Back to GetFilings.com
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the period ended March 31, 2003
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 000-24263
CONRAD INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 72-1416999
(State of other (I.R.S. Employer
jurisdiction of
incorporation or Identification No.)
organization)
1100 Brashear Ave., Suite
200
P.O. Box 790
Morgan City, Louisiana 70381
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (985) 702-0195
-----------------
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 whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [_] No [X]
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
As of May 13, 2003, 7,235,954 shares of the registrant's Common Stock were
outstanding.
================================================================================
1
FORM 10-Q
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
Table of Contents
Page
----
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets, March 31, 2003 and December 31, 2002........................ 3
Consolidated Statements of Operations, Three Months Ended March 31, 2003 and 2002........ 4
Consolidated Statements of Cash Flows, Three Months Ended March 31, 2003 and 2002........ 5
Notes to the Consolidated Financial Statements........................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk............................. 19
Item 4. Controls and Procedures................................................................ 19
Part II. Other Information
Item 1. Legal Proceedings...................................................................... 20
Item 6. Exhibits and Reports on Form 8-K....................................................... 20
Signature.......................................................................................... 21
CEO Certification.................................................................................. 22
CFO Certification.................................................................................. 23
FORWARD-LOOKING-STATEMENTS
This Form 10-Q includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. All statements contained herein other than statements of
historical fact are forward-looking statements. When used in this Form 10-Q,
the words "anticipate", "believe", "estimate" and "expect" and similar
expressions are intended to identify forward-looking statements. Such
statements reflect the Company's current views with respect to future events
and are subject to certain risks, uncertainties and assumptions, including the
Company's reliance on cyclical industries, the Company's reliance on principal
customers and government contracts, the Company's ability to perform contracts
at costs consistent with estimated costs utilized in bidding for the projects
covered by such contracts, variations in quarterly revenues and earnings
resulting from the percentage of completion accounting method, the possible
termination of contracts included in the Company's backlog at the option of
customers, operating risks, competition for marine vessel contracts, the
Company's ability to retain key management personnel and to continue to attract
and retain skilled workers, state and federal regulations, the availability and
cost of capital, and general industry and economic conditions. These and other
risks and assumptions are discussed in more detail in the Company's Form 10-K.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those anticipated, believed, estimated or expected. The Company does not intend
to update these forward-looking statements. Although the Company believes that
the expectations reflected in such forward-looking statements are reasonable,
no assurance can be given that such expectations will prove correct.
2
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements (Unaudited)
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
March 31, December 31,
2003 2002
--------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................................ $ 5,837 $ 6,427
Accounts receivable, net......................................................... 2,523 3,650
Costs and estimated earnings, net in excess of billings on uncompleted contracts. 3,736 4,360
Inventories...................................................................... 587 214
Other current assets............................................................. 1,400 1,641
-------- -------
Total current assets......................................................... 14,083 16,292
PROPERTY, PLANT AND EQUIPMENT, net.................................................. 30,640 29,430
GOODWILL............................................................................ 8,101 8,101
OTHER ASSETS........................................................................ 16 18
-------- -------
TOTAL ASSETS........................................................................ $52,840 $53,841
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................................. $ 1,511 $ 3,278
Accrued employee costs........................................................... 955 760
Accrued expenses................................................................. 423 362
Current maturities of long-term debt............................................. 1,980 1,806
Billings in excess of costs and estimated earnings, net on uncompleted contracts. 627 639
-------- -------
Total current liabilities.................................................... 5,496 6,845
LONG-TERM DEBT, less current maturities............................................. 12,122 11,417
DEFERRED INCOME TAXES............................................................... 3,326 3,364
-------- -------
Total liabilities............................................................ 20,944 21,626
-------- -------
COMMITMENTS AND CONTINGENCIES (Note 8)
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 in 2003
and 2002....................................................................... 73 73
Additional paid-in capital....................................................... 29,000 29,000
Unearned stock compensation...................................................... (4) (6)
Treasury stock at cost, 40,483 shares in 2003 and 2002........................... (211) (211)
Retained earnings................................................................ 3,038 3,359
-------- -------
Total shareholders' equity................................................... 31,896 32,215
-------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.......................................... $52,840 $53,841
======== =======
See notes to unaudited consolidated financial statements.
3
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended
March 31,
----------------
2003 2002
------- -------
REVENUE..................................................................... $10,474 $10,585
COST OF REVENUE............................................................. 9,659 8,490
------- -------
GROSS PROFIT................................................................ 815 2,095
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................................ 1,243 1,302
------- -------
(LOSS) INCOME FROM OPERATIONS............................................... (428) 793
INTEREST EXPENSE............................................................ (66) (81)
OTHER INCOME, NET........................................................... 4 10
------- -------
(LOSS) INCOME BEFORE INCOME TAXES........................................... (490) 722
(BENEFIT) PROVISION FOR INCOME TAXES........................................ (169) 264
------- -------
(LOSS) INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE................................................................. (321) 458
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE......................... -- (4,500)
------- -------
NET LOSS.................................................................... $ (321) $(4,042)
======= =======
Basic and diluted (loss) income per share:
(Loss) income before cumulative effect of change in accounting principle. $ (0.04) $ 0.06
Cumulative effect of change in accounting principle...................... -- (0.62)
------- -------
Net loss................................................................. $ (0.04) $ (0.56)
======= =======
Weighted average common shares outstanding:
Basic.................................................................... 7,236 7,228
======= =======
Diluted.................................................................. 7,236 7,228
======= =======
See notes to unaudited consolidated financial statements.
4
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months
Ended March 31,
----------------
2003 2002
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................................................. $ (321) $(4,042)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Cumulative effect of change in accounting principle................................... -- 4,500
Depreciation and amortization......................................................... 497 494
Deferred income tax benefit........................................................... (38) (74)
Changes in assets and liabilities:
Accounts receivable................................................................ 1,127 (339)
Net change in billings related to cost and estimated earnings, net on
uncompleted contracts............................................................ 612 (3,370)
Inventory and other assets......................................................... (132) (147)
Accounts payable and accrued expenses.............................................. (1,511) 480
------- -------
Net cash provided by (used in) operating activities............................ 234 (2,498)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for plant and equipment.............................................. (1,703) (698)
Payment of executive notes receivable..................................................... -- 456
------- -------
Net cash used in investing activities.......................................... (1,703) (242)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments of debt.............................................................. (321) (321)
Proceeds from issuance of debt............................................................ 1,200 --
------- -------
Net cash provided by (used in) financing activities............................ 879 (321)
------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS.................................................... (590) (3,061)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............................................... 6,427 6,909
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD..................................................... $ 5,837 $ 3,848
======= =======
SUPPLEMENTAL DISCLOSURES CASH FLOW INFORMATION:
Interest paid, net of capitalized interest................................................ $ 66 $ 81
======= =======
Taxes paid................................................................................ $ -- $ --
======= =======
See notes to unaudited consolidated financial statements.
5
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements include the
accounts of Conrad Industries, Inc. and its wholly-owned subsidiaries (the
"Company") which are primarily engaged in the construction, conversion and
repair of a variety of marine vessels for commercial and government customers.
The Company was incorporated in March 1998 to serve as the holding company for
Conrad Shipyard, L.L.C. ("Conrad") and Orange Shipbuilding Company, Inc.
("Orange Shipbuilding"). New construction work and some repair work is
performed on a fixed-price basis. The Company performs the majority of repair
work under cost-plus-fee agreements. All significant intercompany transactions
have been eliminated. In the opinion of the management of the Company, the
interim consolidated financial statements included herein have been prepared in
accordance with generally accepted accounting principles and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
disclosures required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (such
adjustments consisting only of a normal recurring nature) considered necessary
for a fair presentation have been included in the interim consolidated
financial statements. These interim consolidated financial statements should be
read in conjunction with the Company's audited 2002 consolidated financial
statements and related notes filed on Form 10-K for the year ended December 31,
2002.
The results of operations for the three-month period ended March 31, 2003
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2003.
2. RECEIVABLES
Receivables consisted of the following at March 31, 2003 and December 31,
2002 (in thousands):
2003 2002
------ ------
U.S. Government:
Amounts billed................................................. $ 212 $ 424
Unbilled costs and estimated earnings on uncompleted contracts. 692 423
------ ------
904 847
Commercial:
Amounts billed................................................. 2,311 3,226
Unbilled costs and estimated earnings on uncompleted contracts. 3,044 3,937
------ ------
Total............................................................. $6,259 $8,010
====== ======
Included above in amounts billed is an allowance for doubtful accounts of
$16,000 at March 31, 2003 and December 31, 2002. During 2003, there were no
significant transactions recorded in the allowance for doubtful accounts.
During 2002, the Company reserved for approximately $65,000 related to a
receivable deemed uncollectible as a result of a settlement reached with a
vessel construction customer.
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 March 31, 2003,
substantially all is expected to be collected within the next twelve months.
6
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Information with respect to uncompleted contracts as of March 31, 2003 and
December 31, 2002 is as follows (in thousands):
2003 2002
-------- --------
Costs incurred on uncompleted contracts $ 29,702 $ 28,684
Estimated earnings, net................ 4,464 4,698
-------- --------
34,166 33,382
Less billings to date.................. (31,057) (29,661)
-------- --------
$ 3,109 $ 3,721
======== ========
The above amounts are included in the accompanying balance sheets under the
following captions (in thousands):
2003 2002
------ ------
Costs and estimated earnings, net in excess of billings on uncompleted contracts $3,736 $4,360
Billings in excess of cost and estimated earnings, net on uncompleted contracts. (627) (639)
------ ------
Total........................................................................... $3,109 $3,721
====== ======
The Company recorded charges of approximately $50,000 and $150,000 in the
first quarter of 2003 and the fourth quarter of 2002, respectively to reflect
revised estimates related to anticipated losses on certain uncompleted vessels
in progress. As of March 31, 2003 and December 31, 2002, approximately $103,000
and $150,000, respectively, of this provision is included in costs and
estimated earnings, net in excess of billings on uncompleted contracts.
3. INVENTORIES
Inventories consist primarily of costs related to vessels in progress not
under customer contract. As of March 31, 2003, amounts related to these vessels
totaled $356,000. No such amounts were outstanding as of December 31, 2002.
Remaining inventories consist of excess job related materials and supplies.
They are stated at the lower of cost (first-in, first-out basis) or market.
4. 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 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 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
7
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 three
months ended March 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.
During the first quarter of 2003, the Company completed its annual update of
the impairment test as prescribed in SFAS No. 142 with respect to existing
goodwill. The first step of the goodwill impairment test indicated that the
fair value of each of the Company's reporting units exceeded its respective
carrying amount. As no impairment was indicated, the second step of the test,
as defined under SFAS No. 142, was not required to be performed.
The carrying amount of goodwill of $8.1 million as of March 31, 2003 and
December 31, 2002, relates to the Company's vessel construction segment.
5. LONG-TERM DEBT
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 JPMorgan Chase prime rate 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 1.50 to 1.0, a debt
to tangible net worth requirement of no greater than 1.50 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
March 31, 2003, the Company was in compliance with these covenants.
The Term Loan has a maturity date of May 31, 2005 and is payable in 25
remaining monthly principal payments of $107,000 plus interest, with a final
payment of $4.7 million. Interest accrues at 3.09% until August 30, 2003, and
thereafter at the option of the Company either at the JPMorgan Chase prime rate
or LIBOR plus 1.75%. At March 31, 2003 and December 31, 2002, the Term Loan
balance outstanding was $7.4 million and $7.7 million, respectively.
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, 2004. As of March 31, 2003 and
December 31, 2002, no amounts were outstanding on the Revolving Credit Facility.
On July 18, 2002, the Company entered into The Development Loan which
provided financing totaling $6.7 million to fund the development of the Amelia
Deepwater facility. The facility included a revolver that converted to a term
loan on April 1, 2003. Payments under the revolver included interest only until
March 31, 2003, at which time it converted to a term loan to be repaid in 49
monthly principal payments of $58,000 plus interest with a final payment of
$3.9 million due on May 31, 2007. Interest accrues at 3.05% until July 1, 2003,
and thereafter at the option of the Company either at the JPMorgan Chase prime
rate or LIBOR plus 1.75%. At March 31, 2003 and December 31, 2002, the
Development Loan outstanding was $6.7 million and $5.5 million, respectively.
8
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. SHAREHOLDERS' EQUITY
Income (Loss) per Share
The calculation of basic earnings per share excludes any dilutive effect of
stock options, while diluted earnings per share includes the dilutive effect of
stock options. The number of weighted average shares outstanding for "basic"
and "diluted" income per share was 7,235,954 and 7,228,454 for the three months
ended March 31, 2003 and 2002, respectively.
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.
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):
Three Months
Ended March 31,
---------------
2003 2002
------ -------
Net loss, as reported........................................................ $ (321) $(4,042)
Add: Total stock-based employee compensation expense included in reported net
loss net of related tax effects............................................ 1 5
Deduct: Total stock-based employee compensation expense determined under fair
value based method for all awards, net of related tax effects.............. (22) (32)
------ -------
Pro forma, net loss.......................................................... $ (342) $(4,069)
====== =======
Loss per share:
Basic and diluted--as reported............................................ $(0.04) $ (0.56)
====== =======
Basic and diluted--pro forma.............................................. $(0.05) $ (0.56)
====== =======
Weighted average fair value of grants........................................ N/A $ 1.75
====== =======
Black-Scholes option pricing model assumptions:
Risk-free interest rate................................................... 2.83% 2.72%
Expected life (years)..................................................... 3.0 3.0
Volatility................................................................ 77.0% 79.0%
Dividend yield............................................................ -- --
9
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. SEGMENT AND RELATED INFORMATION
The Company classifies its business into two segments:
Vessel Construction
The Company constructs a variety of marine vessels, including tugboats,
ferries, liftboats, barges, offshore support vessels, large and small deck
barges and other steel and aluminum products for both commercial and government
markets. The Company also fabricates components of offshore drilling rigs and
floating production, storage and offloading vessels including sponsons,
stability columns, blisters, pencil columns and other modular components.
Repair and Conversions
The Company's conversion projects primarily consist of lengthening the
midbodies of vessels, modifying vessels to permit their use for a different
type of activity and other modifications to increase the capacity or
functionality of a vessel. The Company also derives a significant amount of
revenue from repairs made as a result of periodic inspections required by the
U.S. Coast Guard, the American Bureau of Shipping and other regulatory agencies.
The Company evaluates the performance of its segments based upon gross
profit. Selling, general and administrative expenses, interest expense, other
income, net, and income taxes are not allocated to the segments. Accounting
policies are the same as those described in Note 1, "Summary of Significant
Accounting Policies" in the Company's Form 10-K for the year ended December 31,
2002. Intersegment sales and transfers are not significant.
Selected information as to the operations of the Company by segment is as
follows (in thousands):
Three Months Ended
March 31,
----------------
2003 2002
------- -------
Revenue:
Vessel construction.................................................. $ 6,800 $ 6,753
Repair and conversions............................................... 3,674 3,832
------- -------
Total revenue.................................................... 10,474 10,585
------- -------
Cost of revenue:
Vessel construction.................................................. 6,574 5,416
Repair and conversions............................................... 3,085 3,074
------- -------
Total cost of revenue............................................ 9,659 8,490
------- -------
Gross profit:
Vessel construction.................................................. 226 1,337
Repair and conversions............................................... 589 758
------- -------
Total gross profit............................................... 815 2,095
Selling, general and administrative expenses............................ 1,243 1,302
------- -------
(Loss) income from operations........................................... (428) 793
Interest expense........................................................ (66) (81)
Other income, net....................................................... 4 10
------- -------
(Loss) income before income taxes....................................... (490) 722
(Benefit) provision for income taxes.................................... (169) 264
------- -------
(Loss) income before cumulative effect of change in accounting principle (321) 458
Cumulative effect of change in accounting principle..................... -- (4,500)
------- -------
Net loss................................................................ $ (321) $(4,042)
======= =======
10
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Certain other financial information of the Company by segment is as follows
(in thousands):
Three Months Ended
March 31,
------------------
2003 2002
------ ----
Depreciation and amortization expense:
Vessel construction...................................... $ 221 $216
Repair and conversions................................... 178 153
Included in selling, general and administrative expenses. 98 125
------ ----
Total depreciation and amortization expense.......... $ 497 $494
====== ====
Capital expenditures:
Vessel construction...................................... $ 39 $149
Repair and conversions................................... 1,643 462
Other.................................................... 21 87
------ ----
Total capital expenditures........................... $1,703 $698
====== ====
Total assets of the Company by segment is as follows as of March 31, 2003
and December 31, 2002 (in thousands):
2003 2002
------- -------
Total assets:
Vessel construction.... $22,205 $24,799
Repair and conversions. 20,894 18,393
Other.................. 9,741 10,649
------- -------
Total assets....... $52,840 $53,841
======= =======
Certain assets, including cash and cash equivalents, and capital
expenditures of the Company are allocated to corporate and are included in the
"Other" caption.
Revenues included in the consolidated financial statements of the Company
are derived from customers domiciled in the United States. All assets of the
Company are located in the United States.
8. COMMITMENTS AND CONTINGENCIES
Legal Matters--The Company is a party to various legal proceedings primarily
involving commercial claims and workers' compensation claims. While the outcome
of these claims and legal proceedings cannot be predicted with certainty,
management believes that the outcome of 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 $790,000.
Letters of Credit and Bonds--In the normal course of its business, the
Company is required to provide letters of credit to secure the payment of
workers' compensation obligations. Additionally, under certain
11
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 $30.3 million and $28.1 million at March 31, 2003 and December 31,
2002, respectively.
9. 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 implemented SFAS No. 143 on January 1, 2003, as
required, and it did not have a material effect on the Company's consolidated
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
implemented SFAS No. 145 on January 1, 2003, and it did not have a material
impact on the Company's 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 adopted the standard as of the effective date and
will implement its provisions on a prospective basis.
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. On January 1, 2003, the Company
adopted the initial recognition and measurement provisions on a prospective
basis for guarantees that may be issued or modified after December 31, 2002.
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 implemented FIN
46 and it did not have a material impact on its consolidated financial position
or results of operations.
* * * * * *
12
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis should be read in conjunction with the
Unaudited Consolidated Financial Statements and the Notes to Unaudited
Consolidated Financial Statements included elsewhere in this Form 10-Q as well
as the Company's annual report on Form 10-K for the year ended December 31,
2002.
Overview
The Company was incorporated in March 1998 to serve as the holding company
for Conrad Shipyard, Inc. ("Conrad") and Orange Shipbuilding Company, Inc.
("Orange Shipbuilding"). The Company completed an initial public offering in
June 1998 by issuing 2.1 million shares of common stock. Conrad has operated
since 1948 at its shipyard in Morgan City, Louisiana. The Company designs,
builds and overhauls tugboats, ferries, liftboats, barges, offshore support
vessels and other steel and aluminum products for both commercial and
government markets. In December 1997, Conrad acquired Orange Shipbuilding to
increase its capacity to serve Conrad's existing markets and to expand its
product capability into the construction of additional types of marine vessels,
including tug boats for the U.S. Army, offshore tug boats, push boats and
double hull barges, and the fabrication of modular components for offshore
drilling rigs and FPSOs. In February 1998, Conrad commenced operations at a
repair and conversion facility in Amelia, Louisiana, thereby expanding its
capacity to provide repair and conversion services for marine vessels. In 2000,
Conrad Shipyard, Inc. was converted into a Louisiana limited liability company
named Conrad Shipyard, L.L.C. In February 2003, the Company commenced
operations at a second repair and conversion facility in Amelia, Louisiana,
thereby further expanding its capacity to provide repair and conversion
services for marine vessels with deeper drafts than the Company has been able
to service at its other facilities.
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 revenues
comes from customers 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 negatively affected the Company's financial
performance. The Company experienced an increase in demand for repair and
conversion services in the first quarter of 2003 due to seasonal workload
patterns. The Company believes that there is little or no visibility at this
time into the repair market.
The Company's backlog, excluding unexercised options, was $31.8 million at
March 31, 2003 as compared to $36.2 million at December 31, 2002 and $22.0
million at March 31, 2002. The increase in backlog from the same period of the
prior year 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.
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
13
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. 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 March 31, 2003, the Company had incurred $6.6 million developing the
facility. In the first quarter of 2003, the Company moved its three largest
drydocks to the facility and commenced operations. The Company plans to move an
additional drydock to the facility during the second quarter of 2003. 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.
14
Results of Operations
The following table sets forth certain historical data of the Company and
percentage of revenues for the periods presented (in thousands):
Conrad Industries, Inc. Summary Results of Operations
(In thousands)
Three Months Ended March 31,
------------------------------
2003 2002
-------------- --------------
Financial Data:
Revenue
Vessel construction........................................ $ 6,800 64.9% $ 6,753 63.8%
Repair and conversions..................................... 3,674 35.1% 3,832 36.2%
Total revenue.......................................... 10,474 100.0% 10,585 100.0%
------- -------
Cost of revenue
Vessel construction........................................ 6,574 96.7% 5,416 80.2%
Repair and conversions..................................... 3,085 84.0% 3,074 80.2%
------- -------
Total cost of revenue.................................. 9,659 92.2% 8,490 80.2%
------- -------
Gross profit
Vessel construction........................................ 226 3.3% 1,337 19.8%
Repair and conversions..................................... 589 16.0% 758 19.8%
------- -------
Total gross profit..................................... 815 7.8% 2,095 19.8%
S G & A expenses.............................................. 1,243 11.9% 1,302 12.3%
------- -------
(Loss) income from operations................................. (428) -4.1% 793 7.5%
Interest expense.............................................. 66 0.6% 81 0.8%
Other expenses (income), net.................................. (4) 0.0% (10) -0.1%
(Loss) income before income taxes............................. (490) -4.7% 722 6.8%
Income tax (benefit) provision................................ (169) -1.6% 264 2.5%
(Loss) income before cumulative effect of change in accounting
principle................................................... (321) -3.1% 458 4.3%
Cumulative effect of change in accounting principle (1)....... -- 0.0% (4,500) -42.5%
------- -------
Net loss...................................................... $ (321) -3.1% $(4,042) -38.2%
======= =======
EBITDA (2).................................................... $ 73 0.7% $ 1,297 12.2%
======= =======
Net cash provided by (used in) operating activities........... $ 234 $(2,498)
======= =======
Operating Data: Labor hours................................... 132 142
======= =======
- --------
(1) 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 the notes to the financial statements.
(2) Represents income from operations before deduction of depreciation and
amortization. EBITDA is not a measure of cash flow, operating results or
liquidity as determined by generally accepted accounting principles. The
Company has included information concerning EBITDA as supplemental
disclosure because management believes that EBITDA provides meaningful
information regarding a company's historical ability to incur and service
debt. EBITDA as defined and measured by the Company may not be comparable
to similarly titled measures reported by other companies. EBITDA should not
be considered in isolation or as an alternative to, or more meaningful
than, net income or cash flow provided by operations as determined in
accordance with generally accepted accounting principles as an indicator of
the Company's profitability or liquidity.
15
The following table sets forth a reconciliation of net cash provided by
(used in) operating activities to EBITDA for the periods presented (in
thousands):
Three months ended
March 31,
-----------------
2003 2002
------ -------
Net cash provided by (used in) operating activities $ 234 $(2,498)
Interest expense................................... 66 81
Other income, net.................................. (4) (10)
(Benefit) provision for income taxes............... (169) 264
Deferred income tax provision...................... 38 74
Changes in operating assets and liabilities........ (96) 3,376
------ -------
EBITDA............................................. $ 73 $ 1,297
====== =======
Three Months Ended March 31, 2003 Compared With Three Months Ended March 31,
2002
During the three months ended March 31, 2003, the Company generated revenue
of $10.5 million, a decrease of approximately $111,000, or 1.0%, compared to
$10.6 million generated for the same period of 2002. The decrease was a result
of a $47,000 (0.7%) increase in vessel construction revenue to $6.8 million for
the first quarter of 2003 compared to $6.8 million for the first three months
of 2002 offset by a decrease of $158,000 (4.1%) in repair and conversion
revenue to $3.7 million for the first quarter of 2003, compared to $3.8 million
for the same period of 2002. The decrease in revenue for the current year is
primarily a result of a decrease in production hours in the repair segment
attributable to decreased oil and gas activity. Vessel construction hours were
consistent with the first quarter of 2002 while repair and conversion hours
were lower by 13.9% when compared to the first three months of 2002.
Gross profit was $815,000 (7.8% of revenue) for the first three months of
2003 as compared to gross profit of $2.1 million (19.8% of revenue) for the
first quarter of 2002. Vessel construction gross profit decreased $1.1 million,
or 83.1%, for the first quarter of 2003 compared to $1.3 million for the same
period in 2002. Repair and conversion gross profit decreased $169,000, or
22.3%, for the first three months of 2003 compared to $758,000 for the first
quarter of 2002. Vessel construction gross profit was depressed as a result of
an additional charge of approximately $50,000 related to anticipated losses on
a commercial contract in progress for four vessels recorded in the first
quarter of 2003. The Company recorded an anticipated loss of $150,000 on this
contract in the fourth quarter of 2002. 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 margins were negatively impacted by increases in the estimated
costs of completion of other vessels related to operational inefficiencies
resulting from the concurrent delivery of three separate vessels. 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 repair and
conversion jobs. Vessel construction gross profit margins decreased to 3.3% for
the first three months of 2002, compared to gross profit margins of 19.8% for
the first quarter of 2002. Repair and conversion gross profits margins were
16.0% for the first quarter of 2003, compared to gross profit margins of 19.8%
for the same period of 2002.
Selling, general and administrative expenses ("SG&A") decreased $59,000, or
4.5%, to $1.2 million (11.9% of revenue) for the first quarter of 2003, as
compared to $1.3 million (12.3% of revenue) for the same period of 2002. The
decrease in SG&A was primarily a result of a decrease in legal and accounting
expenses compared to the first quarter of 2002 as well as a write-off of bad
debts in the year earlier period.
Interest expense decreased $15,000 to $66,000 for the first three months of
2003 as compared to interest expense of $81,000 for the same period of 2002.
The decrease is primarily the result of the capitalization of interest related
to the development of the 52 acres of land in Amelia, Louisiana partially
offset by increased interest expense associated with an increase in the average
outstanding loan balance. The Company expects interest expense to increase in
the remainder of 2003 as a result of an increase in the average outstanding loan
16
balance compared to 2002 and the lack of future capitalization of interest with
the commencement of operations at the second facility in Amelia, Louisiana.
The Company had an income tax benefit of $169,000 for the first quarter of
2003, compared to income taxes of $264,000 for the first three months of 2002.
The decrease in income tax expense is primarily attributable to the first
quarter loss of 2003 from operations as discussed above.
During 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 three
months ended March 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.
During the first quarter of 2003, the Company completed its annual update of
the impairment test as prescribed in SFAS No. 142 with respect to existing
goodwill. The first step of the goodwill impairment test indicated that the
fair value of each of the Company's reporting units exceeded its respective
carrying amount. As no impairment was indicated, the second step of the test,
as defined under SFAS No. 142, was not required to be performed.
Liquidity and Capital Resources
Historically, the Company has funded its business through funds generated
from operations. Net cash provided by operations was $234,000 for the first
three months of 2003 compared to a use of $2.5 million for the prior year
period due to decreases in accounts receivable and billings related to costs
and estimated earnings on uncompleted contracts offset by a decrease in
accounts payable, and an increase in inventory. The Company's working capital
position was $8.6 million at March 31, 2003 compared to $9.4 million at
December 31, 2002. The decrease in the working capital position was primarily
due to approximately $1.7 million in capital expenditures for plant and
equipment associated with the completion of the new facility in Amelia,
Louisiana partially offset by a $1.2 million borrowing under the Development
Loan.
The Company's capital requirements historically have been primarily for
improvements to its facilities and equipment. The Company's net cash used in
investing activities of $1.7 million for the three months ended March 31, 2003
reflected approximately $1.6 million for improvements to the 52 acres in Amelia
and approximately $100,000 for improvements to facilities and equipment.
Net cash provided by financing activities was $879,000 for the three months
ended December 31, 2002 which included borrowing $1.2 million and the repayment
of $321,000 of debt.
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
17
option of the Company either at the JPMorgan Chase prime rate 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 1.50 to
1.0, a debt to tangible net worth requirement of at least 1.5 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 March 31, 2003, the Company was in compliance with these
covenants.
The Term Loan is payable in 25 monthly principal payments of $107,000 plus
interest, with a final payment of $4.7 million due on May 31, 2005. At March
31, 2003, the Term Loan balance outstanding was $7.4 million and the interest
rate was 3.09%.
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, 2004. No draws were outstanding
as of March 31, 2003.
On July 18, 2002 the Company entered into The Development Loan which
provided financing totaling $6.7 million to fund the development of the Amelia
Deepwater facility. The facility included a revolver that converted to a term
loan. Payments under the revolver included interest only payments until March
31, 2003, at which time it converted 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 March 31, 2003, the Company had drawn the $6.7 million
on this credit facility and the interest rate was 3.05%.
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 March 31, 2003, outstanding letters
of credit and bonds amounted to $30.3 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.
The Company's backlog, excluding unexercised options, was $31.8 million at
March 31, 2003 as compared to $36.2 million at December 31, 2002 and $22.0
million at March 31, 2002. The increase in backlog from the same period of
prior year 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.
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 and internal expansion opportunities if deemed
attractive if and when such opportunities arise. The timing, size or success of
any acquisition or internal expansion effort and the associated potential
capital commitments cannot be predicted.
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
18
(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
implemented SFAS No. 143 on January 1, 2003, as required, and it did not have a
material effect on the Company's consolidated 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
implemented SFAS No. 145 on January 1, 2003, and it did not have a material
impact on the Company's 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 adopted the standard as of the effective date and
will implement its provisions on a prospective basis.
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. On January 1, 2003, the Company
adopted the initial recognition and measurement provisions on a prospective
basis for guarantees that may be issued or modified after December 31, 2002.
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 implemented FIN
46 and it did not have a material impact on its consolidated financial position
or results of operations.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to the risk of changing interest rates. Interest on
$14.1 million of the Company's long-term debt with a weighted average interest
rate of 3.07% at March 31, 2003 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 $141,000 per year if the Company were to
maintain the same debt level and structure.
Item 4: 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
19
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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a party to various routine legal proceedings primarily
involving commercial claims and workers' compensation claims. While the outcome
of these claims and legal proceedings cannot be predicted with certainty,
management believes that the outcome of such proceedings in the aggregate, even
if determined adversely, would not have a material adverse effect on the
Company's consolidated financial statements.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
3.1 --Amended and Restated Certificate of Incorporation (filed as Exhibit 3.1 to the Company's
Annual Report on Form 10-K for year ended December 31, 1998 and incorporated by reference
herein).
3.2 --Amended and Restated Bylaws (filed as Exhibit 3.2 to the Company's Annual Report on Form
10-K for year ended December 31, 1998 and incorporated by reference herein).
4.1 --Specimen Common Stock Certificate (filed as Exhibit 4 to the Company's Registration
Statement on Form 8-A and incorporated by reference herein).
4.2 --Registration Rights Agreement by and among Conrad Industries, Inc., J. Parker Conrad, John
P. Conrad, Jr., Katherine C. Court, The John P. Conrad, Jr. Trust, The Daniel T. Conrad Trust,
The Glen Alan Conrad Trust, The Kenneth C. Conrad Trust, The Katherine C. Court Trust, The
James P. Conrad Trust, William H. Hidalgo, and Cecil A. Hernandez (filed as Exhibit 4.2 to
the Company's Annual Report on Form 10-K for year ended December 31, 1998 and
incorporated by reference herein).
4.3 --Registration Rights Agreement between Conrad Industries, Inc. and Morgan Keegan &
Company, Inc. (filed as Exhibit 4.3 to the Company's Annual Report on Form 10-K for year
ended December 31, 1998 and incorporated by reference herein).
4.4 --Rights Agreement dated May 23, 2002 between Conrad Industries, Inc. and American Stock
Transfer & Trust Company (file 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* --Second 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 May 9, 2003.
(b) Reports on Form 8-K
The Company has not filed any Current Reports on Form 8-K during the quarter
for which this report is filed.
20
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 13, 2003
CONRAD INDUSTRIES, INC.
By: /S/ LEWIS J. DERBES, JR.
-----------------------------
Lewis J. Derbes, Jr.
Vice President and Chief
Financial Officer
21
CERTIFICATIONS
I, Kenneth G. Myers, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Conrad Industries,
Inc.;
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 quarterly 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
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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
quarterly 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: May 13, 2003.
/s/ KENNETH G. MYERS, JR.
- --------------------------
Kenneth G. "Jerry" Myers,
Jr.
President & Chief
Executive Officer
22
I, Lewis J. Derbes, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Conrad Industries,
Inc.;
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 quarterly 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
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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
quarterly 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: May 13, 2003.
/s/ LEWIS J. DERBES, JR.
- -------------------------
Lewis J. Derbes, Jr.
Vice President & Chief
Financial Officer
23