Exhibit 13.1
SELECTED FINANCIAL DATA
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1995 1994 1993 1992 1991
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(Amounts in thousands, except per share information)
RESULTS OF OPERATIONS
Total contract revenues $354,728 $437,193 $434,791 $355,820 $204,197
Operating income/(loss) 5,104 (9,097) (21,805) 8,543 6,899
Net income/(loss) 2,900 (7,945) (15,128) 4,403 3,537
Net income/(loss) per share $0.35 $(0.95) $(1.82) $0.67 $0.61
Return on average equity 6.28% (16.31)% (25.59)% 8.67% 10.47%
FINANCIAL CONDITION
Total assets $117,376 $134,794 $145,805 $130,917 $90,731
Working capital 25,185 22,391 33,042 42,981 15,325
Long-term debt -- 3,960 7,670 2,625 4,811
Shareholders' investment 47,631 44,731 52,676 65,536 36,065
Book value per share 5.70 5.35 6.30 8.03 6.09
Year-end closing share price $5.00 $3.75 $11.00 $14.75 $13.00
Current ratio 1.36 1.26 1.39 1.75 1.31
CASH FLOW
Cash provided by/(used in) operating activities
$15,539 $5,415 $4,758 $(11,324) $564
Cash used in investing activities
(2,294) (5,436) (11,232) (4,876) (3,812)
Cash (used in)/provided by financing activities
(2,547) (1,477) 5,105 22,158 1,399
Net increase/(decrease) in cash and cash equivalents
$10,698 $(1,498) $(1,369) $5,958 $(1,849)
BACKLOG
Funded $299,900 $283,300 $357,600 $296,800 $313,800
Total $507,800 $468,300 $587,600 $469,600 $473,200
SHARE INFORMATION
Year-end shares 8,364 8,364 8,364 8,161 5,926
Average shares outstanding 8,368 8,364 8,304 6,561 5,846
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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RESULTS OF OPERATIONS
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The Company returned to profitability for the year ended December 31, 1995,
after two years of net losses. The overriding reasons for this improvement
stemmed from the Company's contract-related writedowns in 1993 and 1994 and
its significant reduction of general and administrative expenses during 1995.
For the years ended December 31, 1994 and 1993, pre-tax charges related to
contractual difficulties and overhead reductions were recorded in the amounts
of $10 million and $28 million, respectively.
Total Contract Revenues
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Total contract revenues decreased to $355 million in 1995 from $437 million
in 1994. The most significant component, totaling $70 million, of this
overall decrease occurred in the Buildings unit primarily due to greater
bidding selectivity in its construction division, as well as from the
substantial completion of Baker Support Services' military housing renovation
business during 1994. While the Buildings unit added the same volume of new
construction work in 1995 and 1994, most of its new work added in 1995 was
contracted during the second half of the year and did not significantly
enhance its 1995 revenues. Another $7 million decrease resulted in the Energy
unit from Baker/MO having terminated certain lower margin and loss contracts
during the year.
For 1994, total contract revenues increased from $435 million in 1993.
Inherent in this slight overall rise are increases of $23 million in the
Buildings unit and $6 million in the Civil unit, and a decrease of $27 million
in the Energy unit. A few new general construction contracts awarded during
1994 accounted for the increase in the Buildings unit, while the Civil unit
benefitted from increases resulting from new work in both of its divisions.
Within the Energy unit, revenues for Baker/MO decreased by $30 million due to
an $11 million reduction related to a single contract in Abu Dhabi, United
Arab Emirates that was completed in 1994, as well as the effect of having lost
two of its major customers.
Gross Profit
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The Company's gross profit increased to $39.6 million in 1995 from $32.8
million in 1994. Gross profit expressed as a percentage of total contract
revenues climbed from 7.5% in 1994 to 11.2% in 1995. With the exception of
the Civil unit, each of the Company's business units reported improvements in
its gross profits as a percentage of total contract revenues for the year.
Despite lower 1995 volumes in the Buildings and Energy units, these units
provided the most significant percentage improvements. Specifically, the
1995 improvement of $5.5 million in the Energy unit resulted primarily from a
combination of 1994 contract-related charges totaling $4.1 million at Baker/MO
and improved 1995 margins related to the aforementioned termination of certain
Baker/MO contracts during the year. In the Buildings unit, the $2.9 million
improvement was effected by the combination of a favorable 1995 contract
settlement, and 1994 writedowns on certain construction contracts. The
percentage decline in the Civil unit resulted primarily from 1995 charges
taken on a significant operations and maintenance contract.
The 1994 gross profit represented an improvement from $22.7 million in 1993.
Expressed as a percentage of total contract revenues, gross profit for 1994
increased from 5.2% in 1993. This overall increase resulted primarily from
an increase of $15.5 million in the Buildings unit, despite a decrease of $5.4
million in the Energy unit. The improvement in the Buildings unit resulted
principally from 1993 charges totaling $18.1 million related to the completion
of several military housing renovation projects. Refinements of contract
estimates related to these projects were made in 1994, thereby improving this
unit's 1994 gross profit by $1.6 million. Also within the Buildings unit, the
remaining decrease in gross profit for its construction division was the result
of an inability to attract profitable new work and the 1994 contract writedowns
mentioned above. The decrease in the Energy unit resulted from a combination
of the 1994 Baker/MO contract-related charges totaling $4.1 million, depressed
conditions in Baker/MO's markets during 1994, and the loss of two of its major
customers.
General and Administrative Expenses
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General and administrative ("G&A") expenses decreased to $34.5 million in 1995
from $41.9 million in 1994. While the 1994 amount included restructuring
charges totaling $1.1 million, the remainder of the overall decrease is
attributable to the cost reduction programs at Baker/MO and in the
construction divisions of the Company's Buildings and Transportation business
units. These cost reductions were effected during 1994 and early 1995 to
better align each of the divisions with its expected revenues, and resulted
in cost reductions totaling approximately $5.6 million in 1995.
G&A expenses decreased in 1994 from $44.5 million in 1993. Significant items
included in the 1993 amount were costs associated with discontinuing certain
operations and writing down certain noncurrent assets totaling $4.5 million.
After excluding these significant items and the previously mentioned $1.1
million for 1994, G&A expenses increased on an overall basis by $800,000 due
to higher costs associated with executive management changes effected in late
1993 and 1994, and the first full year's effect of having added an internal
audit department in late 1993.
Other Income and Expense
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Despite higher interest rates on borrowings during 1995, interest expense
decreased by $396,000 to $336,000 for the year as a result of the Company's
repayment of all working capital borrowings under its revolving credit
agreement in September 1995. Interest income increased by $141,000 to
$221,000 in 1995, again due to the Company's repayment of its borrowings and
its subsequent investment of cash generated from operations.
Interest expense rose by $368,000 to $732,000 during 1994 as a result of
increased working capital borrowings under the Company's revolving credit
agreement and interest rate increases over the course of the year. Other
income increased by $608,000 to $204,000 in 1994 due partly to 1994 income
generated from a real estate investment and because the 1993 expense amount
included a charge of $300,000 related to the writedown of certain property
to its fair market value.
Income Taxes
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The provision for/(benefit from)income taxes resulted in an effective tax
rate of 43% in 1995, (17)% in 1994, and (32)% in 1993. The difference
between these percentages and the 34% statutory U.S. federal rate is
attributable primarily to state and foreign income taxes and the
nondeductibility of certain normal business expenses. The 1995 provision rate
was impacted both by the Company returning to profitability for the year, and
by the realization of a $600,000 tax benefit from a Baker Support joint
venture. The 1994 benefit rate decreased from 1993 due to a reduction of
foreign tax benefits. Another difference in the rates relates to certain
states having established limitations on the amount of net operating losses
that may be carried forward to benefit future years. Furthermore, certain
states do not allow taxable losses generated by subsidiaries to be offset by
taxable income generated by other subsidiaries within the Company's
consolidated group.
The Company has recorded a net deferred tax asset of $4.0 million at December
31, 1995. As discussed further in Note 9 to the consolidated financial
statements, management believes that the Company will have sufficient future
taxable income to make it more likely than not that the net deferred tax asset
will be realized.
New Accounting Pronouncement
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In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). Under this standard, the Company may either
continue to account for stock options granted as it currently does under the
intrinsic value based method prescribed by APB Opinion No. 25, "Accounting for
Stock Issued to Employees," or it may use the fair value based method
prescribed by SFAS 123. The Company plans to continue using the intrinsic
value method, but will adopt the disclosure requirements of SFAS 123
effective January 1, 1996.
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CONTRACT BACKLOG
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The Company's funded backlog, which consists of that portion of work
represented by signed contracts and for which the procuring agency has
appropriated and allocated the funds to pay for the work, was $300 million at
December 31, 1995, an increase from $283 million at the end of 1994. The
overall 1995 increase resulted primarily from an increase in the Company's
Buildings business unit of $27 million, despite relatively minor decreases
in certain other units. Significant new contracts added to the Company's
funded backlog in 1995, all of which relate to the Buildings unit, were a
contract totaling $55 million to construct an airport terminal in Buffalo,
New York, and a $26 million contract to provide construction management
services for a convention center in Orlando, Florida.
Total backlog, which incrementally includes that portion of contract value for
which options are still to be exercised (unfunded backlog), was $508 million
at the end of 1995 versus $468 million at the end of 1994. The overall
increase in unfunded backlog resulted from increases in the Civil unit of $63
million, despite a $29 million decrease in the Buildings unit. The increase
in the Civil unit is predominantly the result of a five-year, $50 million
contract extension to continue providing engineering services for the Federal
Emergency Management Agency (FEMA) and a ten-year, $36 million contract to
provide operation and maintenance services at a military base. The decrease
in the Buildings unit is the consequence of transfers from unfunded to
funded backlog for engineering projects during the year.
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LIQUIDITY AND CAPITAL RESOURCES
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Net cash provided by operating activities improved significantly to $15.5
million in 1995, compared to $5.4 million in 1994 and $4.8 million in 1993.
The 1995 improvement resulted primarily from the Company achieving net income
totaling $2.9 million for 1995 versus 1994's net loss of $7.9 million. The
primary sources of the 1994 cash generated by operating activities were a
decrease of $8.4 million in contract-related assets and a reduction in the
net loss from 1993.
Net cash used in investing activities was $2.3 million in 1995, compared to
$5.4 million in 1994 and $11.2 million in 1993. The purchase of Baker/OTS
accounted for $5.5 million of the 1993 uses, while purchases of property,
plant and equipment made up the remainder for 1993 and represented all of the
1994 and 1995 uses. During 1994, non-recurring capital expenditures totaling
$1.0 million related to the completion of renovations to the Company's office
building in Beaver, Pennsylvania, were incurred. The remainder of the 1995
reduction reflects management's concerted effort to more closely monitor
capital expenditures and the effect of the Company having entered into a
leasing arrangement for the majority of computer equipment during 1995.
Net cash used in financing activities was $2.5 million in 1995, compared to
$1.5 million in 1994 and cash provided of $5.1 million in 1993. During 1995,
the Company totally repaid its borrowings under its revolving credit facility
and subsequently remained invested at year end. All 1994 and 1995 cash uses
resulted from repayments of long-term debt and borrowings on the revolving
credit facility, while the Company was a net borrower on its revolving credit
facility in 1993. During 1993, the Company also benefitted from having sold
its remaining treasury stock to the ESOP.
Working capital increased to $25.2 million at December 31, 1995 from $22.4
million at December 31, 1994. Current ratios were 1.36:1 at the end of 1995
and 1.26:1 at the end of 1994. These increases are principally due to the
Company having short-term investments of $12.9 million at December 31, 1995,
versus being $2.0 million borrowed at December 31, 1994.
In March 1996, the Company entered into an amended secured credit agreement
with Mellon Bank, N.A. Under its terms, the agreement provides for a
commitment of $25.0 million, which covers loans and letters of credit, through
May 31, 1998. As of December 31, 1995, no borrowings were outstanding;
however, letters of credit totaling $6.7 million were outstanding under the
agreement. Management believes that the credit agreement will be adequate to
meet its borrowing and letter of credit requirements through May 31, 1998.
The Company is required to provide bid and performance bonding on certain
construction contracts, and has a $350 million bonding line available through
Aetna Casualty and Surety Company of America. Management believes that its
bonding line will be sufficient to meet its bid and performance needs for the
foreseeable future.
A significant portion of the Company's cash flow is dependent upon
appropriations of public funds and financial terms under long-term contracts.
The Company's short and long-term liquidity will be affected by the improved
but still narrow margins on construction work in backlog, and its ability to
sustain profitable operations and to control costs during periods of lower
volumes. Additional external factors such as price fluctuations in the energy
industry and the effects of interest rates on private construction projects
could affect the Company. At this time, management believes that its funds
generated from operations, its existing credit facility and its longer-term
borrowing capabilities will be sufficient to meet its operating requirements
for the foreseeable future.
CONSOLIDATED BALANCE SHEET
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As of December 31,
1995 1994
ASSETS
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(In thousands)
CURRENT ASSETS
Cash $14,303 $ 3,605
Trade receivables 53,708 69,618
Cost of contracts in progress,
plus estimated earnings recorded,
less billings thereon 19,104 24,246
Prepaid expenses and other 7,816 10,670
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Total current assets 94,931 108,139
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PROPERTY, PLANT AND EQUIPMENT, NET 12,558 14,970
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OTHER ASSETS
Goodwill, net of accumulated amortization
of $1,649,000 and $1,359,000 in
1995 and 1994, respectively 4,667 4,958
Other intangible assets, net of
accumulated amortization of
$1,625,000 and $3,100,000
in 1995 and 1994, respectively 2,467 3,013
Other assets 2,753 3,714
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Total other assets 9,887 11,685
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TOTAL ASSETS $117,376 $134,794
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The accompanying notes are an integral part of this statement.
CONSOLIDATED BALANCE SHEET
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As of December 31,
1995 1994
LIABILITIES AND SHAREHOLDERS' INVESTMENT
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(In thousands)
CURRENT LIABILITIES
Current portion of long-term debt $ 1,204 $ 2,539
Accounts payable 30,879 42,876
Accrued employee compensation 5,703 4,224
Accrued insurance 6,204 8,167
Other accrued expenses 15,261 19,304
Excess of billings on contracts in
progress over cost and estimated
earnings recorded thereon 10,494 8,638
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Total current liabilities 69,745 85,748
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OTHER LIABILITIES
Long-term debt -- 3,960
Other -- 355
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Total liabilities 69,745 90,063
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SHAREHOLDERS' INVESTMENT
Common Stock, par value $1, authorized
44,000,000 shares, issued
7,011,302 and 7,001,435 shares,
in 1995 and 1994, respectively 7,012 7,002
Series B Common Stock, par value $1,
authorized 6,000,000 shares issued
1,352,250 and 1,362,117 shares in
1995 and 1994, respectively 1,352 1,362
Paid-in surplus 36,534 36,534
Retained earnings/(accumulated
deficit) 2,733 (167)
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Total shareholders' investment 47,631 44,731
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TOTAL LIABILITIES AND SHAREHOLDERS'
INVESTMENT $117,376 $134,794
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The accompanying notes are an integral part of this statement.
CONSOLIDATED STATEMENT OF INCOME
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For the years ended December 31,
1995 1994 1993
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(In thousands, except per share amounts)
Total contract revenues $354,728 $437,193 $434,791
Cost of work performed 315,155 404,439 412,090
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Gross profit 39,573 32,754 22,701
General and administrative expenses 34,469 41,851 44,506
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Income/(loss)from operations 5,104 (9,097) (21,805)
Other income (expense):
Interest expense (336) (732) (364)
Interest income 221 80 100
Other, net 91 204 (404)
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Income/(loss) before income
taxes 5,080 (9,545) (22,473)
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Prov. for/(bene. from)income taxes 2,180 (1,600) (7,191)
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Income/(loss) before cumulative effect of change in
accounting principle 2,900 (7,945) (15,282)
Cumulative effect on prior years of change in accounting
for income taxes --- --- 154
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Net income/(loss) $2,900 $(7,945) $(15,128)
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Net income/(loss) per share $0.35 $(0.95) $(1.82)
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The accompanying notes are an integral part of this statement.
CONSOLIDATED STATEMENT OF CASH FLOWS
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For the years ended December 31,
1995 1994 1993
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(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income/(loss) $2,900 $(7,945) $(15,128)
Adjustments to reconcile net income/(loss) to net cash provided
by operating activities:
Depreciation and amortization 5,049 5,279 5,491
Deferred income taxes 460 (1,765) (7,027)
Writedown of noncurrent assets --- --- 1,511
Changes in assets and liabilities:
Decrease/(increase) in receivables, contracts in
progress and adv. billings 22,909 8,406 (12,430)
Decr./(incr.) in other net assets 3,847 (1,007) 7,225
(Decrease)/increase in accounts payable
and accrued expenses (19,626) 2,447 25,116
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Total adjustments 12,639 13,360 19,886
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Net cash provided by
operating activities 15,539 5,415 4,758
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CASH FLOWS FROM INVESTING ACTIVITIES
Add. to property, plant and equip. (2,294) (5,436) (5,685)
Pymnts for acquisitionss, net of
cash acquired --- --- (5,547)
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Net cash used in investing
activities (2,294) (5,436) (11,232)
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CASH FLOWS FROM FINANCING ACTIVITIES
(Repayments of)/proceeds from
revolving credit loans (2,035) (965) 3,000
Repayments of other long-term debt (512) (512) (477)
Proceeds from sale of stock to ESOP --- --- 2,582
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Net cash (used in)/provided by
financing activities (2,547) (1,477) 5,105
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Net increase/(decrease) in cash 10,698 (1,498) (1,369)
Cash at beginning of year 3,605 5,103 6,472
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CASH AT END OF YEAR $14,303 $3,605 $5,103
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Supplemental Disclosure of Cash Flow Data
Interest paid $537 $690 $467
Income taxes paid $1,671 $3,184 $643
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SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES-ACQUISITION OF BUSINESSES
Fair value of assets acquired $--- $--- $10,470
Cash paid --- --- (7,810)
Liabilities assumed --- --- 2,660
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The accompanying notes are an integral part of this statement.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' INVESTMENT
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Series B
Common Common
Stock Stock
Par Value Par Value
$1 $1
(1 vote) (10 votes) Treasury Paid-in Retained
(In thousands) per share per share Shs Amt Surplus Earnings
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Balance, Jan. 3, 1993 $6,988 $1,376 203 $295 $34,561 $22,906
Net loss --- --- --- --- --- (15,128)
Series B Common Stock
conversions to regular
Common Stock 5 (5) --- --- --- ---
Series B Common Stock
sold to ESOP --- --- (203) (295) 1,973 ---
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Balance, Dec. 31, 1993 6,993 1,371 --- --- 36,534 7,778
Net loss --- --- --- --- --- (7,945)
Series B Common Stock
conversions to regular
Common Stock 9 (9) --- --- --- ---
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Balance, Dec. 31, 1994 7,002 1,362 --- --- 36,534 (167)
Net income --- --- --- --- --- 2,900
Series B Common Stock
conversions to regular
Common Stock 10 (10) --- --- --- ---
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Balance, Dec. 31, 1995 $7,012 $1,352 --- $--- $36,534 $2,733
=============================================================================
The accompanying notes are an integral part of this statement.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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Principles of Consolidation
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The consolidated financial statements include the accounts of the Company and
its subsidiaries. All material intercompany accounts and transactions have
been eliminated in consolidation.
Accounting for Contracts
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Total contract revenues have been recorded on the percentage-of-completion
method of accounting for the engineering and construction contracts in the
Buildings, Civil, Environmental and Transportation Units. Contract revenues
attributable to claims 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
recorded as costs are incurred and include estimated fees in the proportion
that costs incurred to date compare to total estimated costs. 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, if significant, 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 costs are incurred and
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 records its interest in all majority-owned joint ventures based
on the equity method of accounting for investments, in the accompanying
Consolidated Balance Sheet. The Company's proportionate share of majority-
owned joint venture revenue and cost of contracts is included in the
accompanying Consolidated Statement of Income. The Company's investment in
joint ventures for which the related projects are expected to be completed
within one year is shown as other current assets in the accompanying
Consolidated Balance Sheet.
Use of Estimates
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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 at 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 percentage-of-completion
accounting for contracts.
Income Taxes
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In the first quarter in 1993, the Company adopted Statement of Financial
Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes."
The adoption of SFAS 109 changed the Company's method of accounting for income
taxes from the deferred method (prescribed by Accounting Principles Board
Opinion No. 11) to an asset and liability approach. The asset and liability
approach requires the recognition of deferred tax assets and liabilities for
the expected future tax consequences of temporary differences between the
carrying amounts and the tax bases of other assets and liabilities. As a
result of adopting SFAS 109, the Company recognized a cumulative benefit from
the change in accounting principle of $154,000 in the first quarter of 1993, or
$0.02 per share for the year ended December 31, 1993.
Depreciation and Amortization
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Depreciation on property, plant and equipment is recorded using straight-line
and accelerated methods over the estimated useful lives of the assets which
range from three to 31 years. Amortization of intangible assets is provided
primarily on a straight-line basis over the estimated useful lives of the
assets, which range from five 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
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Goodwill, which represents the excess of cost over net assets of acquired
companies, is being amortized on the straight-line basis over periods ranging
from 15 to 40 years.
Earnings Per Common Share
- ---------------------------------------------------------------
Per share computations are based upon a weighted average of 8,368,206,
8,363,552, and 8,303,668 shares in 1995, 1994, and 1993, respectively. Stock
options are included as share equivalents in the computation of weighted
average shares outstanding using the treasury stock method.
The Company's 1995 Stock Incentive Plan, which was approved at the annual
meeting of shareholders on May 24, 1995, had no significant impact on earnings
per share for the year ended December 31, 1995.
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2. CONTRACTS
- ---------------------------------------------------------------
The total cost of contracts in progress (used to determine cost of work
performed) plus accumulated gross profit recorded was $624,971,000 and
$885,827,000 at December 31, 1995 and 1994, respectively. Billings to date
on contracts in progress at December 31, 1995 and 1994 were $616,361,000 and
$870,219,000, respectively.
Trade accounts receivable totaling $7,384,000 and $16,120,000 at December 31,
1995 and 1994, respectively, relate to retainage provisions under long-term
contracts which will be due upon completion of the contracts. Based on
management's estimates, the majority of the retention balance at December 31,
1995 is expected to be collected in 1996.
As of December 31, 1995 and 1994, the Company had an allowance for doubtful
accounts of $1,357,000 and $667,000, respectively.
As of December 31, 1995 and 1994, accounts payable included amounts due to
subcontractors of $4,553,000 and $10,533,000, 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. The Company's equity investment in these joint ventures was
$1,891,000 and $1,397,000 at December 31, 1995 and 1994, respectively.
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 Sheet is dependent upon federal and state government
appropriations.
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3. ACQUISITION
- ---------------------------------------------------------------
On March 3, 1993, the Company, through a newly formed Delaware subsidiary,
Baker/OTS Inc., acquired all of the outstanding shares of capital stock of the
Overseas Technical Services companies ("OTS") from their shareholders. The
purchase price for the shares of OTS was $5,270,000. The Company also paid
$2,000,000 as consideration to the sellers for entering into certain
noncompetition covenants and paid $1,000,000 in 1995 as a result of OTS
attaining a specified performance level.
The acquisition of OTS has been accounted for as a purchase. Accordingly, the
operating results for OTS have been included in the Consolidated Statement of
Income since March 3, 1993. 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 date of
acquisition. The excess of acquisition costs over fair market value is being
amortized over 15 years. The principal components of net noncurrent assets
acquired and their approximate values were intangible assets of $4,072,000,
and property, plant and equipment of $169,000.
The operating results on a pro forma basis for fiscal 1993 are not presented
as they are not materially different from the Company's actual results.
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4. BUSINESS SEGMENT INFORMATION
- ---------------------------------------------------------------
Effective January 1, 1995, the Company reorganized from its former three
operating groups into the following five market-focused business units:
Buildings, Civil, Energy, Environmental and Transportation. The following
tables reflect the revenues and income/(loss) from operations for the five
business units (in millions):
1995 1994 1993
- ---------------------------------------------------------------
Total contract revenues from:
Buildings Unit $116.3 $186.2 $162.7
Civil Unit 73.9 78.2 72.0
Energy Unit 37.0 45.5 72.3
Environmental Unit 27.7 30.2 34.4
Transportation Unit 99.8 97.1 93.4
- ---------------------------------------------------------------
Total $354.7 $437.2 $434.8
===============================================================
1995 1994 1993
- ---------------------------------------------------------------
Income/(loss)from operations from:
Buildings Unit $1.8 $(5.4) $(22.0)
Civil Unit (0.6) 4.8 4.5
Energy Unit 0.8 (7.7) (3.4)
Environmental Unit 1.9 1.0 0.0
Transportation Unit 1.2 (1.8) (0.9)
- ---------------------------------------------------------------
Total $5.1 $(9.1) $(21.8)
===============================================================
The following represents identifiable assets (both tangible and
intangible) that are associated with the operations of each
business unit (in millions):
1995 1994
- ---------------------------------------------------------------
Identifiable assets from:
Buildings Unit $33.1 $42.8
Civil Unit 22.5 29.4
Energy Unit 14.2 16.6
Environmental Unit 6.1 9.0
Transportation Unit 27.1 32.9
Corporate 14.4 4.1
- ---------------------------------------------------------------
Total $117.4 $134.8
===============================================================
Based on total contract revenues, the principal markets for the
Company's services are as follows:
1995 1994 1993
- ---------------------------------------------------------------
United States government 32.5% 24.7% 23.3%
Various state governmental
and quasi-governmental
agencies 44.4% 35.6% 36.6%
Commercial, industrial and
private clients 23.1% 39.7% 40.1%
===============================================================
The Company's business is substantially conducted in the domestic marketplace.
No individual contract accounted for more than 10% of the Company's total
contract revenues in 1995, 1994, or 1993; however, several contracts with the
State of Illinois provided 10.5% and 13.5% of the Company's total contract
revenues in 1995 and 1994, respectively. Several contracts with the U.S.
Department of Navy provided 10.9%, 12.1%, and 10.9% of the Company's 1995,
1994 and 1993 total contract revenues, respectively.
- ---------------------------------------------------------------
5. PROPERTY, PLANT AND EQUIPMENT
- ---------------------------------------------------------------
Property, plant and equipment consists of the following (in
thousands):
1995 1994
------- -------
Land $ 693 $ 693
Buildings and improvements 5,952 5,790
Equipment and vehicles 28,202 27,619
- ----------------------------------------------------
Total, at cost 34,847 34,102
Less-Accumulated depreciation 22,289 19,132
- ----------------------------------------------------
Net property, plant and
equipment $12,558 $14,970
====================================================
- ---------------------------------------------------------------
6. LONG-TERM DEBT AND BORROWING ARRANGEMENTS
- ---------------------------------------------------------------
In March 1996, the Company entered into an amended secured credit agreement
(the "Agreement") with Mellon Bank, N.A. (the "Bank"). Under its terms, the
Agreement provides for a commitment of $25 million through May 31, 1998.
Under the Agreement, 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, 1995, no borrowings were outstanding; however, letters of
credit totaling $6,669,000 were outstanding under the Agreement.
The Agreement provides for the Company to borrow at 1/4% over the Bank's prime
interest rate or at other indexed rates that may be lower, and for the Company
to meet certain cash flow, leverage, interest coverage and tangible net worth
requirements. The Agreement also limits the Company's capital expenditures
and the declaration or payment of dividends to the Company's shareholders, and
is secured by substantially all of the Company's assets, excluding the accounts
receivable for certain bonded construction projects.
For 1995, the Company paid the Bank commitment fees of 1/2% per year based on
the unused portion of the commitment; this fee arrangement remains in effect
under the Agreement. The maximum amount of borrowings outstanding under the
Agreement during 1995 was $9,932,000. For 1995, the average daily balance
outstanding when the Company was in a net borrowing position was $4,249,000
at a weighted average rate of 9.1%. For the period during 1994 in which the
Company was in a net borrowing position, the average daily balance outstanding
was $9,293,000 at a weighted average rate of 6.5%. The proceeds of the loans
under the Agreement were used for various working capital requirements.
Amounts included in the current portion of long-term debt in the accompanying
Consolidated Balance Sheet represent amounts due to former owners of acquired
assets and subsidiaries.
- ---------------------------------------------------------------
7. CAPITAL STOCK
- ---------------------------------------------------------------
During 1993, the Company sold 202,601 treasury shares of Series B Common Stock
to the Michael Baker Corporation Employee Stock Ownership Plan at market prices
ranging from $9.29 to $14.20 per share. Total proceeds to the Company for
these sales were $2,252,000.
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,
1995, there were no shares of such Preferred Stock outstanding.
- ---------------------------------------------------------------
8. LEASE COMMITMENTS
- ---------------------------------------------------------------
Rent expense under noncancelable leases was $8,388,000 in 1995, $8,111,000 in
1994 and $8,651,000 in 1993.
Minimum annual rentals payable under noncancelable leases in each of the five
years after December 31, 1995 are $8,441,000, $7,050,000, $5,048,000,
$4,131,000 and $3,873,000, respectively. These noncancelable leases relate to
office space, computer equipment, office equipment and vehicles with lease
terms ranging from one to 10 years.
- ---------------------------------------------------------------
9. INCOME TAXES
- ---------------------------------------------------------------
The provision for/(benefit from) income taxes consisted of the following (in
thousands):
1995 1994 1993
- ---------------------------------------------------------------
Current income taxes:
Federal $ -- $(808) $(1,431)
State 837 80 466
Foreign 883 893 801
- ---------------------------------------------------------------
Total current
income taxes 1,720 165 (164)
- ---------------------------------------------------------------
Deferred income taxes:
Federal 994 (2,190) (7,027)
State (534) 425 --
- ---------------------------------------------------------------
Total deferred
income taxes 460 (1,765) (7,027)
- ---------------------------------------------------------------
Total provision for/(benefit
from)income taxes $2,180 $(1,600) $(7,191)
===============================================================
The following is a reconciliation of income taxes at the federal
statutory rate to income taxes recorded by the Company (in
thousands):
1995 1994 1993
- ---------------------------------------------------------------
Computed income taxes at
U.S. federal statutory rate $1,727 $(3,245) $(7,641)
Loss of foreign tax credits -- 629 --
Foreign taxes, net of federal
income tax benefit 583 377 --
State income taxes, net of
federal income tax benefit 153 333 466
Nondeductible charges 246 179 (91)
Realization of tax benefit (600) -- --
Other, net 71 127 75
- ---------------------------------------------------------------
Total provision for/(benefit
from) income taxes $2,180 $(1,600) $(7,191)
===============================================================
The domestic and foreign components of income/(loss) before
income taxes are as follows (in thousands):
1995 1994 1993
- ---------------------------------------------------------------
Domestic $2,816 $(12,120) $(26,228)
Foreign 2,264 2,575 3,755
- ---------------------------------------------------------------
Total $5,080 $(9,545) $(22,473)
===============================================================
The components of the Company's deferred income tax assets and
liabilities at December 31, 1995 and 1994 are as follows (in
thousands):
1995 1994
- ---------------------------------------------------------------
Deferred income tax assets:
Deductible temporary differences
Provision for expenses and losses $ 4,540 $ 6,485
Contract overbillings 1,326 1,661
Federal tax operating
loss carryforward 1,476 1,363
Accrued vacation pay 1,134 970
Fixed and intangible assets 517 602
Other 1,721 1,331
- ---------------------------------------------------------------
Total deferred income tax assets 10,714 12,412
- ---------------------------------------------------------------
Deferred income tax liabilities:
Contract underbillings (6,689) (7,647)
State income tax, net -- (280)
- ---------------------------------------------------------------
Total deferred income tax
liabilities (6,689) (7,927)
- ---------------------------------------------------------------
Net deferred tax asset $ 4,025 $ 4,485
===============================================================
The Company believes that it will have sufficient future taxable income to
make it more likely than not that the net deferred tax asset at December 31,
1995 will be realized. In making this assessment, management has considered
the Company's historic operating performance and taxable income generated by
its core engineering business, and further believes that its taxable losses
generated in 1993 and 1994 were abnormal.
As of December 31, 1995, the Company had a U.S. net operating loss carryforward
of $4,341,000. This carryforward expires in the year 2010.
The Company's U.S. income tax returns have been examined by the Internal
Revenue Service through 1991. Management believes that adequate provisions
have been made for income taxes at December 31, 1995.
- ---------------------------------------------------------------
10. 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 these proceedings and
their ultimate resolutions will not have a material adverse effect on the
consolidated financial position or annual results of operations of the Company.
The only 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.
At December 31, 1995, 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.
- ---------------------------------------------------------------
11. 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%
of salary contributed by an employee. The Company's matching contributions
are invested in Michael Baker Corporation Common Stock. Such contributions
under this program amounted to $2,912,000, $2,925,000, and $2,862,000
in 1995, 1994, and 1993, respectively.
As of December 31, 1995, the market value of all ESOP investments was
approximately $40,679,000, of which 43% represented the market value of the
ESOP's investment in Michael Baker Corporation Common Stock. The Company's
ESOP held 41% of the shares and 71% of the voting power for the outstanding
Common Stock and Series B Common Stock of the Company at the end of 1995.
- ---------------------------------------------------------------
12. STOCK OPTION PLANS
- ---------------------------------------------------------------
Effective January 1, 1995, the Michael Baker Corporation 1995 Stock Incentive
Plan (the "Plan") was formed to motivate and reward key employees who make
significant contributions toward enhancing the Company's success. Under the
Plan, options are granted to participants annually, provided that the Company
has attained certain minimum prior year performance goals set at the
beginning of the prior year. On the date of grant, one-fourth of the options
granted become vested, and the remaining three-fourths vest in annual
one-fourth increments. Vested options remain exercisable for a period of ten
years from the grant date. The Company's Board of Directors has authorized
500,000 shares of Common Stock for issuance upon the exercise of options
granted under the Plan.
The following table summarizes the options outstanding during 1995, all of
which have an exercise price of $5.00 per share:
- ---------------------------------------------------------------
Granted on and outstanding at January 1 176,894
Forfeited (25,106)
Exercised or expired 0
- ---------------------------------------------------------------
Outstanding at December 31 151,788
- ---------------------------------------------------------------
Exercisable at December 31 44,224
===============================================================
On February 27, 1996, the Company's Board of Directors approved the 1996
Nonemployee Directors Stock Incentive Plan (the "Directors Plan"). The
Directors Plan will become effective upon its approval by the Company's
shareholders at the 1996 Annual Meeting, which is scheduled to be held on
May 13, 1996. The Board of Directors has reserved 150,000 shares for
issuance upon the exercise of options to be granted under the Directors Plan.
If approved, a total of 7,000 nonstatutory stock options will be granted and
3,500 restricted shares will be awarded to nonemployee board members
effective May 14, 1996.
- ---------------------------------------------------------------
13. EMPLOYEE BENEFITS
- ---------------------------------------------------------------
The Company contributes to multiemployer, union-administered, construction-
related pension funds based on rates per hour worked by member employees.
Related contribution costs included in the cost of work performed was
approximately $863,000, $1,060,000, and $820,000 for the years ended
December 31, 1995, 1994, and 1993, respectively.
- ---------------------------------------------------------------
14. QUARTERLY RESULTS OF OPERATION (UNAUDITED)
- ---------------------------------------------------------------
The following is a summary of the unaudited quarterly results of operations
for the two years ended December 31, 1995. The results for the fourth quarter
of 1995 were adversely affected by provisions for certain litigation, contract
claims and rework, and by charges taken on a significant base operating
support services contract. These provisions were offset by favorable
adjustments for medical and casualty insurance costs and a reduction in the
Company's tax provision rate. The insurance adjustments, which totaled
approximately $3.9 million, were based on changes in estimates of the Company's
insurance exposures relative to its reserves and also reflects the more
favorable levels of insurance experience over the last several years. The
tax provision adjustment resulted from the realization of a tax benefit from
a Baker Support Services joint venture, which reduced the Company's tax
provision by $600,000 during the fourth quarter. Each of these fourth quarter
adjustments either arose from decisions reached or events occurring during the
fourth quarter of 1995, or from changes in accounting estimates based on
information which became available during that period.
1995 - Three Months Ended
Mar 31 Jun 30 Sept 30 Dec 31
- ---------------------------------------------------------------
Total contract
revenues $86,543 $88,946 $90,620 $88,619
Gross profit 9,980 10,788 10,462 8,343
Income before
income taxes 829 1,852 2,049 350
Net income 431 915 1,029 525
Net income per
common share $0.05 $0.11 $0.12 $0.07
===============================================================
1994 - Three Months Ended
Mar 31 Jun 30 Sept 30 Dec 31
- ---------------------------------------------------------------
Total contract
revenues $93,883 $109,995 $119,473 $113,842
Gross profit 10,133 10,799 10,242 1,580
Income/(loss) before
income taxes (453) 605 352 (10,049)
Net income/(loss) (241) 322 187 (8,213)
Net income/(loss) per
common share $(0.03) $0.04 $0.02 $(0.98)
===============================================================
- ---------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- ---------------------------------------------------------------
To the Shareholders and Board of Directors
of Michael Baker Corporation:
In our opinion, the accompanying consolidated balance sheet 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 at December 31, 1995 and 1994,
and the results of their operations and their cash flows for the years then
ended, in conformity with generally accepted accounting principles. 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
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above. The consolidated financial statements of Michael
Baker Corporation for the year ended December 31, 1993, were audited by
other independent public accountants whose report, which was based on their
audit and the report of other auditors and dated February 14, 1994, expressed
an unqualified opinion on those statements.
As discussed in Note 9 to the consolidated financial statements, effective
January 4, 1993, the Company changed its method of accounting for income taxes.
/s/ Price Waterhouse LLP
- ------------------------
Price Waterhouse LLP
Pittsburgh, Pennsylvania
February 16, 1996, except as to Note 6 and 12,
which are as of March 22, 1996
- ---------------------------------------------------------------
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 1995 and 1994 were as follows:
1995
- ---------------------------------------------------------------
First Second Third Fourth
High 4 3/8 5 5/8 6 1/4 6 1/4
Low 3 3/4 3 15/16 4 3/4 4 1/4
===============================================================
1994
- ---------------------------------------------------------------
First Second Third Fourth
High 10 7/8 9 1/4 6 3/4 4 9/16
Low 8 1/2 6 1/2 3 7/8 3 1/8
===============================================================