Exhibit 13.1
SELECTED FINANCIAL DATA
1998 1997 1996 1995 1994
================================================================================
(In thousands, except per share information)
RESULTS OF OPERATIONS
Total contract revenues $521,271 $446,432 $418,388 $354,728 $437,193
Operating income/(loss) (1,667) 8,020 7,663 5,180 (9,097)
Net income/(loss) (2,419) 4,953 4,180 2,900 (7,945)
Diluted net income/(loss)
per share $ (0.30) $ 0.60 $ 0.50 $ 0.35 $ (0.95)
Return on average equity (4.4)% 9.3% 8.5% 6.3% (16.3)%
FINANCIAL CONDITION
Total assets $151,861 $144,425 $126,082 $117,376 $134,794
Working capital $ 31,855 $ 36,220 $ 27,417 $ 25,186 $ 22,391
Current ratio 1.36 1.41 1.36 1.36 1.26
Long-term debt $ 3,138 $ -- $ -- $ -- $ 3,960
Shareholders' investment 52,862 55,862 50,752 47,631 44,731
Book value per
outstanding share 6.47 6.79 6.19 5.70 5.35
Year-end closing
share price $ 9.75 $ 9.75 $ 6.38 $ 5.00 $ 3.75
CASH FLOW
Cash provided by/(used
in) operating activities $ (1,379) $ 7,803 $ 1,167 $ 15,539 $ 5,415
Cash used in investing
activities (11,416) (2,533) (3,739) (2,294) (5,436)
Cash provided by/(used in)
financing activities 1,935 124 (1,251) (2,547) (1,477)
- --------------------------------------------------------------------------------
Increase/(decrease)
in cash $(10,860) $ 5,394 $ (3,823) $ 10,698 $ (1,498)
BACKLOG
Funded $447,600 $393,200 $332,800 $299,900 $283,300
Total $735,300 $648,700 $543,700 $507,800 $468,300
SHARE INFORMATION
Year-end shares
outstanding 8,166 8,224 8,197 8,364 8,364
Average diluted shares
outstanding during year 8,178 8,299 8,383 8,368 8,364
================================================================================
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 fourth quarter of 1998, the Company recorded losses totaling $10.9
million related to a construction project being performed by Baker Mellon Stuart
Construction, Inc. ("BMSCI") for Universal City Development Partners ("UCDP") at
the Universal Studios theme park in Orlando, Florida. Other BMSCI-related
charges totaling $2.8 million were also recorded during the fourth quarter of
1998. Following these charges, the Company determined during the first quarter
of 1999 that it will no longer participate in low-bid, high-risk construction
projects for buildings or transportation infrastructure. Accordingly, the
general construction activities of the Company's Buildings unit have been
restructured, and its Transportation Construction (heavy and highway) business
will be sold. In connection with this restructuring, the Company recorded a
charge of $0.8 million during the first quarter of 1999.
Total Contract Revenues
Total contract revenues reached a record $521 million in 1998, up 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 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 (or 11.5% of revenues for the Company) 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 operations and maintenance ("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.
For 1997, total contract revenues increased from $418 million in 1996. The
Transportation, Energy and Civil units recorded the largest revenue increases of
$14 million, $12 million and $9 million, respectively. Revenue growth from new
heavy and highway construction work, particularly in Chicago, accounted for the
Transportation unit's improvement, while the Energy unit's offshore platform
operations in the Gulf of Mexico fueled its growth. The Civil unit's net
increase again resulted from higher revenues on new O&M contracts in its BSSI
division, despite lower revenues in its engineering division due to the 1997
completion of its significant project in Mexico.
TOTAL CONTRACT REVENUES - 1998
A. Buildings 29%
B. Civil 25%
C. Energy 13%
D. Environmental 5%
E. Transportation 28%
Gross Profit
Gross profit decreased to $47.2 million in 1998 from $51.9 million
in 1997. As a percentage of total contract revenues, gross profit declined to 9%
in 1998 compared to 12% in 1997. Both overall decreases are directly
attributable to the construction project charges totaling $13.7 million recorded
in the Buildings unit during the fourth quarter of 1998. The gross profit
percentage increased 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.
For 1997, gross profit increased from $48.6 million in 1996. As a percentage of
total contact revenues, gross profit remained relatively constant at 12% in both
1997 and 1996. The gross profit percentage increased in 1997 for all of the
Company's business units except the Energy unit. The Civil and Transportation
units registered the most significant improvements in 1997. While the Civil unit
raised the gross profit percentages for both its engineering and O&M businesses,
the recovery in the Transportation unit was attributable to its unfavorable
performance on certain construction projects during 1996. The percentage
decrease in the Energy unit resulted primarily from lower margins associated
with its new work added in 1997.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses increased to $48.9 million
in 1998 from $43.9 million in 1997. The 1998 increase principally reflected an
investment in technological support costs, 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 to
9.4% in 1998 from 9.8% in 1997.
SG&A expenses increased in 1997 from $40.9 million in 1996. The 1997 increase
principally reflected international marketing costs and the Energy unit's
investment in the Venezuela market. Expressed as a percentage of total contract
revenues, SG&A expenses remained constant at 9.8% in both 1997 and 1996.
Other Income and Expense
Interest income decreased to $439,000 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 to $42,000 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 to $145,000 in 1998
from $39,000 in 1997 as the result of financing the purchase of certain heavy
and highway construction equipment during the second half of 1998.
Interest income increased in 1997 from $402,000 in 1996, due to the combination
of a higher daily average investment amount and slightly higher interest rates
in 1997. Other income increased in 1997 from $50,000 in 1996, primarily due to
gains realized on the sales of certain investments and equity income from a
another Energy unit joint venture related to work in the Gulf of Mexico.
Income Taxes
The provision for income taxes resulted in an effective tax rate of (82)% in
1998, 47% in 1997, and 48% in 1996. 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 income tax expense for
1998 results from certain foreign and state taxes that cannot be offset against
tax benefits derived from other jurisdictions, despite the Company's
consolidated pre-tax loss. The 1996 provision rate was unfavorably impacted by
higher foreign income taxes paid in that year.
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 $448 million at
December 31, 1998, an increase from $393 million at the end of 1997. The overall
increase in funded backlog is attributable to new work added and transfers from
unfunded backlog during the year.
Total backlog, which incrementally includes that portion of contract value for
which options are still to be exercised (unfunded backlog), was $735 million at
the end of 1998 versus $649 million at the end of 1997. With the exception of
the Civil and Buildings units, each of the Company's business units entered 1999
with higher funded and total backlog than at the end of 1997.
With reference to the Company's restructuring announced in April 1999, funded
backlog related to the businesses that will be continued by the Company was $300
million and $252 million, and total backlog was $587 million and $508 million,
as of year-end 1998 and 1997, respectively.
FUNDED BACKLOG - YEAR END 1998
A. Buildings 8%
B. Civil 15%
C. Energy 17%
D. Environmental 5%
E. Transportation 55%
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $1.4 million in 1998, compared to cash
provided by operating activities of $7.8 million in 1997 and $1.2 million in
1996. The decrease for 1998 was primarily related to the Company's 1998 net
loss. 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 in the Buildings unit.
Net cash used in investing activities was $11.4 million in 1998, compared to
$2.5 million in 1997 and $3.7 million in 1996. These amounts solely comprise
capital expenditures in 1996 and 1997, but the 1998 amount also includes $0.8
million paid during the fourth quarter of 1998 relative to the acquisition of
GeoResearch, Inc. The 1998 capital expenditures totaling $10.6 million include
computer equipment and software purchases totaling $3.9 million as compared with
$1.4 million in 1997. During 1997 and 1996, 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 1998 expenditures is attributable to the purchase of heavy and highway
construction equipment needed for new projects added during 1998. These factors
account for the majority of the 1998 increase in capital expenditures. The 1997
decrease is attributable to higher 1996 expenditures for building improvements
and office equipment related to the Buildings unit's 1996 relocation from
Pittsburgh to Coraopolis, PA, and higher vehicle and equipment purchases during
1996 to meet the requirements of new BSSI O&M projects in the Civil unit.
Net cash provided by financing activities was $1.9 million in 1998 and $0.1
million in 1997, compared to cash used in financing activities of $1.3 million
in 1996. The 1998 proceeds from long-term debt related entirely to the
aforementioned purchase of heavy and highway construction equipment, while the
repayments of long-term debt correlate to both the financed construction
equipment and the 1998 subsidiary acquisition. In late 1996, pursuant to an
announced stock repurchase program, the Company paid $1.3 million to acquire
207,560 treasury shares. In 1998, the Company paid $0.8 million for an
additional 96,379 treasury shares under this program.
Working capital decreased to $31.9 million at December 31, 1998 from $36.2
million at December 31, 1997. The Company's current ratios were 1.36:1 and
1.41:1 at the end of 1998 and 1997, respectively. Both the working capital and
current ratio at year-end 1998 were negatively impacted by the Buildings unit's
construction-related charges recorded during the fourth quarter of 1998.
In July 1998, the Company extended the term of its unsecured credit agreement
with Mellon Bank, N.A. through May 31, 2001. This agreement provides for a
commitment of $25 million, which covers borrowings and letters of credit. As of
December 31, 1998, no borrowings were outstanding; however, letters of credit
totaling $1.8 million were outstanding under the agreement. Management believes
that the credit agreement will be adequate to meet its borrowing and letter of
credit requirements for at least the next year.
The Company is 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. Based on the Company's plan of
restructuring announced in April 1999, management believes that its bonding line
will be sufficient to meet its bid and performance needs for at least the next
year.
Short- and long-term liquidity is 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 new federal transportation
legislation (TEA-21) will provide a significant increase in funding for
transportation infrastructure projects in 1999 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.
YEAR 2000 COMPLIANCE
The Company has completed an assessment of its information systems relative to
the arrival of the 21st century. For internal systems, the Company generally
utilizes modern technologies supplied and supported by leading hardware and
software providers suited to Baker's areas of business. Year 2000 compliance is
primarily being achieved through the normal and recurring process of system
upgrades, the software costs of which are covered under related maintenance
agreements.
Vendors have asserted that the financial and project management systems for the
Company's engineering and construction businesses, its BSSI subsidiary, and one
of two such systems in the Energy unit are Year 2000 compliant. The other Energy
unit system is currently being assessed and scheduled to be compliant by the end
of the third quarter of 1999. Over 90% of the Company is served by a human
resources system which the vendor has stated to be Year 2000 compliant.
Validation testing of the Company's financial, project management and human
resources systems is expected to be completed during the second and third
quarters of 1999.
The Company's interrelated systems (e.g., e-mail, file sharing) are linked by a
network of servers. Upgrades to compliant versions are already in place for
approximately 95% of the network. The remaining servers are scheduled to be
upgraded to compliant versions or merged with existing compliant servers during
the second quarter of 1999. The Company is in the process of evaluating other
less critical operational support systems being used in all business units
(e.g., mapping, CADD, cost estimating, databases, spreadsheets, and specialized
and customized software) to identify any remaining issues for resolution. Any
related issues are scheduled for resolution during the second and third quarters
of 1999. Normal end-user computing needs were addressed with BIOS testing of all
personal computers and a review of the operating systems and software packages.
Patches and upgrade needs have been identified and are being applied with a
scheduled completion date during the third quarter of 1999.
The Company is a service-based organization and, as such, has little reliance on
embedded technology (e.g., microcontrollers) for its key business processes. The
relevance of embedded technology is limited to such items as elevators, HVAC,
security, etc., which are components of the Company's leased facilities.
Embedded technology is also integral to some client facilities which the Company
operates and maintains under customer contracts. Responsibility for the Year
2000 compliance of such facilities rests with the customers.
To assess the Year 2000 compliance of significant third parties, the Company has
initiated a survey process to gather and evaluate information from significant
business customers, vendors and subcontractors. Mailing of the survey was
completed during the first quarter of 1999. The majority of responses are
expected to be received by the end of the second quarter of 1999. The Company
will continue to evaluate the readiness of its key suppliers and customers with
follow-up requests to non-respondents and respondents that are not yet
compliant; such requests will continue through the end of 1999.
Management currently believes that its "most reasonably likely worst case Year
2000 scenario" poses the potential for payment delays from some customers,
including agencies of the U.S. federal government, due to their lack of
readiness for the new century. A formal assessment of the potential impact of
this scenario has not yet been evaluated and is dependent upon the completion of
the aforementioned customer survey process.
Based on the customer survey results, the Company will also enhance its existing
disaster recovery plans to include assessments of potential Year 2000 impacts.
These contingency plans will address both internal factors related to staff,
computer systems and facilities, as well as external factors related to
suppliers, customers and service providers. The Company expects to have all
necessary contingency plans in place by the end of 1999.
Based upon information currently available, management does not believe that the
estimated incremental costs associated with Year 2000 compliance will be
material to the Company's consolidated results of operations or financial
position.
CONSOLIDATED STATEMENT OF INCOME
For the years ended December 31,
1998 1997 1996
================================================================================
(In thousands, except per share amounts)
- --------------------------------------------------------------------------------
Total contract revenues $521,271 $446,432 $418,388
Cost of work performed 474,027 394,527 369,826
- --------------------------------------------------------------------------------
Gross profit 47,244 51,905 48,562
Selling, general and administrative expenses 48,911 43,885 40,899
- --------------------------------------------------------------------------------
Income/(loss) from operation (1,667) 8,020 7,663
Other income/(expense):
Interest income 439 552 402
Interest expense (145) (39) (76)
Other, net 42 811 50
- --------------------------------------------------------------------------------
Income/(loss) before income (1,331) 9,344 8,039
Provision for income taxes 1,088 4,391 3,859
- --------------------------------------------------------------------------------
Net income/(loss) $ (2,419) $ 4,953 $ 4,180
================================================================================
Basic and diluted net
income/(loss) per share $ (0.30) $ 0.60 $ 0.50
================================================================================
<FN>
The accompanying notes are an integral part of this statement.
</FN>
CONSOLIDATED BALANCE SHEET
As of December 31,
1998 1997
================================================================================
(In thousands)
Assets
- --------------------------------------------------------------------------------
Current Assets
Cash $ 5,014 $ 15,874
Receivables 82,672 81,632
Cost of contracts in progress and
estimated earnings, less billings 22,407 21,478
Prepaid expenses and other 10,192 5,799
- --------------------------------------------------------------------------------
Total current assets 120,285 124,783
- --------------------------------------------------------------------------------
Property, plant and equipment, net 17,458 10,985
- --------------------------------------------------------------------------------
Other Assets
Goodwill and other intangible assets, net 7,507 6,521
Other assets 6,611 2,136
- --------------------------------------------------------------------------------
Total other assets 14,118 8,657
- --------------------------------------------------------------------------------
TOTAL ASSETS $ 151,861 $ 144,425
================================================================================
Liabilities and Shareholders' Investment
- --------------------------------------------------------------------------------
Current Liabilities
Accounts payable $ 43,356 $ 45,868
Accrued employee compensation 9,141 9,987
Accrued insurance 6,155 4,905
Other accrued expenses 20,210 14,800
Excess of billings on contracts in
progress over cost and estimated earnings 9,568 13,003
- --------------------------------------------------------------------------------
Total current liabilities 88,430 88,563
- --------------------------------------------------------------------------------
Other Liabilities
Notes payable 3,138 --
Other 7,431 --
- --------------------------------------------------------------------------------
Total liabilities 98,999 88,563
================================================================================
Shareholders' Investment
Common Stock, par value $1, authorized
44,000,000 shares, issued 7,150,179 and
7,086,623 shares, in 1998 and 1997,
respectively 7,150 7,087
Series B Common Stock, par value $1,
authorized 6,000,000 shares, issued
1,319,114 and 1,343,983 shares, in 1998
and 1997, respectively 1,319 1,343
Additional paid-in capital 37,002 36,822
Retained earnings 9,447 11,866
Less 303,359 and 206,980 shares of
Common Stock in treasury, at cost, in
1998 and 1997, respectively (2,056) (1,256)
- --------------------------------------------------------------------------------
Total shareholders' investment 52,862 55,862
- --------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS'
INVESTMENT $ 151,861 $ 144,425
================================================================================
<FN>
The accompanying notes are an integral part of this statement.
</FN>
CONSOLIDATED STATEMENT OF CASH FLOWS
For the years ended December 31,
1998 1997 1996
================================================================================
(In thousands)
Cash Flows from Operating Activities
Net income/(loss) $ (2,419) $ 4,953 $ 4,180
Adjustments to reconcile net income/(loss)
to net cash provided by/(used in)
operating activities:
Depreciation and amortization 5,049 4,483 4,851
Deferred income taxes (695) 1,827 2,629
Changes in assets and liabilities,
net of acquisition:
Increase in receivables
and contracts in progress (8,276) (13,514) (14,275)
Increase in accounts payable
and accrued expenses 9,216 9,534 6,787
(Increase)/decrease in other
net assets (4,254) 520 (3,005)
- --------------------------------------------------------------------------------
Total adjustments 1,040 2,850 (3,013)
- --------------------------------------------------------------------------------
Net cash provided by/(used
in) operating activities (1,379) 7,803 1,167
- --------------------------------------------------------------------------------
Cash Flows from Investing Activities
Additions to property, plant and
equipment (10,573) (2,533) (3,739)
Investment in GeoResearch, Inc. (843) -- --
- --------------------------------------------------------------------------------
Net cash used in investing
activities (11,416) (2,533) (3,739)
- --------------------------------------------------------------------------------
Cash Flows from Financing Activities
Proceeds from long-term debt 3,516 -- --
Repayments of long-term debt (964) -- (12)
Proceeds from exercise of stock
options 183 124 21
Payments to acquire treasury stock (800) -- (1,260)
- --------------------------------------------------------------------------------
Net cash provided by/(used in)
financing activities 1,935 124 (1,251)
- --------------------------------------------------------------------------------
Net increase/(decrease) in cash (10,860) 5,394 (3,823)
Cash at beginning of year 15,874 10,480 14,303
- --------------------------------------------------------------------------------
Cash at end of year $ 5,014 $ 15,874 $ 10,480
================================================================================
Supplemental Disclosure of Cash Flow Data
Interest paid $ 165 $ 50 $ 73
Income taxes paid $ 2,588 $ 2,039 $ 950
================================================================================
<FN>
The accompanying notes are an integral part of this statement.
</FN>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' INVESTMENT
- --------------------------------------------------------------------------------
Series B
Common Common
Stock Stock Treasury Additional
Par Par -------------- Paid-in Retained
(In Thousands) Value $1 Value $1 Shares Amount Capital Earnings
================================================================================
Balance, Dec. 31, 1995 $7,012 $1,352 -- $ -- $36,534 $ 2,733
Net income -- -- -- -- -- 4,180
Series B Common
Stock conversions
to Common Stock 3 (3) -- -- -- --
Stock issued for
Maguire acquisition 33 -- -- -- 129 --
Restricted stock
issued 4 -- -- -- 14 --
Treasury stock
purchases -- -- 208 1,260 -- --
Stock options
exercised 4 -- -- -- 17 --
- --------------------------------------------------------------------------------
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 income -- -- -- -- -- (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
================================================================================
<FN>
The accompanying notes are an integral part of this statement.
</FN>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries, 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, 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 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
In the accompanying Consolidated Balance Sheet, the Company records its interest
in all majority-owned, project-specific joint ventures based on the equity
method of accounting for investments. The Company's proportionate share of
majority-owned, project-specific joint venture revenue and cost of contracts is
included in the accompanying Consolidated Statement of Income. The Company's
investment in these joint ventures, for which the related projects are expected
to be completed within one year, is included within other current assets in the
accompanying Consolidated Balance Sheet.
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 percentage-of-completion
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 net
outstanding checks within banking institutions are reclassified as accounts
payable; such amount totaled $9,141,000 at December 31, 1998.
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, which
range from 3 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 5 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 30 years.
Earnings Per Common Share
Basic and diluted net income per share computations are based upon 8,178,067
weighted average shares outstanding for 1998. Basic net income per share
computations are based upon weighted averages of 8,207,786 and 8,372,034 shares
outstanding for the years 1997 and 1996, respectively. Diluted net income per
share computations are based upon weighted averages of 8,299,083 and 8,382,592
shares outstanding for the years 1997 and 1996, respectively.
Reclassifications
Certain 1997 and 1996 financial statement amounts have been reclassified to
conform with 1998 classifications.
2. CONSTRUCTION CHARGES AND RESTRUCTURING
During the fourth quarter of 1998, 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 because its
design and related drawings were changed substantially during the course of
construction. On March 5, 1999, BMSCI was terminated by UCDP from this project,
which was over 90% completed. UCDP alleges contract breaches related to the
quality of work, contract administration and delays in project completion and
seeks damages, including consequential damages related to project delays. Both
parties filed lawsuits in this matter during the first quarter of 1999. BMSCI
alleges unfair and deceptive trade practices, breach of implied warranty of
plans and specifications, breach of contract, wrongful termination, tortious
interference with business relationships, and breach of implied contract of good
faith and fair dealing, and seeks damages, interest, court costs, and further
relief. Certain subcontractors have also sued BMSCI and its surety, seeking
reimbursement for costs incurred and related damages. Additional claims and
litigation may be filed in connection with this matter.
The losses recorded by the Company related to this project in the fourth quarter
of 1998 totaled $10.9 million, and reflect 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. Through December 31, 1998, the Company has recorded adjusted
revenues totaling $76.9 million ($60.2 million during 1998), and had been paid
$67.0 million, in connection with this contract.
As of March 5, 1999, the Company is aware of subcontractors' allegations, for
amounts in excess of $12 million, representing work performed for which they
have not been paid. Management and its counsel believe that under the provisions
of BMSCI's agreements with it subcontractors, it is not probable that BMSCI will
be required to make payments for such work to the subcontractors unless and
until BMSCI is paid by UCDP. The Company is also aware of material asserted and
unasserted claims by the subcontractors. In addition to the defenses described
below, the Company's experience indicates that subcontractor claims of these
types are often proven to be significantly in excess of amounts ultimately
recoverable.
BMSCI and its counsel believe it has valid claims against UCDP and defenses
against claims by both UCDP and the subcontractors, and BMSCI intends to defend
its position vigorously. No amounts have been accrued at December 31, 1998,
associated with the ultimate resolution of this matter in excess of the items
discussed above, since management and its counsel believe any such additional
costs are neither probable of payment nor reasonably estimable at this time.
The Company expects this matter to be resolved through a trial over a number of
years. It is reasonably possible that BMSCI may recover all or a portion of the
amounts expensed to date on this project. However, it is also reasonably
possible that there may be an unfavorable resolution with respect to the UCDP
litigation or the subcontractor allegations and claims; an unfavorable
resolution with respect to either matter, or both, could have a material adverse
effect on the Company's consolidated financial position, results of operations
and cash flows in a future period.
Other charges totaling $2.8 million were also recorded during the fourth quarter
of 1998 related to the settlement of construction-related litigation and charges
on other completed construction projects.
In connection with the foregoing, the Company has determined that it will no
longer participate in low-bid, high-risk construction projects for buildings or
transportation infrastructure. Accordingly, the general construction activities
of the Company's Buildings unit have been restructured, and the Company's
Transportation Construction (heavy and highway) business will be sold. Existing
low-bid, high-risk construction projects in the Buildings unit will be completed
or sold. Management initiated activities related to the sale of the heavy and
highway business during the second quarter of 1999. In connection with this
restructuring, the Company recorded a charge of $0.8 million during the first
quarter of 1999.
3. CONTRACTS
The total cost of contracts in progress (used to determine cost of work
performed) plus accumulated gross profit recorded was $1,007,668,000 and
$858,705,000 at December 31, 1998 and 1997, respectively. Billings to date on
contracts in progress at December 31, 1998 and 1997 were $994,829,000 and
$850,231,000, respectively.
Trade accounts receivable totaling $9,097,000 and $12,088,000 at December 31,
1998 and 1997, 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, 1998 is expected to be collected in 1999.
As of December 31, 1998 and 1997, accounts payable included amounts due to
subcontractors of $4,623,000 and $8,888,000, 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 $2,028,000
and $1,737,000 at December 31, 1998 and 1997, 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 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.
4. BUSINESS SEGMENT INFORMATION
In 1998, the Company adopted Statement of Financial Accounting Standards No.
("SFAS") 131, "Disclosures about Segments of an Enterprise and Related
Information." SFAS 131 supersedes SFAS 14, "Financial Reporting for Segments of
a Business Enterprise," replacing the "industry segment" approach with the
"management" approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable segments. SFAS
131 also requires disclosures about products and services, geographic areas, and
major customers. The adoption of SFAS 131 did not affect results of operations
or financial position but did affect the disclosure of the segment information
which follows.
The Company has five operating business units. The Buildings, Energy and
Environmental units each represent reportable segments under SFAS 131. 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.
o The Civil unit includes two reportable segments. The Civil-Engineering
segment provides surveying, mapping, geographic information systems,
planning, design, construction management and total program management. The
Civil-Baker Support Services, Inc. ("BSSI") segment principally provides
operations and maintenance services on U.S. military bases.
o The Energy unit provides training, personnel recruitment, pre-operations
engineering, field operations and maintenance, mechanical equipment
maintenance and logistics management services for operating energy
production facilities.
o The Environmental unit provides environmental, health and safety related
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, construction
management and inspection and management consulting services to highway,
toll road and transit agencies. The Transportation-Construction segment
acts as a general contractor for highways, bridges, track installation,
sewer, water and other civil construction projects.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates the
performance of its segments based on income before income taxes.
The following tables reflect disclosures required by SFAS 131 for the Company's
seven segments (in millions):
1998 1997 1996
================================================================================
Total contract revenues:
Buildings unit $151.6 $126.4 $127.4
Civil unit:
Engineering 69.1 67.7 75.1
BSSI 61.8 50.5 34.3
Energy unit 68.6 54.8 43.2
Environmental unit 22.7 21.5 27.3
Transportation unit:
Engineering 72.3 62.0 50.8
Construction 75.2 63.5 60.3
- --------------------------------------------------------------------------------
Total $521.3 $446.4 $418.4
================================================================================
1998 1997 1996
================================================================================
Income/(loss) before taxes:
Buildings unit $(13.9) $ 0.9 $ 0.9
Civil unit:
Engineering 3.5 3.7 4.2
BSSI 0.1 -- (0.8)
Energy unit 4.0 2.3 2.3
Environmental unit 1.0 0.4 0.5
Transportation unit:
Engineering 2.9 1.0 2.3
Construction 0.7 0.6 (1.4)
- --------------------------------------------------------------------------------
Subtotal - segments (1.7) 8.9 8.0
Corporate/Insurance 0.4 0.4 --
- --------------------------------------------------------------------------------
Total $ (1.3) $ 9.3 $ 8.0
================================================================================
1998 1997
================================================================================
Segment assets:
Buildings unit $ 30.5 $ 27.1
Civil unit:
Engineering 18.7 16.2
BSSI 15.6 15.5
Energy unit 27.9 23.5
Environmental unit 5.1 3.7
Transportation unit:
Engineering 21.7 17.7
Construction 20.6 20.2
- --------------------------------------------------------------------------------
Subtotal - segments 140.1 123.9
Corporate/Insurance 11.8 20.5
- --------------------------------------------------------------------------------
Total $151.9 $144.4
================================================================================
1998 1997 1996
================================================================================
Capital expenditures:
Buildings unit $ 0.3 $ 0.1 $ 0.5
Civil unit:
Engineering 1.4 0.6 0.5
BSSI 0.8 0.3 1.0
Energy unit 1.2 0.4 0.5
Environmental nit 0.2 -- --
Transportation unit:
Engineering 1.3 0.3 0.2
Construction 4.2 0.3 0.1
- --------------------------------------------------------------------------------
Subtotal - segments 9.4 2.0 2.8
Corporate 1.2 0.5 0.9
- --------------------------------------------------------------------------------
Total $ 10.6 $ 2.5 $ 3.7
================================================================================
1998 1997 1996
================================================================================
Depreciation and amortization:
Buildings unit $ 0.2 $ 0.2 $ 0.1
Civil unit:
Engineering 0.7 0.4 0.5
BSSI 0.6 0.5 0.4
Energy unit 1.1 1.2 1.1
Environmental unit 0.1 0.1 0.2
Transportation unit:
Engineering 0.6 0.5 0.5
Construction 0.7 0.5 1.0
- --------------------------------------------------------------------------------
Subtotal - segments 4.0 3.4 3.8
Corporate 1.0 1.1 1.1
- --------------------------------------------------------------------------------
Total $ 5.0 $ 4.5 $ 4.9
================================================================================
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 enterprise-wide disclosures required by SFAS 131 are as follows:
1998 1997 1996
================================================================================
Total contract revenues by type of service:
Engineering $178.4 $164.2 $175.1
Construction 212.4 176.9 165.9
Operations & Maintenance 130.5 105.3 77.4
- --------------------------------------------------------------------------------
Total $521.3 $446.4 $418.4
================================================================================
1998 1997 1996
================================================================================
Total contract revenues by geographic origin:
Domestic $475.2 $403.6 $367.2
Foreign 46.1 42.8 51.2
- --------------------------------------------------------------------------------
Total $521.3 $446.4 $418.4
================================================================================
1998 1997 1996
================================================================================
Total contract revenues by principal markets:
United States government 27.1% 23.8% 22.5%
Various state governmental
and quasi-governmental
agencies 34.4% 40.9% 46.6%
Commercial, industrial
and private clients 38.5% 35.3% 30.9%
================================================================================
The Company's business is substantially conducted in the U.S. The aforementioned
contract with UCDP accounted for 11.5% of the Company's total contract revenues
in 1998. No individual contract accounted for more than 10% of the Company's
total contract revenues in 1997 or 1996.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands):
1998 1997
================================================================================
Land $ 552 $ 552
Buildings and improvements 6,832 6,388
Equipment and vehicles 41,137 32,319
- --------------------------------------------------------------------------------
Total, at cost 48,521 39,259
Less - Accumulated depreciation 31,063 28,274
- --------------------------------------------------------------------------------
Net property, plant
and equipment $17,458 $10,985
================================================================================
6. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets consist of the following (in thousands):
1998 1997
================================================================================
Goodwill, net of accumulated
amortization of $2,867,000 and
$2,437,000, respectively $ 6,091 $ 5,078
Other intangible assets, net of
accumulated amortization of
$2,344,000 and $1,817,000,
respectively 1,416 1,443
- --------------------------------------------------------------------------------
Net intangible assets $ 7,507 $ 6,521
================================================================================
Effective October 1, 1998, the Company acquired all of the outstanding shares of
capital stock of GeoResearch, Inc. 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 related intangible
assets totaling $1,943,000 during the fourth quarter of 1998.
7. LONG-TERM DEBT AND BORROWING AGREEMENTS
The Company has an unsecured credit agreement (the "Agreement") with Mellon
Bank, N.A. (the "Bank"). The Agreement 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, 1998, no borrowings were outstanding;
however, letters of credit totaling $1,792,000 were outstanding under the
Agreement.
The Agreement provides for the Company to borrow at 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. Under the Agreement, the Company pays the Bank commitment fees of
3/8% per year based on the unused portion of the commitment.
The maximum amount of borrowings outstanding under the Agreement during 1998 was
$6,974,000. 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 of all loans under the Agreement were used to meet various
working capital requirements. The Company did not borrow under the Agreement
during 1997.
Other amounts totaling $3,961,000 included in other accrued expenses and
long-term debt in the accompanying Consolidated Balance Sheet represent amounts
due for construction equipment financed in 1998 as well as amounts due to the
former owner of GeoResearch, Inc. These notes and obligations mature as follows:
$823,000 in 1999, $627,000 in 2000, $954,000 in 2001, $915,000 in 2002, $370,000
in 2003, and $272,000 thereafter. The interest rates with respect to these notes
ranged from 4.44% to 7.75% as of December 31, 1998.
8. 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. During
1996, the Company repurchased 207,560 treasury shares of Common Stock at market
prices ranging from $5.63 to $6.25 per share, for a total price of $1,260,000.
The Company made no treasury share repurchases during 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, 1998 and
1997, there were no shares of such Preferred Stock outstanding.
9. LEASE COMMITMENTS
Rent expense under noncancellable operating leases was $11,687,000 in 1998,
$10,364,000 in 1997 and $9,972,000 in 1996.
Minimum annual rentals payable under noncancellable operating leases in each of
the five years after December 31, 1998 are $11,220,000, $9,250,000, $6,529,000,
$3,241,000 and $894,000, respectively. These noncancellable leases relate to
office space, computer equipment, office equipment, construction equipment, and
vehicles, with lease terms ranging from one to 10 years.
10. INCOME TAXES
The provision for income taxes consisted of the following (in thousands):
1998 1997 1996
================================================================================
Current income taxes:
Federal $ 18 $ 1,401 $ (176)
State 246 139 --
Foreign 1,519 1,024 1,406
- --------------------------------------------------------------------------------
Total current
income taxes 1,783 2,564 1,230
- --------------------------------------------------------------------------------
Deferred income taxes:
Federal (799) 1,705 2,538
State 104 122 91
- --------------------------------------------------------------------------------
Total deferred
income taxes (695) 1,827 2,629
- --------------------------------------------------------------------------------
Total provision for
income taxes $ 1,088 $ 4,391 $ 3,859
================================================================================
The following is a reconciliation of income taxes at the federal statutory rate
to income taxes recorded by the Company (in thousands):
1998 1997 1996
================================================================================
Computed income
taxes at U.S. federal
statutory rate $ (453) $ 3,177 $ 2,733
Foreign taxes, net of
federal income tax
benefit 1,003 676 928
State income taxes,
net of federal income
tax benefit 225 172 61
Nondeductible charges 313 300 249
Other, net -- 66 (112)
- --------------------------------------------------------------------------------
Total provision for
income taxes $ 1,088 $ 4,391 $ 3,859
================================================================================
The domestic and foreign components of income before income taxes are as follows
(in thousands):
1998 1997 1996
================================================================================
Domestic $(4,203) $ 7,148 $ 3,530
Foreign 2,872 2,196 4,509
- --------------------------------------------------------------------------------
Total $(1,331) $ 9,344 $ 8,039
================================================================================
The components of the Company's deferred income tax assets and liabilities at
December 31, 1998 and 1997 are as follows (in thousands):
1998 1997
================================================================================
Deferred income tax assets:
Deductible temporary differences:
Provision for expenses and losses $ 6,341 $ 2,763
Contract overbillings 666 705
Federal tax operating loss
carryforward -- 98
Accrued vacation pay 1,301 1,404
Fixed and intangible assets 852 795
Minimum tax credits 379 570
Charitable contribution carryforward 307 230
Other 135 197
- --------------------------------------------------------------------------------
Total deferred income tax assets 9,981 6,762
- --------------------------------------------------------------------------------
Deferred income tax liabilities:
Contract underbillings (7,507) (6,159)
Undistributed foreign earnings (1,494) (1,017)
- --------------------------------------------------------------------------------
Total deferred income liabilities (9,001) (7,176)
- --------------------------------------------------------------------------------
Net deferred tax asset/(liability) $ 980 $ (414)
================================================================================
The Company's U.S. income tax returns have been examined and accepted by the
Internal Revenue Service for the years 1990 through 1994. Management believes
that adequate provisions have been made for income taxes at December 31, 1998.
11. 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 a certain deductible limit 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 by 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, except as discussed in
Note 2, 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 Company currently has two significant legal proceedings outstanding. The
more significant of the two relates to BMSCI's construction contract with UCDP
(see related discussion in 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 accordance with the purchase agreement related to its 1998 acquisition of
GeoResearch, Inc., the Company agreed to pay the former owner, who has continued
as an employee of the Company, contingent consideration based on a formula tied
to the operating profit of the combined geospatial businesses, in excess of a
specified threshold, for the year ending December 31, 2001. The threshold
contemplates substantial growth in the combined businesses over the years 1999
through 2001. This contingent consideration payment cannot exceed $5.3 million.
Any such payment would serve to increase the goodwill associated with this
acquisition. It is currently uncertain whether any contingent consideration
payment will be required under the purchase agreement with GeoResearch, Inc.
At December 31, 1998, 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.
12. 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 effective January 1, 1999, the Company began matching 100%
of the first 5-1/2% 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 $4,312,000, $3,321,000 and $3,306,000 in 1998,
1997 and 1996, respectively.
As of December 31, 1998, the market value of all ESOP investments was
$91,037,000, of which 40% represented the market value of the ESOP's investment
in Michael Baker Corporation Common Stock. The Company's ESOP held 44% of the
shares and 73% of the voting power for the outstanding Common Stock and Series B
Common Stock of the Company at the end of 1998.
13. STOCK OPTION PLANS
As of December 31, 1998, 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 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. Options are
typically granted pursuant to an agreement with the employee, under which
one-fourth of the options granted become immediately vested, and the remaining
three-fourths vest in annual one-fourth increments under the Plan. The options
under the Directors' Plan are fully vested at the date of grant. Vested options
remain exercisable for a period of ten years from the grant date under both
plans. Under the Plan, the Company granted special options during 1998, which
vest in the year 2006, but whose vesting may be accelerated to the first quarter
of the year 2001 if the Company meets its pre-established earnings per share
goal for the year 2000.
Under the Directors Plan, each nonemployee director was issued 500 restricted
shares of Common Stock for a total of 3,500 and 4,500 shares of restricted stock
issued in 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 1998,
1997 and 1996:
Average
Shares exercise
subject price
to option per share
- --------------------------------------------------------------------------------
Balance at December 31, 1995 151,788 $ 5.00
Options granted 67,947 $ 4.83
Options exercised (4,125) $ 5.00
Options forfeited (20,918) $ 4.97
- --------------------------------------------------------------------------------
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
================================================================================
The weighted average fair value of options granted during 1998, 1997 and 1996
was $5.37, $3.94 and $2.72, respectively.
The following table summarizes information about stock options outstanding under
both plans as of December 31, 1998:
Options Exercise Outstanding Average Exercisable
granted in price options life* options
- --------------------------------------------------------------------------------
Jan. 1995 $ 5.00 91,994 6.0 91,994
Feb. 1996 $ 4.81 43,518 7.2 31,227
May 1996 $ 5.03 5,000 7.4 5,000
Feb. 1997 $ 6.91 154,672 8.2 73,810
May 1997 $ 6.84 8,000 8.4 8,000
Feb. 1998 $ 9.53 113,366 9.2 28,336
Apr. 1998 $ 10.13 289,031 9.4 7,000
- --------------------------------------------------------------------------------
Total 705,581 8.2 245,367
================================================================================
<FN>
*Average life remaining in years
</FN>
During 1996, the Company adopted SFAS 123, "Accounting for Stock-Based
Compensation," for disclosure purposes only. As allowed under SFAS 123, the
Company continues to apply APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations in its accounting for stock-based
compensation plans. Accordingly, no compensation cost was recognized in 1998,
1997 or 1996. 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.
The Company's pro forma net income/(loss) amounts would have been $(2,669,000),
$4,725,000 and $4,077,000 for the years ended December 31, 1998, 1997 and 1996,
respectively. The Company's pro forma diluted net income/(loss) per share would
have been $(0.33), $0.57 and $0.49 for the years ended December 31, 1998, 1997,
and 1996, 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 49.4%, an expected option life of 6 years, and a
0% expected dividend yield.
14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations for
the two years ended December 31, 1998:
1998 - Three Months Ended
(In thousands) 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 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 unit operating charges totaling $13.7 million (see Note 2).
</FN>
1997 - Three Months Ended
(In thousands) March 31 June 30 Sept. 30 Dec. 31
- --------------------------------------------------------------------------------
Total contract revenues $ 94,092 $105,477 $116,627 $130,236
Gross profit 10,876 12,914 13,413 14,702
Income before income tax 1,109 2,634 2,942 2,659
Net income 577 1,369 1,530 1,477
Diluted net income
per common share $ 0.07 $ 0.17 $ 0.18 $ 0.18
================================================================================
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 (the Company) at December 31, 1998 and
1997, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, 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.
As discussed in Note 2 and Note 11 to the consolidated financial statements, the
Company is involved in certain contingencies, the outcome of which cannot
presently be determined. Accordingly, no provision for any liability that may
result from these contingencies has been made in the accompanying consolidated
financial statements.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
April 20, 1999
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 1998 and 1997 were as follows:
1998 1997
- --------------------------------------------------------------------------------
First Second Third Fourth First Second Third Fourth
- --------------------------------------------------------------------------------
High 10 1/2 10 1/2 9 1/2 10 3/8 7 11/16 7 3/8 10 5/8 11 5/8
Low 8 1/2 9 1/16 6 11/16 7 1/4 6 3/8 6 1/2 6 3/4 9
================================================================================