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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE FISCAL YEAR ENDED AUGUST 31, 2000
or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File Number 0-22992
THE SHAW GROUP INC.
(Exact name of registrant as specified in its charter)
LOUISIANA 72-1106167
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer
Identification Number)
8545 UNITED PLAZA BOULEVARD
BATON ROUGE, LOUISIANA 70809
(Address of principal executive offices) (zip code)
(225) 932-2500
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: Common Stock, no par
value, registered on the New York Stock Exchange.
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the stock held by non-affiliates (affiliates being
directors, officers and holders of more than 5% of the Company's common stock)
of the Registrant at November 16, 2000 was approximately $1.5 billion.
The number of shares of the Registrant's common stock, no par value, outstanding
at November 16, 2000 was 20,220,211.
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PART I
ITEM 1. BUSINESS
GENERAL
The Shaw Group Inc. ("Shaw" or the "Company") is the world's only
vertically-integrated provider of complete piping systems and comprehensive
engineering, procurement and construction services to the power generation
industry. Shaw is the largest supplier of fabricated piping systems in the
United States and a leading supplier worldwide, having installed piping systems
in over 375 power plants with an aggregate generation capacity in excess of
200,000 megawatts. While approximately 67% of the Company's backlog at August
31, 2000 was attributable to the power generation industry, the Company also
does work in the process industries (which includes petrochemical, chemical and
refining), and the environmental and infrastructure sectors.
The Company has taken several important steps to capitalize on the
growing demand for new power generation capacity. These steps include:
o partnering with Entergy Corporation to create EntergyShaw, L.L.C., a
new company that will develop cost-effective, combined-cycle power
plants for Entergy Corporation and other customers in the unregulated
power market;
o the acquisition of most of the operating assets of Stone & Webster,
Incorporated, a leading provider of engineering, procurement and
construction services to the power generation industry for over 100
years; and
o an agreement with General Electric to supply at least 90% of the pipe
fabrication requirements related to its gas turbine sales through 2004;
the Company has provided piping systems for over 200 turbines under
this agreement through September 2000.
The Company was founded in 1987 and has expanded rapidly through
internal growth and the completion and integration of a series of strategic
acquisitions. After giving effect to the Stone & Webster acquisition, the
Company's fiscal 2000 revenues were approximately $763 million and its backlog
at August 31, 2000 was approximately $1.9 billion. The Company currently has
offices and operations in North America, South America, Europe, the Middle East
and Asia-Pacific and has approximately 10,500 employees.
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKs
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. The statements contained in this
Annual Report on Form 10-K that are not historical facts (including without
limitation statements to the effect that The Shaw Group Inc. (the "Company" or
"Shaw") or its management "believes," "expects," "anticipates," "plans," or
other similar expressions) are forward-looking statements based on the Company's
current expectations and beliefs concerning future developments and their
potential effects on the Company. There can be no assurance that future
developments affecting the Company will be those anticipated by the Company.
These forward-looking statements involve significant risks and uncertainties
(some of which are beyond the control of the Company) and assumptions and are
subject to change based upon various factors, including but not limited to the
following risks and uncertainties: changes in the demand for and market
acceptance of the Company's products and services; changes in general economic
conditions, and, specifically, changes in the rate of economic growth in the
United States and other major international economies; the presence of
competitors with greater financial resources and the impact of competitive
products, services and pricing; the cyclical nature of the individual markets in
which the Company's customers operate; changes in investment by the energy,
power and environmental industries; the availability of qualified engineers and
other professional staff needed to execute contracts; the uncertain timing of
awards and contracts; cost overruns on fixed, maximum or unit priced contracts;
changes in trade, monetary and fiscal policies worldwide; currency fluctuations;
the effect of the Company's policies, including but not limited to the amount
and rate of growth of Company expenses; the continued availability to the
Company of adequate funding sources; delays or difficulties in the production,
delivery or installation of products and the provision of services; the ability
of the Company to successfully integrate the operations of Stone & Webster,
Incorporated, specifically, the ability of the Company to achieve cost savings
in Stone & Webster's operations through reductions in personnel, office lease
and business development expenses;
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the protection and validity of patents and other intellectual property; and
various legal, regulatory and litigation risks. Should one or more of these
risks or uncertainties materialize, or should any of the Company's assumptions
prove incorrect, actual results may vary in material respects from those
projected in the forward-looking statements. The Company undertakes no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise. For a more detailed
discussion of some of the foregoing risks and uncertainties, see the Company's
filings with the Securities and Exchange Commission.
SUBSEQUENT EVENTS
EntergyShaw. On September 18, 2000, the Company executed a definitive
agreement with Entergy Corporation to create EntergyShaw, a new, equally-owned
and jointly-managed company. Subsequent to the execution of a letter of intent
for this venture on June 2, 2000, Entergy and FPL Group, Inc., the parent of
Florida Power & Light, announced a merger which will create the largest U.S.
power producer with generating capacity in excess of 48,000 megawatts.
EntergyShaw's initial focus will be the construction of power plants in North
America and Europe for Entergy's and Florida Power & Light's unregulated
wholesale operations. On a combined basis, Entergy and Florida Power & Light
have approximately 70 turbines on order for their unregulated operations. The
Company expects that the installation of most of these turbines will be managed
by EntergyShaw, subject to the approval of its joint-management committee. The
Company estimates that EntergyShaw will generate approximately $100 million in
revenues per turbine installed. Shaw expects to provide the engineering,
procurement, fabrication and construction requirements to EntergyShaw for these
plants. Under the terms of the arrangement, the Company will present
engineering, procurement and construction opportunities that it receives after
December 31, 2000 for power generation projects to EntergyShaw.
Stock offering. In October 2000, the Company closed the sale of
2,418,669 shares (including 600,000 shares for over-allotments) of its common
stock, no par value (the "Common Stock"), in an underwritten public offering at
a price of $63.50 per share, less underwriting discounts and commissions. The
net proceeds to the Company, less underwriting discounts and commissions and
other offering expenses, totaled approximately $145 million and were used to pay
amounts outstanding under the Company's primary revolving line of credit
facility. The Company's primary revolving line of credit facility has been used
to provide working capital, and to fund fixed asset purchases and subsidiary
acquisitions. See "Item 7 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
Two-for-one Common Stock split. On November 13, 2000, the Company
announced that its Board of Directors had authorized a two-for-one Common Stock
split payable on December 15, 2000 to all shareholders of record on December 1,
2000.
FISCAL 2000 DEVELOPMENTS
Stone & Webster Acquisition. Effective July 14, 2000, the Company
purchased most of the operating assets of Stone & Webster, Incorporated ("Stone
& Webster"), a leading engineering, procurement, and construction company, for
$37.6 million in cash, 2,231,773 shares of its Common Stock (valued at
approximately $105 million) and the assumption of approximately $685 million of
liabilities, subject to adjustment pending the resolution of certain claims
arising from the Stone & Webster bankruptcy proceedings. Stone & Webster is a
leading global provider of engineering, procurement, construction, consulting
and environmental services to the power, process, environmental and
infrastructure markets. Stone & Webster was formed in 1889 and has focused on
the power generation industry for most of its existence. Stone & Webster's
capabilities complement and enhance Shaw's traditional strengths in project
execution and pipe fabrication and enables the Company to deliver a more
complete, cost-effective package of products and services to its power and
process customers. The Company believes its combined capabilities will
significantly increase the amount of work it can perform for EntergyShaw. In
addition, the Company believes it may achieve as much as $35 million in annual
cost savings in Stone & Webster's operations through reductions in personnel,
office lease and business development expenses. However, there can be no
assurance as to the actual cost savings that may be realized. The asset purchase
was concluded as part of Stone & Webster's proceeding under Chapter 11 of the
U.S. Bankruptcy Code.
Nanjing, China Ethylene Plant Project. On August 28, 2000, the Company
announced the execution of a letter of intent for the construction of a 600,000
metric ton-per-year ethylene plant in China which will allow Shaw to utilize
substantially completed engineering and equipment which was acquired from Stone
& Webster. The other parties to the
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agreement are BASF Aktiengesellschaft and China Petroleum & Chemical
Corporation. The Company believes the final contract will be executed prior to
the end of the expiration of the letter of intent in February 2001 and will add
this project to its backlog when the final contract is signed.
BUSINESS STRATEGY
The Company's business strategy is to increase shareholder value by
capitalizing on the significant opportunities in the high-growth power sector
and other select markets. The Company intends to achieve this goal by:
Capitalizing on the complementary strengths Stone & Webster brings to
Shaw. As a result of the Stone & Webster acquisition, the Company is
uniquely positioned as the world's only vertically-integrated provider of
complete piping systems and comprehensive engineering, procurement and
construction services to the power generation industry. The Company believes
that this combination of abilities will reduce lead times and costs to its
customers.
Utilizing disciplined project acquisition and management. The Company
intends to focus its activities on cost reimbursable and negotiated lump-sum
work with well-established clients. The Company believes these types of
contracts reduce its exposure to unanticipated and unrecoverable cost
overruns. Negotiated lump-sum contracts are obtained by direct negotiation
rather than on a competitive bid basis. In instances where the Company
enters into fixed-price, lump-sum contracts, Shaw will rely on its
management team's long history of executing erection and installation
projects on time and within budget coupled with disciplined bidding
practices to limit its exposure. In addition, the Company intends to employ
rigorous contract management controls to identify and reduce the risk of
cost overruns.
Leveraging Shaw's technology and intellectual property advantage. The
Company will continue to employ its technology and intellectual property to
further reduce costs and to better serve Shaw's customers. These
technologies include:
o Induction pipe bending technology. The Company believes its induction
pipe bending technology is the most sophisticated, efficient
technology available. Induction bending is a technique using
simultaneous super-heating and compression of pipe to produce
tight-radius bends to Shaw's customers' specifications. When compared
to the traditional cut and weld method, Shaw's technology provides a
more uniform and cost-effective product that is generally considered
to be stronger and less prone to structural fatigue.
o Proprietary ethylene technology. The Company believes it has a
leading position in technology associated with the process design of
plants that produce ethylene. The Company has supplied process
technology for approximately 35% of the world's ethylene capacity
constructed since 1995.
o Reference plant design. The Company is developing a standardized
"reference plant," for use by EntergyShaw in power plants. This
standardized design can be used on multiple installations and should
produce significant cost savings for EntergyShaw's customers.
o Proprietary customer-focused software. The Company has developed
proprietary software to aid in project and process management and the
analysis of power delivery. This software includes:
o proprietary SHAW-DRAW(TM) and SHAW-MAN(TM) software programs which
enhance the customers' ability to plan, engineer, schedule and track
their projects and reduce installation costs and cycle times; and
o proprietary software products which aid in the effective analysis of
the electric power delivery business.
Pursuing strategic relationships and maintaining diverse customer base.
The Company intends to continue to enter into alliance agreements and
strategic partnerships with current and future customers. Shaw's piping
alliance partners include AAL Borg Industries, Air Products and Chemicals,
Inc., Alstom Power, BASF AG, Bechtel Corporation, The Dow Chemical Company,
General Electric, Hitachi, J. Ray McDermott, and Praxair, Inc. Because many
of Shaw's customers are active in more than one of the industries the
Company serves, they have historically remained significant purchasers of
its piping systems and engineering, procurement and construction services
despite fluctuations in activity within any one particular industry. Shaw's
alliance agreements enhance its ability to obtain contracts for individual
projects by eliminating
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formal bid preparation. These agreements have tended to provide Shaw with a
steady source of projects, minimize the impact of short-term pricing
volatility and enable the Company to anticipate a larger portion of future
revenues. EntergyShaw and its agreement with General Electric are examples
of strategic relationships which the Company believes will provide
significant future revenues and new business opportunities.
Pursuing selective acquisitions. The Company intends to continue to
pursue selective acquisitions of businesses or assets that will expand or
complement Shaw's current portfolio of products and services. The Company
has established a successful track record of quickly and efficiently
integrating its acquisitions. Shaw typically establishes integration teams
led by its senior executives. The Company is utilizing a team led by its
executive vice president and chief operating officer to successfully
integrate the assets acquired from Stone & Webster.
VERTICALLY-INTEGRATED PRODUCTS AND SERVICES
The Company has segregated its business into two segments: the pipe
services segment and the manufacturing and distribution segment (previously
called manufacturing). Pipe services provides a range of piping services,
including piping system fabrication; engineering and design; construction,
procurement and maintenance; and consulting. The manufacturing and distribution
segment manufactures and distributes specialty stainless, alloy and carbon steel
pipe fittings. These fittings include stainless and other alloy elbows, tees,
reducers and stub ends.
PIPE SERVICES
Piping Systems Fabrication
The Company provides integrated piping systems and services for new
construction, site expansion and retrofit projects. Piping system integration
can account for as much as 40% of the total man-hours associated with
constructing a power generation or materials processing facility. Shaw provides
fabrication of complex piping systems from raw materials including carbon steel,
stainless steel and other alloys, nickel, titanium and aluminum. The Company
fabricates pipe by cutting it to length, welding fittings on the pipe and
bending the pipe, each to precise customer specifications. The Company currently
operates pipe fabrication facilities in Louisiana, Oklahoma, South Carolina,
Texas, Utah, Virginia, the United Kingdom, Venezuela and Bahrain, where Shaw has
a 49% interest in a joint venture. The Company's fabrication facilities are
capable of fabricating pipe ranging in diameter from 1/2 inch to 72 inches, with
overall wall thicknesses from 1/8 inch to 7 inches. Shaw can fabricate pipe
assemblies up to 100 feet in length and weighing up to 45 tons.
A significant portion of the Company's work consists of the fabrication
of piping systems for use in high pressure, high temperature or corrosive
applications, including systems designed to withstand pressures of up to 2,700
pounds per square inch and temperatures of up to 1,020 degrees Fahrenheit. In
order to ensure that Shaw's products can withstand these types of extreme
conditions, the Company has set rigid quality control standards for all of its
products. In addition to visual inspection, the Company uses other advanced
methods to confirm that its products meet specifications such as radiography,
hydro-testing, dye penetration and ultrasonic flaw detection.
In fiscal 1994, the Company began purchasing sophisticated induction
pipe bending equipment, which significantly increased its capacity to fabricate
piping systems in both volume and complexity. In addition, this equipment
enables Shaw to substitute pipe bending for the more traditional cutting and
welding techniques on certain projects, resulting in labor, time and raw
material savings. In January 1998, the Company acquired Cojafex B.V. of
Rotterdam, including the technology for certain induction pipe bending machines
used for bending pipe and other carbon steel and alloy items for industrial,
commercial and architectural applications.
Primarily because of the significant reductions in labor, time and
material costs associated with pipe bending techniques, the market for pipe
fabrication is increasingly moving in the direction of bending according to
customer specifications. The Company believes that its technology is the most
advanced of its kind in the world and gives Shaw a technological advantage in
this growing segment of the market.
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The Company currently has eight induction pipe bending machines in
operation capable of bending pipe up to 66 inches in diameter with wall
thicknesses of up to five inches. The machine model numbers, locations and pipe
bending capabilities are presented in the following table:
PIPE BENDING CAPABILITIES
-------------------------
MAXIMUM MAXIMUM
PIPE PIPE WALL
MODEL LOCATION DIAMETER THICKNESS
--------------------- --------------------- ------------ -----------
Cojafex PB Special 16 Walker, Louisiana 16 inches 2.5 inches
Cojafex PB Special 16 Laurens, South Carolina 16 inches 2.5 inches
Cojafex PB Special 16 Tulsa, Oklahoma 16 inches 2.5 inches
Cojafex PB Special 16 Manama, Bahrain 16 inches 2.5 inches
Cojafex PB-1200 Walker, Louisiana 48 inches 4.0 inches
Cojafex PB-1600 Clearfield, Utah 66 inches 5.0 inches
Cojafex PB-850 Clearfield, Utah 34 inches 3.0 inches
Cojafex PB Special 12 Clearfield, Utah 12 inches .75 inches
Geographical sourcing requirements, local labor rates and
transportation considerations may make it difficult for the Company to use its
domestic facilities to compete on many international projects. Accordingly, the
Company has established facilities abroad to allow Shaw to bid more
competitively for international projects. The Company currently operates
fabrication facilities in Venezuela, the United Kingdom and Bahrain. In November
1993, the Company entered into a joint-venture agreement to construct and
operate a fabrication facility in Bahrain. Shaw's Bahrainian joint-venture
facility is one of the first modern pipe fabrication facilities in the Middle
East.
Engineering and Design
Shaw's professionals provide a broad range of engineering, design and
design-related services. The Company's engineering capabilities include civil,
structural, mechanical, electrical, environmental and water resources. For each
project, Shaw identifies the project requirements and then integrates and
coordinates the various design elements. Other critical tasks in the design
process may include value analysis and the assessment of construction and
maintenance requirements.
The Company's engineering capabilities for piping systems are directly
linked to its fabrication shops and its proprietary computer aided design
system, SHAW-DRAW(TM). SHAW-DRAW(TM) converts customer design drawings into its
detailed production drawings in seconds, significantly reducing the lead-time
required before fabrication can begin and substantially eliminating detailing
errors. The Company has also implemented SHAW-MAN(TM), which utilizes bar code
technology to efficiently manage and control the movement of all required
materials through each stage of the fabrication process. These proprietary
programs enhance Shaw's customers' planning and scheduling, reducing total
installed costs and project cycle times.
Construction, Procurement and Maintenance
The Company provides construction and construction management services.
Shaw often manages the procurement of materials, subcontractors and craft labor.
The Company believes it has significant expertise in effectively and efficiently
managing this process. Depending on the project, Shaw may function as the
primary contractor or as a subcontractor to another firm. On some projects, the
Company functions as a construction manager, engaged by the customer to oversee
another contractor's compliance with design specifications and contracting
terms. Under operations and maintenance contracts, Shaw conducts repair,
renovation, predictive and preventative services to customer facilities
worldwide.
Consulting
The Company provides technical and economic analysis and
recommendations to owners, investors, developers, operators, and governments in
the global power generation industry. Shaw's services include, among others,
competitive market valuations, asset valuations, assessment of stranded costs,
plant technical descriptions and energy demand modeling. The Company has
particular expertise in the electronic simulation and analysis of power
transmission and distribution systems. Shaw has also developed software,
educational programs and customized hardware solutions to the electric power
industry.
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The Company's activity in this area has grown substantially over the past
several years in response to deregulation of the power industry domestically and
privatization and deregulation initiatives abroad.
MANUFACTURING AND DISTRIBUTION
The Company manufactures specialty stainless, alloy and carbon steel
pipe fittings for use in pipe fabrication. These pipe fittings include stainless
and other alloy elbows, tees, reducers and stub ends ranging in size from 1/2
inch to 48 inches and heavy wall carbon and chrome elbows, tees, caps and
reducers with wall thicknesses of up to 3 1/2 inches. Shaw operates a
manufacturing facility in Shreveport, Louisiana, which distributes its fittings
to Shaw's pipe services operations and to third parties. The Company also
operates several distribution centers in the United States, which distribute its
products and products manufactured by third parties. Manufacturing pipe fittings
enables Shaw to realize greater efficiencies in the purchase of raw materials,
reduces overall lead times and lowers total installed costs.
SEGMENT FINANCIAL DATA AND EXPORT SALE INFORMATION
See Note 13 of the Notes to Consolidated Financial Statements for
detailed financial information regarding each business segment and export sale
information.
MARKETS SERVED
Power Generation
Industry Overview. According to the Department of Energy, demand for
domestic electricity generation has increased substantially since 1990 while
capacity has remained relatively flat. This imbalance, coupled with deregulation
of the power industry and decommissioning of nuclear plants, has resulted in a
surge in domestic construction of power plants. According to the Energy
Information Administration, or EIA, a projected 1,000 new plants with a total of
300 gigawatts of capacity will be needed by 2020 to meet growing demand and to
offset retirements of nuclear and fossil fuel plants. Approximately 90% of new
capacity is projected to be combined-cycle or combustion turbine technology
fueled by natural gas or both oil and gas. The EIA estimates that by 2020,
approximately $30 billion will be expended annually on electricity generation
investments worldwide. The EIA further estimates that between 1998 and 2020
generating capacity from gas turbines and internal combustion engines is
expected to more than triple. The Company's backlog has increased significantly
as a result of this demand. In addition to significant capacity demand, much of
the U.S. is in the process of deregulating the production and sale of
electricity. As of September 2000, 24 states and the District of Columbia have
adopted legislation or regulations to deregulate and an additional 18 states are
considering such actions. Independent power producers and merchant power plants
have and continue to develop additional generation capacity, typically new
plants, which compete directly with existing utilities, in response to the
opportunity presented by deregulation. Deregulation also creates demand for Shaw
from existing utilities that must upgrade or develop new power plants to remain
competitive. The Company expects many existing plants to be "repowered" or
substantially upgraded by replacing all or most of the plant with more efficient
systems that can profitably sell power into competitive markets.
The decommissioning and decontamination of nuclear power plants is a
growing business that the Company believes will see significant additional
demand in the future. This business consists of shutting down and safely
removing a facility from service while reducing the residual radioactivity to a
level that permits release of the property for unrestricted use and termination
of the license. The recent trend appears to be toward shutdown. The EIA
estimates that of the 97 gigawatts of domestic nuclear capacity available in
1998, 40 gigawatts are projected to be retired by 2020, and no new plants are
expected to be constructed. The Company believes this trend toward shutdown is
being driven by deregulation (many nuclear plants are not cost-competitive in a
deregulated market), negative public perception of nuclear plants and limited
storage space for spent nuclear fuel. According to the U.S. Nuclear Regulatory
Commission, decontamination and decommissioning work is ongoing at six plants
and is planned for an additional 12 plants. The Company believes that
decommissioning and decontamination costs can be as high as $500 million per
facility.
Shaw's Services. Approximately $1.3 billion, or 67%, of the Company's
backlog as of August 31, 2000, consists of work in the power generation
industry. The Company is the largest supplier of fabricated piping systems for
power generation facilities in the United States and a leading supplier
worldwide, having installed piping systems in over 375 power plants with an
aggregate generation capacity in excess of 200,000 megawatts. Piping system
integration can account for as
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much as 40% of the total man-hours associated with constructing a power
generation or materials processing facility. As a result of the Company's
acquisition of Stone & Webster, a company which has concentrated on the power
sector since its formation in 1889, Shaw also provides a full range of
engineering, procurement and construction services to power projects on a global
basis. In addition, the Company provides system-wide maintenance and
modification services to existing power plants. These projects can include
upgrading emission control systems and redesigning facilities to allow use of
alternative fuels. The Company attempts to concentrate on more complicated,
non-commodity type projects, where its technology, historical know-how and
project management skills can add value to the project.
The Company has a leading position in the growing decommissioning and
decontamination business for nuclear power plants. The Company is particularly
well positioned to participate in this market given its expertise in the nuclear
arena. Stone & Webster built 17 nuclear facilities in the 1970s and 1980s and
has performed work in 99 of the 104 nuclear power plants located in the U.S. The
Company has performed decommissioning and decontamination services for the Maine
Yankee Power Plant, Connecticut Yankee Haddam Neck Station, Dresden No. 1,
Yankee Rowe, Shoreham Nuclear, U.S. Army Materials Laboratory Research Reactor
and various facilities at the Savannah River Site.
Process
Industry Overview. The Company's process work includes work for
customers primarily in the chemical, petrochemical and refining industries.
Demand in processing industries has declined in recent years as a result of
decreased spending by chemical, petrochemical and refining companies and a
downturn in the Asian economy. To the extent the outlook for this sector
improves, the Company expects to see increased activity in its processing work.
In the petrochemical field, the Company has particular expertise in the
construction of ethylene plants which convert gas and/or liquid hydrocarbon
feedstocks into ethylene, the source of many higher-value chemical products,
including packaging, pipes, polyester, antifreeze, electronics, tires and tubes.
The demand for Shaw's services in the refining industry has been driven by
refiners' need to process a broader spectrum of crude and to produce a greater
number of products. While the refining process is largely a commodity activity,
the configuration of each refinery depends on the grade of crude feedstock
available, desired mix of end products and trade-offs between capital costs and
operating costs. In addition, increasingly stringent environmental regulations,
including significantly reduced emissions allowances required by the Clean Air
Act, have increased retrofit activity. Demand for the Company's process services
in the U.S. consists primarily of maintenance and retrofit work, with the
possibility for new construction as demand increases.
Shaw's Services. Approximately $336 million, or 18%, of the Company's
backlog at August 31, 2000 consisted of work for chemical, petrochemical and
refining customers. In process facilities, piping systems are the critical path
through which raw or feedstock materials travel to be converted from one form of
matter to another. The Company fabricates fully-integrated piping systems as
well as providing a complete suite of engineering, procurement and construction
services for these customers around the world. Shaw's chemical customers include
BASF, Air Products & Chemicals, Albemarle, Bayer and Dow Chemical. The Company's
primary work in the petrochemical industry involves the construction of plants
which produce ethylene. Through the Company's acquisition of Stone & Webster,
Shaw is one of the leading companies in the ethylene segment of the
petrochemical processing industry and has supplied process technology for 35% of
the world's ethylene capacity constructed since 1995. While a number of the
Company's competitors in the refining sector own competitive process
technologies, Shaw's strength is in proprietary technologies which convert
low-value, heavy crude into more value added products. The Company's technology
has been used in over 80 refineries around the world. The Company also
undertakes related work in the gas processing field, including propane
dehydrogenation facilities, gas treatment facilities, liquified natural gas
plants and cryogenic processes.
Environmental and Infrastructure
Industry Overview. Federal, state and local governmental entities are
the primary customers for Shaw's engineering, procurement and construction
services for the environmental and infrastructure sectors. Within these sectors,
the Company performs environmental remediation services and work on
transportation and water and wastewater facilities projects. Demand for the
Company's environmental remediation services is driven by federal, state and
local laws and regulations and enforcement activity. Similarly, demand for
Shaw's services in the water and wastewater business is driven largely by local
government spending to maintain, upgrade or expand water and wastewater
processing capacity.
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Demand in the transportation infrastructure sector is driven by
governmental appropriation programs, which are typically multi-year in scope.
The Transportation Equity Act for the 21st Century is an infrastructure
investment appropriations bill enacted by the U.S. Congress that earmarks $177
billion for highway construction and $41 billion for transit spending over the
fiscal 1998-2003 period. In addition, Congress passed the Aviation Investment
and Reform Act for the 21st Century, which provides for $12 billion in
construction spending over four years to support the Federal Aviation
Administration (FAA)'s Airport Improvement Program.
Shaw's Services. Approximately $254 million, or 13%, of the Company's
backlog at August 31, 2000 consisted of projects in the environmental and
infrastructure markets. Shaw's environmental projects are largely for
governmental entities. Typical projects include work for the U.S. Department of
Energy (DOE) and Department of Defense (DOD). For the DOE, the Company is
working on several former nuclear-weapons production facilities where Shaw
provides engineering, construction and construction management for environmental
remediation activities. For the DOD, the Company is involved in projects at
several superfund sites under programs managed by the U.S. Army Corps of
Engineers. The Company is also continuing work for the DOD under a five-year
chemical weapons demilitarization contract with the U.S. Army. This work
includes designing several neutralization facilities, as well as evaluating new
technologies for the destruction of weapons stockpiles.
In the infrastructure arena, the Company's work consists of
transportation and water projects. The Company has particular expertise in rail
transit systems, including subways, and also participates in selected tunnel,
bridge, airport and highway projects. In the water sector, the Company provides
engineering and construction management services to local government agencies,
often in alliances with other firms. Recent projects include: construction
management for the Metro West Water Supply Tunnel in Massachusetts; construction
management for a leachate migration system at the Fresh Kills landfill in New
York; and engineering and construction for a membrane water treatment plant in
Florida.
Sales by Industry and Geographic Region
The Company's sales by industry in its two most recent fiscal years
approximated the following amounts:
YEAR ENDED AUGUST 31,
---------------------
INDUSTRY 2000 1999
-------- ---------- --------
(DOLLARS IN MILLIONS)
Power Generation $ 329.8 $ 161.8
Process Industries 324.0 271.1
Environmental and Infrastructure 22.8 --
Other Industries 86.1 61.1
---------- -------
$ 762.7 $ 494.0
========== =======
Process industries include chemical and petrochemical processing and
crude oil refining sales, and other industries include oil and gas exploration
and production sales. In prior years these industries were reported separately.
The major industries in which Shaw operates are cyclical. Because
Shaw's customers participate in a broad portfolio of industries, the Company's
experience has been that downturns in one of its sectors may be mitigated by
opportunities in others.
The Company's sales by geographic region in its two most recent fiscal
years approximated the following amounts:
YEAR ENDED AUGUST 31,
---------------------
GEOGRAPHIC REGION 2000 1999
------------------- --------- --------
(DOLLARS IN MILLIONS)
United States $ 591.8 $ 366.2
Europe 65.2 49.7
Far East/Pacific Rim 51.0 41.1
South America 29.8 18.7
Other 20.5 8.1
Middle East 4.4 10.2
--------- --------
$ 762.7 $ 494.0
========= ========
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Prior to February 1994, the Company conducted its international
business exclusively from its plants in the United States. Critical or high
pressure piping systems are typically fabricated in industrialized nations that
tend to have greater capacity for manufacturing piping that satisfies stringent
tolerance and consistency requirements. United States pipe fabricators have
generally fabricated these systems more efficiently than their Western European
and Japanese competitors due to lower labor costs and greater availability of
raw materials. However, geographical sourcing requirements, local labor rates
and transportation considerations may make it difficult for Shaw to use its
domestic facilities to compete on many international projects, particularly
those involving non-critical piping systems. Therefore, the Company has
established facilities abroad to allow Shaw to bid more competitively for
international projects. The Company currently performs the majority of its
international work from its facilities in Venezuela, the United Kingdom, Canada,
Australia and Bahrain.
In November 1993, the Company entered into a joint-venture agreement to
construct and operate a fabrication facility in Bahrain. Shaw's joint venture
partner is Abdulla Ahmed Nass, a Bahrainian industrialist. The Company's
Bahrainian joint-venture facility is one of the first modern pipe fabrication
facilities in the Middle East and has received the Gulf States Certification
from the Gulf Cooperation Council. The Gulf States Certification enables the
joint venture to export products to other Arab countries without paying
additional tariffs. In fiscal 2000, the joint venture had sales of approximately
$18.7 million and the Company's share of the joint venture's net income was
approximately $1,194,000.
In the future, the Company's pursuit of joint-venture relationships to
conduct foreign operations will be determined on a case-by-case basis depending
on market, operational, legal and other relevant factors.
BACKLOG
The Company defines its backlog as a "working backlog," which includes
projects for which Shaw has received a commitment from its customers. This
commitment typically takes the form of a written contract for a specific
project, a purchase order or a specific indication of the amount of time or
material the Company needs to make available for a customer's anticipated
project. In certain instances the engagement is for a particular product or
project for which the Company estimates anticipated revenue, often based on
engineering and design specifications that have not been finalized and may be
revised over time. Shaw's backlog for maintenance work is derived from
maintenance contracts and Shaw's customers' historic maintenance requirements.
The Company estimates that its backlog was approximately $1.9 billion at August
31, 2000. Shaw's backlog does not include revenues the Company may earn through
EntergyShaw or the ethylene project in Nanjing, China. The Company estimates
that approximately 49%, of its backlog at August 31, 2000 will be completed in
fiscal 2001.
Approximately $350 million, or 18%, of the Company's backlog at August
31, 2000 was attributable to a contract with General Electric that requires the
Company to fabricate at least 90% of the pipe necessary to install the
combined-cycle gas turbines to be built by General Electric domestically through
2004. Approximately 40% of the backlog related to the General Electric contract
is for power generation projects for which General Electric has been engaged and
for which Shaw has received a work release or has been notified that a work
release is pending. The balance is for work for which General Electric has
requested that the Company reserve capacity. The Company cannot provide any
assurance, however, that all of these projects will be constructed or that they
will be completed in their currently anticipated time frame.
Many of the Company's contracts provide for cancellation fees in the
event projects in backlog are canceled by customers. However, the Company
typically has no contractual right to the total revenues reflected in its
backlog. These cancellation fees usually provide for reimbursement of Shaw's
out-of-pocket costs, revenue associated with work performed to date and a
varying percentage of the profits the Company would have realized had the
contract been completed. In addition to cancellation risks, projects may remain
in Shaw's backlog for extended periods of time.
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The following table breaks out the Company's backlog in the following
industry sectors and geographic regions for the periods indicated and includes
backlog associated with its acquisition of Stone & Webster:
AT AUGUST 31,
-----------------------------------------------
2000 1999
------------------------ --------------------
IN MILLIONS % IN MILLIONS %
----------- -------- ----------- ------
INDUSTRY SECTOR
Power Generation $ 1,276.3 67% $ 526.9 64%
Process Industries 335.5 18 250.3 31
Environmental and Infrastructure 253.9 13 -- --
Other Industries 47.9 2 41.1 5
----------- -------- ----------- ------
$ 1,913.6 100% $ 818.3 100%
=========== ======== =========== ======
GEOGRAPHIC REGION
Domestic $ 1,527.4 80% $ 613.8 75%
International 386.2 20 204.5 25
----------- -------- ----------- ------
$ 1,913.6 100% $ 818.3 100%
=========== ======== =========== ======
The Company's backlog is largely a reflection of the broader economic
trends being experienced by its customers and is important to Shaw in
anticipating its operational needs. Backlog is not a measure defined in
generally accepted accounting principles and the Company's backlog may not be
comparable to backlog of other companies. The Company cannot provide any
assurance that revenues projected in its backlog will be realized, or if
realized, will result in profits. See "Risk Factors" in Item 7 of this Form
10-K.
TYPES OF CONTRACTS
The Company intends to focus its activities on cost reimbursable and
negotiated lump-sum work with well-established clients. The Company believes
these types of contracts reduce Shaw's exposure to unanticipated and
unrecoverable cost overruns. Negotiated lump-sum contracts are obtained by
direct negotiation rather than on a competitive bid basis. The Company has
entered into fixed price, lump-sum or unit price contracts on a significant
number of its domestic piping contracts and substantially all of its
international piping projects. In addition, approximately 35% of the contract
value the Company assumed in the Stone & Webster acquisition relates to fixed
price or lump-sum contracts. Under fixed, maximum or unit price contracts, Shaw
agrees to perform the contract for a fixed price and as a result, benefits from
costs savings, but is unable to recover any cost overruns. Under certain
negotiated lump-sum contracts, the Company shares with the customer any savings
up to a negotiated ceiling price and carries some or all of the burden of costs
exceeding the negotiated ceiling price. Contract prices are established based in
part on cost estimates which are subject to a number of assumptions, such as
future economic conditions. If these estimates prove inaccurate, or
circumstances change, cost overruns can occur which could have a material
adverse effect on the Company's business and results of its operations. Shaw's
profit for these projects could decrease, or the Company could experience
losses, if the Company is unable to secure fixed pricing commitments from its
suppliers at the time the contracts are executed or if Shaw experiences cost
increases for material or labor during the performance of the contracts.
In addition, the Company has several significant projects for agencies
of the U.S. Government. Generally, U.S. Government contracts are subject to
oversight audits by government representatives, to profit and cost controls and
limitations, and to provisions permitting modification or termination, in whole
or in part, without prior notice, at the government's convenience and with
payment of compensation only for work done and commitments made at the time of
termination. In the event of termination, the Company generally receives some
allowance for profit on the work performed. In some cases, government contracts
are subject to the uncertainties surrounding congressional appropriations or
agency funding. Government business is subject to specific procurement
regulations and a variety of socio-economic and other requirements. Failure to
comply with such regulations and requirements could lead to suspension or
debarment, for cause, from future government contracting or subcontracting for a
period of time. Among the causes for debarment are violations of various
statutes, including those related to employment practices, the protection of the
environment, the accuracy of records and the recording of costs.
The Company's alliance agreements expedite individual project contract
negotiations through means other than the formal bidding process. These
agreements typically contain a standardized set of purchasing terms and
pre-negotiated pricing provisions and often provide for annual price
adjustments. Alliance agreements allow Shaw's customers to achieve greater cost
efficiencies and reduced cycle times in the design and fabrication of complex
piping systems for power, chemical and refinery projects. In addition, while
these agreements do not typically contain committed volumes, the Company
believes that
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these agreements provide Shaw with a steady source of new projects and help
minimize the impact of short-term pricing volatility.
CUSTOMERS AND MARKETING
The Company's customers are principally major multi-national industrial
corporations, independent and merchant power providers, governmental agencies
and equipment manufacturers. For the year ended August 31, 2000, sales to a
customer were $85.0 million, or 11% of sales. Additionally, for the years ended
August 31, 2000 and 1999, sales to a different customer amounted to $83.4
million (11% of sales) and $67.7 million (14% of sales), respectively. For the
year ended August 31, 1998, sales to another customer totaled $51.7 million, or
10% of sales.
Shaw conducts its marketing efforts principally through a sales force
comprised of 48 employees at August 31, 2000. In addition, the Company engages
independent contractors to cover certain customers and territories. Shaw pays
its sales force a base salary plus, when applicable, an annual bonus, while Shaw
pays independent contractors commissions.
RAW MATERIALS AND SUPPLIERS
The Company's principal raw materials for its pipe fabrication
operations are carbon steel, stainless steel and other alloy piping, which Shaw
obtains from a number of domestic and foreign primary steel producers. The
market for most raw materials is extremely competitive and Shaw's relationships
with its suppliers are good. Certain types of raw materials, however, are
available from only one or a few specialized suppliers. The Company's inability
to obtain materials from these suppliers could jeopardize Shaw's ability to
timely complete a project or realize a profit.
The Company purchases directly from manufacturers, or manufactures
itself, a majority of its pipe fittings. This generally lowers Shaw's pipe
fabrication costs. Because of the volume of piping the Company purchases, Shaw
is often able to negotiate advantageous purchase prices. If a manufacturer is
unable to deliver the materials according to the negotiated terms, the Company
may be required to purchase the materials from another source at a higher price.
Shaw keeps items in stock at each of its facilities and transports items between
its facilities as required. The Company obtains more specialized materials from
suppliers when required for a project.
For the Company's engineering, procurement and construction services,
Shaw often relies on third party equipment manufacturers as well as third-party
subcontractors to complete its projects. Shaw is not substantially dependent on
any individual third party for these operations.
INDUSTRY CERTIFICATIONS
In order to perform fabrication and repairs of coded piping systems,
the Company's domestic construction operations and fabrication facilities, as
well as its subsidiaries in Derby, UK and Maracaibo, Venezuela, have obtained
the required American Society of Mechanical Engineers (ASME) certification (S,U
& PP stamps), and its facilities in Laurens, South Carolina; Walker, Louisiana;
Derby, UK; and Maracaibo, Venezuela have obtained the National Board
certification (R stamp). In addition, the Laurens, South Carolina and the
Troutville, Virginia facilities are licensed to fabricate piping for nuclear
power plants and are registered by the International Organization of Standards
(ISO 9002). The Company's engineering subsidiary and its UK operations are also
registered by the International Organization of Standards (ISO 9001), as is its
pipe support fabrication facility (ISO 9002).
PATENTS, TRADEMARKS AND LICENSES
The Company considers its design and project control systems,
SHAW-DRAW(TM) and SHAW-MAN(TM), to be proprietary information of the Company.
Additionally, through Stone & Webster, the Company believes that it has a
leading position in technology associated with the design and construction of
plants which produce ethylene, which the Company protects and develops with
patent registrations, license restrictions, and a research and development
program.
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COMPETITION
In pursuing piping engineering and fabrication projects, the Company
experiences significant competition from competitors in both international and
domestic markets. In the United States, there are a number of smaller pipe
fabricators while, internationally, Shaw's principal competitors are divisions
of large industrial firms. Some of Shaw's competitors, primarily in the
international sector, have greater financial and other resources than the
Company.
In the Company's engineering, procurement and construction operations,
Shaw has numerous regional, national and international competitors, many of
which have greater financial and other resources than the Company. Moreover,
Shaw is a recent entrant into this business, and many of its competitors also
possess substantially greater experience, market knowledge and customer
relationships than the Company.
EMPLOYEES
At August 31, 2000, the Company employed approximately 10,500 full-time
employees, 3,340 of whom are represented by unions. Of the total employees, 352
worked in the Company's wholly-owned subsidiaries in Venezuela, 351 worked in
Canada, 838 worked in the United Kingdom and 38 worked in Australia. In 1998, a
five-year agreement was reached between the Company and a union whereby several
of the Company's subsidiaries in the United States are represented by local
affiliates of the union.
ENVIRONMENTAL
The Company is subject to environmental laws and regulations, including
those concerning emissions into the air, discharges into waterways, generation,
storage, handling, treatment and disposal of waste materials and health and
safety. These laws and regulations generally impose limitations and standards
for certain pollutants or waste materials to obtain a permit and comply with
various other requirements. The Company's projects often involve nuclear,
hazardous and other highly regulated materials, the improper characterization,
handling or disposal of which could constitute violations of federal, state or
local statutes, and result in criminal and civil liabilities. Environmental laws
and regulations generally impose limitations and standards for certain
pollutants or waste materials and require the Company to obtain a permit and
comply with various other requirements. Governmental authorities may seek to
impose fines and penalties on the Company, or revoke or deny the issuance or
renewal of operating permits, for failure to comply with applicable laws and
regulations. In addition, under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended ("CERCLA") and comparable
state laws, the Company may be required to investigate and remediate hazardous
substances. CERCLA and these comparable state laws typically impose liability
without regard to whether a company knew of or caused the release, and liability
has been interpreted to be joint and several unless the harm is divisible and
there is a reasonable basis of allocation. The Company has not been notified
that it is a potentially responsible party under CERCLA or any comparable state
law at any site. The principal federal environmental legislation affecting the
Company's environmental/infrastructure division of the Company's principal
engineering subsidiary and its clients include: the National Environmental
Policy Act of 1969 ("NEPA"), the Resource Conservation and Recovery Act of 1976
("RCRA"), the Clean Air Act, the Federal Water Pollution Control Act and the
Superfund Amendments and Reauthorization Act of 1986 ("SARA"). The Company's
foreign operations are also subject to various requirements governing
environmental protection.
The environmental, health and safety laws and regulations to which the
Company is subject are constantly changing, and it is impossible to predict the
effect of such laws and regulations on the Company in the future. The Company
believes that it is in substantial compliance with all applicable environmental,
health and safety laws and regulations. However, with respect to environmental
matters, the Company has not conducted environmental audits of all of its
properties, including the assets acquired from Stone & Webster. To date, the
Company's costs with respect to environmental compliance have not been material,
and the Company does not anticipate any material environmental liability.
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ITEM 2. PROPERTIES
The principal properties of the Company at August 31, 2000 are as
follows:
LOCATION DESCRIPTION SQUARE FEET
-------- ----------- -----------
Baton Rouge, LA Corporate Headquarters 58,000(2)(3)
Laurens, SC Pipe Fabrication Facility 200,000(2)
Prairieville, LA Pipe Fabrication Facility 60,000(1)
Shreveport, LA Pipe Fabrication Facility 65,000
West Monroe, LA Pipe Fabrication Facility 70,000
Walker, LA Pipe Fabrication Facility 154,000(2)
Maracaibo, Venezuela Pipe Fabrication Facility 45,000
Tulsa, OK Pipe Fabrication Facility 158,600(2)
Clearfield, UT Pipe Fabrication Facility 335,000(1)
Houston, TX Pipe Fabrication Facility 12,000
Troutville, VA Pipe Fabrication Facility 150,000(1)
Derby, U.K. Pipe Fabrication Facility 200,000(1)
Wolverhampton, U.K. Pipe Fabrication Facility 43,000(1)
Baton Rouge, LA Distribution Facility 30,000(1)
Shreveport, LA Piping Components and Manufacturing Facility 385,000
Houston, TX Pipe Fittings Distribution Facility 107,000(1)
Boston, MA Office Building 309,000(1)(5)
Houston, TX Office Building 320,000(2)(3)(4)
(1) Leased facility.
(2) Encumbered with debt.
(3) A portion is leased to outside tenants.
(4) The Company is currently negotiating the sale of Houston office
building and considers the building an asset held for sale.
(5) The Company expects to vacate this office building and move to another
facility in Boston in early 2001.
The Bahrain joint venture leases a 94,000 square foot pipe fabrication
facility in Manama, Bahrain.
In addition to the foregoing, the Company occupies other owned and
leased facilities in various cities, which are not considered principal
properties. The Company considers each of its current facilities to be in good
operating condition and adequate for its present use.
ITEM 3. LEGAL PROCEEDINGS
The Company has been and may from time to time be named as defendants
in legal actions claiming damages in connection with engineering and
construction projects and other matters. These are typically claims for personal
injury or property damage which occur in connection with services performed
relating to project or construction sites and other actions that arise in the
normal course of business, including employment-related claims and contractual
disputes. Such contractual disputes normally involve claims relating to the
performance of equipment design or other engineering services or project
construction services provided by the Company's subsidiaries. Although the
outcome of certain of these matters cannot be predicted, management believes
based upon information currently available, that none of such lawsuits, if
adversely determined, would have a material adverse effect on the Company's
financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of security holders
during the fourth quarter of fiscal 2000.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock, no par value (the "Common Stock"), is
traded on the New York Stock Exchange (the "NYSE") under the symbol "SGR". The
following table sets forth, for the quarterly periods indicated, the high and
low sale prices per share for the Common Stock as reported by the NYSE, for the
Company's two most recent fiscal years and for the current fiscal year to date.
HIGH LOW
---- ---
Fiscal year ended August 31, 1999
First quarter $10 5/8 $ 6 13/16
Second quarter 15 7/16 7 5/16
Third quarter 14 9/16 11 9/16
Fourth quarter 21 3/8 12 5/16
Fiscal year ended August 31, 2000
First quarter $24 $19
Second quarter 27 15/16 20 1/4
Third quarter 44 15/16 24 5/8
Fourth quarter 55 11/16 37 3/8
Fiscal year ending August 31, 2001
First quarter (through November 16, 2000) $93 $54 1/2
The closing sale price of the Common Stock on November 16, 2000, as
reported on the NYSE, was $80 per share. As of November 16, 2000, the Company
had 86 shareholders of record.
The Company has not paid any dividends on the Common Stock and
currently anticipates that, for the foreseeable future, any earnings will be
retained for the development of the Company's business. Accordingly, no
dividends are expected to be declared or paid on the Common Stock for the
foreseeable future. The declaration of dividends is at the discretion of the
Company's Board of Directors. The Company's dividend policy will be reviewed by
the Board of Directors as may be appropriate in light of relevant factors at the
time. The Company is, however, subject to certain prohibitions on the payment of
dividends under the terms of existing credit facilities.
On July 12, 2000, the Company issued an aggregate of 43,445 shares of
its Common Stock in exchange for certain assets and liabilities of PPM
Contractors, Inc. ("PPM"). The Common Stock was issued to the former
shareholders of PPM pursuant to Regulation D under the Securities Act of 1933,
as amended, and was valued at an aggregate of approximately $2.0 million as of
the date of exchange.
Effective July 14, 2000, the Company purchased most of the operating
assets of Stone & Webster for $37.6 million in cash, 2,231,773 shares of its
Common Stock (valued at approximately $105 million at closing) and the
assumption of approximately $685 million of liabilities, subject to adjustment
pending the resolution of certain claims arising from the Stone & Webster
bankruptcy proceedings. The asset purchase was concluded as part of a proceeding
under Chapter 11 of the U.S. Bankruptcy Code. The Common Stock was issued to
Stone & Webster and certain of its subsidiaries pursuant to Regulation D under
the Securities Act of 1933, as amended.
On November 13, 2000, the Company announced that its Board of Directors
had authorized a two-for-one stock split of its Common Stock payable on December
15, 2000, to shareholders of record on December 1, 2000.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents, for the periods and as of the dates
indicated, selected statement of income data and balance sheet data of the
Company on a consolidated basis. The selected historical consolidated financial
data for each of the three fiscal years in the period ended August 31, 2000
presented below have been derived from the Company's audited
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consolidated financial statements. Such data should be read in conjunction with
the Consolidated Financial Statements of the Company and related notes thereto
included elsewhere in this Annual Report on Form 10-K and "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
information has been restated to exclude discontinued operations.
YEAR ENDED AUGUST 31,
----------------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ------------ ------------ ------------ ------------
(2) (3) (4)(7) (5)(6)(7)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATED STATEMENTS OF INCOME
Sales $ 762,655 $ 494,014 $ 501,638 $ 335,734 $ 248,969
============ ============ ============ ============ ============
Income from continuing operations $ 30,383 $ 18,121 $ 16,232 $ 14,300 $ 6,915
============ ============ ============ ============ ============
Basic income per common share from
continuing operations (1) $ 2.05 $ 1.52 $ 1.29 $ 1.23 $ 0.71
============ ============ ============ ============ ============
Diluted income per common share from
continuing operations (1) $ 1.97 $ 1.47 $ 1.26 $ 1.20 $ 0.69
============ ============ ============ ============ ============
CONSOLIDATED BALANCE SHEETS
Total assets $ 1,335,083 $ 407,062 $ 389,844 $ 262,459 $ 218,503
============ ============ ============ ============ ============
Long-term debt obligations,
net of current maturities $ 254,965 $ 87,841 $ 91,715 $ 39,039 $ 36,840
============ ============ ============ ============ ============
Cash dividends declared per common share $ -- $ -- $ -- $ -- $ --
============ ============ ============ ============ ============
(1) Earnings per share amounts for fiscal 1996 and 1997 have been restated
for the adoption of Statement of Financial Standards No. 128, "Earnings
Per Share."
(2) Includes the acquisitions of certain assets of PPM and Stone & Webster
in fiscal 2000. See Note 3 of Notes to Consolidated Financial
Statements.
(3) Includes the acquisitions of certain assets of Prospect Industries plc,
Lancas, C.A., Cojafex and Bagwell in fiscal 1998. See Note 3 of Notes
to Consolidated Financial Statements.
(4) Includes the acquisitions of Pipe Shields Incorporated and United
Crafts, Inc. and certain assets of MERIT Industrial Constructors, Inc.
in fiscal 1997.
(5) Restated to account for the acquisition of NAPTech, Inc., which was
completed on January 27, 1997, and which was accounted for using the
pooling-of-interests method of accounting.
(6) Includes the acquisitions of the assets of Word Industries Pipe
Fabricating, Inc. and certain affiliates and of Alloy Piping Products,
Inc. in fiscal 1996.
(7) Fiscal 1996 and 1997 were restated to exclude the discontinued
operations disposed of in fiscal 1998. See Note 18 of Notes to
Consolidated Financial Statements.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following analysis of the financial condition and results of
operations of the Company should be read in conjunction with the Company's
Consolidated Financial Statements, including the notes thereto.
GENERAL
The Company is the world's only vertically-integrated provider of
complete piping systems and comprehensive engineering, procurement and
construction services to the power generation industry. While approximately 67%
of Shaw's backlog at August 31, 2000 was attributable to the power generation
industry, the Company also does work in the process industries and the
environmental and infrastructure sectors. The Company's financial performance is
impacted by the broader economic trends affecting its customers. All of the
major industries in which Shaw operates are cyclical. Because Shaw's customers
participate in a broad portfolio of industries, the Company's experience has
been that downturns in one of its sectors may be mitigated by opportunities in
others.
The acquisition by the Company of Stone & Webster in July 2000 has more
than doubled the size of the Company, increasing significantly the Company's
engineering, procurement and construction businesses, and will significantly
impact the Company's operations and its working capital requirements. For
additional information regarding the Stone & Webster acquisition, please see
Item 1 -- "Business," "-- Liquidity and Capital Resources" and Note 3 of Notes
to Consolidated Financial Statements.
As of August 31, 2000 and giving effect to the Stone & Webster
acquisition, the Company's backlog was approximately $1.9 billion, of which 67%
was attributable to power generation, 18% was attributable to processing and 13%
was attributable to its environmental and infrastructure work. The Company
estimates that approximately 49%, of its backlog at August 31, 2000 will be
completed in fiscal year 2001. The Company's backlog is largely a reflection of
the broader economic trends experienced by its customers and is important to
Shaw in anticipating its operational needs. Backlog is not a measure defined in
generally accepted accounting principles and the Company's backlog may not be
comparable to backlog of other companies. The Company cannot provide any
assurance that revenues projected in its backlog will be realized, or if
realized, will result in profits. See "-- Risk Factors" and Item 1 -- "Business
- -- Backlog."
RECENT ACQUISITIONS AND DISPOSALS
Stone & Webster Acquisition
On July 14, 2000, the Company purchased most of the operating assets of
Stone & Webster for $37.6 million in cash, 2,231,773 shares of its Common Stock
(valued at approximately $105 million at closing) and the assumption of
approximately $685 million of liabilities, subject to adjustment pending the
resolution of certain claims arising from the Stone & Webster bankruptcy
proceedings. The Company also incurred approximately $6 million of acquisition
costs. Stone & Webster is a leading global provider of engineering, procurement,
construction, consulting and environmental services to the power, process,
environmental and infrastructure markets. Stone & Webster was formed in 1889 and
has focused on the power generation industry for most of its existence. Stone &
Webster's capabilities complement and enhance Shaw's traditional strengths in
project execution and pipe fabrication and enables the Company to deliver a more
complete, cost-effective package of products and services to its power and
process customers. This acquisition has more than doubled the size of the
Company, increasing significantly its engineering, procurement and construction
businesses, and will significantly impact its operations and its working capital
requirements.
Other Acquisitions
On July 12, 2000, the Company completed the acquisition of certain
assets and liabilities of PPM. PPM's primary business is providing sandblasting
and painting services to industrial customers. In connection with the
acquisition, the Company issued 43,445 shares of its Common Stock valued at
approximately $2.0 million.
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On July 28, 1998, the Company completed the acquisition of all of the
outstanding capital stock of Bagwell. Total consideration paid was $1.8 million
of cash and acquisition costs and 645,000 shares of the Company's Common Stock
valued at $13.0 million. Bagwell specializes in the fabrication and construction
of offshore modules, topsides, heliports, vessels and offshore platforms, as
well as management of offshore construction and maintenance work.
On January 19, 1998, the Company completed the acquisition of all of
the outstanding capital stock of Cojafex of Rotterdam, Holland for $8.5 million;
$4.6 million of cash and acquisition costs of which was paid at closing (net of
cash received). The balance of the purchase price will be paid through December
31, 2003. Cojafex owns the technology for certain induction pipe bending
machines used for bending pipe and other carbon steel and alloy items for
industrial, commercial and agricultural applications, and using such technology,
Cojafex designs, engineers, manufactures, markets and sells such induction
bending machines.
On January 15, 1998, the Company purchased all of the outstanding
capital stock of Lancas, C.A. ("Lancas"), a construction company in Punto Fijo,
Venezuela for approximately $2.7 million in cash and acquisition costs, net of
cash received.
On November 14, 1997, the Company purchased all of the capital stock or
substantially all of the assets of the principal operating businesses of
Prospect Industries plc ("Prospect") of Derby, United Kingdom, for approximately
$16.6 million in cash and acquisition costs, net of cash received. Excluded from
the purchase price is $1.4 million, which represents the fair value of the
assets and liabilities of a discontinued operation, CBP Engineering Corp.
("CBP"). The sale of the assets of CBP was consummated in 1998 at no gain or
loss. Prospect, a mechanical contractor and provider of turnkey piping systems
serving the power generating and process industries worldwide, operated through
several wholly-owned subsidiaries including Connex Pipe Systems, Inc.
("Connex"), a piping systems fabrication business located in Troutville,
Virginia; Aiton Australia Pty Limited ("Aiton Australia"), a piping systems,
boiler refurbishment and project management company based near Sydney,
Australia; and Prospect Engineering Limited ("PEL"), a mechanical contractor and
a provider of turnkey piping systems located in Derby, United Kingdom. Under the
terms of the acquisition agreement, the Company acquired all of the outstanding
capital stock of Prospect Industries Overseas Limited, a United Kingdom holding
company that held the entire ownership interest in Connex and CBP, all of the
capital stock of Aiton Australia and certain assets of PEL, as well as
Prospect's entire ownership interest in Inflo. The Company also assumed certain
liabilities of PEL and Prospect relating to its employees and pension plans.
On October 8, 1997, the Company purchased the capital stock of Pipework
Engineering and Developments Limited ("PED"), a pipe fabrication company in
Wolverhampton, United Kingdom, for $699,000 in cash and acquisition costs, net
of cash received, and notes payable to former stockholders of $1,078,000.
See Note 3 of Notes to Consolidated Financial Statements for
discussions regarding these acquisitions.
Disposals
In June 1998, the Company adopted a plan to discontinue its operations
of the following subsidiaries: Weldtech, a seller of welding supplies; its 66%
interest in Inflo Control Systems Limited ("Inflo"), a manufacturer of boiler
steam leak detection, acoustic mill and combustion monitoring equipment and
related systems; Greenbank (a division of PEL), an abrasive and corrosion
resistant pipe systems specialist; and NAPTech Pressure Systems Corporation, a
manufacturer of pressure vessels. The Company sold and/or discontinued its
investment in each of these operations prior to August 31, 1998. Proceeds from
the sale of these operations totaled approximately $1.2 million in net cash and
notes receivable of approximately $7.4 million, which resulted in a net gain on
the disposal of $2.6 million, net of tax. The results of these operations have
been classified as discontinued operations in the consolidated financial
statements of the Company. Revenues of these discontinued operations totaled
approximately $7.7 million in 1998. See Note 18 of Notes to Consolidated
Financial Statements.
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RESULTS OF OPERATIONS
The following table presents certain income and expense items as a
percentage of sales for the years ended August 31, 2000, 1999 and 1998:
YEAR ENDED AUGUST 31,
----------------------------
2000 1999 1998
------ ------ ------
Sales 100.0% 100.0% 100.0%
Cost of sales 83.3 81.0 84.1
------ ------ ------
Gross profit 16.7 19.0 15.9
General and administrative expenses 9.8 12.2 9.7
------ ------ ------
Operating income 6.9 6.8 6.2
Interest expense (1.0) (1.8) (1.7)
Other income, net 0.1 0.3 0.1
------ ------ ------
Income before income taxes 6.0 5.3 4.6
Provision for income taxes 2.2 1.8 1.4
------ ------ ------
Income from continuing operations before earnings (losses)
from unconsolidated entity 3.8 3.5 3.2
Earnings (losses) from unconsolidated entity 0.2 0.2 --
------ ------ ------
Income from continuing operations 4.0 3.7 3.2
Discontinued operations, net of tax:
Operating results -- -- 0.1
Net gain on disposals -- -- 0.5
------ ------ ------
Income before extraordinary item and cumulative effect of
change in accounting principle 4.0 3.7 3.8
Extraordinary item for early extinguishment of debt,
net of taxes (0.1) -- --
Cumulative effect on prior years of change in accounting for
start-up costs, net of taxes -- -- --
------ ------ ------
Net income 3.9% 3.7% 3.8%
====== ====== ======
FISCAL 2000 COMPARED TO FISCAL 1999
Revenues increased 54.4% to $762.7 million in fiscal 2000 from $494.0
million in fiscal 1999. Revenues from both of the Company's business segments
increased with the pipe services segment reflecting a $254.9 million increase or
57%. Approximately $111 million of the revenue increase was generated by the
newly acquired Stone & Webster businesses (see Note 3 of Notes to Consolidated
Financial Statements). Revenues from the manufacturing segment increased $13.6
million or a 29% increase. The Company anticipates significantly higher revenue
volumes in the pipe services segment next year compared to fiscal 2000 due to
Stone & Webster. Gross profit increased 35.4% to $127.1 million in fiscal 2000
from $93.8 million in fiscal 1999 due to the growth in revenue volume during the
year.
The Company's sales to customers in the following geographic regions
approximated the following amounts and percentages:
GEOGRAPHIC REGION FISCAL 2000 FISCAL 1999
------------------- -------------------------- -------------------------
(IN MILLIONS) % (IN MILLIONS) %
------------- ---------- ------------- ----------
United States $ 591.8 77.6% $ 366.2 74.1%
Europe 65.2 8.5 49.7 10.1
Far East/Pacific Rim 51.0 6.7 41.1 8.3
South America 29.8 3.9 18.7 3.8
Other 20.5 2.7 8.1 1.6
Middle East 4.4 .6 10.2 2.1
---------- ---------- ---------- ----------
$ 762.7 100.0% $ 494.0 100.0%
========== ========== ========== ==========
Revenues from domestic projects increased $225.6 million, or 62%, from
$366.2 million for fiscal 1999 to $591.8 million for fiscal 2000. Increases were
experienced in all domestic industry sectors, with power generation sales
accounting
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for the majority of the increase. Revenues from international projects increased
$43.1 million, or 34%, from $127.8 million for fiscal 1999 to $170.9 million for
fiscal 2000. All international industry sectors reflected sales increases over
fiscal 1999 amounts, with the primary increases being in crude oil refining
revenues (part of the process industries sector) and the power generation
sector. For the year ended August 31, 2000, virtually all European sector sales
were to the United Kingdom. European inquiries remain strong, particularly in
Spain. Sales increased in the Far East/Pacific Rim region due to work performed
by the acquired Stone & Webster businesses. Bidding activity has increased in
certain Far East/Pacific Rim countries, such as China, Taiwan and Malaysia.
Additionally, on August 28, 2000, the Company announced the execution of a
letter of intent for the construction of a $425 million 600,000 metric
ton-per-year ethylene plant in China. Even though fiscal 2000 sales in the South
American region increased over the prior year and inquiries are active, the
Company's short-term outlook is uncertain in this region due to general economic
conditions and, particularly with respect to Venezuela, political conditions.
The Company continues to believe that the European, Far East/Pacific Rim, South
American and Middle East markets present significant long-term opportunities for
the Company.
The Company's sales to customers in the following industries
approximated the following amounts and percentages:
INDUSTRY SECTOR FISCAL 2000 FISCAL 1999
--------------- -------------------------- -------------------------
(IN MILLIONS) % (IN MILLIONS) %
------------ ---------- ------------- ----------
Power Generation $ 329.8 43.2% $ 161.8 32.8%
Process Industries 324.0 42.5 271.1 54.9
Other Industries 86.1 11.3 61.1 12.3
Environmental and Infrastructure 22.8 3.0 -- --
---------- ---------- ---------- ----------
$ 762.7 100.0% $ 494.0 100.0%
========== ========== ========== ==========
Process industries sector sales include revenues from the chemical and
petrochemical and crude oil refining industries, which in prior years have been
reported separately. Other industries sales include revenues from the oil and
gas exploration and production industry, which in prior years was reported
separately.
Revenues from power generation projects increased both domestically and
internationally. Sales related to domestic power projects increased due to
additional work performed for United States customers, including the previously
announced $300 million, five-year contract for General Electric. International
power generation revenue increases resulted from work performed by the newly
acquired Stone & Webster businesses. Revenues from power generation projects
should continue to increase to the extent the Company begins performing work for
EntergyShaw in fiscal 2001. Process industries sector sales also increased both
domestically and internationally over 1999 revenues, principally due to sales to
the crude oil refining industry. Environmental and infrastructure sales are
primarily domestic and were generated by the newly acquired Stone & Webster
businesses.
The gross profit margin for the year ended August 31, 2000, decreased
to 16.7% from 19.0% for the same period the prior year. The Company is involved
in numerous projects, all of which affect gross profit in various ways, such as
product mix, pricing strategies, foreign versus domestic work (profit margins
differ, sometimes substantially, depending on where the work is performed), and
constant monitoring of percentage of completion calculations. The Company's
gross profit margin has been declining due to the Company's increase in revenues
related to its erection and maintenance services and the inclusion of Stone &
Webster's procurement and construction activities, which generally carry lower
margins than fabrication work. The Company expects this to continue during
fiscal 2001 as a result of the impact on the Company's product mix driven
primarily by the Stone & Webster businesses.
General and administrative expenses were $74.3 million for fiscal 2000,
up 24% from $60.1 million for fiscal 1999. Approximately $5.3 million of the
increase resulted from Stone & Webster activity since the acquisition. The
remaining increase resulted primarily from higher sales levels and other normal
business expenses. As a percentage of sales, however, general and administrative
expenses decreased to 9.8% for the year ended August 31, 2000 from 12.2% for the
year ended August 31, 1999. General and administrative expenses will increase in
fiscal 2001 due to Stone & Webster; however, the Company expects a continual
decline in these expenses as a percentage of sales.
Interest expense for the year ended August 31, 2000 was $8.0 million,
compared to $8.6 million for the prior fiscal year. Interest expense varies from
year to year due to the level of borrowings and interest rate fluctuations on
variable rate loans. Prior to the Stone & Webster acquisition and the new credit
facility discussed in "-- Liquidity and Capital Resources"
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and Note 8 of the Notes to Consolidated Financial Statements, interest on the
primary line of credit had decreased approximately $1.3 million in fiscal year
2000, compared to the same period in fiscal 1999, due to lower borrowings
partially offset by higher interest rates. Borrowings after the Stone & Webster
acquisition on the new credit facility added approximately $1.1 million of
additional interest costs in fiscal 2000. The remaining $400,000 decrease
relates to paydowns of debt, offset by interest on assumed Stone & Webster debt.
The Company's effective tax rates for the years ended August 31, 2000
and 1999 were 35.9% and 33.1%, respectively. The change in the tax rates relate
primarily to the mix of foreign (including foreign export sales) versus domestic
work. Based on the Company's current mix of foreign and domestic work coupled
with an increase in nondeductible goodwill amortization from the Stone & Webster
acquisition, the effective tax rate for fiscal 2001 is expected to be higher
than that incurred for the year ended August 31, 2000.
FISCAL 1999 COMPARED TO FISCAL 1998
Revenues decreased slightly to $494.0 million in fiscal 1999 from
$501.6 million in fiscal 1998. Revenues in the pipe services segment reflected a
nominal growth of $.8 million or .1% while the manufacturing segment reflected a
decrease of $8.5 million or 15%. The Company believes that part of the decline
in the manufacturing segment revenues was attributable to the price declines due
to foreign producers of stainless pipe fittings flooding their products in the
U.S. market. Gross profit increased 17.8% to $93.8 million in fiscal 1999 from
$79.6 million in fiscal 1998. These variances are discussed below.
The Company's sales to customers in the following geographic regions
approximated the following amounts and percentages:
GEOGRAPHIC REGION FISCAL 1999 FISCAL 1998
- ------------------- ------------------------------ ------------------------------
(IN MILLIONS) % (IN MILLIONS) %
------------- ------------- ------------- -------------
United States $ 366.2 74.1% $ 286.5 57.1%
Far East/Pacific Rim 41.1 8.3 100.6 20.0
Europe 49.7 10.1 55.8 11.1
South America 18.7 3.8 31.9 6.4
Middle East 10.2 2.1 18.4 3.7
Other 8.1 1.6 8.4 1.7
------------- ------------- ------------- -------------
$ 494.0 100.0% $ 501.6 100.0%
============= ============= ============= =============
Revenues from domestic projects increased $79.7 million, or 28%, from
$286.5 million for fiscal 1998 to $366.2 million for fiscal 1999. Increases were
experienced in all domestic industry sectors. Revenues from international
projects decreased $87.3 million, or 41%, from $215.1 million for fiscal 1998 to
$127.8 million for fiscal 1999. The decline in international sales was primarily
attributable to decreases in activity in the power generation sector in the Far
East/Pacific region and in the crude oil refining industries in South America
and the Middle East and in the chemical processing industries in South America.
The Company's sales to customers in the following industries
approximated the following amounts and percentages:
INDUSTRY SECTOR FISCAL 1999 FISCAL 1998
- --------------- ------------------------------ ------------------------------
(IN MILLIONS) % (IN MILLIONS) %
------------- ------------- ------------- -------------
Power Generation $ 161.8 32.8% $ 193.5 38.6%
Process Industries 271.1 54.9 258.9 51.6
Other Industries 61.1 12.3 49.2 9.8
------------- ------------- ------------- -------------
$ 494.0 100.0% $ 501.6 100.0%
============= ============= ============= =============
Process industries sector sales include revenues from the chemical and
petrochemical and crude oil refining industries, which in prior years have been
reported separately. Other industries sales include revenues from the oil and
gas exploration and production industry, which in prior years was reported
separately.
Although total revenues from power generation projects declined in
fiscal 1999 compared to fiscal 1998, revenues from domestic power generation
projects increased nearly 51% for fiscal 1999 compared to fiscal 1998 due to new
domestic power generation projects, including the start-up of a previously
announced $300 million, five-year contract for General
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Electric in August 1999. In fiscal 1999, the Company experienced a decline in
international power generation project revenues, particularly in the Far
East/Pacific Rim market due to general economic conditions. Revenues associated
with international power generation projects declined 33% in fiscal 1999
compared to fiscal 1998.
Revenues from the process industries increased in fiscal 1999 over the
prior year by $12.2 million. Revenues from the chemical processing industries
increased $8.4 million due to increased domestic activity offset in part by
decreased international activity. The decrease in international chemical
processing revenues was due primarily to weak activity in the South American
region as a result of general economic conditions. Revenues from the crude oil
refining industry for fiscal 1999 increased over the prior year $25.4 million
due to increases in domestic project activity exceeding declines in
international project activity. Domestically, activity was positively impacted
by a large construction project for a refinery in Norco, Louisiana that
accounted for approximately 14% of the Company's revenues in fiscal 1999. The
Company experienced a decrease in revenues from international crude oil refining
primarily due to weak activity in South America (resulting from general economic
conditions and recent political events, particularly in Venezuela) and the
Middle East. Revenues from the petrochemical processing industry decreased
significantly in both the domestic and international markets during fiscal 1999
compared to the prior year by $21.6 million. The decrease in revenues from
petrochemical processing was primarily attributable to weak global demand.
Approximately 50% of the increase in fiscal 1999 sales over fiscal 1998
in other industries came from the oil and gas exploration and production
industry. The increase in oil and gas exploration and production industry sales
was due to sales of a subsidiary that was acquired in July 1998,which were
partially offset by reductions in oil and gas project work performed by other
subsidiaries. Most of revenues from this sector are domestic.
Gross profit margin for fiscal 1999 increased to 19.0% from 15.9% for
the prior year. The gross profit margin was positively impacted by increased
revenues from higher-margin projects in the domestic power generation, chemical
processing and crude oil refining industries. The overall increase in demand for
domestic power generation related projects has had a favorable impact on margins
for those projects. Shaw has historically realized lower overall margins on
erection and construction services because the Company generally assumes
responsibility for providing all materials and subcontractor costs on these
projects. These costs are typically passed through to the customer with minimal
profit recognized. During fiscal 1999, the Company entered into a contract for
the expansion of a refinery in Norco, Louisiana which excluded materials and
subcontractor costs from the scope of services. The increase in the gross profit
margin was partially offset by continued lower margins on the Company's
manufactured products due to pricing pressures from foreign imports and lower
margins from its foreign operations due to reduced activity in foreign power
generation and petrochemical processing industries. During the second half of
fiscal 1999, the Company began to experience easing of pricing pressures for
foreign imports.
General and administrative expenses were $60.1 million for fiscal 1999,
up 24% from $48.5 million for fiscal 1998. The increase primarily related to
growth of erection and construction services and the integration of Shaw
Bagwell, Inc., the Company's oil and gas services subsidiary, and Shaw Lancas,
C.A., the Company's Venezuelan construction subsidiary, into its business for
all of fiscal 1999.
For fiscal 1999, interest expense was $8.6 million, up $0.1 million
from $8.5 million in the previous year. Interest expense varies in relation to
the balances in, and variable interest rates under, the Company's principal
revolving line of credit facility, which has generally been used to provide
working capital and fund fixed asset purchases and subsidiary acquisitions.
Additionally, during fiscal 1999, the Company used its line of credit facility
to purchase treasury stock totaling $13.7 million.
The Company's effective tax rates for fiscal 1998 and fiscal 1999 were
30.2% and 33.1%, respectively. The increase in the effective tax rate from 1998
to 1999 was due to the reduced amount of foreign export sales and a reduced
amount of income earned in foreign jurisdictions with lower tax rates than the
United States Federal rate.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operations was $82.0 million for fiscal 2000, compared
to net cash provided by operations of $25.6 million for fiscal 1999. For fiscal
2000, net cash was favorably impacted primarily by net income of $29.5 million,
depreciation and amortization of $16.8 million, and an increase in advanced
billings and billings in excess of cost and estimated earnings on uncompleted
contracts of $21.8 million. Offsetting these positive factors were increases of
$53.3 million in
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receivables, $36.2 million in cost and estimated earnings in excess of billings
on uncompleted contracts, and $17.9 million in inventories, and decreases of
$37.9 million in accounts payable, and $11.1 million in accrued contract losses
and reserves.
The increase in advanced billings and billings in excess of cost and
estimated earnings on uncompleted contracts resulted from accelerated billing
provisions in more contracts. The increase in receivables and cost and estimated
earnings in excess of billings on uncompleted contracts was primarily
attributable to increased sales in the fourth quarter of fiscal 2000 over fiscal
1999. The increase in inventories was due to the procurement of material for
current and future sales activities, which are expected to exceed historical
levels based upon the Company's backlog at August 31, 2000 of approximately $1.9
billion. Accounts payable decreased primarily due to the payment of some of the
liabilities assumed in the Stone & Webster acquisition. The Company acquired a
large number of contracts with either inherent losses or lower than market
remaining margins due to the effect of the financial difficulties experienced by
Stone & Webster on negotiating and executing the contracts. These contracts
were adjusted to their fair value at acquisition date by establishing a reserve
of approximately $83.7 million which will reduce contract costs incurred in
future periods and adjust the gross margins recognized on the contracts. In
addition, the amount of the accrued losses on assumed contracts was
approximately $36.3 million. Since the date of acquisition of Stone & Webster,
the Company reflected an $13.5 million net reduction of contract costs as a
result of these accrued contract losses and reserves.
Net cash used in investing activities was $14.2 million for fiscal
2000, compared to $28.9 million for fiscal 1999. During fiscal 2000, the Company
purchased $20.6 million of property and equipment and sold property and
equipment for approximately $8.7 million. On July 14, 2000, the Company
purchased substantially all of the net operating assets of Stone & Webster, Inc.
for $43.6 million in cash (including $6 million of transaction costs) and
2,231,773 shares of Common Stock (valued at approximately $105.0 million).
Included in the assets acquired was $42.2 million of cash; therefore, the net
cash paid was approximately $2.4 million. On July 12, 2000, the Company
completed the acquisition of certain assets of PPM Contractors, Inc. ("PPM").
Total consideration paid was 43,445 shares of the Company's Common Stock valued
at approximately $2.0 million and the assumption of certain liabilities.
Included in the PPM acquisition, the Company received approximately $.1 million
of cash. During fiscal 1999, the Company embarked on its first significant
project financing participation. In connection with construction and maintenance
work on a refinery project in Norco, Louisiana, Shaw acquired $12.5 million of
interest-bearing notes (see Note 6 of Notes to Consolidated Financial
Statements). Through November 2003, the Company expects to receive additional
notes in lieu of interest. This investment represents a one-time investment,
although the Company may from time to time pursue similar investments on a
selective basis. This type of investment will generally be limited in size to
the profit expected to be received from the projects and will carry a return
that the Company believes will reflect the risk inherent in its investment.
During fiscal 2000, the Company did not enter into any additional project
financing for its customers.
Net cash provided by financing activities totaled $111.8 million for
fiscal 2000, compared to $6.8 million provided in fiscal 1999. In July 2000, in
conjunction with the Stone & Webster acquisition, the Company entered into a
three-year $400 million credit facility, with an aggregate revolving credit
commitment of $300 million and an aggregate letter of credit commitment of $100
million. The facility permits up to $150 million in letters of credit but
reduces the revolver in such event to $250 million. Upon the sale of certain of
the acquired assets, the aggregate revolving credit commitment is to be reduced
to $250 million. Amounts received from other asset sales may result in
additional reductions. The new facility allows the Company to borrow at interest
rates not to exceed 2.75% over the London Interbank Offered Rate ("LIBOR") or
1.25% over the prime rate. The index used to determine the interest rate is
selected by the Company and the spread over the index is dependent upon certain
financial ratios of the Company. The credit facility is secured by among other
things (i) guarantees by the Company's domestic subsidiaries; (ii) the pledge of
the capital stock in the Company's domestic subsidiaries; (iii) the pledge of
66% of the capital stock in certain of the Company's foreign subsidiaries; and
(iv) a security interest in all property of the Company and its domestic
subsidiaries (except real estate and equipment). The Company's revolving line of
credit has been generally used to provide working capital and fund fixed asset
and subsidiary acquisitions.
Primarily as a result of this new facility, in fiscal 2000, the Company
received net proceeds from revolving credit agreements of approximately $161.1
million and repaid debt and leases of approximately $112.6 million (including
$53.4 million of Senior Secured Notes and $39.0 million of debt assumed with the
Stone & Webster acquisition, both of which were paid off utilizing the proceeds
of the new credit facility). On November 10, 1999, the Company closed the sale
of 3,000,000 shares of its Common Stock, in an underwritten public offering at a
price of $21 per share, less underwriting discounts and commissions. On November
16, 1999, the underwriters for such offering exercised an option to purchase an
additional 450,000 shares of Common Stock from the Company pursuant to the
foregoing terms to cover over-allotments. The net
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proceeds to the Company, less underwriting discounts and commissions and other
expenses of the offering, totaled approximately $67.5 million and were used to
pay down amounts outstanding under the Company's primary revolving line of
credit facility and certain other long-term debt. The Company also received
approximately $2.2 million from employees upon the exercise of stock options.
Outstanding checks in excess of bank balances decreased $6.6 million, as a
result of the Company's entering into its new credit facility. Accordingly, the
Company no longer classifies its outstanding disbursements as outstanding checks
in excess of bank balances. The $6.6 million was repaid with the proceeds from
the new facility.
During fiscal 1999, the Company used its revolving line of credit
facility to repurchase 1,561,320 shares of the Company's Common Stock for $13.7
million (including brokerage commissions) through open market and block
transactions in accordance with a plan adopted by its board of directors. In
September 1999 the Company's board of directors voted to terminate its stock
repurchase plan. The purchase of treasury stock in fiscal 2000 of $2.4 million
resulted from the return of some shares issued in the Stone & Webster
acquisition as a result of a contractual commitment to paydown some letters of
credit.
Other than certain integration costs related to the Stone & Webster
acquisition, the Company does not expect its capital expenditures for fiscal
year 2001 to be substantially different from its historical levels.
Stone & Webster had a working capital deficit. The Company assumed a
portion of this deficit through its assumption of certain contracts and their
related net liability positions. This working capital deficit is approximately
$118.6 million as of August 31, 2000, which excludes approximately $75 million
of remaining non-cash liabilities relating to adjusting the acquired contracts
to their fair value at acquisition date as discussed above. The working capital
deficit does include the remaining accrued loses assumed on the contracts of
approximately $30.7 million as of August 31, 2000. This working capital deficit
represents future net cash expenditures primarily from billings in excess of
cost and estimated earnings on completed contracts which represents work billed
but not yet performed and accruals from expected losses on assumed contracts
related to the Company's assumed contracts. The Company expects that this
working capital deficit will be worked off during this next fiscal year.
The Stone & Webster acquisition agreement contains an adjustment
provision that requires the consideration paid by the Company to be increased or
decreased by the amount of the net assets or liabilities, as determined by the
agreement, of the excluded items. In addition, $25 million of the acquisition
proceeds was placed in escrow by the sellers to secure certain indemnification
obligations of the sellers in the agreement. Subsequent to August 31, 2000, the
parties entered into discussions to amend the agreement to return substantially
all of the escrow funds to the Company and waive the adjustment provision in
exchange for the Company's assumption of a previously excluded item. The Company
believes that a final resolution will be reached regarding this amendment which
would result in a net reduction of the Company's purchase price. Such adjustment
is not expected to exceed the amount held in escrow. Such an agreement, even if
reached among the parties, would also require bankruptcy court approval.
As of August 31, 2000, the Company has a positive working capital
balance of approximately $108.7 million. Because the Stone & Webster acquisition
has more than doubled the size of its operations and because a number of the
contracts assumed in the acquisition will result in negative cash flow in the
near term, the Company cannot provide assurance that its working capital
requirements associated with its ongoing projects at any given point in time
will not exceed its available borrowing capacity. To the extent the Company's
working capital requirements exceed its borrowing capacity, Shaw's operations
could be significantly adversely affected.
See "--Risk Factors."
On September 18, 2000, the Company executed a definitive agreement with
Entergy Corporation to create EntergyShaw, a new, equally-owned and
jointly-managed company. As of November 17, 2000, the Company has invested $2
million into the entity, as required under the terms of the agreement.
Subsequent to the execution of a letter of intent for this venture on June 2,
2000, Entergy and FPL Group, Inc., the parent of Florida Power & Light,
announced a merger which will create the largest U.S. power producer with
generating capacity in excess of 48,000 megawatts. EntergyShaw's initial focus
will be the construction of power plants in North America and Europe for
Entergy's and Florida Power & Light's unregulated wholesale operations. On a
combined basis, Entergy and Florida Power & Light have approximately 70 turbines
on order for their unregulated operations. The Company expects that the
installation of most of these turbines will be managed by EntergyShaw, subject
to the approval of its joint-management committee. The Company estimates that
EntergyShaw will generate approximately $100 million in revenues per turbine
installed. Shaw expects to provide the engineering, procurement, fabrication and
construction requirements to EntergyShaw for these plants. Under the terms of
the arrangement, the Company will present engineering, procurement and
construction opportunities that it receives after December 31, 2000 for power
24
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generation projects to the new company. The Company does not believe that work
performed for EntergyShaw will require a significant working capital investment
due to expected terms of the contract with EntergyShaw.
In October 2000, the Company closed the sale of 2,418,669 shares
(including 600,000 shares for over-allotments) of its Common Stock, in an
underwritten public offering at a price of $63.50 per share, less underwriting
discounts and commissions. The net proceeds to the Company, less underwriting
discounts and commissions and other offering expenses, totaled approximately
$145 million and were used to pay amounts outstanding under the Company's
primary revolving line of credit facility. The Company's primary revolving line
of credit facility has been used to provide working capital, and to fund fixed
asset purchases and subsidiary acquisitions.
The Company also acquired certain assets in the Stone & Webster
acquisition which it expects to sell before December 31, 2000. The Company
acquired a cold storage operation which it expects to realize net proceeds of
approximately $70 million when sold. In addition, the Company has an agreement
to sell an office building in Houston, Texas, which would, after paying off the
mortgage of approximately $19.7 million, results in the receipt by the Company
of net proceeds of approximately $22 million. The net proceeds from these asset
disposals will be used to pay down the Company's revolving credit facility.
As of August 31, 2000, the Company had $235 million drawn on its
revolving credit facility leaving availability of approximately $65 million. The
aggregate revolving credit commitment will be reduced by $50 million to $250
million upon completion of the sale of the cold storage business. However, after
application of the proceeds from the stock sale of $145 million and assets sale
of approximately $90 million, the Company anticipates that it will have
substantially all of its credit facility available. The Company believes that
working capital generated from its operations and its availability under its
revolving credit facility will be adequate to fund the working capital deficit
acquired in the Stone & Webster acquisition, its capital expenditures, and its
normal operations for the next twelve months.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, SFAS No. 131 - "Disclosures about Segments of an
Enterprise and Related Information" was issued. SFAS 131 requires the Company to
report financial and descriptive information about its operating segments in its
financial statements. The required disclosures were made for the first time in
its fiscal 1999 financial statements.
In early 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities." The statement is effective for fiscal years beginning after
December 15, 1998 and requires costs of start-up activities and organization
costs to be expensed as incurred. Any unamortized costs on the date of adoption
of the new standard is written off and reflected as a cumulative effect of a
change in accounting principle. The Company adopted this new requirement in
fiscal 2000. On September 1, 1999, the Company wrote off deferred organizational
costs of approximately $320,000, net of taxes.
During fiscal 1999, the Financial Accounting Standards Board issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
The statement establishes accounting and reporting standards for derivative
instruments and for 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. Changes in a derivative's
fair value are to be recognized currently in earnings unless specific hedge
accounting criteria are met. The Company adopted SFAS No. 133, as amended by
SFAS No. 137 which defers the effective date, on September 1, 2000. Had the
Company adopted SFAS 133 as of August 31, 2000, the impact on the financial
position would not have been material.
In fiscal 2000, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 which establishes guidance in applying generally
accepted accounting principles to revenue recognition in financial statements
and is effective for fiscal 2001. The Company has determined that its existing
revenue recognition practices comply with the guidance in the bulletin.
RISK FACTORS
Investing in the Company's Common Stock will provide an investor with
an equity ownership interest in the Company. Shareholders will be subject to
risks inherent in the Company's business. The performance of Shaw's shares
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will reflect the performance of the Company's business relative to, among other
things, general economic and industry conditions, market conditions and
competition. The value of the investment in the Company may increase or decline
and could result in a loss. An investor should carefully consider the following
factors as well as other information contained in this Form 10-K before deciding
to invest in shares of the Company's Common Stock.
This Form 10-K also contains forward-looking statements that involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in the forward-looking statements as a result of many
factors, including the risk factors described below and the other factors
described elsewhere in this Form 10-K. See "Business - Forward-Looking
Statements and Associated Risks."
DEMAND FOR THE COMPANY'S PRODUCTS AND SERVICES IS CYCLICAL AND VULNERABLE TO
DOWNTURNS IN THE POWER GENERATION AND OTHER INDUSTRIES TO WHICH THE COMPANY
MARKETS ITS PRODUCTS AND SERVICES.
The demand for Shaw's products and services depends on the existence of
engineering, construction and maintenance projects, particularly in the power
generation industry, which accounted for 67% of its backlog as of August 31,
2000. The Company also depends to a lesser extent on conditions in the
petrochemical, chemical, environmental, infrastructure and refining industries.
These industries historically have been, and will likely continue to be,
cyclical in nature and vulnerable to general downturns in the domestic and
international economies. The Company's results of operations have varied and may
continue to vary depending on the demand for future projects from these
industries.
THE ACQUISITION OF STONE & WEBSTER MAY RESULT IN WORKING CAPITAL REQUIREMENTS IN
EXCESS OF BORROWING CAPACITY.
As of August 31, 2000, the Company had approximately $285.2 million of
debt outstanding, including $238.1 million outstanding under its revolving
credit facilities. Amounts received from the proposed sale of its cold storage
business will reduce the capacity under this facility by a maximum of $50
million. Amounts received from other assets sales may result in additional
reductions. The Company cannot provide assurance that its credit facility
capacity will be sufficient to meet its needs in the event Shaw encounters
significant unforeseen working capital requirements following its acquisition of
Stone & Webster. In addition, the Company's ability to meet its current debt
service obligations depends on its future performance. This debt level requires
Shaw to use a material portion of operating cash flow to pay interest on debt.
Stone & Webster had a working capital deficit. The Company assumed a
portion of their deficit through its assumption of certain contracts and their
related net liability position. This working capital deficit is approximately
$118.6 million as of August 31, 2000, which excludes approximately $75 million
of remaining non-cash reserves relating to adjusting the acquired contracts to
their value at acquisition date as discussed above. The working capital deficit
does include the remaining accrued loses assumed on the contracts of
approximately $30.7 million as of August 31, 2000. The majority of this deficit
was attributable to advanced billings and billings in excess of cost which
generally represent work the Company has billed but not performed and accruals
for contracts on which the Company expects losses. As a result, as of August 31,
2000, the Company has a positive working capital balance of approximately $108.7
million. Because the Stone & Webster acquisition has more than doubled the size
of its operations and because a number of the contracts assumed in the
acquisition will result in negative cash flow in the near term, the Company
cannot provide assurance that its working capital requirements associated with
its ongoing projects at any given point in time will not exceed its available
borrowing capacity. To the extent the Company's working capital requirements
exceed its borrowing capacity, Shaw's operations could be significantly
adversely affected.
Additional borrowings to meet ongoing liquidity needs could
significantly increase the Company's debt service obligations. These obligations
could have important consequences. For example, they could:
o make it more difficult for the Company to obtain additional financing
in the future for its acquisitions and operations;
o require the Company to dedicate a substantial portion of its cash flows
from operations to the repayment of its debt and the interest
associated with its debt;
o limit the Company's operating flexibility due to financial and other
restrictive covenants, including restrictions on incurring additional
debt, creating liens on its properties and paying dividends;
o subject the Company to risks that interest rates and its interest
expense will increase;
o place the Company at a competitive disadvantage compared to its
competitors with less debt; and
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o make the Company more vulnerable in the event of a downturn in its
business.
THE DOLLAR AMOUNT OF THE COMPANY'S BACKLOG, AS STATED AT ANY GIVEN TIME, IS NOT
NECESSARILY INDICATIVE OF ITS FUTURE EARNINGS.
Shaw cannot provide assurance that the revenues projected in its
backlog will be realized, or if realized, will result in profits. To the extent
that Shaw experiences significant terminations, suspensions or adjustments in
the scope of its projects as reflected in its backlog contracts, the Company
could be materially adversely affected.
The Company defines its backlog as a "working backlog" which includes
projects for which Shaw has received a commitment from its customers. This
commitment takes the form of a written contract for a specific project, a
purchase order or an indication of the amount of time or material Shaw needs to
make available for a customer's anticipated project. In certain instances, the
engagement is for a particular product or project for which Shaw estimates
anticipated revenue, often based on engineering and design specifications that
have not been finalized and may be revised over time. The Company's backlog for
maintenance work is derived from maintenance contracts and the Company's
customers' historic maintenance requirements.
Approximately $350 million, or 18%, of the Company's backlog at August
31, 2000 is attributable to a contract with General Electric which requires Shaw
to fabricate at least 90% of the pipe necessary to install the combined-cycle
gas turbines to be built by General Electric domestically through 2004.
Approximately 40% of this backlog is for power generation projects for which
General Electric has been engaged and is in various stages of design,
engineering and construction, and for which Shaw has received a work release or
have been notified that a work release is pending. The balance is for work for
which General Electric has requested that Shaw reserve capacity. The Company
cannot be assured that all of these projects will be constructed or that they
will be completed in the Company's currently anticipated time-frame.
On occasion, customers will cancel or delay projects for reasons beyond
the Company's control. In the event of project cancellation, Shaw may be
reimbursed for certain costs but typically have no contractual right to the
total revenues reflected in the Company's backlog. In addition, projects may
remain in the Company's backlog for extended periods of time. If Shaw were to
experience significant cancellations or delays of projects in its backlog, the
Company's financial condition would be significantly adversely affected.
DIFFICULTIES INTEGRATING THE COMPANY'S ACQUISITION OF STONE & WEBSTER AND OTHER
ACQUISITIONS COULD ADVERSELY AFFECT SHAW.
The Stone & Webster acquisition more than doubled the size of the
Company, and many of the assets acquired represent a significant expansion of
what were formerly smaller pieces of its traditional lines of business. In
addition, the Company has acquired some businesses which are new to Shaw. As a
result, the Company may encounter difficulties integrating this acquisition and
successfully managing the rapid growth the Company expects to experience from
it. The Company and Stone & Webster utilize different information technology
systems. If the Company decides to integrate these systems, the Company may have
difficulty in doing so. To the extent the Company encounters problems in
integrating the Stone & Webster acquisition and any other acquisitions, the
Company could be materially adversely affected. In addition, the Company plans
to pursue select acquisitions in the future. Because the Company may pursue
these acquisitions around the world and may actively pursue a number of
opportunities simultaneously, the Company may encounter unforeseen expenses,
complications and delays, including difficulties in staffing and providing
operational and management oversight.
THE COMPANY MAY NOT REALIZE ITS ESTIMATED COST SAVINGS FROM THE STONE & WEBSTER
ACQUISITION.
The Company believes that annual cost savings in its recently acquired
Stone & Webster operations could be as much as $35 million on a pre-tax basis.
The Company intends to achieve such savings through reductions in personnel,
office lease and business development expenses. However, the Company cannot
provide assurance that these cost savings will be realized.
THE COMPANY MAY NOT RECEIVE THE ECONOMIC BENEFITS EXPECTED FROM ENTERGYSHAW.
On September 18, 2000, the Company executed a definitive agreement with
Entergy Corporation to create EntergyShaw, a new, equally-owned and
jointly-managed company. Subsequent to the execution of a letter of intent for
this venture on June 2, 2000, Entergy and FPL Group, Inc., the parent of Florida
Power & Light, announced a merger which will create the largest U.S. power
producer with generating capacity in excess of 48,000 megawatts. EntergyShaw's
initial focus
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will be the construction of power plants in North America and Europe for
Entergy's and Florida Power & Light's unregulated wholesale operations. On a
combined basis, Entergy and Florida Power & Light have approximately 70 turbines
on order for their unregulated operations. The Company expects that the
installation of most of these turbines will be managed by EntergyShaw, subject
to the approval of its joint-management committee. The Company estimates that
EntergyShaw will generate approximately $100 million in revenues per turbine
installed. Shaw expects to provide the engineering, procurement, fabrication and
construction requirements to EntergyShaw for these plants. Under the terms of
the arrangement, the Company will present engineering, procurement and
construction opportunities that it receives after December 31, 2000 for power
generation projects to EntergyShaw. The Company can provide no assurance that
all or any portion of the installation of these turbines will be committed to
EntergyShaw. Further, the Company provides no assurance that EntergyShaw will
contract with the Company for the installation of all of these turbines.
THE NATURE OF SHAW'S CONTRACTS COULD ADVERSELY AFFECT THE COMPANY.
Shaw enters into fixed price, lump-sum or unit price contracts on a
significant number of the Company's domestic piping contracts and substantially
all of its international piping projects. In addition, a number of the contracts
the Company assumed in the Stone & Webster acquisition are fixed price or
lump-sum contracts. Under fixed, maximum or unit price contracts, the Company
agrees to perform the contract for a fixed price and as a result, benefits from
costs savings, but is unable to recover any cost overruns. Under fixed price
incentive contracts, the Company shares with the customer any savings up to a
negotiated ceiling price and carries some or all of the burden of costs
exceeding the negotiated ceiling price. Contract prices are established based in
part on cost estimates which are subject to a number of assumptions, such as
assumptions regarding future economic conditions. If in the future these
estimates prove inaccurate, or circumstances change, cost overruns can occur
which could have a material adverse effect on the Company's business and results
of its operations. Shaw's profit for these projects could decrease, or the
Company could experience losses, if the Company is unable to secure fixed
pricing commitments from its suppliers at the time the contracts are entered
into or if the Company experiences cost increases for material or labor during
the performance of the contracts.
Shaw enters into contractual agreements with customers for some of its
engineering, procurement and construction services to be performed based on
agreed upon reimbursable costs and labor rates. In some instances, the terms of
these contracts provide for the customer's review of the accounting and cost
control systems to verify the completeness and accuracy of the reimbursable
costs invoiced. These reviews could result in proposed reductions in
reimbursable costs and labor rates previously billed to the customer.
In addition, the Company has several significant projects for agencies
of the U.S. Government. Generally, U.S. Government contracts are subject to
oversight audits by government representatives, to profit and cost controls and
limitations, and to provisions permitting modification or termination, in whole
or in part, without prior notice, at the government's convenience and with
payment of compensation only for work done and commitments made at the time of
termination. In the event of termination, the Company generally receives some
allowance for profit on the work performed. In some cases, government contracts
are subject to the uncertainties surrounding congressional appropriations or
agency funding. Government business is subject to specific procurement
regulations and a variety of socio-economic and other requirements. Failure to
comply with such regulations and requirements could lead to suspension or
debarment, for cause, from future government contracting or subcontracting for a
period of time. Among the causes for debarment are violations of various
statutes, including those related to employment practices, the protection of the
environment, the accuracy of records and the recording of costs.
THE COMPANY'S RESULTS OF OPERATIONS DEPEND ON SHAW'S ABILITY TO OBTAIN FUTURE
CONTRACTS.
In the case of large-scale domestic and international projects where
timing is often uncertain, it is particularly difficult to predict whether and
when Shaw will receive a contract award. In addition, timing of receipt of
revenues from the Company's projects can be affected by a number of factors
beyond the Company's control, including unavoidable delays from weather
conditions, unavailability of material and equipment from vendors, changes in
the scope of services requested by clients, or labor disruptions. The
uncertainty of the Company's contract award timing can also present difficulties
in matching workforce size with contract needs. In some cases, Shaw maintains
and bears the cost of a ready workforce that is larger than called for under
existing contracts in anticipation of future workforce needs under expected
contract awards. If an expected contract award is delayed or not received, the
Company would incur costs that could have a material adverse effect on it.
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Projects in the industries in which the Company provides products and
services frequently involve a lengthy and complex bidding and selection process.
Because a significant portion of the Company's sales are generated from large
projects, the Company's results of operations can fluctuate from quarter to
quarter. Shaw's significant customers vary between years. The loss of any one or
more of the Company's key customers could have a material adverse impact on it.
POLITICAL AND ECONOMIC CONDITIONS IN FOREIGN COUNTRIES IN WHICH SHAW OPERATES
COULD ADVERSELY AFFECT THE COMPANY.
A significant portion of the Company's sales is attributable to
projects in international markets. Shaw expects international sales and
operations to continue to contribute materially to the Company's growth and
earnings for the foreseeable future. International contracts, operations and
expansion expose the Company to risks inherent in doing business outside the
United States, including:
o uncertain economic conditions in the foreign countries in which Shaw
makes capital investments, operates and sells products and services;
o the lack of well-developed legal systems in some countries in which
Shaw operates and sells products and services, which could make it
difficult for it to enforce the Company's contractual rights;
o expropriation of property;
o restrictions on the right to convert or repatriate currency; and
o political risks, including risks of loss due to civil strife, acts of
war, guerrilla activities and insurrection.
For example, in fiscal 1999, the Company's international sales declined
due to economic downturn in the Far East/Pacific Rim region, resulting in fewer
power generation projects, and general economic conditions and political events
in South America, causing a reduction in sales to the petrochemical processing
industry.
FOREIGN EXCHANGE RISKS MAY AFFECT THE COMPANY'S ABILITY TO REALIZE A PROFIT FROM
CERTAIN PROJECTS.
While Shaw attempts to denominate its contracts in United States
dollars, from time to time the Company enters into contracts denominated in a
foreign currency without escalation provisions. This practice subjects the
Company to foreign exchange risks. In addition, to the extent contract revenues
are denominated in a currency different than the contract costs, the Company
increases its foreign exchange risks. The Company attempts to minimize its
exposure from foreign exchange risks by obtaining escalation provisions or
matching the contract revenue currency with the contract costs currency. Foreign
exchange controls may also adversely affect the Company. For instance, prior to
the lifting of foreign exchange controls in Venezuela in November 1995, foreign
exchange controls adversely affected the Company's ability to repatriate profits
from Shaw's Venezuelan subsidiary or otherwise convert local currency into
United States dollars. Shaw generally does not obtain insurance for or hedge
against foreign exchange risks for a material portion of its contracts. In
addition, the Company's ability to obtain international contracts is impacted by
the relative strength or weakness of the United States dollar relative to
foreign currencies.
FAILURE TO MEET SCHEDULE OR PERFORMANCE REQUIREMENTS OF SHAW'S CONTRACTS COULD
ADVERSELY AFFECT THE COMPANY.
In certain circumstances, the Company guarantees facility completion by
a scheduled acceptance date or achievement of certain acceptance and performance
testing levels. Failure to meet any such schedule or performance requirements
could result in additional costs and the amount of such additional costs could
exceed project profit margins. Performance problems for existing and future
contracts, whether fixed, maximum or unit priced, could cause actual results of
operations to differ materially from those anticipated by the Company.
A DEPENDENCE ON ONE OR A FEW CLIENTS COULD ADVERSELY AFFECT THE COMPANY.
Due to the size of many engineering and construction projects, one or a
few clients have in the past and may in the future contribute a substantial
portion of the Company's consolidated revenues in any one year, or over a period
of several consecutive years. Approximately $350 million, or 18%, of the
Company's backlog is attributable to a contract with General Electric, which
requires Shaw to fabricate at least 90% of the pipe necessary to install the
combined-cycle gas turbines to be built by General Electric domestically through
2004. The Company has had long-standing relationships with many of its
significant customers, including customers with which the Company has entered
into alliance agreements, that have preferred
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pricing arrangements; however, the Company's contracts with them are on a
project by project basis and they may unilaterally reduce or discontinue their
purchases at any time. The loss of business from any one of such customers could
have a material adverse effect on the Company's business or results of
operations.
SHAW'S DEPENDENCE ON A FEW SUPPLIERS AND SUBCONTRACTORS COULD ADVERSELY AFFECT
THE COMPANY.
The principal raw materials in the Company's piping systems business
are carbon steel, stainless steel and other alloy piping, which Shaw obtains
from a number of domestic and foreign primary steel producers. In the Company's
engineering, procurement and construction services Shaw relies on third-party
equipment manufacturers as well as third-party sub-contractors to complete its
projects. To the extent that the Company cannot engage sub-contractors or
acquire equipment or raw materials, Shaw's ability to complete a project in a
timely fashion or at a profit may be impaired. To the extent the amount the
Company is required to pay for these goods and services exceeds the amount the
Company has estimated in bidding for lump-sum work, Shaw could experience losses
in the performance of these contracts. In addition, if a manufacturer is unable
to deliver the materials according to the negotiated terms, the Company may be
required to purchase the materials from another source at a higher price. This
may reduce the profit to be realized or result in a loss on a project for which
the materials were needed.
THE COMPANY'S PROJECTS EXPOSE IT TO POTENTIAL PROFESSIONAL LIABILITY, PRODUCT
LIABILITY, OR WARRANTY AND OTHER CLAIMS.
Shaw engineers and constructs (and the Company's products typically are
installed in) large industrial facilities in which system failures can be
disastrous. Any catastrophic occurrences in excess of insurance limits at
locations engineered or constructed by the Company or where Shaw's products are
installed could result in significant professional liability, product liability
or warranty and other claims against it. In addition, under some of the
Company's contracts, Shaw must use new metals or processes for producing or
fabricating pipe for its customers. The failure of any of these metals or
processes could result in warranty claims against the Company for significant
replacement or reworking costs.
Further, the engineering and construction projects Shaw is performing
expose it to additional risks including cost overruns, equipment failures,
personal injuries, property damage, shortages of materials and labor, work
stoppages, labor disputes, weather problems and unforeseen engineering,
architectural, environmental and geological problems. In addition, once the
Company's construction is complete, Shaw may face claims with respect to the
performance of these facilities.
THE INDEMNIFICATION PROVISIONS OF THE COMPANY'S ACQUISITION AGREEMENTS MAY NOT
FULLY PROTECT IT AND MAY RESULT IN UNEXPECTED LIABILITIES.
Some of the former owners of companies Shaw has acquired are
contractually required to indemnify the Company against liabilities related to
the operation of their company before Shaw acquired it and for
misrepresentations made by them in connection with the acquisition. In some
cases, these former owners may not have the financial ability to meet their
indemnification responsibilities. If this occurs, the Company may incur
unexpected liabilities.
THE COMPANY'S COMPETITORS MAY HAVE GREATER RESOURCES AND EXPERIENCE THAN SHAW
DOES.
In the Company's engineering, procurement and construction business,
Shaw has numerous regional, national, and international competitors, many of
which have greater financial and other resources than Shaw does. The Company's
competitors include well-established, well-financed concerns, both privately and
publicly held, including many major power equipment manufacturers and
engineering and construction companies, some engineering companies, internal
engineering departments at utilities and certain of its customers. Because the
Company is primarily a service organization, Shaw competes by providing services
of the highest quality. The markets that Shaw serves require substantial
resources and particularly highly skilled and experienced technical personnel.
In pipe engineering and fabrication, competition on a domestic and
international level is substantial. In the United States, there are a number of
smaller pipe fabricators. Internationally, the Company's principal competitors
are divisions of large industrial firms. Some of the Company's competitors,
primarily in the international sector, have greater financial and other
resources than Shaw does.
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A FAILURE TO ATTRACT AND RETAIN QUALIFIED PERSONNEL COULD HAVE AN ADVERSE EFFECT
ON THE COMPANY.
The Company's ability to attract and retain qualified engineers,
scientists and other professional personnel, either through direct hiring or
acquisition of other firms employing such professionals, will be an important
factor in determining the Company's future success. The market for these
professionals is competitive, and there can be no assurance that the Company
will be successful in its efforts to attract and retain such professionals. In
addition, Shaw's ability to be successful depends in part on its ability to
attract and retain skilled laborers in its pipe fabrication business. Demand for
these workers is currently high and the supply is extremely limited.
ENVIRONMENTAL FACTORS AND CHANGES IN LAWS AND REGULATIONS COULD INCREASE THE
COMPANY'S COSTS AND LIABILITIES.
The Company is subject to environmental laws and regulations, including
those concerning:
o emissions into the air;
o discharges into waterways;
o generation, storage, handling, treatment and disposal of waste
materials; and
o health and safety.
The Company's projects often involve nuclear, hazardous and other
highly regulated materials, the improper characterization, handling or disposal
of which could constitute violations of federal, state or local statutes, and
result in criminal and civil liabilities. Environmental laws and regulations
generally impose limitations and standards for certain pollutants or waste
materials and require Shaw to obtain a permit and comply with various other
requirements. Governmental authorities may seek to impose fines and penalties on
the Company, or revoke or deny the issuance or renewal of operating permits, for
failure to comply with applicable laws and regulations.
In addition, under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("CERCLA"), as amended and comparable
state laws, the Company may be required to investigate and remediate hazardous
substances. CERCLA and these comparable state laws typically impose liability
without regard to whether a company knew of or caused the release, and liability
has been interpreted to be joint and several unless the harm is divisible and
there is a reasonable basis of allocation. The principal federal environmental
legislation affecting the Company's environmental/infrastructure division of its
principal engineering subsidiary and its clients include: the National
Environmental Policy Act of 1969 ("NEPA"), the Resource Conservation and
Recovery Act of 1976 ("RCRA"), the Clean Air Act, the Federal Water Pollution
Control Act and the Superfund Amendments and Reauthorization Act of 1986
("SARA"). The Company's foreign operations are also subject to various
requirements governing environmental protection.
The environmental health and safety laws and regulations to which Shaw
is subject are constantly changing, and it is impossible to predict the effect
of such laws and regulations on the Company in the future. Shaw has not
conducted environmental audits of many of its properties, including the assets
the Company acquired from Stone & Webster. The Company cannot give any assurance
that its operations will continue to comply with future laws and regulations or
that these laws and regulations will not significantly adversely affect the
Company.
IF SHAW HAS TO WRITE-OFF A SIGNIFICANT AMOUNT OF INTANGIBLE ASSETS, THE
COMPANY'S EARNINGS WILL BE NEGATIVELY IMPACTED.
Because the Company has grown in part through acquisitions, goodwill
and other acquired intangible assets represent a substantial portion of its
assets. Goodwill was approximately $282 million as of August 31, 2000. If the
Company makes additional acquisitions, it is likely that additional intangible
assets will be recorded on its books. A determination that a significant
impairment in value of the Company's unamortized intangible assets has occurred
would require the Company to write-off a substantial portion of its assets. This
write-off would negatively affect the Company's earnings.
THE COMPANY IS AND WILL CONTINUE TO BE INVOLVED IN LITIGATION.
The Company has been and may from time to time be named as defendants
in legal actions claiming damages in connection with engineering and
construction projects and other matters. These are typically claims for personal
injury or
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property damage which occur in connection with services performed relating to
project or construction sites and other actions that arise in the normal course
of business, including employment-related claims and contractual disputes. Such
contractual disputes normally involve claims relating to the performance of
equipment design or other engineering services or project construction services
provided by the Company's subsidiaries.
Certain of the Company's Stone & Webster subsidiaries have possible
liabilities relating to environmental pollution. While the Company did not
assume these liabilities in connection with Stone & Webster's acquisition , a
federal, state or local governmental authority may seek redress from Shaw or its
subsidiaries and the Company may be named as a Potentially Responsible Party in
an action by such governmental authority. While the Company would vigorously
contest any attempt to make the Company responsible for unassumed environmental
liabilities, there can be no assurance that the Company will not be held liable
in connection with such matters in amounts that would have a material adverse
effect on its business and results of operations.
WORK STOPPAGES AND OTHER LABOR PROBLEMS COULD ADVERSELY AFFECT THE COMPANY.
Some of the Company's employees in the United States and abroad may be
represented by labor unions. Shaw experienced a strike, without material impact
on pipe production, by union members in February 1997 relating to the
termination of collective bargaining agreements covering its pipe facilities in
Walker and Prairieville, Louisiana. A lengthy strike or other work stoppage at
any of the Company's facilities could have a material adverse effect on the
Company. From time to time Shaw has also experienced attempts to unionize the
Company's non-union shops. While these efforts have achieved limited success to
date, the Company cannot give any assurance that it will not experience
additional union activity in the future.
CHANGES IN TECHNOLOGY COULD ADVERSELY AFFECT THE COMPANY AND ITS COMPETITORS MAY
DEVELOP OR OTHERWISE ACQUIRE EQUIVALENT OR SUPERIOR TECHNOLOGY.
Through Stone & Webster, the Company believes that it has a leading
position in technology associated with the design and construction of plants
which produce ethylene, which the Company protects and develops with patent
registrations, license restrictions, and a research and development program.
This technology position is subject to the risk that others may develop
competing processes, which could affect the Company's market position. In
addition, Shaw's strengths in design and construction software, as well as power
generation software, may be at risk from competitive technologies.
The Company's induction pipe bending technology and capabilities
influence the Company's ability to compete successfully. However, this
technology and its proprietary software are not currently patented. While the
Company may have some legal protections, litigation brought by the Company in
this regard could be time-consuming and expensive and could prove unsuccessful.
Likewise, although the Company protects some proprietary materials and processes
through non-disclosure and confidentiality agreements, the Company cannot give
any assurance that these agreements will not be breached. Finally, there is
nothing to prevent the Company's competitors from independently attempting to
develop or obtain access to technologies that are similar or superior to Shaw's
technology.
THE COMPANY'S SUCCESS DEPENDS ON KEY MEMBERS OF ITS MANAGEMENT, INCLUDING J. M.
BERNHARD, JR.
The Company's success is dependent upon the continued services of J. M.
Bernhard, Jr., its founder, Chairman, President and Chief Executive Officer, and
other key officers. The loss of Mr. Bernhard or other key officers could
adversely affect the Company. The Company does not maintain key employee
insurance on any of its executive officers.
MARKET PRICES OF THE COMPANY'S EQUITY SECURITIES COULD CHANGE SIGNIFICANTLY.
The market prices of the Company's Common Stock, preferred stock or
warrants may change significantly in response to various factors and events,
including the following:
o the other risk factors described in this Form 10-K, including changing
demand for its products and services;
o a shortfall in operating revenue or net income from that expected by
securities analysts and investors;
o changes in securities analysts' estimates of the financial performance
of Shaw or its competitors or the financial performance of companies in
its industry generally;
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o general conditions in its industry; and
o general conditions in the securities markets.
Many of these factors are beyond the Company's control.
THE COMPANY'S ARTICLES OF INCORPORATION AND BY-LAWS AND LOUISIANA LAW CONTAIN
PROVISIONS THAT CONCENTRATE VOTING POWER IN MANAGEMENT AND COULD DISCOURAGE A
TAKEOVER.
Because of special voting power carried by stock owned by the Company's
officers and directors, as of November 16, 2000, its officers and directors
controlled approximately 29% of the voting power of all of its outstanding
stock. Consequently, these persons, in particular Mr. Bernhard, would be able to
exercise significant influence over corporate actions and the outcome of matters
requiring a shareholder vote, including the election of directors.
The Company's articles of incorporation provide that each share of
Common Stock that has been held by the same person for at least four consecutive
years is entitled to five votes on each matter to be voted upon at shareholders'
meetings, and all shares held for less than four years are entitled to one vote
per share for each matter. This charter provision concentrates control in
current management and could:
o increase the difficulty of removing the incumbent board of directors or
management;
o diminish the likelihood that a potential buyer would make an offer for
the Common Stock; and
o impede a transaction favorable to the interests of shareholders.
In addition, certain provisions of the Company's articles of
incorporation and by-laws and Louisiana law may tend to deter potential
unsolicited offers or other efforts to obtain control of the Company that are
not approved by its board of directors. The provisions may deprive the Company's
shareholders of opportunities to sell shares of Common Stock at prices higher
than prevailing market prices.
THE COMPANY'S ISSUANCE OF PREFERRED STOCK COULD ADVERSELY AFFECT SHAREHOLDER
RIGHTS OF A HOLDER OF COMMON STOCK AND COULD DISCOURAGE A TAKEOVER.
The Company's board of directors is authorized to issue up to 5,000,000
shares of preferred stock without any further action on the part of the
Company's shareholders. In the event that Shaw issues preferred stock in the
future that has preference over the Common Stock with respect to payment of
dividends or upon the Company's liquidation, dissolution or winding up, rights
as holders of Common Stock could be adversely affected. In addition, the ability
of the Company's board of directors to issue shares of preferred stock without
any further action on the part of the Company's shareholders may impede a
takeover of the Company and prevent a transaction favorable to its shareholders.
Any or all of these consequences, should they materialize, could have a
material adverse effect on the Company's results of operations.
33
34
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The Company is exposed to interest rate risk due to changes in interest
rates, primarily in the United States. The Company's policy is to manage
interest rates through the use of a combination of fixed and floating rate debt.
The Company currently does not use any derivative financial instruments to
manage its exposure to interest rate risk. The table below provides information
about the Company's future maturities of principal for outstanding debt
instruments and fair value at August 31, 2000. All instruments described are
non-trading instruments (dollars in millions).
Fair
2001 2002 2003 2004 2005 Thereafter Total Value
------- ------- ------- ------- ------- ---------- ------- -------
Long-term debt
Fixed rate $ 23.4 $ 1.8 $ 1.6 $ 1.2 $ 0.4 $ 3.6 $ 32.0 $ 31.6
Average interest rate 6.6% 6.4% 6.5% 6.9% 7.7% 7.2% 6.7% --
Variable rate $ 4.0 $ 2.8 $ 3.0 $ 0.9 $ 4.2 $ 0.2 $ 15.1 $ 15.1
Average interest rate 7.9% 7.7% 7.7% 8.3% 3.8% 8.8% 6.7% --
Short-term line of credit
Variable rate $ 2.9 -- -- -- -- -- $ 2.9 $ 2.9
Average interest rate 7.1% -- -- -- -- -- 7.1% --
Long-term line of credit
Variable rate -- -- $ 235.2 -- -- -- $ 235.2 $ 235.2
Average interest rate -- -- 9.7% -- -- -- 9.7% --
FOREIGN CURRENCY RISKS
Although the majority of the Company's transactions are in U.S.
dollars, the Company does have certain of its subsidiaries which conduct their
operations in various foreign currencies. The Company currently does not use any
off-balance sheet hedging instruments to manage its risks associated with its
operating activities conducted in foreign currencies unless that particular
operation enters into a contract in a foreign currency which is different than
the local currency of the particular operation. In limited circumstances and
when considered appropriate, the Company will utilize forward exchange contracts
to hedge the anticipated purchases and/or sales. The Company attempts to
minimize its exposure to foreign currency fluctuations by matching its revenues
and expenses in the same currency for its contracts. As of August 31, 2000, the
Company has a minimal number of forward exchange contracts outstanding which are
hedges of certain commitments of foreign subsidiaries. The exposure from the
commitments is not material to the Company's results of operations or financial
position. See Notes 1 and 17 of Notes to the Consolidated Financial Statements.
34
35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Reports of Independent Public Accountants.......................................................................36-37
Consolidated Balance Sheets as of August 31, 2000 and 1999......................................................38-39
Consolidated Statements of Income for the years ended
August 31, 2000, 1999 and 1998...................................................................................40
Consolidated Statements of Shareholders' Equity for the years
ended August 31, 2000, 1999 and 1998.............................................................................41
Consolidated Statements of Cash Flows for the years
ended August 31, 2000, 1999 and 1998..........................................................................42-43
Notes to Consolidated Financial Statements......................................................................44-68
35
36
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of The Shaw Group Inc.:
We have audited the accompanying consolidated balance sheets of The
Shaw Group Inc. (a Louisiana corporation) and subsidiaries as of August 31, 2000
and 1999, and the related consolidated statements of income, shareholders'
equity and cash flows for each of the two years in the period ended August 31,
2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of The Shaw Group Inc.
and subsidiaries as of August 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the two years in the period ended
August 31, 2000, in conformity with accounting principles generally accepted in
the United States.
/s/ Arthur Andersen LLP
- -----------------------
Arthur Andersen LLP
New Orleans, Louisiana
October 18, 2000
36
37
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of The Shaw Group Inc.:
We have audited the accompanying consolidated statements of income,
shareholders' equity and cash flows of The Shaw Group Inc. (a Louisiana
corporation) and subsidiaries for the year ended August 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the results of the operations and cash flows
of The Shaw Group Inc. and subsidiaries, for the year ended August 31, 1998, in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP /s/ Hannis T. Bourgeois, LLP
- ------------------------ ----------------------------
Arthur Andersen LLP Hannis T. Bourgeois, LLP
New Orleans, Louisiana Baton Rouge, Louisiana
October 22, 1998
37
38
THE SHAW GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF AUGUST 31, 2000 AND 1999
(DOLLARS IN THOUSANDS)
ASSETS
2000 1999
----------- -----------
Current assets:
Cash and cash equivalents $ 21,768 $ 6,901
Accounts receivable, including retainage, net 311,285 122,053
Receivables from unconsolidated entity, net 5,871 4,310
Inventories 131,083 78,464
Cost and estimated earnings in excess of billings
on uncompleted contracts 108,450 24,277
Prepaid expenses 13,555 4,131
Deferred income taxes 63,858 992
Assets held for sale 116,501 --
Other current assets 18,335 10,942
----------- -----------
Total current assets 790,706 252,070
Investment in unconsolidated entity, joint ventures and limited partnerships 14,490 4,646
Investment in securities available for sale 15,236 13,830
Property and equipment:
Transportation equipment 4,771 3,704
Furniture and fixtures 40,061 10,487
Machinery and equipment 97,360 73,060
Buildings and improvements 37,922 36,471
Land 10,520 7,038
----------- -----------
190,634 130,760
Less: Accumulated depreciation (46,087) (35,252)
----------- -----------
144,547 95,508
Goodwill, net of accumulated amortization of $6,375
and $3,276 at August 31, 2000 and 1999, respectively 282,238 32,134
Other assets 87,866 8,874
----------- -----------
$ 1,335,083 $ 407,062
=========== ===========
(Continued)
The accompanying notes are an integral part of these statements.
38
39
THE SHAW GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF AUGUST 31, 2000 AND 1999
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
LIABILITIES AND SHAREHOLDERS' EQUITY
2000 1999
----------- -----------
Current liabilities:
Outstanding checks in excess of bank balance $ -- $ 6,633
Accounts payable 225,230 37,714
Accrued liabilities 147,887 28,407
Current maturities of long-term debt 27,358 8,056
Short-term revolving line of credit 2,893 43,562
Deferred revenue-prebilled 6,045 3,576
Advanced billings and billings in excess of cost and estimated
earnings on uncompleted contracts 166,147 10,147
Accrued contract losses and reserves 106,489 --
----------- -----------
Total current liabilities 682,049 138,095
Long-term revolving line of credit 235,187 --
Long-term debt, less current maturities 19,778 87,841
Deferred income taxes 6,098 6,887
Other liabilities 14,696 --
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value,
5,000,000 shares authorized;
no shares issued and outstanding -- --
Common stock, no par value,
50,000,000 shares authorized;
25,901,162 and 19,960,282 shares issued, respectively;
17,701,204 and 11,736,046 shares outstanding, respectively 298,005 119,353
Retained earnings 106,581 77,071
Accumulated other comprehensive income (5,209) (1,535)
Unearned restricted stock compensation (59) (125)
Treasury stock, 8,199,958 and 8,224,236 shares, respectively (22,043) (20,525)
----------- -----------
Total shareholders' equity 377,275 174,239
----------- -----------
$ 1,335,083 $ 407,062
=========== ===========
The accompanying notes are an integral part of these statements.
39
40
THE SHAW GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED AUGUST 31, 2000, 1999 AND 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2000 1999 1998
--------- --------- ---------
Sales $ 762,655 $ 494,014 $ 501,638
Cost of sales 635,579 400,186 422,057
--------- --------- ---------
Gross profit 127,076 93,828 79,581
General and administrative expenses 74,297 60,082 48,503
--------- --------- ---------
Operating income 52,779 33,746 31,078
Interest expense (8,003) (8,649) (8,471)
Other income, net 772 978 698
--------- --------- ---------
(7,231) (7,671) (7,773)
--------- --------- ---------
Income before income taxes 45,548 26,075 23,305
Provision for income taxes 16,359 8,635 7,033
--------- --------- ---------
Income from continuing operations
before earnings (losses) from unconsolidated entity 29,189 17,440 16,272
Earnings (losses) from unconsolidated entity 1,194 681 (40)
--------- --------- ---------
Income from continuing operations 30,383 18,121 16,232
Discontinued operations, net of taxes:
Operating results -- -- 298
Net gain on disposals -- -- 2,647
--------- --------- ---------
Income before extraordinary item and cumulative
effect of change in accounting principle 30,383 18,121 19,177
Extraordinary item for early extinguishment of debt, net of
taxes of $340 (553) -- --
Cumulative effect on prior years of change in
accounting for start-up costs, net of taxes of $196 (320) -- --
--------- --------- ---------
Net income $ 29,510 $ 18,121 $ 19,177
========= ========= =========
Basic income per common share:
Income per common share:
Continuing operations $ 2.05 $ 1.52 $ 1.29
Discontinued operations -- -- .23
--------- --------- ---------
Income before extraordinary item and cumulative
effect of change in accounting principle 2.05 1.52 1.52
Extraordinary item (0.04) -- --
Cumulative effect of change in accounting principle (0.02) -- --
--------- --------- ---------
Net income per common share $ 1.99 $ 1.52 $ 1.52
========= ========= =========
Diluted income per common share:
Income per common share:
Continuing operations $ 1.97 $ 1.47 $ 1.26
Discontinued operations -- -- .23
--------- --------- ---------
Income before extraordinary item and cumulative
effect of change in accounting principle 1.97 1.47 1.49
Extraordinary item (0.03) -- --
Cumulative effect of change in accounting principle (0.02) -- --
--------- --------- ---------
Net income per common share $ 1.92 $ 1.47 $ 1.49
========= ========= =========
The accompanying notes are an integral part of these statements.
40
41
THE SHAW GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
UNEARNED ACCUMULATED
COMMON STOCK RESTRICTED TREASURY OTHER
-------------------------- STOCK -------------------------- COMPREHENSIVE
SHARES AMOUNT COMPENSATION SHARES AMOUNT INCOME
----------- ----------- ------------ ----------- ----------- -----------
Balance, September 1, 1997 19,151,309 $ 104,870 $ -- 6,662,916 $ (6,828) $ --
Comprehensive income:
Net income -- -- -- -- -- --
Other comprehensive income:
Foreign translation adjustments -- -- -- -- -- (420)
Comprehensive income
Restricted stock compensation 30,000 581 (581) -- -- --
Amortization of restricted
stock Compensation -- -- 214 -- -- --
Shares issued to acquire Bagwell 645,000 13,033 -- -- -- --
Exercise of options 116,473 876 -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balance, August 31, 1998 19,942,782 119,360 (367) 6,662,916 (6,828) (420)
Comprehensive income:
Net income -- -- -- -- -- --
Other comprehensive income:
Foreign translation adjustments -- -- -- -- -- (1,115)
Comprehensive income
Restricted stock cancellation (15,000) (255) 145 -- -- --
Amortization of restricted
stock Compensation -- -- 97 -- -- --
Exercise of options 32,500 248 -- -- -- --
Purchases of treasury stock -- -- -- 1,561,320 (13,697) --
----------- ----------- ----------- ----------- ----------- -----------
Balance, August 31, 1999 19,960,282 119,353 (125) 8,224,236 (20,525) (1,535)
Comprehensive income:
Net income
Other comprehensive income: -- -- -- -- -- --
Foreign translation adjustments -- -- -- -- -- (3,674)
Comprehensive income
Shares issued in public offering 3,450,000 67,487 -- -- -- --
Amortization of restricted
stock compensation -- -- 66 -- -- --
Shares issued to acquire PPM 43,445 2,012 -- -- -- --
Shares issued to acquire Stone
& Webster 2,231,773 105,033 -- -- -- --
Exercise of options 290,382 2,255 -- -- -- --
Tax benefit on exercise of options -- 2,739 -- -- -- --
Purchases of treasury stock -- -- -- 50,442 (2,392) --
Retirement of treasury stock (74,720) (874) -- (74,720) 874 --
----------- ----------- ----------- ----------- ----------- -----------
Balance, August 31, 2000 25,901,162 $ 298,005 $ (59) 8,199,958 $ (22,043) $ (5,209)
=========== =========== =========== =========== =========== ===========
TOTAL
RETAINED SHAREHOLDERS'
EARNINGS EQUITY
----------- -----------
Balance, September 1, 1997 $ 39,773 $ 137,815
Comprehensive income:
Net income 19,177 19,177
Other comprehensive income:
Foreign translation adjustments -- (420)
-----------
Comprehensive income 18,757
Restricted stock compensation -- --
Amortization of restricted
stock Compensation -- 214
Shares issued to acquire Bagwell -- 13,033
Exercise of options -- 876
----------- -----------
Balance, August 31, 1998 58,950 170,695
Comprehensive income:
Net income 18,121 18,121
Other comprehensive income:
Foreign translation adjustments -- (1,115)
-----------
Comprehensive income 17,006
Restricted stock cancellation -- (110)
Amortization of restricted
stock Compensation -- 97
Exercise of options -- 248
Purchases of treasury stock -- (13,697)
----------- -----------
Balance, August 31, 1999 77,071 174,239
Comprehensive income:
Net income
Other comprehensive income: 29,510 29,510
Foreign translation adjustments -- (3,674)
-----------
Comprehensive income 25,836
Shares issued in public offering -- 67,487
Amortization of restricted
stock compensation -- 66
Shares issued to acquire PPM -- 2,012
Shares issued to acquire Stone
& Webster -- 105,033
Exercise of options -- 2,255
Tax benefit on exercise of options -- 2,739
Purchases of treasury stock -- (2,392)
Retirement of treasury stock -- --
----------- -----------
Balance, August 31, 2000 $ 106,581 $ 377,275
=========== ===========
The accompanying notes are an integral part of these statements.
41
42
THE SHAW GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED AUGUST 31, 2000, 1999 AND 1998
(DOLLARS IN THOUSANDS)
2000 1999 1998
-------- -------- --------
Cash flows from operating activities:
Net income $ 29,510 $ 18,121 $ 19,177
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation and amortization 16,808 13,271 10,280
Provision for deferred income taxes 2,110 3,697 40
(Earnings) losses from unconsolidated entity (1,194) (681) 40
Transaction losses 1,805 533 702
Gain on sale of discontinued operations -- -- (3,010)
Other (4,700) (1,792) 246
Changes in assets and liabilities, net of effects of acquisitions:
(Increase) decrease in receivables (53,336) 15,640 (38,291)
(Increase) in cost and estimated earnings in excess
of billings on uncompleted contracts (33,833) (4,485) (7,530)
(Increase) decrease in inventories (17,941) (12,243) 4,211
(Increase) decrease in other current assets (5,343) (471) 848
(Increase) decrease in prepaid expenses (787) 564 (2,708)
(Increase) decrease in other assets (10,681) (954) (1,317)
Increase (decrease) in accounts payable (37,886) (7,688) 5,842
Increase (decrease) in deferred revenue--prebilled 2,469 1,763 (1,769)
Increase (decrease) in accrued liabilities 21,445 4,326 1,660
Increase (decrease) in advanced billings and billings in excess
of cost and estimated earnings on uncompleted contracts 21,823 (4,046) 8,355
Increase (decrease) in accrued contract losses and adjustments (13,508) -- --
Increase (decrease) in other long-term liabilities 1,198 -- --
-------- -------- --------
Net cash provided by (used in) operating activities (82,041) 25,555 (3,224)
Cash flows from investing activities:
Investment in subsidiaries, net of cash received (2,342) -- (27,738)
Proceeds from sale of property and equipment 8,715 1,530 3,167
Proceeds from sale of discontinued operations -- -- 1,208
Purchase of property and equipment (20,619) (17,967) (14,616)
Purchase of securities available for sale -- (12,500) --
-------- -------- --------
Net cash used in investing activities $(14,246) $(28,937) $(37,979)
(Continued)
The accompanying notes are an integral part of these statements.
42
43
THE SHAW GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
2000 1999 1998
--------- --------- ---------
Cash flows from financing activities:
Net proceeds (repayments) from revolving credit agreements $ 161,140 $ 22,720 $ (10,182)
Proceeds from issuance of debt 2,443 5,571 62,154
Repayment of debt and leases (112,555) (10,690) (13,817)
Increase (decrease) in outstanding checks
in excess of bank balance (6,610) 2,614 1,725
Purchase of treasury stock (2,392) (13,697) --
Issuance of common stock 69,742 248 876
--------- --------- ---------
Net cash provided by financing activities 111,768 6,766 40,756
Effects of exchange rate changes on cash (614) (226) (168)
--------- --------- ---------
Net increase (decrease) in cash 14,867 3,158 (615)
Cash and cash equivalents--beginning of year 6,901 3,743 4,358
--------- --------- ---------
Cash and cash equivalents--end of year $ 21,768 $ 6,901 $ 3,743
========= ========= =========
Supplemental disclosures:
Cash payments for:
Interest $ 10,033 $ 9,151 $ 7,048
========= ========= =========
Income taxes $ 11,286 $ 5,592 $ 2,873
========= ========= =========
Noncash investing and financing activities:
Sale of property financed through issuance of note receivable $ 3,960 $ 1,400 $ --
========= ========= =========
Investment in securities available for sale acquired
in lieu of interest payment $ 1,406 $ 1,330 $ --
========= ========= =========
Property and equipment acquired through
issuance of debt $ 1,467 $ -- $ 85
========= ========= =========
Investment in subsidiaries acquired through
issuance of common stock $ 107,045 $ -- $ 13,033
========= ========= =========
Investment in subsidiaries acquired through issuance of debt $ -- $ -- $ 4,702
========= ========= =========
Sale of subsidiaries financed through issuance of
notes receivables $ -- $ -- $ 8,792
========= ========= =========
The accompanying notes are an integral part of these statements.
43
44
THE SHAW GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of The Shaw
Group Inc. (a Louisiana corporation) and its wholly-owned subsidiaries
(collectively, the Company). All material intercompany accounts and transactions
have been eliminated in these financial statements.
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
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Areas requiring significant estimates made by management
include the application of percentage-of-completion accounting including
estimates of contract expenses and profits; recoverability of inventory and
application of lower of cost or market accounting; provisions for uncollectable
receivables and related claims; provision for income taxes and related valuation
allowances; recoverability of goodwill and amortization of goodwill; and
accruals for estimated liabilities including litigation and insurance reserves.
Actual results could differ from those estimates.
Nature of Operations
The Company is a vertically-integrated provider of complete piping
systems and comprehensive engineering, procurement and construction services.
The Company operates primarily in the United States, the Far East/Pacific Rim,
Europe, South America and the Middle East for customers in the power generation,
process (including petrochemical, chemical and refining) and other industries
and the environmental and infrastructure sector. The Company offers
comprehensive design and engineering services, piping system fabrication,
industrial construction and maintenance services, manufacturing and sale of
specialty pipe fittings and design and fabrication of pipe support systems. The
Company's operations are conducted primarily through wholly-owned subsidiaries
and joint ventures.
Cash and Cash Equivalents
For purposes of reporting cash flows, all highly liquid investments
with a maturity of three months or less when purchased are cash equivalents. At
August 31, 2000 and 1999, the Company included in cash and cash equivalents
approximately $1,300,000, the proceeds of which came from industrial development
bond financing. These funds are required to be invested in short-term marketable
securities until used for other capital improvements.
Accounts Receivable and Credit Risk
The Company's principal customers are major multi-national industrial
corporations, independent and merchant power providers, governmental agencies
and equipment manufacturers. Work is performed under contract and the Company
believes that its credit risk is minimal. The Company grants short-term credit
to its customers.
At August 31, 2000 and 1999, accounts receivable includes approximately
$17,900,000 and $13,000,000, respectively, of receivables and claims due under
contracts which are subject to contract renegotiations or legal proceedings and
which are recorded at estimated net realizable value. At August 31, 2000,
contracts with six customers made up the $17,900,000 balance discussed above.
Management believes that the ultimate resolution of these disputes will not have
a significant impact on future results of operations.
44
45
Allowance for Uncollectable Receivables and Contract Adjustments
The allowance for uncollectable receivables and contract adjustments of
approximately $5,900,000 and $5,800,000 at August 31, 2000 and 1999,
respectively, is based on management's estimate of the amount expected to be
uncollectable considering historical experience and the information management
is able to obtain regarding the financial condition of significant customers.
Increases to the allowance for the year ended August 31, 2000 were $3,900,000
and total reductions were $3,800,000. Net reductions to this allowance were
approximately $1,300,000 in fiscal 1999. The Company includes contract
adjustments as an increase or reduction of sales.
Inventories
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) or weighted-average cost
methods.
Property and Equipment
Property and equipment are recorded at cost. Additions and improvements
are capitalized. Maintenance and repair expenses are charged to income as
incurred. The cost of property and equipment sold or otherwise disposed of and
the accumulated depreciation thereon, are eliminated from the property and
related accumulated depreciation accounts, and any gain or loss is credited or
charged to income.
For financial reporting purposes, depreciation is provided by utilizing
the straight-line method over the following estimated useful service lives:
Transportation equipment 5-15 Years
Furniture and fixtures 3-7 Years
Machinery and equipment 3-18 Years
Buildings and improvements 8-40 Years
At August 31, 2000, the Company had equipment not yet placed into
service of approximately $5,800,000.
Income Taxes
The Company provides for deferred taxes in accordance with Statement of
Financial Accounting Standards No. 109 - "Accounting for Income Taxes," which
requires an asset and liability approach for measuring deferred tax assets and
liabilities due to temporary differences existing at year end using currently
enacted tax rates.
Revenues
For unit-priced pipe fabrication contracts, the Company recognizes
revenues upon completion of individual spools of production. A spool consists of
piping materials and associated shop labor to form a prefabricated unit
according to contract specifications. Spools are generally shipped to job site
locations when complete. During the fabrication process, all direct and indirect
costs related to the fabrication process are capitalized as work in progress.
For lump-sum fabrication contracts, the Company recognizes revenues based on the
percentage of completion method, measured primarily by the cost of materials for
which production is complete compared with the total estimated material costs of
the contract.
For project management, engineering, procurement, and construction
services, the Company recognizes revenues under the percentage of completion
method measured primarily on contract costs incurred to date, excluding the
costs of any purchased but uninstalled materials, compared with total estimated
contract costs. Revenues from cost-plus-fee contracts are recognized on the
basis of costs incurred during the period plus the fee earned.
Revenue is recognized from consulting services as the work is
performed.
The Company recognizes revenues for pipe fittings, manufacturing
operations and other services primarily at the time of shipment or upon
completion of the services.
45
46
Provisions for estimated losses for uncompleted contracts are made in
the period in which such losses are identified. The cumulative effect of other
changes, including those arising from contract penalty provisions, final
contract settlements and reviews performed by customers, are recognized in the
period in which the revisions are identified. To the extent that these
adjustments result in a reduction or elimination of previously reported profits,
the Company would report such a change by recognizing a charge against current
earnings, which might be significant depending on the size of the project or the
adjustment. An amount equal to the costs attributable to unapproved change
orders and claims is included in the total estimated revenue when realization is
probable. Profit from unapproved change orders and claims is recorded in the
year such amounts are resolved.
Goodwill and Other Intangibles
Goodwill represents the excess of the purchase price of acquisitions
over the fair value of the net assets acquired. Such excess costs and intangible
assets of various licenses, patents, technology and related processes pertaining
to the design and construction of plants which produce ethelyne (See Note 3) are
being amortized on a straight-line basis over a twenty-year period. The Company
periodically assesses the recoverability of the unamortized balance based on
expected future profitability and undiscounted future cash flows of the
acquisitions and their contribution to the overall operation of the Company.
Should the review indicate that the carrying value is not recoverable, the
excess of the carrying value over the undiscounted cash flows would be
recognized as an impairment loss.
Financial Instruments, Forward Contracts - Non-Trading Activities
When considered appropriate, the Company utilizes forward foreign
exchange contracts to hedge firm purchases and sales of certain pipe bending
machines and other transactions. Financial instruments are designated as a hedge
at inception where there is a direct relationship to the price risk associated
with the Company's future sales and purchases. Gains and losses on the early
termination or maturity of forward contracts designated as hedges are deferred
and included in revenues in the period the hedged transaction is recorded. If
the direct relationship to price risk ceases to exist, the difference in the
carrying value and fair value of a forward contract is recognized as a gain or
loss in revenues in the period the direct relationship ceases to exist. Future
changes in fair value of the forward contracts are recognized as gains or losses
in revenues or expenses in the period of change.
Comprehensive Income
SFAS No. 130, "Reporting Comprehensive Income," which was required to
be adopted by the Company in the first quarter of fiscal 1999, establishes
standards for the reporting and display of comprehensive income as part of a
full set of financial statements. Comprehensive income for a period encompasses
net income and all other changes in a company's equity other than from
transactions with the company's owners.
The foreign currency translation adjustments relate to the varying
strength of the U.S. dollar in relation to the British pound, Australian and
Canadian dollar and Dutch guilder. The Company's comprehensive income is
included in the consolidated statements of shareholders' equity.
Reclassifications
Certain reclassifications have been made to the prior years' financial
statements in order to conform to current year's presentation.
New Accounting Standards
In early 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities" ("SOP"). The SOP is effective for fiscal years beginning after
December 15, 1998 and requires costs of start-up activities and organization
costs to be expensed as incurred. Any such unamortized costs on the date of
adoption of the new standard is written off and reflected as a cumulative effect
of a change in accounting principle. The Company adopted this new requirement in
fiscal 2000. On September 1, 1999, the Company wrote off deferred organizational
costs of approximately $320,000, net of taxes.
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During fiscal 1999, the Financial Accounting Standards Board issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
The statement establishes accounting and reporting standards for derivative
instruments and for 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. Changes in a derivative's
fair value are to be recognized currently in earnings unless specific hedge
accounting criteria are met. The Company adopted SFAS No. 133, as amended by
SFAS No. 137 which defers the effective date, on September 1, 2000. Had the
Company adopted SFAS 133 as of August 31, 2000, the impact on the financial
position would not have been material.
In fiscal 2000, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 which establishes guidance in applying generally
accepted accounting principles to revenue recognition in financial statements
and is effective for fiscal 2001. The Company has determined that its existing
revenue recognition practices comply with the guidance in the bulletin.
NOTE 2--PUBLIC OFFERING OF COMMON STOCK
On November 10, 1999, the Company completed the sale of 3,000,000
shares of its common stock, no par value (the "Common Stock"), in an
underwritten public offering at a price of $21 per share, less underwriting
discounts and commissions. On November 16, 1999, the underwriters for such
offering exercised an option to purchase an additional 450,000 shares of Common
Stock from the Company pursuant to the foregoing terms to cover over-allotments.
The net proceeds to the Company, less underwriting discounts and commissions and
other expenses of the offering, totaled approximately $67,500,000 and were used
to pay down amounts outstanding under the Company's primary revolving line of
credit facility and certain other long-term debt.
In October 2000, the Company completed the sale of 2,418,669 shares
(including 600,000 shares for over-allotments) of its common stock, no par value
(the "Common Stock"), in an underwritten public offering at a price of $63.50
per share, less underwriting discounts and commissions. The net proceeds to the
Company, less underwriting discounts and commissions and other offering
expenses, totaled approximately $145 million and were used to pay amounts
outstanding under the Company's primary revolving line of credit facility. The
Company's primary revolving line of credit facility has been used to provide
working capital, and to fund fixed asset purchases and subsidiary acquisitions.
NOTE 3--ACQUISITIONS
Stone & Webster Acquisition
On July 14, 2000, the Company purchased substantially all of the
operating assets of Stone & Webster, Incorporated ("Stone & Webster") for
$37,600,000 in cash, 2,231,773 shares of Common Stock (valued at approximately
$105,000,000 at closing) and the assumption of approximately $685,000,000 of
liabilities, subject to adjustment pending the resolution of certain claims
arising from the Stone & Webster bankruptcy proceedings. The Company also
incurred approximately $6,000,000 of acquisition costs. Stone & Webster is a
global provider of engineering, procurement, construction, consulting and
environmental services to the power, process, environmental and infrastructure
markets. The Company believes that, pursuant to the terms of the acquisition
agreement, it assumed only certain specified liabilities. The Company believes
that it did not assume, among other liabilities, liabilities associated with
certain contracts in progress, completed contracts, claims or litigation that
relate to acts or events occurring prior to the acquisition date, and certain
employee benefit obligations, including Stone & Webster's U.S. defined benefit
plan (collectively, the excluded items). The Company can, however, provide no
assurance that it will have no exposure with respect to such excluded
liabilities.
The acquisition agreement contains an adjustment provision that
requires the consideration paid by the Company to be increased or decreased by
the amount of the net assets or liabilities, as determined by the agreement, of
the excluded items. In addition, $25,000,000 of the acquisition proceeds were
placed in escrow by the sellers to secure certain indemnification obligations of
the sellers in the agreement. Subsequent to August 31, 2000, the parties entered
into discussions to amend the agreement to return substantially all of the
escrow funds to the Company and waive the adjustment provision in exchange for
the Company's assumption of a previously excluded item. The Company believes
that a final resolution will be reached regarding this amendment which would
result in a net reduction of the Company's purchase price and goodwill. Such
adjustment is not expected to exceed the amount held in escrow. Such an
agreement, even if reached among the parties, would also require bankruptcy
court approval.
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The Company acquired a large number of contracts with either inherent
losses or lower than market remaining margins primarily due to the effect that
the financial difficulties experienced by Stone & Webster had on negotiating and
executing the contracts. These contracts were adjusted to their fair value at
acquisition date by establishing a liability of approximately $83,700,000 which
will adjust the gross margins recognized on the contracts as the work is
performed. The amount of the accrued losses on assumed contracts was
approximately $36,300,000. These adjustments will result in a net reduction of
contract costs incurred in future periods. For the period from the acquisition
of Stone & Webster (July 14, 2000) through August 31, 2000, cost of sales were
reduced by $13,508,000 as these reserves were reduced.
The acquisition was concluded as part of a proceeding under Chapter 11
of the U. S. Bankruptcy Code. The bankruptcy court has not finalized its
validation of claims filed with the court. As a result, the final amount of
assumed liabilities may change, although the Company believes, based on its
review of claims filed, that any adjustment to the assumed liabilities will not
be material.
The Company also assumed certain severance and change in control
obligations under executive employment agreements. The Company has recorded a
liability of approximately $22,400,000 related to the executives who were not
retained. This amount is included as a liability in the purchase price
allocation below. No amounts related to this liability were paid as of August
31, 2000.
The Company assumed liabilities and outstanding disputes with certain
customers as part of the acquisition. Simultaneously with the closing of the
acquisition, the Company entered into several agreements with certain customers
and bonding companies to settle these disputes. These agreements resulted in the
bonding companies agreeing to pay the Company approximately $28 million to
assume several contracts, and in the Company agreeing to pay several customers
and suppliers of Stone & Webster fixed amounts to settle their claims and
disputes. Included in other noncurrent liabilities are the present value of the
amounts the Company agreed to pay to settle these items, less the portion which
will be paid in the current year.
The Company acquired a cold storage and frozen-food handling operation
as part of this acquisition. Stone & Webster had previously reported this
operation as a discontinued operation, and the Company has entered into an
agreement to sell this operation. Accordingly, this operation has been reported
as an asset held for sale in the accompanying balance sheet. The Company expects
to close the sale by December 31, 2000. The Company recorded the assets held for
sale at the expected sales price pursuant to the agreement adjusted for the
expected net operating results of the business. From the Company's acquisition
of Stone & Webster to August 31, 2000, losses of approximately $1,093,000 from
this operation's results, which includes allocated interest expense of
approximately $1,000,000, have been excluded from the Company's statement of
income. Any difference between the expected final disposition proceeds related
to this operation and the estimated proceeds of $70,000,000 will be reflected as
an adjustment to the purchase price allocation presented below; however, the
Company does not expect this difference to be material. In addition, the Company
has an agreement to sell an office building in Houston, Texas, which would,
after paying off the mortgage of approximately $19,700,000, result in net
proceeds of approximately $22,000,000. The net proceeds from these asset
disposals will be used to pay down the Company's revolving credit facility.
The purchase method was used to account for the acquisition of Stone &
Webster. Goodwill and other purchased intangibles are being amortized over 20
years using the straight-line method. The purchase price was allocated to
acquired assets and liabilities based on estimated fair value as of July 14,
2000 as follows (in thousands):
Accounts receivable $139,720
Cost and estimated earnings in excess of billings on uncompleted contracts 49,113
Inventories 34,800
Assets held for sale 116,501
Patents, licenses and other intangible assets 50,000
Property and equipment 48,779
Deferred income taxes 65,765
Other Assets 35,025
Goodwill 251,462
Accounts payable and accrued liabilities (326,768)
Billings in excess of cost and estimated earnings on uncompleted contracts (131,966)
Accrued contract losses and adjustments (119,997)
Debt and bank loans (92,497)
Other liabilities (13,498)
--------
Purchase Price (net of cash received of $42,194) $106,439
========
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The operating results of the Stone & Webster businesses have been
included in the Consolidated Statements of Income from the date of acquisition,
July 14, 2000.
The Company acquired various licenses, patents, technology and related
processes pertaining to the design and construction of plants which produce
ethelyne. The associated intangible asset has been estimated in the purchase
price allocation at $50,000,000. The Company is in the process of obtaining an
appraisal of these assets, which it expects to receive before December 31, 2000.
The final amount allocated to this asset will result in an adjustment to the
purchase price allocation to the extent the appraisal is different than the
estimated fair value assigned by the Company.
The following summarized unaudited proforma income statement data
reflects the impact the Stone & Webster acquisition would have had on 2000 and
1999, had the acquisition taken place at the beginning of the applicable fiscal
year (in thousands, except per share data):
UNAUDITED PRO-FORMA
RESULTS FOR THE
YEARS ENDED AUGUST 31,
-------------------------------
2000 1999
---- ----
Gross revenue $ 1,643,000 $ 1,416,000
============== =============
Loss from continuing operations $ (10,000) $ (47,000)
============== =============
Basic earnings from continuing operations per common share $ (0.61) $ (1.77)
============== =============
Diluted earnings from continuing operations per common share $ (0.61) $ (1.77)
============== =============
The unaudited pro-forma results for the years ended August 31, 2000 and
1999 have been prepared for comparative purposes only and do not purport to be
indicative of the amounts which actually would have resulted had the acquisition
occurred on September 1, 1998 or which may result in the future.
Other Acquisitions
On July 12, 2000, the Company completed the acquisition of certain
assets and assumption of liabilities of PPM Contractors, Inc. ("PPM"). Total
consideration paid was 43,445 shares of the Company's Common Stock valued at
$2,012,000 and the assumption of certain liabilities. Acquisition costs were not
material. The purchase method was used to account for the acquisition. Goodwill
of approximately $2,100,000 is being amortized on a straight-line basis over 20
years. PPM's primary business is providing sandblasting and painting services to
industrial customers. The operating results of PPM have been included in the
consolidated statements of income from the date of acquisition.
On July 28, 1998, the Company completed the acquisition of all of the
outstanding capital stock of Bagwell Brothers, Inc. and a subsidiary
(collectively, Bagwell). Total consideration paid was $1,600,000 cash and
645,000 shares of the Company's Common Stock valued at $13,033,000. The Company
also incurred $163,000 of acquisition costs. The purchase method was used to
account for the acquisition. Goodwill of approximately $11,300,000 is being
amortized on a straight-line basis over 20 years. The operating results of
Bagwell have been included in the consolidated statements of income from the
date of acquisition.
On January 19, 1998, the Company completed the acquisition of all of
the outstanding capital stock of Cojafex, B.V. of Rotterdam, Holland (Cojafex)
for approximately $8,500,000; $4,547,000 (net of cash received) of which was
paid at closing. The balance of the purchase price will be paid through December
31, 2003. Acquisition costs of approximately $60,000 were incurred by the
Company. Cojafex owns the technology for certain induction pipe bending machines
used for bending pipe and other carbon steel and alloy items for industrial,
commercial and agricultural applications, and using such technology, Cojafex
designs, engineers, manufactures, markets and sells such induction bending
machines. Goodwill, which is being amortized over 20 years using the
straight-line method, was approximately $8,500,000. The purchase method was used
to account for this acquisition. The operating results of Cojafex have been
included in the consolidated statements of income from the date of acquisition.
On January 15, 1998, the Company purchased all of the outstanding
capital stock of Lancas, C.A. (Lancas), a construction company in Punto Fijo,
Venezuela for approximately $2,600,000 in cash, net of cash received. The
Company also incurred approximately $100,000 of acquisition costs. Goodwill of
approximately $400,000 is being amortized over 20
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years, using the straight-line method. The purchase method was used to account
for this acquisition. The operating results of Lancas have been included in the
consolidated statements of income from the date of acquisition.
On November 14, 1997, the Company purchased all of the capital stock or
substantially all of the assets of the principal operating businesses of
Prospect Industries plc (Prospect) of Derby, United Kingdom, for approximately
$14,600,000 in cash, net of cash received. Acquisition costs of approximately
$2,000,000 were incurred by the Company. Excluded from the purchase price is
$1,438,000, which represents the fair value of the assets and liabilities of a
discontinued operation, CBP Engineering Corp. (CBP). The sale of CBP was
completed in 1998 and no gain or loss was recorded. Prospect, a mechanical
contractor and provider of turnkey piping systems serving the power generating
and process industries worldwide, operated through several wholly-owned
subsidiaries including Connex Pipe Systems, Inc. (Connex), a piping systems
fabrication business located in Troutville, Virginia; Aiton Australia Pty
Limited (Aiton Australia), a piping systems, boiler refurbishment and project
management company based near Sydney, Australia; and Prospect Engineering
Limited (PEL), a mechanical contractor and a provider of turnkey piping systems
located in Derby, United Kingdom. Under the terms of the acquisition agreement,
the Company acquired all of the outstanding capital stock of Prospect Industries
Overseas Limited, a United Kingdom holding company that held the entire
ownership interest in Connex and CBP, all of the capital stock of Aiton
Australia and certain assets of PEL, as well as Prospect's entire ownership
interest in Inflo. The Company also assumed certain liabilities of PEL and
Prospect relating to its employees and pension plans including approximately
$3,800,000 of costs related to the Company's plan to reduce the workforce at
Prospect. These costs relate to amounts due to employees under statutory and
contractual severance entitlements. All amounts related to the severance
entitlements have been paid as of August 31, 1999. The purchase method was used
to account for the acquisition. Goodwill, which is being amortized over 20 years
using the straight-line method, was approximately $2,400,000. The operating
results of the Prospect businesses have been included in the consolidated
statements of income from the date of the acquisition.
On October 8, 1997, the Company purchased the capital stock of Pipework
Engineering and Developments Limited (PED), a pipe fabrication company in
Wolverhampton, United Kingdom, for $539,000 in cash, net of cash received, and
notes payable to former stockholders of $1,078,000. Acquisition costs of
approximately $160,000 were incurred by the Company. The purchase method was
used to account for the acquisition. Goodwill, which is being amortized over 20
years using the straight-line method, was approximately $1,600,000. The
operating results of PED have been included in the consolidated statements of
income of the Company from the date of acquisition.
The proforma effect of these other acquisitions as though they had
occurred as of the beginning of the immediate proceeding fiscal year is not
material to the operations of the Company.
NOTE 4--INVENTORIES
The major components of inventories consist of the following (in
thousands):
AUGUST 31,
-------------------------------------------------------------------------
2000 1999
----------------------------------- ----------------------------------
Weighted Weighted
Average FIFO TOTAL Average FIFO TOTAL
-------- -------- -------- -------- -------- --------
Finished Goods $ 36,158 $ -- $ 36,158 $ 29,886 $ -- $ 29,886
Raw Materials 2,270 45,175 47,445 1,628 34,927 36,555
Work In Process 1,626 45,854 47,480 1,306 10,717 12,023
-------- -------- -------- -------- -------- --------
$ 40,054 $ 91,029 $131,083 $ 32,820 $ 45,644 $ 78,464
======== ======== ======== ======== ======== ========
NOTE 5--INVESTMENT IN UNCONSOLIDATED ENTITIES
During the years ended August 31, 2000 and 1999, the Company has not
made any additional investments in Shaw-Nass Middle East, W.L.L., the Company's
Bahrain joint venture (Shaw-Nass). The Company owns 49% of Shaw-Nass and
accounts for this investment on the equity basis. As such, during the years
ended August 31, 2000, 1999, and 1998, the Company recognized earnings (losses)
of $1,194,000, $681,000, and $(40,000), respectively, from Shaw-Nass. No
distributions have been made through August 31, 2000 by Shaw-Nass. As of August
31, 2000 and 1999, the Company had outstanding receivables from Shaw-Nass
totaling $5,871,000 and $4,310,000, respectively. These receivables relate
primarily to inventory and equipment sold and net short-term advances to
Shaw-Nass.
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During 2000, 1999 and 1998, revenues of $19,000, $1,188,000, and
$1,626,000, were recognized on sales of products from the Company to Shaw-Nass.
The Company's 49% share of profit on these sales was eliminated. At August 31,
2000, undistributed earnings of Shaw-Nass included in the consolidated retained
earnings of the Company amounted to approximately $2,169,000.
On September 18, 2000, the Company executed a definitive agreement with
Entergy Corporation to create EntergyShaw, a new, equally-owned and
jointly-managed company. Subsequent to the execution of a letter of intent for
this venture on June 2, 2000, Entergy and FPL Group, Inc., the parent of Florida
Power & Light, announced a merger which will create the largest U.S. power
producer with generating capacity in excess of 48,000 megawatts. EntergyShaw's
initial focus will be the construction of power plants in North America and
Europe for Entergy's and Florida Power & Light's unregulated wholesale
operations. On a combined basis, Entergy and Florida Power & Light have
approximately 70 turbines on order for their unregulated operations. The Company
expects that the installation of most of these turbines will be managed by
EntergyShaw, subject to the approval of its joint-management committee. Shaw
expects to provide the engineering, procurement, fabrication and construction
requirements to EntergyShaw for these plants. Under the terms of the
arrangement, the Company will present engineering, procurement and construction
opportunities that it receives after December 31, 2000 for power generation
projects to EntergyShaw.
As is common in the engineering, procurement and construction
industries, Stone & Webster executed certain contracts jointly with third
parties through joint ventures, limited partnerships and limited liability
companies. The Company acquired their interests in the investments by assuming
the related contracts (see Note 3). The investments included on the accompanying
consolidated balance sheet as of August 31, 2000 are $8,650,000 which
approximates the Company's estimated net value in these investments.
NOTE 6--INVESTMENT IN SECURITIES AVAILABLE FOR SALE
In connection with its construction services, the Company embarked on
its first significant project financing participation on December 15, 1998. As a
result, the Company acquired $12,500,000 of 15% Senior Secured Notes due
December 1, 2003 (the "15% Notes"), issued by a customer, together with certain
preferred stock related thereto, also issued by the customer. The 15% Notes were
secured originally by a first priority security interest in some of the assets
in the customer's refinery located in Norco, Louisiana, at which the Company was
providing construction services.
On November 17, 1999, pursuant to an exchange offer initiated by the
customer in October 1999, to all of the holders of the 15% Notes (aggregating
approximately $254,000,000 in principal and interest), the Company exchanged
its 15% Notes for (i) $14,294,535 (representing the principal and accrued
interest on the Company's 15% Notes) of 10% Senior Secured Notes due November
15, 2004 (the "New Notes"), and (ii) shares of Class A Convertible Preferred
Stock. The 10% interest rate on the New Notes will increase to 14% on November
16, 2003, and will continue at such rate until maturity. Through November 15,
2003, the Company expects to receive additional New Notes in lieu of interest
payments.
Pursuant to the New Notes exchange offer, the customer issued an
aggregate of approximately $254,000,000 of the New Notes to the holders of the
15% Notes. The Company participated in the New Notes exchange offer because,
upon receipt of the requisite approval by the holders of the 15% Notes, the
collateral securing the 15% Notes would be released. All holders of the 15%
Notes participated in the New Notes exchange offer.
Prior to the exchange offer, the Company's customer incurred additional
secured indebtedness of approximately $150,000,000 ranking senior to the 15%
Notes. Such indebtedness also ranks senior to the New Notes. As such, the
security interest in the refinery assets securing the New Notes is subordinate
to the security interest securing such additional indebtedness. Simultaneous
with the incurrence of additional secured indebtedness, the customer issued
additional common stock, raising $50,000,000 of equity.
Since the New Notes are available for sale, Statement of Financial
Accounting Standards (SFAS) No. 115 -- "Accounting for Certain Investments in
Debt and Equity Securities" requires that they be measured at fair value in the
Company's consolidated balance sheet and that unrealized holding gains and
losses, net of taxes, for these investments be reported in a separate component
of shareholders' equity until realized. Based on issuance of additional debt
securities by the customer during fiscal year 1999, the raising of $50,000,000
of additional equity, and the completion of the refinery project, the Company
believes that the New Notes had an aggregate value approximating the outstanding
principal amount of
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$15,236,000 at August 31, 2000. As a result, no unrealized gain or loss is
recognized in shareholders' equity. Since the financing arrangement is related
to construction services, the interest income of $1,406,000 in 2000 and
$1,330,000 in 1999 from the 15% Notes and the New Notes is included in sales,
and the interest cost of $1,106,000 in 2000 and $621,000 in 1999 associated with
carrying the 15% Notes and the New Notes is included in cost of sales in the
statements of income. The interest cost was calculated at the Company's
effective borrowing rate, which approximated 7.6% and 7.0% for the twelve months
ended August 31, 2000 and 1999, respectively.
In November 1999, the Company also exchanged the related preferred
stock for shares of new Class C Convertible Preferred Stock, the amount and
value of which are not material.
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NOTE 7--LONG-TERM DEBT
Long-term debt consisted of (dollars in thousands): AUGUST 31,
2000 1999
---------- ----------
Note payable to an insurance company, interest payable at 6.44%; secured by
assets held for sale with an approximate net book value of $42,000 at
August 31, 2000 $19,728 $ --
Notes payable to a finance company; variable interest rates based on 30-day
commercial paper rates plus 190 to 235 basis points ranging from 7.41% to
8.38% as of August 31, 2000; payable in monthly installments based on
amortization over the respective note lives; maturing from 2001 to 2006;
secured by property and equipment with an approximate net book value of
$10,645 as of August 31, 2000 and guaranties by the Company and certain
subsidiaries of the Company 5,816 11,827
Note payable to a mortgage company, interest payable monthly at 7.20%; monthly
payments of $35 through June 2019 secured by land, buildings and equipment
with an approximate net book value of $7,251 at August 31, 2000 4,280 4,383
South Carolina Revenue Bonds payable; principal due in 2005; interest paid
monthly accruing at a variable rate of 3.60% as of August 31, 2000; secured
by $4,000 letter of credit 4,000 4,000
Note payable to a bank; interest payable quarterly based upon London Interbank
Offering Rate (LIBOR) plus 1.6%; payable in quarterly principal installments
of $264 with remaining balance due in June 2003; secured by equipment with an
approximate net book value of $8,591 as of August 31, 2000 3,171 4,229
Notes payable to former owners of Cojafex in conjunction with an acquisition;
payable in annual installments of $750 (including interest imputed at
6.56%) through December 31, 2003; secured by the stock of the acquired
subsidiary 2,566 3,112
Note payable to a bank; variable interest rate based upon London Interbank
Offering Rate (LIBOR) plus 1.4%; payable in quarterly principal installments
of $143 through July 2004 plus interest; secured by equipment
with an approximate net book value of $1,515 as of August 31, 2000 2,143 2,714
Note payable to a finance company, interest payable monthly at 7.52%; monthly
payments of $175 through January 2001; unsecured 1,530 --
Capital leases payable; interest rates ranging from 2.64% to 14%; payable in
monthly installments based on amortization over the respective lease lives;
maturing from 2000 through 2003 1,360 84
Note payable to a bank; interest payable quarterly at 7.23%; quarterly payments
of $52 through April 2005; secured by equipment with an
approximate net book value of $683 as of August 31, 2000 828 969
Note payable to a former employee relating to a non-competition agreement;
Interest payable monthly at 7.125%; monthly payments of $21 until April
2004; unsecured; see Note 16 - Related Party Transactions 804 990
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AUGUST 31,
2000 1999
---------- ----------
Notes payable to a bank and finance company; interest rates ranging from 7.82%
to 9.25%; payable in monthly installments based on amortization over the
respective note lives; maturing from 2000 to 2009; secured by property and
equipment with an approximate net book value of $661 as of August 31, 2000 730 --
Senior secured notes payable primarily to insurance companies; interest payable
semi-annually at 6.44% and 6.93% respectively; payable in annual principal
installments of $2,857 beginning May 1999 and $5,714 beginning May 2002,
respectively; rank in pari passu with the Company's U.S. revolving credit
facility (see Note 8 - Revolving Lines of Credit); secured by domestic
subsidiary accounts receivable, inventory, intangible assets, and bank
deposits with an approximate net book value of $212,000 as of August 31,
1999, as well as by the pledge of the capital stock of certain
of the Company's domestic subsidiaries -- 57,143
Mortgages payable to a bank; interest payable monthly at 8.38%; monthly payments
of $10 and $27 with remaining balance due on June 2002; secured by real
property with an approximate net book value of $2,350 as of August 31,
1999 -- 2,922
Mortgage payable to an insurance company; variable interest rate based on
average weekly yield of 30 day commercial paper plus 2.35%; payable in
monthly installments of $40 through June 2007; secured by land and buildings
with an approximate net book value of $1,787 as of August 31, 1999 -- 2,773
Mortgage payable to a bank; interest payable monthly at 8.63%; monthly
installments of $8 with remaining balance due on November 2001; secured by
real property with an approximate net book value of $661 as of August 31,
1999 -- 479
Note payable to a former employee relating to a non-competition agreement;
Interest payable monthly at 7%; monthly payments of $5 until August 2000;
unsecured; see Note 16 - Related Party Transactions -- 57
Other notes payable; interest rates ranging from 7% to 8.25%; payable in monthly
installments based on amortization over the respective note lives;
maturing from 1999 through 2002 180 215
-------- -------
Total debt 47,136 95,897
Less: current maturities (27,358) (8,056)
------- -------
Total long-term portion of debt $19,778 $87,841
======= =======
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Annual maturities of long-term debt during each year ending August 31,
are as follows (in thousands):
Minimum Note
lease payments Payments Total
-------------- -------- --------
2001 $ 777 $ 26,650 $ 27,427
2002 465 4,180 4,645
2003 206 4,363 4,569
2004 -- 2,131 2,131
2005 and thereafter -- 8,452 8,452
------- -------- --------
Total payments 1,448 45,776 47,224
Less: amount representing interest (88) -- (88)
------- -------- --------
Total debt 1,360 45,776 47,136
Less: current portion (708) (26,650) (27,358)
------- -------- --------
Total long-term portion of debt $ 652 $ 19,126 $ 19,778
======= ======== ========
The estimated fair value of long-term debt as of August 31, 2000 and
1999 was approximately $46,700,000 and $91,700,000 respectively, based on
borrowing rates currently available to the Company for notes with similar terms
and average maturities.
NOTE 8--REVOLVING LINES OF CREDIT
In July 2000, in conjunction with the Stone & Webster acquisition, the
Company entered into a three-year $400,000,000 credit facility, with an
aggregate revolving credit commitment of $300,000,000 and an aggregate letter of
credit commitment of $100,000,000. The facility permits up to $150,000,000 in
letters of credit but reduces the revolver in such event to $250,000,000. Upon
the sale of the assets of the cold storage business acquired from Stone &
Webster (see Note 3), the aggregate revolving credit commitment is to be reduced
to $250,000,000. Amounts received from the asset sales may result in additional
reductions. The new facility allows the Company to borrow at interest rates not
to exceed 2.75% over the London Interbank Offered Rate ("LIBOR") or 1.25% over
the prime rate. The index used to determine the interest rate is selected by the
Company and the spread over the index is dependent upon certain financial ratios
of the Company. Since inception of this new credit agreement through August 31,
2000, the maximum amount outstanding under this revolving credit facility was
$240,439,000, and the average amount outstanding was $205,175,000 at a weighted
average interest rate of 9.70%. The credit facility is secured by among other
things (i) guarantees by the Company's domestic subsidiaries; (ii) the pledge of
the capital stock in the Company's domestic subsidiaries; (iii) the pledge of
66% of the capital stock in certain of the Company's foreign subsidiaries; and
(iv) a security interest in all property of the Company and its domestic
subsidiaries (except real estate and equipment). The revolving credit agreement
contains restrictive covenants, which include ratios and minimum capital levels,
among other restrictions. As of August 31, 2000, the Company was in compliance
with the covenants and had approximately $64,813,000 available under the
facility. Since the agreement matures in July 2003, the outstanding balance at
August 31, 2000 of $235,187,000 is classified as a long-term liability.
The July 2000 facility replaced the previous credit facility entered
into by the Company in May 1998, which allowed the Company to borrow up to
$100,000,000 at interest rates not to exceed 2.00% over LIBOR or .75% over the
prime rate. The Company amended this facility in September 1999, to extend the
expiration date to May 31, 2002. The amendment also modified the interest rate
spread, not to exceed 2.50% over LIBOR or 1.75% over the prime rate, and certain
financial covenants and ratios. During fiscal 2000 and 1999, the maximum amount
outstanding under this revolving credit facility was $60,842,000 and $80,532,000
respectively, and the average amount outstanding was approximately $29,819,000
and $55,006,000 respectively, at weighted average interest rates of 7.31% and
6.53% respectively.
In 1998, a foreign subsidiary of the Company initiated an overdraft
credit facility with a bank for up to L.3,000,000, payable on demand. The
facility is secured by the assets of the subsidiary and a L.10,000,000
($14,600,000) limited guarantee given by the Company. The facility was extended
for one year in March 2000. The new facility was for L.2,500,000
($3,600,000) at the bank's base rate plus 1.125%. In September 2000, the
facility was increased to L.3,500,000 ($5,100,000) at the same interest
rate. Since amounts borrowed are payable on demand, the balance outstanding at
August 31, 2000 of $2,893,000 is classified as a short-term liability. The
outcome of the negotiations to renew or replace this overdraft credit facility
at its expiration date is not expected to have any material adverse effect on
the future operations of the Company.
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NOTE 9--INCOME TAXES
The significant components of deferred tax assets and liabilities are
as follows (in thousands):
AUGUST 31,
2000 1999
-------- -------
Assets:
Tax basis of inventory in excess of book basis $ 535 $ 371
Receivables 8,824 --
Self-insurance reserves 238 620
Net operating loss and tax credit carry forwards 1,976 1,457
Accrued severance 8,978 --
Contract reserves 40,306 --
State tax credits 150 628
Other expenses not currently deductible 6,826 1,248
Less: valuation allowance (670) (937)
-------- -------
Total assets 67,163 3,387
Liabilities:
Property, plant and equipment (7,636) (7,456)
Receivables -- (1,121)
Pension (1,767) (705)
-------- -------
Total liabilities (9,403) (9,282)
-------- -------
Net deferred tax assets (liabilities) $ 57,760 $(5,895)
======== =======
Income (loss) before provision for income taxes for the years ended
August 31 was as follows (in thousands):
2000 1999 1998
------- -------- -------
Domestic $45,532 $ 27,663 $12,764
Foreign 16 (1,588) 10,541
------- -------- -------
Total $45,548 $ 26,075 $23,305
======= ======== =======
The provision for income taxes for the years ended August 31 was as
follows (in thousands):
2000 1999 1998
------- -------- -------
Current $ 13,549 $4,534 $ 6,874
Net operating loss utilized (305) -- (200)
Deferred 2,110 3,697 40
State 1,005 404 319
-------- ------ -------
Total $ 16,359 $8,635 $ 7,033
======== ====== =======
A reconciliation of Federal statutory and effective income tax rates
for the years ended August 31 was as follows:
2000 1999 1998
------- -------- -------
Statutory rate 35% 35% 35%
State taxes provided 2 1 1
Foreign income taxed at different rates (3) (2) (6)
Other 2 1 3
State tax credits -- (2) (3)
--- --- ---
36% 33% 30%
=== === ===
As of August 31, 2000, for Federal income tax return purposes, the
Company had approximately $3,500,000 of U.S. net operating loss carryforwards
available to offset future taxable income of its Connex subsidiary. The
carryforwards expire beginning in 2011 through 2014. As of August 31, 2000, the
Company's United Kingdom operations had net operating loss carryforwards of
approximately L.1,224,000 ($1,786,000), which can be used to reduce future
taxable income in the United Kingdom. As of August 31, 2000, a benefit of
$305,000 had been given to these losses in the accompanying financial
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statements. Due to the current operating environment in that market; however, a
valuation allowance is provided for these loss carryforwards.
Unremitted foreign earnings reinvested abroad upon which deferred
income taxes have not been provided aggregated approximately $8,210,000 at
August 31, 2000. Due to the timing and circumstances of repatriation of such
earnings, if any, it is not practicable to determine the unrecognized deferred
tax liability relating to such amounts. Withholding taxes, if any, upon
repatriation would not be significant.
NOTE 10--COMMON STOCK
The Company has one class of Common Stock. Each outstanding share of
Common Stock which has been held for four consecutive years without an
intervening change in beneficial ownership entitles its holder to five votes on
each matter properly submitted to the Company's shareholders for their vote,
waiver, release or other action. Each outstanding share of Common Stock which
has been held for less than four consecutive years entitles its holder to only
one vote. Also, the Board of Directors is authorized to approve the issuance of
preferred stock.
NOTE 11--OPERATING LEASES
The Company leases certain offices, fabrication shops, warehouse
facilities, office equipment and machinery under non-cancelable operating lease
agreements which expire at various times and which require various minimum
rentals. The non-cancelable operating leases which were in effect as of August
31, 2000 require the Company to make the following future minimum lease
payments:
For the year ending August 31 (in thousands):
2001 $ 14,429
2002 11,924
2003 11,232
2004 10,959
2005 and thereafter 55,701
--------
Total future minimum lease payments $104,245
========
The Company enters into short-term lease agreements for equipment
needed to fulfill the requirements of specific jobs. Any payments owed or
committed under these lease arrangements as of August 31, 2000 are not included
as part of total minimum lease payments. Rent expense for the fiscal years ended
August 31, 2000, 1999 and 1998 was $16,391,000, $8,297,000 and $7,902,000,
respectively.
NOTE 12--COMMITMENTS AND CONTINGENCIES
In the normal course of business activities, the Company enters into
contractual agreements with customers for certain construction services to be
performed based on agreed upon reimbursable costs and labor rates. In some
instances, the terms of these contracts provide for the customer's review of the
accounting and cost control systems to verify the completeness and accuracy of
the reimbursable costs invoiced. These reviews could result in proposed
reductions in reimbursable costs and labor rates previously billed to the
customer. The Company does not believe that any such reviews will result in a
material change to the Company's financial position or results of operations.
The Company has posted letters of credit aggregating approximately
$75,000,000 as of August 31, 2000 to secure its performance under certain
contracts and insurance arrangements.
During 2000 and 1999, the Company was self-insured for workers'
compensation claims in certain states up to certain policy limits. Claims in
excess of $250,000 per incident are insured by third party reinsurers.
Additionally, in fiscal 2000, the Company changed from a fully-insured plan for
worker's compensation claims in states not self-insured to a plan with a
$250,000 per incident deductible. The Company has accrued a liability for its
estimated workers' compensation claims totaling approximately $1,040,000 and
$821,000 at August 31, 2000 and 1999, respectively.
During 2000 and 1999, certain subsidiaries of the Company (excluding
Stone & Webster) were self-insured for health claims up to certain policy
limits. Claims in excess of $125,000 per covered individual and approximately
$9,000,000 to
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$10,000,000 in the aggregate per year are insured by third party reinsurers. The
Company had accrued a liability of $1,381,000 and $1,198,000 at August 31, 2000
and 1999, respectively, for outstanding and incurred, but not reported, claims
based on historical experience. Stone & Webster is also self-insured for health
claims up to certain policy limits; at August 31, 2000, the Company had accrued
a liability of $476,000 to cover health claims incurred since the date of
acquisition for its Stone & Webster employees.
In the normal course of its business, the Company becomes involved in
various litigation matters including, among other things, claims by third
parities for alleged property damages, personal injuries, and other matters.
While the Company believes it has meritorious defenses against these claims,
management has used estimates in determining the Company's potential exposure
and has recorded reserves in its financial statements related thereto where
appropriate. It is possible that a change in the Company's estimates of that
exposure could occur, but the Company does not expect such changes in estimate
costs will have a material effect on the Company's financial position or results
of operations. See Note 3 of Notes to Consolidated Financial Statements with
respect to certain contingencies relating to the Stone & Webster acquisition.
NOTE 13--BUSINESS SEGMENTS, OPERATIONS BY GEOGRAPHIC REGION AND MAJOR CUSTOMERS
Business Segments
The Company adopted Statement of Financial Accounting Standards No. 131
("SFAS 131"), Disclosures about Segments of an Enterprise and Related
Information," as of August 31, 1999. SFAS 131 establishes standards for the way
public business enterprises report information about operating segments in
annual financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS 131 defined
operating segments as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. The Company has aggregated its business activities into two
operating segments: the pipe services segment and the manufacturing and
distribution segment.
The pipe services segment supplies complete piping systems, as well as
other services, for projects in the power generation, process, and environmental
and infrastructure industries. Services include piping systems fabrication,
engineering and design, construction, procurement and maintenance, and
consulting.
The manufacturing and distribution segment (previously named the
manufacturing segment) offers its capabilities to its customers by manufacturing
and distributing specialty stainless, alloy and carbon steel pipe fittings.
These fittings include stainless and other alloy elbows, tees, reducers and stub
ends. The Company has one manufacturing facility which distributes its products
to the pipe services segment of the Company enhancing the Company's piping
package, as well as to third parties. The Company also has several distribution
centers in the United States, which distribute its products primarily to third
parties.
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Business Segment Data
The following table presents information about segment profit and
assets (in thousands):
PIPE MANUFACTURING
SERVICES AND DISTRIBUTION CORPORATE TOTAL
----------- ---------------- --------- -----------
FISCAL 2000
Sales to external customers $ 701,700 $ 60,955 $ -- $ 762,655
Intersegment sales 23 15,343 -- 15,366
Corporate overhead allocations 20,360 4,244 (24,604) --
Interest income 185 -- 497 682
Interest expense 203 -- 7,800 8,003
Depreciation and amortization 13,354 2,192 1,262 16,808
Earnings from unconsolidated entity 1,194 -- -- 1,194
Income tax expense 12,733 1,230 2,396 16,359
Net income 22,760 2,361 4,389 29,510
Total assets 1,209,792 64,612 60,679 1,335,083
Investment in unconsolidated entity 5,840 -- -- 5,840
Purchases of property and equipment 11,383 737 8,499 20,619
Other increases in long-lived assets, net -- 288 10,950 11,238
FISCAL 1999
Sales to external customers $ 446,708 $ 47,306 $ -- $ 494,014
Intersegment sales -- 19,914 566 20,480
Corporate overhead allocations 9,214 1,586 (10,800) --
Interest income 234 4 227 465
Interest expense 3,906 1,323 3,420 8,649
Depreciation and amortization 10,431 2,028 812 13,271
Earnings from unconsolidated entity 681 -- -- 681
Income tax expense 10,196 (64) (1,497) 8,635
Net income 20,449 (165) (2,163) 18,121
Total assets 319,904 54,833 32,325 407,062
Investment in unconsolidated entity 4,646 -- -- 4,646
Purchases of property and equipment 9,441 869 7,657 17,967
Other increases in long-lived assets, net 66 -- 48 114
FISCAL 1998
Sales to external customers $ 445,866 $ 55,772 $ -- $ 501,638
Intersegment sales -- 22,538 569 23,107
Corporate overhead allocations 4,800 2,340 (7,140) --
Interest income 174 17 60 251
Interest expense 4,520 1,477 2,474 8,471
Depreciation and amortization 7,272 2,264 744 10,280
Earnings (loss) from unconsolidated entity (40) -- -- (40)
Income tax expense 8,198 707 (1,872) 7,033
Income (loss) from discontinued operations 3,563 (618) -- 2,945
Net income 21,544 689 (3,056) 19,177
Total assets 312,145 55,675 22,024 389,844
Investment in unconsolidated entity 3,965 -- -- 3,965
Purchases of property and equipment 12,564 1,201 851 14,616
Other increases in long-lived assets, net 25,196 15 2,142 27,353
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Operations by Geographic Region
The following tables present geographic sales and long-lived assets (in
thousands):
YEARS ENDED AUGUST 31,
----------------------------------
2000 1999 1998
-------- -------- --------
Sales:
United States $591,812 $365,942 $286,574
China 11,436 30,795 56,069
England 63,886 49,822 52,219
Other Far East/Pacific Rim countries 39,546 10,257 47,025
Other European countries 1,288 160 1,057
South America 29,788 18,736 31,877
Middle East 4,382 10,181 18,374
Other 20,517 8,121 8,443
-------- -------- --------
$762,655 $494,014 $501,638
======== ======== ========
AUGUST 31,
----------------------------------
2000 1999 1998
-------- -------- --------
Long-lived assets:
United States $406,483 $109,466 $105,741
England 38,778 12,639 13,167
Other foreign countries 23,880 19,057 19,942
-------- -------- --------
$469,141 $141,162 $138,850
======== ======== ========
Sales are attributed to geographic regions based on location of
customer. Long-lived assets include all long-term assets except those
specifically excluded under SFAS No. 131, such as deferred income taxes and
securities available for sale.
Information about Major Customers
The Company's customers are principally major multi-national industrial
corporations, independent and merchant power providers, governmental agencies
and equipment manufacturers. For the year ended August 31, 2000, sales to a
customer were $85,000,000, or 11% of sales. Additionally, for the years ended
August 31, 2000 and 1999, sales to a different customer amounted to $83,400,000
(11% of sales) and $67,700,000 (14% of sales), respectively. For the year ended
August 31, 1998, sales to another customer totaled $51,700,000, or 10% of sales.
Export Sales
For the years ended August 31, 2000, 1999, and 1998, the Company has
included as part of its international sales approximately $49,000,000,
$58,000,000, and $104,000,000, respectively, of exports from its domestic
facilities.
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NOTE 14--EARNINGS PER COMMON SHARE
Basic earnings per common share were computed by dividing net income by
the weighted average number of shares of Common Stock outstanding during the
year. Diluted earnings per common share were determined on the assumptions that
all dilutive stock options (see Note 15 of Notes to Consolidated Financial
Statements) were exercised and stock was repurchased using the treasury stock
method, at the average price for each year. The Company adopted SFAS No. 128
effective December 15, 1997. The following table sets forth the computation of
basic and diluted income from continuing operations per share:
FOR THE YEARS ENDED AUGUST 31,
-------------------------------------------
2000 1999 1998
----------- ----------- -----------
Income from continuing operations (dollars in thousands) $ 30,383 $ 18,121 $ 16,232
=========== =========== ===========
Shares:
Weighted average number of common shares outstanding 14,817,754 11,934,595 12,616,997
Net effect of dilutive stock options 567,804 420,831 214,980
----------- ----------- -----------
Weighted average number of common shares outstanding,
plus assumed exercise of stock options 15,385,558 12,355,426 12,831,977
=========== =========== ===========
Income from continuing operations:
Basic earnings per share $ 2.05 $ 1.52 $ 1.29
=========== =========== ===========
Diluted earnings per share $ 1.97 $ 1.47 $ 1.26
=========== =========== ===========
At August 31, 2000, 1999, and 1998, the Company had dilutive stock
options of 1,980,868, 1,188,500, and 343,905, respectively, which were assumed
exercised using the treasury stock method. The resulting net effect of stock
options was used in the calculation of diluted income per common share for each
period. Additionally, the Company had 12,000, 53,000, and 74,341, of stock
options at August 31, 2000, 1999, and 1998, respectively, which were excluded
from the calculation of diluted income per share because they were antidilutive.
NOTE 15--EMPLOYEE BENEFIT PLANS
The Company has a 1993 Employee Stock Option Plan (the Plan) under
which both qualified and non-qualified options and restricted stock may be
granted. As of August 31, 2000, approximately 1,356,000 shares of Common Stock
were reserved for issuance under the Plan. The Plan is administered by a
committee of the Board, which selects persons eligible to receive options and
determines the number of shares subject to each option, the vesting schedule,
the exercise price, and the duration of the option. The exercise price of any
option granted under the Plan cannot be less than 100% of the fair market value
on the date of grant and its duration cannot exceed 10 years. Only qualified
options have been granted under the Plan.
Shares of restricted stock are subject to risk of forfeiture during the
vesting period. Restrictions related to these shares and the restriction terms
are determined by the committee. Holders of restricted stock have the right to
vote the shares. During the year ended August 31, 1998, the Company issued
30,000 shares of restricted stock which had a weighted average grant-date fair
value of $19.38. During fiscal 1999, 15,000 shares were cancelled, and at August
31, 2000 and 1999, 15,000 shares remain outstanding.
In fiscal 1997, the Company adopted a Non-Employee Director Stock
Option Plan. Each member of the Board of Directors who is not, and who has not
been during the one year period immediately preceding the date the director is
first elected to the Board, an officer or employee of the Company or any of its
subsidiaries or affiliates, is eligible to participate in the Plan. A committee
of two or more members of the Board who are not eligible to receive grants under
the Option Plan administers the Plan. Upon adoption, options to acquire an
aggregate of 20,000 shares of Common Stock were issued. Additionally, each
eligible director will be granted an option to acquire 1,500 shares of Common
Stock on an annual basis upon his election or re-election to the Board of
Directors. An aggregate of 50,000 shares of Common Stock have been reserved for
issuance under the Option Plan.
In conjunction with the acquisition of Stone & Webster (see Note 3 of
Notes to Consolidated Financial Statements) the Company established The Shaw
Group Inc. Stone & Webster Acquisition Stock Option Plan to award options to
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employees of the Company who were not officers of the Company, as defined in the
Plan, and who either (i) became employed by the Company as a result of the
acquisition of Stone & Webster, or (ii) were instrumental in the ultimate
completion of the acquisition of Stone & Webster. As of August 31, 2000,
1,000,000 shares of Common Stock were reserved for issuance under this Plan. The
Plan is administered by a committee of the Board, which selects persons eligible
to receive options and determines the number of shares subject to each option,
the vesting schedule, the exercise price, and the duration of the option. The
exercise price of any option granted under the Plan cannot be less than 100% of
the fair market value on the date of grant and its duration cannot exceed 10
years. Only non-qualified options have been granted under the Plan.
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," (SFAS No. 123) which is effective for the Company's fiscal year
beginning September 1, 1996. Under SFAS No. 123, companies can either record
expense based on the fair value of stock-based compensation upon issuance or
elect to remain under the APB 25 method whereby no compensation cost is
recognized upon grant if certain requirements are met. The Company has elected
to continue to account for its stock-based compensation under APB 25. However,
pro-forma disclosures, as if the Company adopted the cost recognition
requirements under SFAS No. 123, are presented below.
Had compensation cost been determined based on the fair value at the
grant date consistent with the provisions of SFAS No. 123, the Company's net
income and earnings per common share would have approximated the pro-forma
amounts below:
FOR THE YEARS ENDED AUGUST 31,
-------------------------------------------------------
2000 1999 1998
-------------- --------------- ---------------
Net income from continuing operations (in thousands):
As reported $ 30,383 $ 18,121 $ 16,232
=============== =============== ===============
Pro-forma $ 28,373 $ 17,398 $ 15,751
=============== =============== ===============
Basic earnings per share from continuing operations:
As reported $ 2.05 $ 1.52 $ 1.29
=============== =============== ===============
Pro-forma $ 1.91 $ 1.46 $ 1.25
=============== =============== ===============
Diluted earnings per share from continuing operations:
As reported $ 1.97 $ 1.47 $ 1.26
=============== =============== ===============
Pro-forma $ 1.84 $ 1.41 $ 1.23
=============== =============== ===============
The pro-forma effect on net earnings for 1999 and 1998 is not
representative of the pro-forma effect on net earnings in future years because
it does not take into consideration pro-forma compensation expense related to
grants prior to September 1, 1995.
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The following table summarizes the activity in the Company's stock
option plans:
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
---------- --------------
Outstanding at September 1, 1997 455,344 $ 9.827
Granted 87,000 $23.920
Exercised (116,473) $ 7.511
Canceled (7,625) $ 6.449
---------- -------
Outstanding at August 31, 1998 418,246 $13.465
Granted 1,086,250 $ 8.820
Exercised (32,500) $ 7.654
Canceled (214,246) $16.925
---------- -------
Outstanding at August 31, 1999 1,257,750 $ 9.053
Granted 1,058,000 $41.443
Exercised (290,382) $ 7.767
Canceled (32,500) $ 8.375
---------- -------
Outstanding at August 31, 2000 1,992,868 $26.396
========== =======
Exercisable at August 31, 2000 225,493 $11.405
========== =======
As of August 31, 2000, 1999, and 1998, the number of shares relating to
options exercisable under the stock option plans was 225,493; 262,750, and
191,996; respectively, and the weighted average exercise price of those options
was $11.405, $9.324, and $20.608, respectively.
The weighted average fair value at date of grant for options granted
during 2000, 1999, and 1998 was $33.43, $5.23 and $13.21 per share,
respectively. The fair value of options granted is estimated on the date of
grant using the Black-Scholes option-pricing model with the following weighted
average assumptions in 2000, 1999, and 1998, respectively: (a) dividend yield of
0.00%, 0.00% and 0.00%; (b) expected volatility of 70%, 65% and 59% (c)
risk-free interest rate of 6.0%, 5.1% and 5.8%; and (d) expected life of 5
years, 5 years and 5 years.
The following table summarizes information about stock options
outstanding as of August 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- -----------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF NUMBER REMAINING EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING CONTRACT LIFE PRICE EXERCISABLE PRICE
-------------------------- --------------- --------------- ------------ -------------- ------------
$ 5.875 - $ 6.750 65,250 4.6 Yrs $6.626 65,250 $ 6.626
$ 8.375 - $ 8.375 786,618 8.1 Yrs $8.375 107,243 $ 8.375
$13.188 - $16.500 26,250 8.7 Yrs $15.215 7,500 $15.313
$19.500 - $23.063 67,250 7.7 Yrs $21.358 33,500 $21.845
$32.875 - $42.000 1,047,500 9.9 Yrs $41.764 12,000 $32.875
---------- ---------
1,992,868 8.9 Yrs $26.396 225,493 $11.405
========== =========
During 1994, the Company, excluding NAPTech, adopted a voluntary 401(k)
profit sharing plan for substantially all employees who are not subject to
collective bargaining agreements. The plan provides for the eligible employee to
contribute from 1% to 15% of annual compensation, subject to an annual limit as
determined under federal law, with the Company matching 50% of the employee's
eligible contribution up to 6% of the employee's annual compensation. The
Company's expense for this plan during 2000, 1999, and 1998 was approximately
$1,509,000, $1,278,000 and $813,000, respectively.
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The Company has a voluntary 401(k) profit sharing plan which covers
substantially all of Stone & Webster's U.S. based full time employees who meet
certain eligibility requirements. The plan 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% of the employees' elective deferral to the plan, up to the
first 5% of the employees' annual compensation. The Company's expense for this
plan from the date of acquisition (July 14, 2000) to August 31, 2000 was
approximately $195,000.
The Company has a qualified, contributory 401(k) savings plan covering
all employees of NAPTech who belong to the Certified Metal Trades Journeymen
collective bargaining unit. The Company is required to make a contribution of 3%
of participants' compensation on an annual basis. The Company's expense for this
plan was approximately $22,000, $18,000 and $61,000 for the years ended August
31, 2000, 1999, and 1998, respectively.
The Company has a defined benefit pension plan for employees of Connex.
Effective January 1, 1994, no new participants were admitted to the plan. The
pension plan's benefit formulas generally base payments to retired employees
upon their length of service. The pension plan's assets are invested in fixed
income assets, equity based mutual funds, and money market funds. At August 31,
2000, the fair market value of the plan assets was $1,646,000, which exceeded
the estimated projected benefit obligation.
The Company's subsidiaries in the United Kingdom (U.K.) and Canada have
defined benefit plans covering their employees. The first U.K. plan was acquired
November 14, 1997 through an acquisition. It is a salary-related plan for
certain employees and admittance to this plan is now closed. The employees in
this plan contribute 7% of their salary. The Company contribution depends on
length of service, the employee's salary at retirement, and the earnings of the
fund investments. If the plan's earnings are sufficient, the Company makes no
contributions. The Canadian plan and second U.K. plan were acquired July 14,
2000 in conjunction with the Stone & Webster acquisition. The Canadian plan is
noncontributory and the benefits are based primarily on years of service and
employees' career average pay; admittance to this plan is now closed. The
Company's policy is to make contributions equal to the current year cost plus
amortization of prior service cost. The second 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. From the dates of acquisition to August
31, 2000, 1999 and 1998, the Company recognized (credits) expenses of
approximately $(145,000), $(18,000), and $111,000, respectively, for these
plans.
Included in the amounts as of and for the year ended August 31, 2000
are the two pension plans assumed by the Company in the Stone & Webster
acquisition. The projected benefit obligation of these two plans at the date of
the acquisition of $59,821,000 and the fair value of the assets at the date of
acquisition of $63,418,000 are included in the table below at the start of the
year.
The following table sets forth the pension cost from the dates of
acquisition to August 31, 2000, and the plans' funded status as of August 31,
2000, 1999 and 1998 in accordance with the provisions of Statement of Financial
Accounting Standards No. 132 - "Employers' Disclosure about Pensions and Other
Postretirement Benefits" (in thousands):
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FOR THE YEARS ENDED AUGUST 31,
-----------------------------------------
2000 1999 1998
------------ -------- --------
CHANGE IN PROJECTED BENEFIT OBLIGATION
Projected benefit obligation at the start of the year $ 76,970 $ 17,133 $ 14,593
Service cost 458 253 284
Interest cost 1,435 914 711
Member's contributions 218 132 153
Actuarial loss/ (gain) 432 -- 1,053
Benefits paid (971) (452) (330)
Foreign currency exchange rate changes (2,949) (831) 669
------------ -------- --------
Projected benefit obligation at the end of the year 75,593 17,149 17,133
------------ -------- --------
CHANGE IN PLAN ASSETS
Fair value of the assets at the start of the year 82,715 17,437 15,582
Actual return on plan assets 2,861 2,949 1,333
Employer contributions 457 111 --
Employee contributions 218 132 153
Benefits Paid (971) (452) (330)
Foreign currency exchange rate changes (3,267) (881) 699
------------ -------- --------
Fair value of the assets at the end of the year 82,013 19,296 17,437
------------ -------- --------
Funded status 6,420 2,147 304
Unrecognized net loss/ (gain) (1,378) (1,146) 615
------------ -------- --------
Prepaid benefit cost $ 5,042 $ 1,001 $ 919
============ ======== ========
WEIGHTED-AVERAGE ASSUMPTIONS
Discount rate at end of the year 5.5 - 6.5% 5.5% 5.5%
Expected return on plan assets for the year 7.0 - 8.75% 7.0% 7.0%
Rate of compensation increase at end of the year 4.5 - 5.0% 4.5% 4.5%
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost $ 458 $ 253 $ 284
Interest cost 1,435 914 711
Expected return on plan assets (2,038) (1,185) (884)
------------ -------- --------
Total net periodic benefit cost (credit) $ (145) $ (18) $ 111
============ ======== ========
The Company also has a money purchase pension plan for employees of one
of its United Kingdom subsidiaries. The employer and employee make matching
contributions between 3% and 6% of employees' salaries depending on age. For the
years ended August 31, 2000 and 1999, the expense was approximately $100,000 and
$78,000, respectively. From date of acquisition through August 31, 1998, the
Company's expense for this plan was approximately $98,000.
The Canadian pension plan acquired as part of the Stone & Webster
acquisition also includes a defined contribution component. The employee can
contribute up to 4% of compensation. The employer will contribute an amount
equal to the sum of: (i) a basic contribution of 2.5% of compensation, and (ii)
a matching contribution equal to 25% of the employee's contribution. From the
date of acquisition (July 14, 2000) to August 31, 2000, the expense was
approximately $43,000 (U.S. dollars) for this plan.
The Company contributes to a Group Employee superannuation fund for its
employees in Australia. This fund is a defined contribution fund with both
employees and the Company contributing a fixed percentage of salary each week.
The Company also contributes to Industry Funds for its employees. These Funds
are also defined contribution funds with the
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Company contributing a fixed amount each week for each employee. All members are
entitled to benefits on termination due to retrenchment, retirement, death or
disability. The Company is under no obligation to make up any shortfall in the
funds assets to meet payments due to employees. For the years ended August 31,
2000 and 1999, the Company expensed in US dollars $52,000 and $82,000 for this
plan, respectively. From the date of acquisition to August 31, 1998, the Company
expensed $139,000 (U.S. dollars) for this plan.
NOTE 16--RELATED PARTY TRANSACTIONS
The Company has entered into employment agreements with its Chief
Executive Officer, Chief Operating Officer and Chief Financial Officer. Under
the terms of the agreements, the executives are entitled to receive their base
salaries and participation in the Company's bonus plan and other employee
benefit plans and programs for the periods of time specified therein. In the
event of termination as a result of certain reasons, the executives will be
entitled to receive their base salaries and certain other benefits for the
remaining term of their agreement. Additionally, in the event of an executive's
death, his estate is entitled to certain payments and benefits.
The Company has entered into several loan agreements with key
management, some of which were non-interest bearing. The impact of discounting
such loans to record interest income is not significant. The balance of these
employee loan receivables as of August 31, 2000, 1999, and 1998 was
approximately $1,663,000, $1,579,000 and $996,000, respectively. These balances
are included in other assets.
During 1996 and 1997, in connection with certain acquisitions, the
Company has entered into non-competition agreements with several key employees.
Related assets totaling approximately $691,000 (net of accumulated amortization
of $1,577,000) are included in other assets and are being amortized over five to
eight years using the straight-line method. Any corresponding liabilities are
included in long-term debt as further discussed in Note 7 of Notes to
Consolidated Financial Statements.
A director of the Company was a managing director of the investment
banking firm that was an underwriter and acted as one of the representatives of
the underwriters for the public offering of 3,000,000 shares of Common Stock
discussed in Note 2 of Notes to Consolidated Financial Statements. The Company
also granted to the underwriters an option to purchase up to an additional
450,000 shares of Common Stock pursuant to such terms to cover over-allotments,
which over-allotment option was exercised. The closing of such public offering
was completed in November 1999, at a price of $21.00 per share, less the
underwriting discounts and commissions of approximately $4,313,000.
Approximately $150,000 of these commissions were earned by the director's
investment banking firm. The same investment banking firm handled the repurchase
of some of the shares of the Company's Common Stock which began in fiscal 1999,
earning approximately $74,000 in commissions.
A director of the Company is an owner of construction companies that
were used primarily as a sub-contractor by the Company. During fiscal 2000 and
1999, payments to these construction companies were not material. During fiscal
1998, the Company paid these construction companies approximately $4,000,000 for
work performed.
NOTE 17--FOREIGN CURRENCY TRANSACTIONS
The Company's wholly-owned subsidiaries in Venezuela had net assets of
approximately $15,100,000 and $16,100,000 denominated in Venezuelan Bolivars as
of August 31, 2000 and 1999, respectively. In accordance with SFAS 52, "Foreign
Currency Translation," the U.S. dollar is used as the functional reporting
currency since the Venezuelan economy is defined as highly inflationary.
Therefore, the assets and liabilities must be translated into U.S. dollars using
a combination of current and historical exchange rates.
During 1996, the Venezuelan government lifted its foreign exchange
controls. Subsequent to this action, the Bolivar devalued from 170 to 690 (at
August 31, 2000) to the U.S. dollar. During 2000, 1999 and 1998, the Company
recorded losses of approximately $1,756,000, $652,000 and $734,000,
respectively, in translating the assets and liabilities of its Venezuelan
subsidiaries into U.S. dollars. Because these losses were partially offset by
inflationary billing provisions in certain Company contracts, the $1,756,000,
$652,000 and $734,000 were offset against sales.
Other foreign subsidiaries maintain their accounting records in their
local currency (primarily British Pounds, Australian and Canadian Dollar, and
Dutch Guilder). The currencies are converted to U.S. dollars with the effect of
the foreign
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currency translation reflected in "accumulated other comprehensive income," a
component of shareholders' equity, in accordance with SFAS No. 52 and SFAS No
130--"Reporting Comprehensive Income." Foreign currency transaction gains or
losses are credited or charged to income. At August 31, 2000 and 1999
respectively, cumulative foreign currency translation adjustments related to
these subsidiaries reflected in shareholders' equity amounted to $5,209,000 and
$1,535,000; transaction gains (losses) reflected in income amounted to ($48,000)
and $119,000 in the years ended August 31, 2000 and 1999, respectively.
NOTE 18--DISCONTINUED OPERATIONS
In June 1998, the Company adopted a plan to discontinue its operations
of the following subsidiaries: Weldtech, a seller of welding supplies; Inflo
Control Systems Limited (Inflo), a manufacturer of boiler steam leak detection,
acoustic mill and combustion monitoring equipment and related systems; Greenbank
(a division of PEL), an abrasive and corrosion resistant pipe systems
specialist; and NAPTech Pressure Systems Corporation, a manufacturer of pressure
vessels and truck tanker trailers. The Company sold and/or discontinued its
investment in each of these operations prior to August 31, 1998. Proceeds from
the sale of these operations totaled approximately $1,200,000 in net cash and
notes receivable of approximately $7,400,000, which resulted in a net gain on
the disposal of $2,647,000, net of tax. The results of these operations have
been classified as discontinued operations in the consolidated financial
statements of the Company. Revenues of these discontinued operations totaled
approximately $7,700,000 in 1998.
NOTE 19--UNBILLED RECEIVABLES, RETAINAGE RECEIVABLES AND COSTS AND ESTIMATED
EARNINGS ON UNCOMPLETED CONTRACTS
In accordance with normal practice in the construction industry, the
Company includes in current assets and current liabilities amounts related to
construction contracts realizable and payable over a period in excess of one
year. Unbilled work represents the excess of contract costs and profits
recognized to date on the percentage of completion accounting method over
billings to date on certain contracts. Deferred contract revenue represents the
excess of billings to date over the amount of contract costs and profits
recognized to date on the percentage of completion accounting method on the
remaining contracts.
Included in accounts receivable is $17,465,000 and $12,338,000 at
August 31, 2000 and 1999, respectively, related to unbilled receivables.
Advanced billings on contracts as of August 31, 2000 and 1999 was $15,992,000
and $7,025,000, respectively. Balances under retainage provisions totaled
$32,449,000 and $4,554,000 at August 31, 2000 and 1999, respectively, and are
also included in accounts receivable in the accompanying consolidated balance
sheets.
The table below shows the components of costs and estimated earnings in
excess of billings and billings in excess of costs and estimated earnings on the
Company's most significant uncompleted contracts as of August 31, 2000 and 1999.
Contracts assumed in the Stone & Webster acquisition include cumulative balances
from the origination of these contracts and, therefore, include amounts which
were earned prior to the acquisition by the Company. In addition, the amounts
below do not include accrued contract losses and reserves as of August 31, 2000.
Included as a net amount in other are certain time and material and other
smaller uncompleted contracts (in thousands):
FOR THE YEARS ENDED AUGUST 31,
------------------------------
2000 1999
------------ ------------
Costs incurred on uncompleted contracts $ 1,562,444 $ 149,115
Estimated earnings thereon 76,267 17,907
------------ ------------
1,638,711 167,022
Less: billings applicable thereto (1,716,610) (145,867)
------------ ------------
(77,899) 21,155
Other 36,194 --
------------ ------------
$ (41,705) $ 21,155
============ ============
Included in the accompanying balance sheet under the following
captions:
Costs and estimated earnings in excess of billings on
uncompleted contracts $ 108,450 $ 24,277
Billings in excess of costs and estimated earnings on
uncompleted contracts (150,155) (3,122)
------------ ------------
$ (41,705) $ 21,155
============ ============
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NOTE 20--QUARTERLY FINANCIAL DATA (UNAUDITED)
(Dollars in thousands, except per share data)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------------- -------------- -------------- --------------
FISCAL 2000
Sales $ 150,808 $ 172,963 $ 175,046 $ 263,838
============== ============== ============== ==============
Gross profit $ 26,078 $ 28,287 $ 27,656 $ 45,055
============== ============== ============== ==============
Net income from continuing operations $ 5,820 $ 7,024 $ 7,384 $ 10,155
============== ============== ============== ==============
Basic net income from continuing operations per share $ .47 $ .46 $ .48 $ .63
============== ============== ============== ==============
Diluted net income from continuing operations per share $ .44 $ .44 $ .46 $ .60
============== ============== ============== ==============
FISCAL 1999
Sales $ 116,032 $ 112,660 $ 125,211 $ 140,111
============== ============== ============== ==============
Gross profit $ 20,717 $ 22,385 $ 24,101 $ 26,625
============== ============== ============== ==============
Net income from continuing operations $ 2,822 $ 4,324 $ 5,225 $ 5,750
============== ============== ============== ==============
Basic net income from continuing operations per share $ .23 $ .37 $ .45 $ .49
============== ============== ============== ==============
Diluted net income from continuing operations per share $ .23 $ .36 $ .43 $ .47
============== ============== ============== ==============
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ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
A Current Report on Form 8-K was filed on September 22, 1999, to
announce a change in the Company's independent public accountants. The Company
engaged Arthur Andersen LLP ("AA"), New Orleans, Louisiana, as its sole
independent auditor for the fiscal year ended August 31, 1999. Previously, the
Company engaged both Hannis T. Bourgeois, LLP ("HTB") and AA as its independent
auditors. The single jointly signed audit report by HTB and AA was considered to
be the equivalent of two separately signed auditors' reports. Thus, previously
each firm represented that it had complied with generally accepted auditing
standards and was in a position that would justify it being the only signatory
of the report. Given Shaw's expansion of its overseas operations, HTB believes
it would be unable to continue to make this representation after fiscal 1998.
Therefore, HTB decided to resign as one of Shaw's independent auditors effective
September 22, 1999.
During the period from September 1, 1997, through the date hereof,
there have been no disagreements on accounting principles or practices,
financial statement disclosure or auditing scope or procedure between the
Company and AA or HTB.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Information regarding directors and executive officers of the Company
is to be included in the Company's definitive proxy statement prepared in
connection with the 2001 Annual Meeting of Shareholders to be held in January
2001 and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is to be included in the
Company's definitive proxy statement prepared in connection with the 2001 Annual
Meeting of Shareholders to be held in January 2001 and is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners
and management is to be included in the Company's definitive proxy statement
prepared in connection with the 2001 Annual Meeting of Shareholders to be held
in January 2001 and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is
to be included in the Company's definitive proxy statement prepared in
connection with the 2001 Annual Meeting of Shareholders to be held in January
2001 and is incorporated herein by reference.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements.
See Item 8 of Part II of this report.
2. Financial Statement Schedules.
3. Exhibits.
*3.1 Restatement of the Articles of Incorporation of the Company
dated December 10, 1993.
*3.2 Amended and Restated By-Laws of the Company dated December 9,
1993.
**4.1 Specimen Common Stock Certificate.
***10.1 1993 Employee Stock Option Plan, as amended and restated.
**10.2 Employment Agreement by and between the Company and James M.
Bernhard, Jr.
**10.3 Joint Venture Agreement of Shaw-Nass Middle East, W.L.L.
dated November 18, 1993, by and among Shaw Overseas (Cayman),
Ltd., Abdulla Ahmed Nass and the Company.
++10.4 1996 Non-Employee Director Stock Option Plan.
@10.5 Asset Purchase Agreement, dated as of July 14, 2000, among
Stone & Webster, Incorporated , certain subsidiaries of
Stone & Webster, Incorporated and The Shaw Group Inc.
@10.6 Credit Agreement dated as of July 14, 2000, among The Shaw
Group Inc., Bank One Capital Markets, Inc. and Bank One, NA.
+10.7 Employment Agreement by and between the Company and Richard F.
Gill.
+10.8 Employment Agreement by and between the Company and Robert L.
Belk.
+++16.1 Letter from Hannis T. Bourgeois, LLP, Consenting to the Form
8-K Current Report.
+21.1 Subsidiaries of the Company.
+23.1 Consent of Arthur Andersen LLP.
+23.2 Consent of Hannis T. Bourgeois, LLP.
+24.1 Powers of Attorney.
+27.1 Financial Data Schedule
- ----------
* Incorporated by reference from the Company's Annual Report on Form
10-K for the fiscal year ended August 31, 1994, as amended.
** Incorporated by reference from the Company's Registration Statement on
Form S-1 filed October 22, 1993, as amended (Registration Number
33-70722).
*** Incorporated by reference from the Company's Annual Report on Form
10-K for the fiscal year ended August 31, 1997.
+ Filed herewith.
++ Incorporated by reference from the Company's Registration Statement on
Form S-8 filed on September 24, 1997 (Registration Number 333-36315).
+++ Incorporated by reference from the Company's Current Report on Form
8-K dated September 22, 1999.
@ Incorporated by reference from the Company's Current Report on Form
8-K dated July 14, 2000.
(b) Reports on Form 8-K
1. On July 28, 2000, the Company filed a Form 8-K announcing the
acquisition of substantially all of the assets of Stone & Webster. The
foregoing Form 8-K was amended by Form 8-K/A filed on September 13,
2000, and such Form 8-K/A contained the following financial statements:
(i) Consolidated balance sheets of Stone & Webster Incorporated and
its subsidiaries as of December 31, 1998 and 1999, consolidated
statements of operations, comprehensive income, shareholder's
equity and statements of cash flows of Stone & Webster
Incorporated and its subsidiaries for the three years ended
December 31, 1999, together with related notes and the report of
independent accountants.
(ii) Consolidated balance sheets of Stone & Webster Incorporated and
its subsidiaries as of March 31, 2000 (unaudited) and December 31,
1999, consolidated statements of operations (unaudited) of Stone &
Webster Incorporated and its subsidiaries for the three months
ended March 31, 2000 and 1999, and
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condensed consolidated statements of cash flows (unaudited) of
Stone & Webster Incorporated and its subsidiaries for the three
months ended March 31, 2000 and 1999, together with related notes.
(iii) Unaudited pro forma combined condensed balance sheet of The Shaw
Group Inc. and its subsidiaries as of May 31, 2000, and unaudited
pro forma combined condensed statements of operations of The Shaw
Group Inc. and its subsidiaries for the twelve months ended August
31, 1999, and for the nine months ended May 31, 2000, together
with related notes.
2. On September 22, 1999, the Company filed a Current Report on Form 8-K
announcing that Hannis T. Bourgeois, LLP had resigned as one of the
Company's independent auditors and that Arthur Andersen LLP would be
engaged as the Company's sole independent auditor for the fiscal year
ended August 31, 1999.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE SHAW GROUP INC.
/s/ J. M. Bernhard, Jr.
-------------------------------------
By: J. M. Bernhard, Jr.
President and Chief Executive Officer
Date: November 29, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ J. M. Bernhard, Jr. Chairman of the Board, November 29, 2000
- -------------------------------- President and Chief
(J. M. Bernhard, Jr.) Executive Officer
/s/ Robert L. Belk Executive Vice President, Chief
- -------------------------------- Financial Officer and Chief
(Robert L. Belk) Accounting Officer November 29, 2000
* Director November 29, 2000
- --------------------------------
(Albert McAlister)
* Director November 29, 2000
- --------------------------------
(L. Lane Grigsby)
* Director November 29, 2000
- --------------------------------
(David W. Hoyle)
* Director November 29, 2000
- --------------------------------
(John W. Sinders, Jr.)
* Director November 29, 2000
- --------------------------------
(William H. Grigg)
* By: /s/ Robert L. Belk November 29, 2000
-------------------------
Robert L. Belk
Attorney-in-Fact
73
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
*3.1 Restatement of the Articles of Incorporation of the Company
dated December 10, 1993.
*3.2 Amended and Restated By-Laws of the Company dated December 9,
1993.
**4.1 Specimen Common Stock Certificate.
***10.1 1993 Employee Stock Option Plan, as amended and restated.
**10.2 Employment Agreement by and between the Company and James M.
Bernhard, Jr.
**10.3 Joint Venture Agreement of Shaw-Nass Middle East, W.L.L.
dated November 18, 1993, by and among Shaw Overseas (Cayman),
Ltd., Abdulla Ahmed Nass and the Company.
++10.4 1996 Non-Employee Director Stock Option Plan.
@10.5 Asset Purchase Agreement, dated as of July 14, 2000, among
Stone & Webster, Incorporated , certain subsidiaries of
Stone & Webster, Incorporated and The Shaw Group Inc.
@10.6 Credit Agreement dated as of July 14, 2000, among The Shaw
Group Inc., Bank One Capital Markets, Inc. and Bank One, NA.
+10.7 Employment Agreement by and between the Company and Richard F.
Gill.
+10.8 Employment Agreement by and between the Company and Robert L.
Belk.
+++16.1 Letter from Hannis T. Bourgeois, LLP, Consenting to the Form
8-K Current Report.
+21.1 Subsidiaries of the Company.
+23.1 Consent of Arthur Andersen LLP.
+23.2 Consent of Hannis T. Bourgeois, LLP.
+24.1 Powers of Attorney.
+27.1 Financial Data Schedule
- ----------
* Incorporated by reference from the Company's Annual Report on Form
10-K for the fiscal year ended August 31, 1994, as amended.
** Incorporated by reference from the Company's Registration Statement on
Form S-1 filed October 22, 1993, as amended (Registration Number
33-70722).
*** Incorporated by reference from the Company's Annual Report on Form
10-K for the fiscal year ended August 31, 1997.
+ Filed herewith.
++ Incorporated by reference from the Company's Registration Statement on
Form S-8 filed on September 24, 1997 (Registration Number 333-36315).
+++ Incorporated by reference from the Company's Current Report on Form
8-K dated September 22, 1999.
@ Incorporated by reference from the Company's Current Report on Form
8-K dated July 14, 2000.