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EXHIBIT 99.2
STONE & WEBSTER, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(DOLLARS IN THOUSANDS, PER SHARE AMOUNTS)
(SEE NOTE (B))
March 31,
2000 December 31,
(Unaudited) 1999
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 36,911 $ 106,481
Accounts receivable, principally trade, net 280,183 288,824
Costs and revenues recognized in excess of billings 121,043 98,663
Deferred income taxes 20,540 23,286
Other 829 404
------------ ------------
Total current assets 459,506 517,658
Fixed assets, net 84,967 73,837
Domestic prepaid pension cost 162,867 157,089
Net assets of discontinued operations 111,681 112,110
Assets held for sale 6,744 6,744
Prepaid expenses 12,378 11,719
Other assets 20,957 36,139
------------ ------------
Total assets $ 859,100 $ 915,296
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank loans $ 24,359 $ 22,793
Current portion of long-term debt 2,328 2,344
Accounts payable, principally trade 136,371 161,218
Billings in excess of costs and revenues recognized 252,532 275,461
Accrued liabilities 58,066 76,612
Accrued taxes 17,138 17,371
------------ ------------
Total current liabilities 490,794 555,799
Long-term debt 19,035 19,950
Deferred income taxes 23,124 23,286
Other liabilities 13,070 11,216
Shareholders' equity:
Preferred stock, no par value; authorized 2,000,000 shares;
none issued -- --
Common stock, $1 par value; authorized 40,000,000 shares;
17,731,488 shares issued including shares held in treasury 17,731 17,731
Capital in excess of par value of common stock 42,017 42,579
Retained earnings 369,952 362,712
Accumulated other comprehensive income (9,776) (10,347)
Less: Common stock held in treasury, at cost (3,495,103 and
3,554,102 shares) 90,560 92,091
Employee stock ownership and restricted stock plans 16,287 15,539
------------ ------------
Total shareholders' equity 313,077 305,045
------------ ------------
Total liabilities and shareholders' equity $ 859,100 $ 915,296
============ ============
The accompanying notes are an integral part of
the consolidated financial statements.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STONE & WEBSTER, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(SEE NOTE (B))
Three Months Ended
March 31,
2000 1999
---------- ----------
Revenue $ 414,337 $ 254,656
Cost of revenue 387,013 307,283
---------- ----------
Gross profit (loss) 27,324 (52,627)
General and administrative expenses 16,550 16,726
---------- ----------
Operating income (loss) 10,774 (69,353)
Other income (expense):
Interest income 674 661
Interest expense (1,086) (1,958)
---------- ----------
Total other income (expense), net (412) (1,297)
---------- ----------
Income (loss) from continuing operations before provision for taxes 10,362 (70,650)
---------- ----------
Income tax provision (benefit) 4,232 (10,000)
---------- ----------
Income (loss) from continuing operations 6,130 (60,650)
Income from discontinued operation, net of tax 1,110 1,956
---------- ----------
Net income (loss) $ 7,240 $ (58,694)
========== ==========
Per share amounts:
Basic and diluted earnings (loss) per share
Continuing operations $ 0.43 $ (4.65)
Discontinued operations 0.08 0.15
---------- ----------
Total earnings (loss) per share $ 0.51 $ (4.50)
========== ==========
Dividends declared per share $ -- $ 0.15
========== ==========
Weighted-average number of shares outstanding:
Basic 14,219 13,053
========== ==========
Diluted 14,219 13,053
========== ==========
The accompanying notes are an integral part of
the consolidated financial statements.
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STONE & WEBSTER, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
Three Months
Ended March 31,
2000 1999
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 7,240 $ (58,694)
Adjustments:
Income from discontinued operation (1,110) --
Depreciation and amortization 4,622 6,066
Amortization of net cost of stock plans 382 562
Deferred income taxes 2,584 (11,205)
Domestic prepaid pension cost (5,778) (3,622)
Changes in operating assets and liabilities (77,545) 60,773
---------- ----------
Net cash provided (used) by operating activities (69,605) (6,120)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets (922) (6,639)
Proceeds from note receivable -- 15,150
---------- ----------
Net cash provided (used) by investing activities (922) 8,511
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CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (931) (532)
Bank Loans 1,566 (375)
Dividends paid -- (1,959)
---------- ----------
Net cash provided (used) by financing activities 635 (2,866)
---------- ----------
Net cash provided (by discontinued operation 322 --
---------- ----------
Net decrease in cash and cash equivalents (69,570) (475)
Cash and cash equivalents at beginning of period 106,481 45,492
---------- ----------
Cash and cash equivalents at end of period $ 36,911 $ 45,017
========== ==========
The accompanying notes are an integral part of
the consolidated financial statements.
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STONE & WEBSTER, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(A) The accompanying unaudited condensed consolidated financial statements
of Stone & Webster, Incorporated and Subsidiaries (the "Company") have
been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and notes required by generally accepted
accounting principles for complete financial statements. The December
31, 1999 consolidated balance sheet data was derived from audited
financial statements but does not include all disclosures required by
generally accepted accounting principles. In the opinion of management,
all adjustments (consisting of normal recurring adjustments) considered
necessary for a fair presentation have been included. Operating results
for the quarter ended March 31, 2000 are not necessarily indicative of
the results that may be expected for the fiscal year ending December
31, 2000 or for any other future period. For further information, refer
to the consolidated financial statements and notes included in the
Company's Annual Report on Form 10-K 405/A for the fiscal year ended
December 31, 1999 filed with the SEC on May 9, 2000.
The preparation of condensed consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying
notes. Actual results could differ from those estimates.
(B) 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, recorded a provision of $27.5
million to complete work on the project, and its 1999 financial
statements were revised for such matter.
As a result of the liquidity problems created by the unanticipated
project overrun, coupled with previously reported operating losses, the
Company accelerated its discussions with potential lenders and
strategic partners to provide interim and long-term financing. In
addition, the Company initiated 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
pursue the sale of its Nordic Refrigerated Services business as
planned. The Company also initiated discussions with certain
subcontractors with regard to extended payment terms.
The issuance of a modified opinion by the Company's independent public
accountants in connection with their audit of the consolidated
financial statements of the Company for the year ended December 31,
1999, is a default under its recently extended credit facility. The
Company has received a waiver related to this default and certain other
matters from its principal bank lenders until May 31, 2000 and is in
discussion with the agent bank for such bank lenders for further
extension of the waiver.
On May 8, 2000, the Company signed a letter of intent to sell
substantially all of its assets in exchange for $150.0 million in cash
and stock, and the assumption of substantially all of the Company's
liabilities shown on its March 31, 2000 balance sheet, standby letters
of credit, and its liabilities under a new credit facility entered into
on May 9, 2000 pursuant to which up to $50.0 million of credit is being
made available to the Company. The $50.0 million credit facility is
intended to enable the Company to address its current liquidity
difficulties and continue to operate its business until the asset sale
is consummated.
In addition, the Company, as a condition to the proposed sale of its
assets, intends to seek bankruptcy court approval of the asset sale.
Accordingly, the Company intends to file a voluntary petition for
reorganization under Chapter 11 of the U.S. Bankruptcy Code following
the execution of a definitive sale agreement, which is expected to
occur by early June 2000. The proposed asset salt transaction is
conditioned on completion of due diligence by the purchaser,
negotiation and execution of a definitive agreement, approval under
Hart-Scott-Rodino Act, and other
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customary conditions. The letter of intent contemplates that the
purchaser may not assume liabilities associated with certain of the
Company's existing contracts, which contracts, will not be identified
until after completion of due diligence. Completion of the sale will
likely result in the recognition of a substantial loss since the net
book value of the Company's assets is currently more than $300.0
million. Determination of the amount of the loss is not reasonably
possible at this time until after negotiation of a definitive sale
agreement and completion of the competitive bid process provided for
under Chapter 11.
(C) Fixed assets, net are stated at cost less accumulated depreciation of
$104.2 million at March 31, 2000 and $102.3 million at December 31,
1999.
(D) On October 27, 1999, the Company announced its intention to sell the
Nordic Refrigerated Services business unit (cold storage segment). The
Company is seeking a buyer and has retained outside consultants to
assist with this sale. Accordingly, the results of the Nordic
Refrigerated Services business unit have been classified as a
discontinued operation and prior periods have been reclassified. The
contemplated sale of substantially all of the Company's assets
discussed in Note (B) includes the assets associated with the cold
storage segment (or the proceeds therefrom if the sale of the cold
storage business precedes the sale of the remainder of the Company's
assets). The continuing operations of the Company are the Engineering,
Construction and Consulting business.
Revenue and income from discontinued operation are as follows:
Three Months Ended
March 31,
(in thousands) 2000 1999
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Revenue $ 10,693 $ 11,442
Operating income 1,708 1,956
Income tax expense 598 --
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Income from discontinued operation $ 1,110 $ 1,956
Net assets from discontinued operation are as follows:
March 31, December 31,
(in thousands) 2000 1999
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Cash $ 2,186 $ 1,864
Other current assets 5,402 5,933
Property plant and equipment, net 109,484 110,108
Other assets 6,289 4,848
Current liabilities (1,386) (1,201)
Deferred taxes (10,294) (9,442)
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Net assets of discontinued operation $ 111,681 $ 112,110
========== ==========
(E) Basic earnings per share for the three months ended March 31, 2000 and
1999 were computed based on the weighted-average number of common
shares outstanding during the period of 14,218,800 and 13,052,578,
respectively. For the three months ended March 31, 2000, dilutive
potential common shares of 1,139,511 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.
For the three months ended March 31, 1999, dilutive potential common
shares of 986,046 relating to stock options were not included in the
computation of diluted earnings per share since their effect would be
antidilutive.
(F) The Company had a valuation allowance of $17.1 million at March 31,
2000 and $16.0 million at December 31, 1999 for the deferred tax assets
related to net operating loss carryforwards. The valuation allowance at
March 31, 2000 comprises $2.7 million relating to U.S. net operating
losses, $11.8 million relating to state net operating loss
carryforwards and $2.6 million relating to the loss carryforwards of
international subsidiaries.
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(G) Pension related items, which reduced operating costs, were $5.3 million
for the quarter ended March 31, 2000 compared to $3.3 million for the
same period in the prior year. These items increased net income by $3.2
million, or $0.22 per share for the quarter ended March 31, 2000,
compared with $2.0 million, or $0.15 per share for the same periods in
1999. Pension related items include a net pension credit for the
Company's domestic subsidiaries and a net pension cost for its foreign
subsidiaries. The pension credit is the result of a plan that is funded
in excess of the projected benefit obligation, which is primarily due
to favorable asset performance.
(H) Under the 1995 Stock Option Plan, as of March 31, 2000, nonqualified
options for 523,000 shares were outstanding and options for 434,125
shares were exercisable. For the three months ended March 31, 2000, no
options were exercised, 11,250 options were canceled and no options
were accelerated.
Under the Stone & Webster, Incorporated Long-Term Incentive
Compensation Plan (the "1998 Plan") as of March 31, 2000, options for
546,000 shares were outstanding and 195,542 options were exercisable.
For the three months ended March 31, 2000, no options were exercised,
109,750 options were canceled, and no options were accelerated.
Comprehensive income (loss) was $7.8 million and $(58.4) million for
the quarters ended March 31, 2000 and 1999, respectively. Other
comprehensive income consists of translation adjustments of $0.6
million and $0.3 million for the quarters ended March 31, 2000 and
1999, respectively.
(I) Certain financial statement items have been reclassified to conform to
the current presentation.
(J) Although the Company continues to have possible liabilities related to
environmental pollution and other legal actions, management believes,
on the basis of its assessment of these matters, including consultation
with counsel, that none of these pending legal actions nor such
possible liabilities will result in payments of amounts, if any, that
would have a material adverse effect on the Company's financial
position, results of operations or earnings per share calculations.
The Trans-Pacific Petrochemical Indotama ("TPPI") project remains
suspended pending resolution of financing issues by the client. The
Company has obtained approval from the owner 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 March 31, 2000, and if resale of the olefins plant was unlikely to
be completed, the Company would have recorded a pre-tax charge of $78.6
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
$72.3 million in 1999. The TPPI project is included in the Company's
backlog in the amounts of $399.6 million and $426.0 million,
respectively, at March 31, 2000 and 1999.
The first quarter 2000 results include operating income of $12.9
million from a settlement reached on an international project, which
settlement reduces amounts expected to be paid by the Company to the
customer. The 1999 first quarter results reflected provisions of $74.2
million to cover completion costs for two international projects, one
of which was the project for which a settlement was reached in the
current quarter. Management believes that it has valid contractual and
equitable grounds for change orders providing additional compensation
under the other project. The Company has or expects to submit claims
greater than losses incurred to date.
A joint venture, in which the Company is a 50 percent owner, has
submitted claims to recover approximately $115.0 million 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 $62.0 million 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 $25.8 million related to this
contract.
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The Company recognized approximately $35.0 million in revenue in 1998
for change orders that have not yet received client approval, which in
management's judgment, is a conservative estimate of the probable
amount to be realized.
(K) In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards 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. In June 1999, the FASB agreed to defer the effective date of the
Statement for one year. The Statement is now effective for fiscal years
beginning after June 15, 2000. The Company will adopt the new standard
by January 1, 2001. Management is evaluating the impact this Statement
may have on the Company's financial statements.
In December 1999, the SEC released Staff Accounting Bulletin (SAB) 101,
"Revenue Recognition in Financial Statements." SAB 101 clarifies the
SEC's views related to revenue recognition and disclosure. SAB 101A was
subsequently issued in March 2000, deferring the requirement to adopt
the revised guidance until the period ended June 30, 2000. The Company
is in the process of assessing the impact of this SAB and does not
anticipate this having a material effect on the consolidated financial
statements.
In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions involving Stock Compensation." FIN
44 clarifies the application of APB Opinion No. 25 regarding (a) the
definition of employee for purposes of applying APB Opinion No. 25, (b)
the criteria for determining whether a stock option plan qualifies as a
noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award,
and (d) the accounting for an exchange of stock compensation awards in
a business combination. FIN 44 is effective July 1, 2000, but certain
conclusions cover specific events that occur after either December 15,
1998, or January 12, 2000. The Company believes that the adoption of
FIN 44 will not have a material effect on the financial position or
results of operations of the Company.