income of $2.3 million for the nine months ended September 30, 1997
primarily due to the non cash executive compensation charge of $4.7 million
13
<PAGE>
(described in "Recent Events") and interest expense of $1.2 million. Pro forma
net income gives effect to the application of federal and state income taxes
to the Company as if it were a C corporation for tax purposes during all the
periods presented. Pro forma net income excludes the one-time charge of
$675,000 to record the cumulative deferred income tax provision.
LIQUIDITY AND CAPITAL RESOURCES
The Company completed the Offering on June 15, 1998 in which it sold 2.1
million shares of common stock for net proceeds of $23.7 million ($1.4 million
of which was received in July, 1998) after underwriting discounts of $1.8
million. The Company used all of the proceeds to repay $10 million of
indebtedness under the Company's Revolving Credit Facility and the remaining
net proceeds were used to repay $13.7 million of the approximately $25 million
of indebtedness under the term loan.
Historically, the Company has funded its business through funds generated
from operations. Net cash provided by operations was $688,000 for the nine
months ended September 30, 1998.
The Company net cash used in investing activities of $1.6 million for the
nine months ended September 30, 1998 was for improvements to facilities and
equipment of which approximately $887,000 was for a major improvement to a
drydock.
The Company has entered into the Loan Agreement, which specifies the terms
of the Term Loan and the Revolving Credit Facility. The Revolving Credit
Facility permits the Company to borrow up to $10.0 million for working capital
and other general corporate purposes, including funding of acquisitions. The
Revolving Credit Facility bears interest on the same terms as the Term Loan
and matures on April 30, 1999. A fee of 0.25% per annum on the unused portion
of the Revolving Credit Facility will be charged quarterly. The Company
borrowed $10.0 million under the Revolving Credit Facility prior to the
Reorganization in order to fund part of the Shareholder Distribution as
further described in Recent Events. The $10.0 million of indebtedness was paid
from the proceeds as detailed above and thus the $10 million Revolving Credit
Facility remains available for future use. The Loan Agreement contains
customary restrictive covenants and financial ratio test, including a current
ratio requirement of 1.5 to 1.0, that could limit the Company's use of
available capacity under the Revolving Credit Facility. The Loan Agreement
prohibits the Company from paying dividends without the consent of the lender
and restricts the ability of the Company to incur additional indebtedness.
In December 1997, Conrad borrowed $25.0 million on a term loan basis to fund
the purchase price of the Orange Acquisition. Interest on the Term Loan
accrues at LIBOR plus 2.0% until March 18, 1999, and thereafter at the option
of the Company either at the lender's prime rate minus 0.5% or LIBOR plus
2.0%. The Company is currently utilizing the LIBOR rate option and the
interest rate at September 30, 1998 was 7.41% per annum. The Term Loan
required the payment of interest only until May 1998 and thereafter the Term
Loan is payable in 70 monthly principal payments of $209,000 plus interest,
with a final payment due on April 2004. The Term Loan is secured by
substantially all of the Company's assets. The Company repaid $12.3 million,
during June 1998, of the outstanding indebtedness under the Term Loan with a
portion of the net proceeds of the Offering. The Term Loan was reduced by an
additional $1.4 million in July 1998 with additional proceeds of the Offering.
The Company additionally commenced principal repayments in June, resulting in
a balance due under the Term Loan of $10.5 million at September 30, 1998.
Net cash used in financing activities was $3.8 million. This net decrease
was composed of cash provided from borrowings of the Revolving Credit Facility
of $10.0 million, borrowings on insurance finance notes of $687,000 and net
proceeds from sale of common stock of $23.0 million less cash used in the
principal repayment of debt of $25.3 million and distributions to shareholders
of $12.3 million prior to the effective date of the Offering.
Management believes that the Company's existing working capital, cash flows
from operations and available borrowing under the Revolving Credit Facility
will be adequate to meet its working capital needs and
14
<PAGE>
planned capital expenditures for property and equipment through 1998. The
Company may pursue attractive acquisition opportunities if and when such
opportunities arise. The timing, size or success of any acquisition effort and
the associated potential capital commitments cannot be predicted.
YEAR 2000 COMPLIANCE.
The Company is in the process of assessing its critical information
technology (IT) systems and non-IT systems and is developing and initiating a
plan to address deficiencies. The Company believes that it is on schedule to
successfully implement the required systems and equipment modifications
necessary to make the Company's critical systems Year 2000 compliant by mid-
1999.
The Company's critical IT systems are comprised primarily of a PC based
general ledger accounting software package and related application modules, a
fixed asset system, payroll system and requisition system. The assessment of
the Company's IT systems found that some of the IT systems were not Year 2000
compliant. Changes to make these systems Year 2000 compliant are being made in
conjunction with the Company's planned upgrade cycle, which should be
completed prior to December 31, 1998.
Non-IT systems are comprised primarily of computer controlled equipment and
electronic devices, including equipment with embedded microprocessors which
are used to operate equipment at the Company's production and repair
facilities. Additionally, telephone systems and other office based electronic
equipment were considered in the assessment of non-IT systems. With respect to
production and repair facilities, the Company's current assessment does not
anticipate significant disruption in the operations of its equipment as a
result of the Year 2000 problem. The Company plans to conduct testing of its
equipment with manufacturers' representatives during the first quarter of 1999
to verify the current assessment. With respect to other office based non-IT
systems, the Company's assessment found that it will be necessary to replace
or modify some existing equipment, which should be completed by mid-1999.
The total cost to make all systems and equipment Year 2000 compliant is
currently estimated at $25,000, exclusive of software and systems that are
being upgraded in the normal business cycle which are currently estimated to
cost $15,000. Approximately $2,000 has been spent in modifying and upgrading
systems and equipment to date. The costs incurred to date and future costs
with respect to Year 2000 compliance are expected to be funded with cash from
operations.
The Company is in the process of initiating communication with most
significant suppliers, customers and financial service providers on the Year
2000 issue. This communication will be used to determine the extent to which
the Company is vulnerable to these third parties' failure to remedy their own
Year 2000 issues. Although there is currently no indication that these
business partners will not achieve their Year 2000 compliance plans, there can
be no guarantee that the systems of other companies on which the Company
relies will be timely converted. Additionally, there can be no guarantee that
the Company will not experience Year 2000 problems. If the Company or its
business partners experience Year 2000 compliance problems, the Company could
experience business interruption and other adverse business consequences which
could have a material adverse impact on the Company's results of operations,
liquidity or financial position. The Company believes that the most likely
negative effects, if any, could include delays in payments to the Company from
customers or payments by the Company to suppliers and disruptions in shipments
of equipment and materials required to fabricate the Company's products.
Based on the Company's current assessment of its IT systems, non-IT systems
and business partners, the Company has not, to date, developed a contingency
plan for Year 2000 issues. The Company will continue to monitor its decision
on contingency planning and such a plan will be developed if and when it is
considered prudent to do so.
NEW ACCOUNTING PRONOUNCEMENTS
During 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No., 130, "Reporting Comprehensive Income"
("SFAS 130") and Statement of Financial Accounting
15
<PAGE>
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 130 provides guidance for the presentation and
display of comprehensive income. SFAS 131 establishes standards for disclosure
of operating segments, products, services, geographic areas and major
customers. The Company is required to adopt both standards for its fiscal year
ending December 31, 1998. Management believes that the implementation of SFAS
130 and SFAS 131 will not have a material impact on the presentation of the
Company's financial statements, but may require additional disclosure.
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards Number 132, "Employers' Disclosure about
Pensions and Other Postretirement Benefits" ("SFAS 132"). SFAS 132 revises the
standards for disclosure of pension and other postretirement benefit plans by
standardizing the disclosure requirements, requiring additional information on
changes in the benefit obligations and fair values of plan assets and
eliminating certain disclosures requirements no longer considered to be
useful. These new disclosure requirements are designed to improve the
understandability of benefit disclosures for financial analysis. The Company
is required to adopt this standard for its fiscal year ending December 31,
1998. Management believes that the implementation of SFAS 132 will not have a
material impact on the presentation of the Company's financial statements but
may require additional disclosure.
PART II. OTHER INFORMATION
ITEM 6.EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 --Financial Data Schedule
(b) Reports on Form 8-K
The Company has not filed any Current Reports on Form 8-K since filing of
the Company's financial prospectus pursuant to Rule 424(b) in connection with
its initial public offering on June 10, 1998.
16
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 13, 1998
CONRAD INDUSTRIES, INC.
/s/ Cecil A. Hernandez
By: _________________________________
Cecil A. Hernandez
Senior Vice President and Chief
Financial Officer
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONRAD
INDUSTRIES, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> SEP-30-1998 SEP-30-1997
<CASH> 2,790 0
<SECURITIES> 0 0
<RECEIVABLES> 7,385 0
<ALLOWANCES> 6 0
<INVENTORY> 254 0
<CURRENT-ASSETS> 15,046 0
<PP&E> 26,665 0
<DEPRECIATION> 8,243 0
<TOTAL-ASSETS> 48,974 0
<CURRENT-LIABILITIES> 7,657 0
<BONDS> 7,946 0
0 0
0 0
<COMMON> 71 0
<OTHER-SE> 30,051 0
<TOTAL-LIABILITY-AND-EQUITY> 48,974 0
<SALES> 36,781 16,454
<TOTAL-REVENUES> 36,781 16,454
<CGS> 26,519 11,266
<TOTAL-COSTS> 26,519 11,266
<OTHER-EXPENSES> 6,943 1,533
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,227 30
<INCOME-PRETAX> 2,092 3,625
<INCOME-TAX> 2,249 0
<INCOME-CONTINUING> (157) 3,625
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (157) 3,625
<EPS-PRIMARY> (0.03) 0.78
<EPS-DILUTED> (0.03) 0.78
</TABLE>
