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, 1997
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 (I.R.S. Employer
incorporation or organization) Identification Number)
11100 Mead Road, Second Floor
Baton Rouge, Louisiana 70816
(Address of principal executive offices) (zip code)
(504) 296-1140
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: Common stock, no par
value.
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 20, 1997 was approximately $234,220,000.
The number of shares of the Registrant's common stock, no par value, outstanding
at November 20, 1997 was 12,488,393.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement to be prepared for use
in connection with the registrant's 1998 Annual Meeting of Shareholders to be
held in January 1998 will be incorporated by reference into Part III of this
Form 10-K.
<PAGE>
PART I
ITEM 1. Business
General
The Shaw Group Inc. ("Shaw" or the "Company") is a leading supplier of
integrated piping systems and provider of industrial construction and
maintenance services primarily for the electric power, chemical, petrochemical,
gas processing and refining industries worldwide. Shaw is committed to being a
"total piping resource" for its customers by offering comprehensive design and
engineering services, piping system fabrication, manufacturing and sale of
specialty pipe fittings, and design and manufacturing of pipe support systems.
The Company recently expanded its capabilities to include final on-site
erection, turnkey construction and project maintenance.
Shaw was founded in 1987 by current management and subsequently
purchased the assets of Benjamin F. Shaw Company, a century-old pipe fabricator.
The Company has increased its revenues from $29.3 million in the year ended
August 31, 1988 to $338.3 million in the year ended August 31, 1997, by
increasing both its domestic and international businesses. Through internal
expansion and a series of strategic acquisitions, Shaw has increased its pipe
fabrication and bending capacity, expanded its piping system products and
services and broadened its overall project scope to include construction and
maintenance services. These initiatives have provided Shaw with the ability to
achieve substantial economies of scale in purchasing raw material, and to
provide customers with a broad range of industrial products and services.
The Company believes it has earned a reputation as an efficient,
low-cost supplier of complex piping systems as a result of several competitive
advantages. Specifically, the Company coordinates and integrates project
engineering and fabrication processes in order to maximize overall efficiency in
time, cost and performance. In addition, the Company's significant investment in
state-of-the-art induction bending equipment provides it with time, labor and
raw material savings as compared to traditional fabrication methods. Shaw also
manufactures specialty pipe fittings, pipe hangers and other pipe products. This
manufacturing capability has served to reduce the Company's supply costs and
enhance its overall piping package. The Company utilizes its proprietary
software technology to enhance the planning and scheduling efforts of its
customers, helping to reduce total installed costs and project cycle times. The
Company also provides final on-site erection of piping systems, as well as total
project construction and maintenance services.
Forward-Looking Statements and Associated Risks
This Annual Report on Form 10-K contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended and
Section 21E of the Securities Exchange Act of 1934 as amended, including
statements regarding, among other items, (i) the Company's growth strategies,
including its intention to make acquisitions; (ii) anticipated trends in the
Company's business; and (iii) the Company's intention to enter into satisfactory
contracts with its customers, including Alliance Agreements. These
forward-looking statements are based largely on the Company's expectations and
are subject to a number of risks and uncertainties, certain of which are beyond
the Company's control. Actual results could differ materially from these
forward-looking statements as a result of, among other things, the following
factors: (i) adverse economic conditions; (ii) the impact of competitive
products and pricing; (iii) product demand and acceptance risks; (iv) the
presence of competitors with greater financial resources; (v) costs and
financing difficulties; and (vi) delays or difficulties in the production,
delivery or installation of products, including a lengthy strike or other work
stoppage by the Company's union employees at any of the Company's facilities. In
light of these risks and uncertainties, there can be no assurance that actual
results will be as projected in the forward-looking statements. Furthermore, the
Company undertakes no obligation to publicly update or revise any
forward-looking statement whether as a result of new information, future events
or otherwise.
Subsequent Events
On October 15, 1997, the Company entered into a letter of intent with
Vekamaf Holding B.V. ("Vekamaf") of Rotterdam, Holland, whereby Shaw will
acquire all of the outstanding capital stock of Cojafex B.V., a Vekamaf
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subsidiary. Under the terms of the letter of intent, the Company will pay an
aggregate of $9.5 million, $5 million of which will be paid over six years. The
closing of the transaction, which is contingent upon the favorable outcome of a
due diligence review and the negotiation and execution of definitive agreements,
among other things, is expected to take place in January of 1998. Cojafex owns
the technology for certain induction bending machines used for bending pipe and
other carbon steel and alloy items for industrial, commercial and architectural
applications. Shaw currently has eight Cojafex induction bending machines and is
the exclusive, worldwide distributor of the Cojafex "PB Special 16" machine.
Shaw is presently supplying Cojafex bending machines packaged with fabrication
technology and technical services on-site in India for one of the largest grass
roots refinery projects ever planned.
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
$15.8 million in cash. 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; CBP Engineering Corp. ("CBP"), an abrasion and corrosion
resistant pipe systems specialist based in Pennsylvania; Aiton Australia Pty
Limited, a piping systems, boiler refurbishment and project management company
based near Sydney, Australia; and Prospect Engineering Limited ("PEL"), a
provider of turnkey piping systems located in Derby, United Kingdom. Prospect
also owned a 66% interest in Inflo Control Systems Limited ("Inflo"), a
manufacturer of boiler steam leak detection, acoustic mill and combustion
monitoring equipment and related systems. Under the terms of the acquisition
agreement, the Company acquired all of the outstanding stock of Prospect
Industries Overseas Limited, a United Kingdom holding company that holds the
entire ownership interest in Connex and CBP, and 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. For Prospect's year ended September 30, 1996, its
most recently published audited consolidated financial statements, sales
amounted to approximately $138 million. For further discussions regarding this
acquisition, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Fiscal 1997 Developments
Effective October 1, 1996, the Company acquired all of the outstanding
capital stock of Pipe Shields Incorporated ("Pipe Shields"), an industrial pipe
insulation company located in Vacaville, California, for approximately $2.5
million in cash, net of cash received. See Note 3 of Notes to Consolidated
Financial Statements.
On December 23, 1996, the Company closed the sale of 2,000,000 shares
of its common stock, no par value (the "Common Stock"), in an underwritten
public offering at a price of $21 per share. In addition, certain selling
shareholders of the Company sold an aggregate of 659,118 shares of Common Stock,
and on January 10, 1997, the underwriters of such offering exercised an option
to purchase an additional 398,000 shares of Common Stock from the Company
pursuant to such terms to cover over-allotments. The closing of such sale
occurred on January 15, 1997. The net proceeds to the Company from the issuance
and sale of the 2,398,000 shares of Common Stock, less underwriting discounts,
commissions and other expenses associated with the transaction, totaled
approximately $47.2 million and were used to repay outstanding amounts on the
Company's line of credit, which is generally used by the Company for working
capital purposes, as well as to fund fixed asset and subsidiary acquisitions..
On January 27, 1997, Shaw acquired all of the outstanding capital stock
of NAPTech, Inc., a fabricator of industrial piping systems and engineered
piping modules located in Clearfield, Utah. In connection with the acquisition,
the Company issued an aggregate of 432,881 shares of the Company's Common Stock
in exchange for NAPTech, Inc. and the 335,000 square foot facility that NAPTech
leased from a related entity (collectively, "NAPTech"). For the fiscal years
ended March 29, 1996 and March 31, 1995, NAPTech, Inc. reported revenues of
$24.9 million and $21.7 million, respectively, and net losses of $3.1 million
and $.2 million, respectively. Though NAPTech had experienced historical
operating and liquidity difficulties, NAPTech's operations have been profitable
since Shaw acquired the business, largely due to a large mining project that was
completed during Shaw's fiscal 1997, as well as the integration of the Company's
materials purchasing power and fabrication expertise. The benefits from the
acquisition of NAPTech
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include, among other things, increased fabrication capacity and additional
induction pipe bending capabilities. See Note 3 of Notes to Consolidated
Financial Statements.
Effective February 1, 1997, the Company acquired all of the outstanding
capital stock of United Crafts, Inc. (UCI), and on March 20, 1997, it purchased
certain assets of MERIT Industrial Constructors, Inc. (MERIT), two industrial
construction and maintenance firms based in Baton Rouge, Louisiana. The total
consideration paid for these transactions was approximately $10 million in cash
and 62,500 shares of Common Stock. These acquisitions have expanded Shaw's
overall piping package to include final on-site piping erection, and broadened
the Company's project scope to include total project construction and
maintenance services. MERIT and UCI have an established customer base in the
Gulf Coast and Southeastern regions of the United States. Their combined annual
revenues for their fiscal years ended in 1996 were $52 million. See Note 3 of
Notes to Consolidated Financial Statements.
On August 11, 1997, the Company announced that Shaw Power Services,
Inc., its wholly-owned subsidiary, and China Baoyuan Industry and Trade Company,
a wholly-owned subsidiary of China National Nuclear Corporation signed a letter
of intent to establish joint-venture ownership of a piping systems fabrication
facility in Dalian, Peoples Republic of China (P.R.C.). Under the terms of the
letter of intent, Shaw's ownership and income participation in the joint-venture
is contemplated to be at least 60%, The formation of the joint-venture is
subject to, among other things, the negotiation and execution of a definitive
agreement and regulatory approvals by the P.R.C. The establishment of a presence
in the P.R.C. is intended to strategically position Shaw to service the planned
expansion of nuclear power generation capacity in China. Shaw also hopes to
capture work that includes critical plant piping systems for Chinese-financed
projects, as well as additional work on these projects. This would include
nuclear, as well as fossil fuel projects throughout the P.R.C.
Industry Overview
The industrial pipe fabrication industry provides piping systems for
new construction and retrofit projects in the electric power, refining,
chemical, petrochemical, gas processing and other industries, including pulp and
paper, pharmaceutical and food processing industries. The Company estimates that
prefabricated piping systems account for approximately 3% of the total installed
cost of a new construction project and are crucial components of each project.
The Company divides the industry into two major segments, the electric power
industry segment and the process industry segment. The refining and chemical and
petrochemical sectors represent the largest portion of the process industry
segment.
The domestic pipe fabrication industry depends largely on new
construction and retrofit projects in the chemical, refining, gas processing,
pulp and paper, pharmaceutical, food processing and other industries. These
industries have historically been cyclical in nature and vulnerable to general
downturns in the economy. The chemical sector began to experience an upturn in
mid-1995 driven by an increase in capital expenditures for capacity expansions
and retrofits. This resulted in a significant improvement in the domestic
pricing environment during fiscal 1996. Project activity in the chemical and
refining sectors continues to be robust and the Company anticipates that a
significant portion of domestic project work over the next several years will be
generated by chemical plant expansions and refinery retrofits relating to the
modernization of aging facilities and compliance with environmental regulations.
Due to the minimal demand for new electric power plant construction in the
United States, the electric power piping market in the United States consists
almost exclusively of retrofits.
In contrast to the domestic market, the international pipe fabrication
market has exhibited significant growth over the last several years, and
industry sources project this growth to continue. New construction represents
the majority of work performed in the electric power sector overseas. Strong
demand for electricity, particularly in underdeveloped and overpopulated areas
of the world, has resulted in a significant increase in new power plant
construction.
Generally, United States pipe fabricators can fabricate electric power
piping systems domestically and ship the finished goods to selected
international markets less expensively than their major overseas competitors,
due primarily
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<PAGE>
to significantly lower labor costs than in certain other industrialized
countries (principally Germany and Japan), and greater availability of raw
materials in the United States. Typically, the Company's international
competitors are divisions of large industrial firms.
Most international projects require a certain percentage of "local
content" sourcing. Therefore, non-critical or low pressure piping for electric
power projects is frequently fabricated at the project site by local welders or
in regional fabrication facilities. The same is true for the chemical and
refining sectors, which utilize less critical piping systems. In most areas of
the Pacific Rim and South America, this work is performed at significantly lower
labor costs. In order to bid more competitively for work in the international
chemical and refinery sector, as well as for the low pressure piping portion of
overseas power projects, Shaw has established overseas facilities and has
developed a portable induction bending machine that can be used on international
job construction sites. The Company is currently employing this technology
on-site in Jamnagar, India to fabricate piping systems for a major refinery
project.
Products and Services
As part of its commitment to being a "total piping resource" for its
customers, the Company provides a complete range of piping products and
services, including pipe fabrication, induction and cold bending, engineering
and design, and pipe fittings manufacturing. The Company has also recently
broadened its project scope to include on-site piping systems installation,
turnkey construction and maintenance services.
Pipe Fabrication
Shaw's core business is the fabrication of complex piping systems from
raw material made of carbon steel, stainless and other alloys, as well as other
materials, including nickel, titanium and aluminum. The Company produces
prefabricated piping systems by cutting pipe to length, welding fittings on the
pipe and bending the pipe, each to precise customer specifications. As of August
31, 1997, Shaw owned and operated seven pipe fabrication facilities in South
Carolina, Louisiana, Oklahoma, Utah and Venezuela as well as a 49% interest in a
joint venture pipe fabrication facility in Bahrain. These eight fabrication
facilities are capable of handling and fabricating pipe ranging in diameter from
one inch to 72 inches, with overall wall thicknesses from 1/8 inch to 7 inches.
Prefabricated pipe assemblies up to 100 feet in length and weighing up to 45
tons can be fabricated by the Company.
The Company's products must meet rigid quality control standards. In
addition to visual inspection, the Company uses radiography, hydro testing, dye
penetration and ultrasonic flaw detection to confirm that its products meet
specifications. A significant portion of Shaw's work is the fabrication of
"critical 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.
Bending
Beginning in fiscal 1994, the Company began purchasing state-of-the-art
induction bending equipment, which significantly increased the Company's
capacity to fabricate piping systems, in both volume and complexity. In
addition, on certain projects Shaw can substitute bends for the cutting of pipe
and welding fittings, resulting in labor, time and raw material savings.
Although the Company has historically been capable of bending pipe using
traditional methods, such bending capabilities were limited with respect to pipe
composition, diameter, wall thickness and bend characteristics. As a result, the
Company generally was required to subcontract for more complex bends,
particularly for pipes with large diameters and wall thicknesses.
The market for pipe fabrication is increasingly moving in the direction
of custom pipe bending according to the specifications of customers, since
bending generally allows for significant reductions in labor, time and materials
costs as compared to traditional means of fabrication. The Company believes its
state-of-the-art equipment gives it a technological advantage in this growing
segment of the market.
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Shaw currently owns eight induction pipe bending machines capable of
bending pipe up to 66 inches in diameter with wall thicknesses of up to 5
inches.
<TABLE>
<CAPTION>
Pipe Bending Capabilities
---------------------------------
Maximum Pipe Maximum Pipe
Model Location Diameter Wall Thickness
----- -------- -------- --------------
<S> <C> <C> <C>
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-1200 Walker, Louisiana 48 inches 4.0 inches
Cojafex PB-1200 on order (1) 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
(1) Presently on order, with an expected delivery in April, 1998.
</TABLE>
The Company has also developed a portable version of the PB Special 16
induction bending machine which is capable of producing multi-directional bends
at project sites around the world. This machine is currently being utilized
on-site in India to fabricate piping systems for one of the largest grass roots
refinery projects ever planned.
Recently, the Company announced that it entered into a letter of
intent with Vekamaf Holding B.V.("Vekamaf") of Rotterdam, Holland, whereby Shaw
will acquire all of the outstanding capital stock of Cojafex B.V. ("Cojafex"), a
Vekamaf subsidiary. Cojafex owns the technology for certain induction bending
machines used for bending pipe and other carbon steel and alloy items for
industrial, commercial and architectural applications. Under the terms of the
letter of intent, Shaw will pay an aggregate of $9.5 million, $5 million of
which will be paid over six years. The closing of the transaction, which is
contingent upon the favorable outcome of a due diligence review and the
negotiation and execution of definitive agreements, among other things, is
expected to take place in January of 1998.
Engineering and Design
In 1994, as an integral part of its strategy of becoming a "total
piping resource", the Company integrated engineering and design capabilities
into its business for complex piping systems for electric power projects, mainly
for the Company's customers outside the United States. Shaw also designs and
engineers pipe hanger and support systems and specializes in engineering
analyses of complex piping systems and related services, primarily for the
electric power industry. These engineering, design and pipe support capabilities
complement the Company's fabrication business, particularly for electric power
projects, enabling the Company to provide more comprehensive piping packages
with reduced overall lead times and lower total installed costs.
The Company utilizes sophisticated plant design software to create
virtual three-dimensional piping system models. The result is a clear,
understandable picture of the complete project which allows clients to "walk
through" the three-dimensional model for an accurate design review. The Company
currently operates 25 workstations utilizing the plant design software at its
offices in Englewood, New Jersey and Toronto, Canada.
The Company's engineering capabilities are directly linked to the
Company's fabrication shops and the Company's proprietary computer aided design
system, SHAW-DRAW(TM). SHAW-DRAW(TM) converts customer design drawings to the
Company's 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
efficiently manages and controls the movement of all required materials into and
through each stage of the fabrication process utilizing bar code technology.
These proprietary programs enhance the planning and scheduling efforts for
Shaw's customers, helping to reduce total installed costs and project cycle
times.
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Pipe Fittings Manufacturing
Shaw's manufacturing capabilities extend to specialty stainless, alloy and
carbon steel pipe fittings for the electric power, refining, chemical and other
industries, including the gas processing, pulp and paper, pharmaceutical and
food processing industries. These fittings include stainless and other alloy
elbows, tees, reducers and stub ends ranging in size from 1/2 to 48 inches and
heavy wall carbon and chrome elbows, tees, caps and reducers with wall
thicknesses of up to 3 1/2 inches. In addition to its manufacturing facility in
Shreveport, Louisiana, Shaw has manufacturing outlets in New Jersey, North
Carolina, Georgia, Louisiana, Texas, Oklahoma and Arizona, which also distribute
pipe and fittings manufactured by third parties. Shaw's in-house manufacturing
capabilities for pipe fittings further enhance the Company's piping package,
enable the Company to realize greater efficiencies in the purchase of raw
materials, help reduce overall lead times and lower total installed costs, and
are additional steps in the Company's commitment to being a "total piping
resource".
Project Construction and Maintenance
With the acquisitions of two industrial construction and maintenance
businesses in fiscal 1997, the Company expanded its piping package to include
on-site piping systems installation and broadened its overall project scope to
include total project construction and plant maintenance services for the
refining, petrochemical, chemical, pipeline and power industries. These capital
intensive projects include grass roots facilities, as well as plant expansions
and upgrades. Shaw's services incorporate most of the construction disciplines,
including civil, structural and steel erection, mechanical/equipment
installation and assembly, piping erection, skid and modular unit fabrication
and assembly, constructability reviews, materials and labor procurement and
management, ASME code work and plant maintenance. As a result of these
acquisitions, the Company has an established presence in the Gulf Coast and
Southeastern regions of the United States and has plans to expand domestically
and internationally.
Markets
The Company's principal markets are new construction and retrofits
in the electric power, refining, petrochemical and chemical industries, both in
the United States and internationally. The Company also historically has
supplied piping systems to the gas processing, pulp and paper, pharmaceutical
and manufacturing industries.
The Company's sales for its most recent two fiscal years ended
August 31 by industry were (in millions):
Year Ended August 31,
---------------------
Industry Sector 1996 1997
- --------------- ---- ----
Chemical $62.1 $130.4
Electric Power 86.7 102.0
Refining 62.4 50.0
Mining -- 33.3
Other 10.8 22.7
----- -----
222.0 $338.4
======
Pooled Sales* 27.4
-----
$249.4
======
* Sales by industry sector for the pooled entity, NAPTech, are not available.
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The Company's sales for its most recent two fiscal years ended August
31 by geographic region were (in millions):
Year Ended August 31,
Geographic Region 1996 1997
- ----------------- ---- ----
United States $ 173.7 $235.2
Far East/Pacific Rim 39.6 62.6
Latin America 2.6 18.4
Middle East 21.4 12.8
Europe 9.0 4.0
Other 3.1 5.4
------ ------
$249.4 $338.4
====== ======
Prior to February 1994, the Company's international business was
conducted exclusively from its plants in the United States. Having fabrication
facilities in certain key international markets assists the Company in securing
additional overseas work, specifically for chemical and refining projects, where
the piping is generally fabricated at the project site or in a regional shop by
local welders. The Company currently has a wholly-owned subsidiary operating in
Venezuela and a joint-venture facility operating in Bahrain. In August of 1997,
the Company announced that it signed a letter of intent with a Chinese partner
to establish joint-venture ownership of a piping systems fabrication facility in
Dalian, Peoples Republic of China (P.R.C.). Under the terms of the letter of
intent, Shaw's ownership and income participation in the joint-venture is
contemplated to be at least 60%. The establishment of a presence in the P.R.C.
is intended to strategically position Shaw to service the planned expansion of
nuclear power generation capacity in China, as well as capture work that
includes critical plant piping systems for Chinese-financed projects, as well as
additional work on these projects. This includes nuclear, as well as fossil fuel
projects throughout the P.R.C. Additionally, in November, 1997, the Company
purchased all of the capital stock or substantially all of the assets of the
principal operating businesses of Prospect Industries PLC of Derby, United
Kingdom. Prospect is a mechanical contractor and provider of turnkey piping
systems serving the power generating and process industries worldwide. This
acquisition gives the Company a significant presence in the United Kingdom and
Australia.
Demand for the Company's products and services in Venezuela was
reasonably strong during the fiscal year ended August 31, 1997. Future
profitability, however, cannot be assured.
In November 1993, the Company entered into a joint-venture agreement
to construct and operate a fabrication facility in Bahrain. The Company's joint
venture partner is Abdulla Ahmed Nass, a Bahrain industrialist. The 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 venture to export
products to other Arab countries without payment of additional tariffs. For
fiscal 1997, the joint venture had sales of $6.9 million and the Company's share
of the joint venture's net earnings was approximately $437,000.
In the future, the Company's use of joint-venture relationships for
foreign operations will be determined on a case-by-case basis depending on
market, operational, legal and other relevant factors.
Contracts and Pricing
The Company obtains orders through competitive bidding, negotiated
contracts and awards under Alliance Agreements. The awarding of contracts is
frequently not based exclusively on price but on the Company's reputation and
ability to meet project deadlines.
The Company's contracts are priced on either a "unit" or a
"fixed"/"lump-sum" price basis. A significant portion of the Company's contracts
are bid on a "unit" basis, pursuant to which the customer pays an agreed-upon
rate for each individual service provided, such as a weld, radiograph
inspection, bend or engineering revision, or the amount of inventory items used.
Raw materials generally are billed to customers at published prices in effect at
the date of the
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contract, and the Company generally obtains fixed pricing commitments from its
suppliers at such time for most of the items necessary to complete the project.
The Company thereby minimizes the risk of raw material price increases that may
occur during the fabrication process.
Substantially all of the Company's international projects are quoted
on a "fixed"/"lump-sum" price basis. Increasingly, this type of contract is
being requested by the Company's customers, particularly for international
electric power projects. The Company generally does not quote the actual
contract price until it has secured a fixed pricing commitment from its
suppliers for most of the items necessary to complete the project, thereby
minimizing any risk of price increases between the contract date and the time
the project is completed.
The Company also obtains work under Alliance Agreements, which are
agreements that the Company enters into with its customers in order to expedite
individual project contract negotiations through means other than the formal
bidding process. These agreements are typically implemented by establishing a
joint steering committee to provide guidance and direction on alliance issues.
Normally this committee meets on a periodic basis to monitor alliance progress
and assign resources to effect continuous improvements in the various work
processes associated with project execution.
Alliance Agreements allow the customer to achieve greater cost
efficiency and reduced cycle times in the design and fabrication of complex
piping systems for electric power, chemical and refinery projects. In addition,
the Company believes that these agreements will provide Shaw with a steady
source of new projects and help minimize the impact of short-term pricing
volatility.
Backlog
Shaw generally bids for projects that require delivery of piping
systems over a period of three to eighteen months. The Company defines its
backlog as a "working backlog", whereby only projects with a written commitment
are included. Typically, electric power projects remain in the Company's backlog
for at least nine months, depending on the size of the project or whether the
Company is doing the design and engineering as well as the fabrication for a
given project. Refining and chemical projects remain in the Company's backlog
three to six months on average.
On occasion, customers will cancel or delay projects for reasons out
of the Company's control. Projects will remain in the Company's backlog for
longer periods if delays occur. Historically, cancellations and major delays
have been insignificant. The low cancellation rate is due to the fact that
piping systems are one of the final steps in the construction of a project and
are essential to the construction of these systems as a whole.
The Company estimated its backlog at approximately $253 million at
August 31, 1997. This compares to the previously announced $154 million and $101
million at August 31, 1996 and 1995, respectively. The Company estimates that
$206 million, or 81.4%, of its backlog at August 31, 1997 will be completed in
fiscal 1998.
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The following table breaks out the percentage of backlog by industry
sector and geographic region for the periods indicated:
At August 31,
---------------------------------
1995* 1996* 1997
----- ----- ----
Industry Sector:
Electric Power 51% 57% 30%
Chemical 20 32 22
Petrochemical -- -- 21
Refining 28 10 15
Oil and Gas -- -- 7
Other 1 1 5
---- ---- ----
100% 100% 100%
==== ==== ====
Geographic Region:
Domestic 56% 66% 68%
International 44 34 32
---- ---- ----
100% 100% 100%
==== ==== ====
* Excludes backlog by industry sector and geographic region for the
pooled entity, NAPTech, which is not available.
Customers and Marketing
The Company's customers are principally major multi-national
engineering and construction firms, equipment manufacturers and industrial
corporations. For fiscal 1997, no single customer represented more than 10% of
the Company's sales.
As of August 31, 1997, the Company's marketing efforts are principally
conducted through its own full-time employed sales force comprised of 35
employees. In addition, certain customers and territories are covered by
independent representatives. The Company's sales force is paid a base salary
plus an annual bonus, while independent representatives receive commissions.
Raw Materials and Suppliers
The Company's principal raw materials are carbon steel, stainless and
other alloy piping, which it obtains from a number of domestic and foreign
primary steel producers. The Company believes that it is not generally dependent
upon any one of its suppliers for raw materials, that the market is extremely
competitive and that its relationship with its suppliers is good. Certain types
of raw materials, however, are available from only one or a few specialized
suppliers, and although the Company has not experienced any significant sourcing
problems to date, there can be no assurance that sourcing problems will not
occur in the future. Shaw purchases a majority of its piping directly from
manufacturers. This eliminates the need for a distributor and results in lower
costs to the Company. Because of the volume of these materials purchased, the
Company is often able to negotiate advantageous purchase prices for steel
piping. Certain items are kept in stock at each of the Company's facilities and
are transported between facilities as required. The Company obtains more
specialized materials from suppliers when required for a project. To date, the
Company has not experienced any significant shortages or delays in obtaining raw
materials.
At the time of obtaining a contract, the Company generally obtains
fixed pricing commitments from its suppliers for most of the items necessary to
complete the project, thereby minimizing any risk of price increases that may
occur during the fabrication process. See "Contracts and Pricing".
Industry Certifications
In order to perform fabrication and repairs of coded piping systems,
the Company's domestic fabrication facilities have obtained the required
American Society of Mechanical Engineers (ASME) stamp, and its Laurens, South
Carolina and Walker, Louisiana facilities have obtained the National Board
stamp. In addition, the Laurens, South
10
<PAGE>
Carolina facility is licensed to fabricate piping for nuclear power plants and
is registered by the International Organization of Standards (ISO 9002), which
is required to perform certain international work. The Company's engineering
subsidiary is 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 does not own any material patents, registered trademarks
or licenses. However, the Company considers its design and project control
systems, SHAW-DRAW(TM) and SHAW-MAN(TM), to be proprietary information of the
Company.
Competition
The Company experiences significant competition from a limited number
of competitors in both international and domestic markets. In the United States,
there are a number of smaller pipe fabricators. Internationally, the principal
competitors are divisions of large industrial firms. Some of the Company's
competitors, especially in the international sector, have greater financial and
other resources than the Company.
Orders are obtained by the Company through competitive bidding,
negotiated contracts and awards under Alliance Agreements. In a competitive bid,
the awarding of contracts is frequently not based solely on price but also on
the Company's reputation and ability to meet project deadlines.
Employees
At November 19, 1997, subsequent to the acquisition of Prospect, the
Company employed approximately 4,600 full-time employees, 1,850 of whom are
represented by unions. Of these employees, 175 worked in the Company's wholly
owned subsidiary in Venezuela and 1,400 worked in the United Kingdom and
Australia. In January 1993, the Company settled a dispute with a union pursuant
to which Shaw agreed to allow the union to solicit membership at all of its
non-union pipe fabricating facilities in the United States. To date, certain
employees at four of the eight United States pipe fabrication facilities of the
Company, including the facility of Connex Pipe Systems, Inc. in Troutville,
Virginia, have approved a union contract.
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. 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 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. 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.
11
<PAGE>
ITEM 2. Properties
The principal properties of the Company at August 31, 1997 are as
follows:
<TABLE>
<CAPTION>
Location Description Square Feet
<S> <C> <C>
Baton Rouge, LA Corporate Headquarters 20,000(1)
Laurens, SC Pipe Fabrication Facility 200,000(2)
Prairieville, LA Pipe Fabrication Facility 60,000(1)
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(2)
Baton Rouge, LA Distribution Facility 30,000(1)
Englewood, NJ Design and Engineering Headquarters 14,000(1)
Toronto, Canada Design and Engineering Office 5,750(1)
Longview, TX Pipe Supports Manufacturing and Fabrication Facility 28,000
Shreveport, LA Piping Components and Manufacturing Facility 385,000(2)
Shreveport, LA Pipe Storage Facility 40,000(2)
Houston, TX Pipe Fittings Distribution Facility 107,000(1)
Vacaville, CA Pipe Supports Manufacturing Facility 43,000(1)
Baton Rouge, LA Construction, Administrative, Warehouse and Fabrication Facility 32,400(2)
Baton Rouge, LA Divisional Offices 12,000(1)
(1) Leased facility. (2) Encumbered with debt.
</TABLE>
The Bahrain joint venture leases a 94,000 square foot pipe fabrication
facility in Manama, Bahrain.
In connection with a contract with a customer, the Company is
committed to open a fabrication facility in Texas. See Note 11 of Notes to
Consolidated Financial Statements.
The Company considers each of its current facilities to be in good
operating condition and adequate for its present use.
With acquisitions subsequent to August 31, 1997, the Company acquired
leased and owned facilites in Troutville, Virginia and Washington, Pennsylvania,
as well as the United Kingdom and Australia. See "Business Subsequent Events."
ITEM 3. Legal Proceedings
The Company is involved in various lawsuits in the ordinary course of
its business. 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 its 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 1997.
12
<PAGE>
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
Company delisted the Common Stock from the Nasdaq National Market on October 17,
1996, and the Common Stock commenced trading on the NYSE on October 18, 1996.
The following table sets forth, for the quarterly periods indicated, the high
and low sale prices per share for the Common Stock as reported on the Nasdaq
National Market through October 17, 1996, and thereafter 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, 1996
First quarter $10 3/32 $8 1/4
Second quarter 16 3/8 8 3/4
Third quarter 20 5/8 14 1/4
Fourth quarter 331/2 15 3/8
Fiscal year ended August 31, 1997
First quarter $37 -- $21 7/8
Second quarter 26 3/4 18 5/8
Third quarter 23 3/4 12 1/2
Fourth quarter 22 1/4 15 3/4
Fiscal year ending August 31, 1998
First quarter (through November 19, 1997) $24 1/4 $17 3/4
The closing sale price of the Common Stock on November 19, 1997, as
reported on the NYSE, was $22 11/16 per share. As of November 3, 1997, the
Company had approximately 3,600 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 at such future time as may be appropriate in light of
relevant factors at the time; however, the Company is subject to certain
prohibitions on the payment of dividends under the terms of existing credit
facilities.
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, 1997
presented below have been derived from the Company's audited consolidated
financial statements. Such data should be read in conjunction with the
Consolidated
13
<PAGE>
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".
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-------------------------------------------------------------
1993(1) 1994(1)(4) 1995(1)(5) 1996(1)(6) 1997(7)
(in thousands, except per share amounts)
Consolidated Statements of Income
<S> <C> <C> <C> <C> <C>
Sales $130,209 $131,145 $156,922 $249,358 $338,350
======== ======== ======== ======== ========
Income before
extraordinary
item $ 3,458 $ 3,236 $ 3,912 $ 6,617 $ 14,048
======== ======== ======== ======== ========
Net income (3) $ 3,458 $ 3,606 $ 4,403 $ 6,617 $ 14,048
======== ======== ======== ======== ========
Earnings per
common share
(2) - Income
before extra-
ordinary item $ .49 $ .40 $ .44 $ .68 $ 1.21
======== ======== ======== ======== ========
Net income (2) $ .49 $ .45 $ .49 $ .68 $ 1.21
======== ======== ======== ======== ========
Consolidated Balance Sheets
Total assets $ 76,865 $105,454 $121,084 $218,503 $262,459
======== ======== ======== ======== ========
Long-term debt
and lease
obligations,
net of current
maturities $ 13,757 $ 7,906 $ 11,718 $ 36,840 $ 39,039
======== ======== ======== ======== ========
Cash dividends declared per common share $ 0 $ 0 $ 0 $ 0 $ 0
======== ========= ======== ======== ========
</TABLE>
(1) Restated to account for the acquisition of NAPTech, which was completed on
January 27, 1997, and which was accounted for using the
pooling-of-interests method.
(2) In connection with the initial public offering of the Company's common
stock, the Company's shareholders ap proved a stock split and
recapitalization on December 6, 1993 which caused the number of outstanding
shares to increase from 4,567.5 to 5,602,000. For 1993 and 1994, the per
share data have been adjusted to give effect to the stock split.
(3) Includes extraordinary gains of $370,000 in 1994 and $491,000 in 1995.
(4) Includes the acquisition of Fronek Company, Inc. and F.C.I. Pipe Support
Sales, Inc. in 1994.
(5) Includes the acquisition of the 50% interest of the other participant in
the Company's joint venture located in Venezuela in fiscal 1995. See Note 3
in "Notes to Consolidated Financial Statements."
14
<PAGE>
(6) Includes the acquisitions of Word Industries Pipe Fabricating, Inc. and
certain affiliates (collectively, "Word") and Alloy Piping Products, Inc.
("APP") in 1996. See Note 3 in "Notes to Consolidated Financial
Statements."
(7) Includes the acquisitions of Pipe Shields, UCI and MERIT in 1997. See Note 3
in "Notes to Consolidated Financial Statements."
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.
Recent Acquisitions
On December 15, 1994, the Company acquired the 50% interest of the
other participant in the Shaw-Formiconi joint venture located in Venezuela,
together with the concurrent acquisition of certain land, buildings and other
assets used by the venture. The total amount of the purchase price related to
this acquisition, including the selling participant's share of joint venture
profits, was approximately $2.9 million. The Company had previously accounted
for its investment in the joint venture as an unconsolidated subsidiary under
the equity method. Since December 15, 1994, the Venezuelan operation has
operated as a wholly owned subsidiary and is included as a consolidated
subsidiary in the Company's consolidated statements since that date. See Notes 3
and 5 of the Notes to Consolidated Financial Statements.
On January 16, 1996, the Company purchased certain assets and assumed
certain liabilities of Word, TS&M Corporation and T.N. Word and certain of Mr.
Word's family members. The acquisition of Word increased the Company's
production capacity and added a facility in Tulsa, Oklahoma. The total purchase
price related to the acquisition was approximately $4.2 million, consisting of
the issuance of 385,000 shares of the Company's Common Stock valued at $3.4
million and cash of approximately $750,000. See Note 3 of the Notes to
Consolidated Financial Statements.
Effective March 1, 1996, the Company acquired all of the outstanding
capital stock of APP, a leading United States manufacturer of specialty
stainless and carbon steel pipe fittings and other stainless pipe products, and
the assets of an APP-related entity, Speedline. In connection with the
acquisition of APP, the Company issued 541,177 shares of the Company's Common
Stock valued at $6.8 million and paid cash of $11.6 million. See Note 3 of the
Notes to Consolidated Financial Statements.
Effective October 1, 1996, the Company acquired all of the outstanding
capital stock of Pipe Shields Incorporated ("Pipe Shields"), an industrial pipe
insulation company located in Vacaville, California, for approximately $2.5
million in cash, net of cash received. See Note 3 of the Notes to Consolidated
Financial Statements.
On January 27, 1997, the Company acquired (i) all of the outstanding
stock of NAPTech, Inc., a fabricator of industrial piping systems and engineered
piping modules located in Clearfield, Utah, and (ii) the 335,000 square foot
facility that NAPTech, Inc. leased from a related entity (collectively
"NAPTech"). In connection with the acquisition, the Company issued 432,881
shares of the Company's Common Stock. The transaction was accounted for using
the pooling-of-interests method, and accordingly the financial information for
all periods presented has been restated to include the financial information of
NAPTech. See Note 3 of the Notes to Consolidated Financial Statements.
Effective February 1, 1997, the Company purchased all of the
outstanding capital stock of United Crafts, Inc. (UCI), an industrial
construction and maintenance company based in Baton Rouge, Louisiana, for cash
of $8,000,000.
See Note 3 of the Notes to Consolidated Financial Statements.
On March 20, 1997, the Company, through a newly-formed, wholly-owned
subsidiary, completed the purchase of certain assets and the assumption of
certain liabilities of MERIT Industrial Constructors, Inc. (MERIT), an
industrial construction and maintenance firm based in Baton Rouge, Louisiana,
and certain of its affiliates. Total consideration paid by the Company was
approximately $1.6 million in cash, 62,500 shares of the Company's Common Stock
valued at $1.3 million, options to purchase 25,000 shares of the Company's
Common Stock at $20.25 per share, as well as the assumption of approximately
$340,000 of debt. See Note 3 of the Notes to Consolidated Financial Statements.
15
<PAGE>
As discussed in "Business - Subsequent Events", in November 1997, the
Company purchased all of the captial stock or substantially all of the assets of
the principal operating businesses of Prospect for cash of approximately $15.8
million . This transaction was funded by drawing on the Company's revolving line
of credit. For Prospect's year ended September 30, 1996, its most recently
published audited consolidated financial statements, sales amounted to
approximately $138 million. Management of the Company believes that the Prospect
acquisition should result in a significant increase in sales for fiscal 1998.
Results of Operations
General
The following table sets forth, for the periods indicated, the
percentages of the Company's sales that certain income and expense items
represent.
Year Ended August 31,
------------------------
1995 1996 1997
---- ---- ----
Sales 100.0% 100.0% 100.0%
Cost of sales 83.3 83.9 81.1
---- ---- ----
Gross profit 16.7 16.1 18.9
General and administrative expenses 10.5 10.7 11.2
----- ----- -----
Operating income 6.2 5.4 7.7
Interest expense (2.2) (1.9) (2.0)
Other income, net 0.2 0.3 0.1
----- ----- -----
Income before income taxes 4.2 3.8 5.8
Provision for income taxes 1.3 1.2 1.7
----- ----- -----
Income before earnings (losses) from
unconsolidated entities 2.9 2.6 4.1
Earnings (losses) from unconsolidated entities (0.4) 0.1 0.1
------ ----- -----
Income before extraordinary item 2.5 2.7 4.2
Extraordinary item, less applicable income taxes 0.3 -- --
----- ------ -----
Net income 2.8% 2.7% 4.2%
===== ===== ====
Fiscal 1997 Compared to Fiscal 1996
Sales increased 35.7% for fiscal 1997 to $338.4 million from $249.4
million for fiscal 1996. Gross profit increased 59.7% to $64.1 million for
fiscal 1997 from $40.1 million for fiscal 1996. Approximately $68 million of the
increase relates to sales of newly-acquired subsidiaries, including those owned
for only part of fiscal 1996. The remaining increase was due primarily to
increased sales for projects in the domestic chemical and mining sectors, and
the foreign power sector, offset by a decrease in the domestic refining sector.
The Company's sales by geographic region were as follows:
Fiscal 1996 Fiscal 1997
--------------------------- ----------------------
(in millions) % (in millions) %
------------- - ------------- ---
Geographic Region:
U.S.A. $ 173.7 69.7% $235.2 69.5%
Far East/Pacific Rim 39.6 15.9 62.6 18.5
Middle East 21.4 8.6 12.8 3.8
Latin America 2.6 1.0 18.4 5.4
Europe 9.0 3.6 4.1 1.2
Other 3.1 1.2 5.3 1.6
------ ------ ------ ------
$249.4 100.0% $338.4 100.0%
====== ====== ====== ======
16
<PAGE>
The Company's sales by industry sector were as follows:
Fiscal 1996 Fiscal 1997
----------------------------- ------------------------
(in millions) % (in millions) %
------------- --- ------------- ---
Industry Sector:
Power $ 86.7 39.0% $ 102.0 30.2%
Refining 62.4 28.1 50.0 14.8
Chemical 62.1 28.0 130.4 38.5
Mining -- -- 33.3 9.8
Other 10.8 4.9 22.7 6.7
------ ------ -------- ------
222.0 100.0% $ 338.4 100.0%
====== ======= ======
Pooled Sales * 27.4
------
$249.4
======
* Sales by industry sector for the pooled entity, NAPTech, are not
available.
Gross margins for fiscal 1997 increased to 18.9% from 16.1% for fiscal
1996. This increase was due primarily to improved profitability on domestic
process projects, an increase in revenues from the power segment and an increase
in the sale of value-added services, such as engineering and design.
General and administrative expenses for fiscal 1997 increased $11.2
million to $37.9 million, as compared to $26.7 million in fiscal 1996.
Approximately, $5.6 million of the increase relates to general and
administrative expenses of newly-acquired subsidiaries, including those owned
for only part of fiscal 1996. Additionally, the Company incurred merger and
business combination costs of approximately $700,000 related to the NAPTech
acquisition, which was accounted for using the pooling-of-interests method.
These acquisition-related costs are included in general and administrative
expenses for the year ended August 31, 1997. See Note 3 to Notes to Consolidated
Financial Statements. The remaining increase in these expenses relate to
variable costs associated with increased sales.
Interest expense for fiscal 1997 was $6.8 million, up 40.5% from the
$4.8 million incurred in fiscal 1996, primarily due to increased borrowing
resulting from the expansion of business and the acquisitions of Pipe Shields,
UCI and MERIT in 1997.
The Company's effective tax rates for fiscal 1997 and fiscal 1996 were
30.6% and 31.9%, respectively. The decrease in the fiscal 1997 rates from fiscal
1996 was primarily due to state income tax incentives and refunds. The majority
of these incentives and refunds will not be recurring; however, the increase in
state income taxes should be partially offset by additional tax savings from
foreign sales.
Fiscal 1996 Compared to Fiscal 1995
Sales increased $92.5 million, or 58.9%, for fiscal 1996 to $249.4
million from $156.9 million for fiscal 1995. This increase was due primarily to
increased sales for projects in the domestic chemical and refinery sectors and
the international power sector, as well as to the acquisitions of Word and APP,
which contributed approximately $15.6 million and $24.9 million, respectively,
in sales from their respective dates of acquisition.
17
<PAGE>
The Company's sales by geographic region were as follows:
Fiscal 1995 Fiscal 1996
----------------------- ------------------------
(in millions) % (in millions) %
------------- --- ------------- ---
Geographic Region:
U.S.A. $ 107.8 68.7% $173.7 69.7%
Far East/Pacific Rim 24.3 15.5 39.6 15.9
Middle East 4.2 2.7 21.4 8.6
Latin America 20.5 13.1 2.6 1.0
Europe -- -- 9.0 3.6
Other 0.1 0.0 3.1 1.2
------ ----- ------ -----
$156.9 100.0% $249.4 100.0%
====== ===== ====== =====
The Company's sales by industry sector were as follows:
Fiscal 1995 Fiscal 1996
--------------------------- -------------------------
(in millions) % (in millions) %
------------- --- ------------- ---
Industry Sector:
Power $ 59.2 43.8% $ 86.7 39.0%
Refining 39.2 29.0 62.4 28.1
Chemical 33.5 24.7 62.1 28.0
Other 3.4 2.5 10.8 4.9
--------- ------- -------- -------
135.3 100.0% 222.0 100.0%
======= =======
Pooled Sales * 21.6 27.4
-------- --------
$156.9 $249.4
======== ========
* Sales by industry sector for the pooled entity, NAPTech, are not
available.
The gross margin for fiscal 1996 decreased to 16.1% from 16.7% for
fiscal 1995. The decrease is attributable primarily to the decreased margins
generated by NAPTech for fiscal 1996 compared to fiscal 1995. In addition,
during fiscal 1996, the Company had a substantial decrease in sales and gross
profits from the Company's Venezuelan facility, which historically had achieved
higher gross margin percentages than the Company's domestic subsidiaries. These
factors contributing to the decline in gross margins were partially offset by an
increase in international projects with their generally higher profit margins,
improvement in pricing in the domestic market and contributions from the APP and
Word subsidiaries.
General and administrative expenses were $26.7 million for fiscal
1996, compared to $16.5 million for the prior year. The $10.2 million increase
was due primarily to the integration of Word and APP into Shaw's business and to
the variable costs associated with the increased sales.
Interest expense for fiscal 1996 was $4.8 million, up 39.2% from the
$3.5 million incurred in fiscal 1995, primarily due to increased borrowing
resulting from the expansion of business, billing delays, and the acquisitions
of APP and Word in 1996. Beginning in the fourth quarter of fiscal 1995, the
Company has benefitted from new loan and security agreements with commercial
lenders and insurance companies, as well as an industrial revenue bond
financing, that reduced overall interest rates applicable to the Company and
helped reduce the impact of the aforementioned increased borrowings.
The Company's effective tax rates for fiscal 1996 and 1995 were 31.9%
and 31.1%, respectively. The increase in the fiscal 1996 tax rates, as compared
to the same period the prior year, was primarily due to an increased proportion
of the Company's net profit in the domestic market due in part to the
integration of APP and Word into the Company's operations.
18
<PAGE>
Liquidity and Capital Resources
Net cash provided by operations was $7.6 million for fiscal 1997,
compared to net cash used in operations of $22.0 million for fiscal 1996. For
fiscal 1997, net cash was favorably impacted by net income of $14.0 million and
additional non-cash activity of $9.3 million, consisting primarily of
depreciation of $7.4 million. Offsetting these positive factors were increases
of $4.7 million in receivables and $6.8 million in inventories and decreases of
$3.5 million in accrued liabilities and $3.4 million in advanced billings.
The increase in receivables was primarily attributable to a higher
volume of sales activity for fiscal 1997. Inventories increased 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, 1997 of approximately $253.0 million. Accrued liabilities and advanced
billings decreased due to normal operating activities and contract billing
provisions.
Net cash used in investing activities was $28.4 million for fiscal
1997, compared to $26.0 million for fiscal 1997. During fiscal 1997, the Company
invested net cash of $2.5 million in connection with the acquisition of Pipe
Shields and net cash of $9.1 million in connection with the acquisitions of UCI
and MERIT. See Note 3 to Notes to Consolidated Financial Statements. In
addition, the Company purchased $15.8 million of property and equipment in
fiscal 1997. Major property and equipment purchases include $4.3 million for two
pipe bending machines, $6.0 million of property and equipment purchases and
improvements at APP, and $5.5 million of other property and equipment purchases.
In addition, the Company increased its investment in its unconsolidated
subsidiary, Shaw-Nass Middle East, W.L.L., by $1.6 million in connection with
the joint venture's purchase of the building it had previously been leasing.
Net cash provided by financing activities was $22.2 million for fiscal
1997, compared to $51.1 million provided in fiscal 1996. For fiscal 1997, the
primary source of cash was from the Company's sale of 2,398,000 shares of its
Common Stock, which netted approximately $47.4 million. See Note 2 to Notes to
Consolidated Financial Statements. The proceeds were used to pay down amounts
outstanding under the Company's revolving line of credit, which has been used to
provide working capital, as well as to fund fixed asset and subsidiary
acquisitions. For additional information on the Company's revolving line of
credit, see Note 7 to Notes to Consolidated Financial Statements. Additionally,
the Company borrowed $15.0 million in term loans, approximately $6.0 million of
which refinanced old debt. The principal new term loans are from two commercial
lenders and an insurance company, are secured by property and equipment, have
maturity dates ranging from 2001 to 2007, and variable interest rates, which at
August 31, 1997 ranged from 6.88% to 7.94%.
The Company believes that its current financing arrangements are
sufficient to support its operations for the next twelve months.
Material Changes in Financial Condition
The Company's current assets increased by $21.4 million from $151.9
million at August 31, 1996 to $173.3 million at August 31, 1997. The increase
resulted primarily from increases in accounts receivable of $11.5 million and
increases in inventories of $7.4 million. Receivables increased primarily due to
increased sales levels and acquisitions, and inventories increased primarily due
to current and future production requirements. At August 31, 1997, approximately
$6.9 million of the receivables were attributable to the acquisitions of Pipe
Shields and UCI.
Property and equipment increased by $19.1 million to $88.6 million at
August 31, 1997 from $69.5 million at August 31, 1996. This increase resulted
primarily from the $.3 million of property and equipment acquired in the
acquisition of Pipe Shields, the $3.8 million of property and equipment acquired
in the acquisition of UCI and MERIT, the purchase of two induction bending
machines aggregating $4.3 million, $6.0 million in fixed asset additions for
APP, and 4.7 million of other property and equipment purchases.
Other assets increased from $6.7 million at August 31, 1996 to $14.8
million at August 31, 1997. The increase was primarily attributable to fiscal
1997 acquisitions, which resulted in goodwill of approximately $8.2 million. See
Note 3 to Notes to Consolidated Financial Statements.
19
<PAGE>
The Company's current liabilities decreased $23.6 million from $104.0
million at August 31, 1996 to $80.4 million at August 31, 1997. This decrease
was primarily due to the reduction in the revolving line of credit of $23.6
million, which was paid down with the proceeds from the sale of 2,398,000 shares
of Common Stock. See Note 2 to Notes to Consolidated Financial Statements. The
revolving line of credit has been used to provide working capital, as well as to
fund fixed asset and subsidiary acquisitions.
Financial Accounting Standards Board Statements
In December 1990, Statement of Financial Accounting Standards No. 106,
"Employer's Accounting for Post-Retirement Benefits Other Than Pensions" ("SFAS
106"), was issued and required to be adopted by the Company no later than fiscal
1994. The Company presently offers no post-retirement benefits which would be
required to be reflected in its financial statements by SFAS 106.
In November 1992, Statement of Financial Accounting Standards No. 112,
"Employer's Accounting for Post-Employment Benefits" ("SFAS 112"), was issued
and required to be adopted by the Company no later than fiscal 1995. The Company
presently offers no post-employment benefits which would be required to be
reflected in its financial statements by SFAS 112.
In 1995, Statement of Financial Accounting Standards No.
121--"Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of" was issued and required to be adopted by the Company no later
than the fiscal year ending August 31, 1997. The effect of adopting SFAS 121 on
the Company's financial statements taken as a whole was not material.
Also in 1995, Statement of Financial Accounting Standards No.
123--"Accounting for Stock-Based Compensation" (the "Statement") was issued
which establishes, among other things, financial accounting and reporting
standards for stock-based employee compensation plans. Entities may either adopt
a "fair value based method" of accounting for an employee stock option as
defined by the Statement or may continue to use accounting methods as prescribed
by APB Opinion No. 25--"Accounting for Stock issued to Employees." Entities
electing to remain with the accounting in APB Opinion No. 25 are required to
make pro forma disclosures of net income and earnings per share as if the fair
value based method of accounting defined in the Statement had been applied. The
Company will continue to follow APB Opinion No. 25 and make appropriate
disclosures in accordance with the Statement. See Note 14 to Notes to
Consolidated Financial Statements.
In February 1997, Statement of Financial Accounting Standards No. 128
- -- "Earnings Per Share" ("SFAS 128") was issued which establishes standards for
computing and presenting earnings per share ("eps"). Under SFAS 128, primary eps
is replaced with basic eps. Basic eps is computed by dividing income applicable
to common shares by the weighted average shares outstanding; no dilution for any
potentially convertible shares is included in the calculation. Fully diluted
eps, now called diluted eps, is still required; however, when applying the
treasury stock method, the average stock price is used rather than the greater
of the average or closing stock price for the period. Under SFAS 128, basic eps
and diluted eps for the years ended August 31, 1995 and 1997 were not materially
different from the eps reported by the Company. For the year ended August 31,
1996, basic eps and diluted eps was $.70 and $.68, respectively. SFAS 128 is
effective for financial statements issued for periods ending after December 15,
1997.
20
<PAGE>
ITEM 8. Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Public Accountants................................22
Consolidated Balance Sheets as of August 31, 1996 and 1997............. 23 - 24
Consolidated Statements of Income for the years ended
August 31, 1995, 1996 and 1997........................................25
Consolidated Statements of Shareholders' Equity for the years
ended August 31, 1995, 1996 and 1997..................................26
Consolidated Statements of Cash Flows for the years
ended August 31, 1995, 1996 and 1997..................................27 - 28
Notes to Consolidated Financial Statements..............................29 - 45
21
<PAGE>
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, 1996 and 1997, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended August 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of The Shaw
Group Inc. and subsidiaries as of August 31, 1996 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended August 31, 1997, in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP /s/ Hannis T. Bourgeois, L.L.P.
- ------------------------ --------------------------------
Arthur Andersen LLP Hannis T. Bourgeois, L.L.P.
New Orleans, Louisiana Baton Rouge, Louisiana
October 15, 1997
(Except with respect to matters discussed in Note 17, as to which the date is
November 14, 1997)
22
<PAGE>
<TABLE>
THE SHAW GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of August 31, 1996 and 1997
<CAPTION>
1996 1997
---- ----
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,967,342 $ 4,357,494
Accounts receivable, net--Notes 6 and 7 75,241,111 85,979,939
Receivables from unconsolidated entities--Note 5 700,479 1,453,098
Inventories--Notes 4, 6 and 7 68,878,231 76,304,426
Prepaid expenses 2,440,503 2,351,897
Deferred income taxes--Note 8 1,634,817 2,855,038
------------- -------------
Total current assets 151,862,483 173,301,892
Investment in unconsolidated entities--Note 5 1,920,880 4,004,736
Property and equipment--Notes 6 and 10:
Transportation equipment 4,685,200 4,984,130
Furniture and fixtures 6,155,724 8,455,791
Machinery and equipment 36,299,786 48,039,977
Buildings and improvements 18,268,904 22,792,452
Assets acquired under capital leases 896,677 317,512
Land 3,201,626 3,973,118
------------ ------------
69,507,917 88,562,980
Less: Accumulated depreciation (including amortization
of assets acquired under capital leases) (12,065,574) (18,235,529)
---------- ----------
57,442,343 70,327,451
Note receivable from related party--Notes 3 and 15 625,000 --
Other assets, net--Notes 3 and 15 6,652,738 14,825,212
------------- ------------
$218,503,444 $262,459,291
============ ============
</TABLE>
(Continued)
The accompanying notes are an integral part of these statements.
23
<PAGE>
<TABLE>
THE SHAW GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of August 31, 1996 and 1997
<CAPTION>
1996 1997
---- ----
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Outstanding checks in excess of bank balance $ 3,104,746 $ 691,111
Accounts payable 28,905,023 31,154,748
Accrued liabilities 9,412,963 8,544,778
Current maturities of long-term debt--Note 6 4,865,038 6,366,407
Revolving line of credit--Note 7 52,796,148 29,146,150
Current portion of obligations under capital
leases--Note 10 68,143 26,448
Deferred revenue--prebilled 1,839,689 3,582,054
Advanced billings 2,990,631 833,817
------------- ------------
Total current liabilities 103,982,381 80,345,513
Long-term debt, less current maturities--Note 6 36,795,386 38,933,370
Obligations under capital leases, less current
portion--Note 10 44,696 105,681
Deferred income taxes--Note 8 1,635,702 5,260,056
Shareholders' equity--Notes 9 and 12:
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; 16,619,099 and 19,151,309 shares
issued in 1996 and 1997; 9,956,183 and 12,488,393
shares outstanding in 1996 and 1997 56,849,127 104,869,788
Retained earnings 26,023,987 39,772,718
Treasury stock, 6,662,916 shares (6,827,835) (6,827,835)
-------------- ---------------
Total shareholders' equity 76,045,279 137,814,671
------------ ------------
$218,503,444 $262,459,291
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
24
<PAGE>
<TABLE>
THE SHAW GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended August 31, 1995, 1996 and 1997
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Income:
Sales $156,921,769 $249,358,437 $338,350,179
Cost of sales 130,714,344 209,210,668 274,234,257
------------ ----------- -----------
Gross profit 26,207,425 40,147,769 64,115,922
General and administrative expenses 16,459,916 26,679,302 37,881,198
----------- ---------- ----------
Operating income 9,747,509 13,468,467 26,234,724
Interest expense (3,465,454) (4,823,336) (6,777,544)
Other income, net 244,315 922,839 155,493
------------ ----------- ----------
(3,221,139) (3,900,497) (6,622,051)
------------ ----------- ----------
Income before income taxes 6,526,370 9,567,970 19,612,673
Provision for income taxes--Note 8 2,026,552 3,053,703 6,001,380
------------ ----------- ----------
Income before earnings (losses) from
unconsolidated entities 4,499,818 6,514,267 13,611,293
Earnings (losses) from unconsolidated
entities--Note 5 (587,569) 102,931 436,855
------------ ----------- ------------
Income before extraordinary item 3,912,249 6,617,198 14,048,148
Extraordinary item, less applicable
income taxes of $-0- in 1995--Note 6 490,625 -- --
----------- ------------ ------------
Net income $ 4,402,874 $ 6,617,198 $ 14,048,148
=========== =========== ============
Earnings per common share--Note 12:
Income before extraordinary item $ .44 $ .68 $ 1.21
Extraordinary item .05 -- --
----------- ------------ ------------
Net income $ .49 $ .68 $ 1.21
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
25
<PAGE>
<TABLE>
THE SHAW GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended August 31, 1995, 1996 and 1997
Common Stock Treasury Stock Total
------------ -------------- Retained Shareholders'
Shares Amount Shares Amount Earnings Equity
------ ------ ------ ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance, September 1, 1994 15,319,577 $41,863,719 6,662,916 $(6,827,835) $16,034,854 $51,070,738
Net income -- -- -- -- 4,402,874 4,402,874
Pooled entity:
Share sale 193,555 2,699,283 -- -- -- 2,699,283
Dividend -- -- -- -- (125,000) (125,000)
Conversion of note payable,
redeemable preferred stock
and cumulative redeemable
preferred stock dividends to
common stock 93,792 1,307,999 -- -- -- 1,307,999
---------- ---------- --------- ---------- ---------- ----------
Balance, August 31, 1995 15,606,924 45,871,001 6,662,916 (6,827,835) 20,312,728 59,355,894
Net income -- -- -- -- 6,617,198 6,617,198
Shares issued to acquire
Word-- Note 3 385,000 3,401,900 -- -- -- 3,401,900
Shares issued to acquire
APP--Note 3 541,177 6,724,712 -- -- -- 6,724,712
Exercise of options 45,125 281,514 -- -- -- 281,514
Pooled entity:
Net loss not included in
reporting period--Note 3 -- -- -- -- (905,939) (905,939)
Share sale 40,873 570,000 -- -- -- 570,000
---------- ---------- --------- ---------- ---------- ----------
Balance, August 31, 1996 16,619,099 56,849,127 6,662,916 (6,827,835) 26,023,987 76,045,279
Net Income -- -- -- -- 14,048,148 14,048,148
Shares issued in public offering
--Note 2,398,000 46,985,442 -- -- -- 46,985,442
Shares issued to acquire certain
assets of MERIT Industrial
Constructors, Inc. and certain
of its affiliates--Note 3 62,500 1,265,625 -- -- -- 1,265,625
Exercise of options 71,710 433,400 -- -- -- 433,400
Pooled entity:
Purchase of treasury stock -- (663,806) -- -- -- (663,806)
Distributions to members of
Freeport Properties, L.C. -- -- -- -- (167,804) (167,804)
Net loss not included in
reporting period--Note 3 -- -- -- -- (131,613) (131,613)
---------- ------------ --------- ------------ ----------- ------------
19,151,309 $104,869,788 6,662,916 $(6,827,835) $39,772,718 $137,814,671
========== ============ ========= ============ =========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
26
<PAGE>
<TABLE>
THE SHAW GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended August 31, 1995, 1996 and 1997
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 4,402,874 $ 6,617,198 $14,048,148
Net loss not included in reporting period - Note 3 -- ( 905,939) ( 131,613)
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 2,982,056 4,992,087 7,358,013
Provision (benefit) for deferred
income taxes 871,559 (2,802,430) 2,230,551
(Earnings) losses from unconsolidated
entities 663,569 (102,931) (436,855)
Translation loss -- 863,822 6,449
Gain on sale of marketable securities -- (855,047) --
Other (301,781) (251,170) 289,903
Changes in assets and liabilities,
net of effects of acquisitions:
(Increase) in receivables (9,016,718) (16,658,477) (4,665,546)
(Increase) in inventories (4,206,489) (19,337,381) (6,779,214)
(Increase) decrease in other current
assets (76,666) (1,479,433) 257,249
(Increase) decrease in other assets (1,004,108) (851,173) 311,851
Increase in accounts payable 6,597,886 9,305,533 274,046
Increase in deferred
revenue--prebilled 156,014 937,685 1,742,365
Increase (decrease) in accrued
liabilities 663,406 (2,295,054) (3,467,096)
Increase (decrease) in advanced billings 2,135,820 854,811 (3,433,726)
---------------- -------------- -------------
Net cash provided by (used in)
operating activities 3,867,422 (21,967,899) 7,604,525
Cash flows from investing activities:
Investment in unconsolidated entities (381,678) 95,513 (1,647,001)
Investment in subsidiaries, net of
cash received (482,243) (9,516,276) (11,651,076)
Proceeds from sale of property and
equipment 70,285 1,702,573 621,786
Purchase of property and equipment (5,810,465) (18,478,171) (15,831,691)
Purchase of marketable securities (269,351) (1,433,143) --
Cash transferred from escrow fund 1,295,000 -- --
Purchase of other assets (7,596) -- --
Proceeds from sale of marketable
securities 1,694,070 2,288,190 --
Payment (issuance) of note receivable to a
related party -- (625,000) 86,770
----------------- ---------------- --------------
Net cash used in investing activities (3,891,978) (25,966,314) (28,421,212)
(Continued)
The accompanying notes are an integral part of these statements.
27
<PAGE>
1995 1996 1997
---- ---- ----
Cash flows from financing activities:
Net proceeds (repayments) from
revolving credit agreement (9,534,617) 31,440,326 (23,889,998)
Proceeds from issuance of debt 13,786,912 22,244,181 15,030,863
Repayment of debt and leases (5,779,974) (5,787,667) (13,107,381)
Dividend from pooled entity (105,000) -- --
Increase (decrease) in outstanding
checks in excess of bank balance 380,734 2,323,561 (2,413,635)
Distributions to members of Freeport Properties, L.C. -- -- (167,804)
Purchase of treasury stock -- -- (663,806)
Issue common stock 1,330,883 851,514 47,418,842
--------- ----------- -----------
Net cash provided by financing activities 78,938 51,071,915 22,207,081
Effects of exchange rate changes
on cash -- (954,143) (242)
----------- ------------ ------------
Net increase (decrease) in cash 54,382 2,183,559 1,390,152
Cash and cash equivalents--beginning
of year 729,401 783,783 2,967,342
----------- ----------- ------------
Cash and cash equivalents--end of year $ 783,783 $ 2,967,342 $ 4,357,494
=========== =========== ===========
Supplemental disclosures:
Cash payments for:
Interest $ 3,467,508 $ 4,865,283 $ 6,662,860
=========== =========== ===========
Income taxes (refund) $(2,370,260) $ 7,712,620 $ 5,784,084
============ =========== ===========
Noncash investing and financing activities:
Property and equipment acquired through
issuance of debt $ 104,963 $ 15,300 $ 83,481
=========== ============ =============
Investment in subsidiaries acquired
through issuance of common stock $ -- $ 10,126,612 $ 1,265,625
=========== ============ =============
Investment in unconsolidated entities
through reduction in receivables $ 1,015,000 $ 89,014 $ --
=========== ============ =============
Property and equipment acquired through
recovery of investment in
unconsolidated subsidiary $ 1,075,300 $ - $ --
=========== ============ =============
Other current assets acquired through issuance
of debt $ -- $ 2,131,515 $ 134,327
=========== ============ =============
Conversion of note payable, contract payable, redeemable
preferred stock and cumulative preferred stock dividends
to common stock $ 2,676,399 $ -- $ --
=========== ============ =============
Purchase of inventory and payment of liabilities through
cancellation of notes receivable to a related party $ -- $ -- $ 538,230
=========== ============ =============
</TABLE>
The accompanying notes are an integral part of these statements.
28
<PAGE>
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 (the
Company). All material intercompany accounts and transactions have been
eliminated in these financial statements. The financial statements have been
restated to include the accounts of the acquisition of an entity (See Note 3)
which was accounted for using the pooling-of-interests method.
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. Actual results could differ from those estimates.
Nature of Operations
The Company is a supplier of industrial piping systems for new
construction and retrofit projects throughout the world, primarily for customers
in the electric power, refining and chemical industries. The Company offers
comprehensive design and engineering services, piping system fabrication,
industrial construction and maintenance services, manufacturing and sale of
speciality pipe fittings and design and fabrication of pipe support systems. The
Company's operations are conducted through nine fabrication facilities, two
engineering offices, one manufacturing facility, one pipe insulation company and
one industrial construction and maintenance company.
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, 1996 and 1997, the Company included in cash and cash equivalents
approximately $1,100,000, 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 customers include major multi-national construction and
engineering firms and industrial corporations. Work is performed under contract
and the Company believes that its credit risk is minimal. The Company grants
short-term credit to its customers.
The Company has established an allowance for doubtful accounts and
contract adjustments. The reserve balances as of August 31, 1996 and 1997 are
approximately $2,500,000 and $2,800,000, respectively. Charges to this allowance
were not material during fiscal 1996 and 1997.
Inventories
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) cost method in 1996 and 1997 and
the average cost method in 1995. The effect of changing from the average to the
FIFO cost method during 1996 was not material.
29
<PAGE>
Work in Process
Work in process includes primarily the costs accumulated in the
fabrication process for units only partially completed.
Property and Equipment
Property and equipment is recorded at cost. Additions and improvements
are capitalized. Maintenance and repair expenses are charged to income as
incurred. The cost of property 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
Income Taxes
The Company provides for deferred taxes in accordance with FASB
Statement 109, 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
Revenue on fabrication contracts is generally recognized upon the
completion of an individual spool of production. A spool consists of piping
materials and associated shop labor to form a pre-fabricated unit according to
contract specifications. During the fabrication process, all direct and indirect
costs related to the fabrication process are capitalized as work in process
inventory. Capitalized costs are charged to earnings upon completion of the
fabrication process for each spool. Spools are generally shipped to job site
locations when complete.
The Company also contracts with certain customers on a fixed price
basis. Revenue is recognized as spools are completed. Costs and estimated
earnings in excess of billings included in accounts receivable totaled
$14,126,120 and $14,425,846 for the years ended August 31, 1996 and 1997,
respectively. Billings in excess of costs and estimated earnings for both years
are recorded as advance billings.
Profit related to prebilled materials is deferred until the fabrication
of the spools is completed.
Intangible Assets
Intangible assets represent the excess of the purchase price of
acquisitions over the fair value of the net assets acquired. Such excess costs
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.
Financial Instruments, Forward Contracts - Non-Trading Activities
The Company utilizes forward foreign exchange contracts to hedge the
anticipated purchases and sales of certain pipe bending machines. Financial
instruments are designated as a hedge at inception where there is a direct
relationship to
30
<PAGE>
the price risk associated with the Company's future sales and purchases. Hedges
of anticipated transactions are accounted for under the deferral method with
gains and losses on these transactions recognized in revenues when the hedged
transaction occurs. 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 contract are recognized as gains or losses in revenues in the period of
change.
Reclassifications
Certain reclassifications have been made to the prior year's financial
statements in order to conform to current reporting practices.
New Accounting Standards
In 1995, Statement of Financial Accounting Standards No.
121--"Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of" ("SFAS 121") was issued and required to be adopted by the
Company no later than the fiscal year ending August 31, 1997. The effect of
adopting SFAS 121 on the Company's financial statements taken as a whole was not
material.
Also in 1995, Statement of Financial Accounting Standards No.
123--"Accounting for Stock-Based Compensation" (the "Statement") was issued
which establishes, among other things, financial accounting and reporting
standards for stock-based employee compensation plans. Entities may either adopt
a "fair value based method" of accounting for an employee stock option as
defined by the Statement or may continue to use accounting methods as prescribed
by APB Opinion No. 25--"Accounting for Stock issued to Employees." Entities
electing to remain with the accounting in APB Opinion No. 25 are required to
make pro forma disclosures of net income and earnings per share as if the fair
value based method of accounting defined in the Statement had been applied. The
Company will continue to follow APB Opinion No. 25 and make appropriate
disclosures in accordance with the Statement. See Note 14 to Notes to
Consolidated Financial Statements.
In February 1997, Statement of Financial Accounting Standards No. 128
- -- "Earnings Per Share" ("SFAS 128") was issued which establishes standards for
computing and presenting earnings per share ("eps"). Under SFAS 128, primary eps
is replaced with basic eps. Basic eps is computed by dividing income applicable
to common shares by the weighted average shares outstanding; no dilution for any
potentially convertible shares is included in the calculation. Fully diluted
eps, now called diluted eps, is still required; however, when applying the
treasury stock method, the average stock price is used rather than the greater
of the average or closing stock price for the period. Under SFAS 128, basic eps
and diluted eps for the years ended August 31, 1995 and 1997 were not materially
different from the eps reported by the Company. For the year ended August 31,
1996, basic eps and diluted eps was $.70 and $.68, respectively. SFAS 128 is
effective for financial statements issued for periods ending after December 15,
1997.
Note 2--Public Offering of Common Stock
On December 23, 1996, the Company closed the sale of 2,000,000 shares
of its common stock, no par value (the "Common Stock"), in an underwritten
public offering at a price of $21.00 per share less underwriting discounts and
commissions. On January 10, 1997, the underwriters for such offering exercised
an option to purchase an additional 398,000 shares of Common Stock from the
Company pursuant to such terms to cover over-allotments. The net proceeds to the
Company, less underwriting discounts and other expenses of the offering, totaled
approximately $47 million and were used to pay down amounts outstanding under
the Company's revolving line of credit. The Company's revolving line of credit
has been used to provide working capital, as well as to fund fixed asset and
subsidiary acquisitions.
31
<PAGE>
Note 3--Acquisitions
On December 15, 1994, the Company acquired the 50% interest of the
other participant in the Shaw-Formiconi joint venture located in Venezuela,
together with the concurrent acquisition of certain land, buildings and other
assets used by the venture. The total amount of the purchase price related to
this acquisition, including the selling participant's share of joint venture
profits, was approximately $2,900,000. The purchase method was used to account
for the acquisition. The $926,825 of excess cost over the estimated fair value
of the assets acquired, which is included in other assets, is being amortized
over twenty years using the straight-line method. The name of the wholly-owned
continuing entity is Manufacturas Shaw South America, C.A.
On January 16, 1996, the Company's newly formed, wholly-owned
subsidiary, Word Industries Fabricators, Inc., purchased certain assets and
assumed certain liabilities from Word Industries Pipe Fabricating, Inc. (WIPF),
TS&M Corporation and T.N. Word and certain of his family members (collectively,
"Word"). The acquisition was completed through the issuance of 385,000 shares of
the Company's common stock valued at $3,442,000 and cash of $503,000.
Acquisition costs of $246,000 were incurred by the Company. The purchase method
was used to account for the acquisition. The purchase price has been allocated
to the estimated fair value of assets acquired and liabilities assumed at the
date of acquisition as follows:
Property and Equipment $5,405,000
Notes Payable (294,000)
Accrued Liabilities (306,000)
Deferred Income Taxes (614,000)
---------
Purchase Price $4,191,000
==========
The operating results of Word have been included in the consolidated
statements of income from the date of acquisition.
In addition to the transactions described above, the Company agreed to
loan WIPF an aggregate of $1,725,000 pursuant to two separate loan agreements,
each dated as of January 15, 1996, one in the amount of $625,000 and the other
in the amount of $1,100,000. The $625,000 loan was funded, but has been paid by
WIPF. As of August 31, 1997, the $1,100,000 loan is no longer available to WIPF.
Effective March 1, 1996, the Company purchased all of the outstanding
capital stock of Alloy Piping Products, Inc. (APP), a leading U.S. manufacturer
of specialty stainless and carbon steel pipe fittings and other stainless pipe
products, and the assets of an APP-related entity, Speedline, a Louisiana
partnership (Speedline). The acquisition was completed through the issuance of
541,177 shares of the Company's common stock valued at $6,765,000 and cash of
$11,280,000. Acquisition costs of $366,000 were incurred by the Company. The
purchase method was used to account for the acquisitions. The purchase price has
been allocated to the estimated fair value of assets purchased and liabilities
assumed at the date of acquisition as follows:
Accounts Receivable $ 6,751,000
Inventory 16,175,000
Other Current Assets 268,000
Property and Equipment 13,001,000
Other Assets 222,000
Revolving Line of Credit (4,855,000)
Notes Payable (5,789,000)
Accounts Payable and Accrued Liabilities (8,117,000)
Deferred Income Taxes (2,205,000)
-----------
Purchase price (net of cash received of $2,960,000) $15,451,000
===========
The operating results of APP have been included in the consolidated
statements of income from the effective date of acquisition.
32
<PAGE>
In addition, in connection with the Company's acquisition of APP and
Speedline, options to acquire an aggregate of 85,000 shares of the Company's
Common Stock at an exercise price of $19.50 per share were issued. The options
are exercisable in 25% increments on each April 5, 1997, 1998, 1999 and 2000
based upon continued employment of the recipients by the Company. At August 31,
1997, options to acquire 35,000 of these shares remain outstanding.
Effective October 1, 1996, the Company acquired all of the outstanding
capital stock of Pipe Shields Incorporated (Pipe Shields), an industrial pipe
insulation company located in Vacaville, California, for approximately $2.5
million in cash, net of cash received. The purchase method was used to account
for the acquisition. The excess of cost over the estimated fair value of the
assets acquired was approximately $2.1 million, which is included in other
assets and is being amortized on a straight-line basis over 20 years. The
operating results of Pipe Shields have been included in the consolidated
statements of income of the Company from the effective date of the acquisition.
The pro-forma effect of the acquisition of Pipe Shields, had it occurred on
September 1, 1994, is not material to the operations of the Company.
On January 27, 1997, the Company completed the acquisition of NAPTech,
Inc., a fabricator of industrial piping systems and engineered piping modules
located in Clearfield, Utah. The Company issued 432,881 shares of its Common
Stock in exchange for NAPTech, Inc. and the 335,000 square foot facility that
NAPTech, Inc. had leased from a related entity, Freeport Properties, L.C.
(Freeport). The acquisition was accounted for using the pooling-of-interests
method; accordingly, the Company's financial information for all prior periods
presented herein has been restated to include financial information of NAPTech,
Inc. and Freeport, (collectively, "NAPTech"). Summarized results of operations
of the separate companies for the period from September 1, 1996 through January
27, 1997, the date of acquisition, are as follows:
Shaw NAPTech
---- -------
Sales $106,555,000 $24,482,000
============ ===========
Net Income $ 2,505,000 $ 584,000
============ ===========
Net income of the combined companies for the fiscal year ended August
31, 1997 has been reduced by approximately $700,000 of merger and business
combination costs of the NAPTech acquisition.
Because the fiscal periods of the Company and NAPTech were not the
same, NAPTech financial statements for the 1995 fiscal year consisted of the
twelve months ended March 31, 1995. The 1996 fiscal year financial statements of
NAPTech were recast from the twelve months ended March 31, 1996 to the twelve
months ended June 30, 1996. The 1997 fiscal year of NAPTech is the same as the
Company's. As a result, the following sales and losses of NAPTech have been
excluded from the respective statements of income:
Fiscal Period Months excluded Sales Net Losses
-------------- ------------------------- ---------- ----------
1996 April, May and June, 1995 $3,811,000 $906,000
1997 July and August, 1996 $5,194,000 $132,000
The following is a reconciliation of the amounts of sales and net
income previously reported (in the Company's Annual Report on Form 10-K for the
year ended August 31, 1996) to the restated financial information for all prior
periods presented herein:
Year Ended Year Ended
August 31, 1995 August 31, 1996
--------------- ---------------
Sales
As previously reported $135,264,643 $222,017,437
NAPTech 21,657,126 27,341,000
------------ ------------
As restated $156,921,769 $249,358,437
============ ============
Net Income
As previously reported $ 4,266,045 $ 8,776,498
NAPTech 136,829 ( 2,159,300)
------------ ------------
As restated $ 4,402,874 $ 6,617,198
============ ============
33
<PAGE>
Effective February 1, 1997, the Company purchased all of the
outstanding capital stock of United Crafts, Inc. (UCI), an industrial
construction and maintenance company based in Baton Rouge, Louisiana, for cash
of $8,000,000. Acquisition costs of approximately $192,000 were incurred by the
Company. The purchase method was used to account for the acquisition. The excess
of cost over the estimated fair value of the assets acquired was $4,770,000,
which is included in other assets and is being amortized on a straight-line
basis over 20 years. The estimated fair value of the assets and liabilities of
UCI as of February 1, 1997 are as follows:
Accounts Receivable $6,040,000
Property and Equipment 2,992,000
Other Assets 4,832,000
Accounts Payable & Accrued Liabilities (3,502,000)
Advance Billings (1,277,000)
Notes Payable (1,101,000)
Deferred Income Taxes (146,000)
----------
Purchase Price (net of cash received of $354,000) $7,838,000
==========
The operating results of UCI have been included in the consolidated
statements of income from the effective date of the acquisition.
On March 20, 1997, the Company, through a newly-formed, wholly-owned
subsidiary, completed the purchase of certain assets and the assumption of
certain liabilities of MERIT Industrial Constructors, Inc. (MERIT), an
industrial construction and maintenance firm based in Baton Rouge, Louisiana,
and certain of its affiliates. Total consideration paid by the Company was
approximately $1.3 million in cash (including acquisition costs), 62,500 shares
of the Company's Common Stock valued at $1.3 million, options to purchase 25,000
shares of the Company's Common Stock at $20.25 per share, as well as the
assumption of approximately $340,000 of debt. The purchase method was used to
account for the acquisition. The excess of cost over the estimated fair value of
the assets acquired was $1,290,000, which is included in other assets and is
being amortized on a straight-line basis over 20 years. The operating results
related to the acquired MERIT assets have been included in the consolidated
statements of income from the date of the acquisition. The pro-forma effect of
the acquisition of the MERIT assets, had it occurred on September 1, 1994, is
not material to the operations of the Company.
The following summarized unaudited income statement data reflects the
impact the above acquisitions accounted for as a purchase would have had on the
Company's results of operations if the Word, APP and UCI acquisitions had taken
place on September 1, 1994:
Unaudited Pro-forma Results for the Year Ended August 31,
---------------------------------------------------------
1995 1996 1997
---- ---- ----
Gross revenue $258,508,000 $322,379,000 $353,385,000
============ ============ ============
Net income $ 7,830,000 $ 6,964,000 $ 14,238,000
============ ============ ============
Earnings per common share $ 0 .79 $ 0.68 $ 1.22
============ ============ ============
Note 4--Inventories
The major components of inventories consist of the following:
August 31,
--------------------------------
1996 1997
---- ----
Finished Goods $ 23,138,238 $29,027,556
Raw Materials 34,241,467 35,256,732
Work In Process 11,498,526 12,020,138
----------- -----------
$68,878,231 $76,304,426
=========== ===========
34
<PAGE>
Note 5--Investment in Unconsolidated Entities
During the years ended August 31, 1995 and 1997, the Company invested
$1,880,000 and $1,647,000, respectively in Shaw-Nass Middle East, W.L.L., the
Company's Bahrain joint venture ("Shaw-Nass"). There was no investment in fiscal
1996. The Company owns 49% of Shaw-Nass and accounts for this investment on the
equity basis. As such, during the years ended August 31, 1995, 1996, and 1997
the Company recognized earnings (losses) of ($205,968), $102,931 and $436,855
respectively from Shaw-Nass. No distributions have been received through August
31, 1997 from Shaw-Nass. In addition, as of August 31, 1996 and 1997, the
Company had outstanding receivables from Shaw-Nass totaling $700,479 and
$1,453,098 respectively. These receivables relate primarily to inventory and
equipment sold to Shaw-Nass. At August 31, 1997 undistributed earnings of
Shaw-Nass included in the consolidated retained earnings of the Company amounted
to approximately $334,000.
As discussed in Note 3, the Company purchased the 50% interest of the
other participant in its Venezuelan joint venture, together with the concurrent
acqusition of certain land, buildings and other assets used by the venture. The
Company had previously accounted for its investment in the joint venture as an
unconsolidated subsidiary under the equity method and had recognized net income
of approximately $29,000 during the period from September 1 to December 15,
1994.
In February 1994, the Company entered into a joint venture agreement
with Sino-Thai Engineering and Construction Co., Ltd. and PAE (Thailand) Company
Limited for the formation of Shaw Asia Company, Ltd. (Shaw Asia) to construct
and operate a pipe fabrication facility in Thailand. During the year ended
August 31, 1994, the Company recognized no income from Shaw Asia as its
operations were not significant. During the year ended August 31, 1995, the
venture did not achieve the desired level of activity, and the Company withdrew
from the joint venture. In conjunction with the withdrawal, the Company
recovered approximately $1.1 million in equipment from the joint venture which
reduced its net investment to approximately $400,000. The remaining balance was
charged off.
<TABLE>
Note 6--Long-Term Debt
<CAPTION>
Long-term debt consisted of: August 31,
---------------------------- ------------------------
1996 1997
---- ----
<S> <C> <C>
Notes payable to insurance companies; variable interest rates based on 30-day
commercial paper rates plus 190 to 235 basis points ranging from 7.26% to
7.88% as of August 31, 1997; 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
$23,950,000 as of August 31, 1997 and guaranties by the Company and
certain subsidiaries of the Company $15,971,239 $17,714,208
Note payable to a bank; interest payable annually at LIBOR plus 1.6%; payable in
28 annual installments of $264,286 with remaining balance due in 2003; secured
by equipment with an approximate net
book value of $9,571,000 as of August 31, 1997 7,400,000 6,342,857
South Carolina Revenue Bonds payable; principal due in 2005; interest paid
monthly accruing at a variable rate of 3.8% as of August 31, 1997;
secured by $4,000,000 letter of credit 4,000,000 4,000,000
Mortgages payable to a bank; interest payable monthly at 8.375%; 95 monthly
payments of $9,850 and $26,935 with remaining balance due on June 1, 2002;
secured by real property with an approximate net book value of $2,980,000 and
deposits at financial institutions
with an approximate value of $362,000 as of August 31, 1997 3,432,531 3,276,450
35
<PAGE>
August 31,
------------------------
1996 1997
---- ----
Note payable to a bank, interest at 9.36%, payable in monthly installments of
$39,559 through May 10, 2001,
collateralized by accounts receivable and equipment 2,853,078 --
Notes payable to a bank; variable interest rate based upon London Interbank
Offering Rate (LIBOR) plus 85 to 200 basis points depending upon certain
financial ratios. Interest rate as of August 31, 1997 was 6.89%; 60 monthly
principal payments of $50,000 and $36,233 through May 31, 2000 and November
15, 2001; secured by property and equipment with an approximate net book value
of $3,076,000,
accounts receivable and inventory as of August 31, 1997 2,300,000 3,584,133
Notes payable to employees relating to non-competition agreements; interest
payable monthly at 7%; monthly payments of $42,000, and $5,000 until April
2001
and August 2000 respectively; unsecured--see Note 15 2,131,515 1,739,765
Note with interest at 8.5%, payable in monthly installments of $17,183 through
1999 with the remaining principal balance due
on January 1, 2000, secured by land and a building 1,856,680 --
Note payable to an individual who is related to the Company,
interest at 10%, payable on demand, uncollateralized. 1,075,000 --
Note payable to a leasing company, interest at 8.59%, payable in monthly
installments of $7,606 through September 1999,
collateralized by equipment. 258,058 --
Note payable to a bank; variable interest rate based on LIBOR plus 1.4%; payable
in 28 quarterly principal payments of $142,857 through March 25, 2004 plus
interest; secured by equipment with
a book value of approximately $4,229,000 as of August 31, 1997 -- 3,857,143
Mortgage payable to an insurance company; variable interest rate based on
average weekly yield of 30 day commercial paper plus 2.35%; payable in 120
monthly installments of $39,934 through June 30, 2007, secured by land and
buildings with a book value of
approximately $1,914,000 as of August 31, 1997 -- 3,263,683
Mortgage payable to a bank; interest payable monthly at 8.63%; 59 monthly
installments of $7,520 with remaining balance due on November 7, 2001; secured
by real property with a book value of
approximately $694,000 as of August 31, 1997 -- 571,963
Other mortgages payable; interest rates at 8%; payable in monthly installments
through February and July, 1998; secured by real property
with a book value of approximately $1,502,000 as of August 31, 1997 142,896 566,816
Other notes payable; interest rates ranging from 4.65% to 9.0%; payable in
monthly installments based on amortization
over the respective note lives; maturing from 1997 through 1999 239,427 382,759
------------- -------------
Total debt 41,660,424 45,299,777
Less: current maturities (4,865,038) (6,366,407)
------------- -----------
Total long-term debt $ 36,795,386 $38,933,370
============ ===========
</TABLE>
36
<PAGE>
Annual maturities of long-term debt during each year ending August 31,
are as follows:
1998 $ 6,366,407
1999 5,834,181
2000 8,396,166
2001 9,952,547
2002 and thereafter 14,750,476
-----------
$45,299,777
===========
In connection with the acquisition of certain assets and the assumption
of certain liabilities of Vinson Supply Company ("Vinson") in 1992, NAPTech
delivered a note payable of $3,800,000 to Vinson, redeemable preferred stock of
$1,062,690 and $200,000 cash. NAPTech thereafter entered into a settlement
agreement with Vinson dated June 13, 1994, in which NAPTech agreed to pay Vinson
$3,000,000 cash plus $55,000 for accounts payable to Vinson, and Vinson agreed
to cancel the note payable to Vinson of approximately $3,539,000, cancel the
106,269 shares of redeemable preferred stock, and cancel the deferred dividend
liability. NAPTech entered into a note payable to a bank in order to fund this
settlement with Vinson.
Based upon the consummation of the aforementioned agreement, in 1995
the Company recognized an extraordinary gain of $490,625 for the early
retirement of debt ($3,539,000 note payable) and wrote-off the book value
relating to 106,269 shares of NAPTech's redeemable preferred stock and
redeemable cumulative preferred stock dividend of $1,062,690 and $245,309,
respectively, as a credit to the NAPTech's common stock.
Certain of the debt agreements contain restrictive covenants which the
Company is required to meet including financial ratios and minimum capital
levels. As of August 31, 1997, the Company was in compliance with the covenants
or had obtained the required waivers.
The estimated fair value of long-term debt approximated its carrying
value, based on borrowing rates currently available to the Company for notes
with similar terms and average maturities, as of August 31, 1996 and 1997.
Note 7--Revolving Line Of Credit
In 1996, the Company entered into a new loan and security agreement
with its commercial lenders which allows the Company to borrow up to
$70,000,000, depending upon the Company's collateral base (which consists
primarily of certain eligible amounts of receivables and inventory), under a
revolving line of credit at an interest rate not to exceed 2% over the London
Interbank Offering Rate (LIBOR) or .75% 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. This replaced
the prior year revolving line of credit which allowed the Company to borrow up
to $30,000,000 at an interest rate based upon the LIBOR plus 85 to 200 basis
points depending upon certain financial ratios of the Company. During fiscal
1996 and 1997, the maximum amount outstanding was approximately $55,512,000 and
$66,198,000, respectively, and the average amount outstanding was $31,752,000
and $44,462,000, respectively, at weighted average interest rates of 7.04% and
7.27%, respectively. The new agreement expires March 31, 1999. The line of
credit is secured by the Company's accounts receivable and inventories. The line
of credit is also subject to certain restrictive covenants similar to those of
the long-term debt. As of August 31, 1997, the Company was in compliance with
these covenants or had obtained the required waivers.
In 1996, a subsidiary of the Company had an additional line of credit
with a bank for $3,400,000. The line of credit was collateralized by accounts
receivable, inventory, and equipment and accrued interest at 2% above the bank's
prime rate and expired July 31, 1997. This line of credit was renewed for
$3,000,000 at an interest rate of 1.25% over the 30-day LIBOR rate and expires
on February 7, 1998. The new line of credit is guaranteed by the Company.
37
<PAGE>
Note 8--Income Taxes
<TABLE>
<CAPTION>
A summary of net deferred taxes is as follows:
August 31,
------------------------------
1996 1997
---- ----
<S> <C> <C>
Deferred tax assets $4,156,255 $4,164,948
Deferred tax liabilities (Net of deferred tax
liabilities assumed in UCI and Pipe Shields
acquisitions totaling -0- in 1996 and
$173,582 in 1997) (4,157,140) (6,396,384)
---------- ----------
Net deferred taxes $ (885) $(2,231,436)
=========== ===========
The significant components of net deferred taxes are as follows:
August 31,
-------------------------------
1996 1997
---- ----
Assets:
Tax basis of inventory in excess of book basis $ 244,800 $ 926,331
Receivable reserves not currently deductible 719,909 1,007,719
Self Insurance reserves not currently deductible 246,153 439,344
Net operating loss and tax credit carry forwards 2,148,382 1,258,476
Other expenses not currently deductible 797,011 533,078
----------- -----------
$ 4,156,255 $ 4,164,948
=========== ===========
Liabilities:
Excess of financial reporting over tax basis of assets $ 3,596,438 $ 6,569,966
Income not currently taxable 560,702 --
----------- -----------
4,157,140 6,569,966
Less: Deferred tax liabilities assumed in UCI and
Pipe Shields acquisitions -- (173,582)
----------- -----------
$ 4,157,140 $ 6,396,384
=========== ===========
</TABLE>
Income before provision for income taxes for the years ended August 31
was as follows:
1995 1996 1997
---- ---- ----
Domestic $1,259,124 $9,526,236 $17,181,177
Foreign 5,267,246 41,734 2,431,496
----------- ------------ ------------
Total $6,526,370 $9,567,970 $19,612,673
========== ========== ===========
The provision for income taxes for the years ended August 31 was as
follows:
1995 1996 1997
---- ---- ----
Current $1,170,993 $5,736,133 $4,231,206
Net operating loss utilized -- -- (889,906)
Deferred 871,559 (2,802,430) 2,230,551
State (16,000) 120,000 429,529
---------- ---------- -----------
Total $2,026,552 $3,053,703 $6,001,380
========== ========== =========
38
<PAGE>
A reconciliation of Federal statutory and effective income tax rates
for the years ended August 31 was as follows:
1995 1996 1997
---- ---- ----
Statutory rate 34% 34% 35%
State taxes provided -- 1 (2)
Foreign income taxed at different rates (4) (4) (4)
Other 1 1 2
--- --- ---
31% 32% 31%
== == ==
As of August 31, 1997, for Federal income tax return purposes, the
Company had approximately $3,500,000 of net operating loss carryforwards
available to offset future taxable income of its NAPTech subsidiary, subject to
an annual limitation of approximately $500,000. The carryforwards expire
beginning in 2008 through 2010.
Note 9--Common Stock
The Company previously had two classes of common stock. The classes had
identical rights, preferences and powers except that Class A common stock had
certain voting preferences. In connection with the Company's initial public
offering in 1993, the Company's charter was amended to provide for only one
class of common stock; however, holders for at least four consecutive years
generally have voting preferences. Also, the amended charter authorizes the
Board of Directors to approve the issuance of preferred stock.
Note 10--Leases
Capital leases -- The Company leases office equipment and machinery
under various non-cancelable lease agreements. Minimum lease rentals have been
capitalized and the related assets and obligations recorded utilizing various
interest rates. The assets are amortized on the straight-line method over the
lease terms and interest expense is accrued on the basis of the outstanding
lease obligations.
Assets acquired under capital leases -- net of accumulated amortization
are as follows:
August 31,
------------------------------
1996 1997
---- ----
Furniture and fixtures $878,236 $250,681
Machinery and equipment 18,441 66,831
--------- ---------
896,677 317,512
Less: accumulated amortization (245,385) (178,895)
--------- ---------
$651,292 $138,617
======== ========
The following is a summary of future obligations under capital leases
(present value of future minimum rentals):
Minimum lease payments:
1998 $ 29,890
1999 57,447
2000 49,851
--------
Total minimum lease payments 137,188
Less: amount representing interest (5,059)
--------
132,129
Less: current portion (26,448)
--------
Long-term obligations under capital leases $105,681
========
39
<PAGE>
Operating leases -- The Company leases certain offices, fabrication
shops, warehouse facilities, office equipment and machinery under noncancelable
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, 1997 require the Company to make the following future
minimum lease payments:
For the year ending August 31:
1998 $1,964,411
1999 1,193,592
2000 893,102
2001 496,964
2002 and thereafter 1,142,807
---------
Total minimum lease payments $5,690,876
==========
Rent expense for the fiscal years ended August 31, 1995, 1996 and 1997
was $1,189,857, $1,117,755 and $1,804,897, respectively.
Note 11--Commitments and Contingencies
The Company has posted letters of credit aggregating approximately $12
million as of August 31, 1997 to secure its performance under certain contracts
and insurance arrangements, as well as its purchase of a pipe bending machine.
For the year ended August 31, 1997, 22% of the Company's labor force
was covered by collective bargaining agreements, all of which will expire during
the Company's next fiscal year. The Company does not expect that the renewal of
the agreements will have an adverse impact on the Company's results of
operations or financial position.
On August 11, 1997, the Company announced that Shaw Power Services,
Inc., its wholly-owned subsidiary, and China Baoyuan Industry and Trade Company,
a wholly-owned subsidiary of China National Nuclear Corporation, have signed a
letter of intent to establish joint-venture ownership of a piping systems
fabrication facility located in Dalian, Peoples Republic of China (P.R.C.).
Under the terms of the letter of intent, which is expected to be consumated in
April, 1998, the Company's ownership and income participation in the
joint-venture is contemplated to be at least 60%. The formation of the
joint-venture is subject to, among other things, the negotiation and execution
of a definitive agreement and regulatory approvals by the P.R.C. It is
anticipated that the Company will invest approximately $7 million of cash and
equipment, as well as its technology in the joint venture. It is the intention
of the Company for the joint-venture facility to be operational by the end of
calendar 1988.
On October 15, 1997, the Company entered into a letter of intent with
Vekamaf Holding B.V. of Rotterdam, Holland, whereby Shaw will acquire all of the
outstanding capital stock of Cojafex B.V., a Vekamaf subsidiary. Cojafex owns
the technology for the design and manufacture of certain induction pipe bending
machines used for bending pipe and other carbon steel and alloy items for
industrial, commercial and architectural applications. Under the terms of this
letter of intent, Shaw will pay an aggregate of $9.5 million, $5 million of
which will be paid at the closing of the transaction and the remainder of which
will be paid over six years. The closing of the transaction is contingent upon
the favorable outcome of a due diligence review and the negotiation and
execution of definitive agreements, among other things, and is expected to take
place in January of 1998.
In connection with a contract with a certain customer, the Company is
commited to open a fabrication facility in Texas. The Company expects to spend
approximately $1.8 million to open this facility.
Note 12--Earnings Per Common Share
Earnings per common share is calculated based on the weighted average
number of shares outstanding, including dilutive common stock equivalents when
material. The weighted average number of shares outstanding for 1995, 1996, and
1997 were 8,915,977, 9,757,610, and 11,632,068 respectively.
40
<PAGE>
Note 13--Major Customers and Export Sales
For the year ended August 31, 1995, sales to a customer accounting for
more than 10% of sales totaled $19,100,000 and comprised 12% of sales. For the
year ended August 31, 1996, sales to a customer accounting for more than 10% of
sales totaled $27,200,000 and comprised 11% of sales. For the year ended August
31, 1997, no one customer had sales to them exceeding 10% of sales. Because of
the nature of the Company's business, the significant customers vary between
years.
For the years ended August 31, 1995, 1996 and 1997, the Company has
included as part of its international sales approximately $40,000,000,
$74,000,000 , and $89,000,000 respectively, of exports from its domestic
facilities.
Note 14--Employee Benefit Plans
The Company has a Stock Option Plan (the Plan) under which both
qualified and non-qualified options may be granted. In addition, 733,165 shares
of common stock are 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 option 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 date of grant and its duration cannot exceed 10 years. Only
qualified options have been granted under the Plan.
In connection with the Company's acquisition of FCI and PSSI during
1994, 5,000 options with an exercise price of $18.00 were issued. The options
expire in 2004 and are currently exercisable. In January 1995, the exercise
price of these options was amended to $5.875 per share, which was the fair
market value of the common stock at the date of such amendment. In addition, in
1994 the Company granted options contingent upon the ability of FCI, PSSI and
certain other subsidiaries to generate consolidated net income in excess of
certain thresholds during the fiscal years ending August 31, 1995, 1996 and
1997. The maximum number of options issuable under this plan is 19,000 per year
or 57,000. These options expire in 2004 and have an exercise price equal to the
closing price quoted on the last business day of the immediately preceding
fiscal year to which the grant of options relate. The minimum threshold for the
year ended August 31, 1995 was not met, and therefore, no options were issued
for that year. For the year ended August 31, 1996, 12,000 options with an
exercise price of $9.59 per share were earned and subsequently issued. For the
year ended August 31, 1997, an additional 12,000 options with an exercise price
of $32.875 were earned and will be issued in fiscal 1998.
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 October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation," 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 disclosues, as if the Company adopted the cost recognition
requirements under SFAS No. 123, are presented below.
41
<PAGE>
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:
1996 1997
------ -------
Net Income (in thousands):
As reported $6,617 $14,048
====== =======
Pro forma $6,544 $13,834
======= =======
Earnings per share:
As reported $ .68 $ 1.21
====== =======
Pro forma $ .67 $ 1.19
====== =======
The pro-forma effect on net earnings for 1996 and 1997 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.
The following table summarizes the activity in the outstanding stock
options of the Company:
Shares Weighted Average
----------------------
Plan Acquisitions Option Price
---- ------------ -----------
Outstanding at September 1, 1994 217,312 5,000 $5.900
Granted 245,635 -- $7.923
Exercised -- -- --
------- -------
Outstanding at August 31, 1995 462,947 5,000 $6.962
Granted 21,793 85,000 $19.243
Exercised (45,125) -- $6.239
-------- -------
Outstanding at August 31, 1996 439,615 90,000 $9.500
Granted 41,189 42,500 $19.623
Exercised (71,710) -- $5.984
Canceled (36,250) (50,000) $15.755
-------- -------
Outstanding at August 31, 1997 372,844 82,500 $10.729
======= ======
Exercisable at August 31, 1997 146,594 13,750 $10.023
======= ======
As of August 31, 1995, 1996 and 1997, the number of options
exercisable under the stock option plan was 37,447; 97,365 and 160,344,
respectively; and the weighted average exercise price of those options was
$14.548, $9.745 and $10.023, respectively.
The weighted average fair value at date of grant for options granted
during 1996 and 1997 was $14.10 and $12.72 per option, 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 1996 and 1997, respectively: (a) dividend yield of 0.00% and
0.00%; (b) expected volatility of 89% and 54%; (c) risk-free interest rate of
6.4% and 6.7%; and (d) expected life of 5 years and 5 years.
42
<PAGE>
The following table summarizes information about stock options
outstanding as of August 31, 1997:
Options Outstanding Options Exercisable
------------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding Contract Life Price Exercisable Price
- --------------- ----------- ------------- --------- ---------- --------
$5.875-$9.594 308,000 7.4 Yrs $ 6.407 117,750 $ 6.653
$13.940-$19.500 65,756 7.5 Yrs $ 17.944 24,506 $16.626
$20.250-$21.750 76,747 8.6 Yrs $ 20.810 13,247 $21.229
$27.880-$27.890 4,841 1.9 Yrs 27.883 4,841 $27.883
-------- -------
455,344 7.6 Yrs $ 10.729 160,344 $10.023
======== =======
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 10% of annual compensation, subject to an annual limit,
with the Company matching 50% of the employee's eligible contribution up to 6%.
The Company's expense for this plan during 1995, 1996 and 1997 was approximately
$220,000, $285,000, and $380,000 respectively.
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 $9,000, $23,900, and $51,600 for the years ended August
31, 1995, 1996 and 1997, respectively.
The Company had a separate qualified, contributory 401(k) savings plan
covering all non-union employees of NAPTech. The Company may, at its discretion,
make a matching contribution in an amount determinable by the Board of
Directors. The Company did not make a contribution to the plan in fiscal 1995;
in fiscal 1996 and 1997 the Company's expense for this plan was approximately
$6,600 and $12,900, respectively. As of August 31, 1997, this plan has been
terminated.
The Company had a profit sharing plan covering substantially all
employees of APP. For the period from the effective date of acquisition through
August 31, 1996, the Company expensed $175,000 for this plan. No expense was
incurred for fiscal 1997, and as of August 31, 1997, this plan has been
terminated.
The Company had a 401(k) profit sharing plan covering substantially all
employees of Pipe Shields, Inc. with more than one year of service. The Company
matched 50% of the employee's eligible contribution, up to 3% of eligible
compensation. For the period from the date of acquisition through August 31,
1997 the Company's expense for this plan amounted to approximately $9,000. This
plan has been terminated as of August 31, 1997.
The Company has a 401(k) savings plan covering substantially all
employees of UCI with more than one year of service. The Company matches 50% of
the first $1,000 of employees' contributions. Additionally, the Company may, at
its discretion, make an additional contribution determinable by the Board of
Directors. The Company's expense for this plan from the date of acquisition
through August 31, 1997 was approximately $87,000.
Note 15--Related Party Transactions
During 1994, the Company entered into an employment agreement with the
President and Chief Executive Officer (CEO) of the Company. Under terms of the
agreement, the President and CEO will receive, among other things, an annual
base salary of $500,000, participation in the Company's annual bonus plan as
determined by the Compensation Committee of the Board of Directors, and other
benefits such as health and life insurance. In the event the President and CEO's
employment is terminated due to events as defined in the agreement, the
President and CEO will receive a lump-sum payment equal to the full amount
payable under the agreement. The employment agreement was amended on August 25,
1997 to extend the expiration date to December 31, 2007. The term shall be
automatically extended for an additional one-year period upon each December 31,
unless a party electing not to extend the agreement provides written notice to
the other party at least three months prior to such December 31.
43
<PAGE>
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 was not significant. The balance of these
employee loan receivables as of August 31, 1995, 1996, and 1997 was $231,900,
$220,191, and $415,791, respectively. These balances are included in other
assets.
As discussed in Note 3, in connection with the Word acquisition, the
Company entered into a $625,000 interest-bearing loan agreement with Word
Industries Pipe Fabricating, Inc. ("WIPF"). WIPF is owned primarily by certain
stockholders of the Company. The loan was paid by WIPF in fiscal 1997.
During 1996 and 1997, in connection with certain acquisitions discussed
in Note 3, the Company has entered into non-competition agreements with several
key employees. Related assets totaling approximately $2.3 million, included in
other assets, are being amortized over five years using the straight-line
method. Any corresponding liabilities are included in long-term debt as further
discussed in Note 6.
In connection with an acquisition discussed in Note 3, the Company
entered into an office building lease with an affiliate of a Company executive,
which lease calls for the payment of rentals in the amount of $5,400 a month.
Note 16--Foreign Currency Transactions
The Company's wholly-owned subsidiary in Venezuela has net assets of
approximately $7,100,000 and $8,700,000 denominated in Venezuelan Bolivars as of
August 31, 1996 and 1997, respectively. In accordance with SFAS 52, 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 1995, the Venezuelan government fixed the exchange rate for
Bolivars, thus there was no change in the exchange rate used to translate these
assets and liabilities, and accordingly no gain or loss was recognized in 1995
by this translation. During the year ended August 31, 1995, the Company
recognized as part of its sales aggregate exchange gains of approximately $.9
million relating to collections on contracts in progress during the year.
During 1996, the Venezuelan government lifted all foreign exchange
controls. Subsequent to this action, the Bolivar devalued from 170 to 475 to the
U.S. dollar. As a result, the Company recorded a translation loss of
approximately $864,000 in translating the assets and liabilities into U.S.
dollars. The Company also recognized a gain of approximately $818,000 during
1996 related to a Venezuelan Government bond purchased at a fixed exchange rate
which was subsequently sold.
During 1997, the Company recorded a $6,449 loss in translating the
assets and liabilities into U.S. dollars. There were no material exchange gains
or losses incurred during fiscal 1997.
In connection with the Company's hedging of certain commitments to
acquire pipe bending machines from a foreign manufacturer, the Company had
outstanding commitments totaling approximately $4.3 million to purchase foreign
currency at a fixed price. These commitments had a fair value of approximately
$4.5 million at August 31, 1997.
Note 17--Subsequent Event
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
$15.8 million. 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; CBP Engineering Corp. ("CBP"), an abrasion and corrosion resistant
pipe systems specialist based in Pennsylvania; Aiton Australia Pty Limited, a
piping systems, boiler refurhishment 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. Prospect also owned a 66% interest in Inflo Control Systems Limited
("Inflo"), a manufacturer of boiler steam leak detection, acoustic mill and
combustion monitoring equipment
44
<PAGE>
and related systems. Under the terms of the acquisition agreement, the Company
acquired all of the outstanding stock of Prospect Overseas Limited, a United
Kingdom holding company that holds the entire ownership interest in Connex and
CBP, 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.
Note 18--Quarterly Financial Data (Unaudited)
<TABLE>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<CAPTION>
<S> <C> <C> <C> <C>
1996
Sales
As previously reported $38,784,247 $49,591,001 $63,780,409 $69,861,780
NAPTech 4,555,723 6,783,712 9,702,887 6,298,678
----------- ----------- ----------- -----------
As restated $43,339,970 $56,374,713 $73,483,296 $76,160,458
=========== =========== =========== ===========
Gross Profit
As previously reported $ 7,185,486 $ 8,721,495 $12,837,160 $12,438,628
NAPTech (530,428) 492,922 (256,322) (741,172)
------------ ------------ ----------- -----------
As restated $ 6,655,058 $ 9,214,417 $12,580,838 $11,697,456
============ ============ =========== ===========
Net Income
As previously reported $ 1,682,694 $ 1,825,651 $ 2,445,369 $ 2,822,784
NAPTech (669,569) (24,278) (563,643) (901,810)
------------ ------------ ----------- -----------
As restated $ 1,013,125 $ 1,801,373 $ 1,881,726 $ 1,920,974
============ ============ =========== ===========
Net Income per Share
As previously reported $ .20 $ .21 $ .26 $ .29
NAPTech (.09) (.01) (.07) (.10)
----------- ------------ ------------ -----------
As restated $ .11 $ .20 $ .19 $ .19
=========== ============ ============ ===========
1997
Sales
As previously reported $67,603,615 $85,515,993 $88,883,982 $88,231,202
NAPTech 8,115,387 -- -- --
----------- ------------ ----------- -----------
As restated $75,719,002 $85,515,993 $88,883,982 $88,231,202
=========== ============ =========== ===========
Gross Profit
As previously reported $13,900,085 $15,137,450 $17,342,672 $17,065,466
NAPTech 670,249 -- -- --
----------- ----------- ----------- -----------
As restated $14,570,334 $15,137,450 $17,342,672 $17,065,466
=========== =========== =========== ===========
Net Income
As previously reported $ 3,037,150 $ 3,588,407 $ 3,554,513 $ 3,759,785
NAPTech 108,293 -- -- --
----------- ----------- ----------- -----------
As restated $ 3,145,443 $ 3,588,407 $ 3,554,513 $ 3,759,785
=========== =========== =========== ===========
Net Income per Share
As previously reported $ .31 $ .31 $ .29 $ .30
NAPTech (.01) -- -- --
----------- ----------- ----------- -----------
As restated $ .30 $ .31 $ .29 $ .30
=========== =========== =========== ===========
</TABLE>
The unaudited quarterly financial data above have been restated from the
Company's previously filed Forms 10-K and 10-Q to reflect the acquisition of
NAPTech in the second quarter of fiscal 1997, which was accounted for using the
pooling-of -interests method.
45
<PAGE>
ITEM 9. Changes in and Disagreements on Accounting and Financial Disclosures.
There have been no changes in accountants and no disagreements on
accounting principles or practices, financial statement disclosure or auditing
scope or procedure between the Company and its independent certified public
accountants during the period beginning September 1, 1994 and ending on the date
hereof.
The single jointly signed auditor's report is considered to be the
equivalent of two separately signed auditor's reports. Thus, each firm
represents that it has complied with generally accepting auditing standards and
is in a position that would justify being the only signatory of the report.
PART III
Item 10. Directors and Executive Officers of the Registrant.
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 1998 Annual Meeting of the Shareholders to be held in January 1998 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 1998 Annual
Meeting of Shareholders to be held in January 1998 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 1998 Annual Meeting of Shareholders to be held
in January 1998 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 1998 Annual Meeting of Shareholders to be held in January 1998 and is
incorporated herein by reference.
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 Second Amended Loan and Security Agreement dated as of March
29, 1996 among the Company, the Borrowing Subsidiaries listed
on Exhibit 1.1 thereto, Mercantile Business Credit, Inc., City
National Bank of Baton Rouge, Hibernia National Bank and Union
Planters Bank of Louisiana.
46
<PAGE>
**10.2 Settlement Agreement dated January 20, 1993, by and among B. F.
Shaw, Inc., National Fabricators, Inc., Lone Star Fabricators,
Inc. and the United Association of Journeymen and Apprentices of
the Plumbing Pipefitting Industry of the United States and
Canada, AFL-CIO.
****10.3 1993 Employee Stock Option Plan, as amended and restated
**10.4 Employment Agreement by and between the Company and James M.
Bernhard, Jr.
**10.5 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.
*10.6 Personal Service and Employment Agreement entered into as of
April 29, 1994 among Fronek Engineering & Consulting, Inc.,
Shaw-Fronek Fabrication, Inc. and Frank Fronek.
+10.7 Stock Purchase Agreement, dated as of March 1, 1996, between
R. Dale Brown, Sr. and Mildred Gayle O'Pry Brown and The Shaw
Group Inc.
+10.8 Asset Purchase Agreement, dated as of March 1, 1996, between
Ronald D. Brown, Jr., Susan Nance Brown and Speedline, a
Louisiana partnership, and The Shaw Group Inc.
+10.9 Employment Agreement, dated as of April 5, 1996, between Alloy
Piping Products, Inc. and Ronald D. Brown, Jr.
+10.10 Consulting and Non-Competition Agreement, dated as of April 5,
1996, between The Shaw Group Inc. and Ronald D. Brown, Jr.
++10.11 Asset Purchase and Sale Agreement between The Shaw Group Inc.
and Word Industries Fabricators, Inc. and Word Industries Pipe
Fabricating, Inc., Word Industries, Inc. and T. N. Word, dated
as of January 15, 1996.
++10.12 Real Property Purchase and Sale Agreement and Plan of
Reorganization between Word Industries Fabricators, Inc. and
T. S. & M. Corporation dated as of January 15, 1996.
++10.13 Agreement dated as of January 15, 1996 between Word Industries
Fabricators, Inc. and T. N. Word.
+++10.14 Plan and Agreement of Merger, dated as of August 5, 1996, among
the shareholders of NAPTech, Inc. (NAPTech"), NAPTech, The Shaw
Group Inc. and SAON, Inc., as amended by the First mendment to
Plan and Agreement of Merger dated as of January 27, 1997.
+++10.15 Purchase and Sale Agreement, dated as of January 27, 1997, among
the members of Freeport Properties, L.C(Freeport"), Freeport,
The Shaw Group Inc. and SAON Properties, Inc.
++++10.16 1996 Non-Employee Director Stock Option Plan.
****21.1 Subsidiaries of the Company.
-------------
* Incorporated by reference from the Company's 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 Form 10-Q for the
quarterly period ended May 31, 1996.
**** Filed herewith.
+ Incorporated by reference from the Company's Current Report on
Form 8-K dated April 17, 1996, as amended by Amendment No. 1
to Current Report on Form 8-K/A-1 filed on June 19, 1996.
++ Incorporated by reference from the Company's Current Report on
Form 8-K dated January 30, 1996, as amended by Amendment No. 1
to Current Report on Form 8-K/A-1 filed on March 29, 1996.
+++ Incorporated by reference from the Company's Current Report on
Form 8-K dated February 11, 1997, as amended by Amendment No.1
to Current Report on Form 8-K/A-1 dated April 9, 1997.)
++++ Incorported by reference from the Company's Registration
Statement on Form S-8 filed on September 24, 1997 (Registration
Number 333-36315).
(b) Reports on Form 8-K
During the fourth quarter of fiscal 1997, the Company filed a Current
Report on Form 8-K dated June 17, 1997 (the "Form 8-K"), to file with the
Securities and Exchange Commission certain financial statements and other
related information that reflects the acquisition by the Company of NAPTech on
January 27, 1997, as a pooling-of-interests. Such financial statements and other
information, attached to the Form 8-K as Attachment A, are restated "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and restated "Item 8. Financial Statements and Supplementary Data"
from the Company's Annual Report on Form 10-K for the fiscal year ended August
31, 1996.
47
<PAGE>
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: December 1, 1997
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, December 1, 1997
- ----------------------- President and Chief
(J. M. Bernhard, Jr.) Executive Officer
/s/ EDWARD L. PAGANO Chief Financial Officer and December 1, 1997
- ------------------------ Chief Accounting Officer
(Edward L. Pagano)
/s/ GEORGE R. SHEPHERD Director December 1, 1997
- -----------------------
(George R. Shepherd)
/s/ FRANK FRONEK Director December 1, 1997
- -----------------------------
(Frank Fronek)
/s/ ALBERT MCALISTER Director December 1, 1997
- ------------------------
(Albert McAlister)
/s/ L. LANE GRIGSBY Director December 1, 1997
- -----------------------------
(L. Lane Grigsby)
/s/ DAVID W. HOYLE Director December 1, 1997
- ----------------------------
(David W. Hoyle)
/s/ JOHN W. SINDERS, JR Director December 1, 1997
- --------------------------
(John W. Sinders, Jr.)
48
<PAGE>
Exhibit 10.3
------------
THE SHAW GROUP INC.
1993 EMPLOYEE STOCK OPTION PLAN
(as amended and restated on July 21, 1997)
1. Purpose. This 1993 Employee Stock Option Plan (the Plan) of The
Shaw Group Inc. (the Company) for certain employees, including officers and
directors, is intended to advance the best interests of the Company by providing
such personnel, who have substantial responsibility for its management and
growth, with additional incentive and by increasing their proprietary interest
in the success of the Company, thereby encouraging them to remain in its employ.
2. Administration. The Plan shall be administered by a committee (the
Committee) consisting of two or more members of the Board of Directors of the
Company, all of whom shall be (a) Non-Employee Director as defined in Rule 16b-3
of the Rules and Regulations promulgated under the Securities Exchange Act of
1934, as amended (the Exchange Act) or any similar or successor rule, and (b)
outside directors as defined in Section 162(m) of the Internal Revenue Code of
1986, as amended (the Code). For the purposes of the Plan, a majority of the
members of the Committee shall constitute a quorum for the transaction of
business, and the vote of a majority of those members present at any meeting
shall decide any question brought before that meeting. In addition, the
Committee may take any action otherwise proper under the Plan by the affirmative
vote, taken without a meeting, of a majority of its members. The Committee shall
have the authority to take any and all actions as it deems necessary or
appropriate, in its sole discretion, to administer the Plan or to carry out the
Committee activities contemplated by the Plan. All questions of interpretation
and application of the Plan, or as to Awards (as defined in Paragraph 5 below)
made hereunder, shall be subject to the determination, which shall be final and
binding, of a majority of the whole Committee. When appropriate, the Plan shall
be administered in order to qualify certain of the Awards made hereunder as
incentive stock options described in Section 422 of the Code.
3. Eligibility. The individuals who shall be eligible to participate
in the Plan shall be such key employees, including officers and directors if
they are employees, of the Company, or of any parent or subsidiary corporation,
as the Committee shall determine from time to time. Except as otherwise
provided, for all purposes of the Plan, the term parent corporation shall mean
any corporation (other than the Company) in an unbroken chain of corporations
ending with the Company if, on the date of grant of the Option in question, each
of the corporations other than the Company owns stock possessing fifty percent
(50%) or more of the total combined voting power of all classes of stock in one
of the other corporations in such chain; and the term subsidiary corporation
shall mean any corporation in an unbroken chain of corporations, beginning with
the Company if, on the date of grant of the Option in question, each of the
corporations, other than the last corporation in the chain, owns stock
possessing fifty percent (50%) or more of the total combined voting power of all
classes of stock in one of the other corporations in such chain.
4. Shares Subject to the Plan. The stock subject to the Awards and
other provisions of the Plan shall be shares of the Company's common sock, no
par value per share (the Common Stock). The total number of shares of the Common
Stock with respect to which Awards may be granted shall not exceed in the
aggregate 850,000 shares; provided, that the class and aggregate number of
shares which may be subject to Awards granted hereunder shall be subject to
adjustment in accordance with the provisions of Paragraph 17 hereof. Such shares
may be treasury shares or authorized but unissued shares. The maximum number of
shares subject to Awards that can be made to any executive or employee under the
Plan is 405,000 shares.
1
<PAGE>
In the event that any outstanding Award for any reason shall expire or
terminate by reason of the death or severance of employment of the participant,
the surrender of any such Award or any other cause, the shares of Common Stock
allocable to such Award may again be subject to an Award under the Plan.
5. Types of Awards Under the Plan. The Committee may make the
following types of awards (an "Award") from time to time to such eligible
employees of the Company as it shall from time to time determine:
(a) Incentive Stock Options. The Committee may grant to an eligible
employee an option (an "Option"), or Options, to buy a stated number
of shares of Common Stock under the terms and conditions of the Plan,
so that the Option will be an incentive stock option within the
meaning of Section 422 of the Code (an Incentive Stock Option).
(b) Non-statutory Stock Options. The Committee may grant to an eligible
employee an Option, or Options, to buy a stated number of shares of
Common Stock under the terms and conditions of the Plan, which do not
constitute an Incentive Stock Option within the meaning of Section 422
of the Code (a Non-statutory Stock Option).
(c) Restricted Stock. The Committee may award to an eligible employee
restricted shares of Common Stock (the "Restricted Stock") as set
forth in Paragraph 13 of the Plan.
Each Award shall be approved by the Committee, and with respect to
Options, the Committee shall specify whether each Option constitutes an
Incentive Stock Option or Non-statutory Stock Option.
6. Option Price. The price at which the shares may be purchased
pursuant to an Option shall be no less than the fair market value of the shares
of Common Stock on the date such Option is granted, and the Committee, in its
discretion, may provide that the price at which shares may be purchased shall be
more than such fair market value. For purposes of the Plan, the fair market
value of a share of Common Stock as of any particular date shall mean the
closing sale price of a share of Common Stock on that date as reported by the
principal national securities exchange on which the Common Stock is then listed
if the Common Stock is then listed on a national securities exchange, or the
average of the bid and asked price of a share of Common Stock on that date as
reported in the NASDAQ listing if the Common Stock is not then listed on a
national securities exchange, provided that if no such closing price or quotes
are so reported on that date or if, in the discretion of the Committee, any
means of determining the fair market value of a share of Common Stock at such
date shall be necessary or advisable, the Committee may provide for another
means for determining such fair market value. The option price as determined
pursuant to this Paragraph 6 shall be referred to herein as the Option Price.
7. Duration of Options. No Option which is an Incentive Stock Option
shall be exercisable after the expiration of ten (10) years from the date such
Option is granted; and the Committee, in its discretion, may provide that such
Option shall be exercisable throughout such ten-year period or during any lesser
period of time commencing on or after the date of grant of such Option and
ending upon or before the expiration of such ten-year period. No Option which is
a Non-statutory Stock Option shall be exercisable after the expiration of ten
(10) years from the date such Option is granted; and the Committee, in its
discretion, may provide that such Option shall be exercisable throughout such
ten-year period or during any lesser period of time commencing on or after the
date of grant of such Option and ending upon or before the expiration of such
ten-year period.
8. Amount Exercisable. The agreement with respect to each Option shall
set forth such terms and conditions, including vesting, with respect to the
exercise of such Option that are not inconsistent with the Plan and as may be
approved by the Committee. The Committee, in its discretion, may change the
terms of exercise so that any Option may be exercised so long as it is valid and
outstanding from time to time in part
2
<PAGE>
or as a whole in such manner and subject to such conditions as it may set. In
addition, the Committee, in its discretion, may accelerate the time in which any
outstanding Option may be exercised. But in no event shall any Option be
exercisable after the tenth anniversary of the date of the grant.
9. Exercise of Options. A participant may exercise such participant's
Option by delivering to the Company a written notice stating (i) that such
participant wishes to exercise such Option on the date such notice is so
delivered, (ii) the number of shares of Common Stock with respect to which such
Option is to be exercised, (iii) the address to which the certificate
representing such shares of Common Stock should be mailed, and (iv) the social
security number of such participant. In order to be effective, such written
notice shall be accompanied by (a) payment of the Option Price of such shares of
Common Stock and (b) payment of an amount of money necessary to satisfy any
withholding tax liability that may result from the exercise of such Option. Each
such payment shall be made by check drawn on a national banking association and
payable to the order of the Company in United States dollars.
As promptly as practicable after the receipt by the Company of (i)
such written notice from the participant, (ii) payment, in the form required by
the foregoing provisions of this Paragraph 9, of the Option Price of the shares
of Common Stock with respect to which such Option is to be exercised, and (iii)
payment, in the form required by the foregoing provisions of this Paragraph 9,
of an amount of money necessary to satisfy any withholding tax liability that
may result from the exercise of such Option, the Company shall deliver to such
participant a certificate representing the number of shares of Common Stock with
respect to which such Option has been so exercised, such certificate to be
registered in the name of such participant, provided that such delivery shall be
considered to have been made when such certificate shall have been mailed,
postage prepaid, to such participant at the address specified for such purpose
in such written notice from the participant to the Company.
10. Special Provisions for Incentive Stock Options. Notwithstanding
any other provisions of the Plan to the contrary, the aggregate fair market
value (determined as of the date the Option is granted) of the Common Stock with
respect to which Incentive Stock Options are exercisable for the first time by
any participant in any calendar year (under this Plan and any other incentive
stock option plan(s) of the Company and any parent or subsidiary corporation(s)
thereof) shall not exceed $100,000. In making this determination, Options shall
be taken into account in the order in which they were granted.
No participant who owns stock possessing more than ten percent (10%)
of the total combined voting power of all classes of stock of the corporation
employing the participant or of its parent or subsidiary corporation shall be
eligible to receive an Option which is an Incentive Stock Option unless at the
time that such Option is granted the Option Price is at least one hundred ten
percent (110%) of the fair market value of the Common Stock at the time such
Option is granted and such Option by its own terms is not exercisable after the
expiration of five years from the date such Option is granted.
For the purposes of the preceding paragraph, an employee will be
considered as owning the stock owned, directly or indirectly, by or for his
brothers and sisters (whether by the whole or half blood), spouse, ancestors,
and lineal descendants; and stock owned, directly or indirectly, by or for a
corporation, partnership, estate, or trust will be considered as being owned
proportionately by or for its shareholders, partners, or beneficiaries.
11. Transferability of Options. Options shall not be transferable by
the optionee otherwise than by will or under the laws of descent and
distribution, and shall be exercisable, during the participant's lifetime, only
by the participant. Notwithstanding the foregoing, the Committee shall have the
authority, in its absolute discretion, to add (originally or by way of
amendment) as a term of any Non-statutory Stock Option awarded hereunder, that
such Non-statutory Stock Option may be transferred, no less than six (6) months
after it is
3
<PAGE>
granted, to members of a participant's immediate family, including trusts for
the benefit of such family members and partnerships in which such family members
are the only partners as well as to charitable organizations that are approved
in advance by the Committee. A transfer pursuant to this Paragraph 11 may only
be effected by the Company at the written request of a participant and shall
become effective only when recorded in the Company's record of outstanding
Non-statutory Stock Options. In the event a Non-statutory Stock Option is
transferred pursuant to this Paragraph, such may not be subsequently transferred
by the transferee except by will or the laws of descent and distribution. In the
event of a transfer pursuant to this Paragraph 11, such Non-statutory Stock
Option shall continue to be governed by and subject to the terms and conditions
of the Plan and the relevant grant.
12. Exercise of Options; Termination of Employment. Except as may be
otherwise expressly provided herein, each Option, to the extent it shall not
previously have been exercised, shall terminate on the earlier of the date of
the expiration of the Option or one day less than three months after the date of
the severance, upon severance of the employment relationship between the Company
and the participant, whether with or without cause, for any reason other than
the death, disability, or retirement of the participant, during which period the
participant shall be entitled to exercise the Option in respect of the number of
shares that the participant would have been entitled to purchase had the
participant exercised the Option on the date of such severance of employment.
Whether authorized leave of absence, or absence on military or government
service, shall continue severance of the employment relationship between the
Company and the participant shall be determined by the Committee at the time
thereof.
In the event of severance because of the disability of the holder of
any Option while in the employ of the Company and before the date of expiration
of such Option, such Option shall terminate on the earlier of such date of
expiration or one year following the date of such severance because of
disability, during which period the participant shall be entitled to exercise
the Option in respect of the number of shares that the participant would have
been entitled to purchase had the participant exercised the Option on the date
of such severance because of disability.
In the event of the death of the holder of any Option while in the
employ of the Company and before the date of expiration of such Option, such
Option shall terminate on the earlier of such date of expiration or one year
following the date of death. After the death of the participant, his executors,
administrators, or any person or persons to whom his Option may be transferred
by will or by the laws of descent and distribution, shall have the right, at any
time prior to the expiration of an Option, to exercise the Option, in respect of
the number of shares that the participant would have been entitled to purchase
if he had exercised the Option on the date of his death while in employment.
In addition, in the event of the retirement of the holder of any
Non-statutory Stock Option, in accordance with the provisions of the Company's
then existing policies regarding retirement as applied by the Committee, before
the date of expiration of such Option, such Option shall terminate on the
earlier of such date of expiration or one year following the date of such
retirement and, if such participant should die within the one-year period, any
rights he may have to exercise the Option shall be exercisable by his executor
or administrator or the person or persons to whom the Option shall have been
transferred by his will or by the laws of descent or distribution, as
appropriate, for the remainder of the one-year period.
For purposes of Incentive Stock Options issued under this Plan, an
employment relationship between the Company and the participant shall be deemed
to exist during any period in which the participant is employed by the Company,
by any parent or subsidiary corporation, by a corporation issuing or assuming an
option in a transaction to which Section 424(a) of the Code applies, or by a
parent or subsidiary corporation of such corporation issuing or assuming an
option (and for this purpose, the phrase corporation issuing or assuming an
option shall be substituted for the word Company in the definitions of parent
and subsidiary
4
<PAGE>
corporations specified in Paragraph 3 of this Plan, and the parent-subsidiary
relationship shall be determined at the time of the corporation action described
in Section 424(a) of the Code). For purposes of Non-statutory Stock Options
issued under this Plan, an employment relationship between the Company and the
participant will exist under the circumstances described above for Incentive
Stock Options and will also exist if the participant is transferred to an
affiliate corporation approved by the Committee.
13. Restricted Stock.
(a) Restricted Stock Awards. The Committee may, in its discretion,
grant one or more Awards of Restricted Stock to any participant. Each Award of
Restricted Stock shall be evidenced by a Restricted Stock agreement which shall
specify the number of shares of Restricted Stock to be issued to the
participant, the date of such issuance, the price (the "Purchase Price"), if
any, to be paid in cash for such shares by the participant, the time period
during which the Restricted Stock must be held before it becomes fully vested
(the "Restriction Period"), and any other conditions imposed on such shares as
the Committee, in its discretion, shall determine. Notwithstanding the
foregoing, the Committee shall impose upon each Award of Restricted Stock made
to a participant who is an executive officer of the Company a Restriction Period
expiring no earlier than six months after the date of grant of the Restricted
Stock. Shares of Restricted Stock shall be evidenced by a stock certificate
registered only in the name of the participant, which stock certificate shall be
held by the Company until the restrictions on such shares shall have lapsed and
those shares shall have thereby vested in full.
(b) Maximum Award of Restricted Stock. The maximum number of shares of
Common Stock may be allotted by the Committee pursuant to Restricted Stock
awarded to any individual participant shall not exceed, in any calendar year,
50,000 shares (subject to adjustment pursuant to Paragraph 17 of the Plan).
(c) Restrictions and Forfeitures.
(i) Shares included in Restricted Stock Awards may not be
sold, assigned, transferred, pledged or otherwise disposed of or encumbered,
either voluntarily or involuntarily, until such share have fully vested.
(ii) Participants receiving Restricted Stock shall be
entitled to dividend and voting rights for the shares issued even though they
are not vested, provided that such rights shall terminate immediately as to any
forfeited Restricted Stock.
(iii) In the event that the participant shall have paid any
cash for the Restricted Stock, the agreement shall specify whether and to what
extent such cash shall be returned upon a forfeiture (with or without an
earnings factor).
(iv) The Restricted Stock shall be evidenced by a stock
certificate registered only in the name of the participant, which stock
certificate shall be held by the Company until the Restricted Stock has fully
vested.
(v) The occurrence of any of the following events shall cause
the immediate vesting of the Restricted Stock:
A. the death of the participant;
B. the retirement of the participant in accordance with the then existing
policies of the Company as applied by the Committee;
5
<PAGE>
C. the disability of the participant.
Notwithstanding the foregoing, to the extent a condition(s) other than a
Restriction Period has been imposed by the Committee upon the Restricted Stock,
the occurrence of the foregoing shall not cause immediate vesting unless and
until such condition(s) has been met.
(vi) A Restricted Stock Award shall be entirely forfeited by
the participant in the event that prior to vesting, the participant breaches any
terms or conditions of the Plan, the participant resigns from or is terminated
(with or without cause) by the Company, or any condition(s) imposed upon vesting
are not met.
(d) Performance or Other Conditions. The Committee may, in its
absolute discretion, make the vesting of any Restricted Stock Award subject to
the fulfillment of a performance or other condition. The Committee shall have
the absolute discretion in determining the terms of any such condition.
(e) Legend on Certificates. Each certificate evidencing a Restricted
Stock Award under the Plan shall be registered in the name of the participant
and deposited by the participant, together with a stock power endorsed in blank,
with the Company and shall bear the following (or a similar) legend:
"The transferability of this certificate and the shares of stock
represented hereby are subject to the terms and conditions (including
forfeiture) contained in The Shaw Group Inc. 1993 Employee Stock
Option Plan and a Restricted Stock Agreement entered into between the
registered owner and The Shaw Group Inc. Copies of such Plan and
Agreement are on file in the offices of the Secretary of The Shaw
Group Inc., 11100 Mead Road, 2nd Floor, Baton Rouge, Louisiana 70816."
(f) Section 83(b) Elections. Within 30 days after the issuance of
shares of Restricted Stock to a participant under the Plan, the participant
shall decide whether or not to file an election pursuant to Section 83(b) of the
Code and Treasury Regulation Section 1.83-2 (and state law counterparts) with
respect to such Restricted Stock. If the participant does file such an election,
the participant shall promptly furnish the Company with a copy of such election.
(g) Agreements to Award Restricted Stock. In amplification of the
Committee's authority under the Plan, but in no way limiting such authority, the
Committee, pursuant to this Paragraph 13, shall have the authority to enter into
agreements with participants to make, in the future, and subject to whatever
terms and conditions the Committee deems appropriate, an award of shares of
Restricted Stock. If an Award of Restricted Stock is made pursuant to an
agreement to make same, the Restricted Stock Award shall at the time granted be
subject to the terms and conditions of the Plan.
14. Requirements of Law. The Company shall not be required to sell or
issue any shares under any Award if the issuance of such shares shall constitute
a violation by the participant or the Company of any provisions of any law or
regulation of any governmental authority. Each Award granted under the Plan
shall be subject to the requirements that, if at any time the Board of Directors
of the Company or the Committee shall determine that the listing, registration,
or qualification of the shares subject thereto upon any securities exchange or
under any state or federal law of the United States or of any other country or
governmental subdivision thereof, or the consent or approval of any governmental
regulatory body, or investment or other representations, are necessary or
desirable in connection with the issue or purchase of shares subject thereto, no
Option may be exercised in whole or in part nor may Restricted Stock be issued
unless such listing,
6
<PAGE>
registration, qualification, consent, approval, or representation shall have
been effected or obtained free of any conditions not acceptable to the Board of
Directors. If required at any time by the Board of Directors or the Committee,
an Option may not be exercised and Restricted Stock may not be issued until the
participant has delivered an investment letter to the Company. In addition,
specifically in connection with the Securities Act of 1933, as amended, upon
exercise of any Option, the Company shall not be required to issue the
underlying shares unless the Committee has received evidence satisfactory to it
to the effect that the holder of such Option will not transfer such shares
except pursuant to registration statement in effect under such Act or unless an
opinion of counsel satisfactory to the Committee has been received by the
Company to the effect that such registration is not required. Any determination
in this connection by the Committee shall be final, binding, and conclusive. In
the event the shares issuable on exercise of an Option are not registered under
the Securities Act of 1933, as amended, the Company may imprint on the
certificate for such shares the following legend or any other legend which
counsel for the Company considers necessary or advisable to comply with the
Securities Act of 1933, as amended:
The shares of stock represented by this certificate have not been registered
under the Securities Act of 1933, as amended, or under the securities laws of
any state and may not be sold or transferred except upon such registration or
upon receipt by the Corporation of an opinion of counsel satisfactory to the
Corporation, in form and substance satisfactory to the Corporation, that
registration is not required for such sale or transfer.
The Company may, but shall in no event be obligated to, register any securities
covered hereby pursuant to the Securities Act of 1933, as amended, and, in the
event any shares are so registered, the Company may remove any legend on
certificates representing such shares. The Company shall not be obligated to
take any other affirmative action in order to cause the exercise of an Option,
the issuance of shares pursuant thereto or the issuance of shares of Restricted
Stock to comply with any law or regulation of any governmental authority.
15. No Rights of Option Holder as Shareholder. No participant shall
have rights as a shareholder with respect to shares covered by his Option until
the date of issuance of a stock certificate for such shares; and, except as
otherwise provided in Paragraph 17 hereof, no adjustment for dividends, or
otherwise, shall be made if the record date therefor is prior to the date of
issuance of such certificate.
16. Employment Obligation. The granting of any Award shall not impose
upon the Company any obligation to employ or continue to employ any participant;
and the right of the Company to terminate the employment of any officer or other
employee at will, with or without cause, shall not be diminished or affected by
reason of the fact that an Award has been granted to him.
17. Changes in the Company's Capital Structure. The existence of
outstanding Options or unvested shares of Restricted Stock shall not affect in
any way the right or power of the Company or its shareholders to make or
authorize any or all adjustments, recapitalizations, reorganizations, or other
changes in the Company's capital structure or its business, or any merger or
consolidation of the Company, or any issue of bonds, debentures, preferred or
prior preference stock ahead of or affecting the Common Stock or the rights
thereof, or the dissolution or liquidation of the Company, or any sale or
transfer of all or any part of its assets or business, or any other corporate
act or proceeding, whether of a similar character or otherwise.
If the Company shall effect a subdivision or consolidation of shares
or other capital adjustment of, or the payment of a dividend in capital stock or
other equity securities of the Company on, its Common Stock, or other increase
or reduction of the number of shares of the Common Stock without receiving
consideration therefor in money, services, or property, or the reclassification
of its Common Stock, in
7
<PAGE>
whole or in part, into other equity securities of the Company, then (a) the
number, class, and per-share price of shares of Common Stock subject to
outstanding Options or unvested shares of Restricted Stock hereunder shall be
appropriately adjusted (or, in the case of the issuance of other equity
securities as a dividend on, or in a reclassification of, the Common Stock, the
Awards shall extend to such other securities) in such a manner as to entitle an
participant to receive (except to vesting and the conditions of the Award), for
the same aggregate cash consideration, the same total number and class or
classes of shares (or, in the case of a dividend of or reclassification into,
other equity securities, such other securities) he would have held after such
adjustment if he had exercised his Option in full (or if the shares of
Restricted Stock had fully vested) immediately prior to the event requiring the
adjustment, or, if applicable, the record date for determining shareholders to
be affected by such adjustment; and (b) the number and class of shares then
reserved for issuance under the Plan (or, in the case of a dividend of, or
reclassification into, other equity securities, such other securities) shall be
adjusted by classes of shares of stock (or, in the case of a dividend of, or
reclassification into, other equity securities, such other securities) that
would have been received by the owner of an equal number of outstanding shares
of Common Stock as a result of the event requiring the adjustment. Comparable
rights shall accrue to each participant in the event of successive subdivisions,
consolidations, capital adjustments, dividends, or reclassifications of the
character described above.
If the Company shall distribute to all holders of its shares of Common
Stock (including any such distribution made to non-dissenting shareholders in
connection with a consolidation or merger in which the Company is the surviving
corporation and in which holders of shares of Common Stock continue to hold
shares of Common Stock after such merger or consolidation) evidences of
indebtedness or cash or other assets (other than cash dividends payable out of
consolidated retained earnings not in excess of, in any one-year period, the
greater of (i) an amount per share of Common Stock equal to ten percent (10%) of
the then Current Market Price and (ii) two times the aggregate amount of
dividends per share paid during the preceding calendar year and dividends or
distributions payable in shares of Common Stock or other equity securities of
the Company described in the immediately preceding paragraph, but including
stock or other securities of any corporation or other entity owned by the
Company), then in each case the Option Price or the Purchase Price, as
applicable, shall be adjusted by reducing the Option Price or the Purchase
Price, as applicable, in effect immediately prior to the record date for the
determination of shareholders entitled to receive such distribution by the fair
market value, as determined in good faith by the Board of Directors of the
Company (whose determination shall be described in a statement filed in the
Company's corporate records and be available for inspection by any participant)
of the portion of the evidence of indebtedness or cash or other assets so to be
distributed applicable to one share of Common Stock; provided that in no event
shall the Option Price or the Purchase Price, as applicable, be less than the
par value of a share of Common Stock. Such adjustment shall be made whenever any
such distribution is made and shall become effective on the date of the
distribution retroactive to the record date for the determination of the
shareholders entitled to receive such distribution. Comparable adjustments shall
be made in the event of successive distributions of the character described
above.
After the merger of one or more corporations into the Company, after
any consolidation of the Company and any one or more corporations, or after any
other corporate transaction described in Section 424(a) of the Code in which the
Company shall be the surviving corporation, each participant, at no additional
cost, shall be entitled to receive in lieu of the number of shares as to which
the Award shall then be applicable, the number and class of shares of stock or
other equity securities to which the participant would have been entitled
pursuant to the terms of the agreement of merger or consolidation if at the time
of such merger or consolidation such participant had been a holder of a number
of shares of Common Stock equal to the number of shares as to which the Award
shall then be applicable and, if as a result of such merger, consolidation, or
other transaction, the holders of Common Stock are not entitled to receive any
shares of Common Stock pursuant to the terms thereof, each participant, at no
additional cost, shall
8
<PAGE>
be entitled to receive, upon exercise of his option, such other assets and
property, including cash, to which he would have been entitled if at the time of
such merger, consolidation, or other transaction he had been the holder of the
number of shares of Common Stock equal to the number of shares as to which the
Award shall then be applicable. Comparable rights shall accrue to each
participant in the event of successive mergers or consolidations of the
character described above.
After a merger of the Company into one or more corporations, after any
consolidation of the Company and any one or more corporation, or after any other
corporate transaction described in Section 424(a) of the Code in which the
Company is not the surviving corporation, each participant shall, at no
additional cost, be entitled, at the option of the surviving corporation, (i) to
have his then existing Award assumed or to have a new award substituted for the
existing Award by the surviving corporation to the transaction which is then
employing him, or a parent or subsidiary of such corporation, on a basis where
the excess of the aggregate fair market value of the shares subject to the award
immediately after the substitution or assumption over the aggregate option or
purchase price of such award is equal to the excess of the aggregate fair market
value of all shares subject to the Award immediately before such substitution or
assumption over the aggregate Option Price or Purchase Price, as applicable, of
such shares, provided that the shares subject to the new award must be traded on
the New York or American Stock Exchange or quoted on the National Association of
Securities Dealers Automated Quotation System, or (ii) to receive in lieu of the
number of shares as to which the Award shall then be applicable, the securities,
property, and other assets, including cash, to which the participant would have
been entitled pursuant to the terms of the agreement of merger or consolidation
or the agreement giving rise to the other corporate transaction if at the time
of such merger, consolidation, or other transaction such participant had been
the holder of the number of shares of Common Stock equal to the number of shares
as to which the Award shall then be applicable.
For purposes of the Plan, Current Market Price per share of Common
Stock shall mean the closing price of a share of Common Stock as reported by the
principal national securities exchange on which the Common Stock is then listed
if the Common Stock is then listed on a national securities exchange, or the
average bid and asked prices of a share of Common Stock as reported in the
NASDAQ listing if the Common Stock is not then listed on a national securities
exchange, on the trading day immediately preceding the first trading day on
which, as a result of the establishment of a record date or otherwise, the
trading price reflects that an acquiror of Common Stock in the public market
will not participate in or receive the payment of any applicable dividend or
distribution.
Except as hereinbefore expressly provided, the issuance by the Company
of shares of stock of any class, or securities convertible into shares of stock
of any class, for cash or property, or for labor or services either upon direct
sale or upon the exercise of rights or warrants to subscribe therefor, or upon
conversion of shares or obligations of the Company convertible into such shares
or other securities, shall not affect, and no adjustment by reason thereof shall
be made with respect to, the number or price of shares of Common Stock then
subject to outstanding Awards.
18. Substitute Options. Options may be granted under the Plan from
time to time in substitution for stock options held by employees of other
corporations who are about to become employees of the Company, or whose employer
is about to become a parent or subsidiary corporation of the Company,
conditioned in the case of an incentive stock option upon the employee becoming
an employee of the Company or a parent or subsidiary corporation of the Company,
as a result of the merger or consolidation of the Company with another
corporation, or the acquisition by the Company of the issued and outstanding
stock of another corporation as the result of which it becomes a subsidiary of
the Company. The terms and conditions of the substitute Options so granted may
vary from the terms and conditions set forth in the Plan to such extent as the
Board of Directors of the Company at the time of grant
9
<PAGE>
may deem appropriate to conform, in whole or in part, to the provisions of the
stock options in substitution for which they are granted, but with respect to
stock options which are incentive stock options, no such variation shall be such
as to affect the status of any such substitute option as an incentive stock
option under Section 422 of the Code.
19. Amendment or Termination of Plan. The Board of Directors may
modify, revise, or terminate the Plan at any time and from time to time;
provided, however, that without the further approval of the holders of shares
representing a majority of the total voting power of the Company at a meeting of
shareholders or by written consent, or if the provisions of the corporate
charter, by-laws, or applicable state law prescribes a greater degree of
shareholder approval for this action, without the degree of shareholder approval
thus required, the Board of Directors may not (a) change the aggregate number of
shares which may be issued pursuant to Awards under the provisions of the Plan,
(b) extend the term during which an Option may be exercised or the termination
date of the Plan, or (c) materially change the class of employees eligible to
receive Awards under the Plan; unless, in each such case, the Board of Directors
of the Company shall obtain an opinion of legal counsel to the effect that
shareholder approval of the amendment is not required (i) by law, (ii) by the
applicable rules and regulations of, or any agreement with, any national
securities exchange on which the Common Stock is then listed, or if the Common
Stock is not so listed, the rules and regulations, or any agreement with, the
National Association of Securities Dealers, Inc., and (iii) in order to make
available to the participant with respect to any award granted under the Plan,
the benefits of rule 16b-3 of the Rules and Regulations under the Exchange Act,
or any similar or successor rule. In addition, the Board shall have the power to
make such changes in the Plan and in the regulations and administrative
provisions hereunder or in any outstanding Option as in the opinion of counsel
for the Company may be necessary or appropriate from time to time to enable any
Option granted pursuant to the Plan to qualify as incentive stock options under
Section 422 of the Code, and the regulations which may be issued thereunder as
in existence from time to time.
20. Written Agreement. Each Award granted hereunder shall be embodied
in a written agreement, which shall be subject to the terms and conditions
prescribed above and shall be signed by the participant and by the appropriate
officer of the Company for and in the name and on behalf of the Company. Such an
agreement shall contain such other provisions as the Committee, in its
discretion, shall deem advisable.
21. Indemnification of Committee. The Company shall, to the fullest
extent provided by law, indemnify each present and future member of the
Committee against, and each member of the Committee shall be entitled without
further act on his part to indemnity from the Company for all expenses
(including, without limitation, reasonable attorneys' fees, the amount of
judgments, and the amount of approved settlements made with a view to the
curtailment of costs of litigation, other than amounts paid to the Company
itself) reasonably incurred by him in connection with or arising out of any
action, suit, or proceeding in which he may be involved by reason of his being
or having been a member of the Committee, whether or not he continues to be such
member of the Committee at the time of incurring such expenses. The foregoing
right of indemnification shall inure to the benefit of the heirs, executors, or
administrators of each such member of the Committee and shall be in addition to
all other rights to which such member of the Committee may be entitled as a
matter of law, contract, or otherwise. Nothing in this Paragraph 21, shall be
construed to limit or otherwise affect any right to indemnification or payment
of expense, or any provisions limiting the liability of any officer or director
of the Company or any member of the Committee, provided by law, the Articles of
Incorporation of the Company, or otherwise.
22. Effective Date of Plan. The Plan shall become effective and shall
be deemed to have been adopted on December 1, 1993.
B.F. Shaw, Inc.
Sunland Fabricatiors, Inc.
National Fabricators, Inc.
Lone Star Fabricators, Inc.
FVF, Incorporated
Associated Valve, Inc.
Shaw Industrial Supply Co., Inc.
Fronek Engineering & Consulting, Inc.
Fronek A/DE, Inc.
Fronek Power Services, Inc.
Shaw/Fronek Fabricators, Inc.
Secorp, Inc.
Shaw International, Inc.
Shaw Overseas (Cayman) Ltd.
Shaw-Nass Middle East, W.L.L.
World Industrial Constructors, Inc.
Shaw Overseas (Far East) Ltd.
Shaw Asia Company Limited
Manufacturas Shaw South America, C.A.
Shaw Heat Treating, C.A.
Shaw Holding South America, C.A.
Shaw Trading FSC, Ltd.
Shaw Group UK, Limited
Shaw Group International, Inc.
Alloy Piping Products, Inc.
Word Industries Fabricators, Inc.
Welding Technologies of America, Inc.
Shaw Managed Services, Inc.
Shaw Power Services, Inc.
NAPTech, Inc.
NAPTech Pressure Systems Corporation
IRM/NAPTech Joint Venture, L.L.C.
Pipe Shields, Inc.
United Crafts, Inc.
UCI Holding, Inc.
ACL Piping
SAON Properties, Inc.
Shaw Maintenance, Inc.
Worldwide Industrial Constructors, Inc.
<TABLE> <S> <C>
<ARTICLE> 5
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<CIK> 0000914024
<NAME> The Shaw Group Inc.
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
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<PERIOD-START> Sep-01-1996
<PERIOD-END> Aug-31-1997
<EXCHANGE-RATE> 1
<CASH> 4,357,494
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0
0
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