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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 000-24263
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CONRAD INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other
jurisdiction of 72-1416999
incorporation or (IRS Employer
organization) Identification No.)
1100 Brashear Ave., Suite 70381
200 (Zip code)
P.O. Box 790
Morgan City, Louisiana
(Address of principal
executive offices)
(985) 702-0195
(Registrant's telephone number, including area code)
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Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value per share
Preferred Stock Purchase Rights
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulations S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [_] No [X]
The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant was approximately $9.7 million as of June
28, 2002, based on the closing sales price of the registrant's common stock on
the NASDAQ National Market on such date of $3.75 per share. For purposes of the
preceding sentence only, all directors, executive officers and Katherine Conrad
Court are assumed to be affiliates. As of March 26, 2003, 7,235,954 shares of
common stock of Conrad Industries, Inc. were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Conrad Industries, Inc.'s definitive proxy statement relating to
the registrant's 2003 annual meeting of stockholders, which proxy statement
will be filed under the Securities Exchange Act of 1934 within 120 days of the
end of the registrant's fiscal year ended December 31, 2002, are incorporated
by reference into Part III of this Form 10-K.
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PART I
Item 1: Business
BUSINESS
General
Conrad Industries, Inc. (the "Company") specializes in the construction,
conversion and repair of a wide variety of marine vessels for commercial and
governmental customers and the fabrication of modular components of offshore
drilling rigs and floating, production, storage and offloading vessels
("FPSOs"). The Company was incorporated in March 1998 to serve as the holding
company for Conrad Shipyard, Inc. ("Conrad") and Orange Shipbuilding Company,
Inc. ("Orange Shipbuilding"). Conrad has operated since 1948 at its shipyard in
Morgan City, Louisiana. In December 1997, Conrad acquired Orange Shipbuilding
to increase its capacity to serve Conrad's existing markets and to expand its
product capability into the construction of additional types of marine vessels.
In February 1998, Conrad commenced operations at a conversion and repair
facility in Amelia, Louisiana ("Amelia Topside"), thereby expanding its
capacity to provide conversion and repair services for marine vessels. The
Company completed its initial public offering of common stock on June 15, 1998.
In 2000, Conrad Shipyard, Inc. was converted into a Louisiana limited liability
company named Conrad Shipyard, L.L.C. In March 2001, Conrad put in service, at
the Company's Morgan City shipyard, an internally constructed drydock which is
280' long and 160' wide with a lifting capacity of 10,000 tons which has
increased the Company's repair and conversion capacity. In February 2003, the
Company moved this dock and its next largest drydock (200' long and 95' wide
with a lifting capacity of 3,000 tons) to a second conversion and repair
facility in Amelia, Louisiana ("Amelia Deepwater") and commenced operations.
This facility allows the Company to handle vessels with deeper drafts than the
Company has historically been able to service and therefore opens up a market
niche from which the Company has historically been limited from participating.
The Company constructs a variety of marine vessels, including large and
small deck barges, single and double hull tank barges, lift boats, push boats,
tow boats, offshore tug boats, offshore supply vessels (OSVs), and aluminum
crew boats. The Company fabricates components of offshore drilling rigs and
FPSOs, including sponsons, stability columns, blisters, pencil columns and
other modular components. The Company's conversion projects primarily consist
of lengthening the midbodies of vessels, modifying vessels to permit their use
for a different type of activity and other modifications to increase the
capacity or functionality of a vessel. The Company also derives a significant
amount of revenue from repairs made as a result of periodic inspections
required by the U.S. Coast Guard, the American Bureau of Shipping ("ABS") and
other regulatory agencies.
The Company serves a variety of customers and markets, including the
offshore oil and gas industry, other commercial markets, various local and
state governments and the U.S. government. The Company believes that its
ability to construct a variety of vessels on a cost-effective basis allows it
to selectively pursue vessel construction opportunities that arise out of the
changing demands of the industries served by the Company.
The Company currently owns and operates four shipyards located along the
Gulf Coast in Morgan City, Louisiana, Orange, Texas and Amelia, Louisiana. The
Company's shipyard in Morgan City is located on approximately 11 acres on the
Atchafalaya River, approximately 30 miles from the Gulf of Mexico, and its
Orange shipyard is located on approximately 12 acres on the Sabine River, 37
miles from the Gulf of Mexico. In February 1998, the Company commenced
operations at a conversion and repair facility in Amelia, Louisiana located on
approximately 16 acres on Bayou Boeuf/Intracoastal Waterway, approximately five
miles from Morgan City. The Company conducts its marine vessel construction
activities indoors at its Morgan City and Orange shipyards in approximately
235,000 square feet of enclosed building space designed specifically for the
construction of marine vessels up to 400 feet in length. In addition, during
2002, the Company completed an extension of one of its fabrication buildings at
the Morgan City yard at a cost of approximately $800,000, which increased the
Company's enclosed building space by approximately 15,000 square feet and
increased capabilities for pre-fabricated components and modular construction
techniques.
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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 Bayou
Boeuf/Intracoastal Waterway approximately 30 miles from the Gulf of Mexico and
is within one mile of the other existing Amelia facility. Approximately 14
acres of the property have been developed as a repair and conversion facility.
The development includes clearing land, grubbing, dredging, installation of a
steel sheet-pile bulkhead system, dry excavation, construction of a 5,400
square foot building, other infrastructure improvements and outfitting with
tools and equipment at an anticipated total cost of approximately $7.6 million.
As of December 31, 2002, the Company had incurred $5.1 million developing the
facility. In February 2003, the Company moved its two largest drydocks to the
facility and commenced operations. The facility allows the Company to handle
vessels with deeper drafts than the Company has historically been able to
service at its other facilities. In addition, the infrastructure improvements
also allow for the potential future development of the facility to accommodate
vessel construction should the market so dictate.
The Company began construction in May 2000 of a new ABS classed and
certified state-of-the-art drydock with a lifting capacity of 10,000 tons,
which is 7,000 tons greater than the 3,000 ton lifting capacity of the
Company's next largest drydock. The cost was $5.7 million. The new 280' long by
160' wide dock allows the Company to (1) increase repair and conversion
capacity; (2) lift and compete to repair larger vessels such as derrick and
pipe laying barges and the large offshore service vessels recently built for
the deep water drilling activities in the Gulf of Mexico; and (3) launch larger
new vessel construction projects more competitively. The drydock was put into
operation during March 2001 at the Morgan City shipyard, bringing the total
number of drydocks operated by the Company to six.
Historical Background
The Company was founded in 1948 by J. Parker Conrad, the Company's
Co-Chairman of the Board of Directors, and began operations at its shipyard in
Morgan City, Louisiana. In 1952, the Company expanded its operations into the
repair business through the acquisition of one of the first drydocks on the
Gulf Coast. In 1962, the Company began building steel barges and other vessels
for the offshore oil and gas industry. Due to adverse conditions in the oil and
gas industry, the Company refocused its operations in 1984 on the construction
and repair of vessels for other commercial and foreign markets. In December
1996, the Company acquired a conversion and repair facility in Amelia,
Louisiana, which commenced operations in the first quarter of 1998. In February
2003, the Company commenced repair and conversion operations at a second
facility in Amelia, Louisiana, as discussed above under "General".
In December 1997, Conrad purchased Orange Shipbuilding (the "Orange
Acquisition") to expand its construction capacity and to expand its production
capabilities into additional types of marine vessels, including vessels for the
U.S. government and the fabrication of modular components for offshore drilling
rigs and FPSOs. Orange Shipbuilding has been engaged in shipbuilding since
1974. The Orange shipyard designed and built a variety of vessels for use in
offshore Gulf of Mexico oil and gas exploration and production activities
before that sector collapsed in 1983. Orange Shipbuilding refocused its
operations on small to medium-sized vessels for the U.S. government after this
decline. During 1996 and 1997, in connection with the upturn in offshore oil
and gas exploration and production in the Gulf of Mexico, Orange Shipbuilding
capitalized on the demand for subcontractors that could fabricate modular
components for offshore drilling rigs and FPSOs on a timely and cost effective
basis.
Operations
The Company's principal operations consist of the construction, conversion
and repair of a wide variety of marine vessels for commercial and governmental
customers and the fabrication of modular components of offshore drilling rigs
and floating, production, storage and offloading vessels ("FPSOs").
Current Projects
The Company's construction and fabrication projects in progress as of
December 31, 2002 consisted of 17 vessels: two small tugs, four 75-foot twin
screw tug boats, a 94-foot Z-drive tug, a 100-foot containment barge, a
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120-foot shale barge, two 120-foot deck barges, three 124-foot towboats, a
170-foot aluminum crew/supply vessel, and two 180-foot ferries. The Company's
backlog (including remaining contract revenue for projects currently in
progress) as of December 31, 2002 was approximately $36.2 million compared to
$10.4 million as of December 31, 2001. Of this remaining contract revenue,
approximately $16.6 million was attributable to a contract to build three
towboats for the U.S. Army Corps of Engineers and approximately $9.5 million
was attributable to a contract to build a ferry for the Alaska Marine Highway
System. The Company anticipates that the majority of the aggregate remaining
revenue from firm contracts as of December 31, 2002 will be realized during
fiscal 2003.
Construction of Vessels
The Company manufactures a variety of small and medium sized vessels
principally for commercial and governmental customers. This activity accounted
for 75.1%, 71.7%, and 60.7% of the Company's total revenue for 2002, 2001 and
2000, respectively. The following is a description of the types of vessels
manufactured by the Company:
Offshore and Inland Barges. The Company builds a variety of offshore
barges, including tank, container and deck barges for commercial customers and
YCs (yard carrier barges) and YONs (yard oil Navy barges) for the U.S. Navy.
The Company also builds a variety of inland barges, including deck and tank
barges. The Company has constructed a variety of barges used in the offshore
oil and gas industry, including shale barges, pipe laying barges, oil and gas
drilling barges, and oil and gas production barges. The Company's barges are
also used in marine construction and are used by operators to carry liquid
cargoes such as petroleum and drilling fluids, dry bulk cargoes such as
aggregate, coal and wood products, deck cargoes such as machinery and
equipment, and other large item cargoes such as containers and rail cars. Other
barges function as cement unloaders and split-hull dump scows. The Company has
built barges ranging from 50 feet to 400 feet in length, with as many cargo
tanks, decks and support systems as necessary for the barges' intended
functions.
Lift Boats. Lift boats are used primarily to furnish a stable work platform
for drilling rigs, to house personnel, equipment and supplies for such
operations and to support construction and ongoing operation of offshore oil
and gas production platforms. Lift boats are self-propelled, self-elevating and
self-contained vessels that can efficiently assist offshore platform
construction and well servicing tasks that traditionally have required the use
of larger, more expensive mobile offshore drilling units or derrick barges.
Lift boats have different water depth capacities and have legs, ranging from 65
to 250 feet, that are used to elevate the deck of the boat in order to perform
required procedures on a platform at different heights above the water.
Tug Boats. The Company builds tug boats for towing and pushing, anchor
handling, mooring and positioning, dredging assistance, tanker escort, port
management, shipping, piloting, fire fighting and salvage.
Other Offshore Support Vessels. In addition to lift boats and tug boats,
the Company builds other types of offshore support vessels that serve
exploration and production facilities and support offshore construction and
maintenance activities. These offshore support vessels include supply vessels,
utility vessels and anchor handling vessels.
Aluminum Crew Boats. Aluminum crew boats are used by offshore companies to
transport crews to offshore facilities at a higher speed than the traditional
steel counterparts.
Push Boats/Tow Boats. Push boats, also known as tow boats, are used by
inland waterway operators to push barges.
Drydocks. Drydocks are used to lift marine vessels from the water in order
to facilitate the inspection and/or repair of the vessels' underwater areas. A
drydock is composed of a floodable pontoon with wing walls and its designated
capacity identifies the number of tons it is capable of safely lifting from the
water. The drydock is
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submerged by opening valves to flood compartments, the vessel is placed over
the submerged deck of the drydock, and the vessel is lifted from the water by
closing the valves and pumping the water out of the flooded compartments.
Conversion and Repair Services
Since 1952, the Company's Morgan City facility has been involved in the
repair of vessels and barges. Conversion and repair services accounted for
24.9%, 28.3%, and 39.3% of the Company's total revenue for 2002, 2001, and
2000, respectively. The Company has six drydocks and dockside space capable of
accommodating vessels and barges up to 500 feet long. The Company's marine
repair activities include shot blasting, painting, electrical system and piping
repairs, propeller and shaft reconditioning and ABS certified welding. The
Company's conversion projects primarily consist of lengthening the midbodies of
vessels, modifying vessels to permit their use for a different type of activity
and other modifications to increase the capacity or functionality of a vessel.
All U.S. Coast Guard inspected vessels and ABS classed vessels are required to
undergo periodic inspections and surveys which require regular drydock
examination. Non-U.S. flag vessels are subject to similar regulations. The
inspection of vessels generally results in repair work being required in order
to pass inspection. In addition, vessel owners often elect to make other
repairs or modifications to vessels while in drydock undergoing required
repairs. While the Company is not aware of any proposals to reduce the
frequency or scope of such inspections, any such reduction could adversely
affect the Company's results of operations.
Fabrication of Modular Components
The Company has been involved in the fabrication of modular components for
offshore drilling rigs and FPSOs for the offshore oil and gas industry since
1996. The Company did not engage in any fabrication of modular components
during 2002, 2001 and 2000. However, the Company plans to continue involvement
in this fabrication to supplement peaks and valleys in the vessel construction
segment of our business. The Company's Orange shipyard has performed this
fabrication work in the past as a subcontractor for other marine construction
companies that specialize in these types of rigs and vessels. These fabrication
projects have included sponsons, stability columns, blisters, pencil columns, a
350-ton flare buoy and a 66-man quarters house.
Customers
The Company services a wide variety of customers domestically and
internationally. Customers include marine service companies, offshore support
companies, rig fabricators, offshore and inland barge and support vessel
operators, offshore construction and drilling contractors, diving companies,
energy companies, the U. S. Army, U.S. Army Corps of Engineers, U.S. Navy, U.S.
Coast Guard and various state and local governmental agencies, many of whom
have been customers of the Company on a recurring and long-term basis. The
Company has also provided and continues to provide repair and conversion
services to many of the major offshore support vessel companies and barge
operators. The Company's principal customers may differ substantially on a
year-to-year basis due to the size and limited number of new construction
projects performed each year.
During fiscal 2002, the Company derived 12.4% of its revenues from
ConocoPhillips for the construction of four towboats, 11.6% from the U.S. Army
for the construction of four ST tugs and 10.2% from Oceanic Fleet for the
construction of an aluminum crew/supply vessel. The remaining 65.8% of revenue
was attributable to 87 other customers.
During fiscal 2001, the Company derived 15.8% of its revenues from Danos &
Curole Marine for construction of a lift boat, 12.4% from Marine Industrial
Fabricators for the construction of five lift boat hulls, and 10.8% from the U.
S. Army for the construction of six S.T. Tugs. The remaining 61.0% of revenue
was attributable to 96 other customers.
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During fiscal 2000, the Company derived 19.4% of its revenues from R & B
Falcon Marine for repair and conversion services, 16.3% from the U. S. Army for
the construction of eight S.T. Tugs and 12.1% from Marine Industrial
Fabricators for the construction of five lift boat hulls. The remaining 52.2%
of revenue was attributable to 94 other customers.
Contract Procedure, Structure and Pricing
The Company's contracts for new commercial construction projects generally
are obtained through a competitive bidding process. In addition, contracts for
the construction and conversion of vessels for the U.S. government are
generally subject to competitive bidding. As a safeguard to anti-competitive
bidding practices, the U.S. Army, the U.S. Navy, the U.S. Coast Guard and the
Corps of Engineers employ the concept of "cost realism," which requires that
each bidder submit information on pricing, estimated costs of completion and
anticipated profit margins. The government agencies use this and other data to
determine an estimated cost for each bidder. They then conduct a cost
comparison of the bidders' estimates against an independent estimate to arrive
at a close approximation of the real cost. The award is then made on the basis
of the expected cost to build, which often results in an award to a higher bid
that is considered a best value to the government.
The Company submits a large number of bids to commercial customers. However,
in the case of U.S. government contracts for which the bidding process is
significantly more detailed and costly, the Company tends to be more selective
regarding the projects on which it bids.
Most of the contracts entered into by the Company, whether commercial or
governmental, are fixed-price contracts under which the Company retains all
cost savings on completed contracts but is liable for all cost overruns.
Contracts with the U.S. government are subject to termination by the
government either for its convenience or upon default by the Company. If the
termination is for the government's convenience, the contracts provide for
payment upon termination for items delivered to and accepted by the government,
payment of the Company's costs incurred through the termination date, and the
costs of settling and paying claims by terminated subcontractors, other
settlement expenses and a reasonable profit. Under the Truth in Negotiations
Act, the U.S. government has a right for three years after final payment on
substantially all negotiated U.S. government contracts to examine all of the
Company's cost records with respect to such contracts to determine whether the
Company used and made available to the U.S. government, or to the prime
contractor in the case of a subcontract, accurate, complete and current cost or
pricing information in preparing bids and conducting negotiations on the
contracts or any amendments thereto.
Although varying contract terms may be negotiated on a case-by-case basis,
the Company's commercial and government contracts ordinarily provide for a down
payment, with progress payments at specified stages of construction and a final
payment upon delivery. Final payment under U.S. government contracts may be
subject to deductions if the vessel fails to meet certain performance
specifications based on tests conducted by the Company prior to delivery.
Under commercial contracts, the Company generally provides a six-month to
twelve-month warranty with respect to workmanship and materials furnished by
the Company. In the majority of commercial contracts, the Company passes
through the suppliers' warranties to the customer and does not warrant
materials acquired from its suppliers. The Company's government contracts
typically contain warranties up to two years covering both materials and
workmanship. Historically, expenses of the Company to fulfill such warranty
obligations have not been material in the aggregate.
Bonding and Guarantee Requirements
Although the Company generally meets financial criteria that exempt it from
bonding and guarantee requirements for most contracts, certain contracts with
federal, state or local governments require contract
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performance bonds, and foreign governmental contracts generally require bank
letters of credit or similar obligations. Commercial contracts also may require
contract bid and performance bonds if requested by the customer. As of December
31, 2002, outstanding letters of credit and bonds amounted to $28.1 million.
The Company believes that general industry conditions have led customers to
require performance bonds more often than in the past. The Company believes
that it has secured adequate bonding for potential future job prospects.
Although the Company believes that it will be able to obtain contract bid and
performance bonds, letters of credit, and similar obligations on terms that it
considers acceptable, there can be no assurance it will be successful in doing
so. In addition, the cost of obtaining such bonds, letters of credit and
similar obligations has increased and may continue to increase.
Engineering
The Company generally builds vessels or fabricates modular components based
on its customers' drawings and specifications. The Company also develops
in-house custom designs for customers' special requirements using its computer
aided design (CAD) capabilities and outside engineering services. The Company
has designed and built numerous barges, towboats, tug boats and other vessels.
This library of projects allows the Company to respond quickly to customers'
needs. The process of computer drafting, preparation of construction drawings
and development of cut tapes for numerically controlled plasma cutting of steel
with the latest 3-D software programs allows the Company to minimize
engineering mistakes and costly rework, thereby ensuring the vessel's intended
function while meeting budget estimates.
Materials and Supplies
The principal materials used by the Company in its marine vessel
construction, conversion and repair and modular component fabrication
businesses are standard steel shapes, steel plate and paint. Other materials
used in large quantities include aluminum, steel pipe, electrical cable and
fittings. The Company also purchases component parts such as propulsion
systems, hydraulic systems, generators, auxiliary machinery and electronic
equipment. All these materials and parts are currently available in adequate
supply from domestic and foreign sources. All of the Company's shipyards obtain
materials and supplies by truck or barge. The Company has not engaged, and
currently does not intend to engage, in hedging transactions with respect to
its purchase requirements for materials.
Vessel Construction Process
Once a contract has been awarded to the Company, a project manager is
assigned to supervise all aspects of the project, from the date the contract is
signed through delivery of the vessel. The project manager oversees the
engineering liaison's completion of the vessel's drawings and supervises the
planning of the vessel's construction. The project manager also oversees the
purchasing of all supplies and equipment needed to construct the vessel, as
well as the actual construction of the vessel.
The Company constructs each vessel from raw materials, which are fabricated
by shipyard workers into the necessary shapes to construct the hull and vessel
superstructure. Component parts, such as propulsion systems, hydraulic systems
and generators, auxiliary machinery and electronic equipment, are purchased
separately by the Company and installed in the vessel. The Company uses job
scheduling and costing systems to track progress of the construction of the
vessel, allowing the customer and the Company to remain apprised of the status
of the vessel's construction.
With the assistance of computers, construction drawings and bills of
materials are prepared for each module to be fabricated. Modules are built
separately, and penetrations for piping, electrical and ventilation systems for
each module are positioned and cut during the plasma cutting operation. Piping,
raceways and ducting are also installed prior to the final assembly of modules.
After the modules are assembled to form the vessel, piping, electrical,
ventilation and other systems, as well as machinery, are installed prior to
launching, testing and final outfitting and delivery of the vessel.
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Sales and Marketing
The Company believes that its reputation and experience facilitate the
Company's marketing efforts. The Company believes that its customer-driven
philosophy of quality, service and integrity leads to close customer
relationships that provide the Company with on-going opportunities to be
invited to bid for customer projects.
The Company's marketing and sales strategy is led by the Director of
Marketing and includes utilizing key employees as salespersons to target
relationships previously established and develop new relationships with
customers in the targeted markets. The Company's personnel identify future
projects by contacting customers and potential customers on a regular basis in
order to anticipate projects that will be competitively bid or negotiated
exclusively with the Company. The Company's personnel also keep its customers
advised of available capacity for drydocking, conversion and repair activity.
Marketing efforts are currently focused in four areas: (i) new construction
of all types of barges, drydocks, lift boats, push boats, tug boats and
offshore support vessels; (ii) conversion and repair of barges and offshore
support vessels; (iii) fabrication of modular components of offshore drilling
rigs and FPSOs; and (iv) construction of vessels and barges for state and local
governments, the U.S. Army, U.S. Navy, U.S. Coast Guard and Corps of Engineers.
The Company is actively involved in strengthening its relationships with
customers through continuous interaction among the Company's key personnel,
project managers and the customers' project supervisors with respect to ongoing
projects. To accommodate the needs of the customers' project supervisors, the
Company has established on-site office facilities that such project supervisors
may use during the construction, repair or conversion project. The Company also
seeks to anticipate the current and future needs of its customers as well as
broader industry trends through these relationships.
Competition
U.S. shipbuilders are generally classified in two categories: (i) the two
largest shipbuilders, which are capable of building large scale vessels for the
U.S. Navy and commercial customers; and (ii) other shipyards that build small
to medium-sized vessels for governmental and commercial markets. The Company
does not compete for large vessel construction projects. The Company competes
for U.S. government contracts to build small to medium-sized vessels
principally with four to six U.S. shipbuilders, which may include one or more
of the two largest shipbuilders. The Company competes for domestic commercial
shipbuilding contracts principally with approximately six to eight U.S.
shipbuilders. The number and identity of competitors on particular projects
vary greatly depending on the type of vessel and size of the project, but the
Company generally competes with only three or four companies with respect to a
particular project. The Company competes with over ten shipyards for its
conversion and repair business.
Competition is based primarily on price, available capacity, service,
quality, and geographic proximity. The Company believes that it competes
effectively because of its hands-on, team management approach to design,
project management and construction, its indoor vessel construction
capabilities, its specialized equipment, its advanced construction techniques
and its skilled work force. The Company seeks to differentiate itself from its
competition in terms of service and quality (i) by investing in enclosed work
spaces, modern systems and equipment, (ii) by offering a broad range of
products and services, including modular component fabrication, (iii) through
its hands-on team management, (iv) by targeting of profitable niche products
and (v) by maintaining close customer relationships.
Employees
At December 31, 2002, the Company had 284 employees, of which 42 were
salaried and 242 were hourly. At December 31, 2001, the Company had 333
employees, of which 35 were salaried and 298 were hourly. At
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December 31, 2000, the Company had 342 employees, of which 29 were salaried and
313 were hourly. The Company is not a party to any collective bargaining
agreements.
Insurance
The Company maintains insurance against property damage caused by fire,
flood, explosion and similar catastrophic events that may result in physical
damage or destruction to the Company's facilities and equipment. The insurance
specifically excludes acts of terrorism and acts of war as the Company has not
been able to locate coverage at a reasonable cost. The Company also maintains
commercial general liability insurance, including builders' risk coverage,
employment practices, professional (design), and directors and officer's
liability. The Company currently maintains excess and umbrella policies. Other
coverages currently in place include workers compensation, water pollution,
automobile, and hull/P&I. All policies are subject to deductibles and other
coverage limitations.
Regulation
Environmental Regulation
The Company is subject to extensive and changing federal, state and local
laws (including common law) and regulations designed to protect the environment
("Environmental Laws"), including laws and regulations that relate to air and
water quality, impose limitations on the discharge of pollutants into the
environment and establish standards for the treatment, storage and disposal of
toxic and hazardous wastes. Stringent fines and penalties may be imposed for
non-compliance with these Environmental Laws. Additionally, these laws require
the acquisition of permits or other governmental authorizations before
undertaking certain activities limit or prohibit other activities because of
protected areas or species and impose substantial liabilities for pollution
related to Company operations or properties. The Company cannot predict how
existing laws and regulations may be interpreted by enforcement agencies or
court rulings, whether additional laws and regulations will be adopted, or the
effect such changes may have on the Company's business, financial condition or
results of operations.
The Company's operations are potentially affected by the federal
Comprehensive Environmental Response Compensation and Liability Act of 1980, as
amended ("CERCLA"). CERCLA (also known as the "Superfund" law) imposes
liability, without regard to fault, on certain categories of persons for
particular costs related to releases of hazardous substances at a facility into
the environment and for liability for natural resource damages. Categories of
responsible persons under CERCLA include certain owners and operators of
industrial facilities and certain other persons who generate or transport
hazardous substances. Liability under CERCLA is strict and generally is joint
and several. Persons potentially liable under CERCLA may also bring a cause of
action against certain other parties for contribution. In addition to CERCLA,
similar state or other Environmental Laws may impose the same or even broader
liability for the discharge, release or the mere presence of certain substances
into and in the environment.
Because industrial operations have been conducted at some of the Company's
properties by the Company and previous owners and operators for many years,
various materials from these operations might have been disposed of at such
properties. This could result in obligations under Environmental Laws, such as
requirements to remediate environmental impacts. There could be additional
environmental impact from historical operations at the Company's properties
that require remediation under Environmental Laws in the future. However, the
Company currently is not aware of any such circumstances that are likely to
result in any such impact under Environmental Laws.
Although no assurances can be given, management believes that the Company
and its operations are in compliance in all material respects with all
Environmental Laws. However, stricter interpretation and enforcement of
Environmental Laws and compliance with potentially more stringent future
Environmental Laws could materially and adversely affect the Company's
operations.
9
Health and Safety Matters
The Company's facilities and operations are governed by laws and
regulations, including the federal Occupational Safety and Health Act, relating
to worker health and workplace safety. The Company believes that appropriate
precautions are taken to protect employees and others from workplace injuries
and harmful exposure to materials handled and managed at its facilities. While
it is not anticipated that the Company will be required in the near future to
expend material amounts by reason of such health and safety laws and
regulations, the Company is unable to predict the ultimate cost of compliance
with these changing regulations. Orange Shipbuilding entered into a settlement
agreement with the Occupational Safety and Health Administration ("OSHA")
during August 2001 following a six-month investigation by OSHA of the Orange
shipyard. In the settlement, Orange agreed to employ a full time safety and
health professional on location at the shipyard, employ an independent outside
auditor to audit its OSHA 2000 logs for 2001 through 2003, correct conditions
relating to alleged violations and pay a fine of $149,850. The settlement did
not constitute an admission by Orange that it violated any laws, regulations or
safety standards. During 2002, the Company has fully complied with all aspects
of the settlement order and has no alleged violations. In addition, the Company
is currently in the process of joining the Shipyard-OSHA alliance through the
Shipbuilders' Council of America.
Jones Act
Section 27 of the Merchant Marine Act of 1920 (the "Jones Act") requires
that all vessels transporting products between U.S. ports must be constructed
in U.S. shipyards, owned and crewed by U.S. citizens and registered under U.S.
law, thereby eliminating competition from foreign shipbuilders with respect to
vessels to be constructed for the U.S. coastwise trade. Many customers elect to
have vessels constructed at U.S. shipyards, even if such vessels are intended
for international use, in order to maintain flexibility to use such vessels in
the U.S. coastwise trade in the future. Bills seeking to rescind or
substantially modify the Jones Act and eliminate or adversely affect the
competitive advantages it affords to U.S. shipbuilders have been introduced in
Congress from time to time and are expected to be introduced in the future.
Although management believes it is unlikely that the Jones Act requirements
will be rescinded or materially modified in the foreseeable future, there can
be no assurance that such rescission or modification will not occur. Many
foreign shipyards are heavily subsidized by their governments and, as a result,
there can be no assurance that the Company would be able to effectively compete
with such shipyards if they were permitted to construct vessels for use in the
U.S. coastwise trade.
OPA '90
Demand for double-hull carriers has been created by the Oil Pollution Act of
1990 ("OPA '90"), which generally requires U.S. and foreign vessels carrying
oil and certain other hazardous cargos and entering U.S. ports to have
double-hulls by 2015. OPA '90 establishes a phase-out schedule that began
January 1, 1995 for all existing single-hull vessels based on the vessel's age
and gross tonnage. OPA '90's single-hull phase-out requirements do not apply to
most offshore supply vessels.
Title XI and the OECD Accord
Title XI of the Merchant Marine Act of 1936 permits the Secretary of
Transportation to provide a U.S. government guarantee for certain types of
financing for the construction, reconstruction, or reconditioning of U.S.-built
vessels. As a result of amendments in 1993, the Secretary of Transportation was
authorized to guarantee loan obligations of foreign vessel owners for
foreign-flagged vessels that are built in U.S. shipyards on terms generally
more advantageous than available under guarantee or subsidy programs of foreign
countries. Additionally, Title XI includes tax and subsidy programs that
provide benefits limited to vessels constructed in the U.S. The U.S. Congress
may reduce or eliminate funding for the Title XI program. Also, if the Congress
adopts the Agreement Respecting Normal Competitive Conditions in the Commercial
Shipbuilding and Repair Industry (the "OECD Accord"), which was signed in
December 1994, among the U.S., the European Union (on behalf of the twelve
European member countries), Finland, Japan, Korea and Norway and Sweden (which
collectively control a significant portion of the market for worldwide vessel
construction), the Title XI guarantee
10
program would need to be amended to eliminate its competitive advantages.
However, management believes that the OECD Accord would significantly improve
the ability of U.S. shipbuilders to compete successfully for international
commercial contracts with foreign shipbuilders, many of which currently are
heavily subsidized by their governments. Although the Congress has failed to
adopt or ratify the OECD Accord, proponents of the Accord may seek to introduce
the legislation in the future.
Available Information
Our internet website is http://www.conradindustries.com. Information on the
Company's website is not part of this Form 10-K. The Company makes available
free of charge its annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and amendments to these reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Exchange Act. In addition, the
Company is currently in the process of making available this information
through its website. Future filings will be posted to the internet website as
soon as it is reasonably practicable after the Company electronically files
such material with or furnishes it to the SEC.
Cautionary Statements
In this Form 10-K and in the normal course of its business, the Company, in
an effort to help keep its stockholders and the public informed about the
Company's operations, may from time to time issue or make certain statements,
either in writing or orally, that are or contain "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. All statements contained herein, other
than statements of historical fact, are forward-looking statements. When used
in this Form 10-K, the words "anticipate," "believe," "estimate" and "expect"
and similar expressions are intended to identify forward-looking statements.
Such statements reflect the Company's current views with respect to future
events and are subject to certain risks, uncertainties and assumptions,
including but not limited to those discussed below. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated, believed,
estimated or expected. The Company does not intend to update these
forward-looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, no assurance can
be given that such expectations will prove correct. Factors that could cause or
contribute to such difference include those discussed below, as well as those
discussed elsewhere herein.
Risks Related to our Business
Because a significant portion of our revenues comes from customers in the
offshore oil and gas industry, decreases in offshore oil and gas activities
tend to reduce demand for our products and services and negatively impact our
revenues and profits. The level of offshore oil and gas activities is affected
by prevailing oil and gas prices, which historically have fluctuated
significantly.
Demand for our products and services depend in part upon the financial
condition and prospects of our customers. For 2002, 2000, and 2001, we received
approximately 59.4%, 66.8%, and 57.6%, respectively, of our revenues from
customers in the offshore oil and gas industry, 19.9%, 11.7%, and 22.4% from
government customers and 20.7%, 21.5%, and 20.0% from other commercial
customers. The offshore oil and gas industry is affected by prevailing oil and
gas prices, which historically have fluctuated significantly. Low oil or gas
prices or a decline in demand for oil or gas can depress offshore exploration,
development and production activity and result in decreased spending by our
offshore oil and gas industry customers. This can result in a decline in the
demand for our products and services and can have a substantial negative effect
on our revenues and profits.
11
We perform a significant amount of our work under U. S. and other government
contracts. Reductions in government spending on the types of products and
services we offer or our inability to secure new government contracts could
have a substantial negative impact on our revenues and profits.
We have built vessels for the U.S. Army, U.S. Navy, U.S. Coast Guard and
Corp of Engineers. We have also built vessels and performed conversion or
repair services for local, state and foreign governments, either directly or as
a subcontractor. Revenue derived from U.S. government customers accounted for
approximately 11.7%, 10.8%, and 19.0% and of our total revenue in 2002, 2001
and 2000, respectively. Government contracts accounted for approximately 84.9%,
52.9%, and 24.9% of our backlog at December 31, 2002, 2001 and 2000,
respectively. U.S. government contracts are generally subject to strict
competitive bidding requirements. In addition, the number of vessels that are
purchased by the U.S. government varies with the federal budget and
appropriation of government funds. Although we have never been subject to
suspension or disbarment, the U.S. government has the right to refuse to award
contracts to a contractor for significant violations of government procurement
regulations. As a result of these factors, we cannot predict whether we will be
able to secure new government contracts. If we do not secure new government
contracts, our revenues and profits could decline substantially. See
"Business--Contract Procedure, Structure and Pricing."
A decline in general economic conditions or a deterioration in the financial
condition of a particular customer or that customer's industry can increase our
customer credit risk, which may adversely affect our profits.
Although varying contract terms may be negotiated on a case-by-case basis,
the Company's commercial and government contracts ordinarily provide for a down
payment, with progress payments at specified stages of construction and a final
payment upon delivery. Final payment under U.S. government contracts may be
subject to deductions if the vessel fails to meet certain performance
specifications based on tests conducted by the Company prior to delivery. 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. Typically repair and conversion
customers are billed upon completion of work performed. If we are unable to
collect an account receivable in the amount we have estimated to be
collectible, we must recognize a charge to earnings that is in effect a
reversal of previously recorded profits.
The loss of a significant customer could result in a substantial loss of
revenue.
A relatively small number of customers have historically generated a large
portion of our revenue, although not necessarily the same customers from year
to year. For the years ended December 31, 2002, 2001 and 2000, our ten largest
customers collectively accounted for 68.5%, 74.8% and 79.4% of our revenues,
respectively. The loss of a significant customer could result in a substantial
loss of revenue and significantly reduce our earnings. See
"Business--Customers."
Measures we may take to respond to a slowdown in new construction or repair
projects due to a deterioration in general economic conditions or in our
customer's industries may not be sufficient to prevent a decline in earnings.
Reductions in activities in our business may cause us to reevaluate our
operations. We may respond to these conditions by reducing our prices and
anticipated profit margins in order to attempt to maintain activity levels in
our yards and thereby maintain our workforce. Price and profit margin
reductions may lead to decreased profitability, particularly over the short
term. In addition, we may respond by beginning construction of historically
marketable vessels before obtaining a customer contract in order to preserve
our workforce. We may also respond by cutting costs, including through employee
attrition or layoffs. Decreases in costs may not be adequate to offset losses
in revenues, particularly over the short term. We may also seek new customers
or different types of projects, which may increase our marketing and other
costs. These measures, among others we may take, may not be sufficient to
prevent a decline in our earnings.
12
We could incur losses under our fixed-price contracts as a result of cost
overruns or delays in delivery.
Most of our contracts for marine vessel construction, including government
contracts, are fixed-price contracts. Under fixed-price contracts, we retain
all cost savings on completed contracts but are liable for the full amount of
all cost overruns. We attempt to anticipate increases in costs of labor and
materials in our bids on fixed-price contracts. However, the costs and gross
profits realized on a fixed-price contract may vary from our estimates due to
factors such as:
. unanticipated variations in labor and equipment productivity over the
term of a contract;
. unanticipated increases in costs of materials, labor and indirect
expenses; and
. errors in estimates and bidding.
Depending on the size of the project, variations from estimated contract
performance could significantly reduce our earnings, and could result in
losses, during any fiscal quarter or year. In addition, some of our fixed-price
contracts provide for incentive payments for early delivery and liquidated
damages for late delivery. If we miss a specified delivery deadline under one
of those contracts, we may be subject to liquidated damages.
From time to time, we bid on fixed-price contracts to construct vessels that
we have not constructed in the past. We believe we have sufficient related
experience to perform these contracts profitably. However, the risks of cost
overruns or delays in delivery on those contracts are greater than for
contracts for vessels that we have built in the past.
We perform many of our repair and conversion projects on a time and
materials basis. Under those projects, we receive a specified hourly rate for
direct labor hours (which exceeds direct labor costs) and a specified mark-up
over our cost of materials. Those contracts protect us against cost overruns
but do not provide us with any benefits for cost savings.
Estimates we may make in applying percentage-of-completion accounting could
result in a reduction of previously reported profits and have a significant
impact on quarter-to-quarter operating results.
We use the percentage-of-completion method to account for our construction
contracts in process. Under this method, revenue and expenses are based on the
percentage of labor hours incurred as compared to estimated total labor hours
for each contract. As a result, the timing of recognition of revenue and
expenses we report may differ materially from the timing of actual contract
payments received and expenses paid. We make provisions for estimated losses on
uncompleted contracts in the period in which the losses are determined. To the
extent that those provisions result in a reduction of previously reported
profits on a project, we must recognize a charge against current earnings.
These charges may significantly reduce our earnings, depending on the size of
the contract and the adjustment. In addition, because many of these contracts
are completed over a period of several months, the timing of the recognition of
related revenue and expense could have a significant impact on
quarter-to-quarter operating results.
Our internal expansion projects may not produce the revenues and profits that
we anticipate.
We recently completed a new drydock, an expansion of a fabrication building
in our Morgan City shipyard and expanded our repair and conversion services
with the addition of the Amelia Deepwater facility. We cannot predict whether
or when these projects will result in increased revenues or profits for our
company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
We actively pursue acquisition opportunities, but may not be able to complete
acquisitions on terms we find acceptable. Any completed acquisitions may not
produce the financial results we anticipate.
We routinely pursue acquisition opportunities that we identify or are
presented to us. However, we may not be able find sellers willing to sell to us
at prices and on other terms we find acceptable, and/or we may not be
13
able to obtain financing on terms we find acceptable. We may need additional
debt or equity financing to complete an acquisition, which may result in
increased leverage and/or dilution of existing stockholders' interests. In
addition, any acquisitions that we complete may not produce the financial
results we anticipated. We have not made any acquisitions since our acquisition
of Orange Shipbuilding Company, Inc. in December 1997.
From time to time, we may not be able to hire sufficient numbers of trained
shipyard workers. Any labor shortage may increase our cost of labor, limit our
production capacity and adversely impact our earnings.
Shipyards along the Gulf Coast have experienced shortages of skilled labor
from time to time as a result of low unemployment in the economy in general
and/or increased demand for skilled labor in the offshore oil and gas and
related industries in particular. We believe that our shipyards are not
currently experiencing labor shortages, although we may experience labor
shortages in the future. Labor shortages could increase our cost of labor,
limit our production capacity, and materially decrease our earnings.
If our customers terminate projects, our reported backlog could decrease, which
could substantially reduce our revenues and earnings.
Our backlog is based on unearned revenue attributable to projects for which
a customer has authorized us to begin work or purchase materials. Our contracts
with commercial customers generally do not permit the customer to terminate the
contract. However, some of our government projects included in our backlog are
subject to change or termination at the option of the customer. In the case of
a termination, the government is generally required to pay us for work
performed and materials purchased through the date of termination and, in some
cases, pay us termination fees. Our backlog of $36.2 million at December 31,
2002 was attributable to 23 projects, of which 84.9% was attributable to eleven
government projects. Either the change or termination of those contracts could
substantially change the amount of backlog currently reported and could
substantially decrease our revenue and earnings.
We rely on key personnel.
We are dependent on the continuing efforts of our executive officers and key
operating personnel. The loss of the services of any of these persons could
result in inefficiencies in our operations, lost business opportunities and the
loss of one or more customers. We generally do not have employment agreements
with our employees other than our executive officers and we do not carry key
person life insurance.
Our principal stockholders may control the outcome of stockholder voting.
J. Parker Conrad, John P. Conrad, Jr. and Katherine Conrad Court own or
control through trusts 4,490,978 shares of our common stock, or 62.1% of the
outstanding shares of our common stock. In addition, our executive officers and
directors and their affiliates as a group, which includes J. Parker Conrad and
John P. Conrad, beneficially own approximately 3,098,833 shares or 42.6% of our
common stock. If they act in concert, these holders will be able to exercise
control over our affairs, elect our entire board of directors, and control
substantially all matters submitted to a vote of our stockholders. The
interests of these holders may differ from the interests of our minority
stockholders, and they may vote their shares in a manner adverse to our
minority stockholders.
Sales, or the availability for sale, of substantial amounts of our common stock
in the public market could adversely affect the market price of our common
stock.
Of the 7,235,954 shares of our common stock currently outstanding, 2,691,470
are freely tradable. The remaining outstanding shares may be resold publicly
only following their registration under the Securities Act of 1933, as amended,
or under an available exemption. We provided registration rights to each of our
stockholders prior to our initial public offering, including three demand and
specified piggyback registration rights, which currently apply to approximately
4,519,451 shares.
14
We also have outstanding options to purchase up to a total of 259,775 shares
of our common stock that we granted to some of our directors, executive
officers and employees. We have registered all the shares subject to these
options under the Securities Act. These shares generally are freely tradable
after their issuance to persons who are not our affiliates unless we
contractually restrict their resale. We also issued warrants to purchase 72,000
shares of our common stock at our initial public offering price to Morgan
Keegan & Company, Inc. and granted Morgan Keegan one demand registration right
and specified piggy back registration rights.
In addition, the average daily trading volume in our common stock for 2002
was 5,079 shares. The availability of a large block of stock for sale in
relation to our normal trading volume can result in a decline in the market
price of our common stock.
Among other things, a decline in the price of our common stock can adversely
affect our ability to raise equity capital in the future and to complete
acquisitions using our common stock.
Some provisions of our corporate documents and Delaware law may discourage a
takeover.
Our Amended and Restated Certificate of Incorporation (the "Charter") and
Delaware law could make it more difficult for a third party to acquire us, even
if a change in control would be beneficial to our stockholders. Specifically,
our Charter:
. authorizes the issuance of "blank check" preferred stock;
. divides our board into three classes, the members of which serve
three-year terms;
. provides that directors may only be removed for cause and then only by
the vote of the holders of a majority of the Company's outstanding
capital stock;
. establishes advance notice requirements for director nominations and
stockholder proposals to be considered at annual meetings;
. prohibits stockholder action by written consent; and
. prohibits stockholders from calling special meetings of stockholders.
In addition, Delaware law restricts specified mergers and other business
combinations between us and any holder of 15% or more of our common stock.
Delaware law also permits the adoption of a shareholder rights plan without
stockholder approval, and during May 2002, the Company adopted a rights plan.
The rights plan is intended to protect stockholder interests in the event the
Company becomes the subject of a takeover initiative that the Company's board
of directors believes could deny the Company's stockholders the full value of
their investment. The adoption of the rights plan is intended as a means to
guard against abusive takeover tactics and is not in response to any particular
proposal. The plan does not prohibit the board from considering any offer that
it considers advantageous to stockholders. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Recent
Events--Stockholder Rights Plan."
We also have employment agreements with our executive officers that provide
for benefits in specified circumstances if there is a change of control of our
company. These provisions might hinder, delay or prevent a change of control of
our company. These provisions could also limit the price that investors might
be willing to pay in the future for shares of our common stock. In addition,
our outstanding stock options and restricted stock vest and become exercisable
upon a change of control.
We do not intend to pay dividends in the near future.
We currently intend to retain any earnings to meet our working capital needs
and to finance the growth of our business. In addition, our loan agreement
restricts us from paying dividends. Accordingly, an investor in our common
stock should not expect to receive periodic income from an investment in our
common stock.
15
Risks Related to our Industry
Our business is highly competitive. As a result, we may lose business and
employees to our competitors or may experience lower profit margins than we
would in the absence of competition. In addition, we may lose acquisition
opportunities to competitors or may pay more for an acquisition than we would
in the absence of competition.
The marine vessel construction, conversion and repair business is highly
competitive. We compete with a large number of shipbuilders on a national,
regional and local basis. Some of our competitors have substantially greater
financial resources than we do, and some are public companies or divisions of
public companies. We continue to experience significant competitive pressure on
pricing and profit margins. We also face competition for acquisition
candidates. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Overview" and "Business--Operations."
Excess capacity in our industry has placed downward pressure on pricing and
profit margins.
Since approximately the mid 1980s, the U.S. shipbuilding and repair industry
has been characterized generally by substantial excess capacity, which is
partly due to the following factors:
. the significant decline in U.S. Navy shipbuilding spending;
. the difficulty U.S. shipyards have competing successfully for commercial
projects against foreign shipyards, many of which are heavily subsidized
by their governments; and
. the overall decline in the construction of vessels utilized by the
offshore oil and gas industry.
These factors have caused competition by U.S. shipyards for domestic
commercial projects to increase significantly, resulting in substantial
pressure on pricing and profit margins.
Federal law favoring U.S. shipyards over foreign shipyards may be modified or
rescinded, resulting in greater competition from foreign shipyards that operate
with lower costs.
Our commercial shipbuilding opportunities are materially dependent on U.S.
laws and regulations, such as:
. the Jones Act, which requires that vessels transporting products between
U.S. ports be constructed by U.S. shipyards; and
. Title XI of the Merchant Marine Act of 1936, which permits the U.S.
government to guarantee financing for vessels built in U.S. shipyards.
The U.S. Congress may reduce or eliminate funding for the Title XI guarantee
program. Legislation seeking to rescind or substantially modify provisions of
the Jones Act is also introduced from time to time. We believe that Congress is
unlikely to rescind or materially modify the Jones Act in the foreseeable
future. However, we can provide no assurance that the Jones Act or other
legislation that benefits U.S. shipbuilders will not be modified or rescinded.
Many foreign shipbuilders are heavily subsidized by their governments and thus
may have significant cost advantages over U.S. shipbuilders. As a result, the
elimination or modification of legislation that benefits U.S. shipbuilders may
reduce our ability to effectively compete with foreign shipbuilders, causing
downward pressure on prices and profit margins and decreased revenues and
earnings.
New regulations or modifications to existing regulations affecting our
significant customers could decrease demand for our products and services and
result in significantly lower revenues and earnings.
New legislation or changes to existing legislation affecting our significant
customers could decrease demand for our products and services. For example, the
adoption of any laws or regulations curtailing the exploration, development and
production activities of oil and gas companies in the Gulf of Mexico would
likely limit the demand for our products and services. In addition, Coast Guard
regulations specify maintenance requirements for
16
vessels used in the offshore oil and gas business, and a reduction in these
requirements could have a materially adverse impact on revenues and earnings in
our repair business.
Compliance with environmental laws and other government regulations may
increase our cost of doing business.
We are subject to various federal, state and local environmental laws and
regulations. These laws and regulations impose limitations on the discharge of
pollutants into the environment and establish standards for the transportation,
storage and disposal of hazardous waste. The government may impose significant
fines or penalties for violations of these environmental laws and regulations.
Some environmental laws impose joint and several "strict liability" for
remediation of spills and releases of oil and hazardous substances. Under these
laws and regulations, a person may be liable for environmental damages without
regard to negligence or fault on the part of that person. As a result, these
laws may expose us to liability for the conduct of or conditions caused by
others. We may also be liable for our own acts that are or were in compliance
with all applicable laws at the time such acts were performed. Environmental
laws have historically been subject to frequent change. We are unable to
predict the future costs or other future effects of environmental laws on our
operations. In addition, any changes in environmental or other laws affecting
our business may further increase our costs.
Our business involves operating hazards and risks of liability and our
insurance coverage may be insufficient to cover all losses that we experience.
Our activities involve the fabrication and refurbishment of large steel
structures, the operation of cranes and other heavy machinery and other
operating hazards. These activities can cause personal injury or loss of life,
severe damage to and destruction of property and equipment and suspension of
operations. The failure of a vessel structure after it leaves our shipyard can
result in similar injuries and damages. Litigation arising from these
occurrences may result in us being named as a defendant in lawsuits asserting
significant damages. In addition, our facilities are located in close proximity
to the Gulf of Mexico and rivers in flood plains. As a result, our facilities
are subject to the possibility of significant physical damage caused by
hurricanes or flooding. Although we maintain insurance protection from these
events, our insurance coverage may not be sufficient in coverage or effective
under all circumstances to protect us against all hazards to which we are
subject. A successful claim against us for which we are not fully covered by
insurance could result in substantial losses to us. In addition, we may not be
able to maintain adequate insurance in the future at rates that we consider
economically prudent.
The terrorist attacks that took place on September 11, 2001 in the U.S. were
unprecedented, and we cannot predict the long-term effect of those attacks on
our business.
The September 11, 2001 terrorist attacks in the U.S. and related weakness in
the economy in general, and the offshore oil and gas industry in particular,
decreased demand for our products and services and had an adverse effect on our
financial performance, for the fourth quarter of 2001 and throughout 2002.
Those attacks have resulted, among other things, in increased concern regarding
the potential for future attacks, hostilities involving the U.S. in Afghanistan
and Iraq, heightened tensions between the U.S. and North Korea and other
political and economic uncertainties. The attacks were unprecedented, and we
cannot predict their long-term effects on our business.
Item 2: Properties
Shipyards. The Company conducts its marine vessel construction, conversion
and repair operations at its four 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 its first 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. The Company
acquired land for a second facility in Amelia, Louisiana for approximately $1.3
million in 2000. Initial development of the land in 2001 included clearing
land, grubbing and
17
dredging at total cost of approximately $900,000. Additional site preparation,
installation of a steel sheet-pile bulkhead system, dry excavation, dredging,
other infrastructure improvements and outfitting with tools and equipment at a
total anticipated cost of $6.7 million is currently underway. The Company
commenced conversion and repair services at this facility during February 2003.
During the past five years, the Company has made, in the aggregate,
approximately $19.2 million of capital expenditures to add capacity and improve
the efficiency of its Morgan City, Amelia and Orange shipyards. Of this amount,
Conrad spent approximately $11.4 million at the Morgan City shipyard for
improvements to its buildings, facilities and drydocks; to purchase cranes,
other fabrication equipment and a launch barge; and to construct/modify
drydocks. Capital expenditures for the last five years also included $6.3
million for the expansion of conversion and repair services into Amelia,
Louisiana. The Company's capital expenditures during the last five years also
included approximately $1.5 million incurred by Orange Shipbuilding for
improvements to its buildings and facilities and to purchase cranes and other
fabrication equipment. Capital expenditures for 2002 were approximately $5.8
million including $680,000 for completion of the expansion of a construction
fabrication building at the Morgan City yard, $4.0 million for improvements to
the 52 acres of land in Amelia, Louisiana, and approximately $1.1 million for
improvements to other facilities and 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 shot blasting 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
125,000 square feet of enclosed building area and ten overhead cranes. In
addition, the shipyard has four drydocks, one submersible launch barge, 1,700
linear feet of steel bulkhead, five rolling cranes and two slips. The buildings
include offices for management and support personnel 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 and two
200-foot by 70-foot drydocks with lifting capacities of 900 and 2,400 tons,
respectively.
In June 2002, the Company moved certain administrative offices to leased
premises in Morgan City, Louisiana comprising approximately 8,700 square feet.
The current lease term extends through May of 2007.
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
Wheelabrator, a "gantry" type NC plasma burner with a 21-foot by 90-foot table,
over 60 automatic and semi-automatic welding machines, two rolling cranes, 600,
800 and 1,600-ton transfer/load-out systems and a marine railway with side
transfer system.
Amelia. The Company has two facilities in Amelia, Louisiana. One facility
is located on Bayou Boeuf/Intracoastal Waterway 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 linear feet of bulkhead and two slips. The Company commenced
marine repair and conversion operations at this location during February 1998.
The Company is currently utilizing this facility for repair and conversion
activity.
The second facility is located on the Bayou Boeuf/Intracoastal Waterway
approximately 30 miles from the Gulf of Mexico and is within one mile of the
other Amelia facility. Of the 52 acres on the site, approximately 14
18
acres have been developed as a repair and conversion facility. This facility
has one building containing approximately 5,400 square feet of enclosed
building area. The site also has 1,100 linear feet of bulkhead and one slip.
The Company has moved its two largest drydocks to the facility and commenced
marine repair and conversion operations at this location during February 2003.
This facility allows the Company to handle vessels with deeper drafts than the
Company has historically been able to service and therefore opens up a market
niche from which the Company has historically been limited from participating.
In addition, the infrastructure improvements also allow for the potential
future development of the facility to accommodate vessel construction should
the market so dictate. The drydocks consist of one 200-foot by 95-foot drydock
with lifting capacities of 3,000 tons and one 280-foot by 160-foot drydock with
lifting capacities of 10,000 tons. The largest dock, constructed by the Company
in 2000 and 2001 for $5.7 million, allows the Company to (1) increase repair
and conversion capacity; (2) lift and compete to repair larger vessels such as
derrick and pipe laying barges and the large offshore service vessels recently
built for the deep water drilling activities in the Gulf of Mexico; and (3)
launch larger new vessel construction projects more competitively. The
construction of this drydock brings the total number of drydocks operated by
the Company to six.
Item 3: Legal Proceedings
The Company is a party to various routine legal proceedings primarily
involving commercial claims and workers' compensation claims. While the outcome
of these claims and legal proceedings cannot be predicted with certainty,
management believes that the outcome of such proceedings in the aggregate, even
if determined adversely, would not have a material adverse effect on the
Company's consolidated financial statements.
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, 2002.
19
PART II
Item 5: Market for the Registrant's Common Stock and Related Stockholder
Matters
The Company's common stock, par value $0.01 per share, (the "Common Stock")
is traded on the NASDAQ National Market System under the symbol "CNRD." At
March 20, 2003, there were approximately 701 holders of the Common Stock of
record.
The following table sets forth the high and low bid prices per share of the
Common Stock, as reported by the NASDAQ National Market, for each fiscal
quarter during the last two fiscal years.
Fiscal Year 2002 High Low
---------------- ----- -----
First Quarter.............................. $5.30 $3.41
Second Quarter............................. 5.10 3.75
Third Quarter.............................. 4.19 2.47
Fourth Quarter............................. 3.84 1.96
Fiscal Year 2001 High Low
---------------- ----- -----
First Quarter.............................. $8.00 $5.00
Second Quarter............................. 8.45 5.95
Third Quarter.............................. 7.24 4.10
Fourth Quarter............................. 6.27 4.50
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 payment of dividends by the Company. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
20
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, 2002 are derived from the historical audited financial statements
of the Company. The following table also sets forth unaudited pro forma
financial information that gives effect to the Company's S Corporation status,
as further explained in the notes. The following information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's consolidated financial statements
and notes thereto included elsewhere in this Form 10-K.
Year Ended December 31,
-------------------------------------------
2002 2001 2000 1999 1998
------- ------- ------- ------- -------
(In thousands, except per share data)
Statement of Operations Data
Revenues............................................... $41,023 $46,904 $38,516 $32,555 $46,313
Cost of revenue........................................ 35,657 37,017 29,168 25,618 34,120
------- ------- ------- ------- -------
Gross profit........................................... 5,366 9,887 9,348 6,937 12,193
Selling, general and administrative expenses........... 4,815 5,077 4,661 3,857 3,515
Terminated acquisition costs (1)....................... 350 -- -- -- --
Executive compensation (2)............................. -- 2,613 -- -- 4,676
------- ------- ------- ------- -------
Income from operations................................. 201 2,197 4,687 3,080 4,002
Interest and other income (expense), net............... (182) (49) 31 (326) (1,141)
------- ------- ------- ------- -------
Income before income taxes............................. 19 2,148 4,718 2,754 2,861
Provision for income taxes............................. 23 1,115 2,021 1,252 1,932
Cumulative deferred tax provision...................... -- -- -- -- 675
------- ------- ------- ------- -------
(Loss) income before cumulative effect of change in
accounting principle................................. (4) 1,033 2,697 1,502 254
Cumulative effect of change in accounting principle (3) 4,500 -- -- -- --
------- ------- ------- ------- -------
Net (loss) income...................................... $(4,504) $ 1,033 $ 2,697 $ 1,502 $ 254
======= ======= ======= ======= =======
Net (Loss) Income Per Common Share Before
Cumulative Effect of Change in Accounting Principle
Basic............................................... $ (0.00) $ 0.14 $ 0.38 $ 0.21 $ 0.04
Diluted............................................. $ (0.00) $ 0.14 $ 0.38 $ 0.21 $ 0.04
Net (Loss) Income Per Common Share
Basic............................................... $ (0.62) $ 0.14 $ 0.38 $ 0.21 $ 0.04
Diluted............................................. $ (0.62) $ 0.14 $ 0.38 $ 0.21 $ 0.04
Weighted Average Common Shares Outstanding
Basic............................................... 7,230 7,129 7,067 7,078 6,167
Diluted............................................. 7,230 7,149 7,076 7,078 6,167
Unaudited Pro Forma Data
Net income as reported above........................ $ 2,861
Pro forma provision for income taxes (4)............ 2,596
-------
Pro forma net income (4)............................ $ 265
=======
Pro forma net income per share (4)(5)............... $ 0.04
Common and equivalent shares outstanding............ 6,569
Statement of Cash Flows Data
Cash provided by operating activities............... $ 613 $ 4,098 $ 8,457 $ 4,520 $ 1,988
Cash used in investing activities................... $(5,311) $(4,776) $(6,692) $ (744) $(1,718)
Cash provided by (used in) financing activities..... $ 4,216 $ 4,074 $(2,504) $(2,598) $(4,747)
Other Financial Data
Depreciation & amortization......................... $ 1,861 $ 2,326 $ 2,199 $ 2,263 $ 2,249
Capital expenditures................................ $ 5,767 $ 4,320 $ 6,692 $ 744 $ 1,718
EBITDA, as adjusted (6)............................. $ 2,062 $ 6,070 $ 6,886 $ 5,343 $10,927
EBITDA margin, as adjusted (7)...................... 5.0% 12.9% 17.9% 16.4% 23.6%
Operating profit margin (8)......................... 0.5% 4.7% 12.2% 9.5% 8.6%
21
As of December 31,
---------------------------------------
2002 2001 2000 1999 1998
------- ------- ------- ------- -------
(In thousands)
Balance Sheet Data
Working capital........................... $ 9,447 $ 9,312 $ 4,107 $ 8,163 $ 7,678
Property, plant & equipment, net.......... $29,430 $25,486 $22,675 $17,377 $18,104
Total assets.............................. $53,841 $52,574 $47,964 $45,120 $47,519
Long term debt, including current portion. $13,223 $ 9,007 $ 4,806 $ 7,314 $ 9,912
Shareholders' equity...................... $32,215 $36,696 $34,685 $31,984 $30,482
- --------
(1) Represents deferred acquisition costs related to the terminated proposed
acquisition of Swiftships Shipbuilders, LLC and Swiftships Technologies LLC
as detailed in "Recent Events" in Item 7 and in Note 7 to the financial
statements.
(2) For 2001, represents non-recurring executive compensation expense incurred
in the third quarter related to the issuance of shares of common stock,
forgiveness of notes and related interest, severance payment and cash
bonuses to William H. Hidalgo, the Company's former President and Chief
Executive Officer, and Cecil A. Hernandez, the Company's former Vice
President--Finance and Administration and Chief Financial Officer as
detailed in the notes to the financial statements. For 1998, 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.
(3) The Company recorded a $4.5 million non-cash charge for the impairment of
goodwill resulting from the adoption of Statement of Financial Accounting
Standards Board No. 142, "Goodwill and Other Intangible Assets" as detailed
in Note 1 to the financial statements.
(4) 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
purposes.
(5) Pro forma income per share consists of the Company's historical income as
an S corporation, adjusted for income taxes that would have been recorded
had the Company operated as a C corporation and excludes the one-time
charge of $675,000 to record the cumulative deferred income tax provision.
This amount is divided by the weighted average shares of common stock
outstanding which are increased to reflect additional shares to pay the
$10.0 million distribution of estimated undistributed earnings to
shareholders (916,591 shares). All such additional shares are based on the
initial public offering price of $12.00 per share, net of offering expenses.
(6) 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, as adjusted, 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 adjusted, as supplemental disclosure because
management believes that EBITDA, as adjusted, provides meaningful
information regarding a company's historical ability to incur and service
debt. EBITDA, as adjusted, as defined and measured by the Company may not
be comparable to similarly titled measures reported by other companies.
EBITDA, as adjusted, 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.
The following table sets forth a reconciliation of EBITDA, as adjusted, to
net cash provided by operating activities for the periods presented (in
thousands):
2002 2001 2000 1999 1998
------ ------ ------- ------ -------
Net cash provided by operating activities.. $ 613 $4,098 $ 8,457 $4,520 $ 1,988
Interest expense........................... 221 193 386 639 1,425
Other income, net.......................... (39) (144) (417) (313) (284)
Provision for income taxes................. 23 1,115 2,021 1,252 2,607
Deferred income tax (benefit) provision.... (3) (174) (93) 137 (663)
Other...................................... (19) (153) -- (13) (65)
Changes in operating assets and liabilities 1,266 1,135 (3,468) (879) 5,919
------ ------ ------- ------ -------
EBITDA, as adjusted........................ $2,062 $6,070 $ 6,886 $5,343 $10,927
====== ====== ======= ====== =======
(7) Represents EBITDA, as adjusted, as a percentage of revenues.
(8) Represents income from operations as a percentage of revenues.
22
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 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. A significant portion of the Company's
historical revenues has been derived from customers in the offshore oil and gas
industry. Accordingly, demand for the Company's products and services has been
adversely impacted since 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. During the fourth quarter of
2001 and throughout 2002, weakness in the economy in general, and the offshore
oil and gas industry in particular, resulted in decreased demand and adversely
affected the Company's financial performance. The Company did experience an
increase in demand for repair and conversion services in the first quarter of
2002 due to seasonal workload patterns; however, the Company experienced
significant decreased demand for repair and conversion services in the last
three quarters of 2002. The Company believes that there is little or no
visibility at this time into the repair market for 2003. However, the Company
anticipates an increase in the repair and conversion market in the first
quarter of 2003 when, as a result of seasonality, the market traditionally
improves and as a result of the opening of the new repair and conversion
facility in Amelia, Louisiana. Although recent improved drydock utilization
rates appear to support this anticipation, it is unclear at this time how long
this trend will continue.
Bid activity in the vessel construction segment improved during 2002
compared to 2001. The Company's backlog, excluding unexercised options, was
$36.2 million at December 31, 2002 as compared to $10.4 million at December 31,
2001. The increase in backlog is primarily attributable to the award of a $16.6
million contract by the Corps of Engineers for the construction of three
towboats and a $9.5 million contract by the Alaska Marine Highway System for a
181-foot ferry. The contract with the Corps of Engineers also includes an
option, exercisable by the customer, for one additional towboat valued at $5.6
million. In addition, the Company is currently in discussion and negotiations
with various customers for new vessel construction contracts and remains
cautiously optimistic that these projects will add to our backlog in the near
future. The Company believes that the impact of the new contract awards and
additional potential future projects will become more evident in 2003 operating
results.
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.
23
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
Internal Expansion
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 Bayou
Boeuf/Intracoastal Waterway approximately 30 miles from the Gulf of Mexico and
is within one mile of the other existing Amelia facility. Approximately 14
acres of the property have been developed as a repair and conversion facility.
The development includes clearing land, grubbing, dredging, installation of a
steel sheet-pile bulkhead system, dry excavation, construction of a 5,400
square foot building, other infrastructure improvements and outfitting with
tools and equipment at an anticipated total cost of approximately $7.6 million.
As of December 31, 2002, the Company had incurred $5.1 million developing the
facility. In February 2003, the Company moved its two largest drydocks to the
facility and commenced operations. The facility allows the Company to handle
vessels with deeper drafts than the Company has historically been able to
service at its other facilities. In addition, the infrastructure improvements
also allow for the potential future development of the facility to accommodate
vessel construction should the market so dictate.
In addition, during 2002, the Company completed construction of an expansion
of a fabrication building at the Morgan City yard at a cost of approximately
$800,000, which increased the Company's enclosed building space by
approximately 15,000 square feet and increased capabilities for pre-fabricated
components and modular construction techniques.
Stockholder Rights Plan
During May 2002, the Company adopted a rights plan. The rights plan is
intended to protect stockholder interests in the event the Company becomes the
subject of a takeover initiative that the Company's board of directors believes
could deny the Company's stockholders the full value of their investment. The
adoption of the rights plan is intended as a means to guard against abusive
takeover tactics and is not in response to any particular proposal. The plan
does not prohibit the board from considering any offer that it considers
advantageous to stockholders.
Under the plan, the Company declared and paid a dividend on June 18, 2002 of
one right for each share of the Company's common stock held by stockholders of
record on June 11, 2002. Each right initially entitles the Company's
stockholders to purchase one one-thousandth of a share of the Company's
preferred stock for $20 per one one-thousandth, subject to adjustment. However,
if a person acquires, or commences a tender offer that would result in
ownership of, 15 percent or more of the Company's outstanding common stock
while the plan remains in place, then, unless the Company redeems the rights
for $0.001 per right, the rights will become exercisable by all rights holders
except the acquiring person or group for shares of the Company's common stock
or of the acquiring person having a market value of twice the purchase price of
the rights.
The rights will expire on May 23, 2012, unless redeemed or exchanged by the
Company at an earlier date. A description and the terms of the rights are set
forth in a rights agreement, dated May 23, 2002, between the Company and
American Stock Transfer & Trust Company, which was filed as Exhibit 1 to the
Company's registration statement on Form 8-A filed May 29, 2002. The rights
will initially trade with shares of the Company's common stock and will have no
impact on the way in which the Company's shares are traded. There are currently
no separate certificates evidencing the rights, and there is no market for the
rights.
Change in Management
Effective September 30, 2002, Cecil A. Hernandez resigned as Chief Financial
Officer of the Company. Mr. Hernandez remains a Director of Conrad Industries,
Inc. The Company appointed Lewis J. Derbes, Jr. as Vice-
24
President and Chief Financial Officer, effective September 30, 2002, pursuant
to the terms of an employment agreement described in Note 5 to the Company's
consolidated financial statements included herein. Mr. Derbes spent the past
five years with Northrop Grumman Corporation's Avondale Industries, Inc.
serving in various senior management positions, recently as Vice President and
Controller.
Swiftships Letter of Intent and Loan
On October 9, 2002, the Company announced that it had terminated
negotiations under a previously announced non-binding letter of intent for the
purchase of the assets of Swiftships Shipbuilders, LLC and Swiftships
Technologies, LLC. Approximately $350,000 of deferred acquisition costs was
charged to operations during the fiscal year ended December 31, 2002 as a
result of the termination of this proposed acquisition.
The letter of intent contained a binding exclusivity agreement whereby the
Swiftships parties agreed that before the earlier of the termination of
negotiations by Conrad or October 31, 2002 they would negotiate exclusively
with Conrad and not solicit any competing acquisition proposal or enter into
any agreement with respect to a competing acquisition proposal. In addition, if
on or prior to April 7, 2003, any of the Swiftships parties accepts or enters
into any agreement with respect to any competing acquisition proposal, the
Swiftships parties must pay Conrad a fee of $1 million payable at the time the
transaction contemplated by the competing acquisition proposal is consummated.
In connection with the letter of intent, Conrad entered into an agreement
pursuant to which it loaned approximately $500,000, secured by real estate, to
Swiftships Shipbuilders, LLC. The loan and related interest were collected in
full during the fourth quarter of 2002.
25
Results of Operations
The following table sets forth certain historical data of the Company and
percentage of revenues for the periods presented (in thousands):
Years Ended December 31,
----------------------------------------------
2002 2001 2000
-------------- -------------- --------------
Financial Data:
Revenue
Vessel construction............................. $30,814 75.1% $33,610 71.7% $23,398 60.7%
Repair and conversions.......................... 10,209 24.9% 13,294 28.3% 15,118 39.3%
------- ------- -------
Total revenue............................... 41,023 100.0% 46,904 100.0% 38,516 100.0%
------- ------- -------
Cost of revenue
Vessel construction............................. 26,826 87.1% 26,677 79.4% 17,993 76.9%
Repair and conversions.......................... 8,831 86.5% 10,340 77.8% 11,175 73.9%
------- ------- -------
Total cost of revenue....................... 35,657 86.9% 37,017 78.9% 29,168 75.7%
------- ------- -------
Gross profit
Vessel construction............................. 3,988 12.9% 6,933 20.6% 5,405 23.1%
Repair and conversions.......................... 1,378 13.5% 2,954 22.2% 3,943 26.1%
------- ------- -------
Total gross profit.......................... 5,366 13.1% 9,887 21.1% 9,348 24.3%
S G & A expenses................................... 4,815 11.7% 5,077 10.8% 4,661 12.1%
Terminated acquisition costs (1)................... 350 0.9% -- 0.0% -- 0.0%
Executive compensation (2)......................... -- 0.0% 2,613 5.6% -- 0.0%
------- ------- -------
Income from operations............................. 201 0.5% 2,197 4.7% 4,687 12.2%
Interest expense................................... 221 0.5% 193 0.4% 386 1.0%
Other income, net.................................. (39) -0.1% (144) -0.3% (417) -1.1%
------- ------- -------
Income before income taxes......................... 19 0.0% 2,148 4.6% 4,718 12.2%
Income taxes....................................... 23 0.1% 1,115 2.4% 2,021 5.2%
------- ------- -------
(Loss) income before cumulative effect of change in
accounting principle............................. (4) 0.0% 1,033 2.2% 2,697 7.0%
Cumulative effect of change in accounting
principle (3).................................... (4,500) -11.0% -- 0.0% -- 0.0%
------- ------- -------
Net (loss) income.................................. $(4,504) -11.0% $ 1,033 2.2% $ 2,697 7.0%
======= ======= =======
EBITDA, as adjusted (4)............................ $ 2,062 5.0% $ 6,070 12.9% $ 6,886 17.9%
======= ======= =======
Net cash provided by operating activities.......... $ 613 $ 4,098 $ 8,457
======= ======= =======
Operating Data: Labor Hours....................... 471 623 528
======= ======= =======
- --------
(1) Represents deferred acquisition costs related to the terminated proposed
acquisition of Swiftships Shipbuilders, LLC and Swiftships Technologies,
LLC as detailed in "Recent Events" and Note 7 to the financial statements.
(2) For 2001 represents, non-recurring executive compensation expense incurred
in the third quarter related to the issuance of shares of common stock,
forgiveness of notes and related interest, severance payment and cash
bonuses to executives as detailed in Note 5 to the financial statements.
(3) The Company recorded a $4.5 million non-cash charge for the impairment of
goodwill resulting from the adoption of Statement of Financial Accounting
Standards Board No. 142, "Goodwill and Other Intangible Assets" as detailed
in Note 1 to the financial statements.
(4) 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,
26
as adjusted, 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 adjusted, as supplemental
disclosure because management believes that EBITDA, as adjusted, provides
meaningful information regarding a company's historical ability to incur and
service debt. EBITDA, as adjusted, as defined and measured by the Company
may not be comparable to similarly titled measures reported by other
companies. EBITDA, as adjusted, 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.
The following table sets forth a reconciliation of EBITDA, as adjusted, to
net cash provided by operating activities for the periods presented (in
thousands):
2002 2001 2000
------ ------ -------
Net cash provided by operating activities.. $ 613 $4,098 $ 8,457
Interest expense........................... 221 193 386
Other income, net.......................... (39) (144) (417)
Provision for income taxes................. 23 1,115 2,021
Deferred income tax (benefit) provision.... (3) (174) (93)
Other...................................... (19) (153) --
Changes in operating assets and liabilities 1,266 1,135 (3,468)
------ ------ -------
EBITDA, as adjusted........................ $2,062 $6,070 $ 6,886
====== ====== =======
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
During the year ended December 31, 2002, the Company generated revenue of
$41.0 million, a decrease of approximately $5.9 million, or 12.5%, compared to
$46.9 million generated for 2001. The decrease was due to a $2.8 million (8.3%)
decrease in vessel construction revenue to $30.8 million for 2002 compared to
$33.6 million for 2001 and a decrease of $3.1 million (23.2%) in repair and
conversion revenue to $10.2 million for 2002, compared to $13.3 million for
2001. The decrease in revenue for the current year is primarily a result of a
decrease in production hours attributable to decreased oil and gas activity.
Vessel construction hours decreased 21.6% compared to 2001 while repair and
conversion hours were lower by 28.5% when compared to 2001. Vessel construction
revenue was 75.1% of total revenue compared to 71.7% for 2001 and repair and
conversion revenue was 24.9% of total revenue compared to 28.3% in 2001. For
2002, 59.4% of revenue was energy related, 19.9% was government and 20.7% was
other commercial. This compares to 66.8% energy, 11.7% government and 21.5%
other commercial in 2001.
Gross profit was $5.4 million (13.1% of revenue) for 2002 as compared to
gross profit of $9.9 million (21.1% of revenue) for 2001. Vessel construction
gross profit decreased $2.9 million, or 42.5%, for 2002 compared to $6.9
million for 2001. Repair and conversion gross profit decreased $1.6 million, or
53.4%, for 2002 compared to $3.0 million for 2001. Vessel construction gross
profit was negatively impacted by a charge of approximately $150,000 related to
anticipated losses on a commercial contract in progress for four vessels.
Complexities in the hull structures of these vessels made prior learning curve
assumptions less achievable. As a result, gross profit and net income will
continue to be negatively impacted until this contract's scheduled completion
in the second quarter of 2003. In addition, the decline in the gross profit of
both segments was attributable to a decrease in production hours as discussed
above due to less demand for vessel construction and repair and conversion
jobs. Vessel construction gross profit margins decreased to 12.9% for 2002,
compared to gross profit margins of 20.6% for 2001. Repair and conversion gross
profits margins were 13.5% for 2002, compared to gross profit margins of 22.2%
for 2001.
Selling, general and administrative expenses ("SG&A") decreased $262,000, or
5.2%, to $4.8 million (11.7% of revenue) for 2002, as compared to $5.1 million
(10.8% of revenue) for 2001. The decrease in SG&A was due primarily to the
elimination of goodwill amortization expense due to the adoption of SFAS No. 142
27
(approximately $0.8 million in 2001), as discussed in Note 1 to the financial
statements, offset by an increase in depreciation and consulting expenses
related to an implementation of a new enterprise business system and an
increase in legal and accounting expenses.
Interest expense increased $28,000 to $221,000 for 2002 as compared to
interest expense of $193,000 for 2001. The increase is primarily the result of
an increase in the average outstanding loan balance partially offset by the
capitalization of interest related to the development of the 52 acres of land
in Amelia, Louisiana. The Company expects interest expense to increase in 2003
as a result of an expected increase in the average outstanding loan balance.
The Company had income tax expense of $23,000 for 2002, compared to income
taxes of $1.1 million for 2001. The decrease in income tax expense is primarily
attributable to the decrease in income from operations as discussed above.
During the second quarter of 2002, the Company completed the two-step
process of the transitional goodwill impairment test prescribed in SFAS No. 142
with respect to existing goodwill as discussed in Note 1 to the financial
statements. The transitional goodwill impairment test resulted in the Company
recognizing a non-cash transitional goodwill impairment charge of $4.5 million
related entirely to the Orange Shipbuilding reporting unit. As required by SFAS
No. 142, the $4.5 million charge is reflected as a cumulative effect of a
change in accounting principle in the Company's Consolidated Statement of
Operations for the twelve months ended December 31, 2002. There was no income
tax effect on the impairment charge as the charge related to non-deductible
goodwill. The fair value of the Orange Shipbuilding reporting unit was
determined based on the excess earnings return on assets (treasury) valuation
method. The circumstance leading to the goodwill impairment was a decline in
market conditions since the acquisition of this reporting unit. This
circumstance caused lower than expected operating profits and cash flows. The
recording of this non-cash charge for the impairment of goodwill resulted in a
net loss of $4.5 million for 2002.
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
During the year ended December 31, 2001, the Company generated revenue of
$46.9 million, an increase of approximately $8.4 million, or 21.8%, compared to
$38.5 million generated for 2000. The increase was due to a $10.2 million
(43.6%) increase in vessel construction revenue to $33.6 million for 2001
compared to $23.4 million for 2000. The increase was partially offset by a $1.8
million (12.1%) decrease in repair and conversion revenue to $13.3 million for
2001, compared to $15.1 million for 2000. The increase in vessel construction
revenue was attributable to the increase in vessel construction production
hours by 36.5% during 2001 compared to 2000. This was due to (1) greater demand
for vessel construction jobs during the first three quarters of 2001, (2) the
fact that the construction of the drydock by production personnel during 2000
absorbed hours during that period which could otherwise have been available for
billable work, and (3) the nature of the jobs during 2001 required more
material and equipment compared to jobs during 2000. The decrease in repair and
conversion revenue during 2001 compared to 2000 was primarily attributable to
(1) decreased demand for repair and conversion services during the fourth
quarter of 2001 due to decreased offshore oil and gas activity and (2) the fact
that two conversion jobs in progress during 2000 required more material and
equipment as compared to projects completed or in progress during 2001. Repair
and conversion hours decreased by 2.4% during 2001 compared to 2000. Vessel
construction revenue was 71.7% of total revenue compared to 60.7% for 2000 and
repair and conversion revenue was 28.3% of total revenue compared to 39.3% in
2000. For 2001, 66.8% of revenue was energy related, 11.7% was government and
21.5% was other commercial. This compares to 57.6% energy, 22.4% government and
20.0% other commercial in 2000.
Gross profit increased $539,000, or 5.8% to $9.9 million (21.1% of revenue)
for 2001 as compared to gross profit of $9.3 million (24.3% of revenue) for
2000. Affecting gross profit for 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
28
amount was expensed in the three month period ended June 30, 2001. Gross profit
for 2001 was positively impacted by 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 28.3% to $6.9
million for 2001 compared to $5.4 million for 2000. Repair and conversion gross
profit decreased $1.0 million or 25.1% to $3.0 million for 2001 compared to
$3.9 million for 2000. The increase in vessel construction gross profit was
primarily due to the increase in vessel production hours and the factors
discussed above. The decrease in repair and conversion gross profit was
primarily due to the fact that jobs during 2000 were more profitable than jobs
during 2001 and the decrease in repair and conversion hours during 2001
(primarily in the fourth quarter) as compared to 2000.
Vessel construction gross profit margins decreased to 20.6% for 2001,
compared to gross profit margins of 23.1% for 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. Repair and conversion gross profits margins
were 22.2% for 2001, compared to gross profit margins of 26.1% for 2000. The
decrease was primarily due to higher cost of jobs completed during the fourth
quarter of 2001 due to lower activity.
Selling, general and administrative expenses increased $416,000, or 8.9%, to
$5.1 million (10.8% of revenue) for 2001, as compared to $4.7 million (12.1% of
revenue) for 2000. These increases were primarily due to an increase in
employee related costs, legal and sales expenses and a bad debt expense of
$153,000.
Included in selling, general and administrative expenses was amortization
expense of existing goodwill of approximately $0.8 million for the years ended
December 31, 2001 and 2000. SFAS No. 142 changes the accounting for goodwill
from an amortization method to an impairment-only approach. Amortization of
goodwill ceased on January 1, 2002, upon adoption of this statement.
Income before income taxes decreased $2.6 million to $2.1 million for 2001
as compared to net income before income taxes of $4.7 million for 2000,
primarily due to the non-recurring executive compensation charge of $2.6
million as detailed in the notes to the financial statements.
The Company had net income of $1.0 million for 2001 as compared to net
income of $2.7 million for 2000. Interest expense decreased $193,000 to
$193,000 for 2001 as compared to interest expense of $386,000 for 2000 due to a
reduction of average debt outstanding during the year and lower interest rates.
The Company had income tax expense of $1.1 million (51.9% effective tax
rate) for 2001, compared to income taxes of $2.0 million (42.8% effective tax
rate) for 2000. The Company's effective tax rate was higher than its statutory
tax rate primarily because its cost in excess of net assets acquired was not
amortized for tax purposes, but was amortized for book purposes in 2000 and
2001.
Liquidity and Capital Resources
Net cash provided by operations was $0.6 million, $4.1 million, and $8.5
million for 2002, 2001, and 2000, respectively. The decrease in 2002 was
primarily a result of a decrease in net income, increases in accounts
receivable and net change in billings related to cost and estimated earnings on
uncompleted contracts partially offset by decreases in inventory and other
assets and increases in accounts payable and accrued expenses. The decrease in
2001 was principally due to a decrease in net income, increases in accounts
receivable, inventory and other assets, decreases in accounts payable and
accrued expenses offset by the decrease in net change in billings related to
cost and estimated earnings on uncompleted contracts. The Company borrowed
funds in 2002 and in previous years primarily to expand its facilities and to
fund the Orange acquisition. The Company had net increases in debt of $4.2
million in 2002 and 2001. The Company's working capital position was $9.4
million and $9.3 million at December 31, 2002 and 2001, respectively.
Capital expenditures were $5.8 million for 2002 of which approximately $4.1
million was for improvements to the 52 acres of land in Amelia, Louisiana,
$680,000 was for the completion of the expansion of a construction
29
fabrication building in Morgan City, Louisiana, and $1.0 million was for
improvements to other facilities and equipment. Capital expenditures were $4.3
million for 2001 of which approximately $1.2 million was for the completion of
the construction of a new drydock, $1.0 million was for improvements to the 52
acres of land in Amelia, Louisiana, $695,000 was for the purchase and
implementation of enterprise resource planning system software and hardware,
and $1.4 million was for improvements to its other facilities and equipment.
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 drydock came from cash and
internally generated funds.
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 Bayou
Boeuf/Intracoastal Waterway approximately 30 miles from the Gulf of Mexico and
is within one mile of the other existing Amelia facility. Approximately 14
acres of the property have been developed as a repair and conversion facility.
The development includes clearing land, grubbing, dredging, installation of a
steel sheet-pile bulkhead system, dry excavation, construction of a 5,400
square foot building, other infrastructure improvements and outfitting with
tools and equipment at an anticipated total cost of approximately $7.6 million.
As of December 31, 2002, the Company had incurred $5.1 million developing the
facility. In February 2003, the Company moved its two largest drydocks to the
facility and commenced operations. The facility allows the Company to handle
vessels with deeper drafts than the Company has historically been able to
service at its other facilities. In addition, the infrastructure improvements
also allow for the potential future development of the facility to accommodate
vessel construction should the market so dictate.
For 2003, the Board of Directors has approved $1.5 million in capital
expenditures for the maintenance, repair and upgrade of existing facilities, in
addition to the $2.5 million previously authorized for the completion of the
Amelia Deepwater facility development.
Net cash provided by financing activities was $4.2 million for 2002 which
included borrowing $5.5 million and the repayment of debt of $1.3 million.
During December 2001, the Company borrowed $6.5 million in additional
long-term debt and refinanced the remaining $2.5 million balance on its term
loan, resulting in a total term loan of $9.0 million at December 31, 2001. The
additional borrowing was arranged to provide long-term financing on recent
capital additions, which included the $5.7 million drydock placed in service in
the first quarter of 2001.
The Company has a Loan Agreement with a commercial bank, which specifies the
terms of the Term Loan, the Development Loan and the Revolving Credit Facility.
The interest rate is variable, and interest accrues at the option of the
Company either at the lender's prime rate minus 0.5% or LIBOR plus 1.75%. 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
and a debt service coverage ratio of 1.35 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 December 31, 2002, the Company was in compliance with these
covenants.
The Term Loan is payable in 28 monthly principal payments of $107,000 plus
interest, with a final payment of $4.7 million due on May 31, 2005. At December
31, 2002, the Term Loan balance outstanding was $7.7 million and the interest
rate was 3.17%.
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 May 31, 2003. No draws were outstanding
as of December 31, 2002.
30
On July 18, 2002 the Company entered into The Development Loan which
provides financing totaling $6.7 million to fund the development of the Amelia
Deepwater facility. The facility includes a revolver that will convert to a
term loan. Payments under the revolver will include interest only payments
until March 31, 2003, at which time it will convert to a term loan to be repaid
in 49 monthly principal payments of $58,000 plus interest, with a final balloon
payment due on May 31, 2007. As of December 31, 2002, the Company had drawn
$5.5 million on this credit facility and the interest rate was 3.13%.
The table below sets out the cash contractual obligations of the Company at
December 31, 2002 (in thousands). Each contractual obligation included in the
table contains various terms, conditions and covenants which, if violated,
accelerate the payment of that obligation.
Payment Due by the Year Ending
----------------------------------------
Contractual Obligation Total 2003 2004 2005 2006 2007
---------------------- ------- ------ ------ ------ ---- ------
Long-term debt
Term loan......... $ 7,723 $1,284 $1,284 $5,155 $ -- $ --
Development loan... 5,500 522 696 696 696 2,890
------- ------ ------ ------ ---- ------
$13,223 $1,806 $1,980 $5,851 $696 $2,890
======= ====== ====== ====== ==== ======
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. At December 31, 2002, outstanding
letters of credit and bonds amounted to $28.1 million. The Company believes
that general industry conditions have led customers to require performance
bonds more often than in the past. The Company believes that it has secured
adequate bonding for potential future job prospects. Although the Company
believes that it will be able to obtain contract bid and performance bonds,
letters of credit, and similar obligations on terms it regards as acceptable,
there can be no assurance it will be successful in doing so. In addition, the
cost of obtaining such bonds, letters of credit and similar obligations has
increased and may continue to increase.
As of December 31, 2002, the Company had an outstanding commitment of $0.7
million for the construction of its new repair and conversion facility in
Amelia, Louisiana. Substantially all of this commitment is expected to be paid
within the next twelve months.
The Company's backlog, excluding unexercised options, was $36.2 million at
December 31, 2002 as compared to $10.4 million at December 31, 2001. The
increase in backlog is primarily attributable to the award of a $16.6 million
contract by the Corps of Engineers for the construction of three towboats. The
contract also includes an option, exercisable by the customer, for one
additional towboat valued at approximately $5.6 million. In addition, the
Company is currently in discussion and negotiations with various customers for
new vessel construction projects and remains cautiously optimistic that these
projects will add to our backlog in the near future.
Management believes that the Company's existing working capital, cash flows
from operations and bank commitments will be adequate to meet its working
capital needs for operations and capital expenditures through 2003. The Company
may pursue acquisition/expansion 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.
Due to the relatively low levels of inflation experienced in fiscal 2002,
2001, and 2000, inflation did not have a significant effect on the results of
the Company in those fiscal years.
31
Critical Accounting Policies and Estimates
The Company's discussion and analysis of its financial condition and results
of operations are based upon the Company's consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these consolidated
financial statements require the Company to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosures of contingent assets and liabilities. On an on-going basis,
the Company evaluates its estimates, including those related to revenue
recognition, allowances for doubtful accounts and long-lived assets. The
Company bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions. The Company believes the following critical accounting policies
affect its more significant judgments and estimates used in preparation of its
consolidated financial statements.
The Company is engaged in various types of construction under long-term
construction contracts. The Company's 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 hour, based on current estimates to complete.
Contract costs include all direct material, labor, and subcontracting cost, and
those indirect costs related to contract performance, such as indirect labor,
supplies, tools, repairs, depreciation, and insurance costs. Indirect costs are
allocated to contracts on the basis of direct labor charges. Revisions in
estimates of cost and earnings during the course of the work are reflected in
the accounting period in which the facts which required the revision become
known. Provisions for estimated losses on uncompleted contracts are made in the
period in which such losses are determined. Significant changes in estimates of
cost due to adverse market conditions or poor contract performance could affect
estimated gross profit, possibly resulting in a contract loss.
The Company estimates its allowance for doubtful accounts receivable based
on an evaluation of individual customer financial strength, current market
conditions, and other information. If the Company's evaluation of its
significant customers' and debtors' creditworthiness should change or prove
incorrect, then the Company may have to recognize additional allowances in the
period that it identifies the risk of loss.
Long-lived assets held and used by the Company are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. The Company assesses the recoverability of
long-lived assets by determining whether the carrying values can be recovered
through projected cash flows and operating results over their remaining lives.
Any impairment of the asset is recognized when it is probable that such future
undiscounted cash flows will be less than the carrying value of the asset.
Future adverse market conditions or poor operating results could result in the
inability to recover the current carrying value of the long-lived asset,
thereby possibly requiring an impairment charge in the future.
The Company is required to test the goodwill of its reporting units for
impairment on at least an annual basis. Currently, the Company's only goodwill
is that associated with its Orange Shipbuilding operations. The Company's
annual test will be performed in the first quarter of 2003, and the Company has
not yet completed the test. In addition to the annual review, the Company must
assess whether goodwill is impaired whenever events or changes in circumstances
indicate that the carrying value of goodwill may be greater than fair value.
Factors that could trigger an impairment review include (1) significant
underperformance relative to historical or projected future operating results,
and (2) significant negative industry or economic trends.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets." SFAS No. 142 changes the
32
accounting for goodwill from an amortization method to an impairment-only
approach. Amortization of goodwill, including goodwill recorded in past
business combinations, ceased upon adoption of this statement. In accordance
with SFAS No. 142, the Company discontinued the amortization of goodwill upon
the adoption of this statement on January 1, 2002.
During the second quarter of 2002, the Company completed the two-step
process of the transitional goodwill impairment test prescribed in SFAS No. 142
with respect to existing goodwill. The first step of the transitional goodwill
impairment test involved a comparison of the fair value of each of the
Company's reporting units, as defined under SFAS No. 142, with its carrying
amount. If the carrying amount exceeded the fair value of a reporting unit, the
Company was required to perform the second step of the transitional goodwill
impairment test. As a result of the outcome of the first step relative to the
Orange Shipbuilding reporting unit, the Company was required to perform the
second step of the transitional goodwill impairment test for this reporting
unit. The second step involved comparing the implied fair value of this
reporting unit's goodwill to its carrying value to measure the amount of
impairment. The transitional goodwill impairment test resulted in the Company
recognizing a non-cash transitional goodwill impairment charge of $4.5 million
related entirely to the Orange Shipbuilding reporting unit. As required by SFAS
No. 142, the $4.5 million charge is reflected as a cumulative effect of a
change in accounting principle in the Company's Consolidated Statement of
Operations for the year ended December 31, 2002. There was no income tax effect
on the impairment charge as the charge related to non-deductible goodwill. The
fair value of the Orange Shipbuilding reporting unit was determined based on
the excess earnings return on assets (treasury) valuation method. The
circumstance leading to the goodwill impairment was a decline in market
conditions since the acquisition of this reporting unit. This circumstance
caused lower than expected operating profits and cash flows.
In June 2001, FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 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 No.
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 does not expect the adoption of this standard will have a material
effect on its consolidated financial position or results of operations.
In August 2001, FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-lived Assets." SFAS No. 144 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 implemented SFAS
No. 144 on January 1, 2002, as required, and it did not have a material effect
on the Company's financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 eliminates SFAS No. 4 and as a result, gains and
losses from extinguishments of debt should be classified as extraordinary items
only if they meet the criteria of APB Opinion No. 30. SFAS No. 145 amends SFAS
No. 13, "Accounting for Leases," to eliminate an inconsistency between the
required accounting for sale-leaseback transactions and the required accounting
for certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. SFAS No. 145 also updates and amends existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. The Company
does not expect that the adoption of SFAS No. 145 will have a material impact
on its consolidated financial position or results of operations.
In July 2002, FASB issued SFAS No. 146, "Accounting for Cost Associated with
Exit or Disposal Activities," which is effective for fiscal periods after
December 31, 2002. SFAS No. 146 requires companies to
33
recognize costs associated with restructuring, discontinued operations, plant
closing, or other exit or disposal activities, when incurred rather than at the
date a plan is committed to. The Company plans to adopt the standard as of the
effective date and will implement its provisions on a prospective basis.
In December 2002, FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure." This Statement amends SFAS No. 123,
"Accounting for Stock Based Compensation," to provide alternate methods of
transition to SFAS No. 123's fair value method of accounting for stock-based
compensation. Statement No. 148 also amends the disclosure provisions of SFAS
No. 123 and APB Opinion No. 28, "Interim Financial Reporting," to require
disclosure in the summary of significant accounting policies of the effects of
an entity's accounting policy with respect to stock-based employee compensation
on reported net income and earnings per share in annual and interim financial
statements. While SFAS No. 148 does not amend SFAS No. 123 to require companies
to account for employee stock options using the fair value method, the
disclosure provisions of SFAS No. 148 are applicable to all companies with
stock-based employee compensation, regardless of whether they account for that
compensation using the fair value method of SFAS No. 123 or the intrinsic value
method of APB No. 25. As allowed by SFAS No. 123, the Company has elected to
continue to utilize the accounting method prescribed by APB Opinion No. 25 and
has adopted the disclosure requirements of SFAS No. 148 as of December 31,
2002. See Note 1 to the consolidated financial statements.
In November 2002, FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the disclosures to be
made by a guarantor about its obligations under certain guarantees. It also
clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. As required, the Company adopted the disclosure
requirements of FIN 45 as of December 31, 2002. See Note 12 to the consolidated
financial statements. The Company will adopt the initial recognition and
measurement provisions on a prospective basis for guarantees issued or modified
after December 31, 2002. The Company has not determined the impact that the
adoption of the recognition/measurement provisions will have on its
consolidated financial position or results of operations.
In January 2003, FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 requires that companies that
control another entity through interests other than voting interests should
consolidate the controlled entity. FIN 46 applies to variable interest entities
created after January 31, 2003, and to variable interest entities in which an
enterprise obtains an interest in after that date. The Company does not expect
that the adoption of FIN 46 will have a material impact on its consolidated
financial position or results of operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to the risk of changing interest rates. Interest on
$13.2 million of the Company's long-term debt including current maturities with
an average interest rate of 3.15% at December 31, 2002, 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 $132,000 per year if
the Company were to maintain the same debt level and structure.
Item 8. Financial Statements and Supplementary Data
Page
----
Independent Auditors' Report.................................................................... 35
Consolidated Balance Sheets as of December 31, 2002 and 2001.................................... 36
Consolidated Statements of Operations for the Years Ended December 31, 2002, 2001, and 2000..... 37
Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2002, 2001, and
2000.......................................................................................... 38
Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001, and 2000..... 39
Notes to Consolidated Financial Statements...................................................... 40
34
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, 2002 and 2001, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 2002. 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 auditing standards generally
accepted in the United States of America. 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 as of December 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2002 in conformity with accounting principles generally accepted
in the United States of America.
As discussed in Note 1 to the consolidated financial statements, Conrad
Industries, Inc. and subsidiaries adopted the provisions of Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
in 2002.
/s/ DELOITTE & TOUCHE LLP
New Orleans, Louisiana
February 18, 2003
35
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31
----------------
2002 2001
ASSETS ------- -------
CURRENT ASSETS:
Cash and cash equivalents........................................................ $ 6,427 $ 6,909
Accounts receivable, net......................................................... 3,650 2,353
Costs and estimated earnings, net in excess of billings on uncompleted contracts. 4,360 2,952
Inventories...................................................................... 214 247
Other current assets............................................................. 1,641 1,795
------- -------
Total current assets......................................................... 16,292 14,256
PROPERTY, PLANT AND EQUIPMENT, net.................................................. 29,430 25,486
GOODWILL............................................................................ 8,101 12,601
OTHER ASSETS........................................................................ 18 231
------- -------
TOTAL ASSETS........................................................................ $53,841 $52,574
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................................. $ 3,278 $ 859
Accrued employee costs........................................................... 760 1,564
Accrued expenses................................................................. 362 826
Current maturities of long-term debt............................................. 1,806 1,284
Billings in excess of costs and estimated earnings on uncompleted contracts...... 639 411
------- -------
Total current liabilities.................................................... 6,845 4,944
LONG-TERM DEBT, less current maturities............................................. 11,417 7,723
DEFERRED INCOME TAXES............................................................... 3,364 3,211
------- -------
Total liabilities............................................................ 21,626 15,878
------- -------
COMMITMENTS AND CONTINGENCIES (Note 12)
SHAREHOLDERS' EQUITY:
Preferred stock, $0.01 par value, 5,000,000 shares authorized, no shares issued.. -- --
Common stock, $0.01 par value, 20,000,000 shares authorized, 7,276,437 and
7,273,937 shares issued in 2002 and 2001....................................... 73 73
Additional paid-in capital....................................................... 29,000 28,992
Unearned stock compensation...................................................... (6) (21)
Treasury stock at cost, 40,483 shares in 2002 and 2001........................... (211) (211)
Retained earnings................................................................ 3,359 7,863
------- -------
Total shareholders' equity................................................... 32,215 36,696
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.......................................... $53,841 $52,574
======= =======
See notes to consolidated financial statements.
36
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Years Ended December 31,
-------------------------
2002 2001 2000
------- ------- -------
REVENUE.............................................................. $41,023 $46,904 $38,516
COST OF REVENUE...................................................... 35,657 37,017 29,168
------- ------- -------
GROSS PROFIT......................................................... 5,366 9,887 9,348
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES......................... 4,815 5,077 4,661
TERMINATED ACQUISITION COSTS......................................... 350 -- --
EXECUTIVE COMPENSATION EXPENSE....................................... -- 2,613 --
------- ------- -------
INCOME FROM OPERATIONS............................................... 201 2,197 4,687
INTEREST EXPENSE..................................................... (221) (193) (386)
OTHER INCOME, NET.................................................... 39 144 417
------- ------- -------
INCOME BEFORE INCOME TAXES........................................... 19 2,148 4,718
PROVISION FOR INCOME TAXES........................................... 23 1,115 2,021
------- ------- -------
(LOSS) INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE............................................... (4) 1,033 2,697
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE.................. (4,500) -- --
------- ------- -------
NET (LOSS) INCOME.................................................... $(4,504) $ 1,033 $ 2,697
======= ======= =======
Basic and diluted (loss) income per common share:
Income before cumulative effect of change in accounting principle. $ -- $ 0.14 $ 0.38
Cumulative effect of change in accounting principle............... (0.62) -- --
------- ------- -------
Net (loss) income................................................. $ (0.62) $ 0.14 $ 0.38
======= ======= =======
Weighted average common shares outstanding:
Basic............................................................. 7,230 7,129 7,067
======= ======= =======
Diluted........................................................... 7,230 7,149 7,076
======= ======= =======
See notes to consolidated financial statements.
37
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
Common Stock Treasury Stock
$0.01 Par Value Additional Unearned at Cost
--------------- Paid-in Stock ------------ Retained
Shares Amount Capital Compensation Shares Amount Earnings Total
------ ------ ---------- ------------ ------ ------ -------- -------
BALANCE, JANUARY 1, 2000............ 7,078 $71 $27,780 $ -- -- $ -- $ 4,133 $31,984
Purchase of treasury stock.......... -- -- -- -- 21 (84) -- (84)
Exercise of stock options........... 14 -- 88 -- -- -- -- 88
Net income.......................... -- -- -- -- -- -- 2,697 2,697
----- --- ------- ---- -- ----- ------- -------
BALANCE, DECEMBER 31, 2000.......... 7,092 71 27,868 -- 21 (84) 6,830 34,685
Purchase of treasury stock.......... -- -- -- -- 19 (127) -- (127)
Stock issued to executives.......... 177 2 1,092 -- -- -- -- 1,094
Restricted stock issued to executive 5 -- 32 (32) -- -- -- --
Amortization of unearned stock
compensation....................... -- -- -- 11 -- -- -- 11
Net income.......................... -- -- -- -- -- -- 1,033 1,033
----- --- ------- ---- -- ----- ------- -------
BALANCE, DECEMBER 31, 2001.......... 7,274 73 28,992 (21) 40 (211) 7,863 36,696
Restricted stock issued to executive 2 -- 8 (8) -- -- -- --
Amortization of unearned stock
compensation....................... -- -- -- 23 -- -- -- 23
Net loss............................ -- -- -- -- -- -- (4,504) (4,504)
----- --- ------- ---- -- ----- ------- -------
BALANCE, DECEMBER 31, 2002.......... 7,276 $73 $29,000 $ (6) 40 $(211) $ 3,359 $32,215
===== === ======= ==== == ===== ======= =======
See notes to consolidated financial statements.
38
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
-------------------------
2002 2001 2000
------- ------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income................................................................... $(4,504) $ 1,033 $ 2,697
Adjustments to reconcile net (loss) income to net cash provided by operating
activities:
Cumulative effect of change in accounting principle............................. 4,500 -- --
Depreciation and amortization................................................... 1,861 2,326 2,199
Deferred income tax provision................................................... 3 174 93
Executive compensation expense.................................................. -- 1,547 --
Other........................................................................... 19 153 --
Changes in assets and liabilities:
Accounts receivable.......................................................... (1,297) (731) 1,450
Net change in billings related to cost and estimated earnings, net on
uncompleted contracts...................................................... (1,180) 233 534
Inventory and other assets................................................... 60 (551) 310
Accounts payable and accrued expenses........................................ 1,151 (86) 1,174
------- ------- -------
Net cash provided by operating activities................................ 613 4,098 8,457
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property, plant and equipment.............................. (5,767) (4,320) (6,692)
Proceeds (issuance) of executive notes receivable................................... 456 (456) --
------- ------- -------
Net cash used in investing activities.................................... (5,311) (4,776) (6,692)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt...................................................... 5,500 8,700 --
Principal repayments of debt........................................................ (1,284) (4,499) (2,508)
Purchase of treasury stock.......................................................... -- (127) (84)
Proceeds from exercised stock options............................................... -- -- 88
------- ------- -------
Net cash provided by (used in) financing activities...................... 4,216 4,074 (2,504)
------- ------- -------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS................................... (482) 3,396 (739)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR........................................... 6,909 3,513 4,252
------- ------- -------
CASH AND CASH EQUIVALENTS, END OF YEAR................................................. $ 6,427 $ 6,909 $ 3,513
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid, net of capitalized interest.......................................... $ 221 $ 193 $ 386
======= ======= =======
Taxes paid.......................................................................... $ -- $ 2,068 $ 1,475
======= ======= =======
NON-CASH ACTIVITIES:
Issuance of stock to executives..................................................... $ -- $ 1,093 $ --
======= ======= =======
Issuance of restricted stock to executives.......................................... $ 8 $ 32 $ --
======= ======= =======
Forgiveness of executive notes receivable and related interest...................... $ -- $ 454 $ --
======= ======= =======
See notes to consolidated financial statements.
39
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 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.
Use of Estimates--The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements, as well as reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
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 major 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.
Allowance for Doubtful Accounts--The Company estimates its allowance for
doubtful accounts based on an evaluation of individual customer financial
strength, current market conditions, and other information.
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.
Interest Capitalization--Interest costs for the construction of certain
long-term assets are capitalized and amortized over the related assets'
estimated useful lives. During the years ended December 31, 2002, 2001 and
2000, interest costs capitalized were $90,000, $77,000 and $141,000,
respectively.
Goodwill--In June 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill
and Other Intangible Assets." SFAS No. 142
40
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
changes the accounting for goodwill from an amortization method to an
impairment-only approach. Amortization of goodwill, including goodwill recorded
in past business combinations, ceased upon adoption of this statement. In
accordance with SFAS No. 142, the Company discontinued the amortization of
goodwill upon the adoption of this statement on January 1, 2002.
During the second quarter of 2002, the Company completed the two-step
process of the transitional goodwill impairment test prescribed in SFAS No. 142
with respect to existing goodwill. The first step of the transitional goodwill
impairment test involved a comparison of the fair value of each of the
Company's reporting units, as defined under SFAS No. 142, with its carrying
amount. If the carrying amount exceeded the fair value of a reporting unit, the
Company was required to perform the second step of the transitional goodwill
impairment test. As a result of the outcome of the first step relative to the
Orange Shipbuilding reporting unit, the Company was required to perform the
second step of the transitional goodwill impairment test for this reporting
unit. The second step involved comparing the implied fair value of this
reporting unit's goodwill to its carrying value to measure the amount of
impairment. The transitional goodwill impairment test resulted in the Company
recognizing a non-cash transitional goodwill impairment charge of $4.5 million
related entirely to the Orange Shipbuilding reporting unit. As required by SFAS
No. 142, the $4.5 million charge is reflected as a cumulative effect of a
change in accounting principle in the Company's Consolidated Statement of
Operations for the year ended December 31, 2002. There was no income tax effect
on the impairment charge as the charge related to non-deductible goodwill. The
fair value of the Orange Shipbuilding reporting unit was determined based on
the excess earnings return on assets (treasury) valuation method. The
circumstance leading to the goodwill impairment was a decline in market
conditions since the acquisition of this reporting unit. This circumstance
caused lower than expected operating profits and cash flows.
A reconciliation of previously reported net income and income per share to
the amounts adjusted for the exclusion of goodwill amortization follows (in
thousands, except per share data):
Year Ended December 31,
----------------------
2002 2001 2000
------- ------ ------
Reported (loss) income before cumulative effect of change in accounting
principle...................................................................... $ (4) $1,033 $2,697
Add: Goodwill amortization....................................................... -- 787 787
------- ------ ------
Adjusted (loss) income before cumulative effect of change in accounting
principle...................................................................... (4) 1,820 3,484
Cumulative effect of change in accounting principle.............................. (4,500) -- --
------- ------ ------
Adjusted net (loss) income....................................................... $(4,504) $1,820 $3,484
======= ====== ======
Reported basic and diluted income per share before cumulative effect of change in
accounting principle........................................................... $ -- $ 0.14 $ 0.38
Add: Goodwill amortization, per basic and diluted share.......................... -- 0.11 0.11
------- ------ ------
Adjusted basic and diluted income per share before cumulative effect of change in
accounting principle........................................................... -- 0.25 0.49
Cumulative effect of change in accounting principle, per basic and diluted share. (0.62) -- --
------- ------ ------
Adjusted basic and diluted (loss) income per share............................... $ (0.62) $ 0.25 $ 0.49
======= ====== ======
41
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The carrying amount of goodwill as of December 31, 2002 and 2001, by segment
is as follows (in thousands):
Vessel Repair and
Construction Conversions Total
------------ ----------- -------
Balance at December 31, 2001 $12,601 $-- $12,601
SFAS No. 142 impairment..... (4,500) -- (4,500)
------- --- -------
Balance at December 31, 2002 $ 8,101 $-- $ 8,101
======= === =======
Impairment of Long-Lived Assets--Long-lived assets held and used by the
Company are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
Company assesses the recoverability of long-lived assets by determining whether
the carrying values can be recovered through undiscounted net cash flows
expected to result from such operations and assets over their remaining lives.
If an impairment is indicated, the asset is written down to its fair market
value, or if fair market value is not readily determinable, to its estimated
discounted net cash flows.
Inventories--Inventories consist primarily of excess job related materials
and supplies. They are stated at the lower of cost or market. Cost is
determined on a first-in, first-out basis.
Basic and Diluted Income Per Share--Basic net income (loss) per share is
computed based on the weighted average number of common shares outstanding
during the period. Diluted net income (loss) per share uses the weighted
average number of common shares outstanding adjusted for the incremental shares
attributable to dilutive outstanding options to purchase common stock and
non-vested restricted stock awards.
Fair Value of Financial Instruments--The carrying amounts of the Company's
financial instruments including cash and cash equivalents, receivables,
payables and long-term debt approximates fair value at December 31, 2002 and
2001.
Income Taxes--Income taxes are accounted for using the asset and liability
method. Deferred income taxes are provided for the tax effect of temporary
differences between the tax basis of assets and liabilities and their reported
amounts in the financial statements at the enacted statutory rate to be in
effect when the taxes are paid.
Stock-Based Compensation--The Company uses the intrinsic value method of
accounting for employee-based compensation prescribed by Accounting Principles
Board ("APB") Opinion No. 25 and, accordingly, follows the disclosure-only
provisions of Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation." SFAS No. 123 encourages the use of a
fair value based method of accounting for compensation expense associated with
stock option and similar plans. However, SFAS No. 123 permits the continued use
of the intrinsic value based method prescribed by Opinion No. 25 but requires
additional disclosures, including pro forma calculations of net earnings and
earnings per share as if the fair value method of accounting prescribed by SFAS
No. 123 had been applied.
42
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Had compensation cost for the Company's stock plans been determined based on
the fair value at the grant dates consistent with the method of SFAS No. 123,
net income and net income per share amounts would have approximated the
following pro forma amounts (in thousands, except per share data):
2002 2001 2000
------- ------ ------
Net (loss) income, as reported............................................... $(4,504) $1,033 $2,697
Add: Total stock-based employee compensation expense included in reported net
(loss) income, net of related tax effects.................................. 14 696 --
Deduct: Total stock-based employee compensation expense determined under
fair value based method for all awards, net of related tax effects......... (124) (933) (464)
------- ------ ------
Pro forma, net (loss) income................................................. $(4,614) $ 796 $2,233
======= ====== ======
(Loss) income per share:
Basic and diluted--as reported............................................ $ (0.62) $ 0.14 $ 0.38
======= ====== ======
Basic and diluted--pro forma.............................................. $ (0.64) $ 0.11 $ 0.32
======= ====== ======
Weighted average fair value of grants........................................ $ 1.75 $ 3.64 $ 2.93
======= ====== ======
Black-Scholes option pricing model assumptions:
Risk-free interest rate................................................... 2.72 % 4.00% 5.15%
Expected life (years)..................................................... 3.0 3.0 2.8
Volatility................................................................ 79.0 % 84.6% 92.5%
Dividend yield............................................................ -- -- --
New Accounting Pronouncements--In June 2001, FASB issued SFAS No. 143,
"Accounting for Asset Retirement Obligations." SFAS No. 143 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 No. 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 does not expect the
adoption of this standard will have a material effect on its consolidated
financial position or results of operations.
In August 2001, FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-lived Assets." SFAS No. 144 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 implemented SFAS
No. 144 on January 1, 2002, as required, and it did not have a material effect
on the Company's financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 eliminates SFAS No. 4 and as a result, gains and
losses from extinguishments of debt should be classified as extraordinary items
only if they meet the criteria of APB Opinion No. 30. SFAS No. 145 amends SFAS
No. 13, "Accounting for Leases," to eliminate an inconsistency between the
required accounting for sale-leaseback transactions and the required accounting
for certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. SFAS No. 145 also updates and amends existing
authoritative pronouncements to make various
43
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
technical corrections, clarify meanings, or describe their applicability under
changed conditions. The Company does not expect that the adoption of SFAS No.
145 will have a material impact on its consolidated financial position or
results of operations.
In July 2002, FASB issued SFAS No. 146, "Accounting for Cost Associated with
Exit or Disposal Activities," which is effective for fiscal periods after
December 31, 2002. SFAS No. 146 requires companies to recognize costs
associated with restructuring, discontinued operations, plant closing, or other
exit or disposal activities, when incurred rather than at the date a plan is
committed to. The Company plans to adopt the standard as of the effective date
and will implement its provisions on a prospective basis.
In December 2002, FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure." This Statement amends SFAS No. 123,
"Accounting for Stock Based Compensation," to provide alternate methods of
transition to SFAS No. 123's fair value method of accounting for stock-based
compensation. Statement No. 148 also amends the disclosure provisions of SFAS
No. 123 and APB Opinion No. 28, "Interim Financial Reporting," to require
disclosure in the summary of significant accounting policies of the effects of
an entity's accounting policy with respect to stock-based employee compensation
on reported net income and earnings per share in annual and interim financial
statements. While SFAS No. 148 does not amend SFAS No. 123 to require companies
to account for employee stock options using the fair value method, the
disclosure provisions of SFAS No. 148 are applicable to all companies with
stock-based employee compensation, regardless of whether they account for that
compensation using the fair value method of SFAS No. 123 or the intrinsic value
method of APB No. 25. As allowed by SFAS No. 123, the Company has elected to
continue to utilize the accounting method prescribed by APB Opinion No. 25 and
has adopted the disclosure requirements of SFAS No. 148 as of December 31,
2002. See Note 1 to the consolidated financial statements.
In November 2002, FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the disclosures to be
made by a guarantor about its obligations under certain guarantees. It also
clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. As required, the Company adopted the disclosure
requirements of FIN 45 as of December 31, 2002. See Note 12 to the consolidated
financial statements. The Company will adopt the initial recognition and
measurement provisions on a prospective basis for guarantees issued or modified
after December 31, 2002. The Company has not determined the impact that the
adoption of the recognition/measurement provisions will have on its
consolidated financial position or results of operations.
In January 2003, FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 requires that companies that
control another entity through interests other than voting interests should
consolidate the controlled entity. FIN 46 applies to variable interest entities
created after January 31, 2003, and to variable interest entities in which an
enterprise obtains an interest in after that date. The Company does not expect
that the adoption of FIN 46 will have a material impact on its consolidated
financial position or results of operations.
Reclassifications--Certain prior year balances have been reclassified to
conform to the current year presentation.
44
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. RECEIVABLES
Receivables consisted of the following at December 31, 2002 and 2001 (in
thousands):
2002 2001
------ ------
U.S. Government:
Amounts billed................................................. $ 424 $ 357
Unbilled costs and estimated earnings on uncompleted contracts. 423 1,137
------ ------
847 1,494
Commercial:
Amounts billed................................................. 3,226 1,996
Unbilled costs and estimated earnings on uncompleted contracts. 3,937 1,815
------ ------
Total...................................................... $8,010 $5,305
====== ======
Included above in amounts billed is an allowance for doubtful accounts of
$16,000 and $20,000 at December 31, 2002 and 2001, respectively. During 2002,
the Company reserved for and wrote off approximately $65,000 related to a
receivable deemed uncollectible as a result of a settlement reached with a
vessel construction customer. 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 December 31, 2002,
substantially all is expected to be collected within the next twelve months.
Information with respect to uncompleted contracts as of December 31, 2002
and 2001 is as follows (in thousands):
2002 2001
-------- --------
Costs incurred on uncompleted contracts $ 28,684 $ 28,311
Estimated earnings, net................ 4,698 8,081
-------- --------
33,382 36,392
Less billings to date.................. (29,661) (33,851)
-------- --------
$ 3,721 $ 2,541
======== ========
The above amounts are included in the accompanying balance sheets under the
following captions (in thousands):
2002 2001
------ ------
Costs and estimated earnings, net in excess of billings on uncompleted contracts $4,360 $2,952
Billings in excess of costs and estimated earnings on uncompleted contracts..... (639) (411)
------ ------
Total........................................................................ $3,721 $2,541
====== ======
The Company recorded a charge of approximately $150,000 for the year ended
December 31, 2002 to reflect revised estimates related to anticipated losses on
certain uncompleted vessels in progress. As of December 31, 2002, the $150,000
provision is included in costs and estimated earnings, net in excess of
billings on uncompleted contracts. As of December 31, 2001, the Company did not
have any contracts in a forward loss position.
45
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at December 31,
2002 and 2001 (in thousands):
2002 2001
-------- --------
Land......................... $ 3,881 $ 3,881
Buildings and improvements... 15,966 14,956
Machinery and equipment...... 5,790 5,272
Drydocks and bulkheads....... 10,866 10,276
Barges and boat.............. 454 454
Office and automotive........ 2,018 968
Construction in progress..... 5,077 2,520
-------- --------
44,052 38,327
Less accumulated depreciation (14,622) (12,841)
-------- --------
$ 29,430 $ 25,486
======== ========
4. LONG-TERM DEBT
Long-term debt consisted of the following at December 31, 2002 and 2001 (in
thousands):
2002 2001
------- -------
Term loan--Bank, variable interest rate (3.17% at December 31, 2002), due
May 31, 2005.............................................................. $ 7,723 $ 9,007
Development loan--Bank, variable interest rate (3.13% at December 31, 2002),
due May 31, 2007.......................................................... 5,500 --
------- -------
13,223 9,007
Less current maturities..................................................... (1,806) (1,284)
------- -------
$11,417 $ 7,723
======= =======
The Company has a Loan Agreement with a commercial bank, which specifies the
terms of the Term Loan, the Development Loan and the Revolving Credit Facility.
The interest rate is variable, and interest accrues at the option of the
Company either at the lender's prime rate minus 0.5% or LIBOR plus 1.75%. 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
and a debt service coverage ratio of 1.35 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 December 31, 2002, the Company was in compliance with these
covenants.
The Term Loan has a maturity date of May 31, 2005 and is payable in 28
remaining monthly principal payments of $107,000 plus interest, with a final
payment of $4.7 million. Interest accrues at 3.17% until February 28, 2003, and
thereafter at the option of the Company either at the lender's prime rate minus
0.5% (4.25% at December 31, 2002) or LIBOR plus 1.75% (3.13% at December 31,
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 May 31, 2003. The
46
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Company pays a fee of 0.25% per annum on the unused portion of the facility. As
of December 31, 2002, no amounts were outstanding on the Revolving Credit
Facility.
On July 18, 2002 the Company entered into The Development Loan which
provides financing totaling $6.7 million to fund the development of the Amelia
Deepwater facility. The facility includes a revolver that will convert to a
term loan. Payments under the revolver will include interest only payments
until March 31, 2003, at which time it will convert to a term loan to be repaid
in 49 monthly principal payments of $58,000 plus interest, with a final balloon
payment due on May 31, 2007. As of December 31, 2002, the Company had drawn
$5.5 million on this credit facility. Interest accrues at the option of the
Company either at the lender's prime rate minus 0.5% (4.25% at December 31,
2002) or LIBOR plus 1.75% (3.13% at December 31, 2002).
Annual maturities of long-term debt for each of the next five years are as
follows (in thousands):
Amount
-------
2003 $ 1,806
2004 1,980
2005 5,851
2006 696
2007 2,890
-------
$13,223
=======
5. SHAREHOLDERS' EQUITY
Treasury Stock
On March 21, 2000, the Company's Board of Directors authorized management to
repurchase shares of its outstanding common stock. The shares are held as
treasury stock and are available for use in connection with the Company's stock
option and other compensation programs or for other corporate purposes. The
Company repurchased 40,483 shares at a total cost of approximately $211,000 as
of December 31, 2002 and 2001.
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 7,230,194, 7,128,840 and 7,067,239 for the years ended
December 31, 2002, 2001 and 2000, respectively. The number of weighted average
shares for "diluted" income per share was 7,230,194, 7,148,914, and 7,076,110
for the years ended December 31, 2002, 2001 and 2000, respectively.
Income (loss) per diluted share calculations for the years ended December
31, 2002, 2001, and 2000 exclude 205,775, 520,503, and 576,275, respectively,
of common shares issuable under common stock options because the options'
exercise price was greater than the average market price of the common shares.
Additionally, 54,000 of common shares issuable under common stock options were
excluded from the loss per diluted share calculation for the year ended
December 31, 2002, because they were anti-dilutive due to the operating loss
for the year.
Stockholders' Rights Plan
During May 2002, the Company adopted a rights plan. The rights plan is
intended to protect stockholder interests in the event the Company becomes the
subject of a takeover initiative that the Company's board of
47
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
directors believes could deny the Company's stockholders the full value of
their investment. The adoption of the rights plan is intended as a means to
guard against abusive takeover tactics and is not in response to any particular
proposal. The plan does not prohibit the board from considering any offer that
it considers advantageous to its stockholders.
Under the plan, the Company declared and paid a dividend on June 18, 2002 of
one right for each share of common stock held by stockholders of record on June
11, 2002. Each right initially entitles the Company's stockholders to purchase
one one-thousandth of a share of the Company's preferred stock for $20 per one
one-thousandth, subject to adjustment. However, if a person acquires, or
commences a tender offer that would result in ownership of, 15 percent or more
of the Company's outstanding common stock while the plan remains in place,
then, unless the Company redeems the rights for $0.001 per right, the rights
will become exercisable by all rights holders except the acquiring person or
group for shares of common stock or of the acquiring person having a market
value of twice the purchase price of the rights.
The rights will expire on May 23, 2012, unless redeemed or exchanged at an
earlier date. The rights will initially trade with shares of the Company's
common stock and will have no impact on the way in which the Company's shares
are traded. There are currently no separate certificates evidencing the rights,
and there is no market for the rights.
Stock Issuance to Executive Officers
In September 2002, the Company entered into an employment agreement with
Lewis J. Derbes, Jr. providing for employment as the Company's Vice President
and Chief Financial Officer through December 31, 2004 and annual extensions
thereafter, subject to the parties mutual agreement. The minimum annual total
compensation under the agreement is $140,000. Pursuant to the agreement, on the
executive's start date of September 30, 2002, he was granted 2,500 restricted
shares of common stock, vesting on the first anniversary of his start date, and
options to purchase 25,000 shares of common stock at the market price on the
start date, vesting over a three year period.
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 first anniversary of his 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 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 were
cancelled. His $233,327 promissory note payable and related accrued interest
payable to the Company were also cancelled.
The Company also granted Cecil A. Hernandez, the Company's former Chief
Financial Officer, in consideration of past services and surrender of his stock
options, 44,261 shares of common stock and paid a cash bonus on February 28,
2002, of $248,000. Options to purchase 114,043 shares of common stock previously
48
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
granted to Mr. Hernandez were cancelled. His $139,277 promissory note payable
and related accrued interest payable to the Company were also cancelled.
Messrs. Hidalgo and Hernandez executed notes payable to the Company in the
amount of their related withholding tax obligations, which were 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.
Stock Option Plan
The Company established the 2002 Stock Plan (the "Stock Plan") in May 2002.
The Stock Plan permits the granting of any or all of the following types of
awards: stock options, restricted stock, automatic director options, and
various other stock-based awards. 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. Only non-employee directors of the Company will receive automatic
grants of director options. Awards granted under the Stock Plan have a maximum
term of ten years. The maximum number of shares that can be delivered under the
2002 Stock Plan is the sum of (1) 512,044 shares, plus (2) any shares
represented by awards granted under the 1998 Stock Plan that are forfeited,
expire or are cancelled without delivery of shares.
The Company established the 1998 Stock Plan in March 1998. The 1998 Stock
Plan permitted the granting of any or all of the following types of awards:
stock options, restricted stock, automatic director options, and various other
stock-based awards. Only non-employee directors of the Company received
automatic grants of director options. Awards granted under the 1998 Stock Plan
have a maximum term of ten years. A total of 950,000 shares were authorized and
reserved for issuance and 246,742 shares were subject to outstanding awards
when the Company adopted the 2002 Stock Plan. No further awards may be made
under the 1998 Stock Plan.
The following is a summary of the option activity for the years ended
December 31, 2002, 2001 and 2000:
Weighted Number
Avg. Price of Options
---------- ----------
Outstanding at January 1, 2000.. $6.54 547,100
Granted......................... 5.71 63,775
Forfeited....................... 6.75 (8,000)
Exercised....................... 6.22 (14,133)
----- --------
Outstanding at December 31, 2000 6.45 588,742
Granted......................... 6.45 53,000
Cancelled....................... 6.65 (400,000)
----- --------
Outstanding at December 31, 2001 6.12 241,742
Granted......................... 3.34 42,800
Forfeited....................... 5.16 (24,767)
----- --------
Outstanding at December 31, 2002 5.70 259,775
===== ========
Exercisable at December 31, 2002 6.10 186,641
===== ========
Exercisable at December 31, 2001 6.11 188,148
===== ========
Exercisable at December 31, 2000 6.50 395,684
===== ========
49
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about stock options outstanding
at December 31, 2002:
Options Outstanding Options Exercisable
------------------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Price Number Remaining Exercise Number Exercise
Range Per Share Outstanding Life Price Exercisable Price
--------------- ----------- ---------- -------- ----------- --------
$2.95-$3.40 54,000 9.09 years $3.24 14,200 $3.25
$4.70-$6.40 109,275 8.28 years $5.98 75,941 $5.79
$6.75-$7.25 96,500 5.57 years $6.77 96,500 $6.77
Options granted under the stock plans during 2002, 2001 and 2000 have
various vesting rights ranging from immediate to three years from the date of
the grant. Vesting is accelerated upon a change of control as defined in the
plans.
Warrants
In June 1998, the Company issued to the underwriter involved in the initial
public 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, 2002, 2001 and 2000, no warrants had been exercised.
6. EMPLOYEE BENEFITS
The Company has a 401(k) plan that covers all employees who meet certain
eligibility requirements. Contributions to the plan by the Company are made at
the discretion of the Board of Directors. Contribution expense was $121,000,
$128,000 and $119,000 for the years ended December 31, 2002, 2001 and 2000,
respectively.
7. TERMINATED ACQUISITION COSTS
On October 9, 2002, the Company announced that it had terminated
negotiations under a non-binding letter of intent executed August 12, 2002
regarding the purchase of substantially all of the assets of Swiftships
Shipbuilders, LLC and Swiftships Technologies, LLC. Approximately $350,000 of
deferred acquisition costs were charged to operations for the year ended
December 31, 2002 as a result of the termination of this proposed acquisition.
In connection with the letter of intent, Conrad entered into an agreement
pursuant to which it loaned approximately $500,000, secured by real estate, to
Swiftships Shipbuilders, LLC. The loan and related interest were collected in
full during the fourth quarter of 2002.
8. INCOME TAXES
The Company has provided for Federal and State income taxes as follows (in
thousands):
2002 2001 2000
---- ------ ------
Current provision. $20 $ 941 $1,928
Deferred provision 3 174 93
--- ------ ------
$23 $1,115 $2,021
=== ====== ======
State income taxes included above are not significant for the years
presented.
50
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The provision for income taxes varied from the Federal statutory income tax
rate due to the following (in thousands):
2002 2001 2000
------------ ----------- -----------
Amount % Amount % Amount %
------ ----- ------ ---- ------ ----
Taxes at Federal statutory rate..... $ 7 35.0 $ 752 35.0 $1,651 35.0
Non-deductible goodwill amortization -- -- 275 12.8 276 5.8
Non-deductible penalty.............. -- -- 53 2.5 -- --
Non-deductible other expenses....... 21 110.5 -- -- -- --
State income taxes.................. (5) (24.4) 35 1.6 94 2.0
--- ----- ------ ---- ------ ----
Total............................ $23 121.1 $1,115 51.9 $2,021 42.8
=== ===== ====== ==== ====== ====
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, 2002 and 2001 are as
follows (in thousands):
2002 2001
------ ------
Deferred Tax Liabilities:
Differences between book and tax basis of property, plant and equipment. $3,364 $3,269
Other................................................................... -- (58)
------ ------
3,364 3,211
------ ------
Deferred Tax Assets (included in other current assets):
Contracts in progress................................................... (33) 124
Accrued expenses not currently deductible............................... (170) (177)
------ ------
(203) (53)
------ ------
Net deferred tax liabilities............................................... $3,161 $3,158
====== ======
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, 2002, 2001 and 2000 are
summarized as follows (in thousands):
2002 2001 2000
--------- --------- ---------
Amount % Amount % Amount %
------ -- ------ -- ------ --
Customer A $4,891 12% $5,065 11% $7,330 19%
Customer B 7,429 16%
Customer C 7,488 19%
Customer D 5,095 12%
Customer E 2,029 5% 5,805 12% 4,663 12%
Customer F 4,167 10%
Sales to Customers A, B, D, E and F for all periods presented in the table
were reported by the Company's vessel construction segment. Sales to Customer C
for all periods presented in the table were reported by the Company's repair
and conversion segment.
51
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. RELATED PARTY TRANSACTIONS
The Company purchases in its ordinary course of business certain components
from Johnny's Propeller Shop, Inc., a company wholly owned by John P. Conrad,
Jr., Co-Chairman of the Board of Directors. Total purchases for the three years
ended December 31, 2002, 2001 and 2000 were $345,000, $211,000 and $207,000,
respectively. The Company believes that such transactions were made on a
competitive basis at market prices.
11. SEGMENT AND RELATED INFORMATION
The Company classifies its business into two segments:
Vessel Construction
The Company constructs a variety of marine vessels, including large and
small deck barges, single and double hull tank barges, lift boats, push boats,
offshore tug boats and offshore support vessels. The Company also fabricates
components of offshore drilling rigs and floating production, storage and
offloading vessels including sponsons, stability columns, blisters, pencil
columns and other modular components.
Repair and Conversions
The Company's conversion projects primarily consist of lengthening the
midbodies of vessels, modifying vessels to permit their use for a different
type of activity and other modifications to increase the capacity or
functionality of a vessel. The Company also derives a significant amount of
revenue from repairs made as a result of periodic inspections required by the
U.S. Coast Guard, the American Bureau of Shipping and other regulatory agencies.
The Company evaluates the performance of its segments based upon gross
profit. Selling, general and administrative expenses, executive compensation
expense, interest expense, other income, net, and income taxes are not
allocated to the segments. Accounting policies are the same as those described
in Note 1, "Summary of Significant Accounting Policies". Intersegment sales and
transfers are not significant.
52
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Selected information as to the operations of the Company by segment is as
follows (in thousands):
Years Ended December 31,
-------------------------
2002 2001 2000
------- ------- -------
Revenue:
Vessel construction........................................ $30,814 $33,610 $23,398
Repair and conversions..................................... 10,209 13,294 15,118
------- ------- -------
Total revenue.......................................... 41,023 46,904 38,516
------- ------- -------
Cost of revenue:
Vessel construction........................................ 26,826 26,677 17,993
Repair and conversions..................................... 8,831 10,340 11,175
------- ------- -------
Total cost of revenue.................................. 35,657 37,017 29,168
------- ------- -------
Gross profit:
Vessel construction........................................ 3,988 6,933 5,405
Repair and conversions..................................... 1,378 2,954 3,943
------- ------- -------
Total gross profit..................................... 5,366 9,887 9,348
Selling, general and administrative expenses.................. 4,815 5,077 4,661
Terminated acquisition costs.................................. 350 --
Executive compensation expense................................ -- 2,613 --
------- ------- -------
Income from operations........................................ 201 2,197 4,687
Interest expense.............................................. (221) (193) (386)
Other income, net............................................. 39 144 417
------- ------- -------
Income before income taxes.................................... 19 2,148 4,718
Provision for income taxes.................................... 23 1,115 2,021
------- ------- -------
(Loss) income before cumulative effect of change in accounting
principle................................................... (4) 1,033 2,697
------- ------- -------
Cumulative effect of change in accounting principle........... (4,500) -- --
------- ------- -------
Net (loss) income............................................. $(4,504) $ 1,033 $ 2,697
======= ======= =======
Certain other financial information of the Company by segment is as follows
(in thousands):
Years Ended December 31,
------------------------
2002 2001 2000
------ ------ ------
Depreciation and Amortization Expense:
Vessel construction...................................... $ 840 $ 814 $ 781
Repair and conversion.................................... 608 551 471
Included in selling, general and administrative expenses. 413 961 947
------ ------ ------
Total Depreciation and Amortization Expense.......... $1,861 $2,326 $2,199
====== ====== ======
53
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):
Years Ended December 31,
-----------------------
2002 2001 2000
------- ------- -------
Total Assets:
Vessel construction................ $24,799 $27,336 $29,565
Repair and conversion.............. 18,393 11,720 11,759
Other.............................. 10,649 13,518 6,640
------- ------- -------
Total assets................... $53,841 $52,574 $47,964
======= ======= =======
Capital expenditures:
Vessel construction................ $ 1,252 $ 637 $ 435
Repair and conversion.............. 3,382 1,642 4,624
Other.............................. 1,133 2,041 1,633
------- ------- -------
Total capital expenditures..... $ 5,767 $ 4,320 $ 6,692
======= ======= =======
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 primarily from customers domiciled in the United States. All assets
of the Company are located in the United States.
12. COMMITMENTS AND CONTINGENCIES
Legal Matters--The Company is a party to various 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 consolidated financial statements.
Employment Agreements--The Company has employment agreements with certain of
its executive officers which provide for employment of the officers through
December 31, 2004, and provide for extensions at the end of the term, subject
to the parties' mutual agreement. The minimum annual total compensation under
these agreements is $650,000.
In September 2002, the Company entered into an employment agreement with
Lewis J. Derbes, Jr. providing for employment as the Company's Vice-President
and Chief Financial Officer through December 31, 2004 and extensions
thereafter, subject to the parties' mutual agreement. The minimum annual total
compensation under the agreement is $140,000.
Construction Commitments--As of December 31, 2002, the Company had an
outstanding commitment of $0.7 million for the construction of its new repair
and conversion facility in Amelia, Louisiana.
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 $28.1 million and $0.2 million at December 31, 2002 and 2001,
respectively.
54
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 2002 and 2001 were
as follows (in thousands, except per share data):
Quarter Ended
----------------------------------------------
March 31, June 30, September 30, December 31,
--------- -------- ------------- ------------
Fiscal 2002
Revenue..................... $10,585 $10,427 $ 9,379 $10,632
Gross profit................ 2,095 1,715 1,099 457
Net (loss) income........... (4,042)(1) 300 (263) (499)(3)
Net (loss) income per share:
Basic.................... (0.56)(1) 0.04 (0.04) (0.07)(3)
Diluted.................. (0.56)(1) 0.04 (0.04) (0.07)(3)
Fiscal 2001
Revenue..................... $11,885 $12,173 $12,941 $ 9,905
Gross profit................ 2,769 2,928 2,819 1,371
Net income (loss)........... 951 976 (743)(2) (151)
Net income (loss) per share:
Basic.................... 0.13 0.14 (0.10)(2) (0.02)
Diluted.................. 0.13 0.14 (0.10)(2) (0.02)
- --------
(1) Includes the effect of $4.5 million cumulative effect of change in
accounting principle ($0.62 per diluted share) related to an impairment of
goodwill resulting from the adoption of Statement of Financial Accounting
Standards Board No. 142, "Goodwill and Other Intangible Assets."
(2) Includes the effect of $2.6 million ($1.6 million after tax or $0.23 per
diluted share) of executive compensation expense recognized in the third
quarter ended September 30, 2001.
(3) Includes the effect of a $0.6 million ($0.3 million after tax or $0.05 per
diluted share) charge to reflect revised estimates related to anticipated
losses on certain uncompleted vessels in progress.
55
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this Item as to the directors and executive
officers of Conrad Industries, Inc. is hereby incorporated by reference from
the Company's definitive proxy statement prepared in connection with the 2003
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, 2002.
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,
2002. Notwithstanding the foregoing, in accordance with Items 306 and 402(a)(8)
of Regulation S-K and Item 7(d)(3) of Schedule 14A, the information contained
in the Company's proxy statement under the sub-heading "Report of the
Compensation Committee" and "Performance Graph", and under the sub-heading
"Report of the Audit Committee" (except for information following the heading
"Audit Fees" therein), shall not be deemed to be filed as part of or
incorporated by reference into this Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The information required by this Item as to the ownership by management and
others of securities of the Company and equity compensation plan information is
hereby incorporated by reference from the Company's definitive proxy statement
prepared in connection with the 2003 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, 2002.
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 2003 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, 2002.
Item 14: Controls and Procedures
Within the 90 days prior to the filing date of this report, the Company
evaluated the effectiveness of the design and operation of its disclosure
controls and procedures. The evaluation was carried out under the supervision
of and with the participation of the Company's management, including the
Company's Chief Executive Officer and Chief Financial Officer. Based on and as
of the date of the evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures are
effective in timely alerting them to material information relating to the
Company, including its consolidated subsidiaries, required to be included in
reports the Company files with or submits to the Securities and Exchange
Commission under the Securities Exchange Act of 1934. There have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect the Company's internal controls subsequent to the
date of the evaluation.
56
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Documents Filed as a Part of this Report
1. Financial Statements:
The financial statements and supplementary data required by this item are
incorporated under Item 8, Part II of this Form 10-K.
All other schedules are omitted because they are not applicable, not
required, or because the required information is included in the financial
statements or notes thereto.
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.
Exhibits Description
- -------- -----------
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).
4.4 --Rights Agreement dated May 23, 2002 between Conrad Industries, Inc. and American Stock
Transfer & Trust Company (filed as Exhibits 1, 2, 3 and 4 to the Company's Registration
Statement on Form 8-A filed May 29, 2002 and incorporated by reference herein).
10.1 --Warrant Agreement between Conrad Industries, Inc. and Morgan Keegan & Company, Inc. (filed
as Exhibit 10.12 to the Company's Annual Report on Form 10-K for year ended December 31,
1998 and incorporated by reference herein).
10.2 --Third Amended and Restated Loan Agreement dated as of July 18, 2002, by and among Whitney
National Bank, Conrad Shipyard, L.L.C., Orange Shipbuilding Company., Inc. and Conrad
Industries, Inc. (filed as Exhibit 10.1 to the Company's Form 10-Q for the period ended
September 30, 2002 and incorporated by reference herein).
10.3* --Allonge to Third Amended and Restated Loan Agreement by and among Whitney National Bank,
Conrad Shipyard, L.L.C., Orange Shipbuilding Company, Inc. and Conrad Industries dated
December 31, 2002.
10.4* --First Amendment to the Third Amended and Restated Loan Agreement by and among Whitney
National Bank, Conrad Shipyard, L.L.C., Orange Shipbuilding Company, Inc. and Conrad
Industries dated March 21, 2003.
57
Exhibits Description
- -------- -----------
10.5* --Officer and Director Indemnification Agreement.
10.6** --Conrad Industries, Inc. Amended and Restated 1998 Stock Plan (First Amendment) (filed with
the Company's Proxy Statement on Schedule 14-A filed on April 22, 1999 and incorporated by
reference herein.
10.7** --Conrad Industries, Inc. 2002 Stock Plan (Annex A) (filed with the Company's Proxy Statement
on Schedule 14-A filed on April 17, 2002 and incorporated by reference herein.
10.8** --Employment Agreement between Conrad Shipyard, Inc. and J. Parker Conrad (filed as Exhibit
10.7 to the Company's Annual Report on Form 10-K for year ended December 31, 1998 and
incorporated by reference herein), Amendment No. 1 dated March 31, 2001 (filed as Exhibit 10.1
to the Company's Form 10-Q for the period ended March 31, 2001 and incorporated by reference
herein) and Amendment No. 2 dated March 31, 2002 (filed as Exhibit 10.1 to the Company's
Form 10-Q for the period ended June 30, 2002 and incorporated by reference herein).
10.9** --Employment Agreement between Conrad Shipyard, Inc. and John Parker Conrad, Jr. (filed as
Exhibit 10.8 to the Company's Annual Report on Form 10-K for year ended December 31, 1998
and incorporated by reference herein), Amendment No. 1 dated March 31, 2001 (filed as Exhibit
10.2 to the Company's Form 10-Q for the period ended March 31, 2001 and incorporated by
reference herein) and Amendment No. 2 dated March 31, 2002 (filed as Exhibit 10.2 to the
Company's Form 10-Q for the period ended June 30, 2002 and incorporated by reference herein)
10.10** --Employment Agreement between Conrad Shipyard, Inc. and William H. Hidalgo (filed as Exhibit
10.9 to the Company's Annual Report on Form 10-K for year ended December 31, 1998 and
incorporated by reference herein) and Amendment No. 1 dated March 31, 2001 (filed as Exhibit
10.3 to the Company's Form 10-Q for the period ended March 31, 2001 and incorporated by
reference herein).
10.11** --Transition Agreement dated August 20, 2001, between Conrad Shipyard, L.L.C. and William H.
Hidalgo, Sr. (filed as Exhibit 10.3 to the Company's Form 10-Q for the period ended
September 30, 2001 and incorporated by reference herein).
10.12** --Employment Agreement between Conrad Shipyard, Inc. and Cecil A. Hernandez (filed as
Exhibit 10.10 to the Company's Annual Report on Form 10-K for year ended December 31, 1998
and incorporated by reference herein), Amendment No. 1 dated March 31, 2001 (filed as Exhibit
10.4 to the Company's Form 10-Q for the period ended March 31, 2001 and incorporated by
reference herein) and Amendment No. 2 dated March 31, 2002 (filed as Exhibit 10.3 to the
Company's Form 10-Q for the period ended June 30, 2002 and incorporated by reference herein).
10.13** --Agreement dated August 20, 2001, between Conrad Industries, Inc. and Cecil A. Hernandez.
(filed as Exhibit 10.4 to the Company's Form 10-Q for the period ended September 30, 2001 and
incorporated by reference herein).
10.14** --Employment Agreement effective August 13, 2001, between Conrad Industries, Inc. and
Kenneth G. Myers, Jr (filed as Exhibit 10.2 to the Company's Form 10-Q for the period ended
September 30, 2001 and incorporated by reference herein).
10.15** --Employment Agreement effective September 30, 2002, between Conrad Industries, Inc. and
Lewis J. Derbes, Jr (filed as Exhibit 10.3 to the Company's Form 10-Q for the period ended
September 30, 2002 and incorporated by reference herein).
10.16 --Loan Agreement dated August 12, 2002, by and among Swift Group, L.L.C., Swiftships
Shipbuilders, L.L.C., Swiftships Technologies, L.L.C., Land and Industrial Asset Management,
L.L.C., Swiftships Freeport, Inc., Champion Shipyards, Inc. and Conrad Shipyard, L.L.C. (filed
as Exhibit 10.2 to the Company's Form 10-Q for the period ended September 30, 2002 and
incorporated by reference herein).
58
Exhibits Description
-------- -----------
21.1* --Subsidiaries of Conrad Industries, Inc.
23.1* --Consent of Deloitte & Touche LLP.
- --------
* Filed herewith.
** Management contract or compensation plan.
(b) Reports on Form 8-K:
Conrad Industries, Inc. has not filed any Current Reports on Form 8-K with
the Securities and Exchange Commission during the fourth quarter of 2002.
59
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/ KENNETH G. MYERS, JR.
-------------------------------------
Kenneth G. Myers, Jr.
Date: March 26, 2003 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.
Signature Title Date
--------- ----- ----
/s/ J. PARKER CONRAD Co-Chairman of the Board of March 26, 2003
- ----------------------------- Directors
J. Parker Conrad
/s/ JOHN P. CONRAD, JR. Co-Chairman of the Board of March 26, 2003
- ----------------------------- Directors
John P. Conrad, Jr.
/s/ KENNETH G. MYERS, JR. President, Chief Executive March 26, 2003
- ----------------------------- Officer and Director
Kenneth G. Myers, Jr. (Principal Executive
Officer)
/s/ CECIL A. HERNANDEZ Director March 26, 2003
- -----------------------------
Cecil A. Hernandez
/s/ MICHAEL J. HARRIS Director March 26, 2003
- -----------------------------
Michael J. Harris
/s/ LOUIS J. MICHOT, JR. Director March 26, 2003
- -----------------------------
Louis J. Michot, Jr.
/s/ RICHARD E. ROBERSON, JR. Director March 26, 2003
- -----------------------------
Richard E. Roberson, Jr.
/s/ LEWIS J. DERBES, JR. Vice President and Chief March 26, 2003
- ----------------------------- Financial Officer
Lewis J. Derbes, Jr. (Principal Financial and
Accounting Officer)
60
CERTIFICATIONS
I, Kenneth G. Myers, Jr., certify that:
1. I have reviewed this annual report on Form 10-K of Conrad Industries, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 26, 2003.
/s/ KENNETH G. MYERS, JR.
- --------------------------
Kenneth G. "Jerry" Myers,
Jr.
President and Chief
Executive Officer
61
I, Lewis J. Derbes, Jr., certify that:
1. I have reviewed this annual report on Form 10-K of Conrad Industries, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 26, 2003.
/s/ LEWIS J. DERBES, JR.
- -------------------------
Lewis J. Derbes, Jr.
Vice President and Chief
Financial Officer
62
INDEX TO EXHIBITS
Exhibits Description
- -------- -----------
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).
4.4 --Rights Agreement dated May 23, 2002 between Conrad Industries, Inc. and American Stock
Transfer & Trust Company (filed as Exhibits 1, 2, 3 and 4 to the Company's Registration
Statement on Form 8-A filed May 29, 2002 and incorporated by reference herein).
10.1 --Warrant Agreement between Conrad Industries, Inc. and Morgan Keegan & Company, Inc. (filed
as Exhibit 10.12 to the Company's Annual Report on Form 10-K for year ended December 31,
1998 and incorporated by reference herein).
10.2 --Third Amended and Restated Loan Agreement dated as of July 18, 2002, by and among Whitney
National Bank, Conrad Shipyard, L.L.C., Orange Shipbuilding Company., Inc. and Conrad
Industries, Inc. (filed as Exhibit 10.1 to the Company's Form 10-Q for the period ended
September 30, 2002 and incorporated by reference herein).
10.3* --Allonge to Third Amended and Restated Loan Agreement dated as of July 18, 2002, by and among
Whitney National Bank, Conrad Shipyard, L.L.C., Orange Shipbuilding Company, Inc. and
Conrad Industries dated December 31, 2002.
10.4* --First Amendment to the Third Amended and Restated Loan Agreement by and among Whitney
National Bank, Conrad Shipyard, L.L.C., Orange Shipbuilding Company, Inc. and Conrad
Industries dated March 21, 2003.
10.5* --Officer and Director Indemnification Agreement.
10.6** --Conrad Industries, Inc. Amended and Restated 1998 Stock Plan (First Amendment) (filed with the
Company's Proxy Statement on Schedule 14-A filed on April 22, 1999 and incorporated by
reference herein.
10.7** --Conrad Industries, Inc. 2002 Stock Plan (Annex A) (filed with the Company's Proxy Statement on
Schedule 14-A filed on April 17, 2002 and incorporated by reference herein.
10.8** --Employment Agreement between Conrad Shipyard, Inc. and J. Parker Conrad (filed as Exhibit
10.7 to the Company's Annual Report on Form 10-K for year ended December 31, 1998 and
incorporated by reference herein), Amendment No. 1 dated March 31, 2001 (filed as Exhibit 10.1
to the Company's Form 10-Q for the period ended March 31, 2001 and incorporated by reference
herein) and Amendment No. 2 dated March 31, 2002 (filed as Exhibit 10.1 to the Company's Form
10-Q for the period ended June 30, 2002 and incorporated by reference herein).
Exhibits Description
- -------- -----------
10.9** --Employment Agreement between Conrad Shipyard, Inc. and John Parker Conrad, Jr. (filed as
Exhibit 10.8 to the Company's Annual Report on Form 10-K for year ended December 31, 1998
and incorporated by reference herein), Amendment No. 1 dated March 31, 2001 (filed as Exhibit
10.2 to the Company's Form 10-Q for the period ended March 31, 2001 and incorporated by
reference herein) and Amendment No. 2 dated March 31, 2002 (filed as Exhibit 10.2 to the
Company's Form 10-Q for the period ended June 30, 2002 and incorporated by reference herein)
10.10** --Employment Agreement between Conrad Shipyard, Inc. and William H. Hidalgo (filed as Exhibit
10.9 to the Company's Annual Report on Form 10-K for year ended December 31, 1998 and
incorporated by reference herein) and Amendment No. 1 dated March 31, 2001 (filed as Exhibit
10.3 to the Company's Form 10-Q for the period ended March 31, 2001 and incorporated by
reference herein).
10.11** --Transition Agreement dated August 20, 2001, between Conrad Shipyard, L.L.C. and William H.
Hidalgo, Sr. (filed as Exhibit 10.3 to the Company's Form 10-Q for the period ended
September 30, 2001 and incorporated by reference herein).
10.12** --Employment Agreement between Conrad Shipyard, Inc. and Cecil A. Hernandez (filed as Exhibit
10.10 to the Company's Annual Report on Form 10-K for year ended December 31, 1998 and
incorporated by reference herein), Amendment No. 1 dated March 31, 2001 (filed as Exhibit 10.4
to the Company's Form 10-Q for the period ended March 31, 2001 and incorporated by reference
herein) and Amendment No. 2 dated March 31, 2002 (filed as Exhibit 10.3 to the Company's Form
10-Q for the period ended June 30, 2002 and incorporated by reference herein).
10.13** --Agreement dated August 20, 2001, between Conrad Industries, Inc. and Cecil A. Hernandez. (filed
as Exhibit 10.4 to the Company's Form 10-Q for the period ended September 30, 2001 and
incorporated by reference herein).
10.14** --Employment Agreement effective August 13, 2001, between Conrad Industries, Inc. and Kenneth
G. Myers, Jr (filed as Exhibit 10.2 to the Company's Form 10-Q for the period ended
September 30, 2001 and incorporated by reference herein).
10.15** --Employment Agreement effective September 30, 2002, between Conrad Industries, Inc. and Lewis
J. Derbes, Jr (filed as Exhibit 10.3 to the Company's Form 10-Q for the period ended
September 30, 2002 and incorporated by reference herein).
10.16 --Loan Agreement dated August 12, 2002, by and among Swift Group, L.L.C., Swiftships
Shipbuilders, L.L.C., Swiftships Technologies, L.L.C., Land and Industrial Asset Management,
L.L.C., Swiftships Freeport, Inc., Champion Shipyards, Inc. and Conrad Shipyard, L.L.C. (filed as
Exhibit 10.2 to the Company's Form 10-Q for the period ended September 30, 2002 and
incorporated by reference herein).
21.1* --Subsidiaries of Conrad Industries, Inc.
23.1* --Consent of Deloitte & Touche LLP.
- --------
* Filed herewith.
** Management contract or compensation plan.
2