<PAGE>
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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, 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
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 15, 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)
Consolidated Balance Sheets September 30, 1999 and December 31, 1998.... 3
Consolidated Statements of Operations Three and Nine Months Ended
September 30, 1999 and 1998............................................ 4
Consolidated Statements of Cash Flows Nine Months Ended September 30,
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................................. 18
Signature................................................................. 19
</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>
September 30, December 31,
1999 1998
------------- ------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents......................... $ 3,454 $ 3,074
Accounts receivable, net.......................... 4,945 7,682
Costs and estimated earnings in excess of billings
on uncompleted contracts......................... 3,287 2,692
Inventories....................................... 196 230
Other current assets.............................. 2,085 562
------- -------
Total current assets............................ 13,967 14,240
PROPERTY, PLANT AND EQUIPMENT, net.................. 17,683 18,104
COST IN EXCESS OF NET ASSETS ACQUIRED............... 14,372 14,963
OTHER ASSETS........................................ 203 212
------- -------
TOTAL ASSETS........................................ $46,225 $47,519
======= =======
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable.................................. $ 1,008 $ 1,650
Accrued employee costs............................ 657 215
Accrued expenses.................................. 567 1,255
Current maturities of long-term debt.............. 2,512 2,594
Billings in excess of costs and estimated earnings
on uncompleted contracts......................... 742 848
------- -------
Total current liabilities....................... 5,486 6,562
LONG-TERM DEBT, less current maturities............. 5,434 7,318
DEFERRED INCOME TAXES............................... 3,228 3,157
------- -------
Total liabilities............................... 14,148 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................................. 4,226 2,631
------- -------
Total shareholders' equity...................... 32,077 30,482
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.......... $46,225 $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 Nine Months
Ended Ended September
September 30, 30,
--------------- ----------------
1999 1998 1999 1998
------ ------- ------- -------
<S> <C> <C> <C> <C>
REVENUE..................................... $6,930 $12,794 $25,100 $36,781
COST OF REVENUE............................. 5,731 9,710 19,119 26,519
------ ------- ------- -------
GROSS PROFIT................................ 1,199 3,084 5,981 10,262
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES................................... 914 741 2,904 2,514
EXECUTIVE COMPENSATION EXPENSE.............. -- -- -- 4,676
------ ------- ------- -------
INCOME FROM OPERATIONS...................... 285 2,343 3,077 3,072
INTEREST EXPENSE............................ (152) (222) (491) (1,227)
OTHER INCOME................................ 81 67 203 247
------ ------- ------- -------
INCOME BEFORE INCOME TAXES.................. 214 2,188 2,789 2,092
PROVISION FOR INCOME TAXES.................. 143 871 1,194 1,574
PROVISION FOR CUMULATIVE DEFERRED TAXES..... -- -- -- 675
------ ------- ------- -------
NET INCOME (LOSS)........................... $ 71 $ 1,317 $ 1,595 $ (157)
====== ======= ======= =======
Net income (loss) per common share:
Basic and diluted......................... $ 0.01 $ 0.18 $ 0.23 $ (0.03)
====== ======= ======= =======
Weighted average common shares outstanding:
Basic and diluted......................... 7,078 7,225 7,078 5,861
====== ======= ======= =======
Pro forma data (Note 3):
Income before income taxes as reported
above.................................... $ 214 $ 2,188 $ 2,789 $ 2,092
Pro forma provision for income taxes...... 143 871 1,194 2,238
------ ------- ------- -------
Pro forma net income (loss)............... $ 71 $ 1,317 $ 1,595 $ (146)
====== ======= ======= =======
Pro forma net income (loss) per share..... $ 0.01 $ 0.18 $ 0.23 $ (0.02)
====== ======= ======= =======
Common and equivalent shares outstanding.. 7,078 7,225 7,078 6,398
====== ======= ======= =======
</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>
Nine Months
Ended
September 30,
----------------
1999 1998
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $ 1,595 $ (157)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization.............................. 1,691 1,678
Deferred income tax expense................................ 71 654
Executive compensation expense............................. -- 4,676
Changes in assets and liabilities, net of effect of
acquisition:
Accounts receivable....................................... 2,737 (2,912)
Net change in billings related to cost and estimated
earnings on uncompleted contracts........................ (701) (4,144)
Inventory and other assets................................ (1,493) (384)
Accounts payable and accrued expenses..................... (888) 1,277
------- -------
Net cash provided by operating activities................ 3,012 688
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for plant and equipment................ (666) (1,601)
------- -------
Net cash used in investing activities.................... (666) (1,601)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt.............................. -- 10,687
Principal repayments of debt................................ (1,966) (25,266)
Distributions to stockholders............................... -- (12,292)
Proceeds from sale of common stock, net..................... -- 23,023
------- -------
Net cash used in financing activities.................... (1,966) (3,848)
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......... 380 (4,761)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............... 3,074 7,551
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD..................... $ 3,454 $ 2,790
======= =======
SUPPLEMENTAL DISCLOSURES CASH FLOW INFORMATION:
Interest paid............................................... $ 491 $ 1,333
======= =======
Taxes paid.................................................. $ 1,752 $ 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
<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 and nine-month periods ended
September 30, 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 and nine-month periods
ended September 30, 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 December 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. The term loan restricts the payment of
dividends by the Company. The term loan is conditioned upon Conrad remaining
in compliance with the covenants of the loan agreement and maintaining certain
financial ratios. As of September 30, 1999, Conrad was in compliance with the
covenants or had received the appropriate waivers.
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
6
<PAGE>
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
under a $10.0 million revolving credit facility. The facility bears interest
on the same terms as the term loan referred to above and matured on October
31, 1999. Conrad has received a commitment to renew the Revolving Credit
Facility through April 30, 2001.
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 September 30, 1999 and December
31, 1998 (in thousands):
<TABLE>
<CAPTION>
1999 1998
------ -------
<S> <C> <C>
U.S. Government:
Amounts billed.......................................... $2,563 $ 3,705
Unbilled costs and estimated earnings on uncompleted
contracts.............................................. 2,709 558
------ -------
5,272 4,263
Commercial:
Amounts billed.......................................... 2,382 3,977
Unbilled costs and estimated earnings on uncompleted
contracts.............................................. 578 2,134
------ -------
Total................................................. $8,232 $10,374
====== =======
</TABLE>
Included above in amounts billed is an allowance for doubtful accounts of
$20,000 at September 30, 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 September 30, 1999,
substantially all is expected to be collected within the next twelve months.
Information with respect to uncompleted contracts as of September 30, 1999
and December 31, 1998 is as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Costs incurred on uncompleted contracts................... $25,420 $20,945
Estimated earnings........................................ 8,336 6,922
------- -------
33,756 27,867
Less billings to date..................................... 31,211 26,023
------- -------
$ 2,545 $ 1,844
======= =======
</TABLE>
7
<PAGE>
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.................................... $3,287 $2,692
Billings in excess of cost and estimated earnings on
uncompleted contracts.................................... 742 848
------ ------
Total................................................... $2,545 $1,844
====== ======
</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 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 7,225,374 for the three months ended September 30,
1999 and 1998, respectively and 7,077,723 and 5,860,504 for the nine months
ended September 30, 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.
8
<PAGE>
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
Selected information as to the operations of the Company by segment is as
follows (in thousands):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended September
September 30, 30,
-------------- ----------------
1999 1998 1999 1998
------ ------ ------- -------
<S> <C> <C> <C> <C>
Revenue:
Vessel construction....................... $4,886 $8,355 $18,769 $24,915
Repair and conversions.................... 2,044 4,439 6,331 11,866
------ ------ ------- -------
Total revenue........................... 6,930 12,794 25,100 36,781
------ ------ ------- -------
Cost of revenue:
Vessel construction....................... 4,052 6,423 13,957 18,268
Repair and conversions.................... 1,679 3,287 5,162 8,251
------ ------ ------- -------
Total cost of revenue................... 5,731 9,710 19,119 26,519
------ ------ ------- -------
Gross profit:
Vessel construction....................... 834 1,932 4,812 6,647
Repair and conversions.................... 365 1,152 1,169 3,615
------ ------ ------- -------
Total gross profit...................... 1,199 3,084 5,981 10,262
Selling, general and administrative
expenses................................... 914 741 2,904 2,514
Executive compensation expense.............. -- -- -- 4,676
------ ------ ------- -------
Income from operations...................... 285 2,343 3,077 3,072
Interest expense............................ (152) (222) (491) (1,227)
Other income................................ 81 67 203 247
------ ------ ------- -------
Income before income taxes.................. 214 2,188 2,789 2,092
Provision for income taxes.................. 143 871 1,194 1,574
Provision for cumulative deferred taxes..... -- -- -- 675
------ ------ ------- -------
Net income (loss)........................... $ 71 $1,317 $ 1,595 $ (157)
====== ====== ======= =======
</TABLE>
Certain other financial information of the Company by segment is as follows
(in thousands):
<TABLE>
<CAPTION>
Three
Months
Ended Nine Months
September Ended
30, September 30,
--------- -------------
1999 1998 1999 1998
---- ---- ------ ------
<S> <C> <C> <C> <C>
Depreciation and amortization expense:
Vessel construction.................................. $198 $202 $ 596 $ 604
Repair and conversions............................... 131 127 393 378
Included in selling, general and administrative
expenses............................................ 236 236 702 696
---- ---- ------ ------
Total depreciation and amortization expense........ $565 $565 $1,691 $1,678
==== ==== ====== ======
</TABLE>
9
<PAGE>
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Three
Months Nine Months
Ended Ended
September September
30, 30,
--------- -----------
1999 1998 1999 1998
---- ---- ---- ------
<S> <C> <C> <C> <C>
Capital expenditures:
Vessel construction.............................. $231 $ 5 $264 $ 269
Repair and conversion............................ 129 70 158 1,061
Other............................................ 20 41 244 271
---- ---- ---- ------
Total capital expenditures..................... $380 $116 $666 $1,601
==== ==== ==== ======
</TABLE>
Total assets of the Company by segment is as follows at September 30, 1999
and December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Total assets:
Vessel construction..................................... $35,290 $35,245
Repair and conversions.................................. 5,488 7,554
Other................................................... 5,447 4,720
------- -------
Total assets.......................................... $46,225 $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 September 30, 1999, the Company had outstanding contract performance
bonds issued by a third party in the amount of $4,119,000.
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
consolidated 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 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.
11
<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
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 these shares to Messrs. Hidalgo and Hernandez, the
Company estimated it would recognize aggregate
12
<PAGE>
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 $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 and May 4, 1999, the executives were awarded options to
purchase an aggregate of 364,043 and 35,957 shares, respectively, of Company
common stock at the market price of the stock on the dates of the awards. On
March 2, 1999 and April 15, 1999, Messrs. Hidalgo and Hernandez executed
promissory notes payable to Conrad Industries bearing interest at 9.0% per
annum in the amounts of $ 233,327 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):
Conrad Industries, Inc. Summary Results of Operations
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended September
September 30, 30,
---------------------------- ------------------------------
1999 1998 1999 1998
------ ------ ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Financial Data:
Revenue
Vessel construction... $4,886 70.5% $8,355 65.3% $18,769 74.8% $24,915 67.7%
Repair and
conversions.......... 2,044 29.5% 4,439 34.7% 6,331 25.2% 11,866 32.3%
------ ------ ------- -------
Total revenue....... 6,930 100.0% 12,794 100.0% 25,100 100.0% 37,781 100.0%
------ ------ ------- -------
Cost of revenue
Vessel construction... 4,052 82.9% 6,423 76.9% 13,957 74.4% 18,268 73.3%
Repair and
conversions.......... 1,679 82.1% 3,287 74.0% 5,162 81.5% 8,251 69.5%
------ ------ ------- -------
Total cost of
revenue............ 5,731 82.7% 9,710 75.9% 19,119 76.2% 26,519 72.1%
------ ------ ------- -------
Gross profit
Vessel construction... 834 17.1% 1,932 23.1% 4,812 25.6% 6,647 26.7%
Repair and
conversions.......... 365 17.9% 1,152 26.0% 1,169 18.5% 3,615 30.5%
------ ------ ------- -------
Total gross profit.. 1,199 17.3% 3,084 24.1% 5,981 23.8% 10,262 27.9%
S G & A expenses........ 914 13.2% 741 5.8% 2,904 11.6% 2,514 6.8%
Non-cash executive
compensation(1)........ -- 0.0% -- 0.0% -- 0.0% 4,676 12.7%
------ ------ ------- -------
Income from operations.. 285 4.1% 2,343 18.3% 3,077 12.3% 3,072 8.4%
Interest expense........ 152 2.2% 222 1.7% 491 2.0% 1,227 3.3%
Other expenses (income),
net.................... (81) -1.2% (67) -0.5% (203) -0.8% (247) -0.7%
------ ------ ------- -------
Income before income
taxes.................. 214 3.1% 2,188 17.1% 2,789 11.1% 2,092 5.7%
Income taxes............ 143 2.1% 871 6.8% 1,194 4.8% 1,574 4.3%
Cumulative deferred tax
provision -- 0.0% -- 0.0% -- 0.0% 675 1.8%
------ ------ ------- -------
Net Income (loss)....... $ 71 1.0% $1,317 10.3% $ 1,595 6.4% $ (157) -0.4%
====== ====== ======= =======
Pro Forma Data:
Income before income
taxes.................. $ 214 3.1% $2,188 17.1% $ 2,789 11.1% $ 2,092 5.7%
Pro forma provision for
income taxes(2)........ 143 2.1% 871 6.8% 1,194 4.8% 2,238 6.1%
------ ------ ------- -------
Pro forma net income
(loss)................. $ 71 1.0% $1,317 10.3% $ 1,595 6.4% $ (146) -0.4%
====== ====== ======= =======
EBITDA(3)............... $ 850 12.3% $2,908 22.7% $ 4,768 19.0% $ 9,426 25.6%
====== ====== ======= =======
Operating Data: Labor
hours.................. 126 177 405 509
</TABLE>
13
<PAGE>
- --------
(1) Represents, 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.
(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 September 30, 1999 Compared with Three Months Ended
September 30, 1998.
The Company's revenues for the three months ended September 30, 1999, was
$6.9 million a decrease of $5.9 million (45.8%) compared to $12.8 million in
revenues for the three months September 30, 1998. The decrease was due to a
$3.5 million (41.5%) decrease in vessel construction to $4.9 million for the
three months ended September 30, 1999 compared to $8.4 million for the three
months ended September 30, 1998. and a $2.4 million (54.0%) decrease in repair
and conversion revenue to $2.0 million for the three months ended September
30, 1999 compared to $4.4 million for the three months ended September 30,
1998. The decreases in vessel construction were attributable to (1) the types
of jobs completed or in progress during the three months which required less
material and equipment as compared to projects completed or in progress during
the three months ended September 30, 1998, and (2) a project that had an
unforeseen billing adjustment at the end of the job due to a reduction in the
final weight of the vessel. Vessel construction production hours decreased by
12.6% during the three months ended September 30, 1999 compared to the three
months ended September 30, 1998. The decreases in repair and conversion
revenue during the three months ended September 30, 1999 compared to the three
months ended September 30, 1998 were primarily attributable 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 due to decline in offshore oil and gas activity. Repair and
conversion hours decreased by 46.5% during the three months ended September
30, 1999 compared to the three months ended September 30, 1998.
Gross profit decreased $1.9 million, or 61.1%, to $1.2 million (17.3% of
revenue) for the three months ended September 30, 1999 as compared to gross
profit of $3.1 million (24.1% of revenue) for the three months ended September
30, 1998. The decrease was due to (1) a decrease in vessel construction gross
profit of $1.1 million or 56.8%, to $834,000 for the three months ended
September 30, 1999 as compared to vessel construction gross profit of $1.9
million for the three months ended September 30, 1998, and (2) a decrease in
repair and conversion gross profit of $787,000 or 68.3%, to $365,000 for the
three months ended September 30, 1999 as compared to repair and conversion
gross profit of $1.2 million for the three months ended September 30, 1998.
These declines were due primarily to the decreases in revenue items described
above and a project that experienced actual costs in excess of estimated cost
as it neared completion.
The decrease in gross profit as a percentage of revenue was primarily due
to the decrease in repair and conversion gross profit margins to 17.9% for the
three months ended September 30, 1999, compared to gross profit margins of
26.0% for the three months ended September 30, 1998. Gross profits as a
percentage of revenue for vessel construction were 17.1% for the three months
ended September 30, 1999, compared to gross profit margins of 23.1% for the
three months ended September 30, 1998.
14
<PAGE>
Selling, general and administrative expenses increased $173,000, or 23.3%,
to $914,000 for the three months ended September 30, 1999 as compared to
$741,000 for the three months ended September 30, 1998. These increases were
primarily due to an increase in employee related cost, legal and accounting
cost and taxes and licenses.
Income before income taxes decreased $2.0 million to $214,000 for the three
months ended September 30, 1999 as compared to $2.2 million for the three
months ended September 30, 1998, primarily due to the factors listed above.
The Company had net income of $71,000 for the three months ended September
30, 1999 as compared to net income of $1.3 million for the three months ended
September 30, 1998. Interest expense decreased $70,000 to $152,000 for the
three months ended September 30, 1999 as compared to interest expense of
$222,000 for the three months ended September 30, 1998. This decrease was due
to a reduction of debt for the period.
The Company had income tax expense of $143,000 (66.8% effective tax rate)
for the three months ended September 30, 1999, compared to income taxes of
$871,000 (39.8% effective tax rate) for the three months ended September 30,
1998. The increase in the effective tax rate percent was due to the effect of
the permanent tax differences for amortization and depreciation.
Pro forma net income decreased $1.2 million to $71,000 for the three months
ended September 30, 1999 as compared to $1.3 million for the three months
ended September 30, 1998 due to the factors discussed above.
Nine Months Ended September 30, 1999 Compared with Nine Months Ended
September 30, 1998.
The Company's revenues for the nine months ended September 30, 1999, was
$25.1 million a decrease of $11.7 million (31.8%) compared to $36.8 million in
revenues for the nine months September 30, 1998. The decrease was due to a
$6.1 million (24.7%) decrease in vessel construction to $18.8 million for the
nine months ended September 30, 1999 compared to $24.9 million for the nine
months ended September 30, 1998 and a $5.5 million (46.6%) decrease in repair
and conversion revenue to $6.3 million for the nine months ended September 30,
1999 compared to $11.9 million for the nine months ended September 30, 1998..
The decreases in vessel construction were attributable to the types of jobs
completed or in progress during the nine months which required less material
and equipment as compared to projects completed or in progress during the nine
months ended September 30, 1998. Vessel construction production hours
increased by 1.2% during the nine months ended September 30, 1999 compared to
the nine months ended September 30, 1998. The decreases in repair and
conversion revenue during the nine months ended September 30, 1999 compared to
the nine months ended September 30, 1998 were primarily attributable 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 due to decline in offshore oil and gas activity. Repair
and conversion hours decreased by 44.5% during the nine months ended September
30, 1999 compared to the nine months ended September 30, 1998.
Gross profit decreased $4.3 million, or 41.7%, to $6.0 million (23.8% of
revenue) for the nine months ended September 30, 1999 as compared to gross
profit of $10.3 million (27.9% of revenue) for the nine months ended September
30, 1998. The decrease was due to (1) a decrease in vessel construction gross
profit of $1.8 million or 27.6%, to $4.8 million for the nine months ended
September 30, 1999 as compared to vessel construction gross profit of $6.6
million for the nine months ended September 30, 1998, and (2) a decrease in
repair and conversion gross profit of $2.4 million or 67.7%, to $1.2 million
for the nine months ended September 30, 1999 as compared to repair and
conversion gross profit of $3.6 million for the nine months ended September
30, 1998. These declines were due primarily to the decreases in revenue items
described above.
The decrease in gross profit as a percentage of revenue was primarily due
to the decrease in repair and conversion gross profit margins to 18.5% for the
nine months ended September 30, 1999, compared to gross profit margins of
30.5% for the nine months ended September 30, 1998. Gross profits as a
percentage of revenue for vessel construction were 25.6% for the nine months
ended September 30, 1999, compared to gross profit margins of 26.7% for the
nine months ended September 30, 1998.
15
<PAGE>
Selling, general and administrative expenses increased $390,000, or 15.5%,
to $2.9 million for the nine months ended September 30, 1999 as compared to
$2.5 million for the nine months ended September 30, 1998. These increases
were primarily due to an increase in costs related to operating as a public
company. These cost included taxes and licenses, directors and consulting
fees, printing cost, legal and accounting and employee cost.
Income before income taxes increased $697,000 to $2.8 million for the nine
months ended September 30, 1999 as compared to a net income before income
taxes of $2.1 million for the nine months ended September 30, 1998, primarily
due to the elimination of the non-cash executive compensation charge of $4.7
million (described in "Recent Events").
The Company had net income of $1.6 million for the nine months ended
September 30, 1999 as compared to a net loss of $157,000 for the nine months
ended September 30, 1998. Interest expense decreased $736,000 to $491,000 for
the nine months ended September 30, 1999 as compared to interest expense of
$1.2 million for the nine months ended September 30, 1998. This decrease was
due to repayment of debt during the period.
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. The
Company had income tax expense of $1.2 million for the nine months ended
September 30, 1999 compared to income taxes of $1.6 million for the nine
months ended September 30, 1998. Income tax expense during the nine months
ended September 30, 1998 was related to the operations of Orange Shipbuilding
during this period and to four months of Conrad operations.
Pro forma net income increased $1.7 million to $1.6 million for the nine
months ended September 30, 1999 as compared to pro forma net loss of $146,000
for the nine months ended September 30, 1998 primarily due to the non-cash
executive compensation charge of $4.7 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 $3.0 million for the nine
months ended September 30, 1999 due to a decrease in accounts receivable,
offset by decrease in accounts payable and accrued expenses, 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 $8.5 million at September 30, 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 $666,000 for the nine months ended September 30, 1999
was for improvements to facilities and equipment. Capital expenditures for
plant and equipment were $1.6 million for the nine months ended September 30,
1998, primarily for major improvements to drydocks.
Net cash used in financing activities was $2.0 million for the nine months
ended September 30, 1999 relating to the repayment of debt.
16
<PAGE>
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 matured on October 31,
1999. The Company has been given a commitment to renew the Revolving Credit
Facility through April 30, 2001. 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 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. The
term loan is conditioned upon Conrad remaining in compliance with the
covenants of the loan agreement and maintaining certain financial ratios. As
of September 30, 1999, Conrad was in compliance with the covenants or had
received the appropriate waivers.
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 December 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, 1999 was 7.51% 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 1998,
resulting in a balance due under the Term Loan of $8.0 million at September
30, 1999.
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 has accessed its critical information technology (IT) systems
and non-IT systems and believes that it has successfully implemented the
required systems and equipment modifications necessary to make the Company's
critical systems Year 2000 compliant.
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 were made.
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. With respect to other office based non-IT systems, the
Company's assessment found it necessary to replace or modify some existing
equipment, which has been completed.
17
<PAGE>
The total cost to make all systems and equipment Year 2000 compliant is
approximately $40,000, exclusive of software and systems that are being
upgraded in the normal business cycle. The costs incurred to date with respect
to Year 2000 compliance were funded with cash from operations.
The Company has communicated with most significant suppliers, customers and
financial service providers on the Year 2000 issue. This communication was
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 has been
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.
The Company has determined that it does not use any product or system which
is so critical, unique and/or high volume such that contingency planning would
not be possible. In the event a system of product suffers a Year 2000 failure,
the Company has available sufficient personnel, capital and material resources
to successfully continue operations using alternative methods.
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 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.
18
<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 15, 1999
CONRAD INDUSTRIES, INC.
/s/ Cecil A. Hernandez
By:__________________________________
Cecil A. Hernandez
Senior Vice President and
Chief Financial Officer
19
<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>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 3,454
<SECURITIES> 0
<RECEIVABLES> 8,252
<ALLOWANCES> 20
<INVENTORY> 196
<CURRENT-ASSETS> 13,967
<PP&E> 27,351
<DEPRECIATION> 9,668
<TOTAL-ASSETS> 46,225
<CURRENT-LIABILITIES> 5,486
<BONDS> 5,434
0
0
<COMMON> 71
<OTHER-SE> 32,006
<TOTAL-LIABILITY-AND-EQUITY> 46,225
<SALES> 25,100
<TOTAL-REVENUES> 25,100
<CGS> 19,119
<TOTAL-COSTS> 19,119
<OTHER-EXPENSES> 2,701
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 491
<INCOME-PRETAX> 2,789
<INCOME-TAX> 1,194
<INCOME-CONTINUING> 1,595
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,595
<EPS-BASIC> 0.23
<EPS-DILUTED> 0.23
</TABLE>
