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 $12.0 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 $8.7 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 $3.3 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 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 30 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.
Items 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 all such proceedings, even if determined adversely, would not have a material adverse effect on the Company's business or financial condition.
Item 4:
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, 1998.
Part II
Item 5:
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 20, 1999, there were approximately 1,038 holders of record of the Company's Common Stock.
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 since trading in the Common Stock began on June 10, 1998.
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."
Item 6:
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, 1998 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 financial statements and notes thereto included elsewhere in this report.
- -------- (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 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.
Item 7:
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 in which it sold 2.1 million shares of common stock for net proceeds of $23.7 million ($1.4 million was received in July 1998) after underwriting discounts of $1.8 million. The Company used all of the proceeds to repay $10 million of indebtedness under the Company's revolving credit facility and the remaining net proceeds were used to repay $13.7 million of the approximately $25 million of indebtedness under a term loan.
The demand for the Company's products and services is dependent upon a number of factors, including the economic condition of the Company's customers and markets, the age and state of repair of the vessels operated by the Company's customers and the relative cost to construct a new vessel as compared with repairing an older vessel. Demand for the Company's products and services has been adversely impacted recently by decreased activity in the offshore oil and gas industry. Activity by commercial and government customers to construct new vessels to replace older vessels and upgrade the capacity or functionality of existing vessels has remained steady. In addition, the Orange Acquisition has enabled the Company to capitalize on the demand for new vessel construction by government customers such as the U.S. Army, U.S. Navy, U.S. Coast Guard and Corps of Engineers. The age of barges and other vessels operated by the Company's customers has also led to a steady mix of repair activities.
The Company is engaged in various types of construction under contracts that generally range from one month to 36 months in duration. The Company uses the percentage-of-completion method of accounting and therefore, takes into account the estimated costs, estimated earnings and revenue to date on fixed- price contracts not yet completed. The amount of revenue recognized is equal to the portion of the total contract price that the labor hours incurred to date bears to the estimated total labor hours, based on current estimates to complete. This method is used because management considers expended labor hours to be the best available measure of progress on these contracts. Revenues from cost-plus-fee contracts are recognized on the basis of cost incurred during the period plus the fee earned.
Most of the contracts entered into by the Company for new vessel construction, whether commercial or governmental, are fixed-price contracts under which the Company retains all cost savings on completed contracts
but is liable for all cost overruns. The Company develops its bids for a fixed price project by estimating the amount of labor hours and the cost of materials necessary to complete the project and then bids such projects in order to achieve a sufficient profit margin to justify the allocation of its resources to such project. The Company's revenues therefore may fluctuate from period to period based on, among other things, the aggregate amount of materials used in projects during a period and whether the customer provides materials and equipment. For projects in which the customer provides material or equipment, the Company generally charges material handling and warehousing fees, resulting in higher profit margins than for projects in which the Company provides the materials and equipment. The Company generally performs conversion and repair services on the basis of cost-plus-fee arrangements pursuant to which the customer pays a negotiated labor rate for labor hours spent on the project as well as the cost of materials plus a margin on materials purchased.
Recent Events
On December 12, 1997, Conrad acquired all of the outstanding shares of common stock of Orange Shipbuilding, a shipyard located in Orange, Texas, for a cash purchase price and related acquisition cost of $25.8 million. The cash purchase price and related acquisition cost were funded with $25.0 million of borrowings and the remainder with existing cash. At the purchase date, Orange Shipbuilding had $3.0 million in cash, resulting in a net purchase price of $22.8 million. The Orange Acquisition has been accounted for under the purchase method. The purchase price was allocated based on estimated fair market values at the date of acquisition. This resulted in an excess of purchase price over fair value of assets acquired of approximately $15.7 million, which excess amount will be amortized over 20 years on a straight- line basis. Due to the close proximity of the acquisition date to Conrad's fiscal year end, results of operations subsequent to the acquisition of Orange Shipbuilding are not included in Conrad's operating results for the year ended December 31, 1997. The results of operation of Orange Shipbuilding from the date of acquisition to the end of Conrad's fiscal year were insignificant.
Conrad operated as an S corporation for federal and state income tax purposes since April 1, 1990. As a result, Conrad was not subject to federal or state income tax until after May 1998, and the entire earnings of Conrad were subject to tax directly at the shareholder level. In May 1998, Conrad's S election was terminated and thereafter Conrad became subject to corporate level income taxation. A one-time net deferred tax liability charge to earnings of $675,000 was made during the second quarter of 1998 in connection with the termination of its S Corporation status. Orange Shipbuilding was also taxed as an S corporation from April 1, 1995 to October 1, 1997, when it elected to terminate its S corporation status, and as a result became subject to corporate income taxes for periods commencing on or after such date. Orange Shipbuilding recorded a one-time net deferred tax liability of approximately $200,000 in the fourth quarter ended December 31, 1997.
In the past, Conrad made distributions to its shareholders in order to fund their federal and state income tax liabilities that resulted from Conrad's S corporation status. In accordance with this practice, during the first quarter of 1998, Conrad distributed approximately $506,000 to its shareholders and distributed an additional $1.8 million prior to the effective date of the Offering to fund the shareholders' federal and state income tax liabilities estimated through the date of termination of its S corporation status.
On May 22, 1998, prior to the Reorganization, Conrad made an additional $10 million distribution ("Shareholder Distribution") to its shareholders, which amount represented undistributed earnings of Conrad, estimated through the date of the termination of Conrad's S corporation status, on which Conrad's shareholders incurred federal and state income taxes. Conrad also made a distribution of certain nonoperating assets with a fair market value of approximately $406,000 to its shareholders prior to the completion of the Offering. The distributions of cash and non-operating assets were made prior to the completion of the Offering, and Conrad funded the Shareholder Distributions with borrowing under its revolving credit facility, which borrowings were repaid with proceeds of the Offering.
In the first quarter of 1998, Conrad issued shares of restricted common stock to William H. Hidalgo, the President and Chief Executive Officer, and Cecil A. Hernandez, the Vice President-Finance and Administration
and Chief Financial Officer, in consideration of past services rendered. The agreements related to such restricted stock provide that 50% of the shares of common stock issued to each such executive would be subject to forfeiture in the event of the voluntary termination of employment by such executive for other than "good reason" prior to the expiration of the initial three-year term of employment specified in the employment agreement of such executive, provided that such restriction would lapse in the event of (i) the termination by the Company of such executive's employment for reasons other than "cause" (as defined) or (ii) the death, disability or retirement (at or after the age of 65) of such executive and will also lapse with respect to 33 1/3% of such restricted shares on each of the first three anniversaries of the completion of the Offering. The shares of common stock of Conrad issued to Mr. Hidalgo and Mr. Hernandez were exchanged, respectively, for 385,695 and 153,819 shares of common stock of the Company pursuant to the Reorganization. In connection with the issuance of shares of Conrad common stock, Mr. Hidalgo and Mr. Hernandez, executed promissory notes in the amounts of $239,870 and $97,400, respectively, representing their tax liabilities paid by the Company. These tax notes were repaid in full by Mr. Hidalgo and Mr. Hernandez in July 1998. In connection with the issuance of these shares to Messrs. Hidalgo and Hernandez, the Company estimated it would recognize aggregate compensation expense of $8.6 million, of which $4.3 million was recognized in the first quarter of 1998 and the remainder was estimated to be recognized over a three- year vesting period, of which $360,000 was expensed in the second quarter of 1998. During the third quarter of 1998 the executives surrendered and the Company cancelled an aggregate 247,277 of their restricted shares in order to eliminate the recurring compensation expense associated with the lapse of the restrictions. As a result of the cancellation of the restricted shares, the remainder of the estimated compensation expense of $4.0 million will not be recognized in the future. On November 3, 1998, the executives were awarded options to purchase an aggregate of 400,000 shares of Company common stock at the market price of the stock on the date of the award.
Results of Operations
The following table sets forth certain historical data of the Company and percentage of revenues for the periods presented.
- -------- (1) 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.
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.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
During the year ended December 31, 1997, Conrad generated revenue of $22.1 million, a decrease of approximately $1.1 million, or 4.6%, compared to $23.2 million generated in 1996. This decrease was due primarily to a $750,000, or 6.6% decrease in new construction and a $307,000, or 2.6%, decrease in conversions and repairs. The decrease in revenue from new vessel construction during 1997 occurred primarily because the mix of jobs completed or in progress during 1997 required less materials and equipment as compared to projects completed or in progress in 1996. The decrease in conversion and repair revenue was primarily attributable to (i) a slight decrease in the availability of skilled laborers and (ii) downtime on one of the Company's drydocks while it was being modified to facilitate the movement of vessels from the drydock to dockside land repair areas.
Gross profit increased $914,000, or 14.8%, to $7.1 million (32.0% of revenue) in 1997 as compared to gross profit of $6.2 million (26.6% of revenue) in 1996, This increase was primarily due to increase in negotiated prices for fixed price contracts, increase in negotiated labor rates for conversion and repair services, improved efficiencies resulting form multi- vessel contracts, the absence of a charge of approximately $510,000 incurred in 1996 relating to the settlement of a contract dispute and a decrease of approximately $360,000 in insurance costs. The contract dispute settlement represented the amount of contract retainage and billings for change orders for one job that the customer refused to pay due to a delay in the delivery of the vessel. The delay in the delivery of the vessel was caused by the change orders submitted by the customer. The Company elected to settle this dispute in lieu of lengthy and costly litigation. The Company realized a profit with respect to this project taking into account this settlement.
Selling, general and administrative expenses increased to $2.2 million (10.1% of revenue) in 1997 as compared to $1.8 million (8.0% of revenue) in 1996 due to an increase in administrative wages, bonuses, payroll taxes and 401 (k) expenses in 1997 as compared to 1996.
Income before income taxes increased $607,000, or 14.1%, to $4.9 million (22.2% of revenue) in 1997 as compared to $4.3 million (18.5% of revenue) in 1996. This increase resulted primarily from the factors discussed above.
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 $2.0 million, $6.1 million, and $5.3 million for 1998, 1997, and 1996 respectively. 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 and 1996 were 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 a net reduction in debt of $15.4 million in 1998, net borrowings for all credit arrangements were $24.1 million during 1997, primarily in connection with the Orange Acquisition and a net reduction in debt of $668,000 in 1996. The Company's working capital position was $7.7 million, $7.8 million, and $4.4 million at December 31, 1998, 1997, and 1996, respectively.
The Company's capital requirements historically have been primarily for improvements to its 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, and $2.0 million in 1996, of which $1.0 million was for the purchase of the Amelia property. 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 a commercial bank (the "Loan Agreement"), which specifies the terms of the Term Loan and the Revolving Credit Facility. The Revolving Credit Facility permits the Company to borrow up to $10.0 million for working capital and other general corporate purposes, including the funding of acquisitions. The Revolving Credit Facility bears interest on the same terms as the Term Loan and matures on April 30, 1999. A fee of 0.25% per annum on the unused portion of the Revolving Credit Facility will be charged quarterly. The Company borrowed $10.0 million under the Revolving Credit Facility prior to the
Reorganization in order to fund part of the Shareholder 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 March 18, 1999, and thereafter at the option of the Company either at the lender's prime rate minus 0.5% or LIBOR plus 2.0%. The Company is currently utilizing the LIBOR rate option and the interest rate at December 31, 1998 was 7.41% per annum. The Term Loan required the payment of interest only until May 1998 and thereafter the Term Loan is payable in 70 monthly principal payments of $209,000 plus interest, with a final payment due on April 2004. The Term Loan is secured by substantially all of the Company's assets. During June 1998, the Company repaid $12.3 million of the outstanding indebtedness under the Term Loan with a portion of the net proceeds of the Offering. The Term Loan was reduced by an additional $1.4 million in July 1998 with additional proceeds of the Offering. The Company additionally commenced principal repayments in June, resulting in a balance due under the Term Loan of $9.9 million at December 31, 1998.
For 1998 net cash used in financing activities was $4.7 million. This net decrease was composed of cash provided from borrowings of the Revolving Credit Facility of $10.0 million, borrowings on insurance finance notes of $687,000 and net proceeds from sale of common stock of $23.0 million less cash used in the principal repayment of debt of $26.1 million and distributions to shareholders of $12.3 million prior to the effective date of the Offering. Net cash provided by (used in) financing activities for 1997 and 1996 was $22.1 million and ($2.6) million, respectively. The increase was principally due to the incurrence of the Term Loan in 1997 to fund the purchase price of the Orange Acquisition.
Management believes that the Company's existing working capital, cash flows from operations and available borrowing under the Revolving Credit Facility will be adequate to meet its working capital needs and planned capital expenditures for property and equipment through 1999. The Company may pursue attractive acquisition opportunities if and when such opportunities arise. The timing, size or success of any acquisition effort and the associated potential capital commitments cannot be predicted.
Due to the relatively low levels of inflation experienced in fiscal 1998, 1997, and 1996, inflation did not have a significant effect on the results of the Company in those fiscal years.
Year 2000 Compliance
The Company is in the process of assessing its critical information technology (IT) systems and non-IT systems and is developing and initiating a plan to address deficiencies. The Company believes that it is on schedule to successfully implement the required systems and equipment modifications necessary to make the Company's critical systems Year 2000 compliant by mid- 1999.
The Company's critical IT systems are comprised primarily of a PC-based general ledger accounting software package and related application modules, a fixed asset system, payroll system and requisition system. The assessment of the Company's IT systems found that some of the IT systems were not Year 2000 compliant. Changes to make these systems Year 2000 compliant are being made in conjunction with the Company's planned upgrade cycle, which should be completed prior to June 30, 1999.
Non-IT systems are comprised primarily of computer-controlled equipment and electronic devices, including equipment with embedded microprocessors which are used to operate equipment at the Company's production and repair facilities. Additionally, telephone systems and other office-based electronic equipment
were considered in the assessment of non-IT systems. With respect to production and repair facilities, the Company's assessment indicates that there will be no disruption in the operations of its equipment as a result of the Year 2000 problem. The Company plans to conduct testing of its equipment with manufacturers' representatives during the first quarter of 1999 to verify the current assessment. With respect to other office based non-IT systems, the Company's assessment found that it will be necessary to replace or modify some existing equipment, which should be completed by mid-1999.
The total cost to make all systems and equipment Year 2000 compliant is currently estimated at $45,000, exclusive of software and systems that are being upgraded in the normal business cycle. Approximately $2,000 has been spent in modifying and upgrading systems and equipment to date. The costs incurred to date and future costs with respect to Year 2000 compliance are expected to be funded with cash from operations.
The Company is in the process of initiating communication with most significant suppliers, customers and financial service providers on the Year 2000 issue. This communication will be used to determine the extent to which the Company is vulnerable to these third parties' failure to remedy their own Year 2000 issues. Although there is currently no indication that these business partners will not achieve their Year 2000 compliance plans, there can be no guarantee that the systems of other companies on which the Company relies will be timely converted. Additionally, there can be no guarantee that the Company will not experience Year 2000 problems. If the Company or its business partners experience Year 2000 compliance problems, the Company could experience business interruption and other adverse business consequences which could have a material adverse impact on the Company's results of operations, liquidity or financial position. The Company believes that the most likely negative effects, if any, could include delays in payments to the Company from customers or payments by the Company to suppliers and disruptions in shipments of equipment and materials required to fabricate the Company's products.
Based on the Company's current assessment of its IT systems, non-IT systems and business partners, the Company has not, to date, developed a contingency plan for Year 2000 issues. The Company will continue to monitor its decision on contingency planning and such a plan will be developed if and when it is considered prudent to do so.
New Accounting Pronouncements
During 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No., 130, "Reporting Comprehensive Income" ("SFAS 130") and Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 130 provides guidance for the presentation and display of comprehensive income. SFAS 131 establishes standards for disclosure of operating segments, products, services, geographic areas and major customers. The Company has adopted SFAS 130 and has concluded that no additional Statement of Comprehensive Income within its consolidated financial statements is required at this time. In addition, the Company has considered the implications of SFAS 131 and has included the required disclosures within the notes to the consolidated financial statements.
In February 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards Number 132, "Employers' Disclosure about Pensions and Other Postretirement Benefits" ("SFAS 132"). SFAS 132 revises the standards for disclosure of pension and other postretirement benefit plans by standardizing the disclosure requirements, requiring additional information on changes in the benefit obligations and fair values of plan assets and eliminating certain disclosures requirements no longer considered to be useful. These new disclosure requirements are designed to improve the understandability of benefit disclosures for financial analysis. The Company has considered the implications of SFAS 132 and has concluded that no additional disclosure is required at this time.
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 111"). SFAS 133 establishes accounting and reporting standards for derivative instruments and hedging activities. The Company has considered the implications of SFAS 133 and has concluded that its implementation will not have a material effect on the Company's consolidated financial statements.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 8.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data required by this item are incorporated under Item 14, Part IV of this Form 10-K.
Item 9.
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Part III.
Item 10.
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 is hereby incorporated by reference from the company's definitive proxy statement prepared in connection with the 1999 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, 1998.
Item 11.
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, 1998.
Notwithstanding the foregoing, in accordance with the instructions to Item 402 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.
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 Conrad Industries is hereby incorporated by reference from the company's definitive proxy statement prepared in connection with the 1999 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, 1998.
Item 13.
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 1999 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, 1998.
Part IV.
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Documents Filed as a Part of this Report
1. Financial Statements:
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.
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.
- -------- * Filed herewith. ** Management contract or compensation plan.
(b) Reports on Form 8-K:
Conrad Industries did not file any Current Reports on Form 8-K with the Securities and Exchange Commission during the fourth quarter of 1998.
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, 1998 and 1997, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
New Orleans, Louisiana February 24, 1999
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
See notes to consolidated financial statements.
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
See notes to consolidated financial statements.
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (In thousands)
See notes to consolidated financial statements.
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
See notes to consolidated financial statements.
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 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 year ended December 31, 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 of operations for the year ended December 31, 1997. The results of operations of Orange Shipbuilding from the date of acquisition to the end of Conrad's 1997 fiscal year 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 matures on April 30, 1999.
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
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
as reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
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 $783,000 at December 31, 1998.
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 closely approximates fair value at December 31, 1998 and 1997.
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--During 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130") and Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 130 provides guidance for the presentation and display of comprehensive income. SFAS 131 establishes standards for disclosure of operating segments, products, services, geographic areas and major customers. The Company has adopted SFAS 130 and has concluded that no additional Statement of Comprehensive Income within its consolidated financial statements is required at this time. In addition, the Company has considered the implications of SFAS 131 and has included the required disclosures within the notes to the consolidated financial statements. See Note 11.
In February 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 132, "Employers' Disclosure about Pensions and Other Postretirement Benefits" ("SFAS 132"). SFAS 132 revises the standards for disclosure of pension and other postretirement benefit plans by standardizing the disclosure requirements, requiring additional information on changes in the benefit obligations and fair values of plan assets, and eliminating certain disclosure requirements no longer considered to be useful. The new disclosure requirements are designed to improve the understandability of benefit disclosures for final analysis. The Company has considered the implications of SFAS 132 and has concluded that no additional disclosure is required at this time.
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting standards for derivative instruments and hedging activities. The Company has considered the implications of SFAS 133 and has concluded that its implementation will not have a material effect on the Company's consolidated financial statements.
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):
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
The following unaudited pro forma summary presents the consolidated results of operations of Conrad as if the purchase acquisition had occurred on January 1, 1996 and includes the financial information of Orange Shipbuilding for its fiscal years ended September 30, 1996 and 1997 (in thousands, except per share data):
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, 1996, or of future results of operations of the consolidated entities.
3.RECEIVABLES
Receivables consisted of the following at December 31, 1998 and 1997 (in thousands):
Included above in amounts billed is an allowance for doubtful accounts of $20,000 and $16,000 at December 31, 1998 and 1997, respectively. During 1996, the allowance included $510,000 charged to expense relating to the resolution of a contract dispute. During 1998 and 1997, there were no significant transactions recorded in the allowance for doubtful accounts.
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 1998, substantially all is expected to be collected within the next twelve months.
Information with respect to uncompleted contracts as of December 31, 1998 and 1997 is as follows (in thousands):
The above amounts are included in the accompanying balance sheets under the following captions (in thousands):
4.PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at December 31, 1998 and 1997 (in thousands):
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5.LONG-TERM DEBT
Long-term debt consisted of the following at December 31, 1998 and 1997 (in thousands):
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. Subsequent to year end, Conrad refinanced this short-term obligation into a term loan. The term loan bears interest at LIBOR rate plus 2.0% until March 18, 1999. Conrad will then have the option to convert the interest rate to either the lender's prime rate less 0.5% or LIBOR rate plus 2.0%. Interest only was payable monthly until May 1998. Thereafter the term loan became payable in 70 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 and is guaranteed up to $2.0 million by J. Parker Conrad, Co-Chairman of the Board of Directors. 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, 1998, Conrad was in compliance with these covenants.
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 matures on April 30, 1999. A fee of 0.25% per annum on the unused portion of the line of credit will be charged quarterly. At December 31, 1998, $10.0 million was available under the facility.
The Company enters into short-term notes payable to finance certain of its insurance premiums. At December 31, 1998 and 1997 the amounts outstanding related to these notes payable were $90,000 and $338,000, respectively. The notes are secured by Conrad's insurance policies and provide for annual interest rates of 7.72% and 8.29% at December 31, 1998 and 1997, respectively.
Annual maturities of long-term debt at December 31, 1998 are as follows (in thousands):
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6.SHAREHOLDERS' EQUITY
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 No. 15 with basic earnings per share and diluted earnings per share. The calculation of basic earnings per share excludes any dilutive effect of stock options, while diluted earnings per share includes the dilutive effect of stock options. Per share and weighted average share amounts for all prior periods 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 6,167,310, 4,660,486 and 4,660,486 for the years ended December 31, 1998, 1997 and 1996, 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 common stock to William H. Hidalgo, the President and Chief Executive Officer, and Cecil A. Hernandez, the Vice President-Finance and Administration and Chief Financial Officer, in consideration of past services rendered. The agreements related to such restricted stock provide that fifty percent of the shares of common stock issued to each such executive would be subject to forfeiture in the event of the voluntary termination of employment by such executive for other than "good reason" prior to the expiration of the initial three-year term of employment specified in the employment agreement of such executive, provided that such restriction would lapse in the event of (i) the termination by the Company of such executive's employment for reasons other than "cause" (as defined) or (ii) the death, disability or retirement (at or after the age of 65) of such executive and will also lapse with respect to 33 1/3% of such restricted shares on each of the first three anniversaries of the completion of the Offering. The shares of common stock of Conrad issued to Mr. Hidalgo and Mr. Hernandez were exchanged, respectively, for 385,695 and 153,819 shares of common stock of the Company pursuant to the Reorganization. In connection with the issuance of shares of Conrad common stock, Mr. Hidalgo and Mr. Hernandez, executed promissory notes in the amounts of $239,870 and $97,400, respectively, representing their tax liabilities paid by the Company. These tax notes were repaid in full by Mr. Hidalgo and Mr. Hernandez in July 1998. In connection with the issuance of these shares to Messrs. Hidalgo and Hernandez, the Company estimated it would recognize aggregate compensation expense of $8.6 million, of which $4.3 million was recognized in the first quarter of 1998 and the remainder was estimated to be recognized over a three- year vesting period, of which $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, the executives were awarded options to purchase an aggregate of 400,000 shares of Company stock at the market price of the stock on the date of the award.
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,
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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 700,000 shares have been authorized and reserved for issuance. No awards may be granted under the Stock Plan after March 31, 2008.
The following is a summary of the option activity for the year ended December 31, 1998:
The following table summarizes information about stock options outstanding at December 31, 1998:
During the fourth quarter of 1998, 121,000 options previously issued during the second quarter 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 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):
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.
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 1998, no warrants had been exercised.
7.EMPLOYEE BENEFITS
In August 1997, Conrad established a 401(k) plan that covers all employees who meet certain eligibility requirements. Contributions to the plan by Conrad are made at the discretion of the Board of Directors. Contribution expense was $88,000 and $42,000 for the years ended December 31, 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 has 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):
State income taxes included above are not significant for the year presented.
The pro forma provision for income taxes varied from the Federal statutory income tax rate due to the following (in thousands):
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, 1998 and 1997 (1997 related to Orange Shipbuilding) are as follows (in thousands):
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The net deferred tax liabilities are included in the following balance sheet captions (in thousands):
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, 1998, 1997 and 1996 are summarized as follows (in thousands):
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, 1998, 1997 and 1996 were $171,000, $164,000 and $121,000, respectively. The Company believes that such transactions were made on a competitive basis at market prices.
In 1991, the Company and J. Parker Conrad, Co-Chairman of the Board of Directors entered into a Key Executive Insurance Agreement pursuant to which each year the Company had paid $20,000 of the annual premium due under an insurance policy on Mr. Conrad's life and it was the beneficiary of $650,000 of the death benefit under the policy. During the year ended December 31, 1998, the Company and Mr. Conrad agreed to terminate this agreement, allowing Mr. Conrad to select the beneficiary of the death benefit. The Company did not pay the annual premium for the year ended December 31, 1998.
As discussed in Note 5 to the financial statements, J. Parker Conrad has guaranteed the indebtedness under the term loan up to $2.0 million.
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.
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Repair and Conversions
The Company's conversion projects primarily consist of lengthening the midbodies of vessels, modifying vessels to permit their use for a different type of activity and other modifications to increase the capacity or functionality of a vessel. The Company also derives a significant amount of revenue from repairs made as a result of periodic inspections required by the U.S. Coast Guard, the American Bureau of Shipping and other regulatory agencies.
The Company evaluates the performance of its segments based upon gross profit. Selling, general and administrative expenses, executive compensation expense, interest expense, other income (expense), and income taxes are not allocated to the segments. Accounting policies are the same as those described in Note 1, "Summary of Significant Accounting Policies". Intersegment sales and transfers are not significant.
Selected information as to the operations of the Company by segment is as follows (in thousands):
Certain other financial information of the Company by segment is as follows (in thousands):
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):
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
At December 31, 1998 and 1997, the Company had outstanding a contract performance bond issued by a third party in the amount of $3,660,000.
The Company has employment agreements with certain of its executive officers which generally provide for an initial term of three years and minimum annual total compensation of $851,000.
The Company is a party to various legal proceedings primarily involving commercial claims and workers' compensation claims. While the outcome of these claims and legal proceedings cannot be predicted with certainty, management believes that the outcome of all such proceedings, even if determined adversely, would not have a material adverse effect on the Company's consolidated financial statements.
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 1998 and 1997 were as follows (in thousands, except per share data):
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.
By: /s/ William H. Hidalgo ----------------------------------
William H. Hidalgo Date: March 31, 1999 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.
INDEX TO EXHIBITS
- -------- * Filed herewith. ** Management contract or compensation plan.