.
.
.
EXHIBIT 13.1
SELECTED FINANCIAL DATA
(Dollar amounts in thousands, Restated* Restated* Restated* Restated*
except per share information) 2005 2004 2003 2002 2001
- --------------------------------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Total contract revenues $ 579,278 $ 552,046 $ 426,761 $ 405,264 $ 403,222
Income from operations 16,882 18,868 5,720 16,354 19,603
Net income/(loss) 5,051 8,394 (800) 9,039 8,751
Diluted earnings/(loss) per share $ 0.58 $ 0.98 $ (0.10) $ 1.06 $ 1.04
Return/(loss) on average equity 6.5% 12.1% (1.2)% 14.8% 16.8%
- --------------------------------------------------------------------------------------------------------------------------
FINANCIAL CONDITION
Total assets $ 225,461 $ 215,013 $ 181,099 $ 145,495 $ 143,562
Working capital $ 49,264 $ 43,624 $ 42,768 $ 35,512 $ 32,172
Current ratio 1.35 1.32 1.42 1.47 1.37
Long-term debt $ - $ - $ 13,481 $ - $ -
Shareholders' investment 79,824 74,781 64,343 65,977 56,398
Book value per outstanding share 9.40 8.78 7.73 7.87 6.81
Year-end closing share price $ 25.55 $ 19.60 $ 10.35 $ 10.95 $ 15.20
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOW
Net cash provided by/(used in)
operating activities $ 12,461 $ 28,494 $ (14,658) $ (9,139) $ 19,602
Net cash (used in)/provided by
investing activities (7,078) (4,055) (4,787) 121 (7,718)
Net cash (used in)/provided by
financing activities (1,813) (18,094) 18,686 421 (2,524)
- --------------------------------------------------------------------------------------------------------------------------
Increase/(decrease) in cash $ 3,570 $ 6,345 $ (759) $ (8,597) $ 9,360
- --------------------------------------------------------------------------------------------------------------------------
BACKLOG
Total $ 1,321,800 $ 1,399,500 $ 720,700 $ 545,200 $ 509,600
- --------------------------------------------------------------------------------------------------------------------------
SHARE INFORMATION
Year-end shares outstanding 8,490 8,519 8,320 8,384 8,278
Average diluted shares
outstanding during year 8,715 8,554 8,403 8,543 8,449
- --------------------------------------------------------------------------------------------------------------------------
* See Note 2 to our consolidated financial statements in this Form 10-K for a
discussion of the restatement.
-1-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESTATEMENT
We have restated our previously issued consolidated financial statements for the
years 2004 and 2003, as well as our previously issued selected financial data
for the years 2004, 2003, 2002 and 2001, for the matters discussed more fully in
Note 2 to our consolidated financial statements in this Form 10-K. All amounts
and commentary included in this Management's Discussion and Analysis of
Financial Condition and Results of Operations section give effect to the
restatement.
As a result, we did not timely file our quarterly reports on Form 10-Q for the
periods ended June 30, 2005, September 30, 2005, and March 31, 2006, or our
annual report on Form 10-K for the year ended December 31, 2005, with the
Securities and Exchange Commission ("SEC"). These failures to file timely SEC
reports have caused us to be out of compliance relative to our listing agreement
with the American Stock Exchange. The American Stock Exchange has indicated that
we must file the above referenced SEC Forms no later than August 15, 2006 in
order to regain compliance.
In addition, we did not meet the SEC's filing deadline related to our Form 10-Q
for the second quarter of 2006. Accordingly, we will remain out of compliance
relative to our listing agreement with the American Stock Exchange until our
Form 10-Q for the second quarter of 2006 is filed. We have requested an
extension of time from the American Stock Exchange to regain compliance with our
listing agreement.
BUSINESS OVERVIEW
We provide engineering and energy expertise for public and private sector
clients worldwide. Our primary services include engineering design for the
transportation and civil infrastructure markets, operation and maintenance of
oil and gas production facilities, architectural and environmental services, and
construction management services for buildings and transportation projects. We
view our short and long-term liquidity as being dependent upon our results of
operations, changes in working capital and our borrowing capacity.
BUSINESS ENVIRONMENT
Our operations are affected by appropriations of public funds for infrastructure
and other government-funded projects, capital spending levels in the private
sector, and the demand for our services in the engineering and energy markets.
We could also be affected by additional external factors such as price
fluctuations and capital expenditures in the energy industry.
Since its approval in 1998, the federal government's TEA-21 legislation has made
significant transportation infrastructure funding available to the various state
agencies. TEA-21 expired on September 30, 2003, but was extended 11 times at
previous funding levels. On August 10, 2005, the U.S. Congress approved a new,
six-year $286.5 billion measure entitled SAFETEA-LU, the Safe, Accountable,
Flexible, Efficient Transportation Equity Act-A Legacy for Users. This new level
of guaranteed funding reflects an increase of approximately 46% over the TEA-21
levels. The most significant impact of the numerous extensions of TEA-21 was
that many states were unable or unwilling to make sizeable long-term investments
in major transportation infrastructure projects. This, in turn, has had a
marginally adverse impact on our transportation planning, design and
construction management services in 2005. However, with the new bill now
enacted, we expect to see increasing activity occurring in the second half of
2006 and into 2007. From 2002 through 2005, we have observed increased federal
spending activity on Departments of Defense ("DoD") and Homeland Security
("DHS") activities, including the Federal Emergency Management Agency ("FEMA").
To mitigate the effect of the state
-2-
transportation budget constraints on our business, management has focused more
marketing and sales activity on these agencies (DoD and DHS) of the federal
government. As a result of this strategy, we increased our revenues from U.S.
Federal government contracting activity in excess of 100 percent since 2002.
Additional government spending in these areas, or on transportation
infrastructure, could result in profitability and liquidity improvements for us.
Significant contractions in any of these areas could unfavorably impact our
profitability and liquidity. In March 2004, we announced that we had been
awarded a five-year contract with FEMA for up to $750 million to serve as the
Program Manager to develop, plan, manage, implement, and monitor the
Multi-Hazard Flood Map Modernization Program for flood hazard mitigation across
the United States and its territories. Approximately $566 million of this
contract value was included in our backlog as of December 31, 2005. In addition,
during 2004, we were selected for several indefinite delivery/indefinite
quantity task order contracts by the U.S. Army Corps of Engineers, U.S. Air
Force and the U.S. National Guard. During 2004, we were also selected for
several contracts with the Mineral Management Service, agencies within the U.S.
Department of Transportation, DHS (which includes FEMA, US-VISIT and the U.S.
Coast Guard), the Department of Energy, and the Federal Bureau of Investigation.
During 2005, we continued to be awarded new work from DOD and DHS, including a
five-year indefinite delivery/indefinite quantity contract with a potential
maximum value of $30 million by the U.S. Army Corp of Engineers, Transatlantic
Programs Center. In addition, we received a three-year, indefinite
delivery/indefinite quantity contract with a potential maximum value of $3
million from the Savannah District, U.S. Army Corp of Engineers.
In 2003, our Energy business refocused its offshore Managed Services offering to
include onshore U.S. oil and gas producers, as demonstrated by two new four-year
contracts totaling $144 million received during 2003 from Huber Energy. During
2005, we received an additional $1.0 million per year onshore Managed Services
contract in the Powder River Basin of Wyoming from Storm Cat Energy, to operate
and maintain its coal bed methane production facilities, which are adjacent to
the Huber properties. With regard to offshore Managed Services, during the third
quarter of 2004, we executed a long-term, multi-million dollar Managed Services
contract with Anglo-Suisse Offshore Partners, LLC ("ASOP") to operate, maintain
and optimize the performance of ASOP's offshore oil and gas producing properties
in the Gulf of Mexico. We have also increased our presence into the deepwater
Gulf of Mexico and international markets, where oil and gas producers are
currently investing significant amounts of capital for new projects.
Internationally, we received a multi-million dollar contract in 2005 to provide
operations assurance services for the Agbami Floating Production Storage and
Offloading Project in deepwater offshore Nigeria.
RESULTS OF OPERATIONS
The following table reflects a summary of our operating results (excluding
intercompany transactions) for ongoing operations for the years ended December
31, 2005, 2004 and 2003 (dollars in millions). We evaluate the performance of
our segments primarily based on income from operations before Corporate overhead
allocations. Corporate overhead is allocated between our Engineering and Energy
segments based on a three-part formula comprising revenues, assets and payroll.
-3-
TOTAL CONTRACT REVENUES/INCOME FROM OPERATIONS
- ---------------------------------------------------------------------------------------------------------------
Restated Restated
2005 2004 2003
- ---------------------------------------------------------------------------------------------------------------
ENGINEERING
Total contract revenues $ 371.1 $ 343.3 $ 250.6
Income from operations pre-Corporate overhead 40.2 33.2 17.9
Percentage of Engineering revenues 10.8% 9.7% 7.1%
Less: Corporate overhead (13.6) (11.3) (11.5)
Percentage of Engineering revenues 3.7% 3.3% 4.6%
- ---------------------------------------------------------------------------------------------------------------
Income from operations 26.6 21.9 6.4
Percentage of Engineering revenues 7.2% 6.4% 2.6%
- ---------------------------------------------------------------------------------------------------------------
ENERGY
Total contract revenues 208.2 208.7 176.2
Income/(loss) from operations pre-Corporate overhead (0.9) 2.7 4.7
Percentage of Energy revenues (0.4)% 1.3% 2.7%
Less: Corporate overhead (5.1) (4.7) (4.0)
Percentage of Energy revenues 2.4% 2.3% 2.3%
- ---------------------------------------------------------------------------------------------------------------
Income/(loss) from operations (6.0) (2.0) 0.7
Percentage of Energy revenues (2.9)% (1.0)% 0.4%
- ---------------------------------------------------------------------------------------------------------------
TOTAL REPORTABLE SEGMENTS
Total contract revenues 579.3 552.0 426.8
Income from operations pre-Corporate overhead 39.3 35.9 22.6
Percentage of total reportable segment revenues 6.8% 6.5% 5.3%
Less: Corporate overhead (18.7) (16.0) (15.5)
Percentage of total reportable segment revenues 3.2% 2.9% 3.6%
- ---------------------------------------------------------------------------------------------------------------
Income from operations 20.6 19.9 7.1
Percentage of total reportable segment revenues 3.6% 3.6% 1.7%
- ---------------------------------------------------------------------------------------------------------------
OTHER CORPORATE/INSURANCE EXPENSE (3.7) (1.0) (1.4)
- ---------------------------------------------------------------------------------------------------------------
TOTAL COMPANY - INCOME FROM OPERATIONS $ 16.9 $ 18.9 $ 5.7
Percentage of total Company revenues 2.9% 3.4% 1.3%
===============================================================================================================
Total Contract Revenues
Total contract revenues increased 5% for 2005. In our Engineering segment,
revenues increased 8%, reflecting the addition of the above mentioned FEMA map
modernization program management project, which commenced near the end of the
first quarter of 2004. In addition, as a result of achieving certain performance
levels from the second quarter of 2004 through the third quarter of 2005 on this
project, the Engineering segment recognized revenue associated with incentive
awards totaling $6.4 million during 2005. Total revenue from FEMA was $114
million in 2005 versus $80 million in 2004. Much of the FEMA revenue growth was
associated with the cost of building the information infrastructure required for
the project. Revenue from Engineering's private and public sector clients
increased 9% and 8%, respectively. In the our Energy segment, revenues decreased
slightly as a result of lower revenues on certain contracts in Energy's
computerized maintenance management and operations assurance services ("CMMS")
business, as partially offset by revenue increases associated with the addition
-4-
of the aforementioned ASOP Managed Services, Storm Cat Energy and Agbami
projects. The lower 2005 revenues associated with CMMS contracts were due to the
wind down of several projects during late 2004 and early 2005. Also negatively
impacting Energy revenues in 2005 was the loss of certain offshore projects in
the Gulf of Mexico, where properties were sold and we were not able to retain
the contracts with the new owners.
Total contract revenues increased 29% for 2004. In our Engineering segment,
revenues increased 37%, reflecting the addition of the above mentioned FEMA map
modernization program management project, which commenced near the end of the
first quarter of 2004. Engineering's revenues were lower during 2003 due to
delays in the commencement of certain public sector projects due to state budget
constraints in the first half of 2003 and a slow down in its private sector
contract activity during 2003. Revenues from our Engineering segment's private
sector clients increased by 4% in 2004, while revenues from public sector
clients increased by 41% as a result of the new FEMA project. Engineering's
revenues for transportation-related services increased by 6% in 2004 due to the
continued funding of transportation infrastructure projects under the TEA-21
legislation. In our Energy segment, revenues increased 19% for 2004 primarily as
the result of the two new onshore Managed Services contracts that commenced
during 2003, as well as the addition of several new overseas contracts and
additions to existing contracts that occurred during 2003 and 2004.
Gross Profit
Expressed as a percentage of total contract revenues, gross profit decreased to
14.4% in 2005 from 15.7% in 2004. Our Engineering segment's gross profit
percentage increased slightly to 19.5% in 2005 from 19.4% in 2004. With respect
to FEMA, the positive effect of the aforementioned incentive awards was more
than offset by a higher use of subcontractors (at lower margins) to build the
information infrastructure in 2005. Our Energy segment's gross profit percentage
decreased to 7.1% in 2005 from 9.9% in 2004. In 2005, Energy's gross profit
expressed as a percentage of revenues was adversely affected by the previously
mentioned loss of certain projects in the Gulf of Mexico and the resulting
change in our contract mix toward lower margin labor-based contracts, and the
delays and cancellations of contracts in our CMMS business and related headcount
reductions that occurred during the first and second quarters of 2005. We also
increased our reserve for medical insurance claims by $0.7 million during the
second quarter of 2005 and the majority of this expense was allocated to cost of
work performed, thereby reducing gross profit for both the Engineering and
Energy segments. Our gross profit for 2005 was further unfavorably impacted by
$1.25 million as a result of the subsequent event relating to a professional
liability insurance claim that is further discussed in Note 17 to the
accompanying consolidated financial statements. Additionally, higher costs
related to workers' compensation and general liability claims had a negative
impact on our Energy segment's gross profit for 2005.
Expressed as a percentage of total contract revenues, gross profit increased to
15.7% in 2004 from 14.3% in 2003. Overall, our 2004 gross profit expressed as a
percentage of revenues benefited from cost reduction measures implemented by
management relative to our medical insurance coverage and from lower workers'
compensation and general liability insurance costs associated with several
favorable claim developments. Our Engineering segment's gross profit percentage
increased to 19.4% in 2004 from 18.1% in 2003. This increase is primarily
attributable to the effect of the new FEMA project, as slightly offset by higher
medical insurance costs. Our Energy segment's gross profit percentage increased
slightly to 9.9% in 2004 from 9.7% in 2003. This slight improvement reflects an
increase in gross profit related to certain Managed Services contracts in 2004,
cost reduction measures we implemented relative to our medical and 401(k)
retirement benefit plans, and lower general liability insurance costs partially
offset by lower profitability associated with certain overseas contracts.
Direct labor expressed as a percentage of total contract revenues was 31%, 30%
and 37% in 2005, 2004 and 2003, respectively. Direct labor is a major component
of our cost of work performed due to the
-5-
nature of our service businesses. The recent decreases were attributable to
greater usage of subcontractors by both our Engineering and Energy segments as
compared to 2003.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses expressed as a percentage
of total contract revenues decreased to 11.5% in 2005 from 12.2% in 2004. In the
Engineering segment, SG&A expenses expressed as a percentage of revenues
decreased to 12.3% in 2005 from 13.1% in 2004. In the Energy segment, SG&A
expenses expressed as a percentage of revenues decreased to 10.0% in 2005 from
10.9% in 2004. These decreases in SG&A expenses expressed as a percentage of
revenues primarily reflect the combination of significantly lower incentive
compensation expense in both segments for 2005 in conjunction with the 5%
increase in revenues. In addition to significantly lower incentive compensation
expense being recorded in 2005 due to our 2005 financial performance, amounts
previously accrued at December 31, 2004 under our long-term incentive
compensation plan and totaling $0.3 million were reversed in the second quarter
of 2005 when such amounts were no longer considered to be payable under the
plan. Offsetting these decreases in SG&A expenses expressed as a percentage of
revenues was the effect of our settling the A&L litigation. As discussed in Note
17 to the accompanying financial statements, this settlement had the effect of
increasing our SG&A expenses (specifically Corporate overhead expense) by $0.9
million in the second quarter of 2005. Aside from the effect of this litigation
settlement, Corporate overhead expense increased by $1.8 million for 2005,
primarily due to higher salary and salary-related costs and professional fees.
Professional fees related to the restatement totaled $0.5 million in 2005.
SG&A expenses expressed as a percentage of total contract revenues decreased to
12.2% in 2004 from 13.0% in 2003. Despite a 22% increase in SG&A expenses for
2004, the decrease in SG&A expenses as a percentage of revenues resulted from
the aforementioned 29% increase in revenues. The increase in SG&A expenses was
primarily related to accruals for our 2004 short-term and long-term incentive
compensation programs at maximum levels. Allocated Corporate overhead costs
expressed as a percentage of revenues decreased in 2004 as a result of lower
spending associated with our new information systems, as partially offset by
professional fees totaling $1.0 million incurred during 2004 in connection with
our implementation of SOX. In our Engineering segment, SG&A expenses (including
Corporate overhead) expressed as a percentage of revenues decreased to 13.1% in
2004 from 15.5% in 2003. Engineering's SG&A expenses (excluding Corporate
overhead) expressed as a percentage of revenues decreased to 9.8% in 2004 from
10.9% in 2003. Engineering's Corporate overhead allocation amount was slightly
lower in 2004, while its revenues increased by 37%. In addition, our Engineering
segment's higher 2004 incentive compensation costs were more than offset by
revenue increases resulting in an SG&A percentage decrease, excluding Corporate
overhead. In our Energy segment, SG&A expenses (including Corporate overhead)
expressed as a percentage of revenues increased to 10.9% in 2004 from 9.4% in
2003. Our Energy segment's SG&A expenses (excluding Corporate overhead)
expressed as a percentage of revenues increased to 8.6% in 2004 from 7.1% in
2003. Energy's Corporate overhead allocation percentage was 2.3% in both 2004
and 2003; accordingly, higher 2004 incentive compensation expense accounted for
both of Energy's SG&A percentage increases.
Other Income and Expense
Interest income increased to $0.3 million in 2005 versus $0.1 million in 2004.
We were in a net invested position for the majority of 2005 versus a net
borrowed position for the majority of 2004. Interest expense increased to $1.5
million in 2005 from $1.4 million in 2004. As a result of our underpayment of
income, payroll, value added, and sales and use taxes in our Energy segment (see
further discussion in Note 2 to the accompanying consolidated financial
statements), we accrued $1.4 million in interest expense in 2005 versus $1.1
million in 2004. Other expense for 2005 totaled $0.6 million and included a
write-down totaling $0.6 million associated with an unconsolidated Energy
subsidiary as the result of Hurricanes Katrina and Rita. Other income for 2004
totaled $1.2 million and primarily included a gain of
-6-
$0.2 million on the sale of an investment and equity earnings totaling $0.6
million from two unconsolidated minority-owned ventures.
Interest income was an insignificant amount in 2004 and 2003 due to minimal
invested amounts and low interest rates on investments during both years.
Interest expense was $1.4 million in both 2004 and 2003. We were in a net
borrowed position under our credit agreement for the majority of 2003 and the
first quarter of 2004. This borrowed position during the majority of 2003 and
early 2004 resulted from changes in our billing process and system effective
January 1, 2003, which caused temporary delays in both client billings and cash
collections during 2003. (See additional discussion under the Liquidity and
Capital Resources section below.) During the second and third quarters of 2004,
we alternated back and forth between net borrowed and net invested positions.
During the majority of the fourth quarter of 2004, we were in a net invested
position. As a result of our restatement, we accrued $1.1 million in interest
expense in 2004 versus $0.6 million in 2003. These interest accruals relate to
the underpayment of income, payroll, value added and sales and use taxes in our
Energy segment (see further discussion in Note 2 to the accompanying
consolidated financial statements). Other income was $1.2 million for 2004 as
compared to other expense of $0.7 million for 2003. Other expense for 2003
primarily consisted of a $0.8 million impairment of an investment in Energy
Virtual Partners ("EVP"), an Energy services business, whose board voted to
discontinue operations and liquidate the business.
Income Taxes
Our provisions for income taxes resulted in effective tax rates of 67% in 2005,
55% in 2004, and 122% in 2003. The variance between the United States ("U.S.")
federal statutory rate and the effective rate for these periods is due primarily
to taxes on foreign income, which we are not able to offset with U.S. foreign
tax credits. Our effective rate is also negatively impacted by state income
taxes, permanent items that are not deductible for U.S. tax purposes and
Nigerian income taxes that are levied on a deemed income basis.
CONTRACT BACKLOG
(In millions) DECEMBER 31, 2005 December 31, 2004
- ---------------------------------------------------------------------------------
Engineering $ 1,109.2 $ 1,115.2
Energy 212.6 284.3
- ---------------------------------------------------------------------------------
Total
$ 1,321.8 $ 1,399.5
=================================================================================
Backlog consists of that portion of uncompleted work that is represented by
signed or executed contracts. Certain of our contracts with the Federal
government and other clients may be terminated at will, or option years may not
be exercised; therefore, no assurance can be given that all backlog will be
realized.
As of December 31, 2005 and 2004, $566 million and $678 million of our backlog
relates to a $750 million contract in the Engineering segment to assist FEMA in
conducting a large-scale overhaul of the nations flood hazard maps, which
commenced late in the first quarter of 2004. This contract includes data
collection and analysis, map production, product delivery, and effective program
management; and seeks to produce digital flood hazard data, provide access to
flood hazard data and maps via the Internet, and implement a nationwide
state-of-the-art infrastructure that enables all-hazard mapping. Due to the task
order structure of the contract, realization of the timing and amount of the
original contract value of $750 million remains difficult to predict. FEMA has
identified specific program objectives and priorities which it intends to
accomplish under this program. As the initial task orders are completed and
progress against objectives is measured, we will become better able to predict
realization of this contract award. We may at a time in the future reduce the
backlog accordingly.
-7-
In our Energy segment, we also consider purchase orders from clients for labor
services as backlog. These purchase orders typically have a twelve-month term.
Amounts recorded as revenues on a periodic basis are reduced from backlog. Most
purchase orders have cancellation clauses with thirty-day notice provisions.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $12.5 million in 2005 and $28.5
million in 2004 compared to net cash used in operating activities of $14.7
million in 2003. The decrease in cash provided by operating activities for 2005
resulted primarily from lower net income, higher days sales outstanding
associated with our net unbilled revenues, and lower accrued compensation
(related to the 2004 incentive compensation bonuses that were paid in 2005). The
cash provided by operating activities for 2004 was the direct result of
significantly higher net income, higher payables at year-end 2004 associated
with Engineering's new FEMA project, the accrued Engineering and Energy 2004
incentive compensation bonuses, and the accrued 2004 discretionary contribution
to our 401(k) retirement plan totaling $1.5 million. The cash used in operating
activities for 2003 was negatively affected by lower net income and year-end
2003 increases in receivables and net unbilled revenues of $9.2 million and
$10.3 million, respectively. These increases were related to our implementation
of our new billing system and related changes to our billing process effective
January 1, 2003. As a result of these billing system and process changes, we
experienced certain data conversion and training issues, which caused delays in
producing client invoices during the first quarter of 2003.
Net cash used in investing activities was $7.1 million, $4.1 million and $4.8
million in 2005, 2004 and 2003, respectively. The cash used in investing
activities for all three years relate entirely to capital expenditures. The
capital expenditures for 2005 include office and field equipment purchases
totaling $3.0 million, computer and software equipment totaling $3.1 million and
leasehold improvements totaling $0.9 million. The capital expenditures for 2004
included office and field equipment purchases totaling $1.5 million, upgrades to
our information systems totaling $1.0 million, and computer software and
equipment purchases totaling $0.9 million. For 2003, the capital expenditures
included leasehold improvements totaling $2.5 million for our largest
Engineering office and $1.4 million relating to the new information systems. Our
capital expenditures also included computer equipment and software purchases
totaling $0.7 million for 2003. We also acquire computer equipment and software,
as well as office space, furniture and fixtures, motor vehicles, and other
equipment through operating leases. The use of operating leases reduces the
level of capital expenditures that would otherwise be necessary to operate both
segments of our business.
Net cash used in financing activities was $1.8 million and $18.1 million for
2005 and 2004, respectively, versus net cash provided by financing activities of
$18.7 million for 2003. The cash usage for financing activities during 2005
resulted from stock repurchases totaling $1.8 million for 104,300 treasury
shares, as partially offset by proceeds from the exercise of stock options in an
amount of $0.6 million. During 2005, we also paid $0.6 million in capital lease
obligations. The cash usage for financing activities during 2004 resulted from
repayments of long-term debt totaling $13.5 million, the elimination of a book
overdraft balance from year-end 2003 and payments for capital lease obligations
of $0.3 million, as partially offset by proceeds from the exercise of stock
options totaling $1.7 million. The cash provided by financing activities for
2003 reflects the proceeds from long-term debt totaling $13.5 million (which was
used to fund the aforementioned working capital needs in conjunction with
changes in our billing process and system and the resultant billing and
collection delays), our book overdraft position with our bank at year-end 2003
and payments for capital lease obligation of $0.2 million. In addition, pursuant
to our stock repurchase program, we paid $0.7 million to acquire 80,400
additional treasury shares during the first quarter of 2003.
-8-
In 1996, our Board of Directors authorized the repurchase of up to 500,000
shares of our Common Stock in the open market. In 2003, the Board of Directors
authorized an additional repurchase of up to 500,000 shares for a total
authorization of 1,000,000 shares. During 2003, we repurchased 80,400 treasury
shares at an average market price of $8.58 per share (based on market prices
ranging from $7.90 to $8.81 per share) for a total cost of $690,000. We made no
treasury share repurchases during 2004. During the second and third quarters of
2005, we repurchased 104,300 treasury shares at an average market price of
$17.11 per share (based on market prices ranging from $16.35 to $18.56 per
share) for a total cost of $1,808,000. As of December 31, 2005, 520,319 treasury
shares had been repurchased under our Board's authorizations. Under our credit
agreement which became effective in September 2004 (see discussion below), our
treasury share repurchases cannot exceed $5 million during the four-year term of
the agreement.
The following table represents the number of shares available for repurchase
under our stock repurchase program:
2005 2004 2003
- -------------------------------------------------------------------------------------------------------------
Shares available for repurchase - beginning of the year 583,981 583,981 164,381
Additional share authorization - - 500,000
Share repurchases (104,300) - (80,400)
- -------------------------------------------------------------------------------------------------------------
Shares available for repurchase - end of the year 479,681 583,981 583,981
=============================================================================================================
Working capital increased to $49.3 million at December 31, 2005 from $43.6
million at December 31, 2004. Our current ratios were 1.35:1 and 1.32:1 at the
end of 2005 and 2004, respectively.
We have an unsecured credit agreement (the "Agreement") with a consortium of
financial institutions. The Agreement provides for a commitment of $60 million
through September 17, 2008. 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, 2005, only letters of credit
totaling $7.0 million were outstanding under the Agreement. The Agreement
requires us to meet minimum equity, leverage, interest and rent coverage, and
current ratio covenants. If any of these financial covenants or certain other
conditions of borrowing are not achieved, under certain circumstances, after a
cure period, the banks may demand the repayment of all borrowings outstanding
and/or require deposits to cover the outstanding letters of credit. We expect to
be in compliance with these financial covenants for at least the next year.
In connection with the restatement of our consolidated financial statements
through March 31, 2005, we did not timely file our quarterly reports on Form
10-Q for the second and third quarters of 2005 and the first quarter of 2006, or
our annual report on Form 10-K for the year ended December 31, 2005. As a
result, several covenant violations related to the timing of our financial
reporting occurred under the Agreement. The lenders have waived these violations
by allowing us to file our Forms 10-Q for the quarters ended June 30, 2005 and
September 30, 2005, our Form 10-K for the year ended December 31, 2005, and our
Form 10-Q for the quarter ended March 31, 2006, with the SEC by August 15, 2006.
We expect to complete all of these past due filings by August 15, 2006.
Furthermore, we did not meet the SEC's filing deadline related to our Form 10-Q
for the second quarter of 2006. Accordingly, our lenders have also waived our
resulting covenant violation related to the timing of this filing by allowing us
to file such Form 10-Q by September 30, 2006. We currently expect to be able to
file our Form 10-Q for the second quarter of 2006 by September 30, 2006.
Beginning with our Form 10-Q filing for the third quarter of 2006, we currently
expect to complete our quarterly and annual SEC filings within the SEC's filing
deadlines.
-9-
In 2003, as a result of the increased borrowings and our financial performance,
we were required to seek and obtain waivers of several of our financial ratio
covenants at the end of the second and third quarters. The most notable
covenants that required waivers were debt to cash flow and leverage ratios. In
connection with the third quarter waiver, we were able to amend our minimum
owners' equity and leverage ratio financial covenants effective with the fourth
quarter of 2003 computations, and the cost in excess of billings covenant was
eliminated.
In the second quarter of 2003, we also entered into an agreement with our banks
to provide a Revolving Credit Note (the "Note") in the amount of $5 million
through the middle of the third quarter of 2003. The Note provided us with
additional liquidity that was needed in conjunction with changes in our billing
process and system which caused temporary delays in both client billings and
cash collections during the first nine months of 2003. All borrowings were
repaid and the Note matured during the third quarter of 2003.
We plan to utilize our borrowing capacity under the Agreement for short-term
working capital needs, to support strategic opportunities that management
identifies, and to make our past due tax payments. Our strategy is to better
position ourselves for growth in our Engineering and Energy segments through
selected opportunistic acquisitions that compliment our experience, skill and
geographic presence. We consider acquisitions and investments as components of
our growth strategy and intend to use both existing cash and the Agreement to
fund such endeavors. If we commit to funding future acquisitions, we may need to
adjust our credit facilities to reflect a longer repayment period on borrowings
used for acquisitions.
After giving effect to the foregoing, we believe that the combination of cash
generated from operations and our existing credit facility will be sufficient to
meet our operating and capital expenditure requirements for at least the next
year.
CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS
A summary of our contractual obligations and off-balance sheet arrangements as
of December 31, 2005 are as follows:
(Amounts in thousands)
- --------------------------------------------------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS Payments due by period
----------------------------------------------------------
Total Within 1 year 2 - 3 years 4 - 5 years After 5 years
- --------------------------------------------------------------------------------------------------------------------
Operating lease obligations $ 65,738 $ 15,130 $ 24,904 $ 14,370 $ 11,334
Capital lease obligations 1,726 814 883 29 -
Purchase obligations 6,580 3,050 3,350 180 -
Other long-term liabilities 707 - - - 707
- --------------------------------------------------------------------------------------------------------------------
Total contractual obligations $ 74,751 $ 18,994 $ 29,137 $ 14,579 $ 12,041
====================================================================================================================
- --------------------------------------------------------------------------------------------------------------------
OFF-BALANCE SHEET ARRANGEMENTS Amount of commitment expiration per period
----------------------------------------------------------
Total Within 1 year 2 - 3 years 4 - 5 years Over 5 years
- --------------------------------------------------------------------------------------------------------------------
Standby letters of credit $ 6,957 $ - $ - $ - $ 6,957
Performance and payment bonds 30 30 - - -
- --------------------------------------------------------------------------------------------------------------------
Total commercial commitments $ 6,987 $ 30 $ - $ - $ 6,957
====================================================================================================================
We primarily utilize operating leases to acquire assets used in our daily
business activities. These assets include office space, computer and related
equipment, and motor vehicles. The lease payments for use of
-10-
these assets are recorded as expenses, but do not appear as liabilities on our
consolidated balance sheets. Our most significant individual operating lease
commitment relates to approximately 117,000 square feet of office space under
lease in Moon Township, PA for our corporate and Engineering segment
headquarters, through January 31, 2013. The related lease commitment for this
office space totaled $16.1 million at December 31, 2005.
Our purchase obligations relate to legally binding agreements to purchase goods
or services at agreed prices as of December 31, 2005. These obligations are
associated with such items as maintenance agreements related to our information
and telecommunication systems, services related to audits of our consolidated
and subsidiary financial statements, insurance premiums and consulting
agreements. Other long-term liabilities include those amounts on our December
31, 2005 balance sheet representing deferred compensation payable to our board
of directors.
Our banks issue standby letters of credit ("LOCs") on our behalf of under the
Agreement discussed above. As of December 31, 2005, most of our outstanding LOCs
were issued to an insurance company to serve as collateral for payments the
insurer is required to make under certain of our self-insurance programs. This
LOC may be drawn upon in the event that we do not reimburse the insurance
company for claims payments made on our behalf. Such LOC renews automatically on
an annual basis unless either the LOC is returned to the bank by the beneficiary
or our banks elect not to renew it.
CRITICAL ACCOUNTING POLICIES
We have identified the following critical accounting policies as those that are
most important to the portrayal of our results of operations and financial
condition, and which require management's most difficult, subjective or complex
judgments. Each of these policies are also addressed in Note 1 to the
consolidated financial statements.
Project Cost Estimates to Complete - We utilize the percentage-of-completion
method of accounting for the majority of our contracts in our Engineering
segment. Revenues for the current period on these contracts are determined by
multiplying the estimated margin at completion for each contract by the
project's percentage of completion to date, adding labor costs, subcontractor
costs and other direct costs ("ODCs") incurred to date, and subtracting revenues
recognized in prior periods. In applying the percentage-of-completion method, a
project's percent complete as of any balance sheet date is computed as the ratio
of labor costs incurred to date divided by the total estimated labor costs at
completion. Estimated labor costs at completion reflect labor costs incurred to
date plus an estimate of the labor costs to complete the project. As changes in
estimates of total labor costs at completion and/or estimated total losses on
projects are identified, appropriate earnings adjustments are recorded during
the period that the change or loss is identified. Due to the volume and varying
degrees of complexity of our active Engineering projects, as well as the many
factors that can affect estimated costs at completion, the computations of these
estimates require the use of complex and subjective judgments. Accordingly,
labor cost estimates to complete require regular review and revision to ensure
that project earnings are not misstated. The percentage-of-completion method is
also to account for certain construction-type contracts in our Energy segment.
We have a history of making reasonably dependable estimates of costs at
completion on our contracts that follow the percentage-of-completion method;
however, due to uncertainties inherent in the estimation process, it is possible
that estimated project costs at completion could vary from our estimates. As of
December 31, 2005, management does not believe that material changes to project
cost estimates at completion for any of our open projects are reasonably likely
to occur.
Revenue Recognition - As referenced above, we recognize revenue under the
percentage-of-completion method for the majority of our Engineering segment
contracts in accordance with AICPA Statement of Position ("SOP") 81-1,
"Accounting for Performance of Construction-Type and Certain Production-Type
Contracts." Under certain circumstances, we may agree to provide new or
additional engineering services
-11-
to a client without a fully executed contract or change order. In these
instances, although the costs of providing these services are expensed as
incurred, the recognition of related contract revenues are delayed until the
contracts and/or change orders have been fully executed by the clients, other
suitable written project approvals are received from the clients, or until
management determines that revenue recognition is appropriate based on the
probability of client acceptance. The probability of client acceptance is
assessed based on such factors as our historical relationship with the client,
the nature and scope of the services to be provided, and management's ability to
accurately estimate the realizable value of the services to be provided. Under
this policy, we had not recognized potential future revenues estimated at $1.4
million and $2.0 million as of December 31, 2005 and 2004, respectively, for
which the related costs had already been expensed as of these dates. The
consistent application of this policy may result in revenues being recognized in
a period subsequent to the period in which the related costs were incurred and
expensed.
Our Energy segment recognizes revenue for the majority of its contracts in
accordance with SEC Staff Accounting Bulletin No. ("SAB") 104, "Revenue
Recognition." SAB 104 requires that revenue should generally be recognized only
after (1) persuasive evidence of an arrangement exists, (2) the related services
have been rendered, (3) our selling price is fixed or determinable, and (4)
collectibility is reasonably assured.
Income Taxes - We account for income taxes in accordance with Statement of
Financial Accounting Standards No. ("SFAS") 109. We record our annual current
tax provision based upon our book income plus or minus any permanent and
temporary differences multiplied by the statutory rate in the appropriate
jurisdictions where we operate. In certain foreign jurisdictions where we
operate, income tax is based on a deemed profit methodology which is a function
of revenue. In these foreign jurisdictions, we calculate our annual current tax
provision based on our recorded revenue multiplied by the foreign jurisdictions
statutory rates. The calculation of our annual tax provision may require
interpreting tax laws and regulations and could result in the use of judgments
or estimates which could cause our recorded tax liability to differ from the
actual amount due.
We recognize current tax assets and liabilities for estimated taxes refundable
or payable on tax returns for the current year. We also recognize deferred tax
assets or liabilities for the estimated future tax effects attributable to
temporary differences and carryforwards. Our current and deferred tax assets and
liabilities are measured based on provisions in enacted tax laws in each
jurisdiction where we operate. We do not consider the effects of future changes
in tax laws or rates in the current period. We analyze our deferred tax assets
and place a valuation allowance on those assets, if we do not expect the
realization of these assets to be more likely than not.
Contingencies - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires us 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 also affect the
amounts of revenues and expenses reported for each period. Specifically,
management estimates are inherent in the assessment of our exposure to insurance
claims that fall below policy deductibles and to litigation and other legal
claims and contingencies, as well as in determining our liabilities for incurred
but not reported ("IBNR") insurance claims. Significant judgments by us, and
reliance on third-party experts are utilized in determining probable and/or
reasonably estimable amounts to be recorded or disclosed in our financial
statements. The results of any changes in accounting estimates are reflected in
the financial statements of the period in which the changes are determined. We
do not believe that material changes to these estimates are reasonably likely to
occur.
-12-
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
123R, which replaces SFAS 123 and supersedes Accounting Principles Board Opinion
No. ("APB") 25, "Accounting for Stock Issued to Employees." SFAS 123R also
amends SFAS 95, "Statement of Cash Flows," to require reporting of excess tax
benefits from the exercises of stock-based compensation awards as a financing
cash inflow rather than as an operating cash inflow. The Securities and Exchange
Commission ("SEC") subsequently amended the effective date of SFAS 123R to be
effective for the first interim period after December 31, 2005 for calendar year
companies. SFAS 123R requires that the expense resulting from all share-based
payment transactions be recognized in the financial statements. This statement
applies to all awards granted after the required effective date, and shall not
apply to awards granted in periods before the required effective date, except if
prior awards are modified, repurchased or cancelled after the effective date. In
March 2005, the SEC released Staff Accounting Bulletin ("SAB") 107 to assist
registrants in implementing SFAS 123R while enhancing the information that
investors receive. The FASB has also issued interpretative guidance. We will
adopt the provisions of SFAS 123R on January 1, 2006 and expect to use the
modified prospective application method in our adoption of SFAS 123R. SFAS 123R
will not have a material impact on our financial statements since we have been
recording our stock-based compensation expense under the fair value method in
accordance with SFAS 123 since January 1, 2003.
In December 2004, the FASB issued SFAS 153 "Exchanges of Nonmonetary Assets - an
Amendment of APB No. 29." APB 29 is based on the principle that exchanges of
nonmonetary assets should be measured based on the fair value of assets
exchanged. The guidance in APB 29, however, included certain exceptions to that
principle. SFAS 153 amends APB 29 to eliminate the exception for nonmonetary
exchanges of similar productive assets and replaces it with a general exception
for exchanges of nonmonetary assets that do not have commercial substance. The
provisions of this statement are effective for nonmonetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005. We do not expect the
provisions of this statement will have any impact on our financial statements.
In December 2004, the FASB issued Staff Position No. ("FSP") 109-1, "Accounting
for Income Taxes, to the Tax Deduction on Qualified Production Activities
Provided by the American Jobs Creation Act of 2004," and 109-2, "Accounting and
Disclosure Guidance for the Foreign Earnings Repatriation Provision within the
American Jobs Creation Act of 2004." FSP 109-1 provides guidance on the
application of SFAS 109, "Accounting for Income Taxes," to the provision within
the American Jobs Creation Act of 2004 ("the Act") that provides a tax deduction
on qualified production activities. FSP 109-2 provides for a special one-time
tax benefit on the repatriation of certain foreign earnings to a U.S. taxpayer,
provided certain criteria are met. Both FSP 109-1 and 109-2 were effective upon
issuance. Neither of these provisions had any impact on our 2005 financial
statements.
In March 2005, the FASB issued FIN 47, "Accounting for Conditional Asset
Retirement Obligations." FIN 47 clarifies that the term "conditional asset
retirement obligation" as used in SFAS 143, "Accounting for Asset Retirement
Obligations," refers to a legal obligation to perform an asset retirement
activity in which the timing and/or method of settlement are conditional on a
future event that may or may not be within the control of the entity.
Accordingly, FIN 47 clarifies that an entity is required to recognize a
liability for the fair value of a conditional asset retirement obligation when
incurred if the fair value of the liability can be reasonably estimated. This
interpretation was effective for fiscal years ending after December 15, 2005. We
adopted FIN 47 in the fourth quarter of 2005, and such adoption had no impact on
our financial statements.
In May 2005, the FASB issued SFAS 154, "Accounting Changes and Error
Corrections, a replacement of APB No. 20 and FASB Statement No. 3." SFAS 154
requires, among other things, retrospective
-13-
application, unless impracticable, to prior period financial statements for
voluntary changes in accounting principles and changes required by an accounting
pronouncement in the unusual circumstances in which the pronouncement does not
include specific transition provisions. SFAS 154 also requires that a change in
depreciation, amortization, or depletion method for long-lived, nonfinancial
assets should be accounted for as a change in accounting estimate effected by a
change in accounting principle. The guidance for reporting the correction of an
error in previously issued financial statements and the change of an accounting
estimate will not change from APB 20. SFAS 154 is effective for us beginning
January 1, 2006. We do not expect the adoption of this standard will have a
material impact on our consolidated financial statements.
In July 2006, the FASB issued FIN 48, "Accounting for Uncertainty in Income
Taxes." FIN 48 provides guidance on the measurement, recognition, classification
and disclosure of, as well as the interim period accounting for, uncertain tax
positions. We will be required to adopt the provisions of FIN 48 effective
January 1, 2007. We are currently evaluating the impact that FIN 48 will have on
our financial statements.
-14-
MICHAEL BAKER CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------------
2004 2003
(As Restated - (As Restated -
(In thousands, except per share amounts) 2005 See Note 2) See Note 2)
- ----------------------------------------------------------------------------------------------------------------------
Total contract revenues $ 579,278 $ 552,046 $ 426,761
Cost of work performed 495,883 465,601 365,703
- ----------------------------------------------------------------------------------------------------------------------
Gross profit 83,395 86,445 61,058
Selling, general and administrative expenses 66,513 67,577 55,338
- ----------------------------------------------------------------------------------------------------------------------
Income from operations 16,882 18,868 5,720
Other income/(expense):
Interest income 341 84 23
Interest expense (1,520) (1,414) (1,400)
Other, net (586) 1,181 (640)
- ----------------------------------------------------------------------------------------------------------------------
Income before income taxes 15,117 18,719 3,703
Provision for income taxes 10,066 10,325 4,503
- ----------------------------------------------------------------------------------------------------------------------
NET INCOME/(LOSS) 5,051 8,394 (800)
- ----------------------------------------------------------------------------------------------------------------------
Other comprehensive income/(loss):
Foreign currency translation adjustments, net of $0 tax 425 (217) (343)
Unrealized gain on investment:
Unrealized holding gain, net of $30 tax in 2003 - - 37
Less: Reclassification adjustment for gain on sale
included in net income, net of $89 tax benefit in 2004 - (109) -
- ----------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME/(LOSS) $ 5,476 $ 8,068 $ (1,106)
======================================================================================================================
BASIC EARNINGS/(LOSS) PER SHARE $ 0.59 $ 1.00 $ (0.10)
DILUTED EARNINGS/LOSS) PER SHARE $ 0.58 $ 0.98 $ (0.10)
======================================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
-15-
MICHAEL BAKER CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
AS OF DECEMBER 31,
--------------------------------------
2004
(As Restated -
(In thousands) 2005 See Note 2)
- -----------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents $ 19,041 $ 15,471
Receivables, net 79,177 79,559
Unbilled revenues on contracts in progress 84,654 73,852
Prepaid expenses and other
8,373 11,893
- -----------------------------------------------------------------------------------------------------------------------
Total current assets 191,245 180,775
- -----------------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, NET 21,805 19,013
OTHER ASSETS
Goodwill and other intangible assets, net 8,661 8,947
Other assets 3,750 5,640
Long-term deferred tax asset - 638
- -----------------------------------------------------------------------------------------------------------------------
Total other assets 12,411 15,225
- -----------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 225,461 $ 215,013
=======================================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
-16-
MICHAEL BAKER CORPORATION
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' INVESTMENT
AS OF DECEMBER 31,
---------------------------------------
2004
(As Restated -
(In thousands, except share amounts) 2005 See Note 2)
- -------------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable $ 45,570 $ 48,723
Accrued employee compensation 25,475 31,596
Accrued insurance 11,544 9,758
Billings in excess of revenues on contracts in progress 13,060 9,705
Current deferred tax liability 13,197 11,957
Income taxes payable 9,827 4,464
Other accrued expenses and current liabilities 23,308 20,948
- -------------------------------------------------------------------------------------------------------------------------
Total current liabilities 141,981 137,151
- -------------------------------------------------------------------------------------------------------------------------
OTHER LIABILITIES
Commitments and contingencies (Note 13) - -
Other long-term liabilities 2,900 3,081
Long-term deferred tax liabilities 756 -
- -------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 145,637 140,232
- -------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' INVESTMENT
Common Stock, par value $1, authorized 44,000,000 shares, issued
8,985,168 and 8,910,371 shares in 2005 and 2004, respectively 8,985 8,910
Additional paid-in capital 42,138 40,730
Retained earnings 34,339 29,288
Unearned compensation (173) (65)
Accumulated other comprehensive loss -
Cumulative foreign currency translation adjustments (704) (1,129)
Less - 495,537 and 391,237 shares of Common Stock in treasury, at cost,
in 2005 and 2004, respectively (4,761) (2,953)
- -------------------------------------------------------------------------------------------------------------------------
Total shareholders' investment 79,824 74,781
- -------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT $ 225,461 $ 215,013
=========================================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
-17-
MICHAEL BAKER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------
2004 2003
(As Restated - (As Restated -
(In thousands) 2005 See Note 2) See Note 2)
- ------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income/(loss) $ 5,051 $ 8,394 $ (800)
Adjustments to reconcile net income/(loss) to net cash
provided by/(used in) operating activities:
Depreciation and amortization 5,093 4,919 5,081
Stock-based compensation expense 128 674 78
Tax benefit of stock compensation 140 493 33
Deferred income tax expense 2,743 7,922 2,279
Impairment of Energy Virtual Partners - - 770
Changes in assets and liabilities:
Increase in receivables and contracts in progress (7,075) (32,988) (19,462)
Increase in accounts payable and accrued expenses 66 42,094 916
(Increase)/decrease in other net assets 6,315 (3,014) (3,553)
- ------------------------------------------------------------------------------------------------------------------------
Total adjustments 7,410 20,100 (13,858)
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by/(used in) operating activities 12,461 28,494 (14,658)
- ------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (7,078) (4,055) (4,787)
- ------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (7,078) (4,055) (4,787)
- ------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
(Repayments of)/proceeds from long-term debt - (13,481) 13,481
Payments for capital lease obligations (581) (325) (176)
(Decrease)/increase in book overdrafts - (6,022) 6,022
Proceeds from exercise of stock options 576 1,734 49
Payments to acquire treasury stock (1,808) - (690)
- ------------------------------------------------------------------------------------------------------------------------
Net cash (used in)/provided by financing activities (1,813) (18,094) 18,686
- ------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in cash and cash equivalents 3,570 6,345 (759)
Cash and cash equivalents, beginning of year 15,471 9,126 9,885
Cash and cash equivalents, end of year $ 19,041 $ 15,471 $ 9,126
========================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW DATA
Cash paid during the year for:
Interest paid $ 163 $ 283 $ 789
Income taxes paid $ 864 $ 2,557 $ 4,826
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Vehicles & equipment acquired through capital lease obligations $ 675 $ 1,063 $ 544
Equipment acquired on credit $ 41 $ 516 $ -
========================================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
-18-
MICHAEL BAKER CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT
COMMON
STOCK, ACCUMULATED
PAR VALUE TREASURY ADDITIONAL OTHER
(In thousands) $1 SHARES AMOUNT PAID-IN RETAINED UNEARNED COMPREHENSIVE
CAPITAL EARNINGS COMPENSATION INCOME/(LOSS)
BALANCE, JANUARY 1, 2003* $ 8,694 (311) $ (2,263) $ 38,349 $ 21,694 $ - $ (497)
- ------------------------------------------------------------------------------------------------------------------------------------
Net loss* - - - - (800) - -
Stock options exercised* 10 - - 72 - - -
Restricted stock issued 7 - - 52 - (60) -
Amortization of restricted
stock - - - - - 20 -
Options granted - - - 61 - - -
Treasury stock purchases - (80) (690) - - - -
Other comprehensive
income/(loss), net of tax*:
Foreign currency translation
adjustments - - - - - - (343)
Unrealized holding gain on
investment - - - - - - 37
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2003 8,711 (391) (2,953) 38,534 20,894 (40) (803)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income* - - - - 8,394 - -
Stock options exercised* 192 - - 2,035 - - -
Restricted stock issued 7 - - 81 - (88) -
Amortization of restricted
stock - - - - - 63
Options granted - - - 80 - - -
Other comprehensive loss, net
of tax*:
Foreign currency translation
adjustments - - - - - - (217)
Reclassification adjustment
for gain on sale of
investment - - - - - - (109)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2004 8,910 (391) (2,953) 40,730 29,288 (65) (1,129)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income - - - - 5,051 - -
Stock options exercised 43 - - 673 - - -
Restricted stock issued 32 - - 601 - (242) -
Amortization of restricted
stock - - - - - 134 -
Options granted - - - 134 - - -
Treasury stock purchases - (104) (1,808) - - - -
Other comprehensive income,
net of tax:
Foreign currency translation
adjustments - - - - - - 425
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2005 $ 8,985 (495) $ (4,761) $ 42,138 $ 34,339 $ (173) $ (704)
- ------------------------------------------------------------------------------------------------------------------------------------
* As Restated - See Note 2.
The accompanying notes are an integral part of the consolidated financial
statements.
-19-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Michael Baker
Corporation ("we, us, our"), our subsidiaries, subsidiaries over which we
exercise control, and entities for which we are determined to be the primary
beneficiary under Financial Accounting Standards Board Interpretation No.
("FIN") 46R, "Consolidation of Variable Interest Entities." We do not have any
variable interest entities requiring consolidation. Minority interest amounts
relating to our less-than-wholly-owned consolidated subsidiaries are included
within the other, net caption in our Consolidated Statements of Income and
within the other long-term liabilities caption in our Consolidated Balance
Sheets. Investments in non-consolidated affiliates (20 to 50% owned companies)
over which we exercise significant influence are accounted for under the equity
method, and entities which we own less than 20% are accounted for under the cost
method, in our Consolidated Balance Sheets and Statements of Income. All
intercompany balances and transactions have been eliminated in consolidation.
Accounting for Contracts
We earn our revenues from the provision of Engineering and Energy related
services. In providing these services, we typically incur direct labor costs,
subcontractor costs, and certain other direct costs ("ODCs") which include
"out-of-pocket" expenses. Under certain cost-type contracts with governmental
agencies in our Engineering segment, we are not contractually permitted to earn
a margin on subcontractor costs and ODCs. The majority of all other Engineering
contracts are structured such that margin is earned on direct labor costs, and
not on subcontractor costs and ODCs. In accordance with Emerging Issues Task
Force Issue No. ("EITF") 99-19, "Reporting Revenue Gross as a Principal versus
Net as an Agent," and EITF 01-14, "Income Statement Characterization of
Reimbursements Received for `Out-of-Pocket' Expenses Incurred," we have assessed
the indicators provided in EITF 99-19 and determined that we will include our
direct labor costs, subcontractor costs and ODCs in computing and reporting our
total contract revenues as long as we remain responsible to the client for the
fulfillment of the contract and for the overall acceptability of all services
provided.
Revenue is recognized for the majority of contracts in our Engineering segment
under the percentage-of-completion method of accounting in accordance with AICPA
Statement of Position ("SOP") 81-1, "Accounting for Performance of
Construction-Type and Certain Performance-Type Contracts." Revenues for the
current period on fixed-price and cost-type contracts are determined by
multiplying the estimated margin at completion for each contract by the
project's percentage of completion to date, adding labor costs, subcontractor
costs and ODCs incurred to date, and subtracting revenues recognized in prior
periods. In applying the percentage-of-completion method to these contracts, we
measure the extent of progress toward completion as the ratio of labor costs
incurred to date over total estimated labor costs at completion. As work is
performed under contracts, estimates of the costs to complete are regularly
reviewed and updated. As changes in estimates of total costs at completion on
projects are identified, appropriate earnings adjustments are recorded during
the period that the change is identified. Provisions for estimated losses on
uncompleted contracts are recorded during the period in which such losses become
evident. Revenues related to contractual claims, which arise from
customer-caused delays or change orders unapproved as to both scope and price,
are recorded only when the amounts have been agreed with the client. Profit
incentives and/or award fees are recorded as revenues when the amounts are both
probable and reasonably estimable. For contracts that do not qualify for
percentage-of-completion accounting, revenue is recognized in accordance with
Staff Accounting Bulletin No. ("SAB") 104, "Revenue Recognition." Under SAB 104,
revenue is generally recognized only after (1) persuasive
-20-
evidence of an arrangement exists, (2) the related services have been rendered,
(3) our selling price is fixed or determinable, and (4) collectibility is
reasonably assured.
Under certain circumstances, we may agree to provide new or additional
engineering services to a client without a fully executed contract or change
order. In these instances, although the costs of providing these services are
expensed as incurred, the recognition of related contract revenues is delayed
until the contracts and/or change orders have been fully executed by the
clients, other suitable written project approvals are received from the clients,
or until management determines that revenue recognition is appropriate based on
the probability of client acceptance. The probability of client acceptance is
assessed based on such factors as our historical relationship with the client,
the nature and scope of the services to be provided, and management's ability to
accurately estimate the realizable value of the services to be provided.
Total contract revenues for the operations and maintenance contracts in our
Energy segment are primarily recognized as related services are provided in
accordance with SAB 104. Performance bonuses are earned under certain operations
and maintenance contracts in the Energy segment. These bonuses are recorded as
revenues when all criteria of SAB 104 have been met.
Fair Value of Financial Instruments
The fair value of financial instruments classified as cash and cash equivalents,
receivables, accounts payable, capital lease obligations and other long-term
liabilities approximates carrying value due to the short-term nature of the
instruments.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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 consolidated financial statements, and also affect the amounts of
revenues and expenses reported for each period. Actual results could differ from
those which result from using the estimates. The use of estimates is an integral
part of determining cost estimates to complete under the
percentage-of-completion method of accounting for contracts. Management also
utilizes estimates in recording profit incentives and/or award fee revenues
under its contracts, in the assessment of our exposure to insurance claims that
fall below policy deductibles, in determining our liabilities for incurred but
not reported ("IBNR") insurance claims, incentive compensation and income tax
expense, and to assess its litigation and other legal claims and contingencies.
The results of any changes in accounting estimates are reflected in the
consolidated financial statements of the period in which the changes become
evident.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand or deposit, and money market
mutual funds with remaining maturities of less than 90 days at the time of
purchase.
Foreign Currency Translation
Some of our foreign subsidiaries utilize the local currencies as the functional
currency. Accordingly, assets and liabilities of these subsidiaries are
translated to U.S. Dollars at exchange rates in effect at the balance sheet date
whereas income and expense accounts are translated at average exchange rates
during the year. The resulting translation adjustments are recorded as a
separate component of shareholders' investment. We also have a foreign
subsidiary for which the functional currency is the U.S. Dollar. The resulting
translation gains or losses for this subsidiary are included in our Consolidated
Statements of Income.
-21-
Leases
We lease office space with lease terms ranging from 1 to 10 years. These lease
agreements typically contain tenant improvement allowances and rent holidays. In
instances where one or more of these items are included in a lease agreement, we
record these allowances as a leasehold improvement asset (which is included in
property and equipment, net) and a related deferred rent liability in our
Consolidated Balance Sheets. These asset amounts are amortized on a
straight-line basis over the shorter of the term of the lease or useful life of
the asset as additional amortization expense and a reduction to rent expense,
respectively. The deferred rent liability balances are recognized over the term
of the lease. Lease agreements sometimes contain rent escalation clauses, which
are recognized on a straight-line basis over the life of the lease in accordance
with Statement of Financial Accounting Standards No. ("SFAS") No. 13,
"Accounting for Leases," as amended. Lease terms generally range from 1 to 10
years with one or more renewal options. For leases with renewal options, we
record rent expense and amortize the leasehold improvements on a straight-line
basis over the original lease term, exclusive of the renewal period. When a
renewal occurs, we record rent expense over the new term. We expense any rent
costs incurred during the period of time we perform construction activities on
newly leased property.
We lease computer hardware and software, office equipment and vehicles with
lease terms ranging from 1 to 5 years. Leasing is used for certain capital
additions when considered cost effective relative to other sources of capital.
Before entering into a lease, an analysis is performed to determine whether a
lease should be classified as a capital or an operating lease according to SFAS
13.
Long-Lived Assets
In accordance with SFAS 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," we evaluate the recoverability of our long-lived assets
(including our investments in unconsolidated subsidiaries and equity investees)
when events or changes in circumstances suggest that the carrying value of
assets may not be recoverable. If the carrying value of a long-lived asset is
determined to exceed its fair value, an impairment charge is recorded in the
period in which the impairment becomes evident.
Capitalization of Software Costs
We capitalize certain costs incurred in connection with developing or obtaining
internal use software in accordance with SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." During the software
application development stage, capitalized costs include the cost of the
software, external consulting costs and internal payroll costs for employees who
are directly associated with a software project. Similar costs related to
software upgrades and enhancements are capitalized if they result in added
functionality which enables the software to perform tasks it was previously
incapable of performing. These capitalized software costs are included in
"Property, Plant and Equipment, net" in our Consolidated Balance Sheets.
Software data conversion, training and maintenance costs are expensed in the
period in which they are incurred.
Depreciation and Amortization
Depreciation on property, plant and equipment is principally recorded using the
straight-line method over the estimated useful lives of the assets. The
estimated useful lives range from 2 to 40 years on buildings and improvements, 3
to 10 years on equipment and vehicles, 30 years for marine vessels, and 3 to 7
years on computer hardware and software. Assets held under capital leases and
leasehold improvements are amortized on a straight-line basis over the shorter
of the lease term or the estimated useful life of the asset. Upon disposal of
property, 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. Amortization of finite-lived intangible assets is
provided on a straight-line basis over the estimated useful lives of the assets.
Our only amortizing intangible asset is a non-compete agreement which is being
amortized over 7 years.
-22-
Goodwill
Goodwill, which represents the excess of acquisition cost over the fair value of
net assets of acquired companies, has not been amortized since we adopted SFAS
142, "Goodwill and Other Intangible Assets," on January 1, 2002. Our goodwill
balance of each reporting unit, as defined by SFAS 142, is evaluated for
potential impairment during the second quarter of each year or when events occur
or circumstances change that could cause the balance to be impaired. Reporting
units for purposes of this test are identical to our operating segments, which
are further discussed in Note 5. The evaluation of impairment involves comparing
the current fair value of the business to the recorded value, including
goodwill. We utilize estimates of future net cash flows and earnings before
interest, taxes, depreciation and amortization ("EBITDA") multiples to determine
the fair value of the business.
Comprehensive Income
Comprehensive income consisted of net income, foreign currency translation
adjustments, and unrealized gain/(loss) on equity investments, net of tax, for
the years ended December 31, 2004 and 2003. These components are included in the
accompanying Consolidated Statements of Income and Shareholders' Investment.
From 2000 through the first quarter of 2004, we held a common stock investment
in an insurance company. During this period, unrealized gains and losses on this
investment were included in shareholders' investment as a component of
accumulated other comprehensive loss. When this investment was sold in the first
quarter of 2004, the related accumulated unrealized gain as of December 31, 2003
was reclassified from accumulated other comprehensive loss to other income.
Subsequent to the sale of our common stock investment in the first quarter of
2004, the only component of our accumulated other comprehensive income/(loss)
balance was foreign currency translation adjustments as of December 31, 2005 and
2004.
Income taxes
We account for income taxes in accordance with SFAS 109, "Accounting for Income
Taxes." We record our annual current tax provision based upon our book income,
plus or minus any permanent and temporary differences, multiplied by the
statutory rate in the majority of the jurisdictions where we operate. In certain
foreign jurisdictions where we operate, income tax is based on a deemed profit
methodology which is a function of revenue. In these foreign jurisdictions, we
calculate our annual current tax provision based on our recorded revenue
multiplied by the foreign jurisdictions statutory rates. The calculation of our
annual tax provision may require interpreting tax laws and regulations and could
result in the use of judgments or estimates which could cause our recorded tax
liability to differ from the actual amount due.
We recognize current tax assets and liabilities for estimated taxes refundable
or payable on tax returns for the current year. We also recognize deferred tax
assets or liabilities for the estimated future tax effects attributable to
temporary differences and carryforwards. Our current and deferred tax assets and
liabilities are measured based on provisions in enacted tax laws in each
jurisdiction where we operate. We do not consider the effects of future changes
in tax laws or rates in the current period. We analyze our deferred tax assets
and place valuation allowances on those assets, if we do not expect the
realization of these assets to be more likely than not.
Penalties resulting from underpaid income taxes are included in selling, general
and administrative expenses in our Consolidated Statements of Income. Interest
expense associated with underpaid income taxes is included in the interest
expense caption in our Consolidated Statements of Income.
-23-
Accounting for Stock Options
As permitted under SFAS 148, "Accounting for Stock-Based Compensation --
Transition and Disclosure" and discussed further in Note 15, we adopted the
prospective method of applying SFAS 148. Under the prospective method, we began
expensing the fair value of all stock options granted, modified or settled
effective January 1, 2003. Prior to January 1, 2003, we utilized the intrinsic
value method of accounting for stock-based compensation, as originally
promulgated by Accounting Principles Board Opinion No. ("APB") 25, "Accounting
for Stock Issued to Employees," and as permitted under SFAS 123, "Accounting for
Stock-Based Compensation."
During 2005, 2004 and 2003, we granted a total of 16,000, 14,000 and 14,000
options to our non-employee Board members and recognized related compensation
expense in the amounts of $133,000, $80,000 and $61,000, respectively. The
exercise prices associated with these option grants were equal to the average
market prices on the dates of the grants. We do not currently pay dividends.
If compensation expense for our 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, our pro forma net income/(loss) and
earnings/(loss) per share amounts would have been as follows:
Restated Restated
(In thousands) 2005 2004 2003
- --------------------------------------------------------------------------------------------------------------------------------
Net income/(loss), as reported $ 5,051 $ 8,394 $ (800)
Add: Stock-based employee compensation
expense included in reported net income/(loss), net of
related tax effects 72 378 33
Deduct: Total stock-based employee
compensation expense determined under
fair value method for all awards, net of
related tax effects (89) (481) (259)
- --------------------------------------------------------------------------------------------------------------------------------
PRO FORMA NET INCOME/(LOSS) $ 5,034 $ 8,291 $ (1,026)
- --------------------------------------------------------------------------------------------------------------------------------
Restated Restated
2005 2004 2003
- --------------------------------------------------------------------------------------------------------------------------------
Reported earnings/(loss) per share:
Basic $ 0.59 $ 1.00 $ (0.10)
Diluted 0.58 0.98 (0.10)
Pro forma earnings/loss) per share:
Basic $ 0.59 $ 0.99 $ (0.12)
Diluted 0.58 0.97 (0.12)
- --------------------------------------------------------------------------------------------------------------------------------
Earnings/(Loss) Per Common Share
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations for the years ended December
31, 2005, 2004 and 2003. The additional shares included in diluted shares
outstanding are entirely attributable to stock options.
-24-
(In thousands except per share data) 2005 2004 2003
- --------------------------------------------------------------------------------
Net income/(loss) $ 5,051 $ 8,394 $ (800)
Basic weighted average shares outstanding 8,507 8,402 8,324
Basic earnings/(loss) per share $ 0.59 $ 1.00 $ (0.10)
Effect of dilutive securities:
Stock options 208 152 -
Diluted weighted average shares outstanding 8,715 8,554 8,324
Diluted earnings/(loss) per share $ 0.58 $ 0.98 $ (0.10)
- --------------------------------------------------------------------------------
As of December 31, 2005, 2004 and 2003, we had zero, 174,624 and 296,435 stock
options outstanding, respectively, which were not included in the computations
of diluted shares outstanding for the respective twelve-month periods because
the option exercise prices were greater than the average market prices of the
common shares. Such options could potentially dilute basic earnings per share in
future periods. If we would have earned a profit during 2003, 78,471 common
equivalent shares would have been added to basic weighted average shares
outstanding to compute diluted weighted average shares outstanding. This
revision had no effect on the previously reported 2003 diluted earnings per
share amounts.
Reclassifications
Certain reclassifications have been made to prior years' consolidated statements
of cash flows and consolidated statements of shareholders' investment in order
to conform to the current year presentation.
2. RESTATEMENT OF PRIOR YEARS' CONSOLIDATED FINANCIAL STATEMENTS
Subsequent to the issuance of our condensed consolidated financial statements
for the quarter ended March 31, 2005, we determined that accounting errors, as
described below, were included in our previously issued consolidated financial
statements. As a result, we have restated the accompanying 2004 and 2003
consolidated financial statements to correct the accounting errors described
below. The following table presents the impact of the restatement on the 2004
and 2003 net income/(loss) and diluted earnings/(loss) per share (amounts in
thousands, except earnings per share):
-25-
For the years ended December 31,
--------------------------------
2004 2003
Diluted Diluted
Amount EPS Amount EPS
- -----------------------------------------------------------------------------
Net income, as originally reported $12,292 $1.44 $2,066 $0.25
- -----------------------------------------------------------------------------
Restatement items, pre-tax:
Penalties and interest on taxes (1) (1,710) (899)
Domestic sales and use taxes (2) (1,714) (13)
International payroll taxes (3) (1,537) (824)
International value added taxes (4) (635) (241)
Minority interest adjustments (5) (156) 5
Sale of marketable securities (6) (145) -
Professional liability IBNR (7) (40) (20)
Unrecorded capital leases (8) (10) (3)
Revenue for reimbursable taxes (9) 1,295 778
Incentive compensation adjustment (10) 514 -
Project claim settlement (11) 499 -
Reclassification of non-income taxes (12) (438) -
- -----------------------------------------------------------------------------
Subtotal - pre-tax adjustments (4,077) (1,217)
- -----------------------------------------------------------------------------
Income tax adjustments:
International income taxes (13) (1,274) (1,053)
Income tax effects on the above (14) 1,453 (596)
- -----------------------------------------------------------------------------
NET INCOME/(LOSS), AS RESTATED $ 8,394 $0.98 $ (800) $(0.10)
- -----------------------------------------------------------------------------
Our accompanying 2004 and 2003 consolidated financial statements are being
restated to correct the following errors:
(1) The underaccrual of estimated penalties and interest related to the
underpayment of international income, payroll and value added taxes and
domestic sales and use taxes by certain wholly-owned Energy segment
subsidiaries, as noted in items (2)-(4) and (13) below. These adjustments
had the effects of reducing beginning retained earnings for fiscal year
2003 and reducing pre-tax income in both 2003 and 2004.
(2) The underaccrual of domestic sales and use taxes by one of our
wholly-owned Energy segment subsidiaries. This adjustment had the effects
of reducing pre-tax income in both 2003 and 2004.
(3) The underaccrual of international payroll taxes by a wholly-owned Energy
subsidiary related to employees working on international projects. These
adjustments had the effects of reducing beginning retained earnings for
fiscal year 2003 and reducing pre-tax income in both 2003 and 2004.
(4) The underaccrual of international value added taxes by certain
wholly-owned Energy segment subsidiaries. These adjustments had the
effects of reducing beginning retained earnings for fiscal year 2003 and
reducing pre-tax income in both 2003 and 2004.
(5) Adjustments related to minority interest balances recorded by our
majority-owned Nigerian subsidiary. These adjustments are primarily
related to the valuation allowances recorded against prepaid income tax
asset balances that are referred to in item (13) below. These adjustments
had the effects of increasing beginning retained earnings and pre-tax
income for fiscal year 2003 and reducing pre-tax income for 2004.
-26-
(6) Failure to record an adjustment related to the demutualization of an
insurance company (which had previously provided us with coverage), from
which shares of stock were received and subsequently sold. The shares were
not valued and recorded as an asset when received in 2000, unrealized
gains and losses were not recorded as other comprehensive income during
the holding period, and the entire amount of sale proceeds was improperly
recorded as a gain when sold in the first quarter of 2004. This adjustment
had the effects of improving beginning retained earnings for fiscal year
2003 and reducing pre-tax income in the first quarter of 2004.
(7) Failure to record an IBNR liability for self-insured professional
liability insurance losses in all prior periods. This adjustment had the
effect of reducing opening retained earnings in fiscal year 2003, and
there were immaterial adjustments to the liability balance and related
expense amounts in both 2003 and 2004.
(8) Unrecorded capital lease assets and obligations related to leased
equipment and vehicles. These adjustments had the effects of reducing
beginning retained earnings for fiscal year 2003 by an immaterial amount
and reducing pre-tax income in both 2004 and 2003 by immaterial amounts.
These adjustments further resulted in additional capital lease assets and
related capital lease obligations totaling approximately $1.15 million
being recorded as of December 31, 2004.
(9) Adjustments to record additional revenue related to certain international
income, payroll and value added taxes (as discussed in items (3) and (4)
above and item (13) below) which are reimbursable by a customer pursuant
to the terms of the related contract. These adjustments had the effect of
increasing pre-tax income in both 2003 and 2004.
(10) An adjustment to reduce our long-term incentive compensation plan expense
for the impact the restatement had on reducing net income. Because a key
element of our plan is our financial results, these incentive compensation
amounts were not subsequently paid. This adjustment had the effect of
increasing pre-tax income for the fourth quarter of 2004.
(11) Failure to properly record a non-routine accounting adjustment related to
a self-insured project claim settlement. This adjustment had the effect of
increasing pre-tax income for the fourth quarter of 2004.
(12) A reclassification of certain international taxes other than income that
were previously included in our 2004 provision for income taxes. In
connection with our preparation of the restated 2004 income tax provision,
it was determined that these amounts were improperly classified. An
offsetting amount is included in item (14) below. This reclassification
had the effect of decreasing both pre-tax income and our provision for
income taxes in 2004, but had no effect on our 2004 net income.
(13) The underaccrual of international income taxes by certain wholly-owned
Energy segment subsidiaries. Additionally, we recorded valuation
allowances against the prepaid income tax asset balances recorded in prior
periods by a majority-owned Nigerian subsidiary, which valuation
allowances should have been previously recorded based on our inability to
realize these assets. In summary, these adjustments had the effects of
reducing beginning retained earnings for fiscal year 2003 and reducing net
income in both 2003 and 2004.
(14) The incremental effects of all foregoing restatement adjustments on the
provision for income taxes in our Consolidated Statements of Income, as
well as certain other adjustments that were determined to be necessary
when the restated income tax provisions were prepared, such as the
-27-
balance sheet effect on paid-in capital of the windfall tax benefits
associated with stock option exercises. These adjustments had the effects
of increasing beginning retained earnings for fiscal year 2003, reducing
net income for 2003, and increasing net income for 2004.
THE FOLLOWING TABLE PRESENTS THE EFFECTS OF THE ADJUSTMENTS ON OUR PREVIOUSLY
ISSUED CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 2004:
FOR THE YEAR ENDED DECEMBER 31, 2004
-----------------------------------------------
As Previously As
(In thousands, except per share amounts) Reported Adjustments Restated
- -------------------------------------------------------------------------------------------------------------------------------
Total contract revenues (footnote 9) $ 550,751 $ 1,295 $ 552,046
Cost of work performed (footnotes 3 & 11) 464,563 1,038 465,601
- -------------------------------------------------------------------------------------------------------------------------------
Gross profit 86,188 257 86,445
Selling, general and administrative expenses (footnotes 1, 2, 4, 7, 8,
10 & 12) 64,760 2,817 67,577
- -------------------------------------------------------------------------------------------------------------------------------
Income from operations 21,428 (2,560) 18,868
Other income/(expense):
Interest income 84 - 84
Interest expense (footnotes 1 & 8) (196) (1,218) (1,414)
Other, net (footnotes 5 & 6) 1,480 (299) 1,181
- -------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 22,796 (4,077) 18,719
Provision for income taxes (footnotes 13 & 14) 10,504 (179) 10,325
- -------------------------------------------------------------------------------------------------------------------------------
NET INCOME 12,292 (3,898) 8,394
- -------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income/(loss), net of tax:
Foreign currency translation adjustments (117) (100) (217)
Reclassification adjustment for gain on investment included in net
income (footnote 6) - (109) (109)
- -------------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 12,175 $ (4,107) $ 8,068
===============================================================================================================================
BASIC EARNINGS PER SHARE $ 1.46 $ (0.46) $ 1.00
DILUTED EARNINGS PER SHARE $ 1.44 $ (0.46) $ 0.98
===============================================================================================================================
-28-
THE FOLLOWING TABLE PRESENTS THE EFFECTS OF THE ADJUSTMENTS ON OUR PREVIOUSLY
ISSUED CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 2003:
FOR THE YEAR ENDED DECEMBER 31, 2003
-----------------------------------------------
As Previously As
(In thousands, except per share amounts) Reported Adjustments Restated
- -------------------------------------------------------------------------------------------------------------------------------
Total contract revenues (footnote 9) $ 425,983 778 $ 426,761
Cost of work performed (footnote 3) 364,879 824 365,703
- -------------------------------------------------------------------------------------------------------------------------------
Gross profit 61,104 (46) 61,058
Selling, general and administrative expenses (footnotes 1, 2, 4, 7 & 8) 54,743 595 55,338
- -------------------------------------------------------------------------------------------------------------------------------
Income from operations 6,361 (641) 5,720
Other income/(expense):
Interest income 23 - 23
Interest expense (footnotes 1 & 8) (806) (594) (1,400)
Other, net (footnote 5) (658) 18 (640)
- -------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 4,920 (1,217) 3,703
Provision for income taxes (footnotes 13 & 14) 2,854 1,649 4,503
- -------------------------------------------------------------------------------------------------------------------------------
NET INCOME/(LOSS) 2,066 $ (2,866) (800)
- -------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income/(loss), net of tax -
Foreign currency translation adjustments (144) (199) (343)
Unrealized holding gain on investment (footnote 6) - 37 37
- -------------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME/(LOSS) $ 1,922 $ (3,028) $ (1,106)
===============================================================================================================================
BASIC EARNINGS/(LOSS) PER SHARE $ 0.25 $ (0.35) $ (0.10)
DILUTED EARNINGS/LOSS) PER SHARE $ 0.25 $ (0.35) $ (0.10)
===============================================================================================================================
-29-
THE FOLLOWING TABLE PRESENTS THE EFFECTS OF THE ADJUSTMENTS ON OUR PREVIOUSLY
ISSUED CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2004:
ASSETS AS OF DECEMBER 31, 2004
-----------------------------------------------
As Previously As
(In thousands) Reported Adjustments Restated
- -------------------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents $ 15,471 $ - $ 15,471
Receivables, net 79,559 - 79,559
Unbilled revenues on contracts in progress 71,280 2,572 73,852
Prepaid expenses and other 12,941 (1,048) 11,893
- -------------------------------------------------------------------------------------------------------------------------------
Total current assets 179,251 1,524 180,775
- -------------------------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, NET 17,879 1,134 19,013
OTHER ASSETS
Goodwill and other intangible assets, net 8,947 - 8,947
Other assets 5,667 (27) 5,640
Long-term deferred tax asset - 638 638
- -------------------------------------------------------------------------------------------------------------------------------
Total other assets 14,614 611 15,225
- -------------------------------------------------------------------------------------------------------------------------------
Total assets $ 211,744 $ 3,269 $ 215,013
===============================================================================================================================
LIABILITIES AND SHAREHOLDERS' INVESTMENT
- -------------------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable $ 48,326 $ 397 $ 48,723
Accrued employee compensation (footnote 3) 27,278 4,318 31,596
Accrued insurance 9,180 578 9,758
Billings in excess of revenues on contracts in progress 9,705 - 9,705
Current deferred tax liability 11,145 812 11,957
Income taxes payable (footnotes 13 & 14) - 4,464 4,464
Other accrued expenses & current liabilities (footnotes 1, 2 & 4) 13,484 7,464 20,948
- -------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 119,118 18,033 137,151
- -------------------------------------------------------------------------------------------------------------------------------
OTHER LIABILITIES
Commitments and contingencies - - -
Other liabilities 6,094 (3,013) 3,081
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 125,212 15,020 140,232
- -------------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' INVESTMENT
Common Stock 8,910 - 8,910
Additional paid-in capital (1) 40,000 730 40,730
Retained earnings (2) 41,769 (12,481) 29,288
Unearned compensation (65) - (65)
Accumulated other comprehensive loss -
Cumulative currency translation adjustments (1,129) - (1,129)
Less - Treasury shares (2,953) - (2,953)
- -------------------------------------------------------------------------------------------------------------------------------
Total shareholders' investment 86,532 (11,751) 74,781
- -------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' investment $ 211,744 $ 3,269 $ 215,013
===============================================================================================================================
(1) Restatement adjustment relates to the windfall tax benefits associated
with stock option exercises from 2002 through 2004. Of this adjustment,
$493 related to 2004.
(2) See effect on opening retained earnings as of January 1, 2003 (shown in
the table at the end of this Note 2), plus the 2003 and 2004 adjustments
to net income (shown in the table at the beginning of this Note 2).
-30-
THE FOLLOWING TABLE PRESENTS THE EFFECTS OF THE ADJUSTMENTS ON OUR PREVIOUSLY
ISSUED CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31,
2004:
FOR THE YEAR ENDED DECEMBER 31, 2004
-----------------------------------------------
As Previously As
(In thousands) Reported Adjustments Restated
- -------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 12,292 $ (3,898) $ 8,394
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,604 315 4,919
Stock-based compensation expense - 674 674
Tax benefit of stock compensation - 493 493
Deferred income tax expense 7,950 (28) 7,922
Changes in assets and liabilities:
Increase in receivables and contracts in progress (31,194) (1,794) (32,988)
Increase in accounts payable and accrued expenses 36,633 5,461 42,094
Increase in other net assets (1,364) (1,650) (3,014)
- -------------------------------------------------------------------------------------------------------------------------------
Total adjustments 16,629 3,471 20,100
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 28,921 (427) 28,494
- -------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (4,807) 752 (4,055)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (4,807) 752 (4,055)
- -------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of long-term debt (13,481) - (13,481)
Payments for capital lease obligations - (325) (325)
Decrease in book overdrafts (6,022) - (6,022)
Proceeds from exercise of stock options 1,734 - 1,734
- -------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (17,769) (325) (18,094)
- -------------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 6,345 - 6,345
Cash and cash equivalents, beginning of year 9,126 - 9,126
- -------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 15,471 $ - $ 15,471
===============================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW DATA
Cash paid during the year for:
Interest paid $ 229 $ 54 $ 283
Income taxes paid $ 2,557 $ - $ 2,557
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Vehicles & equipment acquired through capital lease obligations $ - $ 1,063 $ 1,063
Equipment acquired on credit $ - $ 516 $ 516
===============================================================================================================================
-31-
THE FOLLOWING TABLE PRESENTS THE EFFECTS OF THE ADJUSTMENTS ON OUR PREVIOUSLY
ISSUED CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31,
2003:
FOR THE YEAR ENDED DECEMBER 31, 2003
-----------------------------------------------
As Previously As
(In thousands) Reported Adjustments Restated
- -------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income/(loss) $ 2,066 $ (2,866) $ (800)
Adjustments to reconcile net income/(loss) to net cash
used in operating activities:
Depreciation and amortization 4,902 179 5,081
Stock-based compensation expense - 78 78
Tax benefit of stock compensation - 33 33
Deferred income tax expense 3,975 (1,696) 2,279
Impairment of Energy Virtual Partners 770 - 770
Changes in assets and liabilities:
Increase in receivables and contracts in progress (18,684) (778) (19,462)
(Decrease)/increase in accounts payable and accrued expenses (2,725) 3,641 916
Increase in other net assets (5,138) 1,585 (3,553)
- -------------------------------------------------------------------------------------------------------------------------------
Total adjustments (16,900) 3,042 (13,858)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (14,834) 176 (14,658)
- -------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (4,787) - (4,787)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (4,787) - (4,787)
- -------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 13,481 - 13,481
Payments for capital lease obligations - (176) (176)
Increase in book overdrafts 6,022 - 6,022
Proceeds from exercise of stock options 49 - 49
Payments to acquire treasury stock (690) - (690)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 18,862 (176) 18,686
- -------------------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (759) - (759)
Cash and cash equivalents, beginning of year 9,885 - 9,885
- -------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 9,126 $ - $ 9,126
===============================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW DATA
Cash paid during the year for:
Interest paid $ 753 $ 36 $ 789
Income taxes paid $ 4,826 $ - $ 4,826
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Vehicles & equipment acquired through capital lease obligations $ - $ 544 $ 544
===============================================================================================================================
-32-
These restatement adjustments had the following effects on our opening balances
within shareholders' investment as of January 1, 2003:
As Previously
Reported Adjustments As Restated
- -------------------------------------------------------------------------------
Additional paid-in capital $ 38,146 $ 203 $ 38,349
Retained earnings $ 27,411 $ (5,717) $ 21,694
Accumulated other comprehensive loss $ (569) $ 72 $ (497)
Total shareholders' investment $ 71,419 $ (5,442) $ 65,977
- -------------------------------------------------------------------------------
3. RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
123R, which replaces SFAS 123 and supersedes APB 25, "Accounting for Stock
Issued to Employees." SFAS 123R also amends SFAS 95, "Statement of Cash Flows,"
to require reporting of excess tax benefits from the exercises of stock-based
compensation awards as a financing cash inflow rather than as an operating cash
inflow. The Securities and Exchange Commission ("SEC") subsequently amended the
effective date of SFAS 123R to be effective for the first interim period after
December 31, 2005 for calendar year companies. SFAS 123R requires that the
expense resulting from all share-based payment transactions be recognized in the
financial statements. This statement applies to all awards granted after the
required effective date, and shall not apply to awards granted in periods before
the required effective date, except if prior awards are modified, repurchased or
cancelled after the effective date. In March 2005, the SEC released SAB 107 to
assist registrants in implementing SFAS 123R while enhancing the information
that investors receive. The FASB has also issued interpretative guidance. We
will adopt the provisions of SFAS 123R on January 1, 2006 and expect to use the
modified prospective application method in our adoption of SFAS 123(R). SFAS
123R will not have a material impact on our financial statements since we have
been recording our stock-based compensation expense under the fair value method
in accordance with SFAS 123 since January 1, 2003.
In December 2004, the FASB issued SFAS 153 "Exchanges of Nonmonetary Assets - an
Amendment of APB No. 29." APB 29 is based on the principle that exchanges of
nonmonetary assets should be measured based on the fair value of assets
exchanged. The guidance in APB 29, however, included certain exceptions to that
principle. SFAS 153 amends APB 29 to eliminate the exception for nonmonetary
exchanges of similar productive assets and replaces it with a general exception
for exchanges of nonmonetary assets that do not have commercial substance. The
provisions of this statement are effective for nonmonetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005. We do not expect the
provisions of this statement will have any impact on our financial statements.
In December 2004, the FASB issued Staff Position No. ("FSP") 109-1, "Accounting
for Income Taxes, to the Tax Deduction on Qualified Production Activities
Provided by the American Jobs Creation Act of 2004," and 109-2, "Accounting and
Disclosure Guidance for the Foreign Earnings Repatriation Provision within the
American Jobs Creation Act of 2004." FSP 109-1 provides guidance on the
application of SFAS 109, "Accounting for Income Taxes," to the provision within
the American Jobs Creation Act of 2004 ("the Act") that provides a tax deduction
on qualified production activities. FSP 109-2 provides for a special one-time
tax benefit on the repatriation of certain foreign earnings to a U.S. taxpayer,
provided certain criteria are met. Both FSP 109-1 and 109-2 were effective upon
issuance. Neither of these provisions had any impact on our 2005 financial
statements.
-33-
In March 2005, the FASB issued FIN 47, "Accounting for Conditional Asset
Retirement Obligations." FIN 47 clarifies that the term "conditional asset
retirement obligation" as used in SFAS 143, "Accounting for Asset Retirement
Obligations," refers to a legal obligation to perform an asset retirement
activity in which the timing and/or method of settlement are conditional on a
future event that may or may not be within the control of the entity.
Accordingly, FIN 47 clarifies that an entity is required to recognize a
liability for the fair value of a conditional asset retirement obligation when
incurred if the fair value of the liability can be reasonably estimated. This
interpretation was effective for fiscal years ending after December 15, 2005. We
adopted FIN 47 in the fourther quarter of 2005, and such adoption had no impact
on our financial statements.
In May 2005, the FASB issued SFAS 154, "Accounting Changes and Error
Corrections, a replacement of APB No. 20 and FASB Statement No. 3." SFAS 154
requires, among other things, retrospective application, unless impracticable,
to prior period financial statements for voluntary changes in accounting
principles and changes required by an accounting pronouncement in the unusual
circumstances in which the pronouncement does not include specific transition
provisions. SFAS 154 also requires that a change in depreciation, amortization,
or depletion method for long-lived, nonfinancial assets should be accounted for
as a change in accounting estimate effected by a change in accounting principle.
The guidance for reporting the correction of an error in previously issued
financial statements and the change of an accounting estimate will not change
from APB 20. SFAS 154 is effective for us beginning January 1, 2006. We do not
expect the adoption of this standard will have a material impact on our
financial statements.
In July 2006, the FASB issued FIN 48, "Accounting for Uncertainty in Income
Taxes." FIN 48 provides guidance on the measurement, recognition, classification
and disclosure of, as well as the interim period accounting for, uncertain tax
positions. We will be required to adopt the provisions of FIN 48 effective
January 1, 2007. We are currently evaluating the impact that FIN 48 will have on
our financial statements.
4. CONTRACTS
Revenues and billings to date on contracts in progress at December 31, 2005 and
2004 were as follows (in millions):
<Table>
<Caption>
2005 2004
- --------------------------------------------------------------------------------
Revenues $2,798 $2,170
Billings (2,726) (2,106)
- --------------------------------------------------------------------------------
Net unbilled revenue $ 72 $ 64
- --------------------------------------------------------------------------------
</Table>
Trade receivable balances totaling $4,837,000 and $5,752,000 at December 31,
2005 and 2004, respectively, relate to retainage provisions under long-term
contracts which will be due upon completion of the contracts. Based on
management's estimates, $4,089,000 and $3,946,000 of these retention balances at
December 31, 2005 and 2004, respectively, were expected to be collected within
one year of the balance sheet dates, and were therefore included in the
receivables, net balances. The remaining retention balances reflect long-term
assets, which were included in the other assets balances in our Consolidated
Balance Sheets.
We had allowances for doubtful accounts totaling $746,000 and $683,000 as of
December 31, 2005 and 2004, respectively. These allowance amounts reflect
receivable balances for which collection is doubtful, and have been netted
against the receivables balances shown in the Consolidated Balance Sheets.
-34-
Under certain circumstances, we may agree to provide new or additional
engineering services to a client without a fully executed contract or change
order. In these instances, although the costs of providing these services are
expensed as incurred, the recognition of related contract revenues are delayed
until the contracts and/or change orders have been fully executed by the
clients, other suitable written project approvals are received from the clients,
or until management determines that revenue recognition is appropriate based on
the probability of client acceptance. Under this policy, we had not recognized
potential future revenues estimated at $1.4 million and $2.0 million as of
December 31, 2005 and 2004, respectively, for which the related costs had
already been expensed as of these dates.
Within each of our operating segments, credit is granted to customers for the
payment of services rendered. Although we have a diversified client base, a
substantial portion of our receivables and net revenues on contracts in progress
reflected in our Consolidated Balance Sheets is dependent upon U.S. federal and
state government funding.
Federal government contracts are subject to the U.S. Federal Acquisition
Regulations ("FAR"). These contracts and certain contracts with state and local
agencies are subject to periodic routine audits, which generally are performed
by the Defense Contract Audit Agency ("DCAA"). The DCAA audits our overhead
rates, cost proposals, incurred government contract costs and internal control
systems. During the course of its audits, the DCAA may question incurred costs
if it believes we have accounted for such costs in a manner inconsistent with
the requirements of the FAR or the U.S. Cost Accounting Standards, and may
recommend that our U.S. government corporate administrative accounting officer
disallow any such costs. Historically, we have not experienced significant
disallowed costs as a result of these audits; however, management cannot provide
assurance that future DCAA audits will not result in material disallowances of
incurred costs.
Internationally, we conduct business in certain countries where the local
political environment subjects our related trade receivables, due from
subsidiaries of major oil companies, to lengthy collection delays. Based upon
past experience with these clients, after giving effect to our related allowance
for doubtful accounts balance at December 31, 2005, management believes that
these receivable balances will be fully collectible.
5. BUSINESS SEGMENT INFORMATION
Our business segments reflect how management makes resource decisions and
assesses its performance. Effective January 1, 2005, we have the following two
reportable segments:
- - Our Engineering segment provides a variety of design and related
consulting services. Such services include program management,
design-build, construction management, consulting, planning, surveying,
mapping, geographic information systems, architectural and interior
design, construction inspection, constructability reviews, site assessment
and restoration, strategic regulatory analysis, regulatory compliance, and
advanced management systems.
- - Our Energy segment provides a full range of services for operating energy
production facilities worldwide. These services range from complete
outsourcing solutions to specific services such as training, personnel
recruitment, pre-operations engineering, maintenance management systems,
field operations and maintenance, procurement, and supply chain
management. Many of these service offerings are enhanced by the
utilization of this segment's Managed Services operating model as a
service delivery method. Our Energy segment serves both major and smaller
independent oil and gas producing companies, but does not pursue
exploration opportunities for our own account or own any oil or natural
gas reserves.
-35-
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies (see Note 1). We evaluate the
performance of our segments primarily based on operating income before Corporate
overhead allocations. Corporate overhead includes functional unit costs related
to finance, legal, human resources, information technology and communications,
and is allocated between our Engineering and Energy segments based on a
three-part formula comprising revenues, assets and payroll.
The following tables reflect the required disclosures for our reportable
segments (in millions):
<Table>
<Caption>
TOTAL CONTRACT REVENUES/INCOME FROM OPERATIONS
- --------------------------------------------------------------------------------
Restated Restated
2005 2004 2003
- --------------------------------------------------------------------------------
ENGINEERING
Total contract revenues $ 371.1 $ 343.3 $ 250.6
Income from operations pre-Corporate
overhead 40.2 33.2 17.9
Less: Corporate overhead (13.6) (11.3) (11.5)
- --------------------------------------------------------------------------------
Income from operations 26.6 21.9 6.4
- --------------------------------------------------------------------------------
ENERGY
Total contract revenues 208.2 208.7 176.2
Income/(loss) from operations
pre-Corporate overhead (0.9) 2.7 4.7
Less: Corporate overhead (5.1) (4.7) (4.0)
- --------------------------------------------------------------------------------
Income from operations (6.0) (2.0) 0.7
- --------------------------------------------------------------------------------
TOTAL REPORTABLE SEGMENTS
Total contract revenues 579.3 552.0 426.8
Income from operations pre-Corporate overhead 39.3 35.9 22.6
Less: Corporate overhead (18.7) (16.0) (15.5)
- --------------------------------------------------------------------------------
Income from operations 20.6 19.9 7.1
- --------------------------------------------------------------------------------
OTHER CORPORATE/INSURANCE EXPENSE (3.7) (1.0) (1.4)
- --------------------------------------------------------------------------------
TOTAL COMPANY - INCOME FROM OPERATIONS $ 16.9 $ 18.9 $ 5.7
- --------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
Restated
2005 2004
- -------------------------------------------------------------------
Segment assets:
Engineering $ 116.6 $ 113.7
Energy 80.4 71.8
- -------------------------------------------------------------------
Subtotal - segments 197.0 185.5
Corporate/Insurance 28.5 29.5
- -------------------------------------------------------------------
TOTAL $ 225.5 $ 215.0
- -------------------------------------------------------------------
</Table>
-36-
<Table>
<Caption>
Restated Restated
2005 2004 2003
- ------------------------------------------------------------------------------------------
Capital expenditures:
Engineering $ 2.9 $ 3.4 $ 3.6
Energy 2.3 1.1 0.5
- ------------------------------------------------------------------------------------------
Subtotal - segments 5.2 4.5 4.1
Corporate 2.6 1.1 1.2
- ------------------------------------------------------------------------------------------
TOTAL $ 7.8 $ 5.6 $ 5.3
- ------------------------------------------------------------------------------------------
Restated Restated
2005 2004 2003
- ------------------------------------------------------------------------------------------
Depreciation and amortization expense:
Engineering $ 2.0 $ 2.3 $ 2.7
Energy 1.3 1.0 1.0
- ------------------------------------------------------------------------------------------
Subtotal - segments 3.3 3.3 3.7
Corporate 1.8 1.6 1.4
- ------------------------------------------------------------------------------------------
TOTAL $ 5.1 $ 4.9 $ 5.1
- ------------------------------------------------------------------------------------------
Restated Restated
2005 2004 2003
- ------------------------------------------------------------------------------------------
Interest expense:
Engineering $ 0.1 $ 0.1 $ 0.1
Energy 1.4 1.2 0.5
- ------------------------------------------------------------------------------------------
Subtotal - segments 1.5 1.3 0.6
Corporate - 0.1 0.8
- ------------------------------------------------------------------------------------------
TOTAL $ 1.5 $ 1.4 $ 1.4
- ------------------------------------------------------------------------------------------
</Table>
We have determined that intersegment revenues, 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.
Our enterprise-wide disclosures are as follows (in millions):
<Table>
<Caption>
Restated Restated
2005 2004 2003
- ------------------------------------------------------------------------------------------
Total contract revenues by type of service:
Engineering $ 371.1 $ 343.3 $ 250.6
Operations & maintenance 208.2 208.7 176.2
- ------------------------------------------------------------------------------------------
TOTAL $ 579.3 $ 552.0 $ 426.8
- ------------------------------------------------------------------------------------------
Restated Restated
2005 2004 2003
- ------------------------------------------------------------------------------------------
Total contract revenues by geographic origin:
Domestic $ 507.3 $ 483.6 $ 371.4
Foreign 72.0 68.4 55.4
- ------------------------------------------------------------------------------------------
TOTAL $ 579.3 $ 552.0 $ 426.8
- ------------------------------------------------------------------------------------------
-37-
Restated Restated
2005 2004 2003
- --------------------------------------------------------------------------------
Total contract revenues by principal markets:
United States government 31.0% 25.9% 16.6%
Various state governmental and quasi-governmental
agencies 26.3% 30.2% 34.7%
Commercial, industrial and private clients 42.7% 43.9% 48.7%
- --------------------------------------------------------------------------------
</Table>
Our business is substantially conducted in the United States. Contracts with
various branches of the U.S. government accounted for 31%, 26% and 17% of our
total contract revenues for the years ended December 31, 2005, 2004 and 2003,
respectively. One customer in our Engineering segment, the Federal Emergency
Management Agency ("FEMA"), accounted for approximately 20% and 15% of our total
contract revenues in 2005 and 2004, respectively. No individual customer
accounted for more than 10% of our total contract revenues in 2003. Long-lived
assets are principally held in the United States; amounts held in other
locations are immaterial.
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands):
Restated
2005 2004
- --------------------------------------------------------------------------------
Land $ 486 $ 486
Buildings and improvements 5,531 5,434
Furniture, fixtures, and office equipment 11,232 9,789
Equipment and vehicles 2,275 2,524
Computer hardware 12,398 12,507
Computer software 19,521 16,589
Leasehold improvements 5,092 4,341
Equipment and vehicles under capital lease 2,410 1,813
- --------------------------------------------------------------------------------
Total, at cost 58,945 53,483
Less - Accumulated depreciation and amortization (37,140) (34,470)
- --------------------------------------------------------------------------------
NET PROPERTY, PLANT AND EQUIPMENT $ 21,805 $ 19,013
- --------------------------------------------------------------------------------
Depreciation expense was $4,215,000, $4,254,000 and $4,616,000 for the years
ended December 31, 2005, 2004 and 2003, respectively. The majority of our
vehicles are leased and are accounted for as operating leases; however, certain
of these vehicle leases are accounted for as capital leases. Assets under
capital lease in the above table primarily represent vehicles leased by the
Company. These assets are being amortized over the shorter of the lease term or
the estimated useful life of the asset. Amortization expense related to capital
leases was $592,000, $379,000 and $179,000 for the years 2005, 2004 and 2003
respectively. As of December 31, 2005 and 2004, the Company has recorded
$1,022,000 and $507,000 in accumulated amortization for assets under capital
lease.
-38-
7. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets consist of the following (in thousands):
2005 2004
- --------------------------------------------------------------------------------
Goodwill:
Engineering $ 1,006 $ 1,006
Energy 7,465 7,465
- --------------------------------------------------------------------------------
Total goodwill 8,471 8,471
Other intangible assets, net of accumulated amortization
of $1,810 and $1,524, respectively 190 476
- --------------------------------------------------------------------------------
GOODWILL AND OTHER INTANGIBLE ASSETS, NET $ 8,661 $ 8,947
- --------------------------------------------------------------------------------
Under SFAS 142, our goodwill balance is not being amortized and goodwill
impairment tests are being performed at least annually. We completed our most
recent annual impairment review during the second quarter of 2005, and no
impairment charge was required. Similarly, no goodwill impairment charges were
recorded in 2004 or 2003.
Amortization expense recorded on the other intangible assets balance was
$286,000 in each of 2005, 2004 and 2003. Future amortization expense of the
remaining balance will be $190,000 for the year ending December 31, 2006.
8. LONG-TERM DEBT AND BORROWING AGREEMENTS
In September 2004, we amended and restated our unsecured credit agreement (the
"Agreement") with a consortium of financial institutions. The Agreement provides
for a commitment of $60 million through September 17, 2008. 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, 2005 and 2004, there were no borrowings outstanding under the Agreement;
however, outstanding letters of credit totaled $7.0 million and $7.1 million as
of these dates, respectively.
The Agreement provides for us to borrow at the bank's prime interest rate or at
LIBOR plus an applicable margin determined by our leverage ratio (based on a
measure of EBITDA to indebtedness). The Agreement also requires us to meet
minimum equity, leverage, interest and rent coverage, and current ratio
covenants. If any of these financial covenants or certain other conditions of
borrowing are not achieved, under certain circumstances, after a cure period,
the banks may demand the repayment of all borrowings outstanding and/or require
deposits to cover the outstanding letters of credit. Under the Agreement, we pay
bank commitment fees of 3/8% per year based on the unused portion of the
commitment.
In connection with the restatement of our consolidated financial statements
through March 31, 2005, we did not timely file our quarterly reports on Form
10-Q for the second and third quarters of 2005 and the first quarter of 2006, or
our annual report on Form 10-K for the year ended December 31, 2005, with the
SEC. As a result, several covenant violations related to the timing of our
financial reporting occurred under the Agreement. The lenders have waived these
violations by allowing us to file our Forms 10-Q for the quarters ended June 30,
2005 and September 30, 2005, our Form 10-K for the year ended December 31, 2005,
and our Form 10-Q for the quarter ended March 31, 2006, with the SEC by August
15, 2006. We expect to complete all of these past due filings by August 15,
2006.
-39-
Furthermore, we did not meet the SEC's filing deadline related to our Form 10-Q
for the second quarter of 2006. Accordingly, our lenders have also waived the
resulting covenant violation related to the timing of this filing by allowing us
to file such Form 10-Q by September 30, 2006. We currently expect to be able to
file our Form 10-Q for the second quarter of 2006 by September 30, 2006.
Beginning with our Form 10-Q filing for the third quarter of 2006, we currently
expect to complete our quarterly and annual SEC filings within the SEC's filing
deadlines.
The average daily balance outstanding when we were in a borrowed position was
$1,983,000 and $6,757,000 at weighted-average interest rates of 4.15% and 3.29%
for 2005 and 2004, respectively. The proceeds from these borrowings under the
Agreement were used to meet various working capital requirements.
9. CAPITAL STOCK
In 1996, our Board of Directors authorized the repurchase of up to 500,000
shares of our Common Stock in the open market. In 2003, the Board of Directors
authorized an additional repurchase of up to 500,000 shares for a total
authorization of 1,000,000 shares. During 2003, we repurchased 80,400 treasury
shares at an average market price of $8.58 per share (based on market prices
ranging from $7.90 to $8.81 per share) for a total cost of $690,000. We made no
treasury share repurchases during 2004. During the second and third quarters of
2005, we repurchased 104,300 treasury shares at an average market price of
$17.11 per share (based on market prices ranging from $16.35 to $18.56 per
share) for a total cost of $1,808,000. As of December 31, 2005, 520,319 treasury
shares had been repurchased under our Board's authorizations.
As of December 31, 2005, the difference between the number of treasury shares
repurchased under these authorizations and the number of treasury shares listed
on the consolidated balance sheets relates to an exchange of Series B Common
Stock for 23,452 Common shares which occurred during the first quarter of 2002.
The remaining difference relates to 1,330 shares issued to employees as bonus
share awards in the late 1990s.
Our monthly share repurchases for the year ended December 31, 2005 were as
follows:
(d)
(c) Maximum Number
Total Number of (or Approximate
(a) (b) Shares Purchased Dollar Value)of
Total Average as Part of Shares that May
Number of Price Publicly Yet Be Purchased
Shares Paid per Announced Plans Under the Plans
Period Purchased Share or Programs or Programs
- --------------------------------------------------------------------------------
June 1, 2005-
June 30, 2005 89,100 $17.11 89,100 $494,881
July 1, 2005-
July 31, 2005 15,200 $18.32 15,200 $479,681
- --------------------------------------------------------------------------------
Under the Agreement (which became effective in September 2004), our treasury
share repurchases cannot exceed $5 million during the four-year term of the
Agreement.
-40-
Our Articles of Incorporation authorize the issuance of 6,000,000 shares of
Series B Common Stock, par value $1 per share, which would entitle the holders
thereof to ten votes per share on all matters submitted for shareholder votes.
At December 31, 2005 and 2004, there were no shares of such Series B Stock
outstanding. We have no plans of issuing any Series B Common Stock in the near
future. Our Articles of Incorporation also authorize the issuance of 300,000
shares of Cumulative Preferred Stock, par value $1 per share. At December 31,
2005 and 2004, there were no shares of such Preferred Stock outstanding.
10. RIGHTS AGREEMENT
In 1999, our Board of Directors adopted a Rights Agreement (the "Rights
Agreement"). In connection with the Rights Agreement, we declared a distribution
of one Right (a "Right") for each outstanding share of Common Stock to
shareholders of record at the close of business on November 30, 1999. The Rights
will become exercisable after a person or group has acquired 25% or more of our
outstanding Common Stock or has announced a tender offer that would result in
the acquisition of 25% or more of our outstanding Common Stock. The Board of
Directors has the option to redeem the Rights for $0.001 per Right prior to
their becoming exercisable. The Rights will expire on November 16, 2009, unless
they are earlier exchanged or redeemed.
Assuming the Rights have not been redeemed, after a person or group has acquired
25% or more of our outstanding Common Stock, each Right (other than those owned
by a holder of 25% or more of the Common Stock) will entitle its holder to
purchase, at the Right's then current exercise price, a number of shares of our
Common Stock having a value equal to two times the exercise price of the Rights.
In addition, at any time after the Rights become exercisable and prior to the
acquisition by the acquiring party of 50% or more of the outstanding Common
Stock, our Board of Directors may exchange the Rights (other than those owned by
the acquiring person or its affiliates) for our Common Stock at an exchange
ratio of one share of Common Stock per Right.
11. LEASE COMMITMENTS
Our non-cancelable leases relate to office space, computer hardware and
software, office equipment and vehicles with lease terms ranging from 1 to 10
years. Future annual minimum lease payments under non-cancelable capital and
operating leases as of December 31, 2005 were as follows (in thousands):
Capital Lease Operating Lease
Fiscal Year Obligations Obligations Total
- --------------------------------------------------------------------------------
2006 $ 814 $15,130 $15,944
2007 639 13,673 14,312
2008 244 11,231 11,474
2009 29 9,120 9,149
2010 - 5,250 5,250
Thereafter - 11,334 11,334
- --------------------------------------------------------------------------------
TOTAL $1,726 $65,738 $67,463
- --------------------------------------------------------------------------------
Rent expense under non-cancelable operating leases was $16,590,000 in 2005,
$15,265,000 in 2004, and $12,285,000 in 2003.
12. INCOME TAXES
The components of income/(loss) before income taxes are as follows (in
thousands):
-41-
Restated Restated
2005 2004 2003
- --------------------------------------------------------------------------------
Domestic $ 18,561 $ 18,868 $ 3,752
Foreign (3,444) (149) (49)
TOTAL $ 15,117 $ 18,719 $ 3,703
- --------------------------------------------------------------------------------
The income tax provision consists of the following (in thousands):
Restated Restated
2005 2004 2003
- --------------------------------------------------------------------------------
Current income taxes:
U.S. federal* $ 4,173 $ 127 $ (488)
Foreign 2,625 2,121 2,367
State 525 155 345
- --------------------------------------------------------------------------------
Total current income tax provision/(benefit) 7,323 2,403 2,224
- --------------------------------------------------------------------------------
Deferred income taxes:
U.S. federal* 2,291 7,118 2,281
Foreign 165 369 86
State 287 435 (88)
Total deferred income tax provision/(benefit) 2,743 $ 7,922 $ 2,279
- --------------------------------------------------------------------------------
TOTAL PROVISION FOR INCOME TAXES $ 10,066 $ 10,325 $ 4,503
- --------------------------------------------------------------------------------
* Includes U.S. taxes related to foreign income.
As a result of additional tax deductions related to vested restricted stock
grants and stock option exercises, tax benefits have been recognized as
contributed capital for the years ended December 31, 2005, 2004 and 2003 in the
amounts of $140,000, $493,000, and $33,000, respectively.
The following is a reconciliation of income taxes computed at the Federal
statutory rate to income tax expense recorded (in thousands):
Restated Restated
2005 2004 2003
- --------------------------------------------------------------------------------
Computed income taxes at U.S. federal
statutory rate $ 5,291 $ 6,552 $ 1,296
Taxes on foreign income and losses 3,189 1,323 1,465
Taxes on foreign deemed profits 806 1,219 1,005
Foreign earnings indefinitely reinvested (947) - -
Deferred tax on foreign earnings not
indefinitely reinvested 225 326 91
State income taxes, net of federal income
tax benefit 812 591 110
Permanent differences 646 499 375
Change in valuation allowance, federal - (123) 182
Other 44 (62) (21)
- --------------------------------------------------------------------------------
TOTAL PROVISION FOR INCOME TAXES $ 10,066 $ 10,325 $ 4,503
- --------------------------------------------------------------------------------
-42-
The components of our deferred income tax assets and liabilities at December 31,
2005 and 2004 are as follows (in thousands):
Restated
2005 2004
- --------------------------------------------------------------------------------
Deferred income tax assets:
Accruals not currently deductible for tax purposes $ 9,699 $ 8,224
Billings in excess of revenues 10,528 8,982
Tax loss carryforwards 6,948 9,216
Charitable contribution carryforward - 123
All other items 70 -
- --------------------------------------------------------------------------------
Gross deferred tax assets 27,245 26,545
- --------------------------------------------------------------------------------
Valuation allowance for deferred tax assets (6,150) (6,227)
- --------------------------------------------------------------------------------
Net deferred tax assets 21,095 20,318
- --------------------------------------------------------------------------------
Deferred income tax liabilities:
Unbilled revenues (31,653) (27,714)
Undistributed foreign earnings (1,624) (2,351)
Fixed and intangible assets (1,771) (1,437)
All other items - (135)
- --------------------------------------------------------------------------------
Gross deferred tax liabilities (35,048) (31,637)
- --------------------------------------------------------------------------------
NET DEFERRED TAX LIABILITIES $ (13,953) $(11,319)
- --------------------------------------------------------------------------------
In assessing the realizablility of deferred tax assets, we consider whether it
is more likely than not that some portion or all of the deferred tax assets will
not be realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods in which those
temporary differences become deductible. We consider the scheduled reversal of
deferred tax liabilities and projected future taxable income in making this
assessment. Based upon the level of historical taxable income and projections
for future taxable income over the periods in which the deferred tax assets are
deductible, we believe it is more likely than not that we will realize the
benefits of these deductible differences at December 31, 2005. We have provided
valuation allowances against gross deferred tax assets related primarily to
state and foreign net operating losses. The amount of the deferred tax asset
considered realizable could be reduced in the future if estimates of future
taxable income during the carryforward period are reduced.
We have state net operating loss ("NOL") carryforwards with an aggregate tax
benefit of $3,253,000, which expire from 2009 to 2025. A valuation allowance of
$2,274,000 has been established for these deferred tax assets. In addition,
certain of our foreign subsidiaries have NOL carryforwards aggregating
$3,570,000, which expire in varying amounts starting in 2006; some of these last
indefinitely. A full valuation allowance of $3,570,000 has been established for
the foreign NOL carryforwards. We have also recorded a valuation allowance of
$306,000 against other foreign deferred tax assets.
We have federal unused capital losses totaling $125,000 as of December 31, 2005,
which are available to offset future capital gains. These carryforwards will
expire in 2008. A full valuation allowance of $125,000 has been established for
these deferred tax assets.
During 2005, we made a decision to indefinitely reinvest all earnings from our
Venezuelan subsidiary. As of December 31, 2005, the cumulative amount of foreign
undistributed net earnings related to our Venezuelan subsidiary, for which no
deferred taxes have been provided, was $2,688,000. The decision to
-43-
indefinitely reinvest these earnings resulted in a $947,000 U.S. tax benefit in
2005, since U.S. taxes had previously been provided on these earnings.
We have certain other non-U.S. subsidiaries for which U.S. taxes have been
provided to the extent that a U.S. tax liability could arise upon any remittance
of earnings from the non-U.S. subsidiaries. As of December 31, 2005, we provided
$1,624,000 of U.S. taxes attributable to the undistributed earnings of non-U.S.
subsidiaries. Upon any actual remittance of such earnings, certain countries may
impose withholding taxes that, subject to certain limitations, would then be
available for use as credits against any U.S. tax liability in that period.
The American Jobs Creation Act of 2004 created a temporary incentive for U.S.
corporations to repatriate accumulated income earned abroad by providing for an
85% dividends-received deduction for certain dividends from controlled
corporations. After evaluating its effects, we did not utilize this provision
during 2005.
The Internal Revenue Service was in the process of auditing our 2002
consolidated U.S. income tax return as of December 31, 2005. During 2002, the
Internal Revenue Service completed an examination of our 1998 U.S. income tax
return and made no adjustments. Our 2003 and 2004 U.S. income tax returns
remained subject to audit as of December 31, 2005. Management believes that
adequate provisions have been made for income taxes at December 31, 2005.
13. COMMITMENTS & CONTINGENCIES
We currently believe that amounts recorded for certain tax exposures identified
through our restatement process may ultimately either be recoverable from
clients or may otherwise be reduced. Actual payments could differ from amounts
estimated due to the assessment of certain indirect tax obligations by tax
authorities to our clients in situations where we had the obligation to charge
the client for these taxes, collect the tax and remit it to the tax authorities,
or our successful negotiation of tax penalties and interest at less than full
statutory rates in situations where such penalty and interest obligations have
been estimated and accrued at full statutory rates based on the best information
currently available. Based on information currently available, these exposures
have been determined to reflect probable liabilities. However, depending on the
outcome of future negotiations and discussions with clients and tax authorities,
subsequent conclusions may be reached which indicate that portions of these
additional tax exposures may not require payment and therefore changes in our
estimates could be necessary in future periods. This could result in favorable
effects on our income statements in future periods.
Insurance coverage is obtained for catastrophic exposures as well as those risks
required to be insured by law or contract. We require our insurers to meet
certain minimum financial ratings at the time the coverages are placed; however,
insurance recoveries remain subject to the risk that the insurer will be
financially able to pay the claims as they arise. We are insured with respect to
our workers' compensation and general liability exposures subject to deductibles
or self-insured retentions. Loss provisions for these exposures are recorded
based upon our estimates of the aggregate liability for claims incurred. Such
estimates utilize certain actuarial assumptions followed in the insurance
industry.
We are self-insured for our 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.
-44-
We rely on qualified actuaries to assist us in determining the level of reserves
to establish for both insurance-related claims that are known and have been
asserted against us as well as for insurance-related claims that are believed to
have been incurred based on actuarial analysis, but have not yet been reported
to our claims administrators as of the respective balance sheet dates. We
include any adjustments to such insurance reserves in our consolidated results
of operations.
Our professional liability insurance coverage had been placed on a claims-made
basis with Reliance Insurance Group ("Reliance") for the period July 1, 1994
through June 30, 1999. In 2001, the Pennsylvania Insurance Commissioner placed
Reliance into liquidation. We remain uncertain at this time what effect this
action will have on our recoveries with respect to claims made against us or our
subsidiaries when Reliance coverage was in effect. A wholly-owned subsidiary of
ours was subject to one substantial claim which fell within the Reliance
coverage period. This claim was settled in the amount of $2.5 million, and
payment was made by us in 2003. Due to the liquidation of Reliance, we are
currently uncertain what amounts paid to settle this claim will be recoverable
under the insurance policy with Reliance. We are pursuing a claim in the
Reliance liquidation and believe that some recovery will result from the
liquidation, but the amount of such recovery cannot currently be estimated. We
had no related receivables recorded from Reliance as of December 31, 2005 and
2004.
We have been named as a defendant or co-defendant in other legal proceedings
wherein substantial damages are claimed. Such proceedings are not uncommon to
our business. After consultations with counsel, management believes that we have
recognized adequate provisions for probable and reasonably estimable liabilities
associated with these proceedings, and that their ultimate resolutions will not
have a material impact on our consolidated financial statements.
At December 31, 2005, we had certain guarantees and indemnifications outstanding
which could result in future payments to third parties. These guarantees
generally result from the conduct of our business in the normal course. Our
outstanding guarantees at December 31, 2005 were as follows:
<Table>
<Caption>
Related liability
Maximum balance
undiscounted recorded at
(Dollars in millions) future payments 12/31/05
- --------------------------------------------------------------------------------
Standby letters of credit:
Insurance related $ 6.8 $ 6.8
Other 0.2 -
Sale of certain construction assets
(see Note 17) $ 0.6 $ 0.6
- --------------------------------------------------------------------------------
</Table>
Our banks issue standby letters of credit ("LOCs") on our behalf under the
Agreement as discussed more fully in Note 8 above. As of December 31, 2005, most
of our outstanding LOC amount was issued to an insurance company to serve as
collateral for payments the insurer is required to make under certain of our
self-insurance programs. This LOC may be drawn upon in the event that we do not
reimburse the insurance company for claims payments made on our behalf. Such LOC
renews automatically on an annual basis unless either the LOC is returned to the
bank by the beneficiary or our banks elect not to renew it.
The liability associated with the insurance-related letters of credit reflects
the claims payments for which we expect to reimburse the insurance company
(subsequent to their payments of these claims) in order to avoid the insurance
company's need to draw on the letter of credit. This liability is included as
accrued insurance in our Consolidated Balance Sheet.
-45-
14. EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST
We maintain a defined contribution retirement program through our ESOP, in which
substantially all employees are eligible to participate. The ESOP offers
participants several investment options, including a variety of mutual funds and
Company stock. 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 our Board of Directors. Under the 401(k) Salary
Redirection Program, we revised our matching contribution percentage effective
January 1, 2004 to match up to 100% of the first 3% and 50% of the next full 3%
of eligible salary contributed, thereby resulting in a Company match of as much
as 4.5% of eligible salary contributed. Previously, we matched 100% of the first
5% and 50% of the next full 1% of eligible salary contributed by participants.
Our matching contributions are invested not less than 25% in our Common Stock,
with the remaining 75% being available to invest in mutual funds or our Common
Stock, as directed by the participants. Our required cash contributions under
this program amounted to $5,349,000, $5,006,000 and $6,341,000 in 2005, 2004 and
2003, respectively. An additional discretionary employer contribution of
$1,500,000 for 2004 was approved by our Board of Directors in February 2005, and
accrued as of December 31, 2004. No discretionary employer contributions were
approved by our Board of Directors in either 2005 or 2003.
As of December 31, 2005, the market value of all ESOP investments was
$191,000,000, of which 23% represented the market value of the ESOP's investment
in our Common Stock. Our ESOP held 20% of both the shares and voting power of
our outstanding Common Stock at December 31, 2005.
15. STOCK OPTION PLANS
As of December 31, 2005, we had two fixed stock option plans. Under the 1995
Stock Incentive Plan (the "Plan"), we were authorized to grant options for an
aggregate of 1,500,000 shares of Common Stock to key employees through December
14, 2004. Under the amended 1996 Non-employee Directors' Stock Incentive Plan
(the "Directors' Plan"), we may grant options and restricted shares for an
aggregate of 400,000 shares of Common Stock to non-employee board members
through February 18, 2014. The Directors Plan was amended by a vote at the
annual meeting of shareholders in April 2004 to increase the number of shares
available for grant to 400,000 from 150,000 shares. Under both plans, the
exercise price of each option equals the average market price of our stock on
the date of grant. Unless otherwise established, one-fourth of the options
granted to key employees became immediately vested and the remaining
three-fourths vested in equal annual increments over three years under the now
expired Plan, while the options under the Directors' Plan become fully vested on
the date of grant. Vested options remain exercisable for a period of ten years
from the grant date under both plans.
Under the Directors' Plan, each non-employee director was issued 1,500
restricted shares of Common Stock in 2005 and 1,000 restricted shares in 2004
and 2003, for totals of 12,000 shares in 2005 and 7,000 in 2004 and 2003. We
recognized compensation expense totaling $135,000, $63,000 and $20,000 related
to the issuance of these restricted shares in 2005, 2004 and 2003, respectively.
Restrictions on the shares expire two years after the issue date.
-46-
The following table summarizes all stock option activity for both plans in 2005,
2004 and 2003:
Weighted average
Shares subject exercise price
to option per share
- --------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 1, 2003 629,854 $ 10.34
Options granted 14,000 8.55
Options exercised (9,875) 4.94
Options forfeited or expired (9,698) 14.47
- --------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2003 624,281 $ 10.32
- --------------------------------------------------------------------------------------------------------------
Options granted 14,000 12.63
Options exercised (192,136) 7.88
Options forfeited or expired - -
- --------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2004 446,145 $ 11.44
- --------------------------------------------------------------------------------------------------------------
Options granted 16,000 20.16
Options exercised (43,015) 13.39
Options forfeited or expired - -
- --------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2005 419,130 $ 11.57
- --------------------------------------------------------------------------------------------------------------
The weighted average fair value of options granted during 2005, 2004 and 2003
was $6.71, $6.59 and $3.99, respectively. As of December 31, 2005, no shares of
our Common Stock remained available for future grant under the expired Plan,
while 228,000 shares were available for future grant under the Directors' Plan.
The following table summarizes information about stock options outstanding under
both plans as of December 31, 2005:
<Table>
<Caption>
Options Outstanding Options Exercisable
----------------------------------------------- ----------------------------------
Number of Average Weighted average Number of Weighted average
Range of exercise prices options life* exercise price options exercise price
- ----------------------------------------------------------------------------------------------------------------
$ 4.8125 - $ 9.0000 120,315 4.1 $ 6.93 120,315 $ 6.93
$ 9.5313 - $ 12.850 137,549 3.3 10.40 53,210 10.84
$15.035 - $20.160 161,266 6.5 16.02 161,266 16.02
- ----------------------------------------------------------------------------------------------------------------
TOTAL 419,130 4.8 $ 11.57 334,791 $ 11.93
- ----------------------------------------------------------------------------------------------------------------
</Table>
*Average life remaining in years
The number of options exercisable under both plans as of December 31, 2004 and
2003 was 318,030 and 430,504, respectively.
The fair value of options on the respective grant dates was estimated using a
Black-Scholes option pricing model, based on the following assumptions:
2005 2004 2003
- -----------------------------------------------------------------------------------------------------------------
Weighted average risk-free interest rate 5.4% 5.5% 5.5%
Weighted average expected volatility 44.5% 45.4% 40.6%
Expected option life 6 YEARS 6 years 6 years
Expected dividend yield 0% 0% 0%
- -----------------------------------------------------------------------------------------------------------------
-47-
16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations for
the two years ended December 31, 2005 (in thousands, except per share
information):
2005 - THREE MONTHS ENDED
- --------------------------------------------------------------------------------
Restated
Mar. 31 June 30 Sept. 30 Dec. 31
-------- -------- -------- --------
Total contract revenues $144,195 $142,765 $148,733 $143,585
Gross profit 22,375 18,645 20,838 21,537
Income before income taxes 6,632 1,918 3,543 3,024
Net income 2,855 42 1,340 814
Diluted earnings per common share $ 0.33 $ 0.00 $ 0.15 $ 0.10
- --------------------------------------------------------------------------------
2004 - Three Months Ended
- --------------------------------------------------------------------------------
Restated Restated Restated Restated
Mar. 31 June 30 Sept. 30 Dec. 31*
-------- -------- -------- --------
Total contract revenues 125,328 $130,926 $140,975 $154,817
Gross profit 20,778 23,996 21,992 19,679
Income before income taxes 4,429 5,145 4,813 4,332
Net income 1,835 2,364 1,891 2,304
Diluted earnings per common share 0.22 $ 0.28 $ 0.22 $ 0.26
- --------------------------------------------------------------------------------
* Includes pre-tax expense totaling $1.5 million for a discretionary
employer contribution to our 401(k) program (see Note 14).
2005 - THREE MONTHS ENDED
- --------------------------------------------------
As Reported
Originally
Mar. 31
------------
Total contract revenues $143,963
Gross profit 22,917
Income before income taxes 5,959
Net income 3,456
Diluted earnings per common share $ 0.40
- --------------------------------------------------
-48-
2004 - Three Months Ended
- --------------------------------------------------------------------------------
As As As As
Originally Originally Originally Originally
Reported Reported Reported Reported
Mar. 31 June 30 Sept. 30 Dec. 31*
---------- ---------- ---------- ----------
Total contract revenues $ 125,005 $ 130,603 $ 140,652 $ 154,492
Gross profit 20,941 23,990 21,986 19,271
Income before income taxes 5,845 6,342 5,969 4,639
Net income 3,098 3,605 3,283 2,305
Diluted earnings per
common share $ 0.37 $ 0.42 $ 0.38 $ 0.27
- --------------------------------------------------------------------------------
* Includes pre-tax expense totaling $1.5 million for a discretionary
employer contribution to our 401(k) program (see Note 14).
17. SUBSEQUENT EVENTS
On April 6, 2006, we purchased the stock of Buck Engineering, P.C. (Buck), a
North Carolina-based planning and environmental engineering firm. Buck had 2005
revenues of approximately $13 million and approximately 60 employees at the time
of our acquisition. The acquisition was accounted for under the purchase method
in accordance with SFAS 141, "Business Combinations," and in accordance
therewith, the total purchase price of approximately $10.6 million was allocated
to the assets acquired and liabilities assumed based upon their estimated fair
values. This acquisition had no effect on our consolidated financial statements
as of and for the year ended December 31, 2005.
During 2000, we sold certain assets associated with our former heavy & highway
construction business to A&L, Inc. In October 2003, A&L filed a lawsuit against
us alleging misrepresentation and breach of warranty in connection with the
asset sale. In March 2006, a settlement was reached under which all claims were
released by both parties. The settlement called for our payment of $625,000 to
A&L, as well as our forgiveness of certain receivables totaling $850,000, for
which we had previously recorded reserves totaling $600,000. These adjustments
increased our Corporate overhead (which is allocated between the Engineering and
Energy segments) and reduced pre-tax income by $0.9 million in the second
quarter of 2005.
During the second quarter of 2006, we became aware of new information related to
a partially insured professional liability insurance claim. After consideration
of this new information, we determined that our self-insurance reserve related
to this claim should be increased by $1.25 million. Such adjustment reduced our
pre-tax income by $1.25 million in the second quarter of 2005.
-49-
MANAGEMENT'S REPORT TO SHAREHOLDERS ON
ITS RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management of Michael Baker Corporation is responsible for preparing the
accompanying consolidated financial statements and for ensuring their integrity
and objectivity. These financial statements were prepared in accordance with
accounting principles generally accepted in the United States of America and
fairly represent the transactions and financial position of the Company. The
financial statements include amounts that are based on management's best
estimates and judgments.
The Company's 2005 financial statements have been audited by Deloitte & Touche
LLP, independent registered public accountants, as selected by the Audit
Committee. Management has made available to Deloitte & Touche LLP all the
Company's financial records and related data, as well as the minutes of
shareholders' and directors' meetings. The Company's 2004 and 2003 financial
statements were audited by PricewaterhouseCoopers LLP, independent registered
public accountants.
The Audit Committee is composed of directors who are not officers or employees
of the Company. It meets regularly with members of management, the internal
auditors and the independent registered public accountants to discuss the
adequacy of the Company's internal control over financial reporting, its
financial statements, and the nature, extent and results of the audit effort.
Both the internal auditors and the independent registered public accountants
have free and direct access to the Audit Committee without the presence of
management.
/s/ Donald P. Fusilli, Jr.
- ---------------------------
Donald P. Fusilli, Jr.
President and Chief Executive Officer
/s/ William P. Mooney
- ---------------------------
William P. Mooney
Executive Vice President and Chief Financial Officer
/s/ Craig O. Stuver
- ----------------------------
Craig O. Stuver
Senior Vice President, Corporate Controller and Treasurer
-50-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Michael Baker Corporation
We have audited the accompanying consolidated balance sheet of Michael Baker
Corporation and subsidiaries (the "Company") as of December 31, 2005, and the
related consolidated statements of income, shareholders' investment, and cash
flows for the year then ended. 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 audit. We conducted our audit in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion. In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Michael Baker Corporation
and subsidiaries as of December 31, 2005, and the results of their operations,
and their cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of December 31, 2005, based on the
criteria established in Internal Control -- Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated August 15, 2006 expressed an unqualified opinion on management's
assessment of the effectiveness of the Company's internal control over financial
reporting and an adverse opinion on the effectiveness of the Company's internal
control over financial reporting because of material weaknesses.
/s/ Deloitte & Touche LLP
- -------------------------
Pittsburgh, Pennsylvania
August 15, 2006
-51-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors
of Michael Baker Corporation:
In our opinion, the consolidated balance sheet as of December 31, 2004 and the
related consolidated statements of income, shareholders' investment and cash
flows for each of the two years in the period ended December 31, 2004 present
fairly, in all material respects, the financial position of Michael Baker
Corporation and its subsidiaries at December 31, 2004, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 2004, in conformity with accounting principles generally accepted
in the United States of America. 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 the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, 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 our opinion.
As discussed in Note 2, the Company restated the consolidated financial
statements as of and for the years ended December 31, 2004 and 2003.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
Pittsburgh, Pennsylvania
March 15, 2005, except for Note 2,
as to which the date is August 15, 2006
SUPPLEMENTAL FINANCIAL INFORMATION
Market Information - Common Shares
The principal market on which our Common Stock is traded is the American Stock
Exchange. High and low closing prices of our Common Stock for each quarter
during 2005 and 2004 were as follows:
- --------------------------------------------------------------------------------
2005 2004
----------------------------------- -----------------------------------
Fourth Third Second First Fourth Third Second First
- ------------------------------------------ -----------------------------------
High $27.00 $27.60 $22.95 $24.55 $20.02 $16.60 $15.60 $12.70
Low 22.19 18.00 16.32 18.00 15.60 13.22 11.95 10.16
- --------------------------------------------------------------------------------
-52-