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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 March 31, 1999
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
incorporation or organization) Identification No.)
1501 Front Street
P.O. Box 790 70381
Morgan City, Louisiana (Zip Code)
(Address of principal executive
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 May 12, 1999, 7,077,723 shares of the registrant's Common Stock were
outstanding.
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<PAGE>
FORM 10-Q
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I. Financial Information
Item 1. Financial Statements (Unaudited)................................. 3
Consolidated Balance Sheets March 31, 1999 and December 31, 1998....... 3
Consolidated Statements of Operations Three Months Ended March 31, 1999
and 1998.............................................................. 4
Consolidated Statements of Cash Flows Three Months Ended March 31, 1999
and 1998.............................................................. 5
Notes to the Consolidated Financial Statements......................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 11
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K................................. 17
Signature................................ ................................. 18
</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
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1999 1998
------ --------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................. $ 4,761 $ 3,074
Accounts receivable, net.............................. 5,824 7,682
Costs and estimated earnings in excess of billings on
uncompleted contracts................................ 2,867 2,692
Inventories........................................... 226 230
Other current assets.................................. 1,025 562
------- -------
Total current assets................................ 14,703 14,240
PROPERTY, PLANT AND EQUIPMENT, net...................... 17,926 18,104
COST IN EXCESS OF NET ASSETS ACQUIRED................... 14,766 14,963
OTHER ASSETS............................................ 217 212
------- -------
TOTAL ASSETS............................................ $47,612 $47,519
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable...................................... $ 1,476 $ 1,650
Accrued employee costs................................ 518 215
Accrued expenses...................................... 1,262 1,255
Current maturities of long-term debt.................. 2,553 2,594
Billing in excess of costs and estimated earnings on
uncompleted contracts................................ 549 848
------- -------
Total current liabilities........................... 6,358 6,562
LONG-TERM DEBT, less current maturities................. 6,690 7,318
DEFERRED INCOME TAXES................................... 3,250 3,157
------- -------
Total liabilities................................... 16,298 17,037
------- -------
COMMITMENTS AND CONTINGENCIES (Note 5)
SHAREHOLDERS' EQUITY:
Common stock, $0.01 par value, 20,000,000 shares
authorized, 7,077,723 shares outstanding in 1999 and
1998................................................. 71 71
Additional paid-in capital............................ 27,780 27,780
Retained earnings..................................... 3,463 2,631
------- -------
Total shareholders' equity.......................... 31,314 30,482
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.............. $47,612 $47,519
======= =======
</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>
Three Months
Ended March
31,
---------------
1999 1998
------ -------
<S> <C> <C>
REVENUE....................................................... $9,460 $11,569
COST OF REVENUE............................................... 6,970 8,140
------ -------
GROSS PROFIT.................................................. 2,490 3,429
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.................. 979 888
EXECUTIVE COMPENSATION EXPENSE................................ -- 4,316
------ -------
INCOME (LOSS) FROM OPERATIONS................................. 1,511 (1,775)
INTEREST EXPENSE.............................................. (178) (503)
OTHER INCOME.................................................. 66 93
------ -------
INCOME (LOSS) BEFORE INCOME TAXES............................. 1,399 (2,185)
PROVISION FOR INCOME TAXES.................................... 567 293
------ -------
NET INCOME (LOSS)............................................. $ 832 $(2,478)
====== =======
Net income (loss) per common share:
Basic and diluted........................................... $ 0.12 $ (0.53)
====== =======
Weighted average common shares outstanding:
Basic and diluted........................................... 7,078 4,666
====== =======
Pro forma data (Note 3):
Income (loss) before income taxes as reported above......... $1,399 $(2,185)
Pro forma provision for income taxes........................ 567 418
------ -------
Pro forma net income (loss)................................... $ 832 $(2,603)
====== =======
Pro forma net income (loss) per share......................... $ 0.12 $ (0.47)
====== =======
Common and equivalent shares outstanding...................... 7,078 5,583
====== =======
</TABLE>
See notes to unaudited consolidated financial statements.
4
<PAGE>
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March
31,
---------------
1999 1998
------ -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $ 832 $(2,478)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization............................. 567 547
Deferred income tax expense (benefit)..................... 93 (84)
Executive compensation expense............................ -- 4,316
Changes in assets and liabilities, net of effect of
acquisition:
Accounts receivable..................................... 1,858 (940)
Net change in billings related to cost and estimated
earnings on uncompleted contracts...................... (474) (950)
Inventory and other assets.............................. (466) (736)
Accounts payable and accrued expenses................... 136 (51)
------ -------
Net cash provided by (used in) operating activities... 2,546 (376)
------ -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for plant and equipment................ (190) (1,073)
------ -------
Net cash used in investing activities................. (190) (1,073)
------ -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt.............................. -- 524
Principal repayments of debt................................ (669) (328)
Distributions to shareholders............................... -- (506)
------ -------
Net cash used in financing activities................. (669) (310)
------ -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.......... 1,687 (1,759)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD................ 3,074 7,551
------ -------
CASH AND CASH EQUIVALENTS, END OF PERIOD...................... $4,761 $ 5,792
====== =======
SUPPLEMENTAL DISCLOSURES CASH FLOW INFORMATION:
Interest paid............................................... $ 178 $ 608
====== =======
Taxes paid.................................................. $ 325 $ --
====== =======
NONCASH ACTIVITIES:
Issuance of stock to executives............................. $ -- $ 4,316
====== =======
</TABLE>
See notes to unaudited consolidated financial statements.
5
<PAGE>
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") which are primarily engaged in the construction, conversion and
repair of a variety of marine vessels for commercial and government customers.
New construction work and the majority of repair work is performed on a fixed-
price basis, but the Company also performs some repair work under cost-plus-
fee agreements. All significant intercompany transactions have been
eliminated. In the opinion of the management of the Company, the interim
consolidated 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 consolidated
financial statements. These interim consolidated financial statements should
be read in conjunction with the Company's audited 1998 consolidated financial
statements and related notes filed on Form 10-K for the year ended December
31, 1998.
The results of operations for the three-month period ended March 31, 1999
are not necessarily indicative of the results that may be expected for the
year ending December 31, 1999.
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 of the three-month periods ended March
31, 1999 and 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 loan bears interest at LIBOR rate plus
2.0% until September 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
became 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 (the "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 shareholders, which
represented undistributed earnings of Conrad estimated through the date of the
termination of the S corporation status, on which Conrad's current
shareholders 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. Subsequent to March 31, 1999, Conrad
extended the maturity date on the revolving credit facility until July 31,
1999.
6
<PAGE>
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On June 15, 1998, the Company completed its initial public offering in which
it sold 2.0 million shares of common stock. 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.
On July 13, 1998, the underwriters of the Offering exercised 125,000 shares
of common stock of their over-allotment option. The net proceeds of the over-
allotment exercise of $1.4 million were used to repay indebtedness on the term
loan.
2. RECEIVABLES
Receivables consisted of the following at March 31, 1999 and December 31,
1998 (in thousands):
<TABLE>
<CAPTION>
1999 1998
------ -------
<S> <C> <C>
U.S. Government:
Amounts billed.......................................... $1,411 $ 3,705
Unbilled costs and estimated earnings on uncompleted
contracts.............................................. 1,665 558
------ -------
3,076 4,263
Commercial:
Amounts billed.......................................... 4,413 3,977
Unbilled costs and estimated earnings on uncompleted
contracts.............................................. 1,202 2,134
------ -------
Total................................................. $8,691 $10,374
====== =======
</TABLE>
Included above in amounts billed is an allowance for doubtful accounts of
$20,000 at March 31, 1999 and December 31, 1998. During 1999 and 1998 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 March 31, 1999,
substantially all is expected to be collected within the next twelve months.
Information with respect to uncompleted contracts as of March 31, 1999 and
December 31, 1998 is as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Costs incurred on uncompleted contracts................... $18,335 $20,945
Estimated earnings........................................ 6,168 6,922
------- -------
24,503 27,867
Less billings to date..................................... 22,185 26,023
------- -------
$ 2,318 $ 1,844
======= =======
</TABLE>
The above amounts are included in the accompanying balance sheets under the
following captions (in thousands):
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................... $2,867 $2,692
Billings in excess of cost and estimated earnings on
uncompleted contracts.................................... 549 848
------ ------
Total................................................... $2,318 $1,844
====== ======
</TABLE>
7
<PAGE>
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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. The
number of weighted average shares outstanding for "basic" and "diluted" income
per share was 7,077,723 and 4,666,481 for the three months ended March 31,
1999 and 1998, 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
were increased in 1998 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. SEGMENT AND RELATED INFORMATION
The Company classifies its business into two segments:
Vessel Construction
The Company constructs a variety of marine vessels, including large and
small deck barges, single and double hull tank barges, lift boats, push boats,
offshore tug boats and offshore support vessels. The Company also fabricates
components of offshore drilling rigs and floating production, storage and
offloading vessels including sponsons, stability columns, blisters, pencil
columns and other modular components.
Repair and Conversions
The Company's conversion projects primarily consist of lengthening the
midbodies of vessels, modifying vessels to permit their use for a different
type of activity and other modifications to increase the capacity or
functionality of a vessel. The Company also derives a significant amount of
revenue from repairs made as a result of periodic inspections required by the
U.S. Coast Guard, the American Bureau of Shipping and other regulatory
agencies.
The Company evaluates the performance of its segments based upon gross
profit. Selling, general and administrative expenses, executive compensation
expense, interest expense, other income (expense), and income taxes are not
allocated to the segments. Accounting policies are the same as those described
in Note 1, "Summary of Significant Accounting Policies" in the Company's Form
10-K for the year ended December 31, 1998. Intersegment sales and transfers
are not significant.
8
<PAGE>
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Selected information as to the operations of the Company by segment is as
follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1999 1998
------------------
<S> <C> <C>
Revenue:
Vessel construction...................................... $ 7,125 $ 8,604
Repair and conversions................................... 2,335 2,965
-------- ---------
Total revenue.......................................... 9,460 11,569
-------- ---------
Cost of revenue:
Vessel construction...................................... 5,074 6,158
Repair and conversions................................... 1,896 1,982
-------- ---------
Total cost of revenue.................................. 6,970 8,140
-------- ---------
Gross profit:
Vessel construction...................................... 2,051 2,446
Repair and conversions................................... 439 983
-------- ---------
Total gross profit..................................... 2,490 3,429
Selling, general and administrative expenses............... 979 888
Executive compensation expense............................. -- 4,316
-------- ---------
Income (loss) from operations.............................. 1,511 (1,775)
Interest expense........................................... (178) (503)
Other income............................................... 66 93
-------- ---------
Income (loss) before income taxes.......................... 1,399 (2,185)
Provision for income taxes................................. 567 293
-------- ---------
Net income (loss).......................................... $ 832 $ (2,478)
======== =========
</TABLE>
Certain other financial information of the Company by segment is as follows
(in thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1999 1998
-------------------
<S> <C> <C>
Depreciation and amortization expense:
Vessel construction...................................... $ 203 $ 199
Repair and conversions................................... 131 117
Included in selling, general and administrative
expenses................................................ 233 231
-------- ----------
Total depreciation and amortization expense............ $ 567 $ 547
======== ==========
Capital expenditures:
Vessel construction...................................... $ 23 $ 119
Repair and conversions................................... 18 724
Other.................................................... 149 230
-------- ----------
Total capital expenditures............................. $ 190 $ 1,073
======== ==========
</TABLE>
9
<PAGE>
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Total assets of the Company by segment is as follows at March 31, 1999 and
December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Total assets:
Vessel construction........................................ $36,112 $35,245
Repair and conversions..................................... 6,415 7,554
Other...................................................... 5,085 4,720
------- -------
Total assets............................................. $47,612 $47,519
======= =======
</TABLE>
Certain assets and capital expenditures of the Company are allocated to
corporate and are included in the "Other" caption.
Revenues included in the consolidated financial statements of the Company
are derived from customers domiciled in the United States. All assets of the
Company are located in the United States.
5. COMMITMENTS AND CONTINGENCIES
At March 31, 1999, the Company had outstanding a contract performance bond
issued by a third party in the amount of $3.7 million.
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.
6. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and
reporting standards for derivative instruments and hedging activities. The
Company has considered the implications of SFAS 133 and has concluded that its
implementation will not have a material effect on the Company's consolidated
financial statements.
10
<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 Consolidated Financial Statements and the Notes to Unaudited
Consolidated Financial Statements included elsewhere in this Form 10-Q as well
as the Company's annual report and Form 10-K for the year ended December 31,
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")
prior to the completion of the Offering. In accordance with the terms of the
exchange agreement, the shareholders of Conrad received a number of shares of
common stock of the Company 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 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 of common stock (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 a 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 adversely impacted recently by decreased activity in the
offshore oil and gas industry. Activity by other commercial and government
customers to construct new vessels to replace older vessels and upgrade the
capacity or functionality of existing vessels has remained steady. 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 a steady
mix of 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.
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
11
<PAGE>
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
Conrad 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 net 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 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 represented undistributed earnings of Conrad, estimated through the
date of the termination of Conrad's S corporation status, on which Conrad's
shareholders 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
Distributions with borrowing under its revolving credit facility, which
borrowings were repaid with proceeds of the Offering.
In the first quarter of 1998, Conrad issued shares of restricted 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 50% 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
12
<PAGE>
estimated to be recognized over a three-year vesting period, of which $360,000
was expensed in the second quarter of 1998. During the third quarter of 1998
the executives surrendered and the Company cancelled an aggregate 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 restricted 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 364,043 shares of Company common stock at the market price of the stock on
the date of the award. On March 2, 1999, Messrs. Hidalgo and Hernandez
executed promissory notes payable to Conrad Industries bearing interest at
9.0% per annum in the amounts of $126,337 and $139,277, respectively,
representing their tax liabilities in connection with common shares issued to
them and surrendered during the third quarter of 1998.
Results of Operations
The following table sets forth certain historical data of the Company and
percentage of revenues for the periods presented (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1999 1998
------ -------
<S> <C> <C> <C> <C>
Financial Data:
Revenue
Vessel construction........................ $7,125 75.3 % $ 8,604 74.4 %
Repair and conversions..................... 2,335 24.7 % 2,965 25.6 %
------ -------
Total revenue............................ 9,460 100.0 % 11,569 100.0 %
------ -------
Cost of revenue
Vessel construction........................ 5,074 71.2 % 6,158 71.6 %
Repair and conversions..................... 1,896 81.2 % 1,982 66.8 %
------ -------
Total cost of revenue.................... 6,970 73.7 % 8,140 70.4 %
------ -------
Gross profit
Vessel construction........................ 2,051 28.8 % 2,446 28.4 %
Repair and conversions..................... 439 18.8 % 983 33.2 %
------ -------
Total gross profit....................... 2,490 26.3 % 3,429 29.6 %
S G & A expenses............................. 979 10.3 % 888 7.7 %
Non-cash executive compensation(1)........... -- 0.0 % 4,316 37.2 %
------ -------
Income (loss) from operations................ 1,511 16.0 % (1,775) (15.3)%
Interest expense............................. 178 1.9 % 503 4.3 %
Other expenses (income), net................. (66) (0.7)% (93) (0.8)%
------ -------
Income (loss) before income taxes............ 1,399 14.8 % (2,185) (18.9)%
Income taxes................................. 567 6.0 % 293 2.5 %
------ -------
Net income (loss)............................ $ 832 8.8 % $(2,478) (21.4)%
====== =======
Pro Forma Data:
Income (loss) before income taxes as reported
above....................................... $1,399 14.8 % $(2,185) (18.9)%
Pro forma provision for income taxes(2)...... 567 6.0 % 418 3.6 %
------ -------
Pro forma net income (loss).................. $ 832 8.8 % $(2,603) (22.5)%
====== =======
EBITDA(3).................................... $2,078 22.0 % $ 3,088 26.7 %
====== =======
Operating Data: Labor hours.................. 147 151
</TABLE>
- --------
(1) Represents, non-recurring, non-cash executive compensation expense related
to the issuance of shares of common stock to executives by Conrad in the
first quarter of 1998.
(2) Pro Forma data 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 periods presented.
13
<PAGE>
(3) Represents income from operations before deduction of depreciation,
amortization and non-cash compensation expense related to the issuance of
common 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 Ended March 31, 1999 Compared with Three Months Ended March 31,
1998.
During the three months ended March 31, 1999, the Company generated revenue
of $9.5 million, a decrease of $2.1 million, or 18.2%, compared to $11.6
million in revenue for the three months ended March 31, 1998. The decrease was
due to a $1.5 million decrease in vessel construction attributable to the
types of jobs completed or in progress during the three months ended March 31,
1999 which required less material and equipment as compared to projects
completed or in progress during the three months ended March 31, 1998, and a
$630,000 decrease in repair and conversion revenue primarily attributable to
decreased offshore oil and gas activity.
Gross profit decreased $939,000, or 27.4%, to $2.5 million (26.3% of
revenue) for the three months ended March 31, 1999 as compared to gross profit
of $3.4 million (29.6% of revenue) for the three months ended March 31, 1998.
The decrease was due to (1) a decrease in vessel construction gross profit of
$395,000, or 16.1%, to $2.1 million (28.8% of vessel construction revenue) for
the three months ended March 31, 1999 as compared to vessel construction gross
profit of $2.4 million (28.4%of vessel construction revenue) for the three
months ended March 31, 1998, and (2) a decrease in repair and conversion gross
profit of $544,000, or 55.3%, to $439,000 (18.8% of repair and conversion
revenue) for the three months ended March 31, 1999 as compared to repair and
conversion gross profit of $983,000 (33.2% of repair and conversion revenue)
for the three months ended March 31, 1998. The decrease in gross profit as a
percentage of revenue was primarily due to the decrease in repair and
conversion gross profit margins to 18.8% for the three months ended March 31,
1999 compared to 33.2% for the three months ended March 31, 1998. This decline
was due to decreased demand for repair and conversions services, reduction in
repair and conversion charge rates, and less complexity and shorter duration
of repair and conversion jobs.
Selling, general and administrative expenses increased $91,000, or 10.2%, to
$979,000 for the three months ended March 31, 1999 as compared to $888,000 for
the three months ended March 31, 1998, primarily due to an increase in costs
related to operating as a public company. These cost included taxes and
licenses, directors fees, printing cost and legal and accounting.
Income before income taxes increased $3.6 million to $1.4 million for the
three months ended March 31, 1999 as compared to a loss before income taxes of
$2.2 million for the three months ended March 31, 1998, primarily due to the
elimination of the non-recurring, non-cash executive compensation charge of
$4.3 million (described in "Recent Events").
The Company had net income of $832,000 for the three months ended March 31,
1999 as compared to a net loss of $2.5 million for the three months ended
March 31, 1998. Net income for the three months ended March 31, 1998 was
impacted by the non-recurring, non-cash compensation charge of $4.3 million
(described in "Recent Events"). Interest expense decreased $325,000 to
$178,000 for the three months ended March 31, 1999 as compared to interest
expense of $503,000 for the three months ended March 31, 1998 due to repayment
of debt during June 1998 with proceeds received from the Offering. Conrad was
an S corporation during the three months ended March 31, 1998 and not subject
to income taxes at the corporate level. Income tax expense during the there
months ended March 31, 1998 was related to the operations of Orange
Shipbuilding during this period.
14
<PAGE>
Pro forma net income increased $3.4 million to $832,000 for the three months
ended March 31, 1999 as compared to pro forma net loss of $2.6 million for the
three months ended March 31, 1998 primarily due to the non-recurring, non-cash
executive compensation charge of $4.3 million (described in "Recent Events").
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.
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 (the" Revolving
Credit Facility") and the remaining net proceeds were used to repay $13.7
million of the approximately $25 million of indebtedness under a term loan
(the "Term Loan").
Historically, the Company has funded its business through funds generated
from operations. Net cash provided by operations was $2.5 million for the
three months ended March 31, 1999 due to a decrease in accounts receivable,
accounts payable and accrued expenses offset by changes and billings related
to costs and estimated earnings on uncompleted contracts and other assets. The
Company has borrowed in the past to expand its facilities and to fund the
acquisition of Orange Shipbuilding in December 1997. The Company's working
capital position was $8.3 million at March 31, 1999 compared to $7.7 million
at December 31, 1998.
The Company's capital requirements historically have been primarily for
improvements to its facilities and equipment. The Company's net cash used in
investing activities of $190,000 for the three months ended March 31, 1999 was
for improvements to facilities and equipment. Capital expenditures for plant
and equipment were $1.1 million for the three months ended March 31, 1998,
primarily for major improvements to drydocks.
Net cash used in financing activities was $669,000 for the three months
ended March 31, 1999 relating to the repayment of debt.
The Company has entered into a loan agreement with the Whitney Bank (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 the funding of acquisitions. The Revolving Credit Facility
bears interest on the same terms as the Term Loan and matures on July 31,
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 Distributions as further described in Recent Events.
The $10.0 million of indebtedness was paid from the proceeds as detailed above
and thus the $10.0 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 September 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 March 31, 1999 was 7.06% 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. During June 1998, the Company repaid $12.3 million 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 $9.2 million at March 31, 1999.
15
<PAGE>
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 planned capital
expenditures for property and equipment through 1999. 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 has developed 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 June 30, 1999.
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 assessment indicates that
there will be no disruption in the operations of its equipment as a result of
the Year 2000 problem. The Company is currently conducting final testing of
its equipment and anticipates completion of testing during the second quarter
of 1999. 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 $45,000, exclusive of software and systems that are
being upgraded in the normal business cycle. 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 Pronouncement
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133
16
<PAGE>
establishes accounting and reporting standards for derivative instruments and
hedging activities. The Company has considered the implications of SFAS 133
and has concluded that its implementation will not have a material effect on
the Company's consolidated financial statements.
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.
17
<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: May 13, 1999
CONRAD INDUSTRIES, INC.
By: /s/ CECIL A. HERNANDEZ
----------------------------------
Cecil A. Hernandez
Senior Vice President and
Chief Financial Officer
18
<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 REFERENE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 4,761
<SECURITIES> 0
<RECEIVABLES> 8,711
<ALLOWANCES> 20
<INVENTORY> 226
<CURRENT-ASSETS> 14,703
<PP&E> 26,875
<DEPRECIATION> 8,949
<TOTAL-ASSETS> 47,612
<CURRENT-LIABILITIES> 6,358
<BONDS> 6,690
0
0
<COMMON> 71
<OTHER-SE> 31,243
<TOTAL-LIABILITY-AND-EQUITY> 47,612
<SALES> 9,460
<TOTAL-REVENUES> 9,460
<CGS> 6,970
<TOTAL-COSTS> 6,970
<OTHER-EXPENSES> 913
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 178
<INCOME-PRETAX> 1,399
<INCOME-TAX> 567
<INCOME-CONTINUING> 832
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 832
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0.12
</TABLE>
