Exhibit 13.1
SELECTED FINANCIAL DATA
1999 1998 1997 1996 1995
================================================================================
(In thousands, except per share information)
RESULTS OF OPERATIONS
Total contract revenues $506,012 $521,271 $446,432 $418,388 $354,728
Operating income/(loss) (8,175) (1,667) 8,020 7,663 5,180
Net income/(loss) (8,164) (2,419) 4,953 4,180 2,900
Diluted net income/(loss)
per share $ (1.00) $ (0.30) $ 0.60 $ 0.50 $ 0.35
Return on average equity (16.7)% (4.4)% 9.3% 8.5% 6.3%
================================================================================
FINANCIAL CONDITION
Total assets $149,191 $151,861 $144,425 $126,082 $117,376
Working capital $ 26,073 $ 31,855 $ 36,220 $ 27,417 $ 25,186
Current ratio 1.31 1.36 1.41 1.36 1.36
Long-term debt $ 14,867 $ 3,138 $ -- $ -- $ --
Shareholders' investment 44,799 52,862 55,862 50,752 47,631
Book value per
outstanding share 5.48 6.47 6.79 6.19 5.70
Year-end closing
share price $ 6.63 $ 9.75 $ 9.75 $ 6.38 $ 5.00
================================================================================
CASH FLOW
Cash provided by/(used
in) operating activities $ 1,143 $ (1,379) $ 7,803 $ 1,167 $ 15,539
Cash used in investing
activities (10,255) (11,416) (2,533) (3,739) (2,294)
Cash provided by/(used in)
financing activities 7,783 1,935 124 (1,251) (2,547)
- --------------------------------------------------------------------------------
Increase/(decrease)
in cash $ (1,329) $(10,860) $ 5,394 $ (3,823) $ 10,698
================================================================================
BACKLOG
Funded $365,300 $447,600 $393,200 $332,800 $299,900
Total $657,300 $735,300 $648,700 $543,700 $507,800
================================================================================
SHARE INFORMATION
Year-end shares
outstanding 8,181 8,166 8,224 8,197 8,364
Average diluted shares
outstanding during year 8,175 8,178 8,299 8,383 8,368
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
As discussed more fully in Note 2 to the consolidated financial statements,
during the first quarter of 1999, the Company determined that it would no longer
participate in general construction projects for buildings or transportation
infrastructure. Accordingly, the Company's Buildings unit was restructured, and
the Company recorded related charges in the amount of $0.8 million during the
first quarter of 1999. During the third and fourth quarters of 1999, the Company
recorded additional charges totaling $21.1 million associated with construction
projects in its Buildings and Transportation units. Of this amount,
approximately $5.9 million relates to obligations determined during the third
quarter of 1999 to certain subcontractors and vendors associated with a
construction project for Universal City Development Partners ("UCDP") at the
Universal Studios theme park in Orlando, FL; another $2.4 million relates to the
March 2000 conditional settlement of litigation related to the UCDP project, the
effects of which were recorded during the fourth quarter of 1999; and the
remaining $12.8 million resulted from changes in cost estimates on several
Transportation-Construction (heavy and highway) projects during the year. In
connection with the Company's sale of certain assets held by its heavy and
highway division, additional charges totaling $1.9 million were recorded during
the fourth quarter of 1999. As a result of this sale, the Company remains
responsible for only five significant general construction projects, all of
which are scheduled to be completed by the end of the third quarter of 2000.
Other 1999 charges of $3.2 million comprised adjustments on engineering
projects, the writeoff of certain intangible assets and severance costs.
TOTAL CONTRACT REVENUES Total contract revenues decreased to $506 million in
1999 from $521 million in 1998. The most significant 1999 fluctuations were
registered in the form of increases for the Transportation and Energy units of
$74 million and $13 million, respectively, and a decrease of $98 million in the
Buildings unit. The Transportation unit posted significant revenue improvements
in both its engineering and construction divisions as a direct result of state
transportation funding increases associated with the U.S. government's 1998
federal transportation (TEA-21) legislation. Several new contracts to provide
offshore operations and maintenance ("O&M") services, as well as revenue
increases on existing contracts, accounted for the increase in the Energy unit.
The substantial decrease in the Buildings unit's revenues is directly
attributable to the unit's restructuring and its discontinuance of general
construction services during 1999.
For 1998, total contract revenues increased from $446 million in 1997. All of
the Company's business units posted revenue improvements for 1998. The
Buildings, Transportation, Energy and Civil units recorded the largest revenue
increases of $25 million, $22 million, $14 million and $13 million,
respectively. In the Buildings unit, the UCDP project accounted for $60 million
of revenues in 1998 versus only $17 million in 1997. Nearly equal revenue growth
in each of the engineering and construction divisions contributed to the
Transportation unit's improvement. International growth, including that from a
new consolidated joint venture which provides O&M services to BP Amoco in
Venezuela, caused the increase in the Energy unit. The Civil unit's improvement
principally resulted from higher revenues on new O&M contracts in its Baker
Support Services, Inc. ("BSSI") division.
GROSS PROFIT
Gross profit decreased to $40.7 million in 1999 from $47.2 million in 1998. As a
percentage of total contract revenues, gross profit declined to 8.1% from 9.1%
in 1998. During 1999 and 1998, project charges totaling $22.6 million and $13.7
million, respectively, reduced the Company's gross profit. The 1999 project
charges primarily affected the Buildings and Transportation-Construction
segments in amounts of $8.8 million and $12.8 million, respectively, while the
1998 charges were entirely recorded on construction projects in the Buildings
unit. The gross profit percentage increased in the Civil and Buildings units for
1999, with decreases in the other units. In the Company's Civil unit, the BSSI
division posted both dollar and percentage improvements in gross profit due to
an overall change in its mix of projects following the completion of its then
most significant contract in 1998. Excluding the previously mentioned 1999 and
1998 project charges, the Buildings unit's profit percentage still would have
improved for 1999 due to closer management of its construction projects as they
were being completed during 1999. Despite significant revenue growth which
improved the gross profit in dollars for the Transportation unit's engineering
division, the unit's overall results suffered due to the aforementioned 1999
construction project charges. The Energy unit's decrease in its gross profit
percentage for 1999 was impacted by nonrecurring project-related difficulties
during the second quarter of 1999. The Environmental unit's gross profit
percentage was lower for 1999 due to a change in its mix of contracts.
For 1998, gross profit decreased from $51.9 million in 1997. As a percentage of
total contract revenues, gross profit declined in 1998 from 11.6% in 1997. Both
overall decreases are directly attributable to the aforementioned 1998
construction project charges. The gross profit percentage increased in 1998 for
all of the Company's business units except for the Civil unit, which remained
relatively flat, and the Buildings unit. The Energy and Transportation units
registered the most significant overall improvements in 1998. The Energy unit's
international growth, particularly in Venezuela, raised its gross profit
percentage. Both the engineering and construction operations in the
Transportation unit contributed to its improvement, with the engineering side
providing the greater increase due to higher profitability from several new
projects on which work commenced during 1998. After excluding the aforementioned
1998 construction losses, the Buildings unit's gross profit percentage still
would have been lower for 1998 as the result of its completion of certain more
profitable construction projects in late 1997 and early 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses remained constant at $48.9
million in 1999 and 1998. Expressed as a percentage of total contract revenues,
SG&A expenses increased slightly to 9.7% in 1999 from 9.4% in 1998. The
Company's 1999 charges discussed in Note 2 to the consolidated financial
statements had the effect of increasing SG&A expenses by $4.4 million for 1999.
Excluding these charges, the 1999 SG&A percentage would have been 8.8% due to
lower employee and office lease costs following the Company's first quarter 1999
restructuring and certain officer and employee terminations which occurred
during the year.
SG&A expenses increased in 1998 from $43.9 million in 1997. The 1998 increase
principally reflected an investment in technological support costs, costs of
entry into new transportation markets, additional support costs related to the
Energy unit's consolidated joint venture in Venezuela, and higher international
marketing costs. Expressed as a percentage of total contract revenues, SG&A
expenses decreased slightly in 1998 from 9.8% in 1997.
OTHER INCOME AND EXPENSE
Interest income decreased to $155,000 in 1999 from $439,000 in 1998, due to a
combination of the Company being in a net borrowed position throughout the
majority of 1999 and slightly lower interest rates in 1999. Despite the lower
interest rates in 1999, interest expense increased to $948,000 in 1999 from
$145,000 in 1998 due to higher borrowings under the Company's credit agreement
with Mellon Bank N.A. ("Mellon"), some of which borrowings were used for the
purchase of Steen Production Service, Inc. ("Steen") during the third quarter of
1999. Additional 1999 interest expense also resulted from notes payable due to
the former shareholders of Steen and higher 1999 interest expense associated
with certain heavy and highway construction equipment that was financed during
the second half of 1998. Other expense was $273,000 in 1999 versus other income
of $42,000 in 1998, primarily due to lower 1999 profitability associated with
unconsolidated joint ventures and higher 1999 expense associated with a minority
interest in the income of a consolidated Energy unit joint venture.
Interest income decreased in 1998 from $552,000 in 1997, due to the combination
of a lower daily average investment amount and slightly lower interest rates in
1998. Other income decreased in 1998 from $811,000 in 1997, primarily due to
1998 expense related to the minority interest in the income of a consolidated
Energy unit joint venture and 1997 gains realized on the sales of certain
investments. Interest expense increased in 1998 from $39,000 in 1997 as the
result of the aforementioned 1998 financing of certain heavy and highway
construction equipment.
INCOME TAXES
The Company's 1999 benefit from income taxes resulted in an effective tax
benefit rate of 12% in 1999, compared to provisions for income taxes that
resulted in effective tax rates of (82)% in 1998 and 47% in 1997. The difference
between these percentages and the 34% statutory U.S. federal rate is
attributable primarily to state and foreign income taxes and foreign withholding
taxes. The minimal income tax benefit for 1999 and the income tax expense for
1998 result from the effects of certain foreign and state taxes that cannot be
offset against tax benefits derived from other jurisdictions.
CONTRACT BACKLOG
The Company's funded backlog, which consists of that portion of uncompleted work
represented by signed contracts and for which the procuring agency has
appropriated and allocated the funds to pay for the work, was $365 million at
December 31, 1999, a decrease from $448 million at the end of 1998. Total
backlog, which incrementally includes that portion of contract value for which
options are still to be exercised (unfunded backlog), was $657 million at the
end of 1999 versus $735 million at the end of 1998. The overall 1999 decreases
in funded and total backlog are principally attributable to the previously
discussed wind-down of the Company's two construction divisions, which thereby
caused funded and total backlog reductions in the Buildings and Transportation
units for 1999. The most significant 1999 increases in funded and total backlog
were registered in the Company's Civil-BSSI and Transportation-Engineering
segments.
With reference to the Company's 1999 restructuring, funded backlog related to
the business that will be continued by the Company was $316 million and $300
million, and total backlog was $608 million and $587 million, as of year-end
1999 and 1998, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $1.1 million in 1999, compared to
net cash used in operating activities of $1.4 million in 1998 and net cash
provided by operating activities of $7.8 million in 1997. The 1999 cash
improvement resulted primarily from net reductions in receivables and other
contract-related assets associated with the wind-down of the Company's
construction operations. The decrease for 1998 was primarily related to the
Company's 1998 net loss, while the 1997 improvement was mainly attributed to a
combination of the Company's higher net income and the collection of retention
amounts totaling $3.0 million on a significant construction project.
Net cash used in investing activities was $10.3 million in 1999, $11.4 million
in 1998 and $2.5 million in 1997. Although the 1997 amount solely comprises
capital expenditures, the 1999 and 1998 amounts also include $4.9 million and
$0.8 million, respectively, that was paid relative to the acquisition of new
subsidiaries (as discussed in Notes 3 and 13 to the consolidated financial
statements). The Company's capital expenditures included computer equipment and
software purchases totaling $2.8 million in 1999, compared with $3.9 million in
1998 and $1.4 million in 1997. During 1997, the Company acquired most of its
computer equipment under operating leases, but converted to the purchase of
computer equipment for economic reasons in 1998. An additional $3.5 million of
the overall 1999 decrease and the 1998 increase is attributable to the purchase
of heavy and highway construction equipment needed for new projects added during
1998.
Net cash provided by financing activities was $7.8 million in 1999, compared to
$1.9 million in 1998 and $0.1 million in 1997. Of the Company's 1999 proceeds
from long-term debt, $10.1 million represents borrowings against its credit
agreement with Mellon, while the 1998 proceeds related entirely to the
aforementioned purchase of heavy and highway construction equipment. The 1999
and 1998 repayments of long-term debt correlate to both the financed
construction equipment and the acquisitions of new subsidiaries. In 1998, the
Company also paid $0.8 million to acquire 96,379 treasury shares under a stock
repurchase program.
Working capital decreased to $26.1 million at December 31, 1999 from $31.9
million at December 31, 1998. The Company's current ratios were 1.31:1 and
1.36:1 at the end of 1999 and 1998, respectively. Both the working capital and
current ratio at year-end 1999 were primarily impacted by the effects of the
construction-related charges discussed in Note 2 to the consolidated financial
statements.
In 1998, the Company extended the term of its credit agreement with Mellon
through May 31, 2001. This agreement provides for a commitment of $25 million,
which covers borrowings and letters of credit. As of December 31, 1999,
borrowings totaling $10.1 million were outstanding under the agreement, along
with outstanding letters of credit totaling $2.3 million. As disclosed in Note 8
to the consolidated financial statements, the agreement was unsecured through
December 1999, at which time Mellon acted to secure the agreement as a result of
the Company's third quarter 1999 charges and its related financial covenant
violations. Accordingly, borrowings under the agreement are currently secured by
the receivables and stock of the Company and most of its subsidiaries. These
financial covenants were again not achieved for the fourth quarter of 1999.
Mellon has waived through the end of the first quarter of 2000, its rights
related to certain fourth quarter 1999 loan covenant violations. The Company and
Mellon have agreed on certain amendments to the related loan covenants, such
that the Company believes it will be able to achieve the amended covenants
during 2000. These amendments also included a provision that borrowings under
the agreement shall be limited to 80% of eligible receivables, as determined by
Mellon. Management believes that the credit agreement will be adequate to meet
its borrowing and letter of credit requirements for at least the next year.
Short- and long-term liquidity is further dependent upon appropriations of
public funds for infrastructure and other government-funded projects, capital
spending levels in the private sector, and the demand for the Company's services
in the oil and gas markets. Additional external factors such as price
fluctuations in the energy industry could affect the Company. The current TEA-21
legislation will provide significant increases in funding for transportation
infrastructure projects in 2000 and beyond. At this time, management believes
that its funds generated from operations and its existing credit facility will
be sufficient to meet its operating and capital expenditure requirements for at
least the next year.
The Company has historically been required to provide bid and performance
bonding on certain construction contracts, and has a $500 million bonding line
available through Travelers Casualty & Surety Company of America. As a result of
its 1999 restructuring, the Company will become increasingly less reliant on its
bonding line during 2000. Accordingly, management believes that its bonding line
will be sufficient to meet its bid and performance needs for at least the next
year.
YEAR 2000 COMPLIANCE
In early January 2000, the Company successfully completed its assessment process
relative to the arrival of the 21st century. As a result of management's effort
to identify and resolve in advance any potential issues that could have been
expected to arise coincident with the changeover to the year 2000, the Company
has experienced no significant Year 2000 problems with its information
technology systems since December 31, 1999. Year 2000 compliance was primarily
achieved through the normal and recurring process of system upgrades, the
software costs of which were covered under related maintenance agreements.
Accordingly, the incremental costs associated with Year 2000 compliance were not
material to the Company's consolidated results of operations or its financial
position.
Management previously believed that its "most reasonably likely worst case Year
2000 scenario" posed the potential for payment delays from some customers,
including agencies of the U.S. federal government, due to their possible lack of
readiness for the new century. No such payment delays have significantly
impacted the Company's cash flow since December 31, 1999.
The Company considers its own Year 2000 compliance process completed; however,
the impact of Year 2000 issues on the Company will continue to depend on how
related issues have been addressed by third parties that provide services to the
Company. To date, the Company has not been adversely impacted to any significant
extent by the failure of third parties to address Year 2000 issues. The Company
has developed contingency plans to address risks associated with Year 2000
issues that may arise. There can be no assurance that these plans will fully
mitigate any problems that may arise in the future.
The foregoing Year 2000 discussions constitute a Year 2000 Readiness Disclosure
within the meaning of the Year 2000 Readiness and Disclosure Act of 1998.
MICHAEL BAKER CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
================================================================================
(In thousands, except per share amounts)
- --------------------------------------------------------------------------------
Total contract revenues $506,012 $521,271 $446,432
Cost of work performed 465,273 474,027 394,527
- --------------------------------------------------------------------------------
GROSS PROFIT 40,739 47,244 51,905
Selling, general and administrative expenses 48,914 48,911 43,885
- --------------------------------------------------------------------------------
INCOME/(LOSS) FROM OPERATIONS (8,175) (1,667) 8,020
Other income/(expense):
Interest income 155 439 552
Interest expense (948) (145) (39)
Other, net (273) 42 811
- --------------------------------------------------------------------------------
INCOME/(LOSS) BEFORE INCOME TAXES (9,241) (1,331) 9,344
Provision for/(benefit from) income taxes (1,077) 1,088 4,391
- --------------------------------------------------------------------------------
NET INCOME/(LOSS) $ (8,164) $ (2,419) $ 4,953
================================================================================
BASIC AND DILUTED NET INCOME/
(LOSS) PER SHARE $ (1.00) $ (0.30) $ 0.60
================================================================================
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
MICHAEL BAKER CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31,
------------------
1999 1998
================================================================================
(In thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,685 $ 5,014
Receivables 77,964 82,672
Cost of contracts in progress and
estimated earnings, less billings 20,803 22,407
Prepaid expenses and other 7,363 10,192
- --------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 109,815 120,285
- --------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, NET 17,120 17,458
- --------------------------------------------------------------------------------
OTHER ASSETS
Goodwill and other intangible assets, net 14,563 7,507
Other assets 7,693 6,611
- --------------------------------------------------------------------------------
TOTAL OTHER ASSETS 22,256 14,118
- --------------------------------------------------------------------------------
TOTAL ASSETS $ 149,191 $ 151,861
================================================================================
LIABILITIES AND SHAREHOLDERS' INVESTMENT
- --------------------------------------------------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt $ 3,526 $ 823
Accounts payable 28,862 43,356
Accrued employee compensation 10,462 9,141
Accrued insurance 7,884 6,155
Other accrued expenses 19,453 19,387
Excess of billings on contracts in
progress over cost and estimated earnings 13,555 9,568
- --------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 83,742 88,430
- --------------------------------------------------------------------------------
OTHER LIABILITIES
Long-term debt 14,867 3,138
Other 5,783 7,431
- --------------------------------------------------------------------------------
TOTAL LIABILITIES 104,392 98,999
================================================================================
SHAREHOLDERS' INVESTMENT
Common Stock, par value $1, authorized
44,000,000 shares, issued 7,170,663 and
7,150,179 shares, in 1999 and 1998,
respectively 7,171 7,150
Series B Common Stock, par value $1,
authorized 6,000,000 shares, issued
1,313,816 and 1,319,114 shares, in 1999
and 1998, respectively 1,314 1,319
Additional paid-in capital 37,084 37,002
Retained earnings 1,283 9,447
Less 302,989 and 303,359 shares of
Common Stock in treasury, at cost, in
1999 and 1998, respectively (2,053) (2,056)
- --------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' INVESTMENT 44,799 52,862
- --------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS'
INVESTMENT $ 149,191 $ 151,861
================================================================================
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
MICHAEL BAKER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
================================================================================
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income/(loss) $ (8,164) $ (2,419) $ 4,953
Adjustments to reconcile net income/(loss)
to net cash provided by/(used in)
operating activities:
Depreciation and amortization 7,408 5,049 4,483
Deferred income taxes (3,117) (695) 1,827
Changes in assets and liabilities,
net of acquisitions:
(Increase)/decrease in receivables
and contracts in progress 16,293 (8,276) (13,514)
Increase/(decrease) in accounts payable
and accrued expenses (17,789) 9,216 9,534
(Increase)/decrease in other net assets 6,512 (4,254) 520
- --------------------------------------------------------------------------------
TOTAL ADJUSTMENTS 9,307 1,040 2,850
- --------------------------------------------------------------------------------
NET CASH PROVIDED BY/(USED
IN) OPERATING ACTIVITIES 1,143 (1,379) 7,803
- --------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and
equipment (5,337) (10,573) (2,533)
Acquisition of Steen Production Service, Inc.(4,918) -- --
Acquisition of GeoResearch, Inc. -- (843) --
- --------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (10,255) (11,416) (2,533)
- --------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 10,167 3,516 --
Repayments of long-term debt (2,454) (964) --
Proceeds from exercise of stock options 70 183 124
Payments to acquire treasury stock -- (800) --
- --------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 7,783 1,935 124
- --------------------------------------------------------------------------------
NET INCREASE/(DECREASE) IN CASH AND
CASH EQUIVALENTS (1,329) (10,860) 5,394
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 5,014 15,874 10,480
- --------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 3,685 $ 5,014 $ 15,874
================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW DATA
Interest paid $ 669 $ 165 $ 50
Income taxes paid $ 387 $ 2,588 $ 2,039
================================================================================
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
MICHAEL BAKER CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT
- --------------------------------------------------------------------------------
SERIES B
COMMON COMMON
STOCK STOCK TREASURY ADDITIONAL
PAR PAR ---------------- PAID-IN RETAINED
VALUE $1 VALUE $1 SHARES AMOUNT CAPITAL EARNINGS
================================================================================
(In Thousands)
Balance, Dec. 31, 1996 $7,056 $1,349 208 $1,260 $36,694 $6,913
Net income -- -- -- -- -- 4,953
Series B Common
Stock conversions
to Common Stock 6 (6) -- -- -- --
Restricted stock
issued 3 -- -- -- 21 --
Issuance of
Treasury stock -- -- (1) (4) 2 --
Stock options
exercised 22 -- -- -- 102 --
Other -- -- -- -- 3 --
- --------------------------------------------------------------------------------
Balance, Dec. 31, 1997 7,087 1,343 207 1,256 36,822 11,866
Net loss -- -- -- -- -- (2,419)
Series B Common
Stock conversions
to Common Stock 24 (24) -- -- -- --
Restricted stock
issued 4 -- -- -- 32 --
Treasury stock
purchases -- -- 96 800 -- --
Stock options
exercised 35 -- -- -- 148 --
- --------------------------------------------------------------------------------
Balance, Dec. 31, 1998 7,150 1,319 303 2,056 37,002 9,447
Net loss -- -- -- -- -- (8,164)
Series B Common
Stock conversions
to Common Stock 5 (5) -- -- -- --
Restricted stock
issued 4 -- -- -- 24 --
Issuance of
Treasury stock -- -- -- (3) -- --
Stock options
exercised 12 -- -- -- 58 --
- --------------------------------------------------------------------------------
Balance, Dec. 31, 1999 $7,171 $1,314 303 $2,053 $37,084 $ 1,283
================================================================================
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Michael Baker
Corporation and its subsidiaries (the "Company"), and joint ventures over which
it maintains control. All intercompany accounts and transactions have been
eliminated in consolidation.
ACCOUNTING FOR CONTRACTS
Total contract revenues have been recorded on the percentage-of-completion
method of accounting for the majority of engineering and construction contracts
in the Buildings, Civil, Environmental and Transportation units. Contract
revenues attributable to claims and unapproved change orders are recognized when
realization is probable and the amounts can be reliably estimated. Earnings on
fixed-price contracts are determined by multiplying the total estimated gross
profit for the contracts by the percentage of physical completion to date (which
approximates costs incurred to date in relation to total estimated costs), less
earnings recognized in prior periods. Earnings under cost reimbursement
contracts are principally recorded as costs are incurred. In the event that
legal costs are expected to be incurred in connection with defending the
Company's position related to claims or litigation on projects, such costs are
accrued at the time they are probable of being incurred and reasonably
estimable. As work is performed under long-term contracts, estimates of the
costs are reviewed and, when necessary, revised on a current basis. Contract
costs include costs of subcontracts, direct labor, supplies and overhead.
Estimated losses on contracts in progress are recorded as they are identified.
Total contract revenues for the operations and maintenance contracts within the
Civil and Energy units are primarily recognized as related services are
provided. The Civil unit's government contracts are typically binding on the
Company for a multi-year period and are renewable at the option of the
respective government agency. Modifications to contract terms that result in
retroactive adjustments to contract revenues are recognized when realization is
probable.
ACCOUNTING FOR JOINT VENTURES
The Company's proportionate share of majority-owned, project-specific joint
venture revenue and cost of contracts is included in the accompanying
Consolidated Statements of Income. In the accompanying Consolidated Balance
Sheets, the Company records its interest in all majority-owned, project-specific
joint ventures based on the equity method of accounting for investments.
Depending on whether the related projects are expected to be completed within
one year, the Company's investment in these joint ventures is included within
either prepaid expenses and other current assets or other non-current assets in
the accompanying Consolidated Balance Sheets. All 50% or less interests in
ventures are recorded on the equity method in the accompanying Balance Sheets
and Consolidated Statements of Income.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments classified as current assets and
liabilities approximates carrying value due to the short-term nature of the
instruments. Substantially all long-term debt is based on rates that float with
the current prime rate; accordingly, the carrying value of these obligations
approximates their fair value.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities as of the date of the financial statements,
and the reported amounts of revenues and expenses for the reporting period.
Actual results could differ from those which result from using the estimates.
The use of estimates is an integral part of applying the percentage-
of-completion method of accounting for contracts.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand or deposit and other highly
liquid instruments with original maturities of three months or less. Any
outstanding checks which create book overdrafts within banking institutions are
reclassified as accounts payable; such amounts totaled $3,920,000 and $9,141,000
at December 31, 1999 and 1998, respectively.
DEPRECIATION AND AMORTIZATION
Depreciation on property, plant and equipment is recorded using straight-line
and accelerated methods over the estimated useful lives of the assets. The
estimated useful lives range from 5 to 40 years on buildings and improvements
and from 3 to 20 years on equipment and vehicles. Amortization of intangible
assets is provided primarily on a straight-line basis over the estimated useful
lives of the assets, which range from 7 to 10 years. Upon disposal of property
items, the asset and related accumulated depreciation accounts are relieved of
the amounts recorded therein for such items and any resulting gain or loss is
reflected in income.
GOODWILL
Goodwill, which represents the excess of cost over net assets of acquired
companies, is being amortized on a straight-line basis over periods ranging from
10 to 20 years. The Company evaluates at each balance sheet date whether events
and circumstances have occurred that indicate possible impairment, and uses
estimates of future undiscounted net cash flows over the remaining lives in
measuring whether goodwill is recoverable.
EARNINGS PER COMMON SHARE
Basic and diluted net income per share computations are based upon 8,175,090 and
8,178,067 weighted average shares outstanding for 1999 and 1998, respectively.
For 1997, basic and diluted net income per share computations are based upon
weighted averages shares outstanding of 8,207,786 and 8,299,083, respectively.
RECLASSIFICATIONS
Certain 1998 balance sheet amounts have been reclassified to conform with 1999
classifications.
2. CONSTRUCTION, RESTRUCTURING AND OTHER CHARGES
During 1998 and 1999, the Company recorded losses related to the CityWalk
construction project being performed by Baker Mellon Stuart Construction, Inc.
("BMSCI"), a wholly-owned subsidiary of the Company, for Universal City
Development Partners ("UCDP") at the Universal Studios theme park in Orlando,
Florida. This project involved the construction of a new entrance to the park,
which comprises a shopping area, restaurants and a large cineplex, and
represented BMSCI's largest active construction contract during 1998. Under this
contract, BMSCI acted as the construction manager and self-performed a portion
of the work.
Following its inception in May 1997, the project suffered delays and performance
issues arose. On March 5, 1999, BMSCI was terminated by UCDP from this project,
which was over 90% complete. UCDP alleged contract breaches related to the
quality of work, contract administration and delays in project completion, and
sought damages, including consequential damages related to project delays. Both
parties filed lawsuits in this matter during the first quarter of 1999. BMSCI
alleged unfair and deceptive trade practices, breach of implied warranty of
plans and specifications, breach of contract, wrongful termination, tortuous
interference with business relationships, and breach of implied contract of good
faith and fair dealing, and sought damages, interest, court costs and further
relief. Certain subcontractors also sued BMSCI and its surety, seeking
reimbursement for costs incurred and related damages.
The UCDP project losses recorded by the Company in the fourth quarter of 1998
totaled $10.9 million, and reflected costs incurred in excess of amounts
provided for in the contract, estimated legal costs to defend the Company's
position, the reversal of the cumulative gross profit totaling $1.1 million
recorded through the third quarter of 1998, and certain other costs related to
the termination. During the third quarter of 1999, management and its counsel
determined that the Company was obligated to pay amounts totaling $5.9 million
to certain subcontractors and vendors for work performed or services provided on
this project and for which they had not previously been paid, and additional
losses in this amount were recorded.
A non-binding, court-ordered mediation process before a mediator mutually agreed
by both parties commenced in January 2000. On March 22, 2000, mediation of this
matter resulted in a conditional settlement agreement being entered into by the
Company; BMSCI; Travelers Casualty and Surety Company of America ("Travelers"),
which provided performance and payment bonds on behalf of BMSCI; UCDP; Hellmuth,
Obata & Kassabaum, Inc., which designed the project; and the court-appointed
mediator. Pursuant to the terms of the settlement agreement, the parties
resolved the claims between them, and BMSCI agreed to pay UCDP $2.0 million.
BMSCI remains responsible for resolution of all remaining subcontractor and
vendor claims, the most significant of which is the subject of a suit brought by
ADF International, Inc. ("ADF"), BMSCI's subcontractor for structural steel and
miscellaneous metals, against BMSCI and Travelers. The conditional settlement
agreement is subject to and conditioned upon acceptance and signature by the
Project Policy Insurer not later than March 31, 2000.
On November 24, 1998, ADF filed suit in Federal Court against BMSCI and
Travelers seeking damages for alleged breaches of contract relating to the
project. BMSCI and its surety answered the complaint (and amended complaint) and
BMSCI filed a counterclaim. BMSCI and its counsel believe it has valid claims
against ADF and defenses to claims by ADF. BMSCI intends to pursue and defend
these claims vigorously. BMSCI further intends to engage in negotiations to
settle all other subcontractor and vendor claims. The Company believes it has
made adequate provisions for all subcontractor and vendor claims, including ADF,
in the accompanying consolidated financial statements.
In connection with the conditional settlement agreement, and the estimated
amounts that will be required to settle with subcontractors and vendors, the
Company recorded additional charges totaling $2.4 million during the fourth
quarter of 1999. Other Buildings unit charges totaling $2.8 million were also
recorded during 1998 related to the settlement of construction-related
litigation and charges on other completed construction projects.
In connection with the UCDP litigation, the Company determined during the first
quarter of 1999 that it would no longer participate in general construction
projects for buildings or transportation infrastructure. Accordingly, the
Company's Buildings unit was restructured, and the Company recorded related
charges totaling $0.8 million during the first quarter of 1999. Such charges
reflected severance costs associated with employee terminations, writedowns
related to fixed asset impairments, and lease costs for certain office space
permanently idled by the restructuring.
Certain assets held by the Company's Transportation-Construction (heavy and
highway) segment, including substantially all fixed assets and the remaining
contractual rights and obligations associated with eight active construction
projects, were sold to A&L, Inc. ("A&L") in March 2000 in exchange for cash
proceeds of $0.7 million and A&L's assumption of certain debt and lease
obligations. In connection with this sale, charges totaling $1.9 million were
recorded during the fourth quarter of 1999. Such charges primarily reflect
writedowns related to fixed asset impairments, equipment lease termination
costs, and lease costs for certain office space permanently idled by the
restructuring. As a result of the sale, the Company remains responsible for only
four significant heavy and highway construction projects, all of which are
scheduled for completion by the end of the third quarter of 2000. These
remaining projects are being managed for the Company by A&L.
During 1999, additional charges totaling $12.8 million ($8.1 million in the
fourth quarter) were recorded in the Company's Transportation-Construction
segment due to changes in estimates on several heavy and highway construction
projects.
Other 1999 charges totaling $3.2 million comprised the writeoff of certain
goodwill and other intangible assets associated with the Company's 1998
acquisition of GeoResearch, Inc. ("GeoResearch"), severance costs related to the
departure of certain former officers and employees, and adjustments on
Engineering projects in the Buildings, Civil and Transportation units.
The foregoing 1999 and 1998 charges increased cost of work performed by $22.6
million and selling, general and administrative expenses by $4.4 million in
1999, and increased cost of work performed by $13.7 million for 1998.
3. ACQUISITION
On September 1, 1999, Baker/MO Services, Inc. ("Baker/MO"), a wholly-owned
subsidiary of the Company, purchased all of the outstanding shares of capital
stock of Steen Production Service, Inc. ("Steen"), a Louisiana corporation, from
its shareholders (the "Sellers"). Steen is an operations and maintenance company
which provides pumping and gauging services to oil and gas facilities in the
Gulf of Mexico.
The purchase price for the shares of Steen was $10,826,000, including promissory
notes totaling $4,380,000, which will be paid to the Sellers in two equal annual
installments, and including certain non-competition covenants valued at
$2,000,000. Interest on the promissory notes will accrue from September 1, 1999
at the prime rate as announced by Mellon Bank, N.A. ("Mellon"), and also will be
paid in two annual installments. The Company has guaranteed Baker/MO's
obligation to pay all principal and interest under the promissory notes. In
addition, the Company, through its Baker/MO subsidiary, entered into five-year
employment agreements with each of the two Sellers.
This acquisition has been accounted for as a purchase. Accordingly, the
operating results of Steen have been included in the accompanying Consolidated
Statement of Income since September 1, 1999. As required under the purchase
method of accounting, the acquisition costs have been allocated to the net
assets acquired based upon the fair market value to the Company as of the
acquisition date. The excess of acquisition costs over the fair market value of
the acquired assets and liabilities is being amortized on a straight-line basis
over 20 years.
The Company's operating results for the years ended December 31, 1999 and 1998
are required to be presented on a pro forma basis assuming that the acquisition
of Steen had been effective at the beginning of each respective period. The pro
forma information which follows is not necessarily indicative of the results of
operations as they may be in the future or as they might have been in the
periods indicated, if the acquisition had been consummated at the beginning of
each respective period. The pro forma information gives effect to, among other
things, depreciation and amortization expense on revalued assets acquired;
incremental employee benefit costs; additional interest expense that would have
been incurred in borrowing the initial amounts paid for the acquisition (and
corresponding adjustments of interest income earned); additional interest
expense associated with the notes payable to the Sellers; and the income tax
benefit associated with the foregoing pro forma adjustments.
Assuming that Steen had been acquired on January 1, 1999, the unaudited pro
forma operating results of the Company for the year ended December 31, 1999
would have approximated the following: Total contract revenues of $517,007,000;
Net loss of $(8,880,000); and Basic and diluted net loss per share of $(1.09).
Assuming that Steen had been acquired on January 1, 1998, the unaudited pro
forma operating results of the Company for the year ended December 31, 1998
would have approximated the following: Total contract revenues of $538,247,000;
Net loss of $(3,349,000); and Basic and diluted net loss per share of $(0.41).
4. CONTRACTS
The total cost of contracts in progress (used to determine cost of work
performed) plus accumulated gross profit recorded was $910,838,000 and
$1,007,668,000 at December 31, 1999 and 1998, respectively. Billings to date on
contracts in progress at December 31, 1999 and 1998 were $903,590,000 and
$994,829,000, respectively.
Trade accounts receivable totaling $5,857,000 and $9,097,000 at December 31,
1999 and 1998, respectively, relate to retainage provisions under long-term
contracts which will be due upon completion of the contracts. Based on
management's estimates, substantially all of the retention balance at December
31, 1999 is expected to be collected in 2000.
As of December 31, 1999 and 1998, accounts payable included amounts due to
subcontractors of $2,087,000 and $4,623,000, respectively, which have been
retained under contractual terms pending the completion and acceptance of the
work performed by the subcontractors.
Certain subsidiaries of the Company participate in joint ventures that are
typically formed to accomplish a specific project and then dissolved upon
completion of the project. The number of joint ventures in which the Company
participates and the size, scope and duration of the projects vary between
periods. Summarized financial information for these joint ventures is as follows
(in millions):
50% OR LESS EQUITY INVESTEES
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Total contract revenues $13.4 $ 8.2 $ 6.0
Gross profit 0.8 1.4 1.2
Income from operations -- 0.7 1.2
Net income/(loss) $(0.1) $ 0.5 $ 0.4
- --------------------------------------------------------------------------------
GREATER THAN 50% EQUITY INVESTEES
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Total contract revenues $16.0 $12.2 $10.7
Gross profit 2.4 0.7 0.7
Income from operations 2.3 0.7 0.7
Net income $ 2.4 $ 0.7 $ 0.7
- --------------------------------------------------------------------------------
As described in Note 1, the results of the operations for project-specific joint
ventures in which the Company owns greater than a 50% interest are included in
the Company's results of operations on a proportionate share basis. The portion
of investee results of operations shown above and included in the Company's
consolidated results of operations are as follows (in millions):
GREATER THAN 50% EQUITY INVESTEES
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Total contract revenues $ 9.1 $ 6.8 $ 9.1
Gross profit 1.4 0.3 0.4
Income from operations 1.3 0.3 0.4
Net income $ 1.4 $ 0.4 $ 0.4
- --------------------------------------------------------------------------------
The Company's equity investment in these joint ventures was $4,699,000 and
$2,028,000 at December 31, 1999 and 1998, respectively.
Summarized balance sheet information for the Company's joint ventures is as
follows (in millions):
50% OR LESS GREATER THAN 50%
EQUITY INVESTEES EQUITY INVESTEES
AS OF DECEMBER 31, AS OF DECEMBER 31,
------------------ ------------------
1999 1998 1999 1998
- --------------------------------------------------------------------------------
Current assets $ 7.3 $ 3.1 $ 7.3 $ 4.6
Noncurrent assets 4.7 0.1 0.8 --
Current liabilities 5.1 2.1 2.0 2.9
Noncurrent liabilities $ 2.0 $ -- $ 1.1 $ --
- --------------------------------------------------------------------------------
Consistent with industry practice, within each of the Company's operating units,
credit is granted to customers for the payment of services rendered. Although
the Company has a diversified client base, a substantial portion of its
receivables and net underbillings reflected in the accompanying Consolidated
Balance Sheets is dependent upon U.S. federal and state government
appropriations.
Internationally, the Company conducts business in certain countries where
unstable governments subject the Company's related trade receivables, due from
subsidiaries of major oil companies, to unique collection delays. Based upon
past experience with these clients, management believes that these receivables
will be fully collectible.
5. BUSINESS SEGMENT INFORMATION
The Company has five operating business units. The Buildings, Energy and
Environmental units each represent separate reportable segments, while the
Transportation and Civil units each comprise two reportable segments.
Accordingly, the Company has the following seven reportable segments:
o The Buildings unit has historically provided a variety of services
including design-build, construction management, planning, program
management, general contracting, architectural and interior design,
construction inspection and constructability reviews; however, the unit's
offering of general contracting services was discontinued during 1999 (see
Note 2).
o The Civil unit includes two reportable segments. The Civil-Engineering
segment provides surveying, mapping, geographic information systems,
planning, design and construction management. The Civil-Baker Support
Services Inc. ("BSSI") segment principally provides operations and
maintenance services on U.S. military bases.
o The Energy unit offers services that include turbine overhauls, mechanical
services including major equipment outages, operations and maintenance,
in-shop and onsite mechanical reconditioning and training services for
energy producers.
o The Environmental unit provides a combination of engineering and consulting
services in both the public and private markets.
o The Transportation unit includes two reportable segments. The
Transportation-Engineering segment provides planning, design, program
management and software development capabilities. The Transportation-
Construction segment historically provided general construction services
related to highways, bridges, airports, busways and other transportation
facilities; however, all bidding activity ceased during 1999 and this
segment's operations are currently in the process of being wound down (see
Note 2).
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies (see Note 1). The Company evaluates
the performance of its segments primarily based on income before income taxes.
The following tables reflect the required disclosures for the Company's seven
segments (in millions):
1999 1998 1997
================================================================================
TOTAL CONTRACT REVENUES:
Buildings unit $ 53.8 $151.6 $126.4
Civil unit:
Engineering 68.1 69.1 67.7
BSSI 53.5 61.8 50.5
Energy unit 80.2 68.6 54.8
Environmental unit 28.5 22.7 21.5
Transportation unit:
Engineering 90.2 72.3 62.0
Construction 130.9 75.2 63.5
- --------------------------------------------------------------------------------
SUBTOTAL - SEGMENTS $505.2 $521.3 $446.4
Corporate 0.8 0.0 0.0
- --------------------------------------------------------------------------------
TOTAL $506.0 $521.3 $446.4
================================================================================
1999 1998 1997
================================================================================
INCOME/(LOSS) BEFORE TAXES:
Buildings unit $ (7.8) $(13.9) $ 0.9
Civil unit:
Engineering 1.8 3.5 3.7
BSSI 1.5 0.1 --
Energy unit 2.9 4.0 2.3
Environmental unit 1.6 1.0 0.4
Transportation unit:
Engineering 4.1 2.9 1.0
Construction (14.0) 0.7 0.6
- --------------------------------------------------------------------------------
SUBTOTAL - SEGMENTS (9.9) (1.7) 8.9
Corporate/Insurance 0.7 0.4 0.4
- --------------------------------------------------------------------------------
TOTAL $ (9.2) $ (1.3) $ 9.3
================================================================================
1999 1998
================================================================================
SEGMENT ASSETS:
Buildings unit $ 7.4 $ 30.5
Civil unit:
Engineering 23.3 18.7
BSSI 15.8 15.6
Energy unit 40.3 27.9
Environmental unit 4.8 5.1
Transportation unit:
Engineering 28.9 21.7
Construction 17.4 20.6
- --------------------------------------------------------------------------------
SUBTOTAL - SEGMENTS 137.9 140.1
Corporate/Insurance 11.3 11.8
- --------------------------------------------------------------------------------
TOTAL $149.2 $151.9
================================================================================
1999 1998 1997
================================================================================
CAPITAL EXPENDITURES:
Buildings unit $ 0.2 $ 0.3 $ 0.1
Civil unit:
Engineering 1.0 1.4 0.6
BSSI 0.4 0.8 0.3
Energy unit 0.6 1.2 0.4
Environmental unit 0.1 0.2 --
Transportation unit:
Engineering 1.2 1.3 0.3
Construction 0.7 4.2 0.3
- --------------------------------------------------------------------------------
SUBTOTAL - SEGMENTS 4.2 9.4 2.0
Corporate 1.1 1.2 0.5
- --------------------------------------------------------------------------------
TOTAL $ 5.3 $ 10.6 $ 2.5
================================================================================
1999 1998 1997
================================================================================
DEPRECIATION AND AMORTIZATION:
Buildings unit $ 0.2 $ 0.2 $ 0.2
Civil unit:
Engineering 1.9 0.7 0.4
BSSI 0.8 0.6 0.5
Energy unit 1.5 1.1 1.2
Environmental unit 0.1 0.1 0.1
Transportation unit:
Engineering 0.9 0.6 0.5
Construction 0.9 0.7 0.5
- --------------------------------------------------------------------------------
SUBTOTAL - SEGMENTS 6.3 4.0 3.4
Corporate 1.1 1.0 1.1
- --------------------------------------------------------------------------------
TOTAL $ 7.4 $ 5.0 $ 4.5
================================================================================
The Company has determined that the intersegment revenues, interest income and
expense, equity in the net income of investees accounted for by the equity
method and the amount of investment in equity method investees, by segment, are
immaterial for further disclosure in these financial statements.
The required enterprise-wide disclosures are as follows (in millions):
1999 1998 1997
================================================================================
TOTAL CONTRACT REVENUES BY TYPE OF SERVICE:
Engineering $202.5 $178.4 $164.2
Construction 169.9 212.4 176.9
Operations & Maintenance 133.6 130.5 105.3
- --------------------------------------------------------------------------------
TOTAL $506.0 $521.3 $446.4
================================================================================
1999 1998 1997
================================================================================
TOTAL CONTRACT REVENUES BY GEOGRAPHIC ORIGIN:
Domestic $455.2 $475.2 $403.6
Foreign 50.8 46.1 42.8
- --------------------------------------------------------------------------------
TOTAL $506.0 $521.3 $446.4
================================================================================
1999 1998 1997
================================================================================
TOTAL CONTRACT REVENUES BY PRINCIPAL MARKETS:
United States government 21.4% 27.1% 23.8%
Various state governmental
and quasi-governmental agencies 46.9% 34.4% 40.9%
Commercial, industrial and private clients 31.7% 38.5% 35.3%
================================================================================
The Company's business is substantially conducted in the U.S. No individual
contract accounted for more than 10% of the Company's total contract revenues in
1999 or 1997; however, several contracts with the Pennsylvania Department of
Transportation provided 11% of the Company's total contract revenues in 1999.
The aforementioned contract with UCDP accounted for 12% of the Company's total
contract revenues in 1998.
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands):
1999 1998
================================================================================
Land $ 552 $ 552
Buildings and improvements 7,091 6,832
Equipment and vehicles 42,319 41,137
- --------------------------------------------------------------------------------
TOTAL, AT COST 49,962 48,521
Less - Accumulated depreciation (32,842) (31,063)
- --------------------------------------------------------------------------------
NET PROPERTY, PLANT
AND EQUIPMENT $17,120 $17,458
================================================================================
7. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets consist of the following (in thousands):
1999 1998
================================================================================
Goodwill, net of accumulated
amortization of $3,927 and
$2,867 respectively $ 12,219 $ 6,091
Other intangible assets, net of
accumulated amortization of
$2,916 and $2,344 respectively 2,344 1,416
- --------------------------------------------------------------------------------
NET INTANGIBLE ASSETS $ 14,563 $ 7,507
================================================================================
Effective September 1, 1999, the Company acquired all of the outstanding shares
of capital stock of Steen from its shareholders in a transaction accounted for
as a purchase. The Company recorded goodwill and other intangible assets
totaling $9,164,000 during the third quarter of 1999.
Effective October 1, 1998, the Company acquired all of the outstanding shares of
capital stock of GeoResearch from its shareholder in a transaction accounted for
as a purchase. While this transaction is not considered material for purposes of
detailed disclosure, the Company recorded goodwill and other intangible assets
totaling $1,943,000 during the fourth quarter of 1998. During the third quarter
of 1999, the Company determined that the value of the goodwill and other
intangible assets were impaired and wrote off the unamortized balance of these
intangible assets totaling $825,000.
8. LONG-TERM DEBT AND BORROWING AGREEMENTS
The Company has a credit agreement (the "Agreement") with Mellon, which provides
for a commitment of $25 million through May 31, 2001. The commitment includes
the sum of the principal amount of revolving credit loans outstanding and the
aggregate face value of outstanding letters of credit. As of December 31, 1999,
borrowings of $10,088,000 were outstanding under the Agreement, along with
outstanding letters of credit totaling $2,262,000.
The Agreement provides for the Company to borrow at the Bank's prime interest
rate, and for the Company to meet certain cash flow, leverage, interest coverage
and tangible net worth requirements. Under the Agreement, the Company pays the
Bank commitment fees of 3/8% per year based on the unused portion of the
commitment.
The Agreement was unsecured through December 1999, at which time Mellon acted to
secure the Agreement as a result of the Company's third quarter 1999 charges
(see Note 2) and its related financial covenant violations. Accordingly,
borrowings under the Agreement are currently secured by the receivables and
stock of the Company and most of its subsidiaries. These financial covenants
were again not achieved for the fourth quarter of 1999. Mellon has waived
through the end of the first quarter of 2000, its rights related to the fourth
quarter 1999 loan covenant violations. The Company and Mellon have agreed on
amendments to the related loan covenants, such that the Company believes it will
be able to achieve the amended covenants during 2000. These amendments also
included a provision that borrowings under the Agreement shall be limited to 80%
of eligible receivables, as determined by Mellon.
The maximum amount of borrowings outstanding under the Agreement during 1999 was
$20,641,000. For 1999, the average daily balance outstanding when the Company
was in a net borrowing position was $6,711,000 at a weighted average interest
rate of 7.4%. For 1998, the average daily balance outstanding when the Company
was in a net borrowing position was $2,584,000 at a weighted average interest
rate of 8.0%. The proceeds from 1999 borrowings under the Agreement were used to
for the purchase of Steen and to meet various working capital requirements.
Other amounts totaling $8,305,000 at December 31, 1999, and included in current
portion of long-term debt and long-term debt in the accompanying Consolidated
Balance Sheet, represent amounts associated with the Steen and GeoResearch
acquisitions, in addition to amounts due for construction equipment financed in
1998. These notes and obligations mature as follows: $3,526,000 in 2000,
$3,190,000 in 2001, $938,000 in 2002, $379,000 in 2003, $162,000 in 2004, and
$110,000 thereafter. The interest rates with respect to these notes ranged from
4.44% to 8.50% as of December 31, 1999.
9. CAPITAL STOCK
In 1996, the Board of Directors authorized the repurchase of up to 500,000
shares of the Company's Common Stock in the open market. During 1998, the
Company repurchased 96,379 treasury shares of Common Stock at market prices
ranging from $7.53 to $8.87 per share, for a total price of $800,000. The
Company made no treasury share repurchases during 1999 or 1997.
The Company's Common Stock is divided into two series, Common Stock and Series B
Common Stock. Each share of Common Stock entitles the holder thereof to one vote
on all matters submitted to the shareholders, and each share of Series B Common
Stock entitles the holder thereof to ten votes on all such matters.
The Company's Articles of Incorporation authorize the issuance of 300,000 shares
of Cumulative Preferred Stock, par value $1 per share. At December 31, 1999 and
1998, there were no shares of such Preferred Stock outstanding.
10. RIGHTS AGREEMENT
Effective November 11, 1999, the Company's Board of Directors adopted a Rights
Agreement (the "Rights Agreement") that is intended to provide that shareholders
receive fair treatment in the event of any proposed takeover of the Company. The
existence of the Rights Agreement should encourage potential acquirers to
negotiate with the Company's Board of Directors prior to any hostile takeover
attempt and should give the Board of Directors increased leverage in such
negotiations. The Rights Agreement was not adopted in response to any specific
offer or hostile takeover threat.
In connection with the Rights Agreement, the Company declared a distribution of
one Right (a "Right") for each outstanding share of Common Stock to shareholders
of record at the close of business on November 30, 1999. The Rights will become
exercisable after a person or group has acquired twenty-five percent or more of
the Company's outstanding Common Stock or has announced a tender offer that
would result in the acquisition of twenty-five percent or more of the Company's
outstanding Common Stock. The Board of Directors has the option to redeem the
Rights for $0.001 per Right prior to their becoming exercisable.
Assuming the Rights have not been redeemed, after a person or group has acquired
twenty-five percent or more of the Company's outstanding Common Stock, each
Right (other than those owned by a holder of twenty-five percent or more of the
Common Stock) will entitle its holder to purchase, at the Right's then current
exercise price, a number of shares of the Common Stock of the acquiring party
having a value equal to two times the exercise price of the Rights. In addition,
at any time after the Rights become exercisable and prior to the acquisition by
the acquiring party of fifty percent or more of the outstanding Common Stock,
the Company's Board of Directors may exchange the Rights (other than those owned
by the acquiring person or its affiliates) for Common Stock of the Company at an
exchange ratio of one share of Common Stock per Right.
Initially, the Rights will not be exercisable and certificates will not be
issued. The Rights will be evidenced by and trade with the Company's Common
Stock until they become exercisable and are separated from the Common Stock upon
the occurrence of certain future events. Until that time, one Right will also be
issued with respect to each new share of Common Stock that shall become
outstanding. The Rights will expire on November 16, 2009, unless they are
earlier exchanged or redeemed.
11. LEASE COMMITMENTS
Rent expense under noncancellable operating leases was $11,521,000 in 1999,
$11,687,000 in 1998 and $10,364,000 in 1997.
Minimum annual rentals payable under noncancellable operating leases in each of
the five years after December 31, 1999 are $10,556,000, $7,927,000, $4,815,000,
$1,939,000 and $1,046,000, respectively. These noncancellable leases relate to
office space, computer equipment, office equipment and vehicles, with lease
terms ranging from one to 10 years.
12. INCOME TAXES
The provision for income taxes consisted of the following (in thousands):
1999 1998 1997
================================================================================
CURRENT INCOME TAXES:
Federal $ (70) $ 18 $ 1,401
State 295 246 139
Foreign 1,815 1,519 1,024
- --------------------------------------------------------------------------------
TOTAL CURRENT INCOME TAXES 2,040 1,783 2,564
- --------------------------------------------------------------------------------
DEFERRED INCOME TAXES:
Federal (3,345) (799) 1,705
State 228 104 122
- --------------------------------------------------------------------------------
TOTAL DEFERRED INCOME TAXES (3,117) (695) 1,827
- --------------------------------------------------------------------------------
TOTAL PROVISION FOR/(BENEFIT
FROM) INCOME TAXES $(1,077) $ 1,088 $ 4,391
================================================================================
The following is a reconciliation of income taxes at the federal statutory rate
to income taxes recorded by the Company (in thousands):
1999 1998 1997
================================================================================
Computed income
taxes at U.S. federal
statutory rate $(3,142) $ (453) $ 3,177
Foreign taxes, net of
federal income tax
benefits 1,180 1,003 676
State income taxes,
net of federal income
tax benefit 340 225 172
Nondeductible charges 542 313 300
Other, net 3 -- 66
- --------------------------------------------------------------------------------
TOTAL PROVISION FOR/(BENEFIT
FROM) INCOME TAXES $(1,077) $ 1,088 $ 4,391
================================================================================
The domestic and foreign components of the Company's income/(loss) before income
taxes are as follows (in thousands):
1999 1998 1997
================================================================================
Domestic $(12,355) $(4,203) $ 7,148
Foreign 3,114 2,872 2,196
- --------------------------------------------------------------------------------
TOTAL $ (9,241) $(1,331) $ 9,344
================================================================================
The components of the Company's deferred income tax assets and liabilities at
December 31, 1999 and 1998 are as follows (in thousands):
1999 1998
================================================================================
DEFERRED INCOME TAX ASSETS:
Deductible temporary differences:
Provision for expenses and losses $ 7,123 $ 6,341
Contract overbillings 980 666
Federal tax operating loss
carryforward 1,650 --
Accrued vacation pay 1,169 1,301
Fixed and intangible assets 728 852
Minimum tax credits 379 379
Charitable contribution carryforward 277 307
Other 90 135
- --------------------------------------------------------------------------------
TOTAL DEFERRED INCOME TAX ASSETS 12,396 9,981
- --------------------------------------------------------------------------------
DEFERRED INCOME TAX LIABILITIES:
Contract underbillings (7,232) (7,507)
Undistributed foreign earnings (1,359) (1,494)
- --------------------------------------------------------------------------------
TOTAL DEFERRED INCOME TAX LIABILITIES (8,591) (9,001)
- --------------------------------------------------------------------------------
NET DEFERRED TAX ASSET $ 3,805 $ 980
================================================================================
As of December 31, 1999, the Company had a U.S. net operating loss carryforward
of $4,854,000 that expires in the year 2019. The Company also has contribution
carryforwards totaling $814,000 at December 31, 1999 that expire in 2000 through
2003 and minimum tax credit carryforwards totaling $379,000 at December 31, 1999
that do not expire.
The Company's U.S. income tax returns for the years 1996 through 1998 remain
subject to audit. Management believes that adequate provisions have been made
for income taxes at December 31, 1999.
13. CONTINGENCIES
The Company is self-insured for its primary layer of professional liability
insurance through a wholly-owned captive insurance subsidiary. The secondary
layer of the professional liability insurance continues to be provided,
consistent with industry practice, under a "claims-made" insurance policy placed
with an independent insurance company. Under claims-made policies, coverage must
be in effect when a claim is made. This insurance is subject to standard
exclusions.
The Company is self-insured up to certain limits with respect to its workers'
compensation and general liability exposures. Provisions for losses expected for
these exposures are recorded based upon the Company's estimates of the aggregate
liability for claims incurred. Such estimates utilize certain actuarial
assumptions followed in the insurance industry. Insurance coverage is obtained
for catastrophic exposures as well as those risks required to be insured by law
or contract.
The Company has been named as a defendant or co-defendant in legal proceedings
wherein substantial damages are claimed. Such proceedings are not uncommon to
the Company's business. After consultations with counsel, management believes
that the Company has recognized adequate provisions for probable and reasonably
estimable liabilities associated with these proceedings, and that their ultimate
resolutions will not have a material adverse effect on the consolidated
financial position or annual results of operations of the Company.
The Company currently is a party to two material legal proceedings. The more
significant proceeding relates to BMSCI's construction contract with UCDP (see
Note 2).
The other significant proceeding relates to a lawsuit brought in 1987 in the
Supreme Court of the State of New York, Bronx County, by the Dormitory Authority
of the State of New York against a number of parties, including the Company and
one of its wholly-owned subsidiaries, that asserts breach of contract and
alleges damages of $13,000,000. The Company, which was not a party to the
contract underlying the lawsuit, contends that there is no jurisdiction with
respect to the Company and that it cannot be held liable for any conduct of the
subsidiary. Both the Company and the subsidiary are contesting liability issues
and have filed cross-claims and third-party claims against other entities
involved in the project.
In another matter, on September 30, 1998, the Company purchased all the issued
and outstanding shares of GeoResearch, a District of Columbia corporation, from
its former owner. In connection with this transaction, the Company agreed to pay
the former owner certain cash consideration in installments, repay certain
indebtedness of GeoResearch, and pay as contingent consideration an earnout
amount (if any) based upon a formula tied to the operating profit of the
Company's and GeoResearch's combined geotechnical businesses, in excess of a
specified threshold, for the year ending December 31, 2001. The threshold
contemplated substantial growth in the combined businesses over the years 1999
through 2001. In addition, GeoResearch entered into an Employment Agreement with
the former owner commencing October 1, 1998 and continuing until December 31,
2001, unless sooner terminated as provided therein. GeoResearch terminated the
former owner's Employment Agreement in 1999 and the Company ceased further
payments under the Stock Purchase Agreement alleging material breaches of both
Agreements by the former owner. In addition, GeoResearch and the Company
initiated arbitration as provided for by the agreements, seeking reimbursement
of amounts paid to the former owner as part of the transaction. The former owner
disputes the claims by the Company and GeoResearch and the termination and has
counterclaimed against the Company and GeoResearch seeking to recover remaining
amounts under the Employment Agreement, the remaining installments under the
Stock Purchase Agreement ($875,000), and to establish entitlement to the earnout
which by its terms cannot exceed $5.3 million. At December 31, 1999, the Company
still had the remaining installments under the Stock Purchase Agreement of
$875,000 recorded as a liability in its accompanying Consolidated Balance Sheet.
GeoResearch and the Company are aggressively pursuing their claims against the
former owner of GeoResearch and contesting any liability; however, the outcome
of this matter cannot presently be determined.
At December 31, 1999, certain subcontractors performing work on uncompleted
Company and joint-venture construction contracts and certain contractors on
construction management projects had not been required to furnish performance
bonds. In the opinion of management, provision has been made for all costs that
will be incurred as a result of such contractors not performing in accordance
with their agreements.
14. EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST
The Company maintains a defined contribution retirement program through an
Employee Stock Ownership Plan ("ESOP"), in which substantially all employees are
eligible to participate. In addition to providing a vehicle for investment in
Company stock, the ESOP offers participants several other investment options.
Contributions to the ESOP are derived from a 401(k) Salary Redirection Program
with a Company matching contribution, and a discretionary contribution as
determined by the Company's Board of Directors. Under the 401(k) Salary
Redirection Program, the Company matches 100% of the first 5% and 50% of the
next 1% of eligible salary contributed by participants. The Company's matching
contributions are invested not less than 25% in Michael Baker Corporation Common
Stock, with the remaining 75% being available to invest in Baker Common Stock or
mutual funds, as directed by the participants. From July 1, 1997 through
December 31, 1998, the Company's matching contributions were not permitted to be
less than 50% invested in Baker Common Stock with the remaining 50% being
available to invest in Baker Common Stock or mutual funds, as directed by the
participants. Prior to July 1997, the Company's matching contributions were
required to be invested 100% in Baker Common Stock. Company contributions under
this program amounted to $4,565,000, $4,312,000 and $3,321,000 in 1999, 1998 and
1997, respectively.
As of December 31, 1999, the market value of all ESOP investments was
$101,647,000, of which 23% represented the market value of the ESOP's investment
in Michael Baker Corporation Common Stock. The Company's ESOP held 42% of the
shares and 72% of the voting power for the outstanding Common Stock and Series B
Common Stock of the Company at the end of 1999.
15. STOCK OPTION PLANS
As of December 31, 1999, the Company has two fixed stock option plans. Under the
amended 1995 Stock Incentive Plan (the "Plan"), the Company may grant options
for an aggregate of 1,500,000 shares of Common Stock to key employees. Under the
1996 Nonemployee Directors' Stock Incentive Plan (the "Directors Plan"), the
Company may grant options and restricted shares for an aggregate of 150,000
shares of Common Stock to nonemployee board members. Under both plans, the
exercise price of each option equals the market price of the Company's stock on
the date of grant. Unless otherwise established, one-fourth of the options
granted to key employees become immediately vested, and the remaining
three-fourths vest in annual one-fourth increments under the Plan, while the
options under the Directors' Plan are fully vested at date of grant. Vested
options remain exercisable for a period of ten years from the grant date under
both plans.
Under the Directors Plan, each nonemployee director was issued 500 restricted
shares of Common Stock, for a total of 3,500 shares of restricted stock issued
in 1999 and 1998. The Company recognized compensation expense totaling $27,000,
$35,000 and $31,000 related to the issuance of these restricted shares in 1999,
1998 and 1997, respectively. Restrictions on the shares expire two years after
the issue date.
The following table summarizes all stock option activity for both plans in 1999,
1998 and 1997:
AVERAGE
SHARES EXERCISE
SUBJECT PRICE
TO OPTION PER SHARE
- --------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 194,692 $ 4.94
Options granted 179,593 $ 6.90
Options exercised (22,690) $ 5.48
Options forfeited (10,581) $ 5.76
- --------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 341,014 $ 5.92
Options granted 402,397 $ 9.96
Options exercised (35,191) $ 5.20
Options forfeited (2,639) $ 6.46
- --------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 705,581 $ 8.25
Options granted 67,289 $ 7.18
Options exercised (11,686) $ 6.02
Options forfeited (145,368) $ 9.60
- --------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 615,816 $ 7.86
================================================================================
The weighted average fair value of options granted during 1999, 1998, and 1997
was $3.87, $5.37 and $3.94, respectively.
The following table summarizes information about stock options outstanding under
both plans as of December 31, 1999:
OPTIONS EXERCISE OUTSTANDING AVERAGE EXERCISABLE
GRANTED IN PRICE OPTIONS LIFE* OPTIONS
- --------------------------------------------------------------------------------
Jan. 1995 $ 5.00 90,884 5.0 90,884
Feb. 1996 $ 4.81 38,282 6.2 38,282
May 1996 $ 5.03 4,000 6.4 4,000
Feb. 1997 $ 6.91 133,555 7.2 105,623
May 1997 $ 6.84 7,000 7.4 7,000
Feb. 1998 $ 9.53 87,949 8.2 51,773
Apr. 1998 $ 10.13 186,857 8.4 7,000
Feb. 1999 $ 9.00 10,289 9.2 2,571
July 1999 $ 7.81 7,000 9.6 7,000
Sept. 1999 $ 6.72 50,000 9.8 35,117
- --------------------------------------------------------------------------------
Total 615,816 7.6 349,250
================================================================================
<FN>
*Average life remaining in years
</FN>
As permitted under Statement of Financial Accounting Standards No. ("SFAS") 123,
"Accounting for Stock-Based Compensation," the Company continues to apply
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations in its accounting for stock-based
compensation plans, and adopted SFAS 123 for disclosure purposes only.
Accordingly, no compensation cost was recognized for stock options granted in
1999, 1998 or 1997. If compensation costs for the Company's stock incentive
plans had been determined based on the fair value at the grant dates for awards
under those plans, consistent with the method prescribed by SFAS 123, the
Company's net income and diluted net income per share amounts would have been
reduced.
If SFAS 123 had been used to account for both stock option plans, the Company's
pro forma net income/(loss) amounts would have been $(8,524,000), $(2,669,000)
and $4,725,000 for the years ended December 31, 1999, 1998 and 1997,
respectively. Similarly, the Company's pro forma diluted net income/(loss) per
share would have been $(1.04), $(0.33) and $0.57 for the years ended December
31, 1999, 1998, and 1997, respectively.
The fair value of options on the respective grant dates was estimated using a
Black-Scholes option pricing model with certain assumptions. The key assumptions
used include a weighted average risk-free interest rate of 5.9%, weighted
average expected volatility of 49.2%, an expected option life of 6 years, and a
0% expected dividend yield.
16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations for
the two years ended December 31, 1999 (in thousands, except per share
information):
1999 - THREE MONTHS ENDED
- --------------------------------------------------------------------------------
March 31* June 30 Sept. 30* Dec. 31*
- --------------------------------------------------------------------------------
Total contract revenues $115,118 $134,066 $129,790 $127,038
Gross profit 13,459 15,885 6,158 5,237
Income/(loss) before
income tax 780 3,537 (5,438) (8,120)
Net income/(loss) 413 1,875 (4,017) (6,435)
Diluted net income/(loss)
per common share $ 0.05 $ 0.23 $ (0.49) $ (0.79)
================================================================================
1998 - THREE MONTHS ENDED
- --------------------------------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31*
- --------------------------------------------------------------------------------
Total contract revenues $ 111,097 $127,118 $135,803 $147,253
Gross profit 12,244 15,742 15,764 3,494
Income/(loss) before
income tax 1,378 3,123 3,947 (9,779)
Net income/(loss) 730 1,655 2,093 (6,897)
Diluted net income/(loss)
per common share $ 0.09 $ 0.20 $ 0.25 $ (0.84)
================================================================================
<FN>
*Includes Buildings and Transportation unit project charges and Buildings unit
restructuring charges (see Note 2).
</FN>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of Michael Baker Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of shareholders' investment and of cash flows
present fairly, in all material respects, the financial position of Michael
Baker Corporation and its subsidiaries (the Company) at December 31, 1999 and
1998, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Pittsburgh, PA
March 29, 2000
SUPPLEMENTAL FINANCIAL INFORMATION
Market Information - Common Shares
The principal market on which the Michael Baker Corporation Common Stock is
traded is the American Stock Exchange. High and low closing prices of the Common
Stock for each quarter during 1999 and 1998 were as follows:
1999 1998
- --------------------------------------------------------------------------------
First Second Third Fourth First Second Third Fourth
- --------------------------------------------------------------------------------
High 9 5/8 8 7 7/8 6 5/8 10 1/2 10 1/2 9 1/2 10 3/8
Low 6 5/8 6 1/2 5 5/8 5 8 1/2 9 1/16 6 11/16 7 1/4
================================================================================