EXHIBIT 99.2
Consolidated Financial Statements
Sverdrup Corporation
With Report of Independent Auditors
December 31, 1997
Sverdrup Corporation
Consolidated Financial Statements
December 31, 1997
CONTENTS
Report of Independent Auditors..................... 1
Consolidated Financial Statements
Consolidated Balance Sheets....................... 2
Consolidated Statements of Income................. 3
Consolidated Statements of Stockholders' Equity... 4
Consolidated Statements of Cash Flows............. 5
Notes to Consolidated Financial Statements........ 6
Report of Independent Auditors
The Board of Directors
Sverdrup Corporation
We have audited the accompanying consolidated balance sheets of Sverdrup
Corporation as of December 31, 1997 and 1996, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Sverdrup
Corporation at December 31, 1997 and 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
St Louis, Missouri
February 27, 1998
1
Sverdrup Corporation
Consolidated Balance Sheets
December 31
1997 1996
-------------------------
(In thousands, except per
share information)
ASSETS
Current assets:
Cash and cash equivalents $ 1,151 $ 18,482
Accounts receivable 173,921 127,299
Prepaid expenses and other current assets 11,518 13,206
-----------------------
TOTAL CURRENT ASSETS 186,590 158,987
Investments in real estate 19,126 26,165
Property and equipment 26,061 25,170
Other assets 22,954 32,441
-----------------------
$254,731 $242,763
=======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 63,940 $ 61,487
Contract billings in excess of earnings 31,856 20,861
Accrued expenses 26,436 24,630
Dividends payable 1,496 318
Income taxes - 1,056
Current maturities of long-term debt 11,087 11,262
-----------------------
TOTAL CURRENT LIABILITIES 134,815 119,614
Long-term debt, less current maturities 40,902 44,528
Other long-term liabilities 18,208 31,941
Stockholders' equity:
Common stock, $.0625 par value, authorized - 10,000,000
shares, issued - 7,911,900, and outstanding - 3,400,301
and 3,421,057 shares, respectively 213 215
Retained earnings 67,973 53,845
Shares held in trust (7,380) (7,380)
-----------------------
60,806 46,680
-----------------------
$254,731 $242,763
=======================
See accompanying notes.
2
Sverdrup Corporation
Consolidated Statements of Income
Year Ended December 31
1997 1996 1995
---------------------------------
(In thousands)
Revenue:
Professional services $340,146 $293,535 $288,131
Construction 331,478 228,542 174,313
Facilities operations 228,636 216,475 145,012
Real estate operations 18,675 8,658 18,427
---------------------------------
918,935 747,210 625,883
Costs and expenses:
Productive salaries 78,744 71,363 70,966
Project costs 131,329 99,786 97,897
Salary-related expenses 32,231 30,157 30,570
General expenses 88,919 89,519 82,941
Reimbursable costs 545,811 438,911 309,466
Real estate expenses 10,205 8,004 15,079
---------------------------------
887,239 737,740 606,919
---------------------------------
Operating income 31,696 9,470 18,964
Interest expense - net 3,474 1,659 2,091
Other (income) expense - net (311) 240 396
---------------------------------
Income before income taxes 28,533 7,571 16,477
Income taxes (credit):
Current 12,022 2,026 8,974
Deferred (1,150) 207 (2,478)
---------------------------------
10,872 2,233 6,496
---------------------------------
Net income $ 17,661 $ 5,338 $ 9,981
=================================
See accompanying notes.
3
Sverdrup Corporation
Consolidated Statements of
Stockholders' Equity
Common Stock
Shares Common Retained
Outstanding Stock Earnings
-----------------------------------
(In thousands, except per share
information)
Balance at January 1, 1995 4,002,206 $251 $ 56,491
Net income - - 9,981
Cash dividend - $.60 per share - - (2,157)
Sale of treasury stock and exercise
of options 241,000 15 4,838
Issuance of stock for acquisition 33,129 2 748
Share transactions related to trust 41,968 3 345
Income tax benefit from trust transactions - - 200
Cost of common stock purchased
for treasury (639,874) (40) (13,932)
--------------------------------
Balance at December 31, 1995 3,678,429 231 56,514
Net income - - 5,338
Cash dividend - $ .50 per share - - (1,607)
Sale of treasury stock and exercise
of options 171,853 11 3,960
Cost of common stock purchased
for treasury (429,225) (27) (10,360)
--------------------------------
Balance at December 31, 1996 3,421,057 215 53,845
Net income - - 17,661
Cash dividend - $ .90 per share - - (2,703)
Sale of treasury stock and exercise
of options 150,500 9 3,780
Cost of common stock purchased
for treasury (171,256) (11) (4,610)
---------------------------------
Balance at December 31, 1997 3,400,301 $213 $ 67,973
=================================
See accompanying notes.
4
Sverdrup Corporation
Consolidated Statements of Cash Flows
Year Ended December 31
1997 1996 1995
--------------------------------
(In thousands)
Cash flows from operating activities
Net income $ 17,661 $ 5,338 $ 9,981
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 5,236 5,201 6,151
Deferred income taxes (credit) (521) 207 (2,478)
Equity in income of real estate ventures (6,976) (707) (1,021)
Cash distributions from real estate ventures 8,630 500 3,250
Gain on sale of real estate (464) - (791)
Accounts receivable direct write-offs 908 43 802
Changes in operating assets and liabilities:
Increase in notes and accounts receivables, prepaid
expenses, and other assets (50,762) (24,140) (3,267)
Increase in payables, accrued expenses, and other
liabilities 15,320 15,560 10,466
Other - - (279)
-------------------------------
Cash provided by (used in) operating activities (10,968) 2,002 22,814
Cash flows from investing activities
Purchase of property and equipment, net of disposals (5,823) (20,755) (3,953)
Proceeds from sale of real estate 5,618 - 8,572
-------------------------------
Cash provided by (used in) investing activities (205) (20,755) 4,619
Cash flows from financing activities
Proceeds from sale of stock and exercise of options 3,789 3,971 4,853
Net outlays from trust transactions - - (45)
Proceeds from new borrowings 7,833 26,000 641
Principal payments on debt (11,747) (5,490) (25,144)
Purchase of common stock (excluding $113 in 1997,
$2,183 in 1996 and $9,659 in 1995 in debt) (4,508) (8,204) (4,313)
Dividends paid (1,525) (2,017) (2,758)
-------------------------------
Cash provided by (used in) financing activities (6,158) 14,260 (26,766)
-------------------------------
Increase (decrease) in cash and cash equivalents (17,331) (4,493) 667
Cash and cash equivalents at beginning of year 18,482 22,975 22,308
-------------------------------
Cash and cash equivalents at end of year $ 1,151 $ 18,482 $ 22,975
===============================
See accompanying notes.
5
Sverdrup Corporation
Notes to Consolidated Financial Statements
December 31, 1997
1. Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of Sverdrup
Corporation (the "Company"). All significant intercompany accounts and
transactions have been eliminated. Investments of 20 to 50 percent interest in
partnerships and joint ventures are accounted for using the equity method.
Certain items in the prior years' financial statements have been reclassified to
be consistent with the 1997 presentation.
Description of the Business
The Company is predominately a professional services company engaged in
development, design, construction and operation of capital facilities and
technical systems across the United States and internationally. Its wholly owned
real estate subsidiary is engaged in the business of owning properties and real
estate partnership interests for investment, leasing and development, primarily
in St. Louis, Missouri.
Revenue Accounting for Contracts
The Company recognizes revenues at the time services are performed. On cost-
reimbursable contracts, revenue is recognized as costs are incurred and includes
applicable fees earned through the date services are provided. On fixed-price
contracts, revenues are recorded using the percentage-of-completion method of
accounting by relating contract costs incurred to date to total estimated
contract costs at completion. Contract costs include both direct and indirect
costs. Contract losses are provided for in their entirety in the period they
become determinable, without regard to the percentage of completion.
Some of the Company's contracts with the U.S. federal government, as well as
certain contracts with commercial clients, provide that contract costs
(including indirect costs) are subject to audit and adjustment. For all such
contracts, revenues have been recorded based upon those amounts expected to be
realized upon final settlement.
The practice of not recognizing as income the retentions withheld from fees
under contract terms until such retentions may be billed has been consistently
followed by the Company. Retentions withheld from fees and not recognized as
income were approximately $3,140,000, $3,393,000 and $3,849,000 for the years
ended December 31, 1997, 1996 and 1995, respectively.
6
Sverdrup Corporation
Notes to Consolidated Financial Statements (continued)
1. Significant Accounting Policies (continued)
Foreign Operations
In 1997, 1996 and 1995, the Company's operations outside of the United States
were less than 10 percent of the consolidated revenue. The construction and
professional service activities were conducted primarily in Asia during each of
these years. During 1997, the Asian economy and certain other foreign markets
have declined, as a result, it is possible that the Company's financial results
could be negatively affected by these foreign markets.
Cash Equivalents
The Company considers all highly liquid investments with original maturities of
90 days or less to be cash equivalents.
Accounts Receivable
Accounts receivable at December 31 include the following:
1997 1996
--------------------
(In thousands)
Billed:
Commercial $ 83,811 $ 56,202
U.S. government 20,725 11,648
Unbilled:
Commercial 50,594 43,026
U.S. government 18,791 16,423
--------------------
$173,921 $127,299
====================
Unbilled receivables represent amounts earned under contracts in progress, but
not yet billable under the terms of those contracts. These amounts become
billable according to contract terms which usually consider passage of time,
achievement of certain milestones or completion of the project.
In October 1996, the Company entered into a contract with an Indonesian
government agency for the supply, construction, commissioning, and start-up of a
Transonic Speed Tunnel. As of December 31, 1997, $7,300,000 of the Company's
accounts receivable remained uncollected due to the downturn in the Indonesian
economy. It is the Company's position that it is more likely than not that all
of the accounts receivable will be realized.
7
Sverdrup Corporation
Notes to Consolidated Financial Statements (continued)
1. Significant Accounting Policies (continued)
Investments in Real Estate
The following summarizes investments and ventures in real estate at December 31:
1997 1996
-------------------
(In thousands)
Operating properties $12,482 $14,156
Ventures 10,222 11,876
Land held for development - 5,154
Less accumulated depreciation and amortization (3,578) (5,021)
-------------------
$19,126 $26,165
===================
Ventures include varying ownership interests ranging from 6 percent to 50
percent in various general and limited partnerships that own office buildings,
an amphitheatre, undeveloped land and other assets. Total assets and liabilities
of the ventures directly and indirectly owned are $40,510,000 and $6,109,000 at
December 31, 1997 and $84,663,000 and $47,517,000 at December 31, 1996,
respectively. The ventures' liabilities at December 31, 1996 consisted primarily
of mortgage loans of which the Company guaranteed $8,189,000. There were no
guarantees at December 31, 1997. Substantially all of the Company's investments
and ventures in real estate are held for sale at December 31, 1997.
Net operating income from real estate operations and ventures is comprised of
the following for the year ended December 31:
1997 1996 1995
------------------------
(In thousands)
Income from operations $1,705 $ 654 $2,557
Net gain on sale of properties 6,765 - 791
------------------------
$8,470 $ 654 $3,348
========================
Operating properties depreciation expense for 1997, 1996 and 1995 was $360,000,
$575,000 and $1,151,000, respectively.
8
Sverdrup Corporation
Notes to Consolidated Financial Statements (continued)
1. Significant Accounting Policies (continued)
Property and Equipment
Property and equipment are stated at cost and consisted of the following at
December 31, 1997 and 1996:
1997 1996
--------------------
(In thousands)
Office buildings and land $ 16,696 $ 16,171
Leasehold improvements and computer software 13,103 13,280
Furniture and equipment 44,512 42,960
Less accumulated depreciation and amortization (48,250) (47,241)
--------------------
$ 26,061 $ 25,170
====================
Depreciation and amortization are computed principally using the straight-line
method over the estimated useful lives of the assets, or in the case of
leasehold improvements, over the remaining term of the lease, if shorter.
Estimated useful lives generally range from three to ten years.
Stock Based Compensation
The Company accounts for stock issued to employees in accordance with Accounting
Principles Board Opinion No. 25 - "Accounting for Stock Issued to Employees"
("APB No. 25"). APB No. 25 prescribes an intrinsic value based method for
accounting for stock options. Since the stock issued to participants in the
Company's stock purchase and stock option plans (described in Note 3, below) has
little or no intrinsic value as of the grant date, no compensation cost is
recorded.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires the Company to make estimates and assumptions
that necessarily affect certain amounts reported in its consolidated financial
statements. The more significant estimates affecting amounts reported in the
consolidated financial statements relate to revenues under long-term
construction contracts and self-insurance accruals. Actual results could differ
from those estimates.
9
Sverdrup Corporation
Notes to Consolidated Financial Statements (continued)
2. Debt and Credit Arrangements
Short-Term Credit Arrangements
At December 31, 1997, the Company had approximately $70,000,000 available
through multiple bank lines of credit, under which the Company may utilize these
lines for letters of credit or unsecured borrowing needs. Interest under these
lines is based on either the fed funds rate, the 30-day LIBOR plus .7 percent,
or the corporate based rate quoted by the bank at the time of borrowing. The
agreements require the payment of a fee based on the unused portion of the
facility. The lines are renewed annually and extend through the second and third
quarters of 1998.
Long-Term Debt and Credit Arrangements
The following summarizes long-term debt at December 31:
1997 1996
--------------------
(In thousands)
Notes payable to former stockholders $ 7,249 $ 10,818
Notes payable to bank 24,000 18,000
Real estate mortgage and participating mortgage notes 18,204 24,380
Industrial revenue bonds 2,536 2,592
--------------------
51,989 55,790
Less current maturities (11,087) (11,262)
--------------------
$ 40,902 $ 44,528
====================
The notes payable to former stockholders bear interest at prime-based and LIBOR-
based rates of 6.3 percent to 8.5 percent at December 31, 1997 and have
principal installments due through 2000.
The notes payable to bank include a credit line borrowing of $4,000,000 and a
long-term note payable of $20,000,000. The interest rate for the credit line
borrowing (LIBOR plus .7 percent) was swapped for a five-year fixed rate of 6.93
percent. The long-term note bears interest at LIBOR plus .7 percent and is due
in monthly principal installments of $250,000 with the remainder of the maturity
due December 1999. The terms of the long-term note include certain covenants
which require maintenance of certain financial ratios and net worth.
Various real estate mortgage and participating mortgage notes are due in
installments through 2019, bearing interest at LIBOR-based and prime-based rates
which have an average effective interest rate of 7.7 percent at December 31,
1997 and 1996, respectively. The notes are secured by real estate and limited
guarantees totaling $19,329,000.
10
Sverdrup Corporation
Notes to Consolidated Financial Statements (continued)
2. Debt and Credit Arrangements (continued)
Long-Term Debt and Credit Arrangements (continued)
Industrial revenue bonds are due in installments through 2014 at a tax-exempt
interest rate. The average effective interest rate was 7.7 percent at December
31, 1997 and 7.4 percent at December 31, 1996. The bonds are secured by real
estate with a cost basis of $2,527,000. Deferred loan and bond fees are
amortized over the period of the related debt issues.
Maturities of long-term debt during each of the following years ending after
December 31, 1997 are as follows: 1998 - $11,087,000; 1999 - $19,388,000; 2000 -
$2,368,000; 2001 - $533,000; 2002 - $494,000; and thereafter - $18,119,000.
Interest paid and expensed totaled $3,874,000, $2,386,000 and $3,320,000 in
1997, 1996 and 1995, respectively.
3. Stock Option Plan and Purchase Agreements
The Company has an incentive stock option plan under which certain employees are
participants. The incentive stock options are to be granted at not less than
market value. The options have ten year terms, vest and become fully exercisable
at the grant date. At December 31, 1997, the 1992 and 1995 Incentive Stock
Option Plans had incentive stock options to purchase an additional 391,736
shares available for grants in future years.
A summary of the Company's stock option activity and related information for the
year ended December 31 follows:
1997 1996 1995
-------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
-------------------------------------------------------------------------
Outstanding - beginning of year 340,500 $20.58 280,500 $19.07 274,500 $16.18
Granted - - 80,000 24.20 91,000 22.82
Exercised (5,000) 18.12 (9,000) 8.62 (76,000) 13.17
Forfeited (11,000) 20.42 (11,000) 18.25 (9,000) 18.40
-------- ------- -------
Outstanding - end of year 324,500 $20.63 340,500 20.58 280,500 $19.07
======== ======= =======
Range of option prices for options
outstanding at the end of the year $10.84 - $24.20 $10.84 - $24.20 $8.62 - $22.82
11
Sverdrup Corporation
Notes to Consolidated Financial Statements (continued)
3. Stock Option Plan and Purchase Agreements (continued)
Purchase Agreement - All stockholders of the Company have agreed to sell their
- ------------------
stock to the Company under certain conditions, and the Company has agreed to
purchase such stock at market value. The purchase price per share (market value)
is book value (as defined in the agreement), plus an amount determined for
anticipated profit to be derived from uncompleted work of the Company under
contract at that date. These agreements provide that the Company may pay all or
any part of the purchase price in interest-bearing installment notes over a
period not to exceed five years (see Note 2).
Shares Held in Trust - The Company has a "flexi-trust" (trust) which holds
- --------------------
Company common stock purchased from certain stockholders upon their exercise of
incentive stock options. The trust does not change the incentive stock option
plan or the amount of stock expected to be issued under that plan. The Company
has a promissory note from the trust totaling $7,380,000 at both December 31,
1997 and 1996, respectively. The principal amount of the note includes the
options' exercise price plus the alternative minimum income taxes incurred by
the holders when the options were exercised. Amounts owed by the trust to the
Company are repaid with cash received upon redemption or release of the shares
to the shareholders.
For financial reporting purposes, the trust is consolidated with the Company.
The cost of the shares held by the trust is shown as a reduction to
stockholders' equity in the consolidated balance sheets. All dividends and
interest transactions between the trust and the Company are eliminated. At
December 31, 1997, shares held by the trust totaled 408,446.
Alternate Stock Option Valuation Method - The Company has elected to continue
- ---------------------------------------
accounting for stock option grants in accordance with APB 25. The alternative
accounting for stock option grants (SFAS 123, Accounting for Stock Based
Compensation) requires use of valuation models. In management's opinion, these
models do not provide a reliable measure of fair value of stock options, because
the fair value models were developed for publicly traded options and include
assumptions that can materially affect the alternate fair value amount. Using
the minimum value option pricing model, the impact is insignificant on the
Company's net income for 1997, 1996 and 1995.
4. Employee Benefit Plans
The Company and its subsidiaries have pension plans covering substantially all
employees which provide pension benefits that are based on the employee's
compensation and years of service. The Company makes annual contributions to the
pension plans equal to the maximum amount that can be deducted for federal
income tax purposes. The assets of the plans are held in equity securities and
fixed income securities.
12
Sverdrup Corporation
Notes to Consolidated Financial Statements (continued)
4. Employee Benefit Plans (continued)
The following table sets forth the funded status recognized for the Company's
defined benefit pension plans in the consolidated balance sheets at December 31:
1997 1996
------------------------------- -------------------------------
(In thousands) (In thousands)
Plan Whose Plans Whose Plans Whose Plan Whose
Assets Exceed Accumulated Assets Exceed Accumulated
Accumulated Benefits Accumulated Benefits
Benefits Exceed Assets Benefits Exceed Assets
-------------------------------- -------------------------------
Actuarial present value of
benefit obligations:
Vested benefit obligation $ 78,760 $ 92,934 $86,476 $ 81,668
========================== =========================
Accumulated benefit
obligation $ 80,204 $104,534 $88,015 $ 91,665
========================== =========================
Projected benefit
obligation $ 86,509 $128,443 $95,191 $114,347
Plan assets at fair value 94,264 100,674 97,032 77,605
-------------------------- -------------------------
Plan assets in excess of (less
than) projected benefit obligation 7,755 (27,769) 1,841 (36,742)
Unrecognized pension assets
and liabilities:
Net (gain) loss (13,182) 19,834 (2,662) 22,837
Prior service cost 7,543 13,036 7,820 14,137
Net asset at transition (1,236) (153) (2,149) (218)
Net pension liability
adjustment - (8,807) - (14,074)
-------------------------- -------------------------
Net pension asset (liability) in
other assets and other long-term
liabilities $ 880 $ (3,859) $ 4,850 $(14,060)
========================== =========================
All of the 1997 and 1996 net pension liability is reimbursable under operating
contracts with the United States government. Other assets include $14,892,000
and $26,262,000 at December 31, 1997 and 1996, respectively, related to the
pension plans. Other long-term liabilities include $6,726,000 and $19,719,000 at
December 31, 1997 and 1996, respectively, related to the pension plans. During
1996, the Company terminated pension coverage for three operating contracts and
settled a portion of its pension obligation due to a significant number of
retirees at another operating contract.
13
Sverdrup Corporation
Notes to Consolidated Financial Statements (continued)
4. Employee Benefit Plans (continued)
The components of net periodic pension cost for each of the years ended December
31, 1997, 1996 and 1995 were as follows:
1997 1996 1995
--------------------------------
(In thousands)
Cost of benefits earned $ 7,007 $ 7,670 $ 5,309
Interest cost on projected benefit obligation 14,728 14,530 11,861
Actual return on plan assets (25,178) (16,138) (23,431)
Net amortization of transition asset and deferral
of gain 10,577 609 11,543
Curtailment/settlement costs 119 7,561 -
--------------------------------
Net pension cost $ 7,253 $ 14,232 $ 5,282
================================
The significant actuarial assumptions used in determining the funded status of
the plans were as follows:
1997 1996 1995
----------------------------------------
Discount rates 7.5% and 7.75% 7.5% 7.0%
Compensation increase rate 4.0% 4.0% 4.0%
Expected asset rate of return 7.5% and 9.5% 8.5% and 9.5% 9.5%
The accounting method for treating the amortization of actuarial gains/losses
was changed from a 10 percent corridor in 1996 to a 4 percent corridor in 1997.
The effect of this change on 1997 results of operations was not material.
The Company also sponsors a voluntary defined contribution 401(k) plan which is
available to substantially all employees. Company contributions to this plan of
$6,619,000, $6,102,000 and $4,674,000 in 1997, 1996 and 1995, respectively,
represent a partial matching of employee contributions.
14
Sverdrup Corporation
Notes to Consolidated Financial Statements (continued)
5. Provision for Income Taxes
The Company accounts for income taxes in accordance with SFAS 109 - Accounting
for Income Taxes. Accordingly, deferred tax assets and liabilities are
determined based on the differences between the financial reporting and tax
bases of assets and liabilities and are measured using the enacted tax rates and
laws that will be in effect when the differences are expected to reverse.
Consolidated income tax expense for the years ended December 31, 1997, 1996 and
1995 consisted of the following:
1997 1996 1995
-----------------------------
(In thousands)
Current:
Federal $10,531 $1,604 $ 7,836
State 1,491 422 1,138
----------------------------
12,022 2,026 8,974
Deferred:
Federal (1,041) 190 (2,201)
State (109) 17 (277)
----------------------------
(1,150) 207 (2,478)
----------------------------
$10,872 $2,233 $ 6,496
============================
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and their related amounts used for income tax purposes. The significant
components of the Company's deferred tax assets (liabilities) at December 31,
1997 and 1996 were as follows:
1997 1996
------------------
(In thousands)
Assets:
Benefit plans $ - $ 36
Self-insurance reserves 4,200 4,567
Other, net 97 95
------------------
Total deferred tax assets 4,297 4,698
Liabilities:
Depreciation and amortization (901) (727)
Employee benefit plans (85) -
Accounts receivable reserves (1,114) -
Deferred gains on real estate (910) (3,205)
------------------
Total deferred tax liabilities (3,010) (3,932)
------------------
Net deferred tax asset $ 1,287 $ 766
===================
15
Sverdrup Corporation
Notes to Consolidated Financial Statements (continued)
5. Provision for Income Taxes (continued)
The reconciliations of the tax provisions recorded for the years ended December
30, 1997, 1996 and 1995 to those based on the federal statutory rate were as
follows:
1997 1996 1995
-----------------------------
(In thousands)
Statutory amount $ 9,987 $2,574 $5,767
State taxes, net of the federal benefit 969 279 708
Other, net (84) (620) 21
-----------------------------
$10,872 $2,233 $6,496
=============================
Rate used to compute statutory amount 35% 34% 35%
=============================
For the years ended December 31, 1997, 1996 and 1995, the Company paid
approximately $11,771,000, $7,075,000 and $6,929,000, respectively, in income
taxes. The 1996 tax provision was reduced by research and development credits of
$1,200,000.
6. Commitments and Contingencies
Claims
The Company is involved in a number of proceedings and claims incidental to its
business. Company management and counsel believe that losses from such
proceedings in the aggregate will be substantially covered by insurance and
existing provisions for the self-insured portion of these claims. Provision for
self-insured losses is made at the time the claim is reported based upon the
Company's best estimate of the eventual settlement costs.
Guarantees
Letters of credit issued as prerequisites for receiving advance payments from
clients, professional liability insurance guarantees, performance bonds, and
guarantees of indebtedness in the amounts of $30,626,000 and $32,863,000 were
outstanding at December 31, 1997 and 1996, respectively.
16
Sverdrup Corporation
Notes to Consolidated Financial Statements (continued)
6. Commitments and Contingencies (continued)
Operating Leases
Future minimum payments of $37,575,000 under noncancellable operating leases
with initial or remaining terms exceeding one year are due as follows: 1998 -
$11,258,000; 1999 - $9,006,000; 2000 - $7,055,000; 2001 - $3,989,000; 2002 -
$2,910,000; and thereafter - $3,357,000. Rent expense for all operating leases
amounts to $12,400,000, $10,281,000 and $11,048,000 for 1997, 1996 and 1995 ,
respectively, excluding related party leases discussed below.
7. Fair value of Financial Instruments
The carrying amounts of cash, receivables, payables and accrued expenses are a
reasonable estimate of their fair value due to their short-term nature. The
carrying amount of debt is also a reasonable estimate of its fair value due to
the market-based interest rates on the debt.
8. Related Party Transactions
During 1997, 1996 and 1995, the Company and subsidiaries performed $1,351,000,
$295,000 and $811,000, respectively, of design/build services for various
affiliated real estate ventures. The Company also leased office facilities from
these affiliated ventures for $1,718,000, $1,932,000 and $2,145,000 during 1997,
1996 and 1995, respectively. The Company recognized income of $7,690,000,
$1,921,000 and $2,371,000 in 1997, 1996 and 1995, respectively, from management
fees and equity in income from related ventures. Notes and accounts receivable
include $385,000 and $12,000 in 1997 and 1996, respectively, from related
ventures.
17
Sverdrup Corporation
Notes to Consolidated Financial Statements (continued)
9. Quarterly Data - Unaudited
Summarized quarterly financial information for the years ended December 31, 1997
and 1996 is presented below (in thousands, except per share information):
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
------------------------------------------------------------
1997
Revenue $200,253 $210,917 $259,750 $248,015 $918,935
Operating income 6,040 6,764 13,689 5,203 31,696
Income before income taxes 5,202 5,983 12,573 4,775 28,533
Net income 3,191 3,657 8,234 2,579 17,661
Stock price:
High $25.03 $26.83 $27.75 $28.15 $28.15
Low $24.45 $25.40 $27.03 $27.79 $24.45
----------------------------------------------------------
1996
Revenue $173,136 $169,063 $189,637 $215,374 $747,210
Operating income 4,466 4,736 34 234 9,470
Income (loss) before income taxes 4,203 3,995 (472) (155) 7,571
Net income (loss) 2,508 2,381 (304) 753 5,338
Stock price:
High $23.76 $24.64 $24.65 $24.32 $24.65
Low $23.52 $23.90 $24.20 $24.07 $23.52
----------------------------------------------------------
During the third quarter of 1997, operating income increased along with net
income due to the gain from the sale of real estate holdings. In 1996, the
decreases in third and fourth quarter results relate to a major construction
project loss.
10. Year 2000 Issue - Unaudited
The Company has developed a plan to modify its information technology to be
ready for the year 2000 and has begun converting critical data processing
systems. Currently, the Company expects the project to be substantially complete
by early 1999 and does not expect this project to have a significant effect on
operations or costs.
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Sverdrup Corporation
Notes to Consolidated Financial Statements (continued)
11. Subsequent Event
On February 3, 1998, real estate with a cost basis of $2,527,000 was sold, and
related revenue bonds totaling $2,536,000 were redeemed. A mortgage note secured
by the same real estate totaling $464,000 was paid in full. There was no gain or
loss recognized as a result of this early extinguishment of debt.
On February 27, 1998, the Company's real estate investee, Sverdrup/Boeing Realty
Company joint venture, sold its investment in Riverport Performing Arts Centre
for a gain. The Company's cost basis for the investment in real estate sold was
$2,210,000 at December 31, 1997.
19