1
EXHIBIT 99.1
Stone & Webster, Incorporated and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share amounts.)
December 31,
ASSETS 1999 1998
--------- ---------
Current assets:
Cash and cash equivalents $ 106,481 $ 45,492
Accounts receivable 288,824 293,240
Costs and revenue recognized in excess of billings 98,663 79,102
Deferred income taxes 23,286 20,338
Other 404 638
--------- ---------
Total current assets 517,658 438,810
Fixed assets, net 73,837 219,157
Domestic prepaid pension cost 157,089 155,703
Net assets of discontinued operation 112,110 --
Assets held for sale 6,744 6,744
Note receivable -- 15,150
Prepaid expenses 11,719 9,378
Other assets 36,139 36,545
--------- ---------
$ 915,296 $ 881,487
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank loans $ 22,793 $ 106,350
Current portion of long-term debt 2,344 2,175
Accounts payable, principally trade 161,218 113,139
Billings in excess of costs and revenue recognized 275,461 206,492
Accrued liabilities 76,612 80,036
Accrued taxes 17,371 12,034
--------- ---------
Total current liabilities 555,799 520,226
Long-term debt 19,950 22,228
Deferred income taxes 23,286 33,030
Other liabilities 11,216 14,427
Commitments and contingencies (Note M)
Shareholders' equity:
Preferred stock, no par value
Authorized: 2,000,000 shares
Issued: none
Common stock, $1 par value
Authorized: 40,000,000 shares
Issued: 17,731,488 shares, including shares held in treasury 17,731 17,731
Capital in excess of par value of common stock 42,579 54,625
Retained earnings 362,712 367,358
Accumulated other comprehensive income (loss) (10,347) (9,707)
--------- ---------
412,675 430,007
--------- ---------
Less: Common stock held in treasury, at cost (3,554,102 and
4,692,933 shares, respectively) 92,091 122,030
Employee stock ownership and restricted stock plans 15,539 16,401
--------- ---------
107,630 138,431
--------- ---------
Total shareholders' equity 305,045 291,576
--------- ---------
$ 915,296 $ 881,487
========= =========
The accompanying notes are an integral part
of the consolidated financial statements.
2
Stone & Webster, Incorporated and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Dollars in thousands, except per share amounts.)
Years ended December 31,
1999 1998 1997
----------- ----------- -----------
Revenue $ 1,140,348 $ 1,214,468 $ 1,299,220
Cost of revenue 1,212,979 1,224,157 1,190,697
----------- ----------- -----------
Gross profit (loss) (72,631) (9,689) 108,523
General and administrative expenses 69,893 71,335 68,571
----------- ----------- -----------
Operating income (loss) (142,524) (81,024) 39,952
Other income (expense):
Gain on sale of assets 151,251 -- 985
Interest income 2,328 3,679 4,269
Interest expense (12,959) (4,076) (1,739)
----------- ----------- -----------
Income (loss) from continuing operations
before provision for taxes (1,904) (81,421) 43,467
Income tax provision (benefit) 2,064 (26,813) 14,316
----------- ----------- -----------
Income (loss) from continuing operations (3,968) (54,608) 29,151
Income from discontinued operation, net of
taxes 5,136 5,306 4,359
----------- ----------- -----------
Net income (loss) 1,168 (49,302) 33,510
=========== =========== ===========
Other comprehensive income - change in
cumulative translation adjustment (640) (7,502) 75
----------- ----------- -----------
Comprehensive income (loss) $ 528 $ (56,804) $ 33,585
=========== =========== ===========
Per share amounts:
Basic earnings (loss) per share:
Continuing operations $ (0.30) $ (4.24) $ 2.27
Discontinued operation 0.39 0.41 0.34
----------- ----------- -----------
Total earnings (loss) per share $ 0.09 $ (3.83) $ 2.61
----------- ----------- -----------
Diluted earnings (loss) per share:
Continuing operations $ (0.30) $ (4.24) $ 2.25
Discontinued operation 0.39 0.41 0.34
----------- ----------- -----------
Total earnings (loss) per share $ 0.09 $ (3.83) $ 2.59
----------- ----------- -----------
Dividends declared per share $ 0.45 $ 0.60 $ 0.60
=========== =========== ===========
The accompanying notes are an integral part
of the consolidated financial statements.
3
Stone & Webster, Incorporated and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands.)
Years ended December 31,
1999 1998 1997
--------- --------- ---------
Common stock:
Balance at beginning and end of year $ 17,731 $ 17,731 $ 17,731
--------- --------- ---------
Retained earnings:
Balance at beginning of year 367,358 424,287 398,342
Income tax benefit of Employee Stock Ownership Plan dividends 64 92 124
Net income (loss) 1,168 (49,302) 33,510
Dividends declared (5,878) (7,719) (7,689)
--------- --------- ---------
Balance at end of year 362,712 367,358 424,287
========= ========= =========
Accumulated other comprehensive income at beginning of year (9,707) (2,205) (2,280)
Change in cumulative translation adjustment (640) (7,502) 75
--------- --------- ---------
Accumulated other comprehensive income at end of year (10,347) (9,707) (2,205)
========= ========= =========
Capital in excess of par value of common stock:
Balance at beginning of year 54,625 51,426 50,480
Excess (deficit) of market value over cost of treasury shares
issued:
Under restricted stock plans (1,393) 30 7
Under stock plans -- 53 88
On sale to Employee Retirement Plan (10,655) -- --
Excess of exercise price over cost of treasury shares issued
under the stock option plans -- 138 406
Tax benefit for shares issued under restricted stock plans, net 2 17 3
Issuance of stock for acquisitions -- 2,961 --
Acceleration of stock options -- -- 442
--------- --------- ---------
Balance at end of year 42,579 54,625 51,426
========= ========= =========
Common stock in treasury:
Balance at beginning of year (122,030) (127,070) (125,724)
Cost of treasury shares:
Sold to Employee Retirement Plan (1,000,000 shares) 26,005 -- --
Issued under stock plans (4,039, 3,509 and 5,310 shares in
1999, 1998 and 1997, respectively) 104 91 137
Issued under stock option plans (21,250 and 63,500 shares in
1998 and 1997, respectively) -- 552 1,638
Issued under restricted stock plans (134,792, 2,224 and 690
shares in 1999, 1998 and 1997, respectively) 3,830 58 18
Treasury stock issued for acquisitions (232,273 shares in
1998) -- 6,039 --
Purchased (43,217 and 81,605 shares in 1998 and 1997,
respectively) -- (1,700) (3,139)
--------- --------- ---------
Balance at end of year (92,091) (122,030) (127,070)
========= ========= =========
Employee stock ownership and restricted stock plans:
Balance at beginning of year (16,401) (18,937) (21,416)
Payments received from Employee Stock Ownership Trust
(principal only) 2,815 2,537 2,285
Market value of shares (issued) under restricted stock plans, net (2,437) (88) (25)
Amortization of market value of shares issued under restricted
stock plans 484 87 219
--------- --------- ---------
Balance at end of year (15,539) (16,401) (18,937)
--------- --------- ---------
Total shareholders' equity $ 305,045 $ 291,576 $ 345,232
========= ========= =========
The accompanying notes are an integral part
of the consolidated financial statements.
4
Stone & Webster, Incorporated and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands.)
Years ended December 31,
1999 1998 1997
--------- --------- ---------
Cash flows from operating activities:
Net income (loss) $ 1,168 $ (49,302) $ 33,510
Adjustments:
Income from discontinued operation (5,136) -- --
Restructuring and other charges - real estate write-downs -- (3,066) (7,954)
Depreciation and amortization 16,678 23,723 13,681
Deferred income taxes (12,692) (25,936) 5,761
Domestic pension credit (1,386) (7,548) (18,337)
Gain on sale of assets (151,251) -- (985)
Amortization of net cost of stock plans 1,637 1,243 1,379
Changes in operating assets and liabilities:
Accounts receivable 4,416 (113,183) 1,843
Costs and revenue recognized in excess of billings (19,561) 23,374 7,547
Accounts payable 48,079 27,801 8,787
Billings in excess of costs and revenue recognized 68,969 90,762 11,988
Accrued taxes 5,337 (2,655) 7,525
Accrued liabilities (3,424) 1,978 (9,088)
Prepaid expenses (2,341) (3,982) (2,334)
Other (1,317) (35,677) 29,861
--------- --------- ---------
Net cash provided (used) by continuing operations (50,824) (72,468) 83,184
--------- --------- ---------
Cash flows from investing activities:
Proceeds from maturities of U.S. Government securities -- 31,909 93,671
Purchases of U.S. Government securities -- -- (121,574)
Proceeds from asset divestitures 187,000 13,546 4,919
Proceeds from note receivable 15,150 -- --
Payments for acquisitions, net of cash acquired -- (79,430) --
Purchase of fixed assets (15,449) (20,290) (25,909)
--------- --------- ---------
Net cash provided (used) by investing activities 186,701 (54,265) (48,893)
--------- --------- ---------
Cash flows from financing activities:
Repayments of long-term debt (2,109) (1,787) (1,657)
Proceeds from bank loans 62,464 106,350 --
Payments of bank loans (146,021) -- (5,000)
Payments from Employee Stock Ownership Trust 4,588 4,588 4,588
Payments to Employee Stock Ownership Trust (2,815) (2,537) (4,251)
Purchase of common stock for treasury -- (1,700) (3,139)
Sale of treasury stock to Employee Retirement Plan 15,350 -- --
Dividends paid (5,878) (7,719) (7,689)
--------- --------- ---------
Net cash provided (used) by financing activities (74,421) 97,195 (17,148)
--------- --------- ---------
Net cash (used) by discontinued operation (467) -- --
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 60,989 (29,538) 17,143
--------- --------- ---------
Cash and cash equivalents at beginning of year 45,492 75,030 57,887
--------- --------- ---------
Cash and cash equivalents at end of year $ 106,481 $ 45,492 $ 75,030
--------- --------- ---------
Supplemental disclosures:
Cash paid for interest $ 12,964 $ 4,072 $ 1,731
Cash paid for income taxes $ 5,285 $ 5,651 $ 5,634
Receipt of note for asset held for sale -- -- $ 15,000
--------- --------- ---------
Fair value of assets acquired $ -- $ 13,653 $ --
Liabilities assumed -- (4,653) --
--------- --------- ---------
$ -- $ 9,000 $ --
========= ========= =========
The accompanying notes are an integral part
of the consolidated financial statements.
5
Stone & Webster, Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts.)
(A) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Stone & Webster, Incorporated and Subsidiaries (the "Company") has prepared its
financial statements in accordance with generally accepted accounting principles
and has adopted accounting policies and practices which are generally accepted
in the industries in which it operates. Unless noted otherwise, earnings per
share amounts are presented on a diluted basis. The following are the Company's
significant accounting policies:
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of Stone
& Webster, Incorporated and its wholly owned subsidiaries. All intercompany
transactions and accounts have been eliminated.
REVENUE RECOGNITION ON LONG-TERM CONTRACTS
The Company recognizes engineering and construction revenue on a
percentage-of-completion method, primarily based on contract costs incurred
compared with total estimated costs (contract costs include both direct and
indirect costs). When the Company is contractually responsible for materials,
craft labor, equipment and subcontractor costs, these items are included in
revenue and cost of revenue. Revisions to total estimated contract costs or
losses, if any, are recognized in the period in which they are determined.
Certain contracts contain provisions for performance incentives. Such incentives
are included in revenue when realization is assured. Contract change orders in
excess of agreed contract prices are included in revenue when approved by the
client, or when realization is considered probable. Revenue recognized in excess
of amounts billed is classified in current assets. Accounts receivable include
amounts representing retainages under long-term contracts which are due within
one year. These retainage amounts are not material. The Company anticipates that
substantially all of its costs and revenue recognized in excess of billings will
be billed and collected over the next twelve months and there were no
significant amounts included in accounts receivable or costs and revenue
recognized in excess of billings under contracts for claims subject to
uncertainty as to their ultimate realization. Billings in excess of revenue
recognized are classified in current liabilities.
CASH EQUIVALENTS AND U.S. GOVERNMENT SECURITIES
Cash equivalents consist of overnight repurchase agreements and U.S. Government
securities held for cash management purposes having maturities of three months
or less from the date of purchase. The carrying amounts for cash, cash
equivalents and U.S. Government securities approximate their fair values because
of the short maturity of the instruments.
FIXED ASSETS
Fixed assets are stated at cost. Fixed assets include amounts relating to
software capitalized for internal use. The costs associated with the application
development stage are capitalized, such as direct external costs and directly
related internal payroll and payroll related costs. Depreciation and
amortization are generally provided on a straight-line basis (accelerated
methods for income taxes) over the estimated useful lives of the assets: 31 to
39 years for buildings and 3 to 15 years for furniture and equipment. Leasehold
improvements are amortized over the shorter of the useful lives or the remaining
terms of the related leases.
6
Stone & Webster, Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts.)
Upon retirement or sale, the cost and accumulated depreciation are removed from
the accounts and any resulting gains or losses are reflected in earnings or loss
for the period.
The Company reviews its property, plant and equipment and other long-lived
assets periodically to determine potential impairment. In performing the review,
the Company estimates undiscounted cash flows expected to result from the use of
the asset and its eventual disposition. If the sum of the expected future cash
flows is less than the carrying amount of the asset, an impairment is
recognized.
EQUITY IN JOINT VENTURES AND LIMITED PARTNERSHIPS
As is common in the industry, the Company executes certain contracts jointly
with third parties through joint ventures, limited partnerships and limited
liability companies. Investments in joint venture companies and investments in
limited partnerships and limited liability companies owned more than 5 percent
by the Company are accounted for principally by the equity method for the
balance sheet and proportionate consolidation for the statement of operations.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the expected future tax
consequences of events that have been recognized in the Company's consolidated
financial statements or tax returns. Undistributed earnings of foreign
subsidiaries, for which the Company has not provided deferred U.S. income taxes
because a taxable distribution of these earnings is not anticipated, total
approximately $15,366 at December 31, 1999. On the same basis, deferred U.S.
income taxes have not been provided on the cumulative translation adjustment
component of comprehensive income. Undistributed earnings represents the
accumulated earnings of consolidated international subsidiaries which are being
permanently reinvested in their operations. Investment tax credits are accounted
for by reducing income taxes currently payable and the provision for income
taxes in the period the related assets are placed in service.
TRANSLATION ADJUSTMENTS
Assets and liabilities of international subsidiaries are translated into U.S.
dollars at year-end exchange rates, and income and expense items are translated
at the average exchange rates for the year. Resulting translation adjustments
are reported as a separate component of stockholders' equity. These adjustments
account for the balance of accumulated other comprehensive income.
FOREIGN EXCHANGE CONTRACTS
The Company uses derivative financial instruments to hedge equipment and
material procurement commitments undertaken as contract activities in the
ordinary course of business. The Company's forward exchange contracts do not
subject the Company to risk from exchange rate movements because gains and
losses on such contracts offset losses and gains, respectively, on the assets,
liabilities or transactions being hedged. Accordingly, the unrealized gains and
losses are deferred and accounted for as part of the underlying transactions. At
December 31, 1999, the Company had approximately $2,185 of foreign currency
exchange contracts outstanding relating to contract obligations. In entering
into these contracts, the Company has assumed the risk which might arise from
the possible inability of counterparties to meet the terms of their contracts.
The Company does not expect any losses as a result of counterparty defaults.
7
Stone & Webster, Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts.)
In June 1998, the FASB issued Statement of Financial Accounting Standards (FAS)
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
Statement provides a comprehensive and consistent standard for the recognition
and measurement of derivatives and hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
Statement implementation date was modified by FAS No. 137 and is effective for
fiscal years beginning after June 15, 2000. The Company will adopt the new
standard on January 1, 2001. Management is evaluating the impact this statement
will have on the Company's financial statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. The
most significant estimates are related to long-term contracts, pension plans,
income taxes and contingencies. Actual results could differ from these
estimates.
RECLASSIFICATIONS
Certain financial statement items have been reclassified to conform to the
current year's presentation.
(B) DISCONTINUED OPERATION
On October 27, 1999, the Company announced its intention to sell the Nordic
Refrigerated Services business unit (Nordic). Accordingly, the results have been
classified as a discontinued operation and prior periods have been reclassified.
The Company does not anticipate a loss on the sale of this segment and,
accordingly, no loss provision has been recorded. Income from discontinued
operation from the measurement date to December 31, 1999 was $1,537 ($921 after
tax).
In October 1998, the Company acquired The Nordic Group, a multi-location
privately-owned cold storage company. At the closing, the purchase price of
approximately $80,000 was paid, primarily in cash. The Company recorded this
transaction using the purchase method of accounting for business combinations.
Goodwill related to this transaction amounted to $1,633 which is being amortized
over 20 years.
Revenue and income from discontinued operation were:
1999 1998 1997
------- ------- -------
Revenue $46,768 $34,312 $23,320
Operating income 8,576 8,490 7,340
Income tax expense 3,440 3,184 2,981
------- ------- -------
Income from discontinued operation $ 5,136 $ 5,306 $ 4,359
------- ------- -------
8
Stone & Webster, Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts.)
Net assets from discontinued operation were:
1999 1998
--------- ---------
Cash $ 1,864 $ 2,331
Other current assets 5,933 7,566
Fixed assets, net 110,108 114,795
Other assets 4,848 2,165
Current liabilities (1,201) (8,487)
Deferred taxes (9,442) (4,680)
--------- ---------
Net assets of discontinued operation $ 112,110 $ 113,690
--------- ---------
(C) DIVESTITURE OF NONCORE ASSETS AND ASSETS HELD FOR SALE
In December 1999, the Company sold its corporate headquarters building in Boston
for $187,000, resulting in a gain of $151,251 ($92,236 after tax or $7.03 per
share). In 1998, the Company sold its Cherry Hill, New Jersey, office building
for $13,546, resulting in a gain of $3,066 ($1,993 after tax or $0.15 per
share). In December 1997, the Company sold a building in Boston for $20,000,
resulting in a gain of $8,939 ($5,363 after tax or $0.41 per share).
In 1998, the Company acquired ownership of S.C. Wood, LLC (SC Wood) in
settlement of claims against a client who failed to fulfill certain contractual
obligations. The assets of SC Wood consist primarily of a petroleum products
pumping station, and are carried at $6,744 representing the net book value of
the services and other advances in connection with the project. The Company
plans to sell the operations of SC Wood and therefore the net assets of SC Wood
are classified as an asset held for sale in the Company's Consolidated Balance
Sheets at December 31, 1999 and 1998.
(D) ACQUISITIONS
In January 1998, the Company purchased the assets of Belmont Constructors
Company, Inc. ("Belmont"). At the closing, the Company paid approximately
$5,300. The final purchase price, which was contingent upon the results of
certain long-term contracts, was $3,733. Belmont is principally engaged in
providing construction and construction management services to a diverse group
of clients in the hydrocarbons, water, industrial and power markets. The Company
recorded this transaction using the purchase method of accounting for business
combinations. The fair value of assets acquired exceeded the purchase price and,
therefore, the long-term assets have been reduced.
In August 1998, the Company completed the acquisition of Power Technologies,
Inc. ("PTI"). PTI provides engineering consulting services, develops computer
software for use by utility companies, develops and conducts educational courses
and develops customized computer hardware. At the closing, the purchase price
was paid in the form of 232,723 shares of common stock of the Company having a
value of $9,000. Along with certain other contingent cash considerations related
to a specific project, PTI shareholders may receive up to 206,518 additional
shares of the Company's common stock having a value (based on the stock price
used in connection with the initial closing) of up to $8,000 based on meeting
certain performance requirements over the next four years. The contingent
consideration, if incurred, will be recorded as an adjustment to goodwill. The
Company recorded this transaction using the purchase method of accounting for
business combinations and recorded goodwill related to this transaction in the
amount of $3,354. In 1999, the Company completed its valuation of the carrying
value of assets in conjunction with the purchase of PTI. This resulted in a
reduction to
9
Stone & Webster, Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts.)
certain assets and a purchase price adjustment which increased goodwill by
$2,093, and is being amortized over 20 years.
In October 1998, the Company acquired The Nordic Group. Refer to Note B for
additional information relating to this acquisition.
The results of these acquisitions have been included in the Consolidated
Statement of Operations and Comprehensive Income from the respective dates of
acquisition. The pro forma unaudited results of operations as though these
acquisitions had occurred as of the beginning of 1997, excluding the Nordic
discontinued operation, are as follows:
(Unaudited) 1998 1997
----------- -----------
Revenue $ 1,258,332 $ 1,449,725
Operating income (loss) (73,015) 16,502
Net income (loss) (49,728) 9,434
----------- -----------
Basic earnings (loss) per share $ (3.86) $ 0.74
Diluted earnings (loss) per share $ (3.86) $ 0.73
----------- -----------
Pro forma results are not indicative of future performance.
(E) INCOME TAXES
Income (loss) from continuing operations before income taxes and the components
of the income tax provision (benefit) for continuing operations for the years
ended December 31, 1999, 1998 and 1997 are as follows:
Income (loss) from continuing operations before
income taxes: 1999 1998 1997
-------- -------- --------
Domestic $ 29,336 $(85,058) $ 23,479
International (31,240) 3,637 19,988
-------- -------- --------
$ (1,904) $(81,421) $ 43,467
-------- -------- --------
Income tax provisions (benefit) for continuing
operations:
Current tax expense (benefit):
United States $ 723 $ (5,998) $ 4,851
State and local 6,818 1,491 3,133
International(1) 1,298 6,814 3,552
-------- -------- --------
Total current 8,839 2,307 11,536
-------- -------- --------
Deferred tax expense (benefit):
United States 10,057 (24,381) 2,699
State and local (5,350) (3,649) (48)
International (11,482) (1,090) 129
-------- -------- --------
Total deferred (6,775) (29,120) 2,780
-------- -------- --------
Income tax provision (benefit) for continuing
operations $ 2,064 $(26,813) $ 14,316
-------- -------- --------
(1) Includes taxes, in lieu of income taxes, of $355 in 1999, $291 in 1998, and
$921 in 1997 on international projects which are calculated based on gross
receipts.
10
Stone & Webster, Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts.)
Deferred tax liabilities (assets) are composed of the following:
December 31,
1999 1998
-------- --------
Long-term liabilities:
Depreciation $ 4,423 $ 5,294
Retirement 63,460 62,099
Other 1,125 911
-------- --------
Total long-term liabilities 69,008 68,304
-------- --------
Long-term assets:
Deferred rent (1,792) (2,513)
Employee Stock Ownership Plan interest payments and
contributions (1,369) (3,317)
AMT credit carryforward (5,906) (5,142)
Foreign net operating loss carryforward (14,585) (6,730)
State net operating loss carryforwards (15,013) (7,149)
U.S. net operating loss carryforwards (22,900) (18,324)
Noncurrently deductible accruals (203) (1,246)
-------- --------
Total long-term assets (61,768) (44,421)
-------- --------
Net operating loss valuation allowance 16,046 9,147
-------- --------
Net long-term deferred tax liabilities 23,286 33,030
-------- --------
Current assets:
Vacation pay (4,049) (4,671)
Severance pay (458) (589)
U.S. net operating loss carryforwards (5,685) --
Foreign net operating loss carryforward (3,893) --
State net operating loss carryforwards (850) (660)
Contract reserves (1,564) (13,771)
Other (6,787) (647)
-------- --------
Total current deferred tax assets (23,286) (20,338)
-------- --------
Net deferred tax liabilities $ -- $ 12,692
-------- --------
The Company, as a result of the net operating loss (NOL), paid $706 of federal
alternative minimum tax ("AMT") in 1999. The AMT credit carryforward was $5,906
at December 31, 1999. This AMT credit can be carried indefinitely to reduce
future federal income taxes payable.
The Company had a valuation allowance of $9,147 at December 31, 1998 for the
deferred tax assets related to net operating loss carryforwards. The net change
in the valuation allowance for 1999 was an increase of $6,899 for a total
valuation allowance of $16,046 at December 31, 1999. The increase was due to
U.S., state and foreign entity operating losses. The valuation allowance at
December 31, 1999 comprises $2,204 relating to U.S. net operating losses,
$11,613 relating to state net operating loss carryforwards and $2,229 relating
to the carryforwards of international subsidiaries.
For tax purposes, approximately $386,093 (with a tax benefit of $62,926) of the
net operating loss carryforwards remain at December 31, 1999, of which $60,597
(with a tax benefit of $18,478) is applicable to international subsidiaries, of
which $54,716 does not expire, $240,716 (with a tax benefit of $15,863) relates
to state net operating loss carryforwards and the
11
Stone & Webster, Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts.)
remaining $84,780 (with a tax benefit of $28,585), relates to United States net
operating loss carryforwards. Use of net operating loss carryforwards is limited
to future taxable earnings of the subsidiaries. Operating loss carryforwards
will expire as follows:
2000 $ 62
2001 4,921
2002 4,596
2003 42,994
2004 16,952
2005 828
Thereafter 261,024
--------
Total $331,377
--------
The Company has determined that it will be able to realize a tax benefit of
$46,880 relating to these state, federal and foreign net operating loss
carryforwards and the remaining net operating loss carryforwards (with a tax
benefit of $16,046, which is fully reserved) are expected to expire unused.
The following is an analysis of the difference between the United States
statutory income tax rate and the Company's effective income tax rate:
1999 1998 1997
----- ----- -----
United States statutory income tax rate (35.0)% (35.0)% 35.0%
Increase (decrease) resulting from:
State and local income taxes, net of United States tax
effect 50.2 (1.8) 4.6
Meals and entertainment 24.1 0.4 1.4
Difference in effective tax rate of international operations
and projects, net of United States tax effect 13.1 4.4 7.2
Foreign sales corporation (52.5) (1.2) --
Investment tax credit - Canada -- (0.2) (0.3)
Adjustment of prior years' federal income tax accruals, net
of interest effect (20.7) (0.2) --
Utilization of net operating loss carryforwards of
international operations -- -- (14.5)
Increase in net operating loss valuation reserve 126.2
Other 3.0 0.7 (0.5)
----- ----- -----
Effective income tax rate 108.4% (32.9)% 32.9%
----- ----- -----
12
Stone & Webster, Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts.)
(F) EARNINGS PER SHARE (EPS)
The following is the calculation of basic and fully diluted EPS:
EPS 1999 1998 1997
-------- -------- --------
Income (loss) from continuing operations $ (3,968) $(54,608) $ 29,151
Income (loss) from discontinued operation 5,136 5,306 4,359
-------- -------- --------
Net income (loss) $ 1,168 $(49,302) $ 33,510
-------- -------- --------
Weighted average shares outstanding - basic
(000s) 13,116 12,886 12,812
Basic EPS $ 0.09 $ (3.83) $ 2.61
-------- -------- --------
Weighted average shares outstanding - diluted
(000s) 13,116 12,886 12,929
-------- -------- --------
Diluted EPS(1) $ 0.09 $ (3.83) $ 2.59
-------- -------- --------
(1) In 1999, dilutive potential common shares of 1,140,535 relating to stock
options were not included in the computation of diluted earnings per share
since all options outstanding have an exercise price greater than market
value. In 1998, dilutive potential common shares of 722,443 relating to
stock options were not included in the computation of diluted earnings per
share since their effect would be antidilutive. In 1997, dilutive potential
common shares included in the calculation of earnings per share related
solely to the dilutive impact of stock options.
(G) FINANCIAL INSTRUMENTS
Financial instruments which potentially expose the Company to concentrations of
credit risk consist primarily of cash and cash equivalents, U.S. Government
securities and accounts receivable. The Company maintains its cash balances with
several major financial institutions thus limiting the amount of credit exposure
to any one financial institution. The Company invests all excess cash balances
in U.S. Government treasury securities and repurchase agreements. Concentrations
of credit risk with respect to trade receivables are limited due to the large
number of engineering and construction clients comprising the Company's customer
base and their dispersion across different business and geographic areas. Most
contracts require payments as the projects progress or in certain cases advance
payments. Consistent with industry practices, the Company generally does not
require collateral, but in most cases can place liens against the property,
plant or equipment constructed if a default occurs. The Company maintains
adequate reserves for potential credit losses and such losses have been within
management's estimates.
The Company had several foreign exchange forward contracts at December 31, 1999.
These contracts had varying maturities through May 2001. At December 31, 1999,
the notional amount of foreign exchange forward contracts outstanding was
$2,185. The fair value and unrealized loss on these contracts was $659 and
$(118), respectively, at December 31, 1999.
The Company and its subsidiaries have entered into other financial agreements in
the normal course of business. These agreements, which by their nature contain
potential risk of loss, include lines of credit, letters of credit, performance
bonds and performance guarantees. The fair values of these agreements are
estimated at $1,832 and $1,225 at December 31, 1999 and 1998, respectively,
based on the fees paid to obtain the obligations.
13
Stone & Webster, Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts.)
(H) FIXED ASSETS
Following is a summary of fixed assets at December 31:
1999 1998
-------- --------
Office buildings and other real estate $ 43,450 $101,472
Furniture and equipment 132,669 167,160
Cold storage property, plant and equipment 140,763 141,482
-------- --------
316,882 410,114
Less: Accumulated depreciation and amortization 132,937 190,957
-------- --------
$183,945 $219,157
Less: Fixed assets of discontinued operation, net 110,108 --
-------- --------
Fixed assets, net $ 73,837 $219,157
-------- --------
Fixed assets include computer equipment under capital leases of $1,548 at
December 31, 1999 and $2,817 at December 31, 1998; related amounts included in
accumulated amortization were $185 at December 31, 1999 and $1,899 at December
31, 1998. Total depreciation expense was $22,138 for 1999, $23,567 for 1998 and
$12,018 for 1997. In 1998, the Company wrote down the value of various fixed
assets, primarily computer equipment, to recognize that little, if any, future
benefit will be obtained from these assets, and revised its estimated useful
life for computer equipment from six to three years. The amounts incurred for
these charges were $3,752 ($2,261 after tax or $0.18 per share) and $2,615
($1,577 after tax or $0.12 per share), respectively.
(I) BANK LOANS AND LIQUIDITY
During 1999, the Company expanded and extended its principal credit facility to
$260,000 with an expiration date of May 31, 2000. This facility provided up to
$160,000 in direct borrowings for operating funds and $100,000 in letters of
credit. In December 1999, the Company fully utilized the $160,000 available for
direct borrowings, and upon the sale of its Boston headquarters building, repaid
$140,000 permanently reducing the amount available under this facility to
$120,000. As of December 31, 1999, the entire $20,000 in direct borrowings was
fully utilized and $88,200 of letters of credit were outstanding out of the
$100,000 available. In addition, at December 31, 1999, $7,200 of letters of
credit were outstanding under other bank arrangements. The total available
amount for issuance of letters of credit was $11,800 as of December 31, 1999.
The Company has experienced recurring operating losses and liquidity problems
during the past year. To address these issues, on April 14, 2000, the Company
completed negotiations and entered into an agreement with its current lending
group to extend the credit facility to January 31, 2001. The amended credit
facility contains certain quarterly financial covenants and stipulates that
proceeds from the sale of the discontinued operation will be used to repay the
outstanding direct borrowings and to provide support to the lending group for
the Company's outstanding letters of credit. The remaining proceeds will be used
to enhance the Company's working capital position. The credit agreement also
requires the Company to deposit with the lending group $5,000 per month for
three months beginning in October 2000, as additional support for the Company's
letters of credit (see Note S).
At December 31, 1998, the Company had three separate domestic line of credit
agreements totaling $105,000 which were fully utilized. In addition the Company
had a line of credit in the
14
Stone & Webster, Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts.)
amount of $30,000, against which no amount had been or was allowed to be
borrowed. The Company also assumed a $2,000 line of credit through an
acquisition in the third quarter of 1998. Borrowings under this line of credit
amounted to $1,350 as of December 31, 1998.
The weighted average interest rate was 9.5 percent and 6.17 percent at December
31, 1999 and 1998, respectively. Borrowings under the agreements were used for
general corporate purposes and to fund the 1998 acquisition of The Nordic Group.
Outstanding borrowings incur interest based on the prime rate plus an additional
margin.
In addition to the domestic lines of credit, two international subsidiaries of
the Company have overdraft banking facilities of $8,376 which are used for
general corporate purposes. The overdraft banking facilities incur interest
based on the prime rate. At December 31, 1999, $2,793 was outstanding under the
lines of credit. At December 31, 1998, no amounts were outstanding under the
overdraft banking facilities. (See Note L to the consolidated financial
statements for guarantees of affiliated obligations.)
(J) ACCRUED LIABILITIES
Accrued liabilities consist of the following at December 31:
1999 1998
------- -------
Salaries and benefits $17,235 $17,032
Insurance accruals and premiums 18,946 18,859
Reserve for joint venture activity 9,977 20,996
Accrued professional fees 13,515 6,818
Other 16,939 16,331
------- -------
Total accrued liabilities $76,612 $80,036
------- -------
In 1999, the Company utilized $6,926 of the reserve for a joint venture contract
loss in connection with a contract being executed by a partially owned joint
venture in the Middle East, and an additional $4,093 of the reserve for other
joint venture activity.
(K) LONG-TERM DEBT
Long-term debt consists of the following at December 31:
1999 1998
------- -------
Mortgage loans, due 2009, 6.44% $20,727 $22,355
Mortgage loans, due 2007, 7.65% -- 693
Mortgage loans, due 2004, 7.91% -- 874
Loan payable, other 211 275
Capitalized lease obligations 1,356 206
------- -------
22,294 24,403
------- -------
Less current portion 2,344 2,175
------- -------
Total long-term debt $19,950 $22,228
------- -------
The 6.44 percent mortgage loan due in 2009 is collateralized by an office
building and other real estate with a net book value of $25,144 and $25,833 at
December 31, 1999 and 1998, respectively, which approximates fair values. The
7.65 percent and 7.91 percent mortgage
15
Stone & Webster, Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts.)
loans were repaid in July 1999. The Company assumed the liability of three loans
payable through an acquisition in 1998. These loans are with a former
stockholder of the subsidiary and are due through 2005 at interest rates ranging
from 6.75 percent to 9.00 percent. One loan payable relates to a stock
repurchase, which is collateralized by an office building with a net book value
of $1,775. The remaining two loans are related to deferred compensation
agreements, and are unsecured.
Principal payments required on long-term debt consist of the following for the
years ended December 31:
2000 $ 2,344
2001 2,407
2002 2,286
2003 2,133
2004 2,306
Thereafter 10,818
-------
Total $22,294
-------
(L) COMMITMENTS AND CONTINGENCIES
In the normal course of executing lump sum turnkey engineering, procurement and
construction contracts, the Company may enter into purchase commitments for
equipment, material and services that, depending on the circumstances, may
require payment of cancellation costs in the event of contract termination. It
is the Company's policy to negotiate termination and suspension clauses in
contracts providing for reimbursement to the Company for all reasonable
cancellation costs associated with a project termination or cancellation. In the
event that the contracting party is unable to fulfill their commitment for
reimbursement, the Company could be liable to its suppliers for payment of
cancellation costs.
In connection with the sale of its corporate headquarters building in 1999, the
Company entered into a lease agreement which extends no later than March 2002,
for office space it occupied prior to the sale. The lease is cancelable at the
Company's option based upon the terms of the agreement. The Company also leases
other office space, computer equipment and office equipment with varying lease
terms. All noncancelable leases have been categorized as either capital or
operating. The Company pays property taxes, insurance and maintenance and
expenses related to the leased properties under most leasing arrangements.
Rental expense was $3,288 in 1999, $3,600 in 1998 and $4,710 in 1997.
16
Stone & Webster, Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts.)
Future minimum lease payments under long-term leases as of December 31, 1999 are
as follows:
Capital Operating
Leases Leases
------- ---------
2000 $ 587 $17,571
2001 587 12,577
2002 349 8,826
2003 -- 6,081
2004 -- 5,895
2005 and thereafter -- 8,343
------- -------
Total minimum lease payments 1,523 59,293
------- -------
Amount representing interest 167
------- -------
Present value of minimum lease payments $ 1,356
------- -------
Less rental and sublease income 8,103
------- -------
Total $51,190
------- -------
The current portion of the present value of the minimum lease obligations under
capital leases as of December 31, 1999 amounted to $538.
The Company and certain subsidiaries have been named as defendants, along with
others, in legal actions claiming damages in connection with engineering and
construction projects and other matters. Most such actions involve claims for
personal injury or property damage which occur from time to time in connection
with services performed relating to project or construction sites and for which
coverage under appropriate insurance polices usually applies. Other actions
arising in the normal course of business include employment-related claims and
contractual claims for which insurance coverage or contractual provisions
limiting the Company's liability may or may not apply. Such contractual disputes
normally involve claims relating to the performance of equipment design or other
engineering services or project construction services provided by subsidiaries
of the Company and often such matters may be resolved without going through a
complete and lengthy litigation process.
In 1996, the Company entered into a contract with Trans-Pacific Petrochemical
Indotama ("TPPI") of Indonesia for construction of an integrated ethylene and
olefins complex for $2.3 billion, to be executed by a consortium of contractors.
The Company's portion of the total contract value was $710,000. In the fourth
quarter of 1997, work on the project was suspended, and remains suspended,
pending resolution of financing issues by the client. The Company has obtained
approval to resell or use committed materials and procured equipment to reduce
costs of project suspension. The Company has also had substantive discussions
with potential purchasers of the olefins plant which constitutes the majority of
the Company's scope for the project. Had the TPPI project been cancelled as of
December 31, 1999, and if resale of the olefins plant were unlikely to be
completed, the Company would have recorded a pre-tax charge of approximately
$76,800 representing project working capital plus current procurement
commitments net of the estimated salvage value of procured equipment and
materials. On a similar basis, the pre-tax charge would have been $72,400 in
1998. The TPPI project is included in the Company's backlog in the amount of
$398,000 and $451,000 respectively, at December 31, 1999 and 1998.
The Company was engaged in certain international projects that incurred losses
totaling $74,200 in 1999 and $42,900 in 1998. One of these projects is now
finished and another is in
17
Stone & Webster, Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts.)
the final stages of completion. Due to various factors, including owner-directed
technical and schedule changes, increases in scope of the currently authorized
contracts and other factors, the cost to complete these contracts has
significantly exceeded each contract's value. Management believes that it has
valid contractual and equitable grounds for change orders providing additional
compensation under these contracts. The Company has or expects to submit claims
greater than losses incurred to date. The Company recognized approximately
$35,000 in revenue in 1998 for change orders that have not yet received client
approval. These change orders are included in the claims and, in management's
judgment, reflect a conservative estimate of the probable amount to be realized.
In 1999, a provision of $10,400 on three domestic lump sum contracts was
recorded to reflect increases in the estimated costs to complete. Additionally,
while the Company was working to improve its liquidity position, delays in
payments to vendors adversely impacted delivery of vendor materials and services
and, consequently, job scheduling and sequencing were affected. As a result,
provisions of $65,500 on certain projects (see Note S), including the three
domestic lump sum contracts, were established for additional expenditures to
accelerate certain projects and for increased anticipated costs to complete
other projects.
A joint venture, in which the Company is a 50 percent owner, has submitted
claims to recover approximately $115,000 in connection with scope and
specification changes on a major petrochemical project in the Middle East. The
joint venture has been notified of claims of approximately $62,000, which have
been submitted by a subcontractor who has filed for arbitration. Substantially
all of the subcontractor's claims have been included in the claims submitted by
the joint venture to its client. The Company believes that current reserves are
adequate to cover these claims, and has not recognized any contract revenue in
anticipation of recovery on its claims. In 1997, the Company recognized losses
of $25,781 related to this contract.
The Company continues to have potential liabilities related to environmental
pollution. The Company and two of its subsidiaries are named as defendants in
two legal actions brought by, and have received other claims from, private
parties seeking contributions for costs incurred or to be incurred in
remediation of sites under the Federal Comprehensive Environmental Response,
Compensation and Liability Act and similar state statutes. No government
authority has sought similar redress from the Company or its subsidiaries
(except in the case of one subsidiary in limited connection with claims made
with respect to clients of that subsidiary) nor has the Company been determined
to be a Potentially Responsible Party by the Federal or any state or local
government authority, although some information has been requested with regard
to environmental matters. Based on presently known facts and existing laws and
regulations, management believes that it has valid legal defenses to such
actions and that the costs associated with such matters, including legal costs,
should be mitigated by the presence of other entities which may be Potentially
Responsible Parties, by contractual indemnities, and by insurance coverage.
Management believes, on the basis of its examination and consideration of these
matters and such possible liabilities, including consultation with counsel, that
none of these legal actions, nor such possible liabilities, will result in
payment of amounts, if any, which would have a material adverse effect on the
consolidated financial statements.
The Company liquidated its investment in the Binghamton Cogeneration Partnership
in 1997. Under the liquidation agreement the Company was required to provide a
standby letter of credit in the amount of $6,000 to collateralize its obligation
under an indemnity agreement among the
18
Stone & Webster, Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts.)
parties to the liquidation agreement. The Company is required to maintain this
letter of credit through January 2003.
At December 31, 1999, subsidiaries of the Company have contingent liabilities of
$8,350 arising from guarantees to banks for credit facilities extended to
unconsolidated affiliates for general operating purposes.
(M) COMMON STOCK
In 1996, the Board of Directors of the Company approved a Shareholder Rights
Plan and declared a dividend of one preferred share purchase right ("Right") for
each outstanding share of common stock. Each Right entitles the holder to
purchase from the Company one one-hundredth of a share of Series A Junior
Participating Preferred Stock of the Company at a price of $125 per one
one-hundredth of a Preferred Share, subject to adjustment ("Purchase Price").
The description and terms of the Rights are set forth in a Rights Agreement
dated as of August 15, 1996. The Rights will expire on August 15, 2006 unless
extended or unless the Rights are earlier redeemed or exchanged by the Company.
The Rights are not exercisable (unless waived by the Board of Directors) until
the earlier to occur of: (i) 10 days following a public announcement that a
person or group of affiliated or associated persons ("Acquiring Person") have
acquired beneficial ownership of 15 percent or more of the outstanding shares of
common stock or (ii) 10 business days (or such later date decided by the Board
of Directors) following the commencement of, or announcement of an intention to
make, a tender offer or exchange offer for 15 percent or more of the outstanding
shares of common stock. In such event, each holder (other than such Acquiring
Person) of a Right will have the right to receive upon exercise of the Right
that number of shares of common stock having a market value of two times the
Purchase Price. In the event that the Company is acquired or 50 percent or more
of its assets are sold after a person or group has become an Acquiring Person,
each holder of a Right, upon exercise thereof, will have the right to receive
that number of shares of common stock of the acquiring company which will have a
market value of two times the then Purchase Price.
(N) TREASURY STOCK
In January 1998, the Board of Directors of the Company approved an increase in
the share repurchase program originally authorized in July 1994 from 2,500,000
to 3,000,000 shares of the Company's common stock in open market transactions at
prevailing prices. The Company reserves the right to discontinue the repurchase
program at any time. The Company acquired 43,217 shares in 1998 and no shares in
1999 under the repurchase program. Through December 31, 1999, the Company has
repurchased 2,279,626 shares.
In 1999, the Employee Retirement Plan of Stone & Webster, Incorporated and
Participating Subsidiaries (the "Retirement Plan"), the Company's domestic
defined benefit plan, and the Trust Agreement under the Retirement Plan were
amended to permit the investment of a portion of the assets of the Retirement
Plan in common stock or other qualifying securities issued by the Company,
provided that such investment is in compliance with and subject to the
limitations of the Employee Retirement Income Security Act of 1974, as amended,
and other applicable laws. The Board of Directors has directed that such
investment be made in an orderly manner from time to time in accordance with
investment guidelines and objectives established by the Board.
19
Stone & Webster, Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts.)
On December 14, 1999, the Company sold 1,000,000 shares of its common stock from
treasury shares to the Retirement Plan for a per share price of $15.35.
(O) EMPLOYEE STOCK OWNERSHIP PLAN
Under the terms of the Employee Stock Ownership Plan (the "ESOP"), the Company
makes contributions to the Employee Stock Ownership Trust (the "Trust") which
can acquire from the Company up to 5,000,000 shares of common stock of the
Company, for the exclusive benefit of participating employees.
Notes receivable from the Trust, received as consideration by the Company for
the 1,600,000 shares of common stock sold to the Trust in 1980 and 1985, are
payable in level payments of principal and interest over 20 years. At December
31, 1999, the balance of the notes receivable from the Trust was $13,301. The
unamortized cost of the shares is being funded by annual contributions necessary
to enable the Trust to meet its current obligations, after taking into account
dividends received on the common stock held by the Trust. The net cost of the
ESOP is being amortized over 20-year periods from the dates of acquisition of
shares. The charge to income was $1,153 in 1999, $1,156 in 1998 and $1,160 in
1997. The accrued cost of the ESOP, included in other liabilities, was $6,092
and $7,741 at December 31, 1999 and 1998, respectively.
(P) STOCK COMPENSATION PLANS
The Company has a long-term incentive compensation plan under which outside
directors and certain employees receive stock options and other equity-based
awards. The plan provides for the grant of nonqualified and incentive stock
options, performance shares and units, and restricted stock awards. The total
number of shares reserved for issuance under the plan is 980,777 and no more
than 300,000 shares may be granted in the form of restricted stock. Nonqualified
stock options to purchase 1,000 shares are granted to each nonemployee director
on an annual basis. In addition, nonqualified stock options to purchase 2,000
shares are granted to each nonemployee director upon initial election or
appointment to the Board of Directors. Awards which have been cancelled or
forfeited under the current plan become available for future awards.
In 1999, 9,000 nonqualified stock options were granted to nonemployee directors
and 448,000 options were granted to certain employees. All options awarded to
nonemployee directors become exercisable six months after the date of grant. The
options granted to employees generally become exercisable over four years and
remain exercisable for 10 years from the date of award or upon cancellation. Of
the options granted to employees, 128,085 were incentive stock options and
319,915 were nonqualified stock options.
20
Stone & Webster, Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts.)
A summary of the Company's stock option activity, and related information for
the years ended December 31 is as follows:
1999 1998 1997
----------------------- ----------------------- -----------------------
WEIGHTED- Weighted- Weighted-
AVERAGE Average Average
EXERCISE Exercise Exercise
OPTIONS PRICE Options Price Options Price
--------- --------- --------- --------- --------- ---------
Outstanding at beginning of year 840,750 $ 37.63 656,500 $ 35.05 471,000 $ 32.98
Granted 457,000 28.46 266,500 43.08 264,000 37.89
Exercised -- -- 21,250 32.70 63,500 32.20
Canceled 116,750 37.80 61,000 35.44 15,000 32.34
Outstanding at end of year 1,181,000 34.06 840,750 37.63 656,500 35.05
Exercisable at end of year 661,459 35.43 338,625 34.49 186,370 34.27
--------- --------- --------- --------- --------- ---------
Weighted-average fair value of
options granted during the
year $ 10.10 $ 11.91 $ 10.30
--------- --------- --------- --------- --------- ---------
The following table summarizes information about stock options outstanding at
December 31, 1999:
Weighted Average
Remaining Contractual
Exercise Price Range Shares Life (Years) Shares Exercisable
-------------------- --------- --------------------- ------------------
$24.38 - $26.94 215,000 9.4 -
$30.25 - $34.88 546,750 7.4 431,709
$36.00 - $41.25 186,500 7.3 121,000
$42.63 - $47.13 232,750 8.3 108,750
--------- --- -------
1,181,000 7.9 661,459
--------- --- -------
The Company complies with the pro forma disclosure requirements of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
("SFAS 123"). As prescribed in SFAS 123, the fair value of the options was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions for 1999, 1998 and 1997,
respectively: risk-free interest rates of 4.99 percent, 5.66 percent and 6.67
percent; dividend yields of 1.6 percent, 1.4 percent and 1.6 percent; volatility
factors of the expected market price of the Company's common stock of .377, .237
and .210; and an expected life of the option of 5 years.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. Had compensation costs
for the Company's stock option plan awards been determined based on the fair
value at the date of grant, consistent with the provisions of SFAS 123, the
Company's net income and earnings per share would have been as shown in the
following table:
1999 1998 1997
---------- ---------- ----------
As reported net income (loss) $ 1,168 $ (49,302) $ 33,510
As reported net income (loss) per share $ 0.09 $ (3.83) $ 2.59
Pro forma net income (loss) $ (945) $ (50,383) $ 32,803
---------- ---------- ----------
Pro forma net income (loss) per share $ (0.07) $ (3.91) $ 2.54
---------- ---------- ----------
21
Stone & Webster, Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts.)
Restricted stock awards made from treasury stock were 134,792 shares in 1999,
2,224 shares during 1998 and 690 shares in 1997. The weighted-average grant date
fair value of these awards was $18.08, $39.78 and $36.25 for 1999, 1998 and
1997, respectively. The market value of the shares awarded is being charged to
income over the vesting period. Of the 137,706 shares awarded during the three
years ended December 31, 1999, no shares were forfeited and the unamortized
portion of the market value of the shares was $2,140. Compensation cost
recognized in income (loss) for these shares totaled $483.5, $87.0 and $219.0
for 1999, 1998 and 1997, respectively.
The Company has a stock plan for nonemployee directors under which such
directors receive an annual stock grant of 400 shares, payable quarterly, as
part of their annual retainer, and may elect to receive all or a portion of
director fees in shares of common stock. The Company also has a Nonemployee
Director Deferral Plan under which any nonemployee Director may elect to defer
all or a portion of their annual retainer, meeting fees, or other fees paid in
connection with their Board service to a Cash Deferral Account or a Stock Unit
Account. During 1999, 1998, and 1997, respectively 6,385, 5,104, and 5,310
shares were earned and 2,346, 1,595, and 0 shares were deferred.
(Q) RETIREMENT PLANS
The Company and its domestic subsidiaries have a noncontributory defined benefit
plan covering executive, administrative, technical and other employees. The
benefits of this plan are based primarily on years of service and employees'
career average pay. The Company's policy is to make contributions which are
equal to current year cost plus amortization of prior service cost, except as
limited by full funding restrictions. Plan assets consist principally of common
stocks, bonds and U.S. Government obligations.
The Company's international subsidiaries in the United Kingdom and Canada have
defined benefit plans covering executive, administrative, technical and other
employees. The U.K. plan is contributory and the benefits are based primarily on
years of service and employees' average pay during their last ten years of
service. The Canada plan is noncontributory and the benefits are based primarily
on years of service and employees' career average pay. The Company's policy is
to make contributions which are equal to the current year cost plus amortization
of prior service cost. Plan assets consist principally of common stocks and
bonds.
Information about the Company's pension plans is as follows:
December 31, 1999 Domestic International Total
- ----------------- --------- ------------- ---------
Changes in benefit obligation
Benefit obligation, beginning of year $ 527,122 $ 56,804 $ 583,926
Service cost 8,373 2,447 10,820
Interest cost 34,728 3,443 38,171
Employee contributions -- 702 702
Actuarial (gain) loss (82,120) (467) (82,587)
Special termination benefits 12,714 -- 12,714
Benefits paid (28,972) (2,737) (31,709)
Foreign currency impact -- (1,040) (1,040)
--------- --------- ---------
Benefit obligation, end of year $ 471,845 $ 59,152 $ 530,997
--------- --------- ---------
22
Stone & Webster, Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts.)
December 31, 1999 Domestic International Total
- ----------------- --------- ------------- ---------
Change in plan assets
Fair value of plan assets, beginning of year $ 711,954 $ 54,439 $ 766,393
Actual return on plan assets 38,050 8,480 46,530
Contribution -- 2,994 2,994
Benefits paid (28,972) (2,737) (31,709)
Foreign currency impact -- (912) (912)
--------- --------- ---------
Fair value of plan assets, end of year $ 721,032 $ 62,264 $ 783,296
--------- --------- ---------
Funded status $ 249,187 $ 3,112 $ 252,299
Fourth quarter contribution -- 516 516
Unrecognized prior service cost 6,458 308 6,766
Unrecognized net (gain) loss (98,556) 1,306 (97,250)
Unrecognized net transition asset -- (1,170) (1,170)
--------- --------- ---------
Prepaid pension cost $ 157,089 $ 4,072 $ 161,161
--------- --------- ---------
Prepaid pension cost, beginning of year $ 155,703 $ 2,794 $ 158,497
(Expense) income for year 14,488 (1,004) 13,484
Contributions -- 2,458 2,458
Foreign currency impact -- (176) (176)
Curtailment loss -- -- --
Prior service cost recognition (388) -- (388)
Special termination benefit (12,714) -- (12,714)
--------- --------- ---------
Prepaid pension cost $ 157,089 $ 4,072 $ 161,161
--------- --------- ---------
December 31, 1998 Domestic International Total
- ----------------- --------- ------------- ---------
Changes in benefit obligation
Benefit obligation, beginning of year $ 480,138 $ 53,351 $ 533,489
Service cost 8,547 1,826 10,373
Interest cost 32,700 3,591 36,291
Employee contributions -- 557 557
Actuarial loss 18,191 2,122 20,313
Special termination benefits 11,552 -- 11,552
Curtailment loss 1,265 185 1,450
Settlements -- (1,937) (1,937)
Benefits paid (25,271) (2,261) (27,532)
Foreign currency impact -- (630) (630)
--------- --------- ---------
Benefit obligation, end of year $ 527,122 $ 56,804 $ 583,926
--------- --------- ---------
Change in plan assets
Fair value of plan assets, beginning of year $ 684,655 $ 56,727 $ 741,382
Actual return on plan assets 52,570 1,109 53,679
Contribution -- 2,066 2,066
Defined contribution plan contribution payment -- (341) (341)
Settlements -- (1,937) (1,937)
Expenses -- (182) (182)
Benefits paid (25,271) (2,261) (27,532)
Foreign currency impact -- (742) (742)
23
Stone & Webster, Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts.)
December 31, 1999 Domestic International Total
- ----------------- --------- ------------- ---------
Fair value of plan assets, end of year $ 711,954 $ 54,439 $ 766,393
--------- --------- ---------
Funded status $ 184,832 $ (2,365) $ 182,467
Fourth quarter contribution -- 503 503
Unrecognized prior service cost 8,576 355 8,931
Unrecognized net (gain) loss (37,668) 5,780 (31,888)
Unrecognized net transition asset (37) (1,479) (1,516)
--------- --------- ---------
Prepaid pension cost $ 155,703 $ 2,794 $ 158,497
--------- --------- ---------
Prepaid pension cost, beginning of year $ 148,155 $ 898 $ 149,053
(Expense) income for year 20,677 (203) 20,474
Contributions -- 2,012 2,012
Foreign currency impact -- 87 87
Curtailment loss (1,265) -- (1,265)
Prior service cost recognition (312) -- (312)
Special termination benefit (11,552) -- (11,552)
--------- --------- ---------
Prepaid pension cost $ 155,703 $ 2,794 $ 158,497
--------- --------- ---------
Domestic prepaid pension cost is separately captioned in the balance sheet and
is included in long-term assets. The plan's funded status as of any measurement
date is based on prevailing market conditions as to discount rate and plan
assets, and accordingly, is subject to volatility. The projected benefit
obligation was determined using assumed discount rates of 8.0 percent at
December 31, 1999 and of 6.75 percent at December 31, 1998 and an assumed
long-term rate of compensation increase of 4.50 percent at December 31, 1999 and
1998. Pension cost was determined using an assumed long-term rate of return on
plan assets of 9.25 percent at January 1, 1999, 1998 and 1997.
Net international prepaid pension cost is included in the consolidated balance
sheets in other long-term assets. The plans' funded status as of any measurement
date is based on prevailing market conditions as to discount rate and plan
assets, and accordingly, is subject to volatility. The projected benefit
obligation was determined using an assumed weighted discount rate ranging from
6.5 percent to 7.0 percent at December 31, 1999 and 6.0 percent to 8.0 percent
at December 31, 1998, and assumed long-term rates of compensation increases of
4.75 percent to 5.0 percent at December 31, 1999 and December 31, 1998. Pension
cost was determined using assumed long-term rates of return on plan assets
ranging from 8.0 percent to 8.75 percent for 1999, 1998 and 1997.
The components of net pension (income) expense are as follows:
1999 Domestic International Total
- ---- --------- ------------- ---------
Service cost $ 8,373 $ 2,447 $ 10,820
Interest cost on projected benefit obligation 34,728 3,443 38,171
Expected return on assets (59,283) (5,108) (64,391)
Amortization of unrecognized transition asset (37) (281) (318)
Amortization of unrecognized prior service cost 1,731 59 1,790
Prior service cost recognition 388 -- 388
Defined contribution expense -- 444 444
Special termination benefit 12,714 -- 12,714
24
Stone & Webster, Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts.)
1999 Domestic International Total
- ---- --------- ------------- ---------
Pension expense (income) $ (1,386) $ 1,004 $ (382)
--------- --------- ---------
1998 Domestic International Total
- ---- --------- ------------- ---------
Service cost $ 8,547 $ 1,826 $ 10,373
Interest cost on projected benefit obligation 32,700 3,591 36,291
Expected return on assets (53,922) (4,655) (58,577)
Amortization of unrecognized transition asset (9,795) (299) (10,094)
Amortization of unrecognized prior service cost 1,793 68 1,861
Curtailment loss (gain) 1,265 (309) 956
Prior service cost recognition 312 (360) (48)
Defined contribution expense -- 341 341
Special termination benefit 11,552 -- 11,552
--------- --------- ---------
Pension expense (income) $ (7,548) $ 203 $ (7,345)
--------- --------- ---------
1997 Domestic International Total
- ---- --------- ------------- ---------
Service cost $ 6,995 $ 2,044 $ 9,039
Interest cost on projected benefit obligation 31,924 3,886 35,810
Expected return on assets (48,850) (4,336) (53,186)
Amortization of unrecognized transition asset (10,199) (312) (10,511)
Amortization of unrecognized prior service cost 1,793 31 1,824
Prior service cost recognition -- (75) (75)
--------- --------- ---------
Pension expense (income) $ (18,337) $ 1,238 $ (17,099)
--------- --------- ---------
In the fourth quarters of 1999 and 1998, voluntary Incentive Retirement programs
were offered to approximately 230 and 600 employees, respectively. These
programs were accepted by 164 employees at a total cost of $13,102 ($7,861 after
tax or $0.60 per share) in 1999 and by 206 employees at a total cost of $13,129
($7,943 after tax, or $0.61 per share) in 1998. The charges reduced the domestic
pension asset in both 1999 and 1998.
Fluctuations in the actual return on plan assets reflect fluctuations in the
market prices of equity securities as well as debt securities owned by the
pension plan.
The Company maintains an Employee Investment Plan ("EIP") which covers
substantially all U.S. based full time employees who meet certain eligibility
requirements. The EIP allows employee participants an election to defer a
percentage of their compensation up to the limitations as determined under
federal law. In addition, the Company contributes a matching amount equal to 25
percent of the employees' elective deferral to the plan, up to the first 5
percent of the employees' annual compensation. The Company, at the discretion of
the Board of Directors, may make discretionary contributions to the plan. For
the years ended December 31, 1999, 1998 and 1997, the Company made matching
contributions of $2,027, $2,334, and $2,461, respectively.
25
Stone & Webster, Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts.)
(R) GEOGRAPHIC REGIONS AND INTERNATIONAL SUBSIDIARIES
The Company has one principal business segment: Engineering, Construction and
Consulting, which is reported as continuing operations. The Company's Nordic
Refrigerated Services business unit (Nordic) previously reported as the cold
storage segment is now reported as a discontinued operation.
Geographic information for continuing operations is as follows:
1999 1998 1997
----------- ----------- -----------
Revenue
United States - Domestic $ 788,037 $ 483,332 $ 635,685
United States - Export(1) 197,869 274,490 396,194
----------- ----------- -----------
United States - Total $ 985,906 $ 757,822 1,031,879
----------- ----------- -----------
International 154,442 456,646 267,341
----------- ----------- -----------
Total revenue $ 1,140,348 $ 1,214,468 $ 1,299,220
----------- ----------- -----------
Operating income (loss)(2)
United States $ (109,451) $ (85,375) $ 20,655
International (33,073) 4,351 19,297
----------- ----------- -----------
Operating income (loss) $ (142,524) $ (81,024) $ 39,952
----------- ----------- -----------
Long lived assets
United States $ 266,499 $ 293,985 $ 260,171
International 13,796 15,752 14,079
----------- ----------- -----------
Total long lived assets $ 280,295 $ 309,737 $ 274,250
----------- ----------- -----------
(1) Includes Far East/Pacific geographic area, including Indonesia which
accounted for 8 percent of consolidated revenue in 1999, 10 percent in 1998
and 13 percent in 1997. No other international geographic area accounted
for more than 10 percent of consolidated revenue in 1999, 1998 or 1997. Far
East/Pacific revenue was $131,386, $157,870 and $246,743 in 1999, 1998 and
1997, respectively.
(2) Pension related items include the effect of incentive retirement programs.
Domestic and international pension related items are presented in Note Q to
the consolidated financial statements. Income from pension related items
for continuing operations was $542 in 1999, $7,458 in 1998 and $17,200 in
1997.
Net income (loss) and assets, net of liabilities, of international subsidiaries
amounted to $(21,415) and $7,549 in 1999, $925 and $32,486 in 1998 and $16,308
and $35,248 in 1997, respectively.
(S) SUBSEQUENT EVENTS
Company officials were recently notified of an unanticipated cost overrun on a
key project by a major subcontractor related to estimates to complete work
during the first half of 2000. As a result of this information, the Company
subsequently conducted a thorough review of this project and, based on this
review, has recorded a provision of $27,500 to complete work on the project, and
has revised its 1999 financial statements for such matter.
As a result of the liquidity problems created by the unanticipated project
overrun, coupled with previously reported operating losses, the Company has
accelerated its discussions with potential lenders and strategic partners to
provide interim and long-term financing. In addition, the Company is in
substantive discussions regarding possible strategic transactions that may
result in the sale of all or part of its engineering and construction business,
and is continuing to
26
Stone & Webster, Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts.)
pursue the sale of its Nordic Refrigerated Services business as planned. The
Company has also initiated discussions with certain subcontractors with regard
to extended payment terms. The Company's ability to continue as a going concern
is dependent on the success of these initiatives. Management believes that its
plans will allow the Company to obtain adequate financing to continue to operate
the Company; however, the potential failure to execute on these plans raises
substantial doubt as to the Company's ability to continue as a going concern.
In addition, the issuance of a modified opinion by the Company's independent
public accountants is an event of default under its recently extended credit
facility. The Company is in discussions with the agent bank for the lending
group to provide a waiver for this event of default.
On May 8, 2000, the Company signed a letter of intent to sell substantially all
of its assets. In connection with this proposed transaction the Company will
enter into a $50,000 secured credit facility with the proposed buyer to finance
operations until the sale is consummated. The Company intends to file a
voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy
Code after the Company signs a definitive sale agreement.
Report of Independent Accountants
To the Shareholders and Board of Directors of Stone & Webster, Incorporated:
In our opinion, the accompanying consolidated financial statements listed in the
index appearing under Item 7(a)(i), after the restatement described in Note S,
present fairly, in all material respects, the consolidated financial position of
Stone & Webster, Incorporated and its subsidiaries at December 31, 1999 and
1998, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States. These consolidated 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 of these statements in accordance with
auditing standards generally accepted in the United States, which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Notes I and S, the
Company has experienced recurring operating losses and liquidity problems during
the past year, and is in violation of its credit facility. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters, which are described in Notes I
and S, include entering into possible strategic transactions, including the sale
of all or part of its engineering and construction business, and continuing to
pursue the sale of its Nordic Refrigerated Services business as planned. The
financial statements do not include any adjustments that might result from this
uncertainty.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 14, 2000 (Except as to Note I
for which the date is April 14, 2000 and
Note S for which the date is May 8, 2000)
27
Stone & Webster, Incorporated and Subsidiaries
SELECTED FINANCIAL DATA
(Dollars in thousands, except per share amounts.)
Years ended December 31,
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
Revenue $ 1,140,348 $ 1,214,468 $ 1,299,220 $ 1,143,587 $ 981,631
Operating income (loss) from
continuing operations (3) (142,524) (81,024) 39,952 (31,874) 27,258
Income (loss) from continuing
operations (1,2 and 3) (3,968) (54,608) 29,151 (21,128) 10,008
Basic income (loss) from
continuing operations per share $ (0.30) $ (4.24) $ 2.27 $ (1.60) $ 0.70
Diluted income (loss) from
continuing operations per share $ (0.30) $ (4.24) $ 2.25 $ (1.60) $ 0.70
Dividends declared per share (4) $ 0.45 $ 0.60 $ 0.60 $ 0.45 $ 0.60
----------- ----------- ----------- ----------- -----------
Total assets $ 915,296 $ 881,487 $ 738,777 $ 692,065 $ 716,772
----------- ----------- ----------- ----------- -----------
Long-term debt $ 19,950 $ 22,228 $ 22,510 $ 24,260 $ 74,677
----------- ----------- ----------- ----------- -----------
Notes: (1) Reflects gain or loss on sale of assets, which increased net
income by $92,236, or $7.03 per share in 1999, $1,993, or $0.15
per share in 1998, decreased net income by $5,363, or $0.41 per
share in 1997, and decreased net income by $7,511, or $0.52 per
share in 1995.
(2) Includes income from divested operations of $1,048, or $0.08 per
share in 1997, and an extraordinary gain of $6,787, or $0.52 per
share in 1997 on debt extinguishment from transfer of Auburn VPS
Partnership assets to the construction lenders.
(3) Income (loss) from continuing operations in 1999 includes a
provision for contract losses of $92,864 or $7.08 per share
(operating income includes $150,100) and in 1998, $53,891 or
$4.18 per share (operating income includes $87,274). Income
(loss) from continuing operations also includes a write-down of
fixed assets of $3,838 or $0.30 per share (operating income
includes $6,367) in 1998, a provision for the Company's share of
contract losses on a joint venture in the Middle East of $15,469,
or $1.20 per share (operating income includes $25,781) in 1998,
restructuring and other charges of $28,516, or $2.14 per share
(operating income includes $54,424 for these items) in 1996, a
write-down of the Company's equity interest in Binghamton
Cogeneration Partnership to fair value in 1997 of $2,712, or
$0.21 per share, and costs associated with the Incentive
Retirement Programs of $7,861 or $0.60 per share in 1999 and
$7,943 or $0.61 per share in 1998 and $1,416, or $0.10 per share
in 1995.
(4) On October 26, 1999 and January 25, 2000, the Board of Directors
decided to forego the normal quarterly dividend of $0.15 per
share due to the Company's liquidity needs. In the fourth quarter
of 1996, the Company changed the quarterly dividend declaration
date to the first month of the quarter from the month preceding
the quarter; this change had no effect on the annual dividend
payment rate of $0.60 per share, although dividends declared in
1996 totaled $0.45 per share.