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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the period ended September 30, 2001
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission File Number 000-24263
CONRAD INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 72-1416999
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1501 Front Street
P.O. Box 790
Morgan City, Louisiana 70381
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (985) 384-3060
----------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
As of November 12, 2001, 7,233,454 shares of the registrant's Common Stock
were outstanding.
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FORM 10-Q
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
Table of Contents
Page
----
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets September 30, 2001 and December
31, 2000................................................... 3
Consolidated Statements of Operations Three and Nine Months
Ended September 30, 2001 and 2000.......................... 4
Consolidated Statements of Cash Flows Nine Months Ended
September 30, 2001 and 2000................................ 5
Notes to the Consolidated Financial Statements.............. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk.. 18
Part II. Other Information..............................................
Item 1. Legal Proceedings........................................... 18
Item 6. Exhibits and Reports on Form 8-K............................ 19
Signature............................................................... 20
FORWARD-LOOKING-STATEMENTS
This Form 10-Q includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. All statements contained herein other than statements of
historical fact are forward-looking statements. When used in this Form 10-Q,
the words "anticipate", "believe", "estimate" and "expect" and similar
expressions are intended to identify forward-looking statements. Such
statements reflect the Company's current views with respect to future events
and are subject to certain risks, uncertainties and assumptions, including the
Company's reliance on cyclical industries, the Company's reliance on principal
customers and government contracts, the Company's ability to perform contracts
at costs consistent with estimated costs utilized in bidding for the projects
covered by such contracts, variations in quarterly revenues and earnings
resulting from the percentage of completion accounting method, the possible
termination of contracts included in the Company's backlog at the option of
customers, operating risks, competition for marine vessel contracts, the
Company's ability to retain key management personnel and to continue to attract
and retain skilled workers, state and federal regulations, the availability and
cost of capital, and general industry and economic conditions. These and other
risks and assumptions are discussed in more detail in the Company's Form 10-K.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those anticipated, believed, estimated or expected. The Company does not intend
to update these forward-looking statements. Although the Company believes that
the expectations reflected in such forward-looking statements are reasonable,
no assurance can be given that such expectations will prove correct.
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
September 30, December 31,
2001 2000
------------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................... $ 1,054 $ 3,513
Accounts receivable, net.......................... 6,965 1,622
Costs and estimated earnings in excess of billings
on uncompleted contracts......................... 3,316 4,663
Inventories....................................... 205 240
Other current assets.............................. 1,905 1,801
------- -------
Total current assets............................ 13,445 11,839
PROPERTY, PLANT AND EQUIPMENT, net.................. 24,477 22,675
COST IN EXCESS OF NET ASSETS ACQUIRED............... 12,798 13,388
OTHER ASSETS........................................ 393 62
------- -------
TOTAL ASSETS........................................ $51,113 $47,964
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................. $ 2,091 $ 1,390
Accrued employee costs............................ 2,329 504
Accrued expenses.................................. 557 1,441
Line of credit.................................... 1,500 --
Current maturities of long-term debt.............. 2,508 2,508
Billings in excess of costs and estimated earnings
on uncompleted contracts......................... 1,479 1,889
------- -------
Total current liabilities....................... 10,464 7,732
LONG-TERM DEBT, less current maturities............. 417 2,298
DEFERRED INCOME TAXES............................... 3,396 3,249
------- -------
Total liabilities............................... 14,277 13,279
------- -------
COMMITMENTS AND CONTINGENCIES (Note 6)
SHAREHOLDERS' EQUITY:
Common stock, $0.01 par value, 20,000,000 shares
authorized, 7,273,937 and 7,091,856 shares issued
in 2001 and 2000, respectively................... 73 71
Additional paid-in capital........................ 28,992 27,868
Unearned stock compensation....................... (32) --
Treasury stock at cost, 40,483 and 20,800 shares
in 2001 and 2000, respectively................... (211) (84)
Retained earnings................................. 8,014 6,830
------- -------
Total shareholders' equity...................... 36,836 34,685
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY...... $51,113 $47,964
======= =======
See notes to unaudited consolidated financial statements.
3
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Nine Months
Ended Ended
September 30, September 30,
--------------- ----------------
2001 2000 2001 2000
------- ------ ------- -------
REVENUE.................................... $12,941 $8,902 $36,999 $27,388
COST OF REVENUE............................ 10,122 6,794 28,483 20,473
------- ------ ------- -------
GROSS PROFIT............................... 2,819 2,108 8,516 6,915
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.................................. 1,247 1,053 3,597 3,398
EXECUTIVE COMPENSATION EXPENSE............. 2,613 -- 2,613 --
------- ------ ------- -------
(LOSS) INCOME FROM OPERATIONS.............. (1,041) 1,055 2,306 3,517
INTEREST EXPENSE........................... (61) (72) (144) (356)
OTHER INCOME, NET.......................... 24 128 107 315
------- ------ ------- -------
(LOSS) INCOME BEFORE INCOME TAXES.......... (1,078) 1,111 2,269 3,476
(BENEFIT) PROVISION FOR INCOME TAXES....... (335) 485 1,085 1,492
------- ------ ------- -------
NET (LOSS) INCOME.......................... $ (743) $ 626 $ 1,184 $ 1,984
======= ====== ======= =======
Net (loss) income per common share:
Basic.................................... $ (0.10) $ 0.09 $ 0.17 $ 0.28
======= ====== ======= =======
Diluted.................................. $ (0.10) $ 0.09 $ 0.17 $ 0.28
======= ====== ======= =======
Weighted average common shares outstanding:
Basic.................................... 7,143 7,061 7,095 7,066
======= ====== ======= =======
Diluted.................................. 7,143 7,130 7,119 7,075
======= ====== ======= =======
See notes to unaudited consolidated financial statements.
4
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months
Ended
September 30,
--------------
2001 2000
------ ------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................... $1,184 $1,984
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................ 1,733 1,652
Deferred income tax expense.................................. 148 37
Executive compensation expense............................... 1,547 --
Changes in assets and liabilities:
Accounts receivable......................................... (5,343) (1,870)
Net change in billings related to cost and estimated
earnings on uncompleted contracts.......................... 937 7,126
Inventory and other assets.................................. (420) (131)
Accounts payable and accrued expenses....................... 1,642 2,884
------ ------
Net cash provided by operating activities.................. 1,428 11,682
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for plant and equipment.................. (2,923) (4,246)
Issuance of executive notes receivable........................ (456) --
------ ------
Net cash used in investing activities...................... (3,379) (4,246)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments of debt.................................. (1,881) (1,881)
Net borrowings from line-of-credit............................ 1,500 --
Purchase of treasury stock.................................... (127) (84)
Proceeds from exercised stock options......................... -- 81
------ ------
Net cash used in financing activities...................... (508) (1,884)
------ ------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........... (2,459) 5,552
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD................. 3,513 4,252
------ ------
CASH AND CASH EQUIVALENTS, END OF PERIOD....................... $1,054 $9,804
====== ======
SUPPLEMENTAL DISCLOSURES CASH FLOW INFORMATION:
Interest paid, net of capitalized interest.................... $ 144 $ 413
====== ======
Taxes paid.................................................... $1,907 $1,210
====== ======
NONCASH ACTIVITIES:
Issuance of stock to executives............................... $1,093 $ --
====== ======
Issuance of restricted stock to executive..................... $ 32 $ --
====== ======
Forgiveness of executive notes receivable and related
interest..................................................... $ 454 $ --
====== ======
See notes to unaudited consolidated financial statements.
5
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1.ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements include the
accounts of Conrad Industries, Inc. and its wholly-owned subsidiaries (the
"Company") which are primarily engaged in the construction, conversion and
repair of a variety of marine vessels for commercial and government customers.
The Company was incorporated in March 1998 to serve as the holding company for
Conrad Shipyard, L.L.C. ("Conrad") and Orange Shipbuilding Company, Inc.
("Orange Shipbuilding"). New construction work and some repair work is
performed on a fixed-price basis. The Company performs the majority of repair
work under cost-plus-fee agreements. All significant intercompany transactions
have been eliminated. In the opinion of the management of the Company, the
interim consolidated financial statements included herein have been prepared in
accordance with generally accepted accounting principles and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
disclosures required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (such
adjustments consisting only of a normal recurring nature) considered necessary
for a fair presentation have been included in the interim consolidated
financial statements. These interim consolidated financial statements should be
read in conjunction with the Company's audited 2000 consolidated financial
statements and related notes filed on Form 10-K for the year ended December 31,
2000.
The results of operations for the three-month and nine-month periods ended
September 30, 2001 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2001.
2. RECEIVABLES
Receivables consisted of the following at September 30, 2001 and December
31, 2000 (in thousands):
2001 2000
------- ------
U.S. Government:
Amounts billed............................................ $ 408 $ --
Unbilled costs and estimated earnings on uncompleted
contracts................................................ 661 1,921
------- ------
1,069 1,921
Commercial:
Amounts billed............................................ 6,557 1,622
Unbilled costs and estimated earnings on uncompleted
contracts................................................ 2,655 2,742
------- ------
Total................................................... $10,281 $6,285
======= ======
Included above in amounts billed is an allowance for doubtful accounts of
$20,000 at September 30, 2001 and December 31, 2000. During 2001 and 2000 there
were no significant transactions recorded in the allowance for doubtful
accounts.
Unbilled costs and estimated earnings on uncompleted contracts were not
billable to customers at the balance sheet dates under terms of the respective
contracts. Of the unbilled costs and estimated earnings at September 30, 2001,
substantially all is expected to be collected within the next twelve months.
6
Information with respect to uncompleted contracts as of September 30, 2001
and December 31, 2000 is as follows (in thousands):
2001 2000
------- -------
Costs incurred on uncompleted contracts.................... $26,186 $18,577
Estimated earnings......................................... 7,207 5,235
------- -------
33,393 23,812
Less billings to date...................................... (31,556) (21,038)
------- -------
$ 1,837 $ 2,774
======= =======
The above amounts are included in the accompanying balance sheets under the
following captions (in thousands):
2001 2000
------ ------
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................... $3,316 $4,663
Billings in excess of cost and estimated earnings on
uncompleted contracts.................................... (1,479) (1,889)
------ ------
Total................................................. $1,837 $2,774
====== ======
3.LONG-TERM DEBT
The Company has a Loan Agreement with a commercial bank, which specifies the
terms of the Term Loan and the Revolving Credit Facility. Interest accrues at
LIBOR plus 2.0% until November 30, 2001, and thereafter at the option of the
Company either at the lender's prime rate minus 0.5% or LIBOR plus 2.0%. The
Loan Agreement is secured by substantially all of the Company's assets,
contains customary restrictive covenants and requires the maintenance of
certain financial ratios, including a current ratio requirement of 1.25 to 1.0
that could limit the Company's use of available capacity under the Revolving
Credit Facility. In addition, 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. At September 30, 2001, the
Company was in compliance with these covenants or had received the appropriate
waiver.
The Term Loan has a maturity date of April 2004 and is payable in fourteen
monthly principal payments of $209,000 plus interest.
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 and matures on January 28, 2002. The Company pays a fee
of 0.25% per annum on the unused portion of the facility. As of September 30,
2001, $1.5 million was outstanding on the Revolving Credit Facility.
4. 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. The number of weighted average shares outstanding for "basic"
income per share was 7,142,912 and 7,060,836 for the three months ended
September 30, 2001 and 2000, respectively, and 7,095,271 and 7,066,464 for the
nine months ended September 30, 2001 and 2000, respectively. The number of
weighted average shares outstanding for "diluted" income per share was
7,142,912 and 7,130,419 for the three months ended September 30, 2001 and 2000,
respectively, and 7,119,364 and 7,074,713 for the nine months ended September
30, 2001 and 2000, respectively.
7
5. 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, 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" in the Company's Form 10-K for the year ended December 31,
2000. Intersegment sales and transfers are not significant.
Selected information as to the operations of the Company by segment is
as follows (in thousands):
Three Months Nine Months
Ended Ended
September 30, September 30,
-------------- ----------------
2001 2000 2001 2000
------ ------ ------- -------
Revenue:
Vessel construction....................... $9,352 $4,408 $25,757 $16,499
Repair and conversions.................... 3,589 4,494 11,242 10,889
------ ------ ------- -------
Total revenue........................... 12,941 8,902 36,999 27,388
------ ------ ------- -------
Cost of revenue:
Vessel construction....................... 7,241 3,368 20,133 12,413
Repair and conversions.................... 2,881 3,426 8,350 8,060
------ ------ ------- -------
Total cost of revenue................... 10,122 6,794 28,483 20,473
------ ------ ------- -------
Gross profit:
Vessel construction....................... 2,111 1,040 5,624 4,086
Repair and conversions.................... 708 1,068 2,892 2,829
------ ------ ------- -------
Total gross profit...................... 2,819 2,108 8,516 6,915
Selling, general and administrative
expenses................................... 1,247 1,053 3,597 3,398
Executive compensation expense.............. 2,613 -- 2,613 --
------ ------ ------- -------
(Loss) income from operations............... (1,041) 1,055 2,306 3,517
Interest expense............................ (61) (72) (144) (356)
Other income, net........................... 24 128 107 315
------ ------ ------- -------
(Loss) income before income taxes........... (1,078) 1,111 2,269 3,476
(Benefit) provision for income taxes........ (335) 485 1,085 1,492
------ ------ ------- -------
Net (loss) income........................... $ (743) $ 626 $ 1,184 $ 1,984
====== ====== ======= =======
8
Certain other financial information of the Company by segment is as follows
(in thousands):
Three Months Nine Months
Ended Ended
September 30, September 30,
------------- -------------
2001 2000 2001 2000
------ ------ ------ ------
Depreciation and amortization expense:
Vessel construction.............................. $ 206 $ 194 $ 612 $ 582
Repair and conversions........................... 151 118 410 360
Included in selling, general and administrative
expenses........................................ 238 237 711 710
------ ------ ------ ------
Total depreciation and amortization expense.... $ 595 $ 549 $1,733 $1,652
====== ====== ====== ======
Three Months Nine Months
Ended Ended
September 30, September 30,
------------- -------------
2001 2000 2001 2000
------------- ------ ------
Capital expenditures:
Vessel construction.............................. $ 39 $ 113 $ 464 $ 413
Repair and conversions........................... 954 2,025 2,263 3,603
Other............................................ -- 130 196 230
----- ------- ------ ------
Total capital expenditures..................... $ 993 $ 2,268 $2,923 $4,246
===== ======= ====== ======
Total assets of the Company by segment is as follows as of September 30,
2001 and December 31, 2000 (in thousands):
2001 2000
------- -------
Total assets:
Vessel construction........................................... $31,186 $29,565
Repair and conversions........................................ 13,950 11,759
Other......................................................... 5,977 6,640
------- -------
Total assets................................................ $51,113 $47,964
======= =======
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.
6.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 originally provided for employment of the officers
through March 31, 2001, and provides for annual extensions at the end of its
term, subject to the parties' mutual agreement. These agreements have been
extended for a one-year term through March 31, 2002. The minimum annual total
compensation of these agreements is $570,000.
9
In August 2001, the Company entered into an employment agreement with
Kenneth G. Myers, Jr. providing for employment as the Company's President and
Chief Executive Officer through December 31, 2004 and annual extensions
thereafter, subject to the parties' mutual agreement. The minimum annual total
compensation under the agreement is $230,000. Pursuant to the agreement, on the
executive's start date of August 27, 2001, he was granted 5,000 restricted
shares of common stock, vesting on the anniversary of the start date, and
options to purchase 50,000 shares of common stock at the market price on the
start date, vesting over a three-year period.
In August 2001, the Company and William H. Hidalgo entered into a transition
agreement and terminated his employment agreement. The agreement provided that
he would remain employed by the Company as President and Chief Executive
Officer through August 26, 2001 and as Special Advisor to the new Chief
Executive Officer through October 31, 2001. In consideration of past services,
assistance with an orderly transition, surrender of his stock options,
execution of the agreement (including a one-year non-competition covenant) and
severance, Mr. Hidalgo received approximately 132,820 shares of common stock
and, on February 28, 2002, a severance payment of $195,290 and bonus of
$622,500. Options to purchase 285,957 shares of common stock previously granted
to Mr. Hidalgo have been cancelled. His $233,327 promissory note payable and
related accrued interest payable to the Company has also been cancelled.
The Company also granted Cecil A. Hernandez, the Company's Chief Financial
Officer, in consideration of past services and surrender of his stock options,
approximately 44,261 shares of common stock and a cash bonus payable on
February 28, 2002, of $248,000. Options to purchase 114,043 shares of common
stock previously granted to Mr. Hernandez have been cancelled. His $139,277
promissory note payable and related accrued interest payable to the Company has
also been cancelled. Mr. Hernandez will remain as the Company's Chief Financial
Officer and a director.
Messrs, Hidalgo and Hernandez executed notes payable to the Company in the
amount of their related withholding tax obligations, which will be repaid on
February 28, 2002 by an offset against the bonuses due on that date. In
addition, the Company purchased 19,683 shares of common stock from the
executives to assist them in meeting their income tax obligations relating to
these transactions.
As a result of these transactions, the Company incurred a one-time earnings
charge of approximately $2.6 million or $0.37 per diluted share ($1.6 million,
net of tax or $0.23 per diluted share), in the quarter ended September 30,
2001.
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 $0.2 million and $1.6 million at September 30, 2001 and December
31, 2000.
7. NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
133, Accounting for Derivative Instruments and Hedging Activities as amended by
SFAS No. 138 on January 1, 2001. SFAS No. 133, as amended, establishes
accounting and reporting standards for derivative and hedging activities and
requires, among other things, that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. Management has concluded that the adoption of SFAS No. 133 did
not have a significant impact on the financial position, results of operations,
or cash flows of the Company.
On June 29, 2001, the Financial Accounting Standards Board ("FASB")
concluded its voting process on SFAS No. 141, "Business Combinations", and this
statement was issued in July 2001. SFAS No. 141 requires that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001.
10
Goodwill and certain intangible assets will remain on the balance sheet and not
be amortized. On an annual basis, and when there is reason to suspect that
their values have been diminished or impaired, these assets must be tested for
impairment, and write-downs may be necessary. The Company implemented SFAS No.
141 on July 1, 2001, as required.
On June 29, 2001, FASB concluded its voting process of SFAS No. 142,
"Goodwill and Other Intangible Assets", and this statement was issued in July
2001. SFAS No. 142 changes the accounting for goodwill from an amortization
method to an impairment-only approach. Amortization of goodwill, including
goodwill recorded in past business combinations, will cease upon adoption of
this statement. Amortization expense of existing goodwill was approximately
$0.2 million and $0.6 million for the three and nine months ended September 30,
2001. The Company is required to implement SFAS No. 142 on January 1, 2002 and
it has not determined the impact that this statement will have on its
consolidated financial position or results of operations.
SFAS No. 143, "Accounting for Asset Retirement Obligations," requires the
recording of liabilities for all legal obligations associated with the
retirement of long-lived assets that result from the normal operation of those
assets. These liabilities are required to be recorded at their fair values
(which are likely to be the present values of the estimated future cash flows)
in the period in which they are incurred. SFAS 143 requires the associated
asset retirement costs to be capitalized as part of the carrying amount of the
long-lived asset. The asset retirement obligation will be accreted each year
through a charge to expense. The amounts added to the carrying amounts of the
assets will be depreciated over the useful lives of the assets. The Company is
required to implement SFAS No. 143 on January 1, 2003, and it has not
determined the impact that this statement will have on its consolidated
financial position or results of operations.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived
Assets," promulgates standards for measuring and recording impairments of long-
lived assets. Additionally, this standard establishes requirements for
classifying an asset as held for sale, and changes existing accounting and
reporting standards for discontinued operations and exchanges for long-lived
assets. The Company is required to implement SFAS No. 144 on January 1, 2002,
and it does not expect the implementation of this standard to have a material
effect on the Company's financial position or results of operations.
11
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis should be read in conjunction with the
Unaudited Consolidated Financial Statements and the Notes to Unaudited
Consolidated Financial Statements included elsewhere in this Form 10-Q as well
as the Company's annual report on Form 10-K for the year ended December 31,
2000.
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 Company completed an initial public offering in
June 1998 by issuing 2.1 million shares of common stock. 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, offshore tug boats
and offshore supply vessels. 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 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. 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. In 2000, Conrad Shipyard, Inc. was
converted into a Louisiana limited liability company named Conrad Shipyard,
L.L.C.
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
were adversely impacted beginning in the latter part of 1998 by decreased
activity in the offshore oil and gas industry. During 2000, the Company began
to experience a modest increase in demand for products and services due to the
upturn in activity in the offshore oil and gas industry. Activity by other
commercial and government customers to construct new vessels to replace older
vessels and upgrade the capacity or functionality of existing vessels has
remained steady. The September 11, 2001 terrorist attacks at the World Trade
Center and the Pentagon, and the related weakness in the economy in general and
the offshore oil and gas industry in particular, have resulted in decreased
demand for the Company's products and services. These events have adversely
affected the Company's repair segment. In addition, bid activity for new vessel
construction has slowed. If these trends continue, the Company expects that its
financial performance for the fourth quarter of 2001 will be adversely
affected.
The Company is engaged in various types of construction under contracts that
generally range from one month to 36 months in duration. The Company uses the
percentage-of-completion method of accounting and therefore, takes into account
the estimated costs, estimated earnings and revenue to date on fixed-price
contracts not yet completed. The amount of revenue recognized is equal to the
portion of the total contract price that the labor hours incurred to date bears
to the estimated total labor hours, based on current estimates to complete.
This method is used because management considers expended labor hours to be the
best available measure of progress on these contracts. Revenues from cost-plus-
fee contracts are recognized on the basis of cost incurred during the period
plus the fee earned.
Most of the contracts entered into by the Company for new vessel
construction, whether commercial or governmental, are fixed-price contracts
under which the Company retains all cost savings on completed contracts but is
liable for all cost overruns. The Company develops its bids for a fixed price
project by estimating the 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
12
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
In May 2000 the Company began construction of a new drydock, which is 280'
long and 160' wide with a lifting capacity of 10,000 tons. The drydock was put
into operation during the first part of March 2001 at the Company's Morgan City
shipyard. The cost was $5.7 million. Funds for the construction of the drydock
came from cash and internally generated funds. This dock will allow the Company
to (1) increase repair and conversion capacity; (2) compete for larger repair
and conversion projects; and (3) launch larger new vessel construction projects
more competitively.
On October 23, 2000, the Company purchased 52 acres of land in Amelia,
Louisiana for $1.3 million. The land is strategically located on the
Intracoastal Waterway approximately 30 miles from the Gulf of Mexico. Work is
currently in progress to develop the property as a repair and conversion
facility. The Company anticipates that the first phase of development will cost
approximately $6 million and will include clearing land, dredging slip,
bulkheading and partial construction of an infrastructure to support repair and
conversion activities. The property is within one mile of the other existing
Amelia facility. Due to the weakness in the economy in general and the offshore
oil and gas industry in particular, the Company has strategically slowed down
this development.
The Company has appointed Kenneth G. "Jerry" Myers, Jr. as President and
Chief Executive Officer, effective August 27, 2001, pursuant to the terms of an
employment agreement described in Note 6 to the Company's consolidated
financial statements included herein. Myers has spent the past 21 years with
Avondale Industries serving in various senior management positions. Most
recently, he served as Vice President in charge of managing Avondale's largest
shipbuilding program. While at Avondale, Myers has also held positions
including Chief Information Officer, Vice President-Business Review, in charge
of government program accounting, where he managed over $10 billion in
government contracts, Assistant Vice President responsible for mergers and
acquisitions and Assistant Controller.
In August 2001, the Company and William H. Hidalgo entered into a transition
agreement and terminated his employment agreement. The agreement provided that
he would remain employed by the Company as President and Chief Executive
Officer through August 26, 2001 and as Special Advisor to the new Chief
Executive Officer through October 31, 2001. In consideration of past services,
assistance with an orderly transition, surrender of his stock options,
execution of the agreement (including a one-year non-competition covenant) and
severance, Mr. Hidalgo received approximately 132,820 shares of common stock
and, on February 28, 2002, will receive a severance payment of $195,290 and
bonus of $622,500. Options to purchase 285,957 shares of common stock
previously granted to Mr. Hidalgo have been cancelled. His $233,327 promissory
note and related accrued interest payable to the Company have also been
cancelled.
The Company also granted Cecil A. Hernandez, the Company's Chief Financial
Officer, in consideration for past services and surrender of his stock options,
approximately 44,261 shares of common stock and a cash bonus payable on
February 28, 2002, of $248,000. Options to purchase 114,043 shares of common
stock previously granted to Mr. Hernandez have been cancelled. His $139,277
promissory note and related accrued interest payable to the Company have also
been cancelled. Mr. Hernandez will remain as the Company's Chief Financial
Officer and a director.
Messers. Hidalgo and Hernandez executed notes payable to the Company in the
amount of their related withholding tax obligations, which will be repaid on
February 28, 2002 by an offset against the bonuses due on that date. In
addition, the Company purchased 19,683 shares of common stock from the
executives to assist them in meeting their income tax obligations relating to
these transactions.
13
As a result of these transactions, the Company incurred a one-time, after
tax earnings charge of approximately $1.6 million, or $0.23 per diluted share,
in the quarter ended September 30, 2001. The transactions will have a minimal
effect on the Company's cash flow due to the income tax implications of the
non-cash portion of the charge related to the issuance of the common stock.
Results of Operations
The following table sets forth certain historical data of the Company and
percentage of revenues for the periods presented (in thousands):
Conrad Industries, Inc. Summary Results of Operations
(In thousands)
Three Months Ended Nine Months Ended September
September 30, 30,
---------------------------- ------------------------------
2001 2000 2001 2000
------------- ------------- -------------- --------------
Financial Data:
Revenue Vessel
construction......... $9,352 72.3% $4,408 49.5% $25,757 69.6% $16,499 60.2%
Repair and
conversions.......... 3,589 27.7% 4,494 50.5% 11,242 30.4% 10,889 39.8%
------ ----- ------ ----- ------- ----- ------- -----
Total revenue....... 12,941 100.0% 8,902 100.0% 36,999 100.0% 27,388 100.0%
------ ----- ------ ----- ------- ----- ------- -----
Cost of revenue
Vessel construction... 7,241 77.4% 3,368 76.4% 20,133 78.2% 12,413 75.2%
Repair and
conversions.......... 2,881 80.3% 3,426 76.2% 8,350 74.3% 8,060 74.0%
------ ----- ------ ----- ------- ----- ------- -----
Total cost of
revenue............ 10,122 78.2% 6,794 76.3% 28,483 77.0% 20,473 74.8%
------ ----- ------ ----- ------- ----- ------- -----
Gross profit
Vessel construction... 2,111 22.6% 1,040 23.6% 5,624 21.8% 4,086 24.8%
Repair and
conversions.......... 708 19.7% 1,068 23.8% 2,892 25.7% 2,829 26.0%
------ ----- ------ ----- ------- ----- ------- -----
Total gross profit.. 2,819 21.8% 2,108 23.7% 8,516 23.0% 6,915 25.2%
S G & A expenses........ 1,247 9.6% 1,053 11.8% 3,597 9.7% 3,398 12.4%
Executive compensation
expense (1)............ 2,613 20.2% -- 0.0% 2,613 7.1% -- 0.0%
------ ----- ------ ----- ------- ----- ------- -----
Income (loss) from
operations............. (1,041) -8.0% 1,055 11.9% 2,306 6.2% 3,517 12.8%
Interest expense........ 61 0.5% 72 0.8% 144 0.4% 356 1.3%
Other expenses (income),
net.................... (24) -0.2% (128) -1.4% (107) -0.3% (315) -1.2%
------ ----- ------ ----- ------- ----- ------- -----
Income (loss) before
income taxes........... (1,078) -8.3% 1,111 12.5% 2,269 6.1% 3,476 12.7%
Income taxes............ (335) -2.6% 485 5.4% 1,085 2.9% 1,492 5.4%
------ ----- ------ ----- ------- ----- ------- -----
Net Income (loss)....... $ (743) -5.7% $ 626 7.0% $ 1,184 3.2% $ 1,984 7.2%
====== ====== ======= =======
EBITDA (2).............. $1,101 8.5% $1,604 18.0% $ 5,586 15.1% $ 5,169 18.9%
------ ------ ------- -------
Operating Data: Labor
hours.................. 168 112 500 396
- --------
(1) Represents, non-recurring executive compensation expense related to the
issuance of shares of common stock, forgiveness of notes and related
interest, severance payment and cash bonuses to executives by the Company
as detailed in "Recent Events" and notes to the financial statements.
(2) Represents income from operations before deduction of depreciation,
amortization, and non-cash compensation expense related to the issuance of
common stock and forgiveness of notes and related interest 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.
14
Three Months Ended September 30, 2001 Compared with Three Months Ended
September 30, 2000.
During the three months ended September 30, 2001, the Company generated
revenue of $12.9 million, an increase of approximately $4.0 million, or 45.4%,
compared to $8.9 million generated for the three months ended September 30,
2000. The increase was due to a $4.9 million (112.2%) increase in vessel
construction revenue to $9.4 million for the three months ended September 30,
2001, compared to $4.4 million for the three months ended September 30, 2000
and a decrease of $905,000 (20.1%) in repair and conversion revenue to $3.6
million for the three months ended September 30, 2001 compared to $4.5 million
for the three months ended September 30, 2000. The increase in vessel
construction revenue was attributable to the increase in vessel construction
production hours which increased by 85.5% during the three months ended
September 30, 2001 compared to the three months ended September 30, 2000 due to
(1) greater demand for vessel construction jobs, (2) the fact that the
construction of the drydock by production personnel during the three months
ended September 30, 2000 absorbed hours during that period which could
otherwise have been available for billable work and (3) the nature of the jobs
during the three months ended September 30, 2001 required more material and
equipment as compared to jobs during the three months ended September 30, 2000.
The decrease in repair and conversion revenue during the three months ended
September 30, 2001 compared to the three months ended September 30, 2000 was
primarily attributable to two conversion jobs in progress during the three
months ended September 30, 2000 which required more material and equipment as
compared to projects completed or in progress during the three months ended
September 30, 2001 and because of less favorable pricing for jobs completed or
in progress during the three months ended September 30, 2001 as compared to the
three months ended September 30, 2000 primarily because of decreased demand for
repair and conversions due to decreased offshore oil and gas activity. Repair
and conversion hours increased 15.8% during the three months ended September
30, 2001 compared to the three months ended September 30, 2000 as the result of
the new drydock being in service and increase activity at the Amelia Topside
facility. The September 11, 2001 terrorist attacks at the World Trade Center
and the Pentagon, and the related weakness in the economy in general and the
offshore oil and gas industry in particular, have resulted in decreased demand
for the Company's products and services. These events have adversely affected
the Company's repair segment. In addition, bid activity for new vessel
construction has slowed. If these trends continue, the Company expects that its
financial performance for the fourth quarter of 2001 will be adversely
affected.
Gross profit increased $711,000, or 33.7% to $2.8 million (21.8% of revenue)
for the three months ended September 30, 2001 as compared to gross profit of
$2.1 million (23.7% of revenue) for the three months ended September 30, 2000.
Vessel construction gross profit increased $1.1 million or 103.0% to $2.1
million for the three months ended September 30, 2001 as compared to vessel
construction gross profit of $1.0 million for the three months ended September
30, 2000. Repair and conversion gross profit decreased $360,000 or 33.7% to
$708,000 for the three months ended September 30, 2001 as compared to repair
and conversion gross profit of $1.1 million for the three months ended
September 30, 2000. The increase in vessel construction gross profit was
primarily due to the increase in vessel production hours due to greater demand
for vessel construction jobs and the fact that the construction of the drydock
by production personnel during the three months ended September 30, 2000
absorbed hours during that period which could otherwise have been available for
billable work. The decrease in repair and conversion gross profit was primarily
due to the result of less favorable pricing for jobs completed or in progress
during the three months ended September 30, 2001 as compared to the three
months ended September 30, 2000 and because of the two conversion jobs
discussed above.
Vessel construction gross profit margins decreased to 22.6% for the three
months ended September 30, 2001, compared to gross profit margins of 23.6% for
the three months ended September 30, 2000 primarily due to the nature of some
jobs in 2001 being more material intensive. Repair and conversion gross profit
margins were 19.7% for the three months ended September 30, 2001, compared to
gross profit margins of 23.8% for the three months ended September 30, 2000.
The decrease in repair and conversion gross profit margins was primarily due to
the result of less favorable pricing due to decreased offshore oil and gas
activity.
Selling, general and administrative expenses increased $194,000, or 18.4%,
to $1.2 million (9.6% of revenue) for the three months ended September 30,
2001, as compared to $1.1 million (11.8% of revenue) for
15
the three months ended September 30, 2000. This increase was primarily due to
increase in salaries, legal and sales expenses.
For the three months ended September 30, 2001 the Company incurred a loss
before income taxes of $1.1 million which was a decrease of $2.2 million as
compared to income before income taxes of $1.1 million for the three months
ended September 30, 2000, primarily due to the non-recurring, executive
compensation charge of $2.6 million (described in "Recent Events").
The Company had a net loss of $743,000 for the three months ended September
30, 2001 as compared to net income of $626,000 for the three months ended
September 30, 2000. Interest expense decreased $11,000 to $61,000 for the three
months ended September 30, 2001 as compared to interest expense of $72,000 for
the three months ended September 30, 2000 due to lower interest rates and a
reduced average outstanding loan balance.
The Company had an income tax benefit of $335,000 for the three months ended
September 30, 2001, compared to income taxes of $485,000 for the three months
ended September 30, 2000. The tax benefit was due to the loss incurred during
the quarter due to the non-recurring executive compensation charge mentioned
above. Normally the Company's effective tax rate is higher than its statutory
tax rate because its cost in excess of net assets acquired is not amortized for
tax purposes.
Nine Months Ended September 30, 2001 Compared with Nine Months Ended September
30, 2000.
During the nine months ended September 30, 2001, the Company generated
revenue of $37.0 million, an increase of approximately $9.6 million, or 35.1%,
compared to $27.4 million generated for the nine months ended September 30,
2000. The increase was due to a $9.3 million (56.1%) increase in vessel
construction revenue to $25.8 million for the nine months ended September 30,
2001, compared to $16.5 million for the nine months ended September 30, 2000
and an increase of $353,000 (3.2%) in repair and conversion revenue to $11.2
million for the nine months ended September 30, 2001 compared to $10.9 million
for the nine months ended September 30, 2000. The increase in vessel
construction revenue was attributable to the increase in vessel construction
production hours which increased by 47.8% during the nine months ended
September 30, 2001 compared to the nine months ended September 30, 2000 due to
(1) greater demand for vessel construction jobs, (2) the fact that the
construction of the drydock by production personnel during the nine months
ended September 30, 2000 absorbed hours during that period which could
otherwise have been available for billable work and (3) the nature of the jobs
during the nine months ended September 30, 2001 required more material and
equipment as compared to jobs during the nine months ended September 30, 2000.
The increase in repair and conversion revenue during the nine months ended
September 30, 2001 compared to the nine months ended September 30, 2000 was
primarily due to the 4.1% increase in repair and conversion production hours as
the result of the new drydock being in service and increase activity at the
Amelia Topside facility. .
Gross profit increased $1.6 million, or 23.2% to $8.5 million (23.0% of
revenue) for the nine months ended September 30, 2001 as compared to gross
profit of $6.9 million (25.2% of revenue) for the nine months ended September
30, 2000. Effecting gross profit for the nine months ended September 30, 2001
was an agreement between Conrad subsidiary Orange Shipbuilding Company, Inc.
and the Occupational Safety and Health Administration in which Orange agreed to
pay a fine of $149,850 to settle alleged violations at its Orange, Texas
shipyard. This amount was expensed in the three month period ended June 30,
2001. Gross profit also improved due to a reduction in estimated medical
insurance costs based on actual experience during the policy year ended May 31,
2001. Vessel construction gross profit increased $1.5 million or 37.6% to $5.6
million for the nine months ended September 30, 2001 as compared to vessel
construction gross profit of $4.1 million for the nine months ended September
30, 2000. Repair and conversion gross profit increased $63,000 or 2.2% to $2.9
million for the nine months ended September 30, 2001 as compared to repair and
conversion gross profit of $2.8 million for the nine months ended September 30,
2000. The increase in vessel construction
16
gross profit was primarily due to the increase in vessel production hours and
the factors discussed above. The increase in repair and conversion gross profit
was primarily due to the increase in repair production hours.
Repair and conversion gross profit margins decreased to 25.7% for the nine
months ended September 30, 2001, compared to gross profit margins of 26.0% for
the nine months ended September 30, 2000. Vessel construction gross profit
margins decreased to 21.8% for the nine months ended September 30, 2001,
compared to gross profit margins of 24.8% for the nine months ended September
30, 2000 primarily due to some jobs in 2001 being more material intensive and
some jobs in 2001 having lower profit margins due to greater job cost.
Selling, general and administrative expenses increased $199,000, or 5.9%, to
$3.6 million (9.7% of revenue) for the nine months ended September 30, 2001, as
compared to $3.4 million (12.4% of revenue) for the nine months ended September
30, 2000. This increase was primarily due to increase in salaries, bonuses,
legal and sales expenses.
Income before income taxes decreased $1.2 million to $2.3 million for the
nine months ended September 30, 2001 as compared to income before income taxes
of $3.5 million for the nine months ended September 30, 2000, primarily due to
the non-recurring executive compensation charge of $2.6 million (described in
"Recent Events").
The Company had net income of $1.2 million for the nine months ended
September 30, 2001 as compared to net income of $2.0 million for the nine
months ended September 30, 2000. Interest expense decreased $212,000 to
$144,000 for nine months ended September 30, 2001 as compared to interest
expense of $356,000 for the nine months ended September 30, 2000 due to
capitalization of interest related to the construction of the drydock, a
reduction of average debt and lower interest rates.
The Company had income tax expense of $1.1 million (47.8% effective tax
rate) for the nine months ended September 30, 2001, compared to income taxes of
$1.5 million (42.9% effective tax rate) for the nine months ended September 30,
2000. The Company's effective tax rate is higher than its statutory tax rate
because its cost in excess of net assets acquired is not amortized for tax
purposes. The Company had a tax benefit during the three months ended September
30, 2001 due to the non-recurring executive compensation charge mentioned
above.
Liquidity and Capital Resources
Historically, the Company has funded its business through funds generated
from operations. Net cash provided by operations was $1.4 million for the nine
months ended September 30, 2001 due to increases in billings related to costs
and estimated earnings on uncompleted contracts and accounts payable and
accrued expenses and offset by increases in accounts receivable and other
assets. The Company's working capital was $3.0 million at September 30, 2001
compared to $4.1 million at December 31, 2000. The decrease in the working
capital was primarily due to $2.9 million in capital expenditures for plant and
equipment. The Company has borrowed in the past to expand its facilities and to
fund the acquisition of Orange Shipbuilding in December 1997. In June, the
Company borrowed $1.5 million on its revolving credit facility, primarily to
fund capital expenditures.
The Company's capital requirements historically have been primarily for
improvements to its facilities and equipment. The Company's net cash used in
investing activities of $3.4 million for the nine months ended September 30,
2001 was for improvements to facilities and equipment of which approximately
$1.2 million was for the completion of the construction of a new dry-dock,
$903,000 was for improvements to its other facilities and equipment, $820,000
was for improvements to the 52 acres in Amelia and $456,000 was for issuance of
executive notes receivables as described in "Recent Events."
In March 2001, the Company completed construction of a new drydock, which is
280' long and 160' wide with a lifting capacity of up to 10,000 tons. The cost
was $5.7 million. Funds for the construction of the
17
drydock came from cash and internally generated funds. This dock will allow the
Company to (1) increase repair and conversion capacity, (2) compete for larger
repair and conversion projects, and (3) launch larger new vessel construction
projects more competitively.
Net cash used by financing activities was $508,000 for the nine months ended
September 30, 2001 which included borrowings under the credit facility of $1.5
million, debt repayment of $1.9 million and $127,000 for the purchase of
treasury stock from executives as described in "Recent Events."
On October 23, 2000 the Company purchased 52 acres of land in Amelia,
Louisiana for $1.3 million. The Company is currently developing the property as
a shipyard. The Company anticipates that the first phase of development will
cost approximately $6 million and will include clearing land, dredging slip,
bulkheading and partial construction of an infrastructure to support repair and
conversion activities. During the nine months ended September 30, 2001 the
Company expended $820,000 for improvements to the property. Due to the weakness
in the economy in general and the offshore oil and gas industry in particular,
the Company has strategically slowed down this development. The Company plans
to fund the remaining $5.2 million relating to this project in fiscal year 2002
by a combination of internally generated cash and borrowings.
The Company has a Loan Agreement with a commercial bank, which specifies the
terms of the Term Loan and the Revolving Credit Facility. Interest accrues at
LIBOR plus 2.0% until November 30, 2001, and thereafter at the option of the
Company either at the lender's prime rate minus 0.5% or LIBOR plus 2.0%. The
Loan Agreement is secured by substantially all of the Company's assets,
contains customary restrictive covenants and requires the maintenance of
certain financial ratios, including a current ratio requirement of 1.25 to 1.0
that could limit the Company's use of available capacity under the Revolving
Credit Facility. In addition, 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. At September 30, 2001, the
Company was in compliance with these covenants or has obtained the appropriate
waiver.
The Term Loan has a maturity date of April 2004 and is payable in fourteen
monthly principal payments of $209,000 plus interest. At September 30, 2001,
the Term Loan balance outstanding was $2.9 million. At the current amortization
schedule, the Term Loan will be paid in full by the end of fiscal year 2002.
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, and matures on January 30, 2002. The Company pays a
fee of 0.25% per annum on the unused portion of the facility. As of September
30, 2001, $1.5 million was outstanding on the Revolving Credit Facility. The
Company has extended its Revolving Credit Facility from October 30, 2001 until
January 28, 2002 and is in discussions about extending its Credit Facility on a
longer-term basis. Management believes that this facility or a similar source
of borrowing will be available on reasonable terms.
The Company's backlog of $10.0 million at September 30, 2001 was
attributable to 9 projects, of which $1.0 million was attributable to three
government projects. The Company has signed contracts for 3 projects totaling
$1.5 million since September 30, 2001, which has increased backlog.
Additionally, the Company is finalizing a contract for the purchase by the U.
S. Army of two additional ST Tugs totaling $5.3 million. The Company is
currently in discussion and negotiations with various customers for vessel
construction projects. The Company is cautiously optimistic that some of these
projects will be added to our backlog soon.
For the remainder of 2001, the Company anticipates approximately $1.8
million in capital expenditures for the maintenance, repair and upgrade of
existing facilities. In addition, the Board of Directors approved a $798,000
expansion of the Morgan City facility which will increase capabilities for pre-
fabricated components and modular constructions techniques. Due to the weakness
in the economy in general and the offshore oil and gas industry in particular,
the Company has strategically slowed down the Amelia property development and
does not anticipate expending the remaining $5.2 million estimated to be needed
to complete the first phase of development until 2002.
18
Management believes that the Company's existing working capital and cash
flows from operations will be adequate to meet its working capital needs for
operations and some capital expenditures through 2001. Management believes that
some of the planned capital expenditures may require additional borrowings and
believes that borrowings should be available on reasonable terms. The Company
may pursue acquisition opportunities it believes are attractive if and when
such opportunities arise. The timing, size or success of any acquisition effort
and the associated potential capital commitments cannot be predicted.
New Accounting Pronouncements
The Company adopted Statement of Financial Accounting Standards ("SFAS" )
No. 133, Accounting for Derivative Instruments and Hedging Activities as
amended by SFAS No. 138 on January 1, 2001. SFAS No. 133, as amended,
establishes accounting and reporting standards for derivative and hedging
activities and requires, among other things, that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. Management has concluded that the adoption of
SFAS 133 did not have a significant impact on the financial position, results
of operations, or cash flows of the Company.
On June 29, 2001, the Financial Accounting Standards Board ("FASB")
concluded its voting process on SFAS No. 141, "Business Combinations," and this
statement was issued in July 2001. SFAS No. 141 requires that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001. Goodwill and certain intangible assets will remain on the balance
sheet and not be amortized. On an annual basis, and when there is reason to
suspect that their values have been diminished or impaired, these assets must
be tested for impairment, and write-downs may be necessary. The Company
implemented SFAS No. 141 on July 1, 2001, as required.
On June 29, 2001, FASB concluded its voting process of SFAS No. 142,
"Goodwill and Other Intangible Assets", and this statement was issued in July
2001. SFAS No. 142 changes the accounting for goodwill from an amortization
method to an impairment-only approach. Amortization of goodwill, including
goodwill recorded in past business combinations, will cease upon adoption of
this statement. Amortization expense of existing goodwill was approximately
$0.2 million and $0.6 million for the three and nine months ended September 30,
2001. The Company is required to implement SFAS No. 142 on January 1, 2002 and
it has not determined the impact that this statement will have on its
consolidated financial position or results of operations.
SFAS No. 143, "Accounting for Asset Retirement Obligations," requires the
recording of liabilities for all legal obligations associated with the
retirement of long-lived assets that result from the normal operation of those
assets. These liabilities are required to be recorded at their fair values
(which are likely to be the present values of the estimated future cash flows)
in the period in which they are incurred. SFAS 143 requires the associated
asset retirement costs to be capitalized as part of the carrying amount of the
long-lived asset. The asset retirement obligation will be accreted each year
through a charge to expense. The amounts added to the carrying amounts of the
assets will be depreciated over the useful lives of the assets. The Company is
required to implement SFAS No. 143 on January 1, 2003, and it has not
determined the impact that this statement will have on its consolidated
financial position or results of operations.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived
Assets," promulgates standards for measuring and recording impairments of long-
lived assets. Additionally, this standard establishes requirements for
classifying an asset as held for sale, and changes existing accounting and
reporting standards for discontinued operations and exchanges for long-lived
assets. The Company is required to implement SFAS No. 144 on January 1, 2002,
and it does not expect the implementation of this standard to have a material
effect on the Company's financial position or results of operations.
19
Item 3: Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to the risk of changing interest rates. Interest on
$2.9 million of the Company's long-term debt with an interest rate of 4.64% at
September 30, 2001 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 $29,000 per year if the Company were to maintain
the same debt level and structure.
PART II. OTHER INFORMATION
Item 1. 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 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
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 --Allonge to Note by Conrad Shipyard, L.L.C. and Whitney National Bank,
Dated October 30, 2001, in the Original Principal Amount of
$10,000,000.00.
10.2 --Employment Agreement effective August 13, 2001, between Conrad
Industries, Inc.. and Kenneth G. Myers, Jr..
10.3 --Transition Agreement dated August 20, 2001, between Conrad Shipyard,
L.L.C. and William H. Hidalgo, Sr.
10.4 --Agreement dated August 20, 2001, between Conrad Industries, Inc. and
Cecil A. Hernandez.
(b) Reports on Form 8-K
On August 21, 2001 the Company filed a Current Report on Form 8-K reporting
under Item 5 a press release dated August 20, 2001 disclosing the Company's
management transition plans.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 14, 2001
CONRAD INDUSTRIES, INC.
By: /s/ Cecil A. Hernandez
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Cecil A. Hernandez
Senior Vice President and
Chief Financial Officer
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