<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-K
----------------
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 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 No. 000-24263
----------------
CONRAD INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 72-1416999
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1501 Front Street
Morgan City, Louisiana 70380
(Address of principal executive (Zip code)
offices)
(504) 384-3060
(Registrant's telephone number, including area code)
----------------
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: Common Stock,
$0.01 par value per share
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulations S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $8.9 million as of March 23, 2000, based on the
closing sales price of the registrant's common stock on the NASDAQ on such
date of $4.25 per share. For purposes of the preceding sentence only, all
directors, executive officers and beneficial owners of ten percent or more of
the common stock are assumed to be affiliates. As of March 23, 2000, 7,077,723
shares of common stock of Conrad Industries, Inc. were outstanding.
INCORPORATION OF DOCUMENTS BY REFERENCE
Portions of Conrad Industries Inc.'s definitive proxy statement relating to
the registrant's 2000 annual meeting of stockholders, which proxy statement
will be filed under the Securities Exchange Act of 1934 within 120 days of the
end of the registrant's fiscal year ended December 31, 1999, are incorporated
by reference into Part III of this Form 10-K.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART I
Item 1: Business
BUSINESS
General
Conrad Industries, Inc. (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"). Conrad has operated since
1948 at its shipyard in Morgan City, Louisiana. 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. 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.
The Company specializes in the construction, conversion and repair of a wide
variety of marine vessels for commercial and governmental customers and the
fabrication of modular components of offshore drilling rigs and floating,
production, storage and offloading vessels ("FPSOs"). The Company constructs a
variety of marine vessels, including large and small deck barges, single and
double hull tank barges, lift boats, push boats, tow boats, offshore tug boats
and offshore supply vessels ("OSVs"). The Company fabricates components of
offshore drilling rigs and FPSOs, including sponsons, stability columns,
blisters, pencil columns and other modular components. 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 ("ABS") and other regulatory agencies.
The Company serves a variety of customers and markets, including the
offshore oil and gas industry, other commercial markets and the U.S.
government. The Company believes that its ability to construct a variety of
vessels on a cost-effective basis allows it to selectively pursue vessel
construction opportunities that arise out of changing demands of the
industries served by the Company.
The Company currently operates three shipyards located along the Gulf Coast
in Morgan City, Louisiana, Orange, Texas and Amelia, Louisiana. The Company's
shipyard in Morgan City is located on approximately 11 acres on the
Atchafalaya River, approximately 30 miles from the Gulf of Mexico, and its
Orange shipyard is located on approximately 12 acres on the Sabine River, 37
miles from the Gulf of Mexico. In February 1998, the Company commenced
operations at a conversion and repair facility in Amelia, Louisiana located on
approximately 16 acres on Bayou Boeuf, approximately five miles from Morgan
City. The Company conducts its marine vessel construction activities indoors
at its Morgan City and Orange shipyards in approximately 220,000 square feet
of enclosed building space designed specifically for the construction of
marine vessels up to 400 feet in length.
Historical Background
The Company was founded in 1948 by J. Parker Conrad, the Company's Co-
Chairman of the Board of Directors, and began operations at its shipyard in
Morgan City, Louisiana. In 1952, the Company expanded its operations into the
repair business through the acquisition of one of the first drydocks on the
Gulf Coast. In 1962, the Company began building steel barges and other vessels
for the offshore oil and gas industry. Due to adverse conditions in the oil
and gas industry, the Company refocused its operations in 1984 on the
construction and repair of vessels for other commercial and foreign markets.
During 1996, the Company acquired its conversion and repair facility in
Amelia, Louisiana, which commenced operations in the first quarter of 1998.
2
<PAGE>
In December 1997, Conrad purchased Orange Shipbuilding (the "Orange
Acquisition") to expand its construction capacity and to expand its production
capabilities into additional types of marine vessels, including the
fabrication of modular components for offshore drilling rigs and FPSOs. Orange
Shipbuilding has been engaged in shipbuilding since 1974. The Orange shipyard
designed and built a variety of vessels for use in offshore Gulf of Mexico oil
and gas exploration and production activities before that sector collapsed in
1983. Orange Shipbuilding refocused its operations on small to medium-sized
vessels for the U.S. government after this decline. During 1996 and 1997, in
connection with the upturn in offshore oil and gas exploration and production
in the Gulf of Mexico, Orange Shipbuilding capitalized on the demand for
subcontractors that could fabricate modular components for offshore drilling
rigs and FPSOs on a timely and cost effective basis.
Operations
The Company's principal operations consist of the construction of marine
vessels, the fabrication of modular components for offshore drilling rigs and
FPSOs and repair and conversion services.
Current Projects. The Company's construction and fabrication and projects in
progress as of December 31, 1999 consisted of 14 vessels (including two lift
boat hulls, four barges, and eight ST tugs) and two conversion offshore tug
boat projects with aggregate remaining contract revenue of approximately $20.6
million (excluding unexercised options held by customers). The Company's
backlog (including such remaining contract revenue for projects currently in
progress) as of December 31, 1999 was approximately $20.6 million as compared
to the Company's backlog of $21.5 million as of December 31, 1998. Of this
remaining contract revenue, approximately $12.8 million was attributable to
contracts to build vessels for the U.S. Army and the Corps of Engineers. The
Company anticipates that approximately $16.2 million of the aggregate
remaining revenue from firm contracts as of December 31, 1999 will be realized
during fiscal 2000.
Products and Services
Construction of Vessels
The Company manufactures a variety of small and medium sized vessels
principally for commercial and governmental customers. This activity accounted
for 71.4% of revenue during 1999. The following is a description of the types
of vessels manufactured by the Company:
Offshore and Inland Barges. The Company builds a variety of offshore barges,
including tank, container and deck barges for commercial customers and YCs
(yard carrier barges) and YONs (yard oil Navy barges) for the U.S. Navy. The
Company also builds a variety of inland barges, including deck and tank
barges. The Company has constructed a variety of barges used in the offshore
oil and gas industry, including shale barges, pipe laying barges, oil and gas
drilling barges, and oil and gas production barges. The Company's barges are
also used in marine construction and are used by operators to carry liquid
cargoes such as petroleum and drilling fluids, dry bulk cargoes such as
aggregate, coal and wood products, deck cargoes such as machinery and
equipment, and other large item cargoes such as containers and rail cars.
Other barges function as cement unloaders and split-hull dump scows. The
Company has built barges ranging from 50 feet to 400 feet in length, with as
many cargo tanks, decks and support systems as necessary for the barges'
intended functions.
Lift Boats. Lift boats are used primarily to furnish a stable work platform
for drilling rigs, to house personnel, equipment and supplies for such
operations and to support construction and ongoing operation of offshore oil
and gas production platforms. Lift boats are self-propelled, self-elevating
and self-contained vessels that can efficiently assist offshore platform
construction and well servicing tasks that traditionally have required the use
of larger, more expensive mobile offshore drilling units or derrick barges.
Lift boats have different water depth capacities and have legs, ranging from
65 to 250 feet, that are used to elevate the deck of the boat in order to
perform required procedures on a platform at different heights above the
water.
Tug Boats. The Company builds tug boats for towing and pushing, anchor
handling, mooring and positioning, dredging assistance, tanker escort, port
management, shipping, piloting, fire fighting and salvage.
3
<PAGE>
Other Offshore Support Vessels. In addition to lift boats and tug boats, the
Company does build other types of offshore support vessels that serve
exploration and production facilities and support offshore construction and
maintenance activities. These offshore support vessels include supply vessels,
utility vessels and anchor handling vessels.
Push Boats/Tow Boats. Push boats, also known as tow boats, are used by
inland waterway operators to push barges.
Drydocks. Drydocks are used to lift marine vessels from the water in order
to facilitate the inspection and/or repair of the vessels' underwater areas. A
drydock is composed of a floodable pontoon with wing walls and its designated
capacity identifies the number of tons it is capable of safely lifting from
the water. The drydock is submerged by opening valves to flood compartments,
the vessel is placed over the submerged deck of the drydock, and the vessel is
lifted from the water by closing the valves and pumping the water out of the
flooded compartments.
Fabrication of Modular Components
The Company has been involved in the fabrication of modular components for
offshore drilling rigs and FPSOs for the offshore oil and gas industry since
1996. This activity accounted for approximately 1.9% of the Company's revenue
during 1999. The Company's Orange shipyard has performed this fabrication work
as a subcontractor for other marine construction companies that specialize in
these types of rigs and vessels. These fabrication projects include sponsons,
stability columns, blisters, pencil columns, a 350-ton flare buoy and a 66-man
quarters house.
Conversion and Repair Services
Since 1952, the Company's Morgan City facility has been involved in the
repair of vessels and barges. Conversion and repair services accounted for
approximately 26.7% of the Company's revenue during 1999. The Company has five
drydocks and dockside space capable of accommodating vessels and barges up to
300 feet long. The Company's marine repair activities include shotblasting,
painting, electrical system and piping repairs, propeller and shaft
reconditioning and ABS certified welding. 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. All U.S. Coast Guard
inspected vessels and ABS classed vessels are required to undergo periodic
inspections and surveys which require drydock examination at least twice
during any five-year period. Non-U.S. flag vessels are subject to similar
regulations. The inspection of vessels generally results in repair work being
required in order to pass inspection. In addition, vessel owners often elect
to make other repairs or modifications to vessels while in drydock undergoing
required repairs. While the Company is not aware of any proposals to reduce
the frequency or scope of such inspections, any such reduction could adversely
affect the Company's results of operations.
Customers
The Company services a wide variety of customers domestically and
internationally. Customers include marine service companies, offshore support
companies, rig fabricators, offshore and inland barge and support vessel
operators, offshore construction and drilling contractors, diving companies,
energy companies, the U.S. Army, U.S. Navy, U.S. Coast Guard and Corps of
Engineers, many of whom have been customers of the Company on a recurring and
long-term basis. The Company has also provided and continues to provide repair
and conversion services to many of the major offshore support vessel companies
and barge operators. The Company's principal customers may differ
substantially on a year-to-year basis due to the size and limited number of
new construction projects performed each year.
During fiscal 1999, the Company derived 21.1% of its revenues from the U. S.
Army for the construction of nine ST Tugs, 14.8% from R & B Falcon Marine for
repair and conversion services, 11.5% from the Corp of
4
<PAGE>
Engineers for the construction of two barges and 11.2% from North American
Shipbuilding for construction of two offshore supply vessel hulls. The
remaining 41.4% of revenues was attributable to 90 other customers.
Contract Procedure, Structure and Pricing
The Company's contracts for new construction projects generally are obtained
through a competitive bidding process. Contracts for the construction and
conversion of vessels for the U.S. government are generally subject to
competitive bidding. As a safeguard to anti-competitive bidding practices, the
U.S. Army, the U.S. Navy, the U.S. Coast Guard and the Corps of Engineers have
recently employed the concept of "cost realism," which requires that each
bidder submit information on pricing, estimated costs of completion and
anticipated profit margins. The government agencies use this and other data to
determine an estimated cost for each bidder. They then conduct a cost
comparison of the bidders' estimates against an independent estimate to arrive
at a close approximation of the real cost. The award is then made on the basis
of the expected cost to build, which often results in an award to a higher
bid.
The Company submits a large number of bids to commercial customers. However,
in the case of U.S. government contracts for which the bidding process is
significantly more detailed and costly, the Company tends to be more selective
regarding the projects on which it bids.
Most of the contracts entered into by the Company, 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.
Contracts with the U.S. government are subject to termination by the
government either for its convenience or upon default by the Company. If the
termination is for the government's convenience, the contracts provide for
payment upon termination for items delivered to and accepted by the
government, payment of the Company's costs incurred through the termination
date, and the costs of settling and paying claims by terminated
subcontractors, other settlement expenses and a reasonable profit. Under the
Truth in Negotiations Act, the U.S. government has a right for three years
after final payment on substantially all negotiated U.S. government contracts
to examine all of the Company's cost records with respect to such contracts to
determine whether the Company used and made available to the U.S. government,
or to the prime contractor in the case of a subcontract, accurate, complete
and current cost or pricing information in preparing bids and conducting
negotiations on the contracts or any amendments thereto.
Although varying contract terms may be negotiated on a case-by-case basis,
the Company's commercial and government contracts ordinarily provide for a
downpayment, with progress payments at specified stages of construction and a
final payment upon delivery. Final payment under U.S. government contracts may
be subject to deductions if the vessel fails to meet certain performance
specifications based on tests conducted by the Company prior to delivery.
Under commercial contracts, the Company generally provides a six-month
warranty with respect to workmanship. In the majority of commercial contracts,
the Company passes through the suppliers' warranties to the customer and does
not warrant materials acquired from its suppliers. The Company's government
contracts typically contain one-year warranties covering both materials and
workmanship. Expenses of the Company to fulfill warranty obligations have not
been material in the aggregate.
Bonding and Guarantee Requirements
Although the Company generally meets financial criteria that exempt it from
bonding and guarantee requirements for most contracts, certain contracts with
federal, state or local governments require contract performance bonds, and
foreign governmental contracts generally require bank letters of credit or
similar obligations. Commercial contracts also may require contract bid and
performance bonds if requested by the customer. As of December 31, 1999, the
Company had outstanding one government contract performance and
5
<PAGE>
payment bond issued by a third party with an aggregate face amount of
approximately $1.6 million. Although the Company believes that it will be able
to obtain contract bid and performance bonds, letters of credit, and similar
obligations on terms it regards as acceptable, there can be no assurance it
will be successful in doing so. In addition, the cost of obtaining such bonds,
letters of credit and similar obligations may increase.
Engineering
The Company generally builds vessels or fabricates modular components based
on its customers' drawings and specifications. The Company also develops in-
house custom designs for customers' special requirements using its computer
aided design (CAD) capabilities and has designed and built numerous barges,
pusher tugs and other vessels. The process of computer drafting, preparation
of construction drawings and development of cut tapes for numerically
controlled plasma cutting of steel with the latest 3-D software programs
allows the Company to prevent engineering mistakes and costly rework, thereby
ensuring the vessel's intended function while meeting budget estimates.
Materials and Supplies
The principal materials used by the Company in its marine vessel
construction, conversion and repair and modular component fabrication
businesses are standard steel shapes, steel plate and paint. Other materials
used in large quantities include aluminum, steel pipe, electrical cable and
fittings. The Company also purchases component parts such as propulsion
systems, hydraulic systems, generators, auxiliary machinery and electronic
equipment. All these materials and parts are currently available in adequate
supply from domestic and foreign sources. All of the Company's shipyards
obtain materials and supplies by truck or barge, and the Company's Orange
shipyard is located on a railroad service line and receives much of its steel
by rail. The Company has not engaged, and currently does not intend to engage,
in hedging transactions with respect to its purchase requirements for
materials.
Vessel Construction Process
Once a contract has been awarded to the Company, a project manager is
assigned to supervise all aspects of the project, from the date the contract
is signed through delivery of the vessel. The project manager oversees the
engineering department's completion of the vessel's drawings and supervises
the planning of the vessel's construction. The project manager also oversees
the purchasing of all supplies and equipment needed to construct the vessel,
as well as the actual construction of the vessel.
The Company constructs each vessel from raw materials, which are fabricated
by shipyard workers into the necessary shapes to construct the hull and vessel
superstructure. Component parts, such as propulsion systems, hydraulic systems
and generators, auxiliary machinery and electronic equipment, are purchased
separately by the Company and installed in the vessel. The Company uses job
scheduling and costing systems to track progress of the construction of the
vessel, allowing the customer and the Company to remain apprised of the status
of the vessel's construction.
With the assistance of computers, construction drawings and bills of
materials are prepared for each module to be fabricated. Modules are built
separately, and penetrations for piping, electrical and ventilation systems
for each module are positioned and cut during the plasma cutting operation.
Piping, raceways and ducting are also installed prior to the final assembly of
modules. After the modules are assembled to form the vessel, piping,
electrical, ventilation and other systems, as well as machinery, are installed
prior to launching, testing and final outfitting and delivery of the vessel.
Sales and Marketing
The Company believes that its reputation and experience facilitate the
Company's marketing efforts. The Company believes that its customer-driven
philosophy of quality, service and integrity leads to close customer
relationships that provide the Company with on-going opportunities to be
invited to bid for customer projects.
6
<PAGE>
The Company's marketing and sales strategy includes utilizing key employees
as salespersons to target relationships previously established and develop new
relationships with customers in the targeted markets. The Company's personnel
identify future projects by contacting customers and potential customers on a
regular basis in order to anticipate projects that will be competitively bid
or negotiated exclusively with the Company. The Company's personnel also keep
its customers advised of available capacity for drydocking, conversion and
repair activity.
Marketing efforts are currently focused in four areas: (i) new construction
of all types of barges, drydocks, lift boats, push boats, tug boats and
offshore support vessels; (ii) conversion and repair of barges and offshore
support vessels; (iii) fabrication of modular components of offshore drilling
rigs and FPSOs; and (iv) construction of vessels and barges for the U.S. Army,
U.S. Navy, U.S. Coast Guard and Corps of Engineers.
The Company is actively involved in strengthening its relationships with
customers through continuous interaction between the Company's key personnel,
project managers and the customers' project supervisors with respect to
ongoing projects. To accommodate the needs of the customers' project
supervisors, the Company has established on-site office facilities that such
project supervisors may use during the construction, repair or conversion
project. The Company also seeks to anticipate the current and future needs of
its customers as well as broader industry trends through these relationships.
Competition
U.S. shipbuilders are generally classified in two categories: (i) the five
largest shipbuilders, which are capable of building large scale vessels for
the U.S. Navy and commercial customers; and (ii) other shipyards that build
small to medium-sized vessels for governmental and commercial markets. The
Company does not compete for large vessel construction projects. The Company
competes for U.S. government contracts to build small to medium-sized vessels
principally with 10 to 15 U.S. shipbuilders, which may include one or more of
the six largest shipbuilders. The Company competes for domestic commercial
shipbuilding contracts principally with approximately 15 U.S. shipbuilders.
The number and identity of competitors on particular projects vary greatly
depending on the type of vessel and size of the project, but the Company
generally competes with only three or four companies with respect to a
particular project. The Company competes with over 70 shipyards for its
conversion and repair business.
Competition is based primarily on price, available capacity, service,
quality, and geographic proximity. The Company competes with a large number of
shipbuilders on a national, regional and local basis, some of which have
substantially greater financial resources than the Company and some of which
are public companies or divisions of public companies. The Company may also
face competition for acquisition candidates from these companies, some of
which have acquired shipbuilding and ship repair businesses during the past
decade. Other smaller shipbuilding and ship repair businesses may also seek
acquisitions from time to time.
The Company believes that it competes effectively because of its hands-on,
team management approach to design, project management and construction, its
indoor vessel construction capabilities, its specialized equipment, its
advanced construction techniques and its skilled work force. The Company seeks
to differentiate itself from its competition in terms of service and quality
(i) by investing in enclosed work spaces, modern systems and equipment, (ii)
by offering a broad range of products and services, including modular
component fabrication, (iii) through its hands-on team management, (iv) by
targeting of profitable niche products and (v) by maintaining close customer
relationships.
The shipbuilding industry is highly competitive, and competition by U.S.
shipbuilders for domestic commercial projects increased significantly during
the 1990s due to a number of factors, including (i) substantial excess
capacity because of the significant decline in spending by the U.S. Navy for
the construction of new vessels and (ii) difficulties experienced by U.S.
shipbuilders in competing successfully for commercial projects against foreign
shipyards, many of which are heavily subsidized by their governments.
7
<PAGE>
Employees
At December 31, 1999, the Company had 288 employees, of which 27 were
salaried and 261 were hourly. The Company is not a party to any collective
bargaining agreements.
Insurance
The Company maintains insurance against property damage caused by fire,
flood, explosion and similar catastrophic events that may result in physical
damage or destruction to the Company's facilities and equipment. All policies
are subject to deductibles and other coverage limitations. The Company also
maintains commercial general liability insurance, including builders' risk
coverage. The Company currently maintains excess and umbrella policies. Other
coverages currently in place include workers compensation, water pollution,
automobile and hull/P&I. The Company also maintains a type of business
interruption insurance that would compensate the Company for the loss of
business income and would reimburse the Company for additional expenses
resulting from certain specified events such as floods, hurricanes and fire.
These policies are subject to deductibles, maximum coverage amounts and
various exclusions.
Regulation
Environmental Regulation
The Company is subject to extensive and changing federal, state and local
laws (including common law) and regulations designed to protect the
environment ("Environmental Laws"), including laws and regulations that relate
to air and water quality, impose limitations on the discharge of pollutants
into the environment and establish standards for the treatment, storage and
disposal, of toxic and hazardous wastes. Stringent fines and penalties may be
imposed for non-compliance with these Environmental Laws. Additionally, these
laws require the acquisition of permits or other governmental authorizations
before undertaking certain activities, limit or prohibit other activities
because of protected areas or species and impose substantial liabilities for
pollution related to Company operations or properties. The Company cannot
predict how existing laws and regulations may be interpreted by enforcement
agencies or court rulings, whether additional laws and regulations will be
adopted, or the effect such changes may have on the Company's business,
financial condition or results of operations.
The Company's operations are potentially affected by the federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980,
as amended ("CERCLA"). CERCLA (also known as the "Superfund" law) imposes
liability, without regard to fault, on certain categories of persons for
particular costs related to releases of hazardous substances at a facility
into the environment and for liability for natural resource damages.
Categories of responsible persons under CERCLA include certain owners and
operators of industrial facilities and certain other persons who generate or
transport hazardous substances. Liability under CERCLA is strict and generally
is joint and several. Persons potentially liable under CERCLA may also bring a
cause of action against certain other parties for contribution. In addition to
CERCLA, similar state or other Environmental Laws may impose the same or even
broader liability for the discharge, release or the mere presence of certain
substances into and in the environment.
Because industrial operations have been conducted at some of the Company's
properties by the Company and previous owners and operators for many years,
various materials from these operations might have been disposed of at such
properties. This could result in obligations under Environmental Laws, such as
requirements to remediate environmental impacts. There could be additional
environmental impact from historical operations at the Company's properties
that require remediation under Environmental Laws in the future. However, the
Company currently is not aware of any such circumstances that are likely to
result in any such impact under Environmental Laws.
In order to comply with the relatively recent requirement of the
Environmental Protection Agency, the Company has applied to the Louisiana
Department of Environmental Quality ("DEQ") for a storm water permit at its
Morgan City shipyard. The Company believes that it will obtain this permit in
the ordinary course without any significant adverse effect on its operations
and without the need for any significant capital expenditures.
8
<PAGE>
Although no assurances can be given, management believes that the Company
and its operations are in compliance in all material respects with all
Environmental Laws. However, stricter interpretation and enforcement of
Environmental Laws and compliance with potentially more stringent future
Environmental Laws could materially and adversely affect the Company's
operations.
Health and Safety Matters
The Company's facilities and operations are governed by laws and
regulations, including the federal Occupational Safety and Health Act,
relating to worker health and workplace safety. The Company believes that
appropriate precautions are taken to protect employees and others from
workplace injuries and harmful exposure to materials handled and managed at
its facilities. While it is not anticipated that the Company will be required
in the near future to expend material amounts by reason of such health and
safety laws and regulations, the Company is unable to predict the ultimate
cost of compliance with these changing regulations.
Jones Act
The Merchant Marine Act of 1920 (the "Jones Act") requires that all vessels
transporting products between U.S. ports must be constructed in U.S.
shipyards, owned and crewed by U.S. citizens and registered under U.S. law,
thereby eliminating competition from foreign shipbuilders with respect to
vessels to be constructed for the U.S. coastwise trade. Many customers elect
to have vessels constructed at U.S. shipyards, even if such vessels are
intended for international use, in order to maintain flexibility to use such
vessel in the U.S. coastwise trade in the future. Bills seeking to
substantially modify the provisions of the Jones Act mandating the use of
ships constructed in the United States for U.S. coastwise trade have been
introduced in Congress. Similar bills seeking to rescind or substantially
modify the Jones Act and eliminate or adversely affect the competitive
advantages it affords to U.S. shipbuilders have been introduced in Congress
from time to time and are expected to be introduced in the future. Although
management believes it is unlikely that the Jones Act requirements will be
rescinded or materially modified in the foreseeable future, there can be no
assurance that such rescission or modification will not occur. Many foreign
shipyards are heavily subsidized by their governments and, as a result, there
can be no assurance that Company would be able to effectively compete with
such shipyards if they were permitted to construct vessels for use in the U.S.
coastwise trade.
OPA '90
Demand for double-hull carriers has been created by the Oil Pollution Act of
1990 ("OPA '90"), which generally requires U.S. and foreign vessels carrying
fuel and certain other hazardous cargos and entering U.S. ports to have
double-hulls by 2015. OPA '90 establishes a phase-out schedule that began
January 1, 1995 for all existing single-hull vessels based on the vessel's age
and gross tonnage. OPA '90's single-hull phase-out requirements do not apply
to offshore supply vessels less than 5,000 gross tons.
Title XI Amendments and the OECD Accord
In late 1993, Congress amended Title XI of the Merchant Marine Act of 1936
to permit the Secretary of Transportation to provide a U.S. government
guarantee for certain types of financing for the construction, reconstruction,
or reconditioning of U.S.-built vessels. As a result of these amendments, the
Secretary of Transportation was authorized to guarantee loan obligations of
foreign vessel owners for foreign-flagged vessels that are built in U.S.
shipyards on terms generally more advantageous than available under guarantee
or subsidy programs of foreign countries. Additionally, Title XI includes tax
and subsidy programs that provide benefits limited to vessels constructed in
the U.S. If the U.S. Congress adopts the Agreement Respecting Normal
Competitive Conditions in the Commercial Shipbuilding and Repair Industry (the
"OECD Accord"), which was signed in December 1994, among the U.S., the
European Union (on behalf of the twelve European member countries), Finland,
Japan, Korea and Norway and Sweden (which collectively control over a
significant portion of the market for worldwide vessel construction), the
Title XI guarantee program will be required to be amended
9
<PAGE>
to eliminate the competitive advantages provided by the 1993 amendments to
Title XI. During the 104th Congress in 1997, legislation providing for the
implementation of the OECD Accord and the elimination of competitive
advantages provided by the 1993 amendments to Title XI passed the U.S. House
of Representatives but was not acted upon by the U.S. Senate. In 1998,
Congress failed to adopt or ratify the OECD Accord. Proponents of the OECD
Accord may seek to introduce the legislation in the future.
The OECD Accord, when implemented, would provide the same treatment to
signatory countries under the tax and subsidy programs as is currently
accorded to U.S.-built vessels. Despite the fact that the OECD Accord will
require the elimination of certain competitive advantages provided to U.S.
shipbuilders by the 1993 amendments to Title XI, management believes that the
OECD Accord should significantly improve the ability of U.S. shipbuilders to
compete successfully for international commercial contracts with foreign
shipbuilders, many of which currently are heavily subsidized by their
governments.
Factors Influencing Future Results and Accuracy of Forward-Looking Statements
In this Form 10-K, the Annual Report and in the normal course of its
business, the Company, in an effort to help keep its stockholders and the
public informed about the Company's operations, may from time to time issue or
make certain statements, either in writing or orally, that are or contain
"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-K, 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 but not limited to
those discussed below. 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. Factors that could cause or contribute to
such difference include those discussed below, as well as those discussed
elsewhere herein.
Reliance on Cyclical Industries
The demand for the Company's products and services is dependent upon many
factors, including the financial condition of companies that purchase marine
vessels and require marine repair and conversion services. The Company's
customers include companies in the offshore oil and gas industry and the
petrochemical industry. Companies in these industries are subject to
significant fluctuations in their revenue and profitability due to a variety
of factors, including general economic conditions and factors affecting each
of these industries individually. The offshore oil and gas industry, in
particular, is affected by prevailing oil and gas prices, which historically
have fluctuated significantly. Oil prices have fluctuated significantly since
early 1998, and in 1999 the Company experienced reduced levels of demand for
its products and services from customers involved in the offshore oil and gas
industry. Adverse developments in the industries to which the Company provides
its products and services could have a material adverse effect on the
Company's financial condition and results of operations.
New Product Risks
The Company is constructing offshore support vessels of types that have not
been constructed by the Company in the past. The Company believes it has the
capability to build such vessels on a profitable basis due to its experience
performing extensive conversion and repair work on such vessels and in
constructing similar vessels such as push boats and offshore tug boats. In
addition, the Company, through its Orange Shipbuilding subsidiary, commenced
fabrication of a significant amount of modular components for offshore oil and
gas rigs and FPSOs in 1996. Most of these projects are subcontracts received
from companies that are capable of building such components themselves but did
not have the capacity to meet current demand. A decrease in demand for
10
<PAGE>
such fabrication services or increase in the capacity of such primary
contractors could have a material adverse effect on the ability of the Company
to secure similar work in the future. In 1999, the Company experienced
significantly less demand for its fabrication services related to modular
components for offshore oil and gas rigs and FPSOs due to adverse developments
in the offshore oil and gas industry related to lower oil and gas prices.
Government Contracting
The Company builds vessels for the U.S. Army, U.S. Navy, U.S. Coast Guard
and Corps of Engineers. The Company has also built vessels and performed
conversion or repair services for local, state and foreign governments in
recent years, either directly or as a subcontractor. Revenue derived from U.S.
government customers accounted for approximately 32.6% of the Company's total
revenue in 1999, and approximately 61.9% of the Company's backlog at December
31, 1999 was attributable to U.S. government contracts. U.S. government
contracts are generally subject to strict competitive bidding requirements.
Purchases of vessels by the U.S. government are generally subject to the
uncertainties inherent in the budgeting and appropriations process, which is
affected by political events over which the Company has no control. In
addition, although the Company has never been subject to suspension or
debarment, the U.S. government has the right to suspend or debar a contractor
from government contracting for significant violations of government
procurement regulations. There can be no assurance that the Company will be
successful in obtaining new government contracts. See "Business--Contract
Procedure, Structure and Pricing."
The Company's principal U.S. government business is currently being
performed under fixed-price contracts that wholly or partially shift to the
Company the risk of construction costs that exceed the contract price.
Contract Pricing Risks
Most of the Company's contracts for marine vessel construction, whether
commercial or governmental, are fixed-price contracts under which the Company
retains all cost savings on completed contracts but is also liable for the
full amount of all cost overruns. Although the Company anticipates increased
costs of labor and materials in its bids, the revenue, cost and gross profit
realized on a fixed-price contract will often vary from the estimated amounts
because of many factors, including changes in job conditions, variations in
labor and equipment productivity over the term of the contract and unexpected
increases in costs of materials and labor. In addition, costs of labor may
differ from the Company's estimates in bidding on and building new vessels not
previously constructed by the Company due to unanticipated time to complete
such project. See "Business--Employees." These variations and the risks
generally inherent in the shipbuilding industry may result in gross profits
realized by the Company being different from those originally estimated and
may result in reduced profitability or losses on these projects. Depending on
the size of the project, variations from estimated contract performance could
have a significant adverse effect on the Company's operating results for any
particular fiscal quarter or year. In addition, some of the Company's
contracts for marine vessel construction require the Company to pay liquidated
damages if the Company fails to meet specified performance deadlines. Any such
payments could have a material adverse effect on the Company's operating
results.
The Company performs many of its repair and conversion projects on a time
and materials basis, under which the Company receives a specified hourly rate
for direct labor hours (which exceeds its direct labor costs and includes
related overhead) and a specified percentage mark-up over its cost of
materials. Under such contracts, the Company is protected against cost
overruns but does not benefit directly from cost savings.
Percentage of Completion Accounting
The Company uses the percentage-of-completion method to account for its
construction contracts in process. Under this method, revenue and expenses
from construction contracts are based on the percentage of labor hours
incurred as compared to estimated total labor hours for each contract. As a
result, the timing of recognition of revenue and expenses for financial
reporting purposes may differ materially from the timing of actual contract
payments received and expenses paid. Provisions for estimated losses on
uncompleted contracts are made in the
11
<PAGE>
period in which such losses are determined. To the extent that such provisions
result in a loss or a reduction or elimination of previously reported profits
with respect to a project, the Company would recognize a charge against
current earnings, which could be material. As many of the Company's contracts
are completed over a period of several months, the timing of the recognition
of revenue and expense for these types of contracts could have a significant
impact on quarter-to-quarter operating results.
Shortage of Trained Workers
Shipyards located in the Gulf Coast have experienced shortages of skilled
labor from time to time as a result of demand for skilled workers brought
about by increases in offshore drilling activities, the construction of
offshore drilling rigs and production platforms and the crewing of offshore
vessels. In 1997, the Company experienced labor shortage that resulted in
increased costs of labor at the Company's Morgan City and Orange shipyards and
limited the Company's ability to increase its skilled work force at its Morgan
City shipyard. While the Company believes that its shipyards are not currently
experiencing labor shortages, the Company's shipyards are faced with
limitations on the availability of skilled labor that could limit the
Company's ability to increase production at its shipyards to the extent the
Company might otherwise desire. No assurances can be given regarding whether
labor shortages will be experienced at the Company's shipyards in the future.
Reliance on Principal Customers
A significant portion of the Company's revenue has historically been
generated by a few customers, although not necessarily the same customers from
year to year. For the year ended December 31, 1999, the Company's ten largest
customers collectively accounted for 84.9% of revenue. The loss of a
significant customer for any reason could result in a substantial loss of
revenue and could have a material adverse effect on the Company's operating
performance. See "Business--Customers."
Backlog
The Company's backlog is based on unearned revenue with respect to those
projects on which a customer has authorized the Company to begin work or
purchase materials pursuant to written contracts or other forms of
authorization. Although the Company's contracts with its commercial customers
generally do not permit the customer to terminate the contract, certain
government projects currently included in the Company's backlog are subject to
change and/or termination at the option of the customer, either of which could
substantially change the amount of backlog currently reported. In the case of
a termination of a government project, the government is generally required to
pay the Company for work performed and materials purchased through the date of
termination and, in some cases, is required to pay the Company a termination
fee; however, due to the large dollar amounts of backlog estimated for each of
a small number of government projects, amounts included in the Company's
backlog could decrease substantially if one or more of these projects were to
be terminated by the government. The Company's backlog of $20.6 million at
December 31, 1999 was attributable to 16 projects, of which $12.8 million was
attributable to nine government projects. Termination of one or more of the
government projects could have a material adverse effect on the Company's
revenue, net income and cash flow for fiscal 2000. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Overview" and "Business--Operations."
Competition
U.S. shipbuilders are generally classified in two categories: (i) the five
largest shipbuilders which are capable of building large scale vessels for the
U.S. Navy and commercial customers and (ii) other shipyards that build small
to medium-sized vessels for governmental and commercial markets. The Company
does not compete for large vessel construction projects. The Company competes
for U.S. government contracts to build small to medium-sized vessels
principally with approximately 10 to 15 U.S. shipbuilders, which may include
one or more of the six largest shipbuilders. The Company competes for domestic
commercial vessel construction contracts principally with up to approximately
15 U.S. shipbuilders. The number and identity of competitors on particular
12
<PAGE>
projects vary greatly depending on the type of vessel and size of the project,
but the Company generally competes with only three or four other companies
with respect to a particular project. The Company competes with over 70
regional shipyards for its conversion and repair business.
The marine vessel construction business is highly competitive. During the
1990's, the U.S. shipbuilding industry has been characterized by substantial
excess capacity because of the significant decline in new construction
projects for the U.S. Navy, the difficulties experienced by U.S. shipbuilders
in competing successfully for commercial projects against foreign shipyards,
many of which are heavily subsidized by their governments, and the decline in
the construction of vessels utilized in the offshore energy industry. As a
result of these factors, competition by U.S. shipbuilders for domestic
commercial projects has increased significantly and resulted in substantial
pressure on pricing and profit margins. Recently, there was an increase in
demand for vessel construction, conversion and repair services and this
increased demand could result in the redeployment of previously idled shipyard
capacity or other shipyards shifting their focus to the types of products and
services currently provided by the Company. In addition, due to the increased
demand for fabrication services involving the offshore oil and gas industry,
it is possible that land or facilities with water access to the Gulf of Mexico
that were previously not used in the fabrication business could be converted
to use for this purpose. Any of these events could increase the amount of
competition experienced by the Company for construction, conversion and repair
activity, which could have a material adverse effect on the Company's revenue
and profit. Contracts for the construction of vessels are usually awarded on a
competitive bid basis. Although price is the primary factor in determining
which qualified bidder is awarded a contract, customers also consider, among
other things, availability and technical capabilities of equipment and
personnel, efficiency, reliability, safety record and reputation.
Operating Risks
The Company's activities involve the fabrication and refurbishment of large
steel structures, the operation of cranes and other heavy machinery and other
operating hazards that can cause personal injury or loss of life, severe
damage to and destruction of property and equipment and suspension of
operations. The failure of the structure of a vessel after it leaves the
Company's shipyard can result in similar injuries and damages. Litigation
arising from any such occurrences may result in the Company being named as a
defendant in lawsuits asserting large claims. In addition, due to their
proximity to the Gulf of Mexico and location along rivers in flood plains, the
Company's work in progress and facilities are subject to the possibility of
significant physical damage caused by hurricanes or flooding. Although the
Company maintains insurance protection as it considers economically prudent,
there can be no assurance that such insurance will be sufficient in coverage
or effective under all circumstances or against all hazards to which the
Company may be subject. A successful claim for which the Company is not fully
insured could have a material adverse effect on the Company.
Regulation
The Company's commercial shipbuilding opportunities are materially dependent
on certain U.S. laws and regulations, the Jones Act which requires that
vessels transporting products between U.S. ports be constructed by U.S.
shipyards, OPA '90, which requires a phased-in transition of single-hull
tankers, barges and other product carriers to double-hull vessels beginning
January 1, 1995, and the 1993 amendments to Title XI of the Merchant Marine
Act of 1936, which permit the U.S. government to guarantee loan obligations of
foreign vessel owners for foreign-flagged vessels built in U.S. shipyards. In
connection with U.S. efforts to implement a 1994 multilateral agreement
designed in part to eliminate government subsidies to commercial shipbuilders,
legislation has been introduced each of the last several years in the U.S.
Congress that would eliminate certain competitive advantages afforded to U.S.
shipyards under the 1993 amendments to the Title XI guarantee program,
although Congress adjourned during 1997 and 1998 without adopting similar
proposed legislation. In addition, legislative bills seeking to rescind or
substantially modify the provisions of the Jones Act mandating the use of
U.S.-built ships for coastwise trade are introduced from time to time and are
expected to be introduced in the future. Although management believes that
Congress is unlikely to rescind or materially modify the Jones Act in the
13
<PAGE>
foreseeable future, there can be no assurance to this effect with respect to
the Jones Act or any other law or regulation benefitting U.S. shipbuilders.
Many foreign shipyards are heavily subsidized by their governments and, as a
result, there can be no assurance that the Company would be able to compete
effectively with such shipyards if they were permitted to construct vessels
for use in the U.S. coastwise trade. The repeal of the Jones Act, or any
amendment of the Jones Act that would eliminate or adversely affect the
competitive advantages provided to U.S. shipbuilders, could have a material
adverse effect on the Company's business, financial condition and results of
operations.
In addition, the Company depends, in part, on the demand for its services
from the oil and gas industry and is affected by changing taxes and other laws
and regulations relating to the oil and gas industry generally. The adoption
of laws and regulations curtailing exploration and development drilling for
oil and gas in the Gulf of Mexico for economic, environmental and other policy
reasons would adversely affect the Company's operations by limiting demand for
its services. The Company cannot determine to what extent future operations
and earnings of the Company may be affected by new legislation, new
regulations or changes in existing regulations.
Environmental Matters
The Company is subject to various federal, state and local Environmental
Laws and regulations that impose limitations on the discharge of pollutants
into the environment and establish standards for the transportation, storage
and disposal of toxic and hazardous wastes. Significant fines and penalties
may be imposed for non-compliance and certain Environmental Laws impose joint
and several "strict liability" for remediation of spills and releases of oil
and hazardous substances, rendering a person liable for environmental damage
without regard to negligence or fault on the part of such person. Such laws
and regulations may expose the Company to liability for the conduct of or
conditions caused by others, or for acts of the Company that are or were in
compliance with all applicable laws at the time such acts were performed.
Compliance with Environmental Laws increases the Company's cost of doing
business. Additionally, Environmental Laws have been subject to frequent
change.
The Company is unable to predict the future costs or other future effects of
Environmental Laws on its operations. There can be no assurance that the
Company will not incur material liability related to the Company's operations
and properties under Environmental Laws.
Reliance on Key Personnel
The Company will be highly dependent on the continuing efforts of William H.
Hidalgo, the Company's President and Chief Executive Officer, and the
Company's other executive officers and key operating personnel. The loss of
the services of any of these persons could have an adverse effect on the
business or prospects of the Company.
Control by Existing Management and Stockholders
The Company's executive officers and directors and persons and entities
affiliated with them beneficially own approximately 4,973,723 shares of Common
Stock representing 70.3% of the outstanding shares of Common Stock of which J.
Parker Conrad, John P. Conrad, Jr. and Katherine Conrad Court own or control
through trusts 4,674,486 shares of Common Stock, representing 66.1% of all
shares of Common Stock outstanding. These holders of Common Stock control in
the aggregate 66.1% of the votes of all shares of Common Stock, and, if acting
in concert, will be able to exercise control over the Company's affairs, to
elect the entire Board of Directors and to control the outcome of
substantially all of the matters submitted to a vote of stockholders.
Potential Effect of Shares Eligible for Future Sale on Price of Common Stock
Of the 7,077,723 shares of Common Stock currently outstanding, the 2,125,000
shares sold in the Offering are freely tradable. The remaining outstanding
shares may be resold publicly only following their registration
14
<PAGE>
under the Securities Act of 1933, as amended (the "Securities Act"), or
pursuant to an available exemption from registration (such as provided by Rule
144 following a one-year holding period from issuance for previously
unregistered shares).
The Company also has outstanding options to purchase up to a total of
547,100 shares of Common Stock granted to certain directors, officers and
employees of the Company. The Company registered all the shares subject to
these options under the Securities Act for public resale. These shares
generally are freely tradeable after their issuance by persons not affiliated
with the Company unless the Company contractually restricts their resale. The
Company also issued warrants to purchase an aggregate of 72,000 shares of
Common Stock at the initial public offering price to Morgan Keegan & Company,
Inc.("Morgan Keegan"). Pursuant to a Warrant Agreement with Morgan Keegan, the
Company also granted to Morgan Keegan one demand registration right
exercisable not earlier than one year after the closing date of the Offering
and certain piggyback registration rights. Sales, or the availability for
sale, of substantial amounts of the Common Stock in the public market could
adversely affect prevailing market prices and the future ability of the
Company to raise equity capital and complete any additional acquisitions for
Common Stock.
Possible Anti-takeover Effect of Certain Charter Provisions
The Company's Amended and Restated Certificate of Incorporation (the
"Charter") authorizes the Board of Directors to issue, without stockholder
approval, one or more series of preferred stock having such preferences,
powers and relative, participating, optional and other rights (including
preferences over the Common Stock respecting dividends and distributions and
voting rights) as the Board of Directors may determine. The issuance of this
"blank-check" preferred stock could render more difficult or discourage an
attempt to obtain control of the Company by means of a tender offer, merger,
proxy contest or otherwise. In addition, the Charter provides for a classified
Board of Directors, which may also have the effect of inhibiting or delaying a
change in control of the Company. Certain provisions of the Delaware General
Corporation Law may also discourage takeover attempts that have not been
approved by the Board of Directors.
Item 2: Properties
Shipyards. The Company conducts its marine vessel construction, conversion
and repair operations at its shipyards in Morgan City and Amelia, Louisiana,
and Orange, Texas. The Company has owned and operated the Morgan City shipyard
since 1948. The Company acquired the conversion and repair facility in Amelia,
Louisiana for approximately $1.0 million in 1996 and commenced conversion and
repair services at this facility during February 1998. In December 1997, the
Company acquired Orange Shipbuilding for a purchase price of approximately
$22.8 million (net of cash acquired). This acquisition significantly increased
the shipbuilding capacity of the Company.
During the past six years, the Company has made, in the aggregate,
approximately $9.9 million of capital expenditures to add capacity and improve
the efficiency of its Morgan City and Orange Shipbuilding shipyards. Of this
amount, Conrad spent approximately $6.3 million at the Morgan City shipyard
for improvements to its building and facilities, to purchase cranes and other
fabrication equipment and to purchase and modify a drydock and launch barge. A
portion of Conrad's expenditures in 1998 and 1997 were incurred to increase
the heavy lifting and drydocking capabilities of one of its drydocks. These
shipyard improvements will allow barges and vessels to be moved from drydock
space to dockside land repair areas, thereby enabling the Company to perform
major modifications and repairs, such as lengthening of vessel midbodies, on
previously unused dockside land while freeing the drydock for other projects.
The Company's capital expenditures during the last six years also included
approximately $3.6 million incurred by Orange Shipbuilding for improvements to
its buildings and facilities and to purchase cranes and other fabrication
equipment.
All of the Company's new vessel construction is done indoors in well-lighted
space specifically designed to accommodate construction of marine vessels up
to 400 feet in length. As a result, marine vessel construction is not hampered
by weather conditions, and the Company is able to more effectively utilize its
workforce and
15
<PAGE>
equipment, thereby allowing it to control costs and meet critical construction
schedules. The Company employs modular construction techniques and zone
outfitting, which involve the installation of pipe, electrical wiring and
other systems at the modular stage, thereby reducing construction time while
at the same time simplifying systems integration and improving quality. The
Company also uses computerized plasma arc metal cutting for close tolerances
and automated shotblasting and painting processes for efficiency and high
quality.
Morgan City. The Company's Morgan City, Louisiana shipyard is located on the
Atchafalaya River approximately 18 miles from the Gulf of Mexico on
approximately 11 acres. The shipyard has 14 buildings containing approximately
110,000 square feet of enclosed building area and nine overhead cranes. In
addition, the shipyard has five drydocks, one submersible launch barge, 1,700
feet of steel bulkhead, six rolling cranes and two slips. The buildings
include the Company's headquarters as well as three large fabrication
warehouses specifically designed to accommodate marine vessel construction.
The drydocks consist of two 120-foot by 52-foot drydocks, two 200-foot by 70-
foot drydocks and one 200-foot by 95-foot drydock with lifting capacities of
900, 2,400 and 3,000 tons, respectively.
Orange. The Company's Orange, Texas shipyard is located on the Sabine River
approximately 37 miles from the Gulf of Mexico on approximately 12 acres. The
shipyard has six construction bays under approximately 110,000 square feet of
enclosed building area with 14 overhead cranes. The site also has 150 feet of
steel bulkhead and one slip. The Company's Orange shipyard equipment includes
a Wheelabratore, a "gantry" type NC plasma burner with a 21-foot by 90-foot
table, over 60 automatic and semi-automatic welding machines, three rolling
cranes, 600, 800 and 1,600-ton transfer/load-out systems and a marine railway
with side transfer system.
Amelia. The Company's Amelia, Louisiana conversion and repair facility is
located on Bayou Boeuf approximately 30 miles from the Gulf of Mexico on
approximately 16 acres. This facility has six buildings containing
approximately 30,000 square feet of enclosed building area. The site also has
2,100 feet of bulkhead and two slips. The Company commenced marine repair and
conversion operations at this shipyard during February 1998.
Item 3: Legal Proceedings
The Company is a party to various routine 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 such proceedings in the
aggregate, even if determined adversely, would not have a material adverse
effect on the Company's business or financial condition.
Item 4: Submission of Matters to Vote of Security Holders
The Company did not submit any matters to a vote of security holders during
the fourth quarter of its fiscal year ended December 31, 1999.
16
<PAGE>
PART II
Item 5: Market for the Registrant's Common Stock and Related Stockholder
Matters
The Company's common stock, par value $0.01 per share, (the "Common Stock" )
is traded on the Nasdaq National Market System under the symbol "CNRD." At
March 17, 2000, there were approximately 867 holders of the Common Stock of
record.
The following table sets forth the high and low bid prices per share of the
Common Stock, as reported by the Nasdaq National Market, for each fiscal
quarter.
<TABLE>
<CAPTION>
Fiscal Year 1999 High Low
---------------- ------ ------
<S> <C> <C>
First Quarter.............................................. $5.00 $ 2.75
Second Quarter............................................. 7.00 3.63
Third Quarter.............................................. 5.81 4.13
Fourth Quarter............................................. 5.25 2.88
<CAPTION>
Fiscal Year 1998 High Low
---------------- ------ ------
<S> <C> <C>
Second Quarter (commencing June 10, 1998).................. $12.06 $11.00
Third Quarter.............................................. 11.75 4.00
Fourth Quarter............................................. 7.50 3.75
</TABLE>
Prior to the Offering, Conrad made distributions of cash and nonoperating
assets to its stockholders. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Recent Events." The Company
currently intends to retain all its earnings, if any, to meet its working
capital requirements and to finance the expansion of its business.
Accordingly, the Company does not anticipate paying any cash dividends on its
Common Stock in the foreseeable future. In addition, the Term Loan restricts
the payments of dividends by the Company. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
17
<PAGE>
Item 6: Selected Financial Data
The following table sets forth selected historical consolidated financial
data of the Company as of the dates and for the periods indicated. The
historical financial data for each year in the five-year period ended
December 31, 1999 are derived from the historical financial statements of the
Company. The following table also set forth pro forma financial information
that gives effect to the Company's S Corporation status, as further explained
in the notes. The following information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's consolidated financial statements and notes
thereto included elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1999 1998 1997 1996 1995
------- ------- -------- ------- -------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues....................... $32,555 $46,313 $ 22,117 $23,174 $20,914
Cost of revenue................ 25,618 34,120 15,032 17,003 16,660
------- ------- -------- ------- -------
Gross profit................... 6,937 12,193 7,085 6,171 4,254
Selling, general and
administrative expenses....... 3,857 3,515 2,242 1,847 1,497
Executive compensation(1)...... -- 4,676 -- -- --
------- ------- -------- ------- -------
Income from operations......... 3,080 4,002 4,843 4,324 2,757
Interest and other income
(expense), net................ (326) (1,141) 62 (26) (112)
------- ------- -------- ------- -------
Income before income taxes..... 2,754 2,861 4,905 4,298 2,645
Provision for income taxes....... 1,252 1,932 -- -- --
Cumulative deferred tax
provision....................... -- 675 -- -- --
------- ------- -------- ------- -------
Net income....................... $ 1,502 $ 254 $ 4,905 $ 4,298 $ 2,645
======= ======= ======== ======= =======
Net Income Per Common Share:
Basic and diluted.............. $ 0.21 $ 0.04 $ 1.05 $ 0.92 $ 0.57
Weighted Average Common Shares
Oustanding:
Basic and diluted.............. 7,078 6,167 4,660 4,660 4,660
Unaudited Pro Forma Data:
Net income as reported above... $ 2,754 $ 2,861 $ 4,905 $ 4,298 $ 2,645
Pro forma provision for income
taxes(2)...................... 1,252 2,596 1,815 1,590 979
------- ------- -------- ------- -------
Pro forma net income(2)........ $ 1,502 $ 265 $ 3,090 $ 2,708 $ 1,666
======= ======= ======== ======= =======
Pro forma net income per
share(2)(3)................... $ 0.21 $ 0.04 $ 0.55 -- --
Common and equivalent shares
outstanding................... 7,078 6,569 5,577 -- --
Statement of Cash Flows Data:
Cash provided by operating
activities.................... $ 4,520 $ 1,988 $ 6,114 $ 5,313 $ 3,604
Cash used in investing
activities(4)................. $ (744) $(1,718) $(23,872) $(1,961) $(1,120)
Cash provided by (used in)
financing activities.......... $(2,598) $(4,747) $ 22,100 $(2,619) $ (623)
Other Financial Data:
Depreciation & amortization.... $ 2,263 $ 2,249 $ 850 $ 798 $ 722
Capital expenditures(4)........ $ 744 $ 1,718 $ 23,872 $ 1,961 $ 1,120
EBITDA(5)...................... $ 5,343 $10,927 $ 5,693 $ 5,122 $ 3,479
EBITDA margin(6)............... 16.4% 23.6% 25.7% 22.1% 16.6%
Operating profit margin(7)..... 9.5% 8.6% 21.9% 18.7% 13.2%
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
As of December 31,
---------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital...................... $ 8,163 $ 7,678 $ 7,760 $ 4,402 $ 3,733
Property, plant & equipment, net..... $17,377 $18,104 $18,304 $ 8,514 $ 7,465
Total assets......................... $45,120 $47,519 $48,945 $15,236 $13,895
Long term debt, including current
portion............................. $ 7,314 $ 9,912 $25,338 $ 1,233 $ 1,900
Shareholders' equity................. $31,984 $30,482 $15,279 $12,379 $10,032
</TABLE>
- --------
(1) Represents non-cash executive compensation expense related to the
issuance of shares of restricted common stock in the first quarter of
1998 to William H. Hidalgo, the Company's President and Chief Executive
Officer, and Cecil A. Hernandez, the Company's Vice President-Finance and
Administration and Chief Financial Officer. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Recent
Events."
(2) Gives effect to the application of federal and state income taxes to the
Company as if it were a C corporation for tax purposes. Prior to May 28,
1998, Conrad operated as an S corporation for federal and state income
tax purpose.
(3) Pro forma income per share consists of the Company's historical income as
an S corporation, adjusted for income taxes that would have been recorded
had the Company operated as a C corporation and excludes the one-time
charge of $675,000 to record the cumulative deferred income tax
provision. This amount is divided by the weighted average shares of
common stock outstanding which are increased to reflect 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 initial public offering price of $12.00 per share, net of offering
expenses.
(4) Includes acquisition expenditures of $22.8 million (net of cash acquired)
incurred in December 1997 in connection with the Orange Acquisition.
(5) Represents income from operations before deduction of depreciation,
amortization and non-cash compensation expense related to the issuance of
stock and stock options to employees. EBITDA is not a measure of cash
flow, operating results or liquidity as determined by generally accepted
accounting principles. The Company has included information concerning
EBITDA as supplemental disclosure because management believes that EBITDA
provides meaningful information regarding a company's historical ability
to incur and service debt. EBITDA as defined and measured by the Company
may not be comparable to similarly titled measures reported by other
companies. EBITDA should not be considered in isolation or as an
alternative to, or more meaningful than, net income or cash flow provided
by operations as determined in accordance with generally accepted
accounting principles as an indicator of the Company's profitability or
liquidity.
(6) Represents EBITDA as a percentage of revenues.
(7) Represents income from operations as a percentage of revenues.
19
<PAGE>
Item 7: Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and the Notes to Consolidated Financial
Statements included elsewhere in this Form 10-K.
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 the Offering on June 15, 1998. 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
its 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 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.
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
20
<PAGE>
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 of 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 compensation
21
<PAGE>
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.
22
<PAGE>
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>
Years Ended December 31,
---------------------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Financial Data:
Revenue
Vessel construction......... $23,870 73.3% $31,754 68.6% $10,671 48.2%
Repair and conversions...... 8,685 26.7% 14,559 31.4% 11,446 51.8%
------- ------- -------
Total revenue............. 32,555 100.0% 46,313 100.0% 22,117 100.0%
------- ------- -------
Cost of revenue
Vessel construction......... 18,458 77.3% 23,560 74.2% 7,250 67.9%
Repair and conversions...... 7,160 82.4% 10,560 72.5% 7,782 68.0%
------- ------- -------
Total cost of revenue..... 25,618 78.7% 34,120 73.7% 15,032 68.0%
------- ------- -------
Gross profit
Vessel construction......... 5,412 22.7% 8,194 25.8% 3,421 32.1%
Repair and conversions...... 1,525 17.6% 3,999 27.5% 3,664 32.0%
------- ------- -------
Total gross profit........ 6,937 21.3% 12,193 26.3% 7,085 32.0%
S G & A expenses.............. 3,857 11.8% 3,515 7.6% 2,242 10.1%
Non-cash executive
compensation(1).............. -- 0.0% 4,676 10.1% -- 0.0%
------- ------- -------
Income from operations........ 3,080 9.5% 4,002 8.6% 4,843 21.9%
Interest expense.............. 639 2.0% 1,425 3.1% 126 0.6%
Other expenses (income), net.. (313) -1.0% (284) -0.6% (188) -0.9%
------- ------- -------
Income before income taxes.... 2,754 8.5% 2,861 6.2% 4,905 22.2%
Income taxes.................. 1,252 3.8% 1,932 4.2% -- 0.0%
Cumulative deferred tax
provision.................... -- 0.0% 675 1.5% -- 0.0%
------- ------- -------
Net income.................... $ 1,502 4.6% $ 254 0.5% $ 4,905 22.2%
======= ======= =======
Pro Forma Data:
Income before income taxes as
reported above............... $ 2,754 8.5% $ 2,861 6.2% $ 4,905 22.2%
Pro forma provision for income
taxes........................ 1,252 3.8% 2,596 5.6% 1,815 8.2%
------- ------- -------
Pro forma net income(2)....... $ 1,502 4.6% $ 265 0.6% $ 3,090 14.0%
======= ======= =======
EBITDA(3)..................... $ 5,343 16.4% $10,927 23.6% $ 5,693 25.7%
======= ======= =======
Operating Data: Labor Hours... 537 663 386
</TABLE>
- --------
(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.
23
<PAGE>
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
During the year ended December 31, 1999, Conrad generated revenue of $32.6
million, a decrease of approximately $13.8 million, or 29.7%, compared to
$46.3 million generated in 1998. The decrease was due to a $7.9 million
(24.8%) decrease in vessel construction to $23.9 million for 1999 compared to
$31.8 million for 1998 and a $5.9 million (40.3%) decrease in repair and
conversion revenue to $8.7 million for 1999 compared to $14.6 million for
1998. The decreases in vessel construction were attributable to the types of
jobs completed or in progress during 1999 which required less material and
equipment as compared to projects completed or in progress during 1998. Vessel
construction production hours decreased by 3.5% during 1999 compared to 1998.
The decreases in repair and conversion revenue during 1999 compared to 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 38.4% during
1999 compared to 1998.
Gross profit decreased $5.3 million, or 43.1%, to $6.9 million (21.3% of
revenue) for 1999 as compared to gross profit of $12.2 million (26.3% of
revenue) for 1998. The decrease was due to (1) a decrease in vessel
construction gross profit of $2.8 million or 34.0%, to $5.4 million for 1999
as compared to vessel construction gross profit of $8.2 million for 1998, and
(2) a decrease in repair and conversion gross profit of $2.5 million or 61.9%,
to $1.5 million for 1999 as compared to repair and conversion gross profit of
$4.0 million for 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 17.6% for 1999,
compared to gross profit margins of 27.5% for 1998. Gross profits as a
percentage of revenue for vessel construction were 22.7% for 1999, compared to
gross profit margins of 25.8% for 1998
Selling, general and administrative expenses increased $342,000, or 9.7%, to
$3.9 million (11.8% of revenue) for 1999 as compared to $3.5 million (7.6% of
revenue) for 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 decreased $107,000 to $2.8 million for the year
ended December 31, 1999 as compared to a net income before income taxes of
$2.9 million for the year ended December 31, 1998, primarily due to the
elimination of the non-cash executive compensation charge of $4.7 million
(described in "Recent Events") and other items described above.
The Company had net income of $1.5 million for the year ended December 31,
1999 as compared to net income of $254,000 for the year ended December 31,
1998. Interest expense decreased $786,000 to $639,000 for the year ended
December 31, 1999 as compared to interest expense of $1.4 million for the year
ended December 31, 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 $1.3 million for the year ended December 31,
1999 compared to income taxes of $1.9 million for the year ended December 31,
1998. Income tax expense during the year ended December 31, 1998 was related
to the operations of Orange Shipbuilding during this period and to four months
of Conrad operations.
Pro forma net income increased $1.2 million to $1.5 million for the year
ended December 31, 1999 as compared to pro forma net income of $265,000 for
the year ended December 31, 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.
24
<PAGE>
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
The Company's results of operations for the year ended December 31, 1997 do
not include information relative to Orange Shipbuilding and thus only present
Conrad's results of operations for that period.
During the year ended December 31, 1998, the Company generated revenue of
$46.3 million, an increase of $24.2 million, or 109.4%, compared to $22.1
million generated in 1997. The increase was due to a $17.0 million increase in
vessel construction attributable to the inclusion of the activities of Orange
Shipbuilding in the results of operations of the Company for the year, and a
$4.1 million increase in vessel construction and $3.1 million increase in
repair and conversion revenue at Conrad for the year. The increase at Conrad
was primarily attributable to increased demand as offshore oil and gas
activity increased and to the types of jobs completed or in progress during
1998 which required more material and equipment as compared to projects
completed or in progress in 1997.
Gross profit increased $5.1 million, or 72.1%, to $12.2 million (26.3% of
revenue) in 1998 as compared to gross profit of $7.1 million (32.0% of
revenue) in 1997. The increase was due primarily to an increase of $4.0
million at Orange Shipbuilding, $800,000 in other vessel new construction and
$300,000 in repair and conversion. The decrease in gross profit as a
percentage of revenue was primarily due to an increase in the types of jobs
completed or in progress during 1998 which required more material and
equipment than that required for projects completed or in progress in 1997.
Selling, general and administrative expenses increased $1.3 million to $3.5
million (7.6% of revenue) for 1998 as compared to $2.2 million (10.1% of
revenue) for 1997, primarily due to an $801,000 increase in goodwill and loan
cost amortization, a $415,000 increase in salary and wages, an increase of
$175,000 in legal and accounting fees and a decrease of $359,000 in bonus
expense.
Income before income taxes decreased $2.0 million to $2.9 million for 1998
as compared to $4.9 million for 1997, primarily due to the non-cash executive
compensation charge of $4.7 million (described in "Recent Events") and
interest expense of $1.4 million.
The Company had net income of $254,000 for 1998 compared to $4.9 million for
1997. Net income for 1998 was impacted by the non-cash compensation charge of
$4.7 million, interest expense of $1.4 million, a one time deferred income tax
charge of $675,000 for such period related to the Company's conversion from an
S corporation to a C corporation and income taxes of $1.9 million. The Company
was an S corporation during 1997 and not subject to income taxes at the
corporate level.
Pro forma net income decreased $2.8 million to $265,000 for 1998 as compared
to pro forma net income of $3.1 million for 1997 primarily due to the non-cash
executive compensation charge of $4.7 million (described in "Recent Events")
and interest expense of $1.4 million. Pro forma net income gives effect to the
application of federal and state income taxes to the Company as if it were a C
corporation for tax purposes during all the periods presented. Pro forma net
income excludes the one-time charge of $675,000 to record the cumulative
deferred income tax provision.
Liquidity and Capital Resources
The Company completed the Offering on June 15, 1998 in which it sold 2.1
million shares of common stock for net proceeds of $23.7 million ($1.4 million
of which was received in July 1998) after underwriting discounts of $1.8
million. The Company used all of the proceeds to repay $10.0 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 $25.0 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 $4.5 million, $2.0
million, and $6.1 million for 1999, 1998, and 1997 respectively. The increases
in 1999 was principally due to a decrease in accounts receivable offset by
increases in inventory
25
<PAGE>
and other assets and net change in billings related to cost and estimated
earnings on uncompleted contracts and decrease in accounts payable and accrued
expenses. The decrease in 1998 was primarily due to increase in accounts
receivable and net change in billings related to cost and estimated earnings
on uncompleted contracts of $5.6 million. The increases in 1997 was
principally due to increases in net income, accounts payable and accrued
expenses and billings related to costs and estimated earnings on uncompleted
contracts, offset by changes in accounts receivable. The Company has borrowed
in the past to expand its facilities and to fund the Orange Acquisition. The
Company had net reductions in debt of $2.6 million and $15.4 million in 1999
and 1998 respectively, net borrowings for all credit arrangements were $24.1
million during 1997, primarily in connection with the Orange Acquisition. The
Company's working capital position was $8.2 million, $7.7 million, and $7.8
million at December 31, 1999, 1998, and 1997, respectively.
The Company's capital requirements historically have been primarily for
improvements to its facilities and equipment. Capital expenditures were
$744,000 for 1999 for improvements to facilities and equipment. Capital
expenditures were $1.7 million for 1998 for improvements to facilities and
equipment, of which approximately $887,000 was for a major improvement to a
drydock. Capital expenditures totaled $1.1 million in 1997, which included
major repairs to drydocks, purchases of equipment and additions to facilities.
Other investing activities in 1997 included the acquisition of Orange
Shipbuilding for $22.8 million (net of cash acquired).
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.
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 prime rate option and the
interest rate at December 31, 1999 was 8.00% 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 $7.3 million at December 31, 1999.
On March 21, 2000 the Company's Board of Directors authorized management to
repurchase up to 200,000 shares or $1 million of its outstanding common stock.
Management may repurchase shares from time to time in the open market at
prevailing prices, or through privately negotiated transactions depending on
prevailing market conditions. The shares will be held as treasury and will be
available for use in connection with the Company's stock option plan and other
compensation programs or for other corporate purposes. Funds for the program
will come from cash or internally generated funds.
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
26
<PAGE>
capital expenditures for property and equipment through 2000. 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.
Due to the relatively low levels of inflation experienced in fiscal 1999,
1998, and 1997, inflation did not have a significant effect on the results of
the Company in those fiscal years.
Year 2000 Compliance
In order to minimize or eliminate the effect of the Year 2000 risk on its
critical information technology (IT) systems and non-IT systems, the Company
identified, evaluated, implemented and tested changes to its IT systems,
applications and software necessary to achieve Year 2000 compliance. The IT
and non-IT systems and equipment successfully transitioned to the Year 2000
with no significant issues. The Company continues to monitor latent problems
that could surface at dates or events in the future. The Company does not
anticipate any significant problems related to those events. The total cost of
Year 2000 compliance was approximately $40,000, exclusive of software and
systems that were being upgraded in the normal business cycle. The costs
incurred with respect to Year 2000 compliance were funded with cash from
operations.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS No. 133
establishes new accounting and reporting standards for derivative financial
instruments and for hedging activities. SFAS No. 133 requires the Company to
measure all derivatives at fair value and to recognize them in the balance
sheet as an asset or liability, depending on the Company's rights or
obligations under the applicable derivative contract. In June 1999, the FASB
issued SFAS No. 137, which deferred the effective date of adoption of SFAS No.
133 for one year. The Company will adopt SFAS No. 133 no later than the first
quarter of fiscal year 2001.The Company has considered the implications of
adopting the new method of accounting for derivatives and hedging activities
and has concluded that its implementation will not have a material impact on
the Company's consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to the risk of changing interest rates. Interest on
$7.3 million of the Company's long-term debt with an interest rate of 8.0% at
December 31, 1999, was variable based on short-term market rates. Thus a
general increase of 1.0% in short-term market interest rates would result in
additional interest cost of $73,000 per year if the Company were to maintain
the same debt level and structure.
Item 8. Financial Statements and Supplementary Data
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report............................................. 28
Consolidated Balance Sheets as of December 31, 1999 and 1998............. 29
Consolidated Statements of Operations for the Years Ended December 31,
1999, 1998 and 1997..................................................... 30
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1999, 1998 and 1997........................................ 31
Consolidated Statements of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997..................................................... 32
Notes to Consolidated Financial Statements............................... 33
</TABLE>
27
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Conrad Industries, Inc.
We have audited the accompanying consolidated balance sheets of Conrad
Industries, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Conrad Industries, Inc. and
subsidiaries at December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1999 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
New Orleans, Louisiana
February 23, 2000
28
<PAGE>
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31,
---------------
ASSETS 1999 1998
------ ------- -------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.................................... $ 4,252 $ 3,074
Accounts receivable, net..................................... 3,072 7,682
Costs and estimated earnings in excess of billings on
uncompleted contracts....................................... 3,843 2,692
Inventories.................................................. 175 230
Other current assets......................................... 2,025 562
------- -------
Total current assets....................................... 13,367 14,240
PROPERTY, PLANT AND EQUIPMENT, net............................. 17,377 18,104
COST IN EXCESS OF NET ASSETS ACQUIRED.......................... 14,176 14,963
OTHER ASSETS................................................... 200 212
------- -------
TOTAL ASSETS................................................... $45,120 $47,519
======= =======
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable............................................. $ 769 $ 1,650
Accrued employee costs....................................... 421 215
Accrued expenses............................................. 971 1,255
Current maturities of long-term debt......................... 2,508 2,594
Billings in excess of costs and estimated earnings on
uncompleted contracts....................................... 535 848
------- -------
Total current liabilities.................................. 5,204 6,562
LONG-TERM DEBT, less current maturities........................ 4,806 7,318
DEFERRED INCOME TAXES.......................................... 3,126 3,157
------- -------
Total liabilities.......................................... 13,136 17,037
------- -------
COMMITMENTS AND CONTINGENCIES (Note 12)
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............................................ 4,133 2,631
------- -------
Total shareholders' equity................................. 31,984 30,482
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY..................... $45,120 $47,519
======= =======
</TABLE>
See notes to consolidated financial statements.
29
<PAGE>
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
REVENUE........................................... $ 32,555 $ 46,313 $ 22,117
COST OF REVENUE................................... 25,618 34,120 15,032
-------- -------- --------
GROSS PROFIT...................................... 6,937 12,193 7,085
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES...... 3,857 3,515 2,242
EXECUTIVE COMPENSATION EXPENSE.................... -- 4,676 --
-------- -------- --------
INCOME FROM OPERATIONS............................ 3,080 4,002 4,843
INTEREST EXPENSE.................................. (639) (1,425) (126)
OTHER INCOME, NET................................. 313 284 188
-------- -------- --------
INCOME BEFORE INCOME TAXES........................ 2,754 2,861 4,905
PROVISION FOR INCOME TAXES........................ 1,252 1,932 --
PROVISION FOR CUMULATIVE DEFERRED TAXES........... -- 675 --
-------- -------- --------
NET INCOME........................................ $ 1,502 $ 254 $ 4,905
======== ======== ========
Net income per common share:
Basic and diluted............................... $ 0.21 $ 0.04 $ 1.05
======== ======== ========
Weighted average common shares outstanding:
Basic and diluted............................... 7,078 6,167 4,660
======== ======== ========
Unaudited pro forma data (Note 6):
Income before income taxes as reported above.... $ 2,754 $ 2,861 $ 4,905
Pro forma provision for income taxes............ 1,252 2,596 1,815
-------- -------- --------
Pro forma net income............................ $ 1,502 $ 265 $ 3,090
======== ======== ========
Pro forma net income per share.................. $ 0.21 $ 0.04 $ 0.55
======== ======== ========
Common and equivalent shares outstanding........ 7,078 6,569 5,577
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
30
<PAGE>
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Common Stock
$0.01 Par
Value Additional Unearned
-------------- Paid-in Stock Retained
Shares Amount Capital Compensation Earnings Total
------ ------ ---------- ------------ -------- -------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1,
1997................... 4,660 $47 $ 156 $ -- $12,176 $12,379
Distributions........... -- -- -- -- (2,005) (2,005)
Net income.............. -- -- -- -- 4,905 4,905
----- --- ------- ------ ------- -------
BALANCE, DECEMBER 31,
1997................... 4,660 47 156 -- 15,076 15,279
Distributions........... -- -- -- -- (12,699) (12,699)
Stock issued to
executives............. 540 5 8,627 (4,316) -- 4,316
Amortization of unearned
stock compensation..... -- -- -- 360 -- 360
Stock cancellation...... (247) (2) (3,954) 3,956 -- --
Sale of common stock,
net of underwriting
commissions and
transaction costs of
$2,528................. 2,125 21 22,951 -- -- 22,972
Net income.............. -- -- -- -- 254 254
----- --- ------- ------ ------- -------
BALANCE, DECEMBER 31,
1998................... 7,078 71 27,780 -- 2,631 30,482
Net income.............. -- -- -- -- 1,502 1,502
----- --- ------- ------ ------- -------
BALANCE, DECEMBER 31,
1999................... 7,078 $71 $27,780 $ -- $ 4,133 $31,984
===== === ======= ====== ======= =======
</TABLE>
See notes to consolidated financial statements.
31
<PAGE>
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1999 1998 1997
------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................... $ 1,502 $ 254 $ 4,905
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................. 2,263 2,249 850
Deferred income tax (benefit) provision....... (137) 663 --
Executive compensation expense................ -- 4,676 --
Other......................................... 13 65 --
Changes in assets and liabilities, net of
effect of acquisition:
Accounts receivable......................... 4,610 (3,215) (1,086)
Net change in billings related to cost and
estimated earnings on uncompleted
contracts.................................. (1,464) (2,341) 794
Inventory and other assets.................. (1,308) (192) (35)
Accounts payable and accrued expenses....... (959) (171) 686
------- -------- --------
Net cash provided by operating
activities............................... 4,520 1,988 6,114
------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of subsidiary, net of cash
acquired....................................... -- -- (22,819)
Capital expenditures for property, plant and
equipment...................................... (744) (1,718) (1,053)
------- -------- --------
Net cash used in investing activities..... (744) (1,718) (23,872)
------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock, net......... -- 22,972 --
Proceeds from issuance of debt.................. -- 10,687 25,338
Principal repayments of debt.................... (2,598) (26,113) (1,233)
Distributions to shareholders................... -- (12,293) (2,005)
------- -------- --------
Net cash (used in) provided by financing
activities............................... (2,598) (4,747) 22,100
------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS...................................... 1,178 (4,477) 4,342
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR...... 3,074 7,551 3,209
------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR............ $ 4,252 $ 3,074 $ 7,551
======= ======== ========
SUPPLEMENTAL DISCLOSURES CASH FLOW INFORMATION:
Interest paid................................... $ 639 $ 1,531 $ 20
======= ======== ========
Taxes paid...................................... $ 1,957 $ 1,557 $ --
======= ======== ========
NONCASH ACTIVITIES:
Issuance of stock to executives................. $ -- $ 4,676 $ --
======= ======== ========
Distributions of assets to shareholders......... $ -- $ 406 $ --
======= ======== ========
</TABLE>
See notes to consolidated financial statements.
32
<PAGE>
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation--The 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.
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 (See Note 2). The acquisition has been
accounted for by the purchase method. Accordingly, the operations of Orange
Shipbuilding are included in the Company's operations for the years ended
December 31, 1999 and 1998. Due to the close proximity of the acquisition date
to Conrad's fiscal year end, results of operations subsequent to the
acquisition for Orange Shipbuilding are not included in the accompanying
statement operations for the year ended December 31, 1997, as the results of
operations of were not significant. The acquisition was funded with a $25.0
million short-term promissory note and existing cash (See Note 5).
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 income 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 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 for the over-
allotment exercise of $1.4 million were used to repay indebtedness on the term
loan.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements, as well as reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
33
<PAGE>
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenue Recognition--The Company is engaged in various types of construction
under long-term construction contracts. The accompanying financial statements
have been prepared using the percentage-of-completion method of accounting
and, therefore, take into account the estimated cost, estimated earnings and
revenue to date on 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.
Contract costs include all direct material, labor, and subcontracting costs,
and those indirect costs related to contract performance, such as indirect
labor, supplies, tools, repairs, depreciation, and insurance costs. Revisions
in estimates of cost and earnings during the course of the work are reflected
in the accounting period in which the facts which require the revision become
known. Provisions for estimated losses on uncompleted contracts are made in
the period in which such losses are determined.
Indirect costs are allocated to contracts and to self-constructed equipment
and improvements on the basis of direct labor charges.
Cash and Cash Equivalents--Cash and cash equivalents include cash on hand,
on deposit and short-term investments with original maturities of three months
or less.
Property, Plant and Equipment--Property, plant and equipment is stated at
cost. Depreciation is recorded using the straight-line method over the
estimated useful lives of the individual assets which range from three to
forty years. Ordinary maintenance and repairs which do not extend the physical
or economic lives of the plant or equipment are charged to expense as
incurred. Management reviews property, plant and equipment for impairment
whenever events or changes in circumstances indicate that the related carrying
amount may not be recoverable. When required, impairment losses are recognized
based on the excess of the asset's carrying amount over its fair value.
Cost in Excess of Net Assets Acquired--Cost in excess of net assets acquired
is amortized on a straight-line basis over twenty years. Management of Conrad
periodically reviews the carrying value of the excess cost in relation to the
current and expected undiscounted cash flows of the business which benefits
therefrom in order to assess whether there has been a permanent impairment of
the excess cost of the net purchased assets. Accumulated amortization on
excess cost was $1,570,000 and $783,000 at December 31, 1999 and 1998,
respectively.
Inventories--Inventories consist primarily of excess job cost items and
supplies. They are stated at the lower of cost or market. Cost is determined
on a first-in, first-out basis.
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. Per share and weighted average share amounts for all years
presented have been restated to conform to the requirements of SFAS 128. See
Note 6.
Fair Value of Financial Instruments--The carrying amounts of the Company's
financial instruments including cash and cash equivalents, receivables,
payables and long-term debt approximates fair value at December 31, 1999 and
1998.
34
<PAGE>
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock-Based Compensation--Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123") encourages but
does not require companies to record compensation cost for stock-based
employee compensation plans at fair value. The Company has chosen to account
for stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations and has adopted the disclosure-only
provisions of SFAS 123. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the amount an employee must pay to acquire
the stock. See Note 6.
New Accounting Pronouncements--In June 1998, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 133, Accounting for Derivative Instruments and Hedging
Activities. SFAS No. 133 establishes new accounting and reporting standards
for derivative financial instruments and for hedging activities. SFAS No. 133
requires the Company to measure all derivatives at fair value and to recognize
them in the balance sheet as an asset or liability, depending on the Company's
rights or obligations under the applicable derivative contract. In June 1999,
the FASB issued SFAS No. 137, which deferred the effective date of adoption of
SFAS No. 133 for one year. The Company will adopt SFAS No. 133 no later than
the first quarter of fiscal year 2001. The Company has considered the
implications of adopting the new method of accounting for derivatives and
hedging activities and has concluded that its implementation will not have a
material impact on the Company's consolidated financial statements.
2. ACQUISITION
On December 12, 1997, Conrad acquired all of the outstanding shares of
common stock of Orange Shipbuilding, a shipyard in Orange, Texas, for
$25,817,000, which includes the costs of acquisition. The acquisition was
funded with a $25.0 million promissory note (see Note 5) and existing cash.
The acquisition has been accounted for under the purchase method. The final
purchase price was allocated to the net assets acquired (net book value of
$6,758,000) based on their estimated fair values at the date of acquisition as
follows (in thousands):
<TABLE>
<S> <C>
Current assets, other than cash..................................... $ 1,425
Property, plant and equipment....................................... 9,588
Liabilities assumed................................................. (3,940)
Cost in excess of net assets acquired............................... 15,746
-------
Purchase price, net of cash acquired ($2,998)....................... $22,819
=======
</TABLE>
Prior to the sale of its common stock to Conrad, the former stockholders of
Orange Shipbuilding elected to terminate its status as an S corporation for
federal income tax purposes. Accordingly, it became liable for federal income
taxes beginning October 1, 1997. The liabilities assumed by Conrad include a
current income tax liability of approximately $515,0000 related to the
operations of Orange Shipbuilding from October 1, 1997 until the acquisition
date and a deferred income tax liability of $2,595,000 primarily relating to
the difference in the book and tax basis of property and equipment at the
acquisition date.
35
<PAGE>
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following unaudited pro forma summary presents the consolidated results
of operations of Conrad as if the purchase acquisition had occurred on January
1, 1997 and includes the financial information of Orange Shipbuilding for its
fiscal year ended September 30, 1997 (in thousands, except per share data):
<TABLE>
<CAPTION>
1997
-------
<S> <C>
Revenues........................................................... $35,922
=======
Net income......................................................... $ 7,185
=======
Net income per common share:
Basic and diluted................................................ $ 1.54
=======
Pro forma net income adjusted for income taxes related to
operations as S corporation....................................... $ 4,644
=======
Pro forma net income per share..................................... $ 0.83
=======
</TABLE>
The above unaudited pro forma amounts have been prepared for comparative
purposes only and include certain adjustments, such as additional
amortization expense as a result of goodwill, additional depreciation
expense for assets recorded at fair market value at the date of
acquisition, additional interest expense for borrowings, and an adjustment
to conform the revenue recognition policy for contracts in progress. They
do not purport to be indicative of the results of operations which actually
would have resulted had the combination been in effect on January 1, 1997,
or of future results of operations of the consolidated entities.
3. RECEIVABLES
Receivables consisted of the following at December 31, 1999 and 1998 (in
thousands):
<TABLE>
<CAPTION>
1999 1998
------ -------
<S> <C> <C>
U.S. Government:
Amounts billed............................................ $ 347 $ 3,705
Unbilled costs and estimated earnings on uncompleted
contracts................................................ 3,505 558
------ -------
3,852 4,263
Commercial:
Amounts billed............................................ 2,725 3,977
Unbilled costs and estimated earnings on uncompleted
contracts................................................ 338 2,134
------ -------
Total................................................... $6,915 $10,374
====== =======
</TABLE>
Included above in amounts billed is an allowance for doubtful accounts of
$20,000 at December 31, 1999 and 1998. During 1999, 1998 and 1997, there were
no significant transactions recorded in the allowance for doubtful accounts.
Unbilled costs and estimated earnings on uncompleted contracts were not
billable to customers at the balance sheet dates under terms of the respective
contracts. Of the unbilled costs and estimated earnings at December 31, 1999,
substantially all is expected to be collected within the next twelve months.
36
<PAGE>
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Information with respect to uncompleted contracts as of December 31, 1999 and
1998 is as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Costs incurred on uncompleted contracts..................... $27,108 $20,945
Estimated earnings.......................................... 8,257 6,922
------- -------
35,365 27,867
Less billings to date....................................... 32,057 26,023
------- -------
$ 3,308 $ 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...................................... $3,843 $2,692
Billings in excess of cost and estimated earnings on
uncompleted contracts...................................... 535 848
------ ------
Total..................................................... $3,308 $1,844
====== ======
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at December 31, 1999
and 1998 (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- -------
<S> <C> <C>
Land...................................................... $ 2,537 $ 2,477
Buildings and improvements................................ 10,992 10,879
Machinery and equipment................................... 5,456 5,220
Drydocks and bulkheads.................................... 7,023 6,919
Barges and boat........................................... 480 480
Office and automotive..................................... 782 710
Construction in progress.................................. 29 --
-------- -------
27,299 26,685
Less accumulated depreciation............................. (9,922) (8,581)
-------- -------
$ 17,377 $18,104
======== =======
</TABLE>
5. LONG-TERM DEBT
Long-term debt consisted of the following at December 31, 1999 and 1998 (in
thousands):
<TABLE>
<CAPTION>
1999 1998
------- ------
<S> <C> <C>
Term loan--Bank, variable interest rate (8.00% at December
31, 1999),
due April 30, 2004....................................... $ 7,314 $9,822
Short-term financing agreement, 7.72% interest rate, due
June 9, 1999............................................. -- 90
------- ------
7,314 9,912
Less current maturities................................... (2,508) (2,594)
------- ------
$ 4,806 $7,318
======= ======
</TABLE>
37
<PAGE>
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In December 1997, Conrad entered into a $25.0 million promissory note with a
commercial bank to fund the acquisition of Orange Shipbuilding (see Note 2).
Principal and interest at an 8.0% annual rate were payable monthly. In 1998,
Conrad refinanced this short-term obligation into a term loan. Interest on the
term loan was LIBOR rate plus 2.0% until December 18, 1999, and thereafter at
the option of the Company either at the lender's prime rate less 0.5% or LIBOR
rate plus 2.0%. Conrad is currently utilizing the lender's prime rate option,
and the interest rate at December 31, 1999 was 8.00% per annum. The term loan
required the monthly payment of interest only until May 1998, and thereafter
the term loan is payable in seventy monthly principal payments of $209,000
plus interest with a final payment due in April 2004. The Company used $13.7
million of the proceeds from the Offering and the over-allotment exercise to
repay indebtedness under the term loan. The term loan is secured by
substantially all of Conrad's assets. 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 December 31, 1999, Conrad was in compliance with these
covenants or had received the appropriate waiver.
In May 1998, Conrad entered into a $10.0 million revolving credit facility
which may be used for working capital and other general corporate purposes,
including the funding of acquisitions. The facility bears interest on the same
terms as the term loan referred above and matured on October 31, 1999. Conrad
has received 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 line of credit
will be charged quarterly. At December 31, 1999, $10.0 million was available
under the facility.
Annual maturities of long-term debt at December 31, 1999 are as follows (in
thousands):
<TABLE>
<CAPTION>
Amount
------
<S> <C>
2000.................................................................. $2,508
2001.................................................................. 2,508
2002.................................................................. 2,298
------
$7,314
======
</TABLE>
6. SHAREHOLDERS' EQUITY
Income Per Share
The calculation of basic earnings per share excludes any dilutive effect of
stock options, while diluted earnings per share includes the dilutive effect
of stock options. Per share and weighted average share amounts for all prior
periods have been restated to conform to the requirements of SFAS 128. The
number of weighted average shares outstanding for basic and diluted income per
share was 7,077,723, 6,167,310 and 4,660,486 for the years ended December 31,
1999, 1998 and 1997, respectively.
Proforma income per share consists of the Company's historical income as an
S corporation, adjusted for income taxes that would have been recorded had the
Company operated as a C corporation and excludes the one-time charge of
$675,000 to record the cumulative deferred income tax provision. This amount
is divided by the weighted average shares of common stock outstanding which
are increased to reflect 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.
Stock Issuance to Executive Officers
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
38
<PAGE>
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
and Chief Financial Officer, in consideration of past services rendered. The
agreements related to such restricted stock provide that fifty percent of the
shares of common stock issued to each such executive would be subject to
forfeiture in the event of the voluntary termination of employment by such
executive for other than "good reason" prior to the expiration of the initial
three-year term of employment specified in the employment agreement of such
executive, provided that such restriction would lapse in the event of (i) the
termination by the Company of such executive's employment for reasons other
than "cause" (as defined) or (ii) the death, disability or retirement (at or
after the age of 65) of such executive and will also lapse with respect to 33
1/3% of such restricted shares on each of the first three anniversaries of the
completion of the Offering. The shares of common stock of Conrad issued to Mr.
Hidalgo and Mr. Hernandez were exchanged, respectively, for 385,695 and
153,819 shares of common stock of the Company pursuant to the Reorganization.
In connection with the issuance of shares of Conrad common stock, Mr. Hidalgo
and Mr. Hernandez, executed promissory notes in the amounts of $239,870 and
$97,400, respectively, representing their tax liabilities paid by the Company.
These tax notes were repaid in full by Mr. Hidalgo and Mr. Hernandez in July
1998. In connection with the issuance of these shares to Messrs. Hidalgo and
Hernandez, the Company estimated it would recognize aggregate compensation
expense of $8.6 million, of which $4.3 million was recognized in the first
quarter of 1998 and the remainder was estimated to be recognized over a three-
year vesting period, of which $360,000 was expensed in the second quarter of
1998. During the third quarter of 1998 the executives surrendered and the
Company canceled 247,277 of their restricted shares in order to eliminate the
recurring compensation expense associated with the lapse of the restrictions.
As a result of the cancellation of the shares, the remainder of the estimated
compensation expense of $4.0 million will not be recognized in the future.
On November 3, 1998 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 the Company bearing interest at 9.0% per annum in
the amount 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.
Stock Option Plan
The Company established the 1998 Stock Plan (the "Stock Plan") in March
1998. The Stock Plan permits the granting of any or all of the following types
of awards ("Awards"): stock appreciation rights, stock options, restricted
stock, dividend equivalents, performance units, automatic director options,
phantom shares, limited stock appreciation rights, bonus stock and cash tax
rights. All officers and employees of, and any consultants to the Company or
any affiliate of the Company will be eligible for participation in all Awards
under the Stock Plan other than directors options. The non-employee directors
of the Company will only receive automatic grants of Director options. Awards
granted under the Stock Plan have a maximum term of ten years. A total of
950,000 shares have been authorized and reserved for issuance. No awards may
be granted under the Stock Plan after March 31, 2008.
39
<PAGE>
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is a summary of the option activity for the years ended
December 31, 1999 and 1998:
<TABLE>
<CAPTION>
Number of
Options
---------
<S> <C>
Outstanding at January 1, 1998..................................... --
Granted............................................................ 501,543
Forfeited.......................................................... (9,000)
Exercised.......................................................... --
-------
Outstanding at December 31, 1998................................... 492,543
Granted............................................................ 59,557
Forfeited.......................................................... (5,000)
Exercised.......................................................... --
-------
Outstanding at December 31, 1999................................... 547,100
=======
Exercisable at December 31, 1999................................... 202,232
=======
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------ --------------------
Weighted Weighted Weighted
Exercise Average Average Average
Price Range Number Remaining Exercise Number Exercise
Per Share Outstanding Life Price Exercisable Price
----------- ----------- --------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$3.25--$6.75 547,100 8.3 years $6.53 202,232 $6.54
</TABLE>
During the fourth quarter of 1998, 121,000 options previously issued during
the second quarter of 1998 with an exercise price of $12.00 were repriced to
an exercise price of $6.75 which was equal to the fair value of the Company's
common stock on the repricing date.
Options granted under the Stock Plan during 1999 and 1998 have various
vesting rights ranging from six months to two and one-half years from the date
of the grant.
The Company accounts for options granted under the Stock Plan as prescribed
by APB 25 and, accordingly, no compensation expense has been recognized for
stock options granted as the exercise price of all stock options granted under
the Stock Plan was equal to the fair value of the Company's common stock at
the date of grant. Had compensation cost for the Stock Plan been determined
based on the fair value at the grant dates consistent with the method of SFAS
123, the Company's net income and net income per share amounts would have
approximated the following proforma amounts (in thousands, except per share
data):
<TABLE>
<CAPTION>
1999 1998
-------------- ---------------
As Pro As Pro
Reported Forma Reported Forma
-------- ----- -------- ------
<S> <C> <C> <C> <C>
Net income (loss)........................... $1,502 $ 582 $ 254 $ (139)
Net income (loss) per share:
Basic and diluted........................... $ 0.21 $0.08 $0.04 $(0.02)
</TABLE>
The weighted average fair value of options granted during the year ended
December 31, 1999 was $1.50. The fair value of each option granted is
estimated on the date of the grant using the Black-Scholes option pricing
model with the following assumptions: (i) no dividend yield, (ii) expected
volatility of 74.5%, (iii) risk-free interest rate of 5.15%, and (iv) expected
life of 2.8 years.
40
<PAGE>
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The weighted average fair value of options granted during the year ended
December 31, 1998 was $3.40. The fair value of each option granted is
estimated on the date of the grant using the Black-Scholes option pricing
model with the following assumptions: (i) no dividend yield, (ii) expected
volatility of 75.4%, (iii) risk-free interest rate of 5.15%, and (iv) expected
life of 2.8 years.
Warrants
In June 1998, the Company issued to the Underwriter involved in the
Offering, warrants to purchase 72,000 shares of common stock exercisable for
five years at the initial public offering price of $12.00 per share. At
December 31, 1999 and 1998, no warrants had been exercised.
7. EMPLOYEE BENEFITS
In August 1997, the Company established a 401(k) plan that covers all
employees who meet certain eligibility requirements. Contributions to the plan
by the Company are made at the discretion of the Board of Directors.
Contribution expense was $120,000, $88,000 and $42,000 for the years ended
December 31, 1999, 1998 and 1997, respectively.
8. INCOME TAXES
Prior to the Reorganization and the completion of its initial public
offering, Conrad made an election to terminate their S corporation status and
became subject to federal and state income 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. The Company had provided for income taxes relating
to the operation of Orange Shipbuilding since its acquisition on December 12,
1997.
Income taxes are now accounted for under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS 109") which requires
the use of the asset and liability approach for financial accounting and
reporting for income taxes.
The Company has provided for Federal and State income taxes as follows (in
thousands):
<TABLE>
<CAPTION>
1999 1998
------- ------
<S> <C> <C>
Current provision........................................... $ 1,389 $1,944
Deferred (benefit) provision................................ (137) 663
------- ------
$ 1,252 $2,607
======= ======
</TABLE>
State income taxes included above are not significant for the year
presented.
41
<PAGE>
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The provision for income taxes varied from the Federal statutory income tax
rate due to the following (in thousands):
<TABLE>
<CAPTION>
Proforma
1999 1998 1998
----------- ----------- -----------
Amount % Amount % Amount %
------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Taxes at Federal statutory rate............ $ 964 35.0 $1,001 35.0 $1,001 35.0
Non-deductible executive compensation
expense................................... -- -- 42 1.5 1,275 44.6
Non-deductible goodwill amortization....... 275 10.0 161 5.6 273 9.5
State income taxes......................... 13 0.5 30 1.0 47 1.6
Historical results of operations prior to
Conrad Shipyard Sub S termination (not
subject to income tax).................... -- -- 698 24.4 -- --
Cumulative deferred taxes.................. -- -- 675 23.6 -- --
------ ---- ------ ---- ------ ----
Total.................................... $1,252 45.5 $2,607 91.1 $2,596 90.7
====== ==== ====== ==== ====== ====
</TABLE>
Deferred income taxes represent the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and their tax bases. The tax effects of significant items comprising
the Company's net deferred tax balances at December 31, 1999 and 1998 are as
follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Deferred Tax Liabilities:
Differences between book and tax basis of property, plant
and equipment............................................. $3,126 $3,157
Deferred Tax Assets (included in other current assets):
Contracts in progress...................................... (108) (129)
Accrued expenses not currently deductible.................. (127) --
------ ------
Net deferred tax liabilities............................... $2,891 $3,028
====== ======
</TABLE>
9. SALES TO MAJOR CUSTOMERS
Sales to various customers, which amount to 10% or more of the Company's
total revenues for the three years ended December 31, 1999, 1998 and 1997 are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- ----------
Amount % Amount % Amount %
------- --- ------- --- ------ ---
<S> <C> <C> <C> <C> <C> <C>
Customer A................................... $10,606 33% $12,693 27%
Customer B................................... 7,303 16%
Customer C................................... 4,804 15% 5,230 11%
Customer D................................... 3,620 11%
Customer E................................... $4,604 21%
Customer F................................... 3,395 15%
Customer G................................... 2,351 11%
</TABLE>
42
<PAGE>
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. RELATED PARTY TRANSACTIONS
The Company purchases in its ordinary course of business certain components
from Johnny's Propeller Shop, Inc., a company wholly owned by John P. Conrad,
Jr., Co-Chairman of the Board of Directors. Total purchases for the three
years ended December 31, 1999, 1998 and 1997 were $89,000, $171,000 and
$164,000, respectively. The Company believes that such transactions were made
on a competitive basis at market prices.
11. 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, net, 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". Intersegment sales
and transfers are not significant.
43
<PAGE>
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Selected information as to the operations of the Company by segment is as
follows (in thousands):
<TABLE>
<CAPTION>
Years Ended December
31,
-------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Revenue:
Vessel construction................................ $23,870 $31,754 $10,671
Repair and conversions............................. 8,685 14,559 11,446
------- ------- -------
Total Revenue.................................... 32,555 46,313 22,117
------- ------- -------
Cost of Revenue:
Vessel construction................................ 18,458 23,560 7,250
Repair and conversions............................. 7,160 10,560 7,782
------- ------- -------
Total Cost of Revenue............................ 25,618 34,120 15,032
------- ------- -------
Gross Profit:
Vessel construction................................ 5,412 8,194 3,421
Repair and conversions............................. 1,525 3,999 3,664
------- ------- -------
Total Gross Profit............................... 6,937 12,193 7,085
Selling, General and Administrative Expenses......... 3,857 3,515 2,242
Executive Compensation Expense....................... -- 4,676 --
------- ------- -------
Income from Operations............................... 3,080 4,002 4,843
Interest Expense..................................... (639) (1,425) (126)
Other Income, net.................................... 313 284 188
------- ------- -------
Income before Income Taxes........................... 2,754 2,861 4,905
Provision for Income Taxes........................... 1,252 1,932 --
Provision for Cumulative Deferred Taxes.............. -- 675 --
------- ------- -------
Net Income........................................... $ 1,502 $ 254 $ 4,905
======= ======= =======
</TABLE>
Certain other financial information of the Company by segment is as follows
(in thousands):
<TABLE>
<CAPTION>
Years Ended
December 31,
------------------
1999 1998 1997
------ ------ ----
<S> <C> <C> <C>
Depreciation and Amortization Expense:
Vessel construction........................................ $ 793 $ 813 $269
Repair and conversions..................................... 524 511 481
Included in selling, general and administrative expenses... 946 925 100
------ ------ ----
Total Depreciation and Amortization Expense.............. $2,263 $2,249 $850
====== ====== ====
</TABLE>
44
<PAGE>
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Total assets and capital expenditures of the Company by segment are as
follows (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Total Assets:
Vessel construction............................... $ 34,307 $ 35,245 $ 35,438
Repair and conversion............................. 5,663 7,554 6,598
Other............................................. 5,150 4,720 6,909
-------- -------- --------
Total Assets.................................... $ 45,120 $ 47,519 $ 48,945
======== ======== ========
Capital Expenditures:
Vessel construction............................... $ 312 $ 330 $ 82
Repair and conversion............................. 160 806 741
Other............................................. 272 582 230
-------- -------- --------
Total Capital Expenditures...................... $ 744 $ 1,718 $ 1,053
======== ======== ========
</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.
12. COMMITMENTS AND CONTINGENCIES
Legal Matters--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.
Employment Agreements--The Company has employment agreements with certain of
its executive officers which generally provide for an initial term of three
years ending on March 31, 2001 and minimum annual total compensation of
$851,000.
Letters of Credit and Bonds--In the normal course of its business, the
Company is required to provide letters of credit to secure the payment of
workers' compensation obligations. Additionally, under certain contracts the
Company may be required to provide letters of credit and bonds to secure
certain performance and payment obligations of the Company thereunder.
Outstanding letters of credit and bonds relating to these business activities
amounted to $1.8 million and $3.7 million at December 31, 1999 and 1998,
respectively.
45
<PAGE>
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. SUPPLEMENTAL SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Consolidated operating results for the four quarters of 1999 and 1998 were
as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------
March 31, June 30, September 30, December 31,
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Fiscal 1999
Revenue......................... 9,460 8,710 6,930 7,455
Gross profit.................... 2,490 2,291 1,199 956
Net income (loss)............... 832 692 71 (93)
Net income (loss) per share:
Basic and diluted............. 0.12 0.10 0.01 (0.01)
Fiscal 1998
Revenue......................... 11,569 12,418 12,794 9,532
Gross profit.................... 3,429 3,749 3,084 1,931
Net income (loss)............... (2,478) 1,004 1,317 410
Net income (loss) per share:
Basic and diluted............. (0.53) 0.18 0.18 0.06
Pro forma net income (loss)..... (2,603) 1,080 1,317 410
Pro forma net income (loss) per
share.......................... (0.47) 0.17 0.18 0.06
</TABLE>
46
<PAGE>
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III.
Item 10. Directors and Executive Officers of the Registrant
The information required by this Item as to the directors and executive
officers of Conrad Industries, Inc. is hereby incorporated by reference from
the Company's definitive proxy statement prepared in connection with the 2000
Annual Meeting of Stockholders which is to be filed with the Securities and
Exchange Commission pursuant to the Securities Exchange Act of 1934 within 120
days of the end of the Company's fiscal year on December 31, 1999.
Item 11. Executive Compensation
The information required by this Item is hereby incorporated by reference
from the Company's definitive proxy statement which is to be filed with the
Securities and Exchange Commission pursuant to the Securities Exchange Act of
1934 within 120 days of the end of the Company's fiscal year on December 31,
1999. Notwithstanding the foregoing, in accordance with the instructions to
Item 402(a)(8) of Regulation S-K, the information contained in the company's
proxy statement under the sub-heading "Report of the Compensation Committee"
and "Performance Graph" shall not be deemed to be filed as part of or
incorporated by reference into this Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item as to the ownership by management and
others of securities of the Company is hereby incorporated by reference from
the Company's definitive proxy statement prepared in connection with the 2000
Annual Meeting of Stockholders which is to be filed with the Securities and
Exchange Commission pursuant to the Securities Exchange Act of 1934 within 120
days of the end of the Company's fiscal year on December 31, 1999.
Item 13. Certain Relationships and Related Transactions
The information required by this Item as to certain business relationships
and transactions with management and other related parties of the Company is
hereby incorporated by reference from the Company's definitive proxy statement
prepared in connection with the 2000 Annual Meeting of Stockholders which is
to be filed with the Securities and Exchange Commission pursuant to the
Securities Exchange Act of 1934 within 120 days of the end of the Company's
fiscal year on December 31, 1999.
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Documents Filed as a Part of this Report
1. Financial Statements:
The financial statements and supplementary data required by this item are
incorporated under Item 8, Part II of this Form 10-K.
All other schedules are omitted because they are not applicable, not
required, or because the required information is included in the financial
statements or notes thereto.
47
<PAGE>
2. Exhibits:
Exhibits to the Form 10-K have been included only with the copies of the
Form 10-K filed with the Commission and the NASDAQ--National Market System.
Upon request to the Company and payment of a reasonable fee, copies of the
individual exhibits will be furnished.
<TABLE>
<CAPTION>
Exhibits Description
-------- -----------
<C> <S>
3.1 --Amended and Restated Certificate of Incorporation (filed as Exhibit
3.1 to the Company's Annual Report on Form 10-K for year ended
December 31, 1998 and incorporated by reference herein).
3.2 --Amended and Restated Bylaws (filed as Exhibit 3.2 to the Company's
Annual Report on Form 10-K for year ended December 31, 1998 and
incorporated by reference herein).
4.1 --Specimen Common Stock Certificate (filed as Exhibit 4 to the
Company's Registration Statement on Form 8-A and incorporated by
reference herein).
4.2 --Registration Rights Agreement by and among Conrad Industries, Inc.,
J. Parker Conrad, John P. Conrad, Jr., Katherine C. Court, The John
P. Conrad, Jr. Trust, The Daniel T. Conrad Trust, The Glen Alan
Conrad Trust, The Kenneth C. Conrad Trust, The Katherine C. Court
Trust, The James P. Conrad Trust, William H. Hidalgo, and Cecil A.
Hernandez (filed as Exhibit 4.2 to the Company's Annual Report on
Form 10-K for year ended December 31, 1998 and incorporated by
reference herein).
4.3 --Registration Rights Agreement between Conrad Industries, Inc. and
Morgan Keegan & Company, Inc (filed as Exhibit 4.3 to the Company's
Annual Report on Form 10-K for year ended December 31, 1998 and
incorporated by reference herein).
10.1 --Stock Purchase Agreement dated as of December 12, 1997, by and
among Conrad Shipyard, Inc., Orange Shipbuilding, Thomas E. Clary,
Robert D. Clary and George B. Clary (filed as Exhibit 10.1 to the
company's Registration Statement on Form S-1 (Registration No. 33-
49773) and incorporated by reference herein).
10.2 --Loan Agreement, dated as of March 19, 1998, by and among Whitney
National Bank, Conrad Shipyard, Inc. and Orange Shipbuilding (filed
as Exhibit 10.2 to the company's Registration Statement on Form S-1
(Registration No. 33-49773) and incorporated by reference herein).
10.3 --Loan Agreement, dated as of May 22, 1998, by and among Whitney
National Bank, Conrad Shipyard, Inc. and Orange Shipbuilding (filed
as Exhibit 10.3 to the company's Registration Statement on Form S-1
(Registration No. 33-49773) and incorporated by reference herein).
10.4 --Stock Exchange Agreement, dated as of March 31, 1998, by and among
Conrad Industries, Inc., Conrad Shipyard, Inc., Orange Shipbuilding,
John P. Conrad, Jr., Katherine C. Court, The John P. Conrad, Jr.
Trust, The Daniel T. Conrad Trust, The Glenn Alan Conrad Trust, The
Kenneth C. Conrad Trust, the Katherine C. Court Trust, The James P.
Court Trust, William H. Hidalgo and Cecil A. Hernandez (filed as
Exhibit 10.4 to the company's Registration Statement on Form S-1
(Registration No. 33-49773) and incorporated by reference herein).
10.5** --Conrad Industries, Inc. Amended and Restated 1998 Stock Plan (First
Amendment) (filed with the Company's Proxy Statement on Schedule 14A
on April 22, 1999 and incorporated by reference herein).
10.6** --Officer and Director Indemnification Agreement (filed as Exhibit
10.6 to the Company's Registration Statement on Form S-1)
(Registration No. 33-49773) and incorporated by reference herein).
10.7** --Employment Agreement between Conrad Shipyard, Inc. and J. Parker
Conrad (filed as Exhibit 10.7 to the Company's Annual Report on Form
10-K for year ended December 31, 1998 and incorporated by reference
herein).
</TABLE>
48
<PAGE>
<TABLE>
<C> <S>
10.8** --Employment Agreement between Conrad Shipyard, Inc. and John Parker
Conrad, Jr. (filed as Exhibit 10.8 to the Company's Annual Report on
Form 10-K for year ended December 31, 1998 and incorporated by
reference herein).
10.9** --Employment Agreement between Conrad Shipyard, Inc. and William H.
Hidalgo (filed as Exhibit 10.9 to the Company's Annual Report on
Form 10-K for year ended December 31, 1998 and incorporated by
reference herein).
10.10** --Employment Agreement between Conrad Shipyard, Inc. and Cecil A.
Hernandez (filed as Exhibit 10.10 to the Company's Annual Report on
Form 10-K for year ended December 31, 1998 and incorporated by
reference herein).
10.11** --Employment Agreement between Orange and Ralph C. Thon (filed as
Exhibit 10.11 to the Company's Annual Report on Form 10-K for year
ended December 31, 1998 and incorporated by reference herein).
10.12 --Warrant Agreement between the Conrad Industries, Inc. and Morgan
Keegan & Company, Inc. (filed as Exhibit 10.12 to the Company's
Annual Report on Form 10-K for year ended December 31, 1998 and
incorporated by reference herein).
21.1 --Subsidiaries of Conrad Industries, Inc. (filed as Exhibit 21.1 to
the Company's Annual Report on Form 10-K for year ended December 31,
1998 and incorporated by reference herein).
*27.1 --Financial Data Schedule.
</TABLE>
- --------
* Filed herewith.
** Management contract or compensation plan.
(b) Reports on Form 8-K:
Conrad Industries has not filed any Current Reports on Form 8-K with the
Securities and Exchange Commission during the fourth quarter of 1999.
49
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
CONRAD INDUSTRIES, INC.
/s/ William H. Hidalgo
By: _________________________________
William H. Hidalgo
Date: March 28, 2000 President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ J. Parker Conrad
- ------------------------------------
J. Parker Conrad Co-Chairman of the Board of
Directors March 28, 2000
/s/ John P. Conrad, Jr.
- ------------------------------------
John P. Conrad, Jr. Co-Chairman of the Board of
Directors March 28, 2000
/s/ William H. Hidalgo
- ------------------------------------
William H. Hidalgo President, Chief Executive
Officer and Director
(Principal Executive
Officer) March 28, 2000
/s/ Cecil A. Hernandez
- ------------------------------------
Cecil A. Hernandez Vice President--Finance and
Administration, Chief
Financial Officer,
Secretary and Director
(Principal Financial
Officer and Principal
Accounting Officer) March 28, 2000
/s/ Michael J. Harris
- ------------------------------------
Michael J. Harris Director March 28, 2000
/s/ Louis J. Michot, Jr.
- ------------------------------------
Louis J. Michot, Jr. Director March 28, 2000
/s/ Richard E. Roberson, Jr.
- ------------------------------------
Richard E. Roberson, Jr. Director March 28, 2000
</TABLE>
50
<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> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 4,252
<SECURITIES> 0
<RECEIVABLES> 6,935
<ALLOWANCES> 20
<INVENTORY> 175
<CURRENT-ASSETS> 13,367
<PP&E> 27,299
<DEPRECIATION> 9,922
<TOTAL-ASSETS> 45,120
<CURRENT-LIABILITIES> 5,204
<BONDS> 4,806
0
0
<COMMON> 71
<OTHER-SE> 31,913
<TOTAL-LIABILITY-AND-EQUITY> 45,120
<SALES> 32,555
<TOTAL-REVENUES> 32,555
<CGS> 25,618
<TOTAL-COSTS> 25,618
<OTHER-EXPENSES> 3,544
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 639
<INCOME-PRETAX> 2,754
<INCOME-TAX> 1,252
<INCOME-CONTINUING> 1,502
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,502
<EPS-BASIC> 0.21
<EPS-DILUTED> 0.21
</TABLE>
