-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TB48vx+gXyJq67Un+0cWW6Xjajdb3+fREjIJO4/mkIiVfwJff+dPiZfJn4GIKM3U gWcrkQ4+cVxraVGqTrsOVA== 0000009263-99-000006.txt : 19990430 0000009263-99-000006.hdr.sgml : 19990430 ACCESSION NUMBER: 0000009263-99-000006 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990429 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BAKER MICHAEL CORP CENTRAL INDEX KEY: 0000009263 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MANAGEMENT SERVICES [8741] IRS NUMBER: 250927646 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-06627 FILM NUMBER: 99603992 BUSINESS ADDRESS: STREET 1: 420 ROUSE ROAD STREET 2: AIRPORT OFFICE PARK BLDG 3 CITY: CORAOPOLIS STATE: PA ZIP: 15108 BUSINESS PHONE: 4122696300 MAIL ADDRESS: STREET 1: P O BOX 12259 CITY: PITTSBURGH STATE: PA ZIP: 15231-0259 FORMER COMPANY: FORMER CONFORMED NAME: EUTHENICS SYSTEMS CORP DATE OF NAME CHANGE: 19750527 FORMER COMPANY: FORMER CONFORMED NAME: BAKER MICHAEL JR INC DATE OF NAME CHANGE: 19720526 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 COMMISSION FILE NUMBER 1-6627 MICHAEL BAKER CORPORATION ------------------------- (Exact name of registrant as specified in its charter) PENNSYLVANIA 25-0927646 - ------------ ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) AIRPORT OFFICE PARK, BUILDING 3, 420 ROUSER ROAD, CORAOPOLIS, PA 15108 - ---------------------------------------------------------------- ----- (Address of principal executive offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (412) 269-6300 -------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: TITLE OF CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED -------------- ----------------------------------------- COMMON STOCK, PAR VALUE $1 PER SHARE AMERICAN STOCK EXCHANGE Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ---- The Registrant estimates that as of March 31, 1999, the aggregate market value of shares of the Registrant's Common Stock and Series B Common Stock held by non-affiliates (excluding for purposes of this calculation only, 2,504,311 shares of Common Stock and 1,224,553 shares of Series B Common Stock held of record or beneficially by the executive officers and directors of the Registrant as a group and the Registrant's Employee Stock Ownership Plan) of the Registrant was $31,550,101 for the Common Stock and $664,426 for the Series B Common Stock (calculated for the Series B Common Stock on the basis of the shares of Common Stock into which Series B Common Stock is convertible). As of March 31, 1999, the Registrant had outstanding 7,159,408 shares of its Common Stock and 1,316,198 shares of its Series B Common Stock. DOCUMENTS INCORPORATED BY REFERENCE Parts of Form 10-K into which Document Document is Incorporated - -------------------------------------------------------------------------------- None Note with respect to Forward Looking Statements: This Annual Report on Form 10-K, and in particular the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of Exhibit 13.1 hereto, which is incorporated by reference into Item 7 of Part II, contains forward looking statements concerning future operations and performance of the Registrant. Forward looking statements are subject to market, operating and economic risks and uncertainties that may cause the Registrant's actual results in future periods to be materially different from any future performance suggested herein. Factors that may cause such differences include, among others: increased competition, increased costs, changes in general market conditions, and changes in anticipated levels of government spending on infrastructure. Such forward looking statements are made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. PART I Item 1. BUSINESS -------- Michael Baker Corporation ("Baker" or "the Registrant") was founded in 1940 and organized as a Pennsylvania corporation in 1946. Today, through its operating subsidiaries and joint ventures, Baker provides engineering, heavy and highway construction, construction management, and operations and technical services worldwide. The Registrant is organized into the following five market-focused business units: Buildings, Civil, Energy, Environmental and Transportation. These business units have coincided with the Registrant's reportable segments in previous years; however, under the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," adopted by the Registrant in 1998, two business units are required to be presented in greater detail. Accordingly, the Registrant's reportable segments now include the Engineering and Baker Support Services, Inc. ("BSSI") divisions of the Civil unit, and the Engineering and Construction (heavy and highway) divisions of the Transportation unit. Information regarding the amounts of revenues, income before taxes, total assets, capital expenditures, and depreciation and amortization expense attributable to the Registrant's reportable segments is contained in Note 4 to the consolidated financial statements, which are included within Exhibit 13.1 to this Form 10-K. Such information is incorporated herein by reference. According to the annual listings published in 1998 by Engineering News Record magazine, Baker ranked 43rd among U.S. design firms, 18th among transportation design firms, 102nd among environmental firms, 132nd among international design firms and 150th among U.S. construction contractors. Baker also ranked 104th among government contractors according to a listing published in 1998 by Government Executive magazine. These rankings were based on 1997 revenues. BUSINESS UNITS - -------------- BUILDINGS. Through March 1999, the Buildings unit comprised a general construction, construction management and design-build division and a facilities planning and design division, that together or separately pursued the design-build market. This unit offered a variety of services including design- build, construction management, planning, program management, general contracting, architectural and interior design, construction inspection, and constructability reviews. The Buildings unit has completed a wide range of projects, such as corporate headquarters, data centers, correctional facilities, educational facilities, airports and entertainment facilities. Following a significant 1998 loss on a construction project in the Buildings unit, effective in April 1999, the Buildings unit has been restructured such that its low-bid, high-risk, general construction activities have been discontinued, and the Registrant will no longer propose on these types of construction projects. Existing low-bid, high-risk construction projects will be completed or sold. In the future, Baker will place increased emphasis on growing its construction management-for-fee business (for which the risk to the Registrant is lower than general construction), and will partner with contractors to pursue larger design-build contracts in the buildings market. The Registrant will continue the facilities planning and design division of the Buildings unit. CIVIL. As previously stated, the Civil unit includes two divisions, Engineering and BSSI. This unit has combined Baker's military infrastructure work in planning and operations and maintenance ("O&M") to improve its ability to market to, and serve, the U.S. Department of Defense, a significant Baker client. The Engineering division provides services which include surveying, mapping, geographic information systems ("GIS"), planning, design, construction management and total program management. The BSSI division principally provides O&M services on U.S. military bases. The Civil unit serves clients in the fields of telecommunications, water resources, pipelines, emergency management, resources management, water/wastewater systems and facilities O&M. ENERGY. The Energy unit specializes in providing a full range of technical services for operating energy production facilities. The unit's comprehensive services consist of training, personnel recruitment, pre-operations engineering, field operations and maintenance, mechanical equipment maintenance and logistics management. The Energy unit serves both major and independent oil and gas producing companies, as well as domestic regulated utilities and independent power producers. This unit operates in over a dozen foreign countries, with major projects in the U.S., Venezuela, Thailand and Nigeria. ENVIRONMENTAL. The Environmental unit provides environmental, health, and safety related engineering and consulting services in both the public and private markets. This unit provides services which include site restoration, strategic regulatory analysis, compliance, and advanced management systems. Clients of the Environmental unit include commercial entities, Fortune 100 companies and the Department of Defense, including the U.S. Army Corps of Engineers and the U.S. Navy. Under the Navy's Comprehensive Long-term Environmental Action Navy (CLEAN) program, this unit has been providing environmental support services throughout the mid-Atlantic states, the Caribbean and Europe since 1991. TRANSPORTATION. Through its two divisions, Engineering and Construction, the Transportation unit provided planning, design, construction and operations support services to governmental transportation agencies throughout the nation in 1998. Within the Engineering division, Baker serves the professional services segment of the market providing planning, design, construction management and inspection, and management consulting services to municipal, state and federal highway, toll road and transit agencies. This division is consistently among the twenty largest providers of such services and enjoys a national reputation for its work in developing highways, bridges, airports, busways and other transit facilities. The Construction division converts design plans into steel and concrete infrastructure as a general contractor for highways, bridges, track installation, sewer, water and other heavy civil construction projects. The primary customers for this division are the same as the Engineering division, but more geographically restricted to Pennsylvania, Illinois, New York and Florida. In connection with the previously mentioned restructuring of the Buildings unit in April 1999, the Registrant announced that its heavy and highway construction business will be sold. The Registrant initiated activities related to the sale of the heavy and highway business during the second quarter of 1999. Normal construction bidding activity will continue during the period through the sale. Following the sale of this business, the Transportation Engineering division will partner with other contractors to pursue selected design-build contracts, which are becoming a growing project delivery method within the transportation marketplace. The Registrant will continue its transportation engineering/design division of the Transportation unit, which is poised to benefit significantly from the U.S. government's TEA-21 legislation signed during 1998. DOMESTIC AND FOREIGN OPERATIONS - ------------------------------- Approximately 91%, 90% and 88% of the Registrant's total contract revenues were derived from work performed within the United States for the years ended December 31, 1998, 1997 and 1996, respectively. Further financial information regarding the Registrant's domestic and foreign operations is contained in Notes 4 and 10 to the consolidated financial statements, which are included within Exhibit 13.1 to this Form 10-K. Such information is incorporated herein by reference. Of the Registrant's domestic revenues, the majority comprises engineering and construction work performed in the Northeast region of the U.S. The Registrant's international revenues are derived primarily from its Energy unit. FUNDED AND UNFUNDED BACKLOG - --------------------------- The Registrant's funded backlog, which comprises that portion of uncompleted work represented by signed contracts and for which the procuring agency has appropriated and allocated the funds to pay for the work, was $448 million at December 31, 1998 and $393 million at December 31, 1997. Total backlog, which incrementally includes that portion of contract value for which options are still to be exercised (unfunded backlog), was $735 million at December 31, 1998 and $649 million at December 31, 1997. With reference to the Registrant's restructuring announced in April 1999, funded backlog related to the businesses that will be continued by the Registrant was $300 million and $252 million, and total backlog was $587 million and $508 million, as of year-end 1998 and 1997, respectively. There is not necessarily a direct correlation between the foregoing figures and the Registrant's annual total contract revenues. In the case of multi-year contracts, total contract revenues are spread over several years and correspond to the timing of the contract rather than the Registrant's fiscal year. Many multi-year contracts, particularly with agencies of the U.S. government, provide for optional renewals on the part of the customer. The Registrant's experience has been that these optional contract renewals, which are included in unfunded backlog, have generally been exercised. Funded backlog generally is highest during the last quarter of the Registrant's fiscal year because that corresponds to the first quarter of the U.S. government's fiscal year, which is when many government contract renewals occur. SIGNIFICANT CUSTOMERS - --------------------- Contracts with various branches of the U.S. government accounted for 27%, 24% and 23% of the Registrant's total contract revenues for the years ended December 31, 1998, 1997 and 1996, respectively. In addition, an individual Buildings unit construction contract with Universal City Development Partners accounted for 11.5% of the Registrant's total contract revenues in 1998. Further financial information regarding this contract is contained in Note 2 to the consolidated financial statements, which are included within Exhibit 13.1 to this Form 10-K. Such information is incorporated herein by reference. No individual contract accounted for more than 10% of the Registrant's total contract revenues in 1997 or 1996. COMPETITIVE CONDITIONS - ---------------------- The Registrant's business is highly competitive with respect to all principal services it offers. Baker competes with numerous firms that provide some or all of the services provided by the Registrant. The competitive conditions in the Registrant's businesses relate to the nature of the contracts being pursued. Public-sector contracts, consisting mostly of contracts with federal and state governmental entities, are generally awarded through a competitive process, subject to the contractors' qualifications and experience. The Baker business units employ extensive cost estimating, scheduling and other techniques for the preparation of these competitive bids. Private-sector contractors compete primarily on the bases of qualifications, quality of performance and price of services. Such private-sector contracts are generally awarded on a negotiated basis. The Registrant believes that the principal competitive factors (in various orders of importance) in the areas of services it offers are quality of service, reputation, experience, technical proficiency and cost of service. The Registrant believes that it is well positioned to compete effectively by emphasizing its full range of professional services. SEASONALITY - ----------- Based upon the Registrant's experience, total contract revenues and net income from engineering and construction-related services tend to be lower for the first quarter than for the remaining quarters due to winter weather conditions, particularly for projects in the Northeast and Midwest regions of the United States. PERSONNEL - --------- At December 31, 1998, the Registrant employed approximately 3,824 persons, broken down by business unit as follows: Buildings unit-287 Environmental unit-159 Civil unit-1,472 Transportation unit-1,026 Energy unit-841 Corporate staff-39 The Registrant's employees are not represented by labor unions, with the exception of its construction personnel which are generally covered by collective bargaining agreements, as are certain BSSI employees in the Civil unit. The majority of current construction-related collective bargaining agreements do not expire until the year 2005. During 1999, several BSSI collective bargaining agreements are scheduled for renegotiation, but no significant issues are expected. Currently, the Registrant considers its relationships with labor unions to be good. Item 2. PROPERTIES ---------- The principal offices of the Registrant are located at the Airport Office Park, 410 and 420 Rouser Road, Coraopolis, Pennsylvania 15108, at which approximately 165,000 square feet of office space is leased for use by the Registrant's Civil, Buildings, Environmental and Transportation units and, to a lesser extent, by its corporate staff. The Registrant owns a 75,000 square foot office building located in Beaver County, Pennsylvania, which is situated on a 175 acre site and utilized by the Registrant's Civil unit. The Beaver building and property are currently for sale. Upon any such sale, the Registrant would expect to either continue leasing this building from the new owner or relocate the affected employees to the Coraopolis area. The Registrant leases an aggregate of approximately 466,000 square feet of office-related floor space, including its principal offices. The space leased by business unit is as follows: The Buildings unit leases approximately 75,000 square feet in: Rocky Hill, Connecticut Annapolis, Maryland Orlando, Florida Coraopolis, Pennsylvania Chicago, Illinois Alexandria, Virginia The Civil unit leases approximately 150,000 square feet in: Anchorage, Alaska Elmsford, New York Fairbanks, Alaska Coraopolis, Pennsylvania Phoenix, Arizona Dallas, Texas Rocky Hill, Connecticut Salt Lake City, Utah Annapolis, Maryland Alexandria, Virginia Bethesda, Maryland Virginia Beach, Virginia Jackson, Mississippi Mexico City, Mexico Billings, Montana The Energy unit leases approximately 30,000 square feet in: Lafayette, Louisiana Abu Dhabi, United Arab Emirates Houston, Texas Middlesex, United Kingdom The Environmental unit leases approximately 46,000 square feet in: Merrillville, Indiana Princeton, New Jersey Annapolis, Maryland Coraopolis, Pennsylvania The Transportation unit leases approximately 148,000 square feet in: Birmingham, Alabama Cleveland, Ohio Phoenix, Arizona Columbus, Ohio Fort Smith, Arkansas Coraopolis, Pennsylvania Rocky Hill, Connecticut Gibsonia, Pennsylvania Tampa, Florida Harrisburg, Pennsylvania Chicago, Illinois Horsham, Pennsylvania Shreveport, Louisiana Alexandria, Virginia Annapolis, Maryland Richmond, Virginia Princeton, New Jersey Virginia Beach, Virginia Brooklyn, New York Charleston, West Virginia Elmsford, New York The Corporate staff utilizes approximately 17,000 square feet of leased space in Coraopolis and Beaver, Pennsylvania. Item 3. LEGAL PROCEEDINGS ----------------- The Registrant has been named as a defendant or co-defendant in legal proceedings wherein substantial damages are claimed. Such proceedings are not uncommon to the Registrant's business. After consultations with counsel, except as discussed below, management believes that the Registrant has recognized adequate provisions for these proceedings and their ultimate resolutions will not have a material adverse effect on the consolidated financial position or annual results of operations of the Registrant. The Registrant currently has two significant legal proceedings outstanding. The more significant one relates to a contract for the construction of the CityWalk project at the Universal Studios theme park in Orlando, Florida between Baker Mellon Stuart Construction, Inc. ("BMSCI"), a wholly-owned subsidiary of the Registrant, and Universal City Development Partners ("UCDP"). BMSCI was providing project-related construction services to UCDP under the contract. During BMSCI's performance under the contract, which began in 1997, the project suffered delays due to substantial changes in the design of the project and the related drawings. On March 5, 1999, UCDP terminated BMSCI's right to proceed with the project work by alleging default. UCDP has also notified BMSCI of UCDP claims for damages resulting from the alleged default, including the cost to complete or correct the work, additional maintenance or operation costs, and alleged lost revenues or other damages. UCDP simultaneously filed a lawsuit for breach of contract in the Federal District Court in the Middle District of Florida ("Federal Court"). The Registrant will answer the complaint, or file a motion to dismiss or other responsive pleading in the action. On March 8, 1999, BMSCI filed a lawsuit against UCDP in the Circuit Court for the Ninth Judicial Circuit in and for Orange County, Florida ("State Court") alleging breach of contract, wrongful termination and other counts and seeking damages, interest, court costs and other relief, including potential counterclaims. Discovery has not begun in either case, although the parties are cooperating in the initial exchange of documents for the cases. No other scheduling order or other case management documents have been filed. In addition, two of BMSCI's subcontractors have also filed suit against BMSCI in connection with the project. On November 24, 1998, ADF International Inc., BMSCI's subcontractor for structural steel/miscellaneous metals, filed suit in Federal Court against BMSCI and its surety seeking damages for breach of contract relating to the project. BMSCI and its surety have answered the complaint (and amended complaint) and BMSCI has filed a counterclaim. Discovery in the matter is beginning, and no trial date has been set. On February 10, 1999, Martin K. Eby Construction Company, Inc., BMSCI's subcontractor for foundations, also filed suit in Federal Court against BMSCI and its surety seeking damages for breach of contract relating to the project. BMSCI and its surety have answered the complaint. Discovery in the matter is beginning, and no trial date has been set. BMSCI has held discussions with both ADF International Inc. and Martin K. Eby Construction Company, Inc. with the intent of jointly pursuing the subcontractors' claims and those of BMSCI against UCDP, which may be ultimately responsible for the claims arising from the project. Additional claims may be filed in connection with this matter. Baker and its counsel believe that BMSCI has valid claims against UCDP and its subcontractors and intends to defend these claims vigorously. However, an unfavorable resolution of these matters could have a material adverse effect on the Registrant's consolidated financial position, results of operations and cash flow. The other proceeding relates to a lawsuit brought in 1987 in the Supreme Court of the State of New York, Bronx County, by the Dormitory Authority of the State of New York against a number of parties, including the Registrant and one of its wholly-owned subsidiaries, that asserts breach of contract and alleges damages of $13 million. The Registrant, which was not a party to the contract underlying the lawsuit, contends that there is no jurisdiction with respect to the Registrant and that it cannot be held liable for any conduct of the subsidiary. Both the Registrant and the subsidiary are contesting liability issues and have filed cross-claims and third-party claims against the other entities involved in the project. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------- No matters were submitted to a vote of the Registrant's security holders during the fourth quarter of 1998. PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY ------------------------------------------------------------- HOLDER MATTERS -------------- Information relating to the market for the Registrant's Common Stock and other matters related to the holders thereof is set forth in the "Supplemental Financial Information" section of Exhibit 13.1 to this Form 10-K. Such information is incorporated herein by reference. The Registrant's present policy is to retain any earnings to fund the operations and growth of the Registrant. The Registrant has not paid any cash dividends since 1983 and has no plans to do so in the foreseeable future. At March 31, 1999, the Registrant had 1,444 holders of its Common Stock and 659 holders of its Series B Common Stock. Item 6. SELECTED FINANCIAL DATA ----------------------- A summary of selected financial data for the Registrant, including each of the last five fiscal years for the period ended December 31, 1998, is set forth in the "Selected Financial Data" section of Exhibit 13.1 to this Form 10-K. Such summary is incorporated herein by reference. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS --------------------- A discussion of the Registrant's financial condition, cash flows and results of operations is set forth in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of Exhibit 13.1 to this Form 10-K. Such discussion is incorporated herein by reference. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ---------------------------------------------------------- Based on the Registrant's current and long-term debt balances totaling $4.0 million at December 31, 1998, Baker has no material exposure to interest rate risk. Less than 1% of the Registrant's total assets and total contract revenues as of and for the year ended December 31, 1998 were denominated in British Pounds Sterling; accordingly, the Registrant has no material exposure to foreign currency exchange risk. These materiality assessments are based on the assumption that either the interest rates or the foreign currency exchange rates could change unfavorably by 10%. Based on the nature of the Registrant's business, it has no exposure to commodity price risk. In accordance with the foregoing, the Registrant has no interest rate swap or exchange agreements, nor does it have any foreign currency exchange contracts. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ------------------------------------------- The consolidated financial statements, together with the report thereon of PricewaterhouseCoopers LLP, dated April 20, 1999, and supplementary financial information are set forth within Exhibit 13.1 to this Form 10-K. Such financial statements and supplementary financial information are incorporated herein by reference. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND --------------------------------------------------------------- FINANCIAL DISCLOSURE -------------------- Not applicable. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT -------------------------------------------------- Directors and Executive Officers The following table sets forth certain information regarding the directors of the Registrant. Each director was elected by the Registrant's shareholders at the 1998 Annual Meeting for a one year term to expire on the date of the next annual meeting of shareholders or until his respective successor shall have been elected and shall have qualified. Except as otherwise indicated, each director has held the principal occupation listed or another executive position with the same entity for at least the past five years.
Director Principal Occupation; Other Director Since Directorships; Age - -------------------------------------------------------------------------------- Robert N. Bontempo 1997 Associate Professor of International Business at Columbia University since July 1994; formerly Assistant Professor of International Business at Columbia University from July 1989 to July 1994; Fellow at the Center for Advanced Study at Stanford University, Summer 1992; formerly Personnel Research Analyst at IBM Corporate Headquarters; Age 40 William J. Copeland 1983 Retired; formerly Chairman of the Board of the Registrant; formerly Vice Chairman of the Board of PNC Financial Corp. and Pittsburgh National Bank; Director or trustee of various investment companies affiliated with Federated Investors; Age 80 Roy V. Gavert, Jr. 1988 President and Chief Executive Officer of Kiplivit North America, Inc. (manufacturing) since July 1995; Managing Director of World Class Processing, Inc.(manufacturing); principal of the Horton Company (manufacturer of valves for household appliances); formerly Managing Director of Gavert Wennerholm & Co. (venture capital); formerly Managing Director of Eagle Capital, Inc. (investment bank and venture capital); formerly Executive Vice President, Westinghouse Electric Corporation; Age 65 Charles I. Homan 1994 President and Chief Executive Officer since October 1994; formerly Executive Vice President from January 1990 to September 1994; formerly Senior Vice President from April 1988 to December 1989; formerly President of Michael Baker, Jr., Inc. (a subsidiary) from May 1983 to September 1994; Director of Citizens Banking Company; Age 55 Thomas D. Larson 1993 Self employed (consultant); formerly Administrator, United States Federal Highway Administration until January 1992; formerly Secretary of the Pennsylvania Department of Transportation; formerly Professor of Engineering, The Pennsylvania State University; Age 70 John E. Murray, Jr. 1997 President and Professor of Duquesne University since July 1988; formerly University Distinguished Service Professor at University of Pittsburgh; formerly Dean of Villanova University School of Law; formerly Acting Dean and Professor at Duquesne University School of Law; Director of Federated Investors; Age 66 Richard L. Shaw 1966 Chairman of the Board; formerly Chairman of the Board, President and Chief Executive Officer of the Registrant from September 1993 through September 1994; formerly President and Chief Executive Officer of the Registrant from April 1984 to May 1992; Director of L.B. Foster Company (manufacturing); Age 71 Konrad M. Weis 1991 Retired; formerly President and Chief Executive Officer of Bayer USA Inc. (chemicals, health care and imaging technologies); Director of PNC Equity Management Corporation, Titan Pharmaceuticals, Inc. and Dravo Corporation; Age 70 J. Robert White 1994 Executive Vice President, Chief Financial Officer and Treasurer since July 1994; formerly Assistant Director of Investor Relations for Westinghouse Electric Corporation from prior to 1990 through June 1994; formerly Adjunct Professor of Accounting and Finance at the University of Pittsburgh and Carnegie Mellon University; Age 56
Charles I. Homan and J. Robert White are both directors and executive officers of the Registrant. With the exception of Messrs. Homan and White, who are listed above, the following represents a listing of executive officers of the Registrant as of December 31, 1998: H. James McKnight - Age 54; Senior Vice President, General Counsel and Secretary of the Registrant since 1995. Mr. McKnight previously served as counsel to International Technology Corporation from February 1995 through September 1995, and was a self-employed consultant from 1992 through February 1995. Glenn S. Burns - Age 49; Executive Vice President of the Registrant and President of Baker Mellon Stuart Construction, Inc., a subsidiary of the Registrant, from 1995 until his resignation in February 1999. Mr. Burns previously served as Vice President, General Counsel and Secretary of the Registrant from 1994 through 1995 and as Assistant General Counsel from 1991 through 1994. Donald P. Fusilli, Jr. - Age 47; Executive Vice President of the Registrant since 1991 and President of Baker/MO Services, Inc., a subsidiary of the Registrant, since 1995. Mr. Fusilli previously served as General Counsel and Secretary of the Registrant from 1986 through 1994. He has been employed by the Registrant in various capacities since 1973. John C. Hayward - Age 51; Executive Vice President of the Registrant since 1995 and President of Michael Baker Jr., Inc. since 1994. Mr. Hayward previously served as Senior Vice President of Michael Baker Jr., Inc. from 1989 through 1994. He has been employed by the Registrant in various capacities since 1974. Philip A. Shucet - Age 48; Executive Vice President of the Registrant and President of Baker Environmental, Inc., a subsidiary of the Registrant, since 1996. Mr. Shucet previously served as Vice President of Michael Baker Jr., Inc. from 1995 to 1996. Mr. Shucet has been employed by the Registrant in various capacities since 1989. Edward L. Wiley - Age 55; Executive Vice President of the Registrant since 1995 and Executive Vice President of Michael Baker Jr., Inc. since 1994. Mr. Wiley previously served as Senior Vice President of Michael Baker Jr., Inc. from 1989 through 1994. He has been employed by the Registrant in various capacities since 1968. Executive officers of the Registrant serve at the pleasure of the Board of Directors and are elected by the Board or appointed annually for a term of office extending through the election or appointment of their successors. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934 (the "1934 Act") requires the Registrant's directors and executive officers, and persons who own more than ten percent of a registered class of the Registrant's equity securities, to file with the Securities and Exchange Commission (the "Commission") initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Registrant. Such persons are required by Commission regulations to furnish the Registrant with copies of all Section 16(a) forms which they file. The Registrant believes that all such filing requirements applicable to its executive officers and directors were complied with in 1998 except that a Form 5 filed by Philip A. Shucet, an officer of the Registrant, was deemed to be late because it inadvertently omitted certain information. ITEM 11. EXECUTIVE COMPENSATION ---------------------- The following table sets forth certain information regarding compensation received by the Chief Executive Officer and the four remaining most highly compensated executive officers of the Registrant for the last three completed fiscal years.
Summary Compensation Table Long-Term Compensation ------------ Shares of Annual Compensation Common Stock Name and Principal ------------------- Underlying All Other Position Year Salary Bonus Options(2) Compensation(1) - -------------------------------------------------------------------------------- Charles I. Homan 1998 $385,300 $ -- 58,362 $12,592 President and Chief 1997 $341,600 $62,757 23,529 $12,092 Executive Officer 1996 $319,400 $54,412 12,571 $11,455 Donald P. Fusilli, Jr. 1998 $201,200 $23,022 27,480 $10,000 Executive Vice 1997 $188,200 $25,642 9,122 $ 8,700 President-Energy 1996 $180,000 $24,750 5,236 $ 8,658 John C. Hayward 1998 $195,700 $22,569 26,738 $12,592 Executive Vice 1997 $188,200 $15,643 9,122 $10,578 President- 1996 $180,000 $15,000 5,236 $ 9,267 Transportation Edward L. Wiley 1998 $206,200 $11,068 28,161 $11,400 Executive Vice 1997 $192,300 $36,314 9,122 $10,075 President-Civil 1996 $180,000 $35,776 5,236 $ 9,351 J. Robert White 1998 $209,100 $ -- 28,664 $10,827 Executive Vice 1997 $192,300 $31,923 9,122 $ 8,030 President, Chief 1996 $180,000 $30,001 5,236 $ 9,479 Financial Officer and Treasurer (1) Includes matching contributions made by the Registrant under its 401(k) plan paid on behalf of the following individuals in 1998, 1997 and 1996, respectively: Mr. Homan, $10,000, $9,500 and $9,151; Mr. Fusilli, $10,000, $7,254 and $7,873; Mr. Hayward, $10,000, $9,012 and $ 7,962; Mr. Wiley, $10,000, $8,802 and $8,211; and Mr. White, $6,777, $5,438 and $7,860. Also includes group life insurance premiums paid by the Registrant on behalf of the following individuals in 1998, 1997 and 1996, respectively: Mr. Homan, $2,592, $2,592 and $2,304; Mr. Fusilli, $0, $1,446 and $785; Mr. Hayward $2,592, $1,566, and $1,305; Mr. Wiley, $1,400, $1,273 and $1,140; and Mr. White, $4,050, $2,592 and $1,619. (2) Stock options were granted February 27, 1996, February 27, 1997 and February 27, 1998, under the Registrant's 1995 Stock Incentive Plan. In addition the Registrant also granted certain performance based stock options to the executive officers on April 23, 1998, which will vest in the first quarter of 2001 if the Registrant achieves certain performance goals in the year 2000.
Options Granted in 1998 Potential Realizable Value No. of % of Total at Assumed Annual Shares Options Rates of Stock Subject Granted to Price Appreciation to Employees For Option Term Options in Exercise Expiration ------------------ Name Granted 1998 Price/Share Date 5% 10% - -------------------------------------------------------------------------------- Charles I. Homan 18,361(1) 4.6% $ 9.5313 27-Feb-08 $110,059 $278,912 40,001(2) 10.1% $10.1250 23-Apr-08 $254,709 $645,482 Donald P. Fusilli, 6,977(1) 1.8% $ 9.5313 27-Feb-08 $ 41,821 $105,984 Jr. 20,503(2) 5.2% $10.1250 23-Apr-08 $130,554 $330,850 John C. Hayward 6,977(1) 1.8% $ 9.5313 27-Feb-08 $ 41,821 $105,984 19,761(2) 5.0% $10.1250 23-Apr-08 $125,829 $318,876 Edward L. Wiley 7,161(1) 1.8% $ 9.5313 27-Feb-08 $ 42,924 $108,779 21,000(2) 5.3% $10.1250 23-Apr-08 $133,719 $338,869 J. Robert White 7,163(1) 1.8% $ 9.5313 27-Feb-08 $ 42,936 $108,809 21,501(2) 5.4% $10.1250 23-Apr-08 $136,909 $346,954 (1) All options were granted pursuant to the 1995 Stock Incentive Plan and vest in four equal annual installments beginning on the date of grant. The dollar amounts under the potential realizable value columns are the result of calculations at assumed annually compounded rates of stock price appreciation over the ten-year life of the options in accordance with the proxy regulations of the Securities and Exchange Commission, and are not intended to forecast actual future appreciation, if any, of the Registrant's Common Stock. The actual value, if any, an executive may realize will depend on the excess of the market price of the shares over the exercise price on the date the option is exercised. (2) These options were granted April 23, 1998, pursuant to the 1995 Stock Incentive Plan. The options become fully exercisable on April 23, 2006, but will vest in the first quarter of 2001 if certain performance goals are satisfied for the year 2000.
Aggregated Option Exercises in 1998 Number of Securities Value of Underlying Unexercised Unexercised In-the-Money Shares Options at Options at Acquired December 31, 1998 December 31, 1998 On Value Exercisable/ Exercisable/ Name Exercise Realized Unexercisable Unexercisable(1) - -------------------------------------------------------------------------------- Charles I. Homan -- -- 53,282/68,680 $211,633/$51,986 Donald P. Fusilli, Jr. -- -- 22,832/31,606 $ 92,591/$20,578 John C. Hayward -- -- 22,132/30,864 $ 89,266/$20,578 Edward L. Wiley -- -- 21,828/32,241 $ 87,614/$20,608 J. Robert White 15,477 $67,525 6,351/32,742 $ 13,362/$20,608 (1) Based on the exercise price and fair market value of the Common Stock as of December 31, 1998.
Compensation of Directors Compensation for non-employee directors is as follows: Annual retainer--$15,000; Attendance at each regularly scheduled or special meeting of the Board of Directors--$1,000; Attendance at a Board of Directors committee meeting--$500; Telephonic attendance at a Board of Directors or committee meeting--$100; Additional annual retainer for chairman of the Board of Directors--$5,000; and Additional annual retainer for committee chairmen--$2,500. Notwithstanding anything to the contrary set forth in any of the Registrant's previous filings under the Securities Act of 1933, as amended, or the Securities and Exchange Act of 1934, as amended, that might incorporate future filings, including this Form 10-K in whole or in part, the following report and the Stock Performance Graphs shall not be incorporated by reference into any such filings. Report of the Compensation Committee Introduction Decisions regarding compensation of the Registrant's executives generally are made by a three-member Compensation Committee of the Board. All decisions of the Compensation Committee relating to compensation of the Registrant's executive officers are reviewed and approved by the full Board. Set forth below is a report submitted by Messrs. Larson, Murray and Weis in their capacity as the Board's Compensation Committee addressing the Registrant's compensation policies for 1998 as they affected executive officers of the Registrant, including Mr. Homan, the President and Chief Executive Officer, and Messrs. Fusilli, Hayward, Wiley and White, the four executive officers other than Mr. Homan who were, for 1998, the Registrant's most highly paid executive officers. Compensation Philosophy The Registrant applies a consistent philosophy toward compensation based upon the following objectives: (i) to attract and retain executive officers and other key employees of outstanding ability, and to motivate all employees to perform to the full extent of their abilities; (ii) to ensure that pay is competitive with other leading companies in the Registrant's industry; (iii) to reward executive officers for corporate, group and individual performance; and (iv) to ensure that total compensation to the executive officers as a group is not disproportionate when compared to the Registrant's total employee population. Compensation The Compensation Committee retains the services of Hewitt Associates, a compensation consulting firm, to assist the Committee in connection with performance of its duties. Hewitt Associates provides ongoing advice to the Committee with respect to the reasonableness of compensation paid to executive officers of the Registrant. The Registrant applies a compensation program consisting of base salary and annual incentive compensation. In determining Mr. Homan's salary as President and Chief Executive Officer and the remaining executive officers' base salaries for 1998, the Compensation Committee reviewed the relationship of his compensation to that of other executive officers of the Registrant and, the Registrant's current and projected growth and profitability performance. Incentive compensation for Mr. Homan and the other executive officers is determined based on the achievement of such predetermined corporate performance goals as profitability and earnings per share. Each such officer's annual performance is measured by reviewing contribution to overhead and profit, new work added, cash flow return on investment, human resources development and continuous improvement management goals. The Chief Executive Officer recommends to the Compensation Committee salary adjustments for executive officers. The committee reviews these recommendations in light of the above factors and with reference to the Hewitt Report and the executive salary studies described above. A final comparison is made to verify that the total percentage increase in compensation paid to the executive officers as a group is not disproportionate to the percentage increase applicable to other Registrant employee groups. All executive employees participate in an annual incentive program. The components of the plan are based upon corporate and individual performance. Measures of corporate performance may include, but are not limited to, one or more financial measures such as earnings per share and profitability. Individual performance is based on the performance rating received as part of the annual Performance Management Process. The Performance Management Process is a program which emphasizes performance planning (management/employee goal setting), progress reviews and management feedback to employees. Primary objectives of the program are to enhance the professional development of the individual employee and to align individual performance goals with those of the Registrant. The rating is based upon factors agreed to by the Chief Executive Officer and the individual executive employees. 1995 Stock Incentive Plan On December 15, 1994, the Board of Directors approved the 1995 Stock Incentive Plan (the "Option Plan"), which was approved by the shareholders at the 1995 Annual Meeting and provides long-term incentive compensation to eligible employees. The Compensation Committee retains the services of Buck Consultants to assist the Committee in evaluating the Option Plan relative to practices of other publicly-traded companies engaging in one or more lines of business comparable to those of the Registrant. Stock options are awarded based on the Compensation Committee's judgment concerning the position and responsibilities of the employee being considered, the nature and value of his or her services, his or her current contribution to the success of the Registrant, and any other factors which the Compensation Committee may deem relevant. Stock option awards tie the interests of employees to the long-term performance of the Registrant, and provide an effective incentive for employees to create shareholder value over the long term since the full benefit of the compensation package cannot be realized unless an appreciation in the Registrant's stock price occurs over a number of years. In 1998, the Compensation Committee reviewed the Option Plan and, based on its review, recommended to the Board of Directors that the Option Plan be amended to increase by 1,000,000 the number of shares available for grants thereunder and to increase the maximum number of shares as to which options may be granted to any one employee during any calendar year from 30,000 to 100,000 shares. The Board of Directors approved the amendment on February 27, 1998, and the Shareholders adopted the amendment on April 22, 1998 at the 1998 Annual Meeting of Shareholders. The Compensation Committee believes these changes were desirable in order to ensure that there are sufficient options available under the Option Plan to continue to motivate and reward employees and to ensure that the grants are significant enough to provide meaningful inducement and reward to key employees. In addition, on April 23, 1998, the Compensation Committee adopted a proposal to award a one-time grant of stock options to certain employees, the vesting of which will be based upon the Registrant achieving earnings for the year ended December 31, 2000 (the "Fiscal Year 2000") equal to or in excess of $1.25 per share of Common Stock (the "Vision 2000 Options"). The Vision 2000 Options will vest and may be exercisable immediately upon the determination of the Board of Directors, based on the audited financial results of the Registrant for the Fiscal Year 2000, that the Registrant has achieved earnings of at least $1.25 per share for the Fiscal Year 2000. In the event that the Registrant does not achieve such earnings, the Vision 2000 Options will become exercisable eight years from the date of the grant. The exercise price of the Vision 2000 Options will be the fair market value of the Common Stock on the date of the grant. The Vision 2000 Options were granted on April 23, 1998, and have an exercise price equal to $10.125. 1996 Nonemployee Directors' Stock Incentive Plan On February 27, 1996, the Board of Directors approved the 1996 Nonemployee Directors' Stock Incentive Plan, which was approved by the shareholders at the 1996 Annual Meeting. This plan provides long-term incentive compensation to eligible directors. Under this plan, each member of the Board of Directors who is not an employee of the Registrant or any of its subsidiaries is granted 500 restricted shares and an option to purchase 1,000 shares of Common Stock on the first business day following each Annual Meeting of Shareholders. This report is submitted by the Compensation Committee of the Registrant's Board of Directors. Thomas D. Larson John E. Murray, Jr. Konrad M. Weis Compensation Committee Interlocks and Insider Participants The members of the Compensation Committee in 1998, Thomas D. Larson, John E. Murray, Jr. and Konrad M. Weis, are nonemployee directors. During 1998, no executive officer of the Registrant served on a compensation committee (or other board committee performing equivalent functions) or on the board of directors of any entity (other than the Registrant's Board of Directors) related to any member of the Registrant's Board of Directors. Stock Performance Graph The graph below compares for the five-year period commencing December 31, 1993, the yearly percentage change in the cumulative total shareholder return on the Registrant's Common Stock with the cumulative total return of the S&P 500 Stock Index, the Russell 2000 Stock Index and with a peer group identified by the Registrant to best approximate the Registrant's diverse business groups. The peer group was selected to include publicly-traded companies engaging in one or more of the Registrant's lines of business: engineering, construction and operations and maintenance. The peer group consists of the following companies: Aqua Alliance, Inc. (f/k/a Air and Water Technologies Corp.), Dames & Moore Group, Granite Construction, Inc., Harding Lawson Associates Group, Inc., ICF Kaiser International, Inc., Jacobs Engineering Group, Inc., Morrison Knudsen Corp., Perini Corp., Stone & Webster, Inc., STV Group, Inc., Tetra Tech, Inc., Turner Corp., URS Corp., Roy F. Weston, Inc. [Note: Guy F. Atkinson Registrant of California, a member of the peer group in previous years, ceased operations during 1998.] The following five year total shareholder return chart compares the Registrant's total shareholder return on the Registrant's Common Stock with that of the peer group used for the year ended December 31, 1998.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURNS Among Michael Baker Corporation, S&P 500 Index, Russell 2000 Index and The Peer Group* Cumulative Total Return - -------------------------------------------------------------------------------- 12/93 12/94 12/95 12/96 12/97 12/98 - -------------------------------------------------------------------------------- Michael Baker Corporation 100 34 45 58 89 89 Peer Group 100 80 97 96 111 152 S&P 500 100 101 139 171 229 294 Russell 2000 100 98 126 147 180 179 * Assumes $100 invested at the close of trading on December 31, 1993 in the Registrant's Common Stock, the S&P 500 Index, the Russell 2000 Index, and the peer group and assumes the reinvestment of dividends.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT -------------------------------------------------------------- The following table sets forth certain information as to the beneficial ownership of the Registrant's Common Stock and Series B Common Stock held by each person known by the Board of Directors of the Registrant to own beneficially more than 5% of the outstanding shares of Common Stock or Series B Common Stock of the Registrant, by each director, by each of the executive officers named in the Summary Compensation Table (the "Summary Compensation Table"), and by all directors and executive officers as a group. The Michael Baker Corporation Employee Stock Ownership Plan and Trust (the "ESOP") holds 72.4% of the voting power of the Registrant's outstanding Common Capital Stock. Information contained in this Item 12 is as of the most recent practicable date, which is December 31, 1998, for beneficial owners of more than 5%, March 31, 1999 as to shares held by the ESOP, and as to the directors and executive officers. The information in the table concerning beneficial ownership is based upon information furnished to the Registrant by or on behalf of the persons named in the table.
Common Stock Series B Common Stock ------------------------- ---------------------- Number of Number of Shares and Shares and Nature of Nature of Beneficial Beneficial Name Ownership(1) Percent Ownership(1) Percent - -------------------------------------------------------------------------------- Michael Baker Corporation 2,475,158 34.6 1,223,475 93.0 Employee Stock Ownership Plan and Trust(1) Michael Baker Corporation P.O. Box 12259 Pittsburgh, PA 15231-0259 Goldman Sachs(2) 882,800 12.4 None -- 85 Broad Street New York, New York 10004 Lord Abbett & Co. 787,690 11.0 None -- 767 Fifth Avenue New York, New York 10153 Dimensional Fund Advisors 456,114 6.4 None -- Inc.(3) 1299 Ocean Avenue 11th Floor Santa Monica, CA 90401 Robert N. Bontempo 3,000(7) * None -- William J. Copeland 5,500(7) * None -- Donald P. Fusilli, Jr. 40,581(5)(7) * 8,169(6) * Roy V. Gavert, Jr. 4,500(7) * None -- John C. Hayward 39,907(5)(7) * 9,934(6) * Charles I. Homan 95,460(4)(5)(7) 1.3 21,234(4)(6) 1.6 Thomas D. Larson 6,425(4)(7) * None -- John E. Murray, Jr. 3,000(7) * None -- Richard L. Shaw 12,705(7) * None -- Konrad M. Weis 12,000(4)(7) * None -- J. Robert White 17,985(5)(7) * 1,532(6) -- Edward L. Wiley 48,654(4)(5)(7) * 15,349(6) 1.2 All Directors and 352,639(4)(5)(7) 4.9 62,978(6) 4.8 Executive Officers as a group (17) persons * Less than 1%. (1) Under regulations of the Securities and Exchange Commission, a person who has or shares voting or investment power with respect to a security is considered a beneficial owner of the security. Voting power is the power to vote or direct the voting of shares, and investment power is the power to dispose of or direct the disposition of shares. Unless otherwise indicated in the other footnotes below, each person has sole voting power and sole investment power as to all shares listed opposite his name. The ESOP requires the trustee to vote the shares held by the trust in accordance with the instructions from the ESOP participants for all shares allocated to such participants' accounts. Allocated shares for which no such instructions are given and shares not allocated to the account of any employee are voted by the trustee in the same proportion as the votes for which participant instructions are given. In the case of a tender offer, allocated shares for which no instructions are given are not voted or tendered, and shares not allocated to the account of any employee are voted by the trustee in the same proportion as the votes for which participant instructions are given. (2) Shares held as a group by Goldman Sachs & Co. and the Goldman Sachs Group, L.P., each of which disclaim beneficial ownership of all such shares. This information has been taken from Schedule 13G dated as of December 31, 1998. (3) Dimensional Fund Advisors Inc., ("Dimensional") an investment advisor registered under Section 203 of the Investment Advisors Act of 1940, furnishes investment advice to four investment companies registered under the Investment Registrant Act of 1940, and serves as investment manager to certain other investment vehicles, including commingled group trusts. (These investment companies and investment vehicles are the "Portfolios"). In its role as investment advisor and investment manager, Dimensional possesses both voting and investment power over the securities of the Issuer described in this schedule that are owned by the Portfolios. All securities reported in this schedule are owned by the Portfolios, and Dimensional disclaims beneficial ownership of such securities. (4) Some or all of such shares are jointly owned by such person and his spouse. Voting and investment power as to such shares is shared by the nominee and his spouse. (5) Includes the number of shares of Common Stock indicated for each of the following persons or group which are allocated to their respective accounts as participants in the ESOP and as to which they are entitled to give binding voting instructions to the trustee of the ESOP: Mr. Fusilli (12,416 shares); Mr. Hayward (12,442 shares); Mr. Homan (23,485 shares); Mr. White (6,255 shares); Mr. Wiley (18,447 shares); and directors and executive officers as a group (87,996 shares). ESOP holdings have been rounded to the nearest full share. (6) Includes the number of shares of Series B Common Stock indicated for each of the following persons or group which are allocated to their respective accounts as participants in the ESOP and as to which they are entitled to give binding voting instructions to the trustee of the ESOP: Mr. Fusilli (8,169 shares); Mr. Hayward (9,934 shares) Mr. Homan (20,156 shares); Mr. White (1,532 shares); Mr. Wiley (15,349 shares); and directors and executive officers as a group (61,900 shares). ESOP holdings have been rounded to the nearest full share. (7) Includes indicated number of shares of Common Stock issuable pursuant to stock options which may be exercised within 60 days of the date of this Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ---------------------------------------------- The Registrant entered into an employment agreement with Richard L. Shaw (formerly President and Chief Executive Officer of the Registrant) in April 1988, which agreement was supplemented in March 1992, October 1994 and February 1998. At the time of his retirement as of the end of September 1994, Mr. Shaw was being compensated at an annual salary of approximately $400,000. The agreement provides for Mr. Shaw's performance of consulting services to the Registrant until May 31, 2000, with annual compensation equal to 20% of his salary prior to retirement. In addition, during this period, the Registrant will cover costs of health insurance, reimburse actual out-of-pocket expenses and maintain a life insurance policy for Mr. Shaw. This agreement also provides for a supplemental retirement benefit of $2,500 per month commencing after the expiration of such period. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K --------------------------------------------------------------- (a)(1) The following financial statements are incorporated in Item 8 of Part II of this Report by reference to the consolidated financial statements within Exhibit 13.1 to this Form 10-K: Consolidated Balance Sheet as of December 31, 1998 and 1997 Consolidated Statement of Income for the three years ended December 31, 1998 Consolidated Statement of Cash Flows for the three years ended December 31, 1998 Consolidated Statement of Shareholders' Investment for the three years ended December 31, 1998 Notes to Consolidated Financial Statements Report of Independent Accountants (a)(2) All financial statement schedules are omitted because they are either not applicable or the required information is shown in the consolidated financial statements or notes thereto. (a)(3) The following exhibits are included herewith as a part of this Report:
EXHIBIT NO. DESCRIPTION - ----------- ----------- 3.1 Articles of Incorporation of the Registrant, as amended, filed as Exhibit 3.1 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, and incorporated herein by reference. 3.2 By-laws of the Registrant, as amended, filed as Exhibit 3.2 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994, and incorporated herein by reference. 10.1 1998 Incentive Compensation Plan of Michael Baker Corporation, filed herewith. 10.2 Employment Agreement dated as of April 12, 1988, Supplemental Agreement No. 1 dated as of March 17, 1992, and Supplemental Agreement No. 2 dated as of October 1, 1994, by and between the Registrant and Richard L. Shaw, filed as Exhibit 10.6 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994, and incorporated herein by reference. 10.2(a) Supplemental Employment Agreement No. 3 dated as of June 1, 1995 and Supplemental Agreement No. 4 dated as of March 1, 1998, by and between the Registrant and Richard L. Shaw, filed as Exhibit 10.2(a) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997, and incorporated herein by reference. 10.3 Loan Agreement by and among Michael Baker Corporation and Subsidiaries and Mellon Bank, N.A. dated as of June 12, 1997, filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 1997, and incorporated herein by reference. 10.3(a) First Amendment to Loan Agreement by and among Michael Baker Corporation and Subsidiaries and Mellon Bank, N.A. dated as of July 24, 1998, filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the period ended September 30, 1998, and incorporated herein by reference. 10.4 Michael Baker Corporation 1995 Stock Incentive Plan amended effective April 23, 1998, filed herewith. 10.5 Michael Baker Corporation 1996 Nonemployee Directors' Stock Incentive Plan, filed as Exhibit A to the Registrant's definitive Proxy Statement with respect to its 1996 Annual Meeting of Shareholders, and incorporated herein by reference. 13.1 Selected Financial Data, Management's Discussion and Analysis of Financial Condition and Results of Operations, Consolidated Financial Statements as of December 31, 1998 and for the three years then ended, Report of Independent Accountants, and Supplemental Financial Information, filed herewith and to be included as the Financial Section of the Annual Report to Shareholders for the year ended December 31, 1998. 21.1 Subsidiaries of the Registrant, filed herewith. 23.1 Consent of Independent Accountants, filed herewith. (b) The Registrant filed no reports on Form 8-K during the fourth quarter of 1998.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. MICHAEL BAKER CORPORATION Dated: April 29, 1999 By:/s/ Charles I. Homan ------------------------ Charles I. Homan, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: SIGNATURE TITLE DATE - --------- ----- ---- /s/ Richard L. Shaw Chairman of the Board April 29, 1999 - ------------------------------ Richard L. Shaw /s/ Charles I. Homan Director, President April 29, 1999 - ------------------------------ and Chief Executive Charles I. Homan Officer /s/ J. Robert White Director, Executive Vice April 29, 1999 - ------------------------------ President, Chief Financial J. Robert White Officer and Treasurer (Principal Financial and Accounting Officer) /s/ Robert N. Bontempo Director April 29, 1999 - ------------------------------ Robert N. Bontempo Director April 29, 1999 - ------------------------------ William J. Copeland /s/ Roy V. Gavert, Jr. Director April 29, 1999 - ------------------------------ Roy V. Gavert, Jr. /s/ Thomas D. Larson Director April 29, 1999 - ------------------------------ Thomas D. Larson /s/ John E. Murray, Jr. Director April 29, 1999 - ------------------------------ John E. Murray, Jr. /s/ Konrad M. Weis Director April 29, 1999 - ------------------------------ Konrad M. Weis EX-10.1 2 1998 INCENTIVE COMPENSATION PLAN Exhibit 10.1 1998 INCENTIVE COMPENSATION PLAN MICHAEL BAKER CORPORATION
INDEX ARTICLE I - GENERAL 1.1 ESTABLISHMENT OF THE PLAN 1.2 PURPOSE 1.3 ADMINISTRATION ARTICLE II - DEFINITIONS 2.1 DEFINITIONS 2.2 GENDER AND NUMBER ARTICLE III - ELIGIBILITY AND PARTICIPATION 3.1 ELIGIBILITY 3.2 PARTICIPATION 3.3 PARTIAL PLAN YEAR PARTICIPATION ARTICLE IV - AWARDS 4.1 COMPONENTS OF PARTICIPATION AWARDS 4.2 CORPORATE PERFORMANCE MEASURES AND GOALS 4.3 INDIVIDUAL PERFORMANCE REVIEW CRITERIA 4.4 BUSINESS UNIT PERFORMANCE 4.5 BUSINESS SEGMENT PERFORMANCE 4.6 INDIVIDUAL PERFORMANCE 4.7 DISCRETIONARY AWARDS ARTICLE V - PAYMENT OF AWARDS 5.1 PAYMENT OF AWARDS 5.2 PLAN FUNDING ARTICLE VI - CHANGE IN CONTROL 6.1 CHANGE IN CONTROL 6.2 DEFINITION OF CHANGE IN CONTROL ARTICLE VII - MISCELLANEOUS PROVISIONS 7.1 NON-TRANSFERABILITY 7.2 TAX WITHHOLDING 7.3 AMENDMENTS 7.4 INDEMNIFICATION 7.5 BENEFICIARY DESIGNATION 7.6 RIGHTS OF PARTICIPANTS 7.7 GOVERNING LAW 7.8 EFFECTIVE DATE 1998 INCENTIVE COMPENSATION PLAN - ATTACHMENT 1 ELIGIBILITY OPPORTUNITY PERFORMANCE MEASUREMENT POTENTIAL PAYOUT (PERCENTAGE OF ANNUAL SALARY) FREQUENCY OF PAYOUT
1998 INCENTIVE COMPENSATION PLAN MICHAEL BAKER CORPORATION ARTICLE I GENERAL 1.1 ESTABLISHMENT OF THE PLAN: Michael Baker Corporation, a Pennsylvania corporation (the "Company"), hereby adopts this Plan, which shall be known as the MICHAEL BAKER CORPORATION 1998 INCENTIVE COMPENSATION PLAN (the "Plan"). 1.2 PURPOSE: The purpose of the Plan is to focus attention on shareholder value, drive performance in support of this goal and other business goals, and reward individual performance. 1.3 ADMINISTRATION: (a) The Plan shall be administered by the Incentive Compensation Committee (the "Committee"), of the Company with the concurrence of the Compensation Committee of the Board of Directors of the Company. The members of the Committee shall be appointed by the Chief Executive Officer (the "CEO"), and any vacancy on the Committee shall be filled by an appointee of the CEO. (b) Subject to the limitations of the Plan, the Committee shall, subject to approval by the CEO and Compensation Committee of the Board of Directors: (i) select from the regular, full-time exempt Employees of the Company, those who shall participate in the Plan (a "Participant" or "Participants"), (ii) make awards in such forms and amounts as the Committee shall determine, (iii) impose such limitations, restrictions, and conditions upon such awards as the Committee shall deem appropriate, (iv) interpret the Plan and adopt, amend, and rescind administrative guidelines and other rules and regulations relating to the Plan, (v) correct any defect or omission or reconcile any inconsistency in this Plan or in any award granted hereunder, and (vi) make all necessary determinations and take all other actions necessary or advisable for the implementation and administration of the Plan. The Committee's determinations on matters within its authority shall be conclusive and binding upon the Company and all other Persons. ARTICLE II DEFINITIONS 2.1 DEFINITIONS: Whenever used herein, the following terms shall have the meaning set forth below, unless otherwise expressly provided. (a) "Base Salary" shall mean the regular salary actually paid during a Plan Year to a participant while participating in the Plan. Regular salary shall include any salary reduction contributions made to the Company's Internal Revenue Code Section 401(k) Plan or other deferred compensation plans, but exclusive of any awards under this Plan and of any other bonuses, incentive pay, exercise of stock options, overtime pay, special awards, hiring/retention awards, car allowances, imputed income related to company provided life insurance, reimbursement for moving expenses, tuition reimbursement, additional compensation related to international assignments such as expatriate differential compensation, tax equalization, etc., or any other extraordinary income. (b) "Board" shall mean the Board of Directors of Michael Baker Corporation. (c) "Committee" shall mean the Incentive Compensation Committee of the Company, which shall consist of at least three employees of the Company. (d) "Company" shall mean Michael Baker Corporation and its Subsidiaries. (e) "Corporate" shall mean relating to Michael Baker Corporation. (f) "Employee" shall mean a regular, full-time, exempt Employee of the Company who is in a position meeting the defined eligibility criteria for participation in the Plan, as stated in Section 3.1. (g) "Participant" shall mean an Employee who is approved by the Committee for participation in the Plan for a specified Plan Year. (h) "Performance Management Process" shall mean the Company's three-step performance cycle. The cycle begins with setting individual performance goals, followed by performance coaching, and ending with formal performance review at the end of the performance period. (i) "Plan Year" shall mean the Company's fiscal year. (j) "Business Unit" shall mean, in 1998, the operating units of: Buildings, Civil, Energy, Environmental and Transportation, and any other Business Unit added during the year. (k) "Business Segment" shall mean, in 1998, Business Unit segments of: Buildings-Design, Buildings-Construction, Civil-Engineering, Civil-Baker Support Services, Inc., Energy-Baker/MO, Transportation-Engineering and Transportation-Construction (Heavy & Highway) and any other Business Segment added during the year. (l) "Contribution to Corporate Overhead and Profit" shall mean the following: Business Unit Level -- Income before income taxes plus Corporate overhead, Engineering Support overhead (related only to Engineering segments), I/C insurance premiums (VGIC), and internal interest expense (VGIC). Engineering Segment Level -- Income before income taxes plus Corporate overhead, Business unit overhead, Engineering Support Overhead, I/C insurance premiums (VGIC), and internal interest expense (VGIC). Non-Engineering Segment Level -- Income before income taxes plus Corporate overhead, Business unit overhead, I/C insurance premiums (VGIC) and internal interest expense (VGIC). 2.2 GENDER AND NUMBER: Except when otherwise indicated by the context, words in the masculine gender, when used in the Plan, shall include the feminine gender, the singular shall include the plural, and the plural shall include the singular. ARTICLE III ELIGIBILITY AND PARTICIPATION 3.1 ELIGIBILITY: Eligibility for participation in the Plan shall be limited to regular, full-time exempt Employees of the Company. 3.2 PARTICIPATION: Participation in the Plan shall be determined by the executive management of the Company. The CEO shall determine Corporate participants and the Business Unit Heads shall determine Business Unit participants, in all cases with the concurrence of the Michael Baker Corporation CEO and the Compensation Committee of the Board of Directors of the Company. The number of participants in the Plan shall be influenced by the Business Unit's ability to financially support the accrual for the projected payout opportunity. (See Plan Funding 5.2 on page 11) Participants are to include executive management, business unit managers, and selected managers who are accountable for significant contributions to Corporate, as determined by the CEO, and to the Business Unit, as determined by the Business Unit head. Participants are to be designated as having accountability associated with Corporate, overall Business Unit or specific Business Segment performance. Participants are to be designated as having Tier 1 or Tier 2 accountability as defined in an attachment to the Plan. 3.3 PARTIAL PLAN YEAR PARTICIPATION: An Employee who becomes eligible after the beginning of a Plan Year may participate in the Plan for that Plan Year. Such situations may include, but are not limited to (i) new hires, (ii) when an Employee is promoted from a position which did not meet the eligibility criteria, (iii) when an Employee is transferred from an affiliate which does not participate in the Plan, or (iv) when job responsibilities become consistent with other Plan participants. The CEO retains the right to prohibit or allow participation in the initial Plan Year of eligibility for any of the aforementioned Employees. Any so added participant will be eligible to receive a pro-rated share based upon a 2,080 work-hour year. Any Employee who leaves the employment of the company prior to July 1 of the Plan Year is not eligible to receive any payout from the Plan for that year. Subject to the conditions of the following sentence, any employee who leaves the employment of the Company after June 30 of the Plan Year is eligible to receive a pro-rata payout from the Plan for that year based upon the percent of the fiscal year employed. Employees who are terminated for cause or voluntarily resign their positions from the company at any time during the Plan year are not eligible to receive any payout from the Plan that year. ARTICLE IV AWARDS 4.1 COMPONENTS OF PARTICIPANT AWARDS: Each award may be based on (i) Corporate performance, (ii) Business Unit performance, (iii) Business Segment/individual performance plan accomplishments. 4.2 CORPORATE PERFORMANCE MEASURES AND GOALS: For each Plan Year, the Compensation Committee of the Board of Directors and the CEO shall agree on a range of performance goals for Corporate results. Each performance range shall include a level of performance at which awards shall be earned. Measures of performance may include, but are not limited to, one or more financial ratios such as earnings per share, profitability, return on equity and return on assets. Performance measures need not be the same within the Company. For 1998, corporate results shall be dependent upon audited corporate earnings per share (after all incentives have been paid). Payouts related to this part of the plan will be based upon step accomplishments and should not be pro-rated. For treatment of corporate payouts, please refer to sections 4.5 and 4.6. For 1998, performance level goals for earnings per share are:
Corporate Performance Goal Setting Level (Earnings Per Share) ----- -------------------- Level 1 On Plan $.66 Level 2 Commendable $.72 Level 3 Outstanding $.78
4.3 INDIVIDUAL PERFORMANCE REVIEW CRITERIA In order for an individual to be eligible for any portion of an incentive compensation payout, they must receive at least a "3.0" or "Meets Expectations" on the performance review form. This change is made to further reinforce Baker's cultural strategy which embraces the importance of goal attainment and how those goals are attained. As in last year's plan, an individual must receive a "2.6" or greater on the performance plan in order to be eligible for the payout related to individual performance goals. 4.4 BUSINESS UNIT PERFORMANCE: Business Unit performance shall be reflected in the final award based upon the Business Unit's Contribution to Corporate Overhead and Profit. The Incentive Compensation Committee shall establish and approve Competent, Commendable and Outstanding Contribution goals specific to each Business Unit at the beginning of the Plan year. The Competent goal shall serve as a Threshold target which must be met in order for Business Unit Managers and those having overall Business Unit accountability to be eligible to receive an incentive payout based upon their individual performance plans. In addition, the Competent goal shall serve as a Threshold target which must be met in order for all Business Segment participants to receive a payout based upon Business Unit performance. For Business Segment participants, the incentive compensation award related to Business Unit performance is based upon "step" accomplishment of Competent, Commendable, or Outstanding goals and is not to be pro-rated. Any Business Unit with an objective of a positive contribution performance (net income before tax plus corporate overhead) which results in a year-end negative contribution, may be eligible for the portion of incentive compensation dependent on overall corporate earnings per share performance, pending CEO approval as advised by the Incentive Compensation Committee. Any Business Unit with an objective of a negative contribution performance (net income before tax plus corporate overhead) which results in a year-end more negative contribution, may be eligible for the portion of incentive compensation dependent on overall corporate earnings per share performance, pending CEO approval as advised by the Incentive Compensation Committee. Factors to be taken into consideration may include the amount of deviation from objective, impact of the contribution of the Business Unit to the Corporation and any extraordinary issues. Any Business Unit with an objective of a negative contribution which results in a year-end more favorable performance, will be eligible for the portion of incentive compensation dependent on overall corporate performance. 4.5 BUSINESS SEGMENT PERFORMANCE: Business Segment performance shall be reflected in the final award based on the Business Segment's Contribution to Corporate Overhead and Profit. The Incentive Compensation Committee shall approve Competent, Commendable and Outstanding Contribution goals specific to each Business Segment at the beginning of the Plan year. The Competent goal shall serve as a Threshold target which must be met in order for participants within the Segment to be eligible to receive an incentive payout based upon individual performance plans. Any Business Segment with an objective of a positive contribution performance (net income before tax plus corporate overhead) which results in a year-end negative contribution, may be eligible for the portion of incentive compensation dependent on overall corporate earnings per share performance and/or Business Unit Contribution to Overhead and Profit, pending CEO approval as advised by the Incentive Compensation Committee. Any Business Segment with an objective of a negative contribution performance (net income before tax plus corporate overhead) which results in a year-end more negative contribution, may be eligible for the portion of incentive compensation dependent on overall corporate earnings per share performance and/or Business Unit Contribution to Overhead and Profit, pending CEO approval as advised by the Incentive Compensation Committee. Any Business Segment with an objective of a negative contribution which results in a year-end more favorable performance, will be eligible for the portion of incentive compensation dependent on overall corporate performance and Business Unit Contribution to Overhead and Profit. 4.6 INDIVIDUAL PERFORMANCE: Individual performance shall be reflected in the final award based on the performance rating assigned to an Employee as part of the Performance Management Process and is based upon a number of factors established by the participant's manager(s) at the beginning of the Plan Year. Guidelines of performance goals and percentage weights for Business Unit managers are recommended to be:
% of Business Unit Performance Plans ----------------- Business Unit Contribution to 20% Corporate Overhead and Profit New Work Added To The Company 45% Cash Flow Return on Investment (CFROI) 15% Critical Success Factors (Continuous Improvement) 10% Human Resources Development 10%
Guidelines of performance goals and percentage weights for Business Segment participants are recommended to be:
% of Business Segment and Individual Performance Plans ----------------- Business Segment Contribution to 20% Corporate Overhead and Profit New Work Added To The Company 45% Accounts Receivables 15% Critical Success Factors (Continuous Improvement) 10% Human Resources Development 10%
The above guidelines are recommended but are not prescriptive, particularly for functional positions (e.g.: finance, marketing, human resources). Individual performance measures for incentive compensation participants are to be developed jointly with the employee's immediate supervisor, be consistent with the participant's respective job responsibilities, and be included on the participant's performance plan. Participants may have plans that relate to corporate, unit or segment. The performance plans are to be submitted to the CEO by the Business Unit head or Functional Unit head by the designated time in the Plan year. For individuals who become eligible for participation in the Plan during the course of the year, a completed performance plan is to be submitted within four weeks of the individual becoming eligible for participation. At the end of the Plan Year, incentive compensation participants' managers will determine the level of performance accomplished by the participant. Participant performance which does not meet or exceed the Meets Expectations-On Plan Performance-3 level on a specific goal will result in no incentive payout for that specific performance goal. Once performance has exceeded the Meets Expectations-On Plan Performance-3 level on a specific financial goal, any performance beyond the 3 level will result in a pro-rated weighted calculation of the incremental incentive compensation earned by the participant, until the maximum level 5 performance is achieved. Once performance has exceeded the Meets Expectations-On Plan Performance-3 level for major performance areas for functional unit employees, any performance beyond the 3 level will result in a pro-rated calculation, in increments of .5 (e.g.: 3.5, 4.0, 4.5 etc.), of the incremental incentive compensation earned by the participant, until the maximum level 5 performance is achieved. Payout for participants meeting individual performance goals will occur when Business Unit or Business Segment (as applicable) operating profit accomplishes threshold performance indicated in each Business Unit's or Business Segment's Performance Plan (after all individual incentives have been paid). The specific accomplishments associated with these goals are to be recorded on each participant's annual Performance Plan at the end of the Plan Year as part of the overall performance evaluation. 4.7 DISCRETIONARY AWARDS: In addition to individual performance incentives, a discretionary pool may be created within Corporate and within each Business Unit to selectively award those individuals who have exceeded expected performance. Guidelines for discretionary awards are indicated within the Corporate and Business Units' Incentive Compensation Plan Summary in the attachments. Functional Unit discretionary awards are to be selected by the CEO with the concurrence of the Incentive Compensation Committee. Business Unit discretionary awards are to be selected by the Executive Vice President of the Business Unit with the concurrence of the Incentive Compensation Committee. ARTICLE V PAYMENT OF AWARDS 5.1 PAYMENT OF AWARDS: At the end of each Plan Year, the CEO shall report the overall Corporate and individual performance levels to the Compensation Committee of the Board of Directors, who shall then approve the payment of awards. The incentive compensation earned as a result of the Company achieving corporate profitability goals and through the achievement of Business Unit, Business Segment and individual goals, will be paid in cash no later than March 15 of the year after which it was earned. 5.2 PLAN FUNDING: Accrual for the Incentive Compensation Plan will be established annually by the Committee, subject to the approval of the CEO. The approved accrual for the Incentive Compensation Plan shall pre-fund the amounts available to be earned for incentive compensation distributions. Any forfeitures associated with the termination of those in the incentive compensation plan prior to year-end will be allocated toward the funding of the incentive pool for the following year. In addition, if the incentive pool is not paid out in full because of Business Unit, Business Segment or participants' failure to achieve goals established under the Plan or the Performance Management Process, the unearned portion would be allocated toward the funding of the incentive pool for the following year. Any excess pre-funding accrual based upon corporate goals which are not met and, therefore, not earned by Incentive Compensation Plan participants, will be removed from expense. ARTICLE VI CHANGE IN CONTROL 6.1 CHANGE IN CONTROL: In the event of a Change in Control of the Company, as defined below, a Participant shall be entitled to, for the Plan Year in which the Change of Control occurs, the award determined using: (i) The Participant's actual Base Salary rate in effect on the date of the Change in Control, (ii) Actual Corporate performance results to the date of Change in Control, and (iii) Participant's Individual Performance results. The Committee as constituted immediately prior to the Change in Control shall determine how actual Corporate performance should be measured for purposes of the award calculation in 6.1. The Committee's determination shall be conclusive and final. Awards and any previously accrued awards shall be paid in cash to the Participant promptly following any discontinuance of the Plan on or after a Change of Control. 6.2 DEFINITION OF CHANGE IN CONTROL: A "Change in Control" will be deemed to have occurred on the first to occur of the following: (a) The Company acquires actual knowledge that any Person other than the Company, a Subsidiary, the Company's Stock Ownership Plan and Trust or any employee benefit plan(s) sponsored by the Company has acquired the Beneficial Ownership, directly or indirectly, of securities of the Company entitling such Person to 20% or more of the Voting Power of the Company; (b) A Tender Offer is made to acquire securities of the Company entitling the holders thereof to 20% or more of the Voting Power of the Company; or (c) A solicitation subject to Rule 14a-11 under the 1934 Act (or any successor Rule) relating to the election or removal of 50% or more of the members of any class of the Board shall be made by any person other than the Company or less than 51% of the members of the Board shall be Continuing Directors; or (d) The shareholders of the Company shall approve a merger, consolidation, share exchange, division or sale or other disposition of assets of the Company as a result of which the shareholders of the Company immediately prior to such transaction shall not hold, directly or indirectly, immediately following such transaction a majority of the Voting Power of (i) in the case of a merger or consolidation, the surviving or resulting corporation, (ii) in the case of a share exchange, the acquiring corporation or (iii) in the case of a division or a sale or other disposition of assets, each surviving, resulting or acquiring corporation which, immediately following the transaction, holds more than 10% of the consolidated assets of the Company immediately prior to the transaction. The term "person" shall mean and include any individual, corporation, partnership, company, association or other "person," as such term is used in Section 14(d) of the Exchange Act, other than the Company or any employee benefit plans sponsored by the Company. "Continuing Directors" shall mean a director of the Company who either (a) was a director of the Company on the effective date of the Plan or (b) is an individual whose election, or nomination for election, as a director of the Company was approved by a vote of at least two-thirds of the directors then still in office who were Continuing Directors (other than an individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of directors of the Company which would be subject to Rule 14a-11 under the 1934 Act, or any successor Rule). ARTICLE VII MISCELLANEOUS PROVISIONS 7.1 NON-TRANSFERABILITY: No right of interest of any Participant in this Plan shall be assignable or transferable, or subject to any lien, directly, by operation of law or otherwise, including execution, levy, garnishment, attachment, pledge, and bankruptcy. 7.2 TAX WITHHOLDING: The Company shall have the right to deduct from all payments under this Plan any foreign, Federal, state, or local taxes required by law to be withheld with respect to such payments. 7.3 AMENDMENTS: The Company, in its absolute discretion, without notice, at any time and from time to time, may modify or amend, in whole or in part, any or all other provisions of this Plan, or suspend or terminate it entirely; provided, that no such modification, amendment, suspension, or termination may reduce the right of a Participant (or his beneficiary as the case may be) to a payment or distribution in accordance with the provisions contained in this Plan or change to the detriment of a Participant of any potential rights in that Plan Year pursuant to Section 6.1 of this Plan. 7.4 INDEMNIFICATION: Each person who is or shall have been a member of the Committee or the Board or who is or shall have been an Employee of the Company shall be indemnified and held harmless by the Company against and from any loss, cost, liability, or expense, including, without limitation, fees and expenses of legal counsel, that may have been imposed upon or reasonably incurred by him in connection with or resulting from any claim, action, suit, or proceeding to which he may be a party or in which he may be involved by reason of any action taken or failure to act under the Plan and against and from any and all amounts paid by him in settlement thereof, with the Company's approval, or paid by him in satisfaction of any judgment in any such action, suit, or proceeding against him provided he shall give the Company an opportunity, at its own expense, to handle and defend the same before he undertakes to handle and defend it on his own behalf. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such person may be entitled under the Company's Certificate of Incorporation or Bylaws, as a matter of law, or otherwise, or any power that the Company may have to indemnify them or hold them harmless. 7.5 BENEFICIARY DESIGNATION: Each Participant under the Plan may name, from time to time, beneficiary or beneficiaries (who may be named contingently or successively) to whom any benefit under the Plan is to be paid in case of his death before he receives any or all of such benefit. Each designation will revoke all prior designations by the same Participant, shall be in a form prescribed by the Company, and will be effective only when filed by the Participant in writing with the Company during his lifetime. In the absence of any such designation, or if the designated beneficiary is no longer living, benefits shall be paid to the surviving member(s) of the following classes of beneficiaries, with preference for classes in the order listed below: (a) Participant's spouse (unless the parties were divorced or legally separated by court decree); (b) Participant's children (including children by adoption); or (c) Participant's executor or administrator. Payment of benefits shall be made exclusively to the member(s) of the first class, in the order listed above, which has surviving member(s). If that class has more than one member, benefit payment shall be made in equal shares among members of that class. 7.6 RIGHTS OF PARTICIPANTS: Nothing in this Plan shall interfere with or limit in any way the right of the Company to terminate or change a Participant's employment at any time, nor confer upon any Participant, any right to continue in the employment of the Company for any period of time or to continue his present or any other rate of compensation. No Participant in a previous Plan Year, or other Employee at any time, shall have a right to be selected for participation in a current or future Plan Year. 7.7 GOVERNING LAW: The Plan shall be construed in accordance with and governed by the laws of the State of Pennsylvania. 7.8 EFFECTIVE DATE: The Plan shall be deemed effective as of January 1, 1998. 1998 Michael Baker Corporation Incentive Compensation Plan - Summary Attachment 1 February 19, 1998 - --------------------------------------------------------------------------------
ELIGIBILITY FOR INCENTIVE COMPENSATION PLAN - -------------------------------------------------------------------------------- Number of Participants Tier 1: approximately 60 Tier 2: approximately 60 Tier 3: Discretionary
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Participants TIER 1 Corporate Executive Management, Officers and Directors Business Units Business Unit Heads Selected Staff who support the functions of the entire Business Unit (Designated by Business Unit Head) Business Segments- Profit Center Managers with greater Engineering and Design than $2.5 Million net revenue responsibility (Designated by Business Unit Head) Business Segments-Construction and Profit Center Managers with greater Heavy/Highway and Baker Support than $60 Million gross revenue Services, Inc. responsibility (Designated by Business Unit Head) TIER 2 Corporate Selected Functional Unit Managers Business Units Selected Staff who support the functions of the entire Business Unit (Designated by Business Unit Head) Business Segments Selected Managers, Other Profit Center Managers, and selected Senior Project Managers (Designated by Business Unit Head) TIER 3 Discretionary
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Participant Recommendation Corporate participants and Business Unit Heads (CEO) Within Business Units (Head of Business Unit) - -------------------------------------------------------------------------------- Participant Approval President and Chief Executive Officer - -------------------------------------------------------------------------------- Participants Added During Year? Yes, Pro-rata - -------------------------------------------------------------------------------- Ineligible Employees Termination for Cause/Voluntary Resignation
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INCENTIVE COMPENSATION OPPORTUNITY Tier 1 Tier 2 Tier 3 Total % of Annual Salary 0-25% 0-15% Discretionary First Level (total maximum) 8.333% 5% To Be Determined Second Level (total maximum) 16.667% 10% Third Level (total maximum) 25% 15%
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PERFORMANCE MEASUREMENT Corporate Participants, Heads of Business Units and Staff, Managers with multiple Business Unit responsibility, and all Environmental Business Unit Participants Corporate Profitability Goals 50% of Potential Award Individual Performance Plan Goals 50% of Potential Award
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Business Unit-Segments and Profit Center Managers Corporate Profitability Goals 25% of Potential Award Business Unit Performance Goals 25% of Potential Award Individual Performance Plan Goals 50% of Potential Award
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PERFORMANCE GOALS Corporate Profitability Goals - -------------------------------------------------------------------------------- Audited Corporate Earnings Per Share % of Payout Based Earnings (After All Incentives Have Been Paid) Upon Corporate Plan Per Share ------------------- --------- 1st Level (On-Plan Performance) 33% $.66 2nd Level (Commendable) 33% $.72 3rd Level (Outstanding) 34% $.78
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INDIVIDUAL PERFORMANCE PLAN GOALS % of % of (Number of goals and % for each Business Business specific goal is to be customized Unit Segment Functional for each participant based Participants' Participants' Unit upon Operating Objective, Individual Individual Individual Marketing driven orientation Performance Performance Performance and level of accountability. % Plans Plans Plan is not to be less than 10% for ------------- ------------- ----------- any goal) Business Unit or Business Segment 20% 20% * Contribution to Corporate Overhead and Profit New Work Added to the Company 45% 45% * Cash Flow Return on Investment (CFROI) 15% * * Accounts Receivables * 15% * Critical Success Factors 10% 10% 10% Human Resources Development 10% 10% 10% *Functional Unit Performance Plans are to be determined by Dept. Heads and participants with CEO approval
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POTENTIAL PAYOUT Corporate Individual Profitability Performance Goals Goals (% of Annual Salary) ------------ ------------ Tier 1 Corporate and Business Unit Heads and Staff 1st Level (On-Plan Performance) 4.167% 4.167% 2nd Level (Commendable) 8.334% 8.334% 3rd Level (Outstanding) 12.500% 12.500% Business Corporate Unit Individual Profitability Performance Performance Goals Goals Goals ------------- ---------- ------------ Tier 1 Business Unit-Segments 1st Level (On-Plan Performance) 2.084% 2.084% 4.167% 2nd Level (Commendable) 4.167% 4.167% 8.334% 3rd Level (Outstanding) 6.250% 6.250% 12.500% - -------------------------------------------------------------------------------- Corporate Individual (% of Annual Salary) Profitability Performance Goals Goals --------------- ------------ Tier 2 Corporate and Business Unit Staff 1st Level (On-Plan Performance) 2.50% 2.50% 2nd Level (Commendable) 5.00% 5.00% 3rd Level (Outstanding) 7.50% 7.50% - -------------------------------------------------------------------------------- Business Corporate Unit Individual Profitability Performance Performance Goals Goals Goals ------------- ----------- ------------ Tier 2 Business Unit-Segments 1st Level (On-Plan Performance) 1.25% 1.25% 2.50% 2nd Level (Commendable) 2.50% 2.50% 5.00% 3rd Level (Outstanding) 3.75% 3.75% 7.50% - --------------------------------------------------------------------------------
THRESHOLD Corporate Minimum earnings per share for any Potential Payout $0.66 on Corporate Component (after all incentives have been paid) Business Units and Business Segments Minimum Contribution to Overhead and Profit (After Accrual for Incentive Compensation Payments and Internal Interest Charges)
Contribution ------------ Civil Business Unit $ 7,663,356 Civil-Engineering $ 7,137,564 Baker Support Services, Inc. $ 901,046 Buildings Business Unit $ 3,484,475 Buildings-Design $ 2,013,734 Buildings-Construction $ 2,440,691 Transportation Business Unit $ 8,190,461 Transportation-Engineering $ 7,259,758 Transportation-Heavy & Highway $ 1,251,332 Environmental Business Unit $ 1,989,210 Energy Business Unit $ 4,463,648 Energy/Baker MO $ 2,464,938
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TYPE OF PAYOUT Cash - -------------------------------------------------------------------------------- FREQUENCY OF PAYOUT Annually, with payment by the following year's first quarter - -------------------------------------------------------------------------------- FUNDING Pre-funding accrual in the year earned - -------------------------------------------------------------------------------- FORFEITURES Allocated toward next year's funding
- -------------------------------------------------------------------------------- EX-10.4 3 AMENDED 1995 STOCK INCENTIVE PLAN Exhibit 10.4 MICHAEL BAKER CORPORATION 1995 STOCK INCENTIVE PLAN, AS AMENDED EFFECTIVE APRIL 23, 1998 The purposes of the 1995 Stock Incentive Plan (the "Plan") are to encourage eligible employees of Michael Baker Corporation (the "Corporation") and its subsidiaries to increase their efforts to make the Corporation and each Subsidiary more successful, to provide an additional inducement for such employees to remain with the Corporation or a Subsidiary, to reward such employees by providing an opportunity to acquire shares of the Common Stock, par value $1.00 per share, of the Corporation (the "Common Stock") on favorable terms and to provide a means through which the Corporation may attract able persons to enter the employ of the Corporation or one of its Subsidiaries. For the purposes of the Plan, the term "Subsidiary" means any Corporation in an unbroken chain of corporations beginning with the Corporation, if each of the corporations other than the last corporation in the unbroken chain owns stock possessing at least fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in the chain. SECTION 1 ADMINISTRATION The Plan shall be administered by a committee (the "Committee") to be appointed from time to time by the Corporation's Board of Directors (the "Board") which hereafter shall consist of not less than two members of the Board, each of whom shall on January 1, 1995, or at the time of appointment to the Committee subsequent thereto and at all times during service as a member of the Committee be (i) a "disinterested person" as that term is then defined under Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the "1934 Act") or any successor rule and (ii) an "outside director" under Section 162(m)(4)(c) of the Internal Revenue Code of 1986 (the "Code"), or any successor provision. The Committee shall interpret the Plan and prescribe such rules, regulations and procedures in connection with the operation of the Plan as it shall deem to be necessary and advisable for the administration of the Plan consistent with the purposes of the Plan. All questions of interpretation and application of the Plan, or as to grants under the Plan, shall be subject to the determination of the Committee, which shall be final and binding. The Committee shall keep records of action taken at its meetings. A majority of the Committee shall constitute a quorum at any meeting, and the acts of a majority of the members present at any meeting at which a quorum is present, or acts approved in writing by all the members of the Committees, shall be the acts of the Committee. SECTION 2 ELIGIBILITY Those key employees of the Corporation or any Subsidiary (including, but not limited to, covered employees as defined in Section 162(m)(3) of the Code, or any successor provision) who share responsibility for the management, growth or protection of the business of the Corporation or any Subsidiary shall be eligible to be granted stock options as described herein. Subject to the provisions of the Plan, the Committee shall have full and final authority, in its discretion, to grant stock options as described herein and to determine the employees to whom any such grant shall be made and the number of shares to be covered thereby. In determining the eligibility of any employee, as well as in determining the number of shares covered by each grant of a stock option, the Committee shall consider the position and the responsibilities of the employee being considered, the nature and value to the Corporation or a Subsidiary of his or her services, his or her present and/or potential contribution to the success of the Corporation or a Subsidiary and such other factors as the Committee may deem relevant. SECTION 3 SHARES AVAILABLE UNDER THE PLAN The aggregate number of shares of the Common Stock which may be issued and as to which grants of stock options may be made under the Plan is 1,500,000 shares, subject to adjustment and substitution as set forth in Section 6. If any stock option granted under the Plan is canceled by mutual consent or terminates or expires for any reason without having been exercised in full, the number of shares subject thereto shall again be available for purposes of the Plan. If shares of Common Stock are forfeited to the Corporation pursuant to the restrictions applicable, the shares so forfeited shall not again be available for purposes of the Plan unless during the period such shares were outstanding, the grantee received no dividends or other "benefits of ownership" from such shares. The shares which may be issued under the Plan may be either authorized but unissued shares or treasury shares or partly each, as shall be determined from time to time by the Board. SECTION 4 GRANT OF STOCK OPTIONS The Committee shall have authority, in its discretion, to grant "incentive stock options" pursuant to Section 422 of the Code, to grant "nonstatutory stock options" (i.e., stock options which do not qualify under Sections 422 or 423 of the Code) or to grant both types of stock options (but not in tandem). During the duration of the Plan, the maximum number of shares as to which stock options may be granted and as to which shares may be awarded under the Plan to any one employee during any calendar year is 100,000 shares, subject to adjustment and substitution as set forth in Section 6. For the purposes of this limitation, any adjustment or substitution made pursuant to Section 6 with respect to the maximum number of shares set forth in the preceding sentence shall also be made with respect to any shares subject to stock options previously granted under the plan to such employee during the same calendar year. Notwithstanding any other provision contained in the Plan or in any stock option agreement referred to in Section 5(F) but subject to the possible exercise of the Committee's discretion contemplated in the last sentence of this Section 4, the aggregate fair market value, determined as provided in Section 5(G) on the date of grant, of the shares with respect to which incentive stock options are exercisable for the first time by an employee during any calendar year under all plans of the corporation employing such employee, any parent or subsidiary corporation of such corporation and any predecessor corporation of any such corporation shall not exceed $100,000. If the date on which one or more of such incentive stock options could first be exercised would be accelerated pursuant to any provision of the Plan or any stock option agreement, and the acceleration of such exercise date would result in a violation of the limitation set forth in the proceeding sentence, then, notwithstanding any such provision, but subject to the provisions of the next succeeding sentence, the exercise dates of such incentive stock options shall be accelerated only to the date or dates, if any, that do not result in a violation of such limitation and, in such event, the exercise dates of the incentive stock options with the lowest option prices shall be accelerated to the earliest such dates. The Committee may, in its discretion, authorize the acceleration of the exercise date of one or more incentive stock options even if such acceleration would violate the $100,000 limitation set forth in the first sentence of this paragraph and even if such incentive stock options are thereby converted in whole or in part to nonstatutory stock options. The Committee may accept the cancellation of outstanding stock options in return for the grant of new stock options for the same or a different number of shares and at the same or a different option price. SECTION 5 TERMS AND CONDITIONS OF STOCK OPTIONS Stock options granted under the Plan shall be subject to the following terms and conditions: (A) The purchase price at which each stock option may be exercised (the "option price") shall be such price as the Committee, in its discretion, shall determine but shall not be less than one hundred percent (100%) of the fair market value per share of the Common Stock covered by the stock option on the date of grant, except that in the case of an incentive stock option granted to an employee who, immediately prior to such grant, owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Corporation or any Subsidiary (a "Ten Percent Employee"), the option price shall not be less than one hundred ten percent (110%) of such fair market value on the date of grant. For purposes of this Section 5(A), the fair market value of the Common Stock shall be determined as provided in Section 5(G). For purposes of this Section 5(A), an individual (i) shall be considered as owning not only shares of stock owned individually but also all shares of stock that are at the time owned, directly or indirectly, by or for the spouse, ancestors, lineal descendants, and brothers and sisters (whether by the whole or half blood) of such individual and (ii) shall be considered as owning proportionately any shares owned, directly or indirectly, by or for any corporation, partnership, estate or trust in which such individual is a shareholder, partner or beneficiary. (B) The option price for each stock option shall be paid in full upon exercise and shall be payable in cash in United States dollars (including check, bank draft or money order), which may include cash forwarded through a broker or other agent-sponsored exercise or financing program; provided, however, that in lieu of such cash the person exercising the stock option may (if authorized by the Committee at the time of grant in the case of an incentive stock option, or at any time in the case of a nonstatutory stock option) pay the option price in whole or in part by delivering to the Corporation shares of the Common Stock having fair market value on the date of exercise of the stock option, determined as provided in Section 5(G), equal to the option price for the shares being purchased; except that (i) any portion of the option price representing a fraction of a share shall in any event be paid in cash and (ii) no shares of the Common Stock which have been held for less than six months may be delivered in payment of the option price of a stock option. If the person exercising a stock option participates in a broker or other agent-sponsored exercise or financing program, the Corporation will cooperate with all reasonable procedures of the broker or other agent to permit participation by the person exercising the stock option in the exercise or financing program. Notwithstanding any procedure of the broker or other agent-sponsored program, if the option price is paid in cash, the exercise of the stock option shall not be deemed to occur and no shares of the Common Stock will be issued until the Corporation has received full payment in cash (including check, bank draft or money order) for the option price from the broker or other agent. The date of exercise of a stock option shall be determined under procedures established by the Committee, and as of the date of exercise the person exercising the stock option shall be considered for all purposes to be the owner of the shares with respect to which the stock option has been exercised. Payment of the option price with shares shall not increase the number of shares of the Common Stock which may be issued under the Plan as provided in Section 3. (C) No stock option shall be exercisable by a grantee during the first six months of its term, except that this limitation on exercise shall not apply if Section 7(B) becomes applicable. No stock option shall be exercisable after the expiration of ten years (five years in the case of incentive stock option granted to a Ten Percent Employee) from the date of grant. A stock option to the extent exercisable at any time may be exercised in whole or in part. (D) No stock option shall be transferable by the grantee otherwise than by will, or if the grantee dies intestate, by the laws of descent and distribution of the state of domicile of the grantee at the time of death. All stock options shall be exercisable during the lifetime of the grantee only by the grantee. (E) Subject to the provisions of Section 4 in the case of incentive stock options, unless the Committee, in its discretion, shall otherwise determine: (i) If the employment of a grantee who is not disabled within the meaning of Section 422(c)(6) of the Code (a "Disabled Grantee") is voluntarily or involuntarily terminated with the consent of the Corporation or Subsidiary or a grantee retires under any retirement plan of the Corporation or a Subsidiary, any then outstanding incentive stock option held by such grantee shall be exercisable by the grantee (but only to the extent exercisable by the grantee immediately prior to the termination of employment) at any time prior to the expiration date of such incentive stock option or within three months after the date of termination of employment, whichever is the shorter period; (ii) If the employment of a grantee who is not a Disabled Grantee is voluntarily or involuntarily terminated with consent of the Corporation or a Subsidiary, any then outstanding nonstatutory stock option held by such grantee shall be exercisable by the grantee (but only to the extent exercisable by the grantee immediately prior to the termination of employment) at any time prior to the expiration date of such nonstatutory stock option or within one year after the date of termination of employment, whichever is the shorter period; (iii) If the employment of a grantee who is a Disabled Grantee is voluntarily or involuntarily terminated with the consent of the Corporation or a Subsidiary, any then outstanding stock option held by such grantee shall be exercisable by the grantee in full (whether or not so exercisable by the grantee immediately prior to the termination of employment) by the grantee at any time prior to the expiration date of such stock option or within one year after the date of termination of employment, whichever is the shorter period; (iv) If a grantee retires under any retirement plan of the Corporation or a Subsidiary, any then outstanding nonstatutory stock option held by such grantee shall be exercisable by the grantee (but only to the extent exercisable by the grantee immediately prior to such retirement) at any time prior to the expiration date of such nonstatutory stock option or within three years after the date of retirement, whichever is the shorter period; (v) Following the death of a grantee during employment, any outstanding stock option held by the grantee at the time of death shall be exercisable in full (whether or not so exercisable by the grantee immediately prior to the death of the grantee) by the person entitled to do so under the will of the grantee, or, if the grantee shall fail to make testamentary disposition of the stock option or shall die intestate, by the legal representative of the grantee at any time prior to the expiration date of such stock option or within one year after the date of death, whichever is the shorter period; (vi) Following the death of a grantee after termination of employment during a period when a stock option is exercisable, any outstanding stock option held by the grantee at the time of death shall be exercisable by such person entitled to do so under the will of the grantee by such legal representative (but only to the extent the stock option was exercisable by the grantee immediately prior to the death of the grantee) at any time prior to the expiration date of such stock option or within one year after the date of death, whichever is the shorter period; and (vii) If a grantee of a stock option (a) engages in the operation or management of a business (whether as owner, partner, officer, director, employee or otherwise and whether during or after termination of employment) which is in competition with the Corporation or any of its Subsidiaries, (provided, however, that this clause shall not apply if Section 7(C) applies following termination of employment), (b) induces or attempts to induce any customer, supplier, licensee or other individual, corporation or other business organization having a business relationship with the Corporation or any of its Subsidiaries to cease doing business with the Corporation or any of its Subsidiaries or in any way interferes with the relationship between any such customer, supplier, licensee or other person and the Corporation or any of its Subsidiaries or (c) solicits any employee of the Corporation or any of its Subsidiaries to leave the employment thereof or in any way interferes with the relationship of such employee with the Corporation or any of its Subsidiaries, the Committee, in its discretion, may immediately terminate all outstanding stock options held by the grantee. Whether a grantee has engaged in any of the activities referred to in the preceding sentence which would cause the outstanding stock options to be terminated shall be determined, in its discretion, by the Committee, and any such determination by the Committee shall be final and binding. (F) All stock options shall be confirmed by an agreement, or an amendment thereto, which shall be executed on behalf of the Corporation by the President and Chief Executive Officer, the Chief Financial Officer or any Vice President and by the grantee. The agreement confirming a stock option shall specify whether the stock option is an incentive stock option or a nonstatutory stock option. The provisions of such agreements need not be identical. (G) Fair market value of the Common Stock shall be the mean between the following prices, as applicable, for the date as of which fair market value is to be determined as quoted in The Wall Street Journal (or in such other reliable publication as the Committee, in its discretion, may determine to rely upon): (i) if the Common Stock is listed on the American or the New York Stock Exchange, the highest and lowest sales prices per share of the Common Stock as quoted in the Composite Transactions listing for such exchange on such date, (ii) if the Common Stock is not listed on either such exchange, the highest and lowest sales prices per share of the Common Stock for such date on (or on any composite index including) the principal United States securities exchange registered under the 1934 Act on which the Common Stock is listed, or (iii) if the Common Stock is not listed on any such exchange, the highest and lowest sales prices per share of the Common Stock for such date on the National Association of Securities Dealers Automated Quotation System or any successor system then in use ("NASDAQ"). If there are no such sale price quotations for the date as of which fair market value is to be determined but there are such sale price quotations within a reasonable period both before and after such date, then fair market value shall be determined by taking a weighted average of the means between the highest and lowest sales prices per share of the Common Stock as so quoted on the nearest date before and the nearest date after the date as of which fair market value is to be determined. The average should be weighted inversely by the respective numbers of trading days between the selling dates and the date as of which fair market value is to be determined. If there are no such sale price quotations on or within a reasonable period both before and after the date as of which fair market value is to be determined, then fair market value of the Common Stock shall be the mean between the bona fide bid and asked prices per share of Common Stock as so quoted for such date on NASDAQ, or if none, the weighted average of the means between such bona fide bid and asked prices on the nearest trading date before and the nearest trading date after the date as of which fair market value is to be determined, if both such dates are within a reasonable period. The average is to be determined in the manner described above in this Section 5(G). If the fair market value of the Common Stock cannot be determined on the basis previously set forth in this Section 5(G) for the date as of which fair market value is to be determined, the Committee shall in good faith determine the fair market value of the Common Stock on such date. Fair market value shall be determined without regard to any restriction other than a restriction which, by its terms, will never lapse. (H) The obligation of the Corporation to issue shares of the Common Stock under the Plan shall be subject to (i) the effectiveness of a registration statement under the Securities Act of 1933, as amended, with respect to such shares, if deemed necessary or appropriate by counsel for the Corporation, (ii) the condition that the shares shall have been listed (or authorized for listing upon official notice of issuance) upon the American Stock Exchange or each such other stock exchange, if any, on which the Common Stock shares may then be listed and (iii) all other applicable laws, regulations, rules and orders which may then be in effect. Subject to the foregoing provisions of this Section 5 and the other provisions of the Plan, any stock option granted under the Plan may be exercised at such times and in such amounts and be subject to such restrictions and other terms and conditions, if any, as shall be determined, in its discretion, by the Committee and set forth in the agreement referred to in Section 5(F), or an amendment thereto. SECTION 6 ADJUSTMENT AND SUBSTITUTION OF SHARES If a dividend or other distribution shall be declared upon the Common Stock payable in shares of the Common Stock, the number of shares of the Common Stock subject to any outstanding stock options and the number of shares of the Common Stock which may be issued under the Plan but are not subject to outstanding stock options and the maximum number of shares as to which stock options may be granted and as to which shares may be awarded under the Plan to any employee during any calendar year under Section 4 on the date fixed for determining the shareholders entitled to receive such stock dividend or distribution shall be adjusted by adding thereto the number of shares of the Common Stock which would have been distributable thereon if such shares had been outstanding on such date. If the outstanding shares of the Common Stock shall be changed into or exchangeable for a different number or kind of shares of stock or other securities of the Corporation or another corporation, whether through reorganization, reclassification, recapitalization, stock split-up, combination of shares, merger or consolidation, then there shall be substituted for each share of the Common Stock subject to any then outstanding stock option and for each share of the Common Stock which may be issued under the Plan but which is not then subject to any outstanding stock option, the number and kind of shares of stock or other securities into which each outstanding share of the Common Stock shall be so changed or for which each such share shall be exchangeable. In case of any adjustment or substitution as provided for in the first two paragraphs of this Section 6, the aggregate option price for all shares subject to each then outstanding stock option prior to such adjustment or substitution shall be the aggregate option price for all shares of stock or other securities (including any fraction) to which such shares shall have been adjusted or which shall have been substituted for such shares. Any new option price per share shall be carried to at least three decimal places with the last decimal place rounded upwards to the nearest whole number. If the outstanding shares of the Common Stock shall be changed in value by reason of any spin-off, split-off or split-up, or dividend in partial liquidation, dividend in property other than cash, or extraordinary distribution to shareholders of the Common Stock, the Committee shall make any adjustments to any then outstanding stock option which it determines are equitably required to prevent dilution or enlargement of the rights of optionees which would otherwise result from any such transaction. No adjustment or substitution provided for in this Section 6 shall require the Corporation to issue or sell a fraction of a share or other security. Accordingly, all fractional shares or other securities which result from any such adjustment or substitution shall be eliminated and not carried forward to any subsequent adjustment or substitution. If any such adjustment or substitution provided for in this Section 6 requires the approval of shareholders in order to enable the Corporation to grant incentive stock options, then no such adjustment or substitution shall be made without the required shareholder approval. Notwithstanding the foregoing, in the case of incentive stock options, if the effect of any such adjustment or substitution would be to cause the stock option to fail to continue to qualify as an incentive stock option or to cause a modification, extension or renewal of such stock option within the meaning of Section 424 of the Code, the Committee may elect that such adjustment or substitution not be made but rather shall use reasonable efforts to effect such other adjustment of each then outstanding stock option as the Committee, in its discretion, shall deem equitable and which will not result in any disqualification, modification, extension or renewal (within the meaning of Section 424 of the Code) of such incentive stock option. Except as provided in this Section 6, a grantee shall have no rights by reason of any issue by the Corporation of stock of any class or securities convertible into stock of any class, any subdivision or consolidation of shares of stock of any class, the payment of any stock dividend or any other increase or decrease in the number of shares of stock of any class. SECTION 7 ADDITIONAL RIGHTS IN CERTAIN EVENTS (A) Definitions For purposes of this Section 7, the following terms shall have the following meanings: (1) The term "Person" shall be used as that term is used in Section 13(d) and 14(d) of the 1934 Act as in effect on the effective date of the Plan. (2) "Beneficial Ownership" shall be determined as provided in Rule 13d-3 under the 1934 Act as in effect on the effective date of the Plan. (3) "Voting Shares" shall mean all securities of a company entitling the holders thereof to vote in an annual election of directors (without consideration of the rights of any class of stock other than the Common Stock to elect directors by a separate class vote); and a specified percentage of "Voting Power" of a company shall mean such number of the Voting Shares as shall enable the holders thereof to cast such percentage of all the votes which could be cast in an annual election of directors (without consideration of the rights of any class of stock other than Common Stock to elect directors by a separate class vote). (4) "Tender Offer" shall mean a tender offer or exchange offer to acquire securities of the Corporation (other than such offer made by the Corporation or any Subsidiary), whether or not such offer is approved or opposed by the Board. (5) "Continuing Directors" shall mean a director of the Corporation who either (a) was a director of the Corporation on the effective date of the Plan or (b) is an individual whose election, or nomination for election, as a director of the Corporation was approved by a vote of at least two-thirds of the directors then still in office who were Continuing Directors (other than an individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of directors of the Corporation which would be subject to Rule 14a-11 under the 1934 Act, or any successor Rule). (6) "Section 7 Event" shall mean the date upon which any of the following events occur: (a) The Corporation acquires actual knowledge that any Person other than the Corporation, a Subsidiary, the Corporation's Stock Ownership Plan and Trust or any employee benefit plan(s) sponsored by the Corporation has acquired the Beneficial Ownership, directly or indirectly, of securities of the Corporation entitling such Person to 20% or more of the Voting Power of the Corporation; (b) A Tender Offer is made to acquire securities of the Corporation entitling the holders thereof to 20% or more of the Voting Power of the Corporation; or (c) A solicitation subject to Rule 14a-11 under the 1934 Act (or any successor Rule) relating to the election or removal of 50% or more of the members of any class of the Board shall be made by any person other than the Corporation or less than 51% of the members of the Board shall be Continuing Directors; or (d) The shareholders of the Corporation shall approve a merger, consolidation, share exchange, division or sale or other disposition of assets of the Corporation as a result of which the shareholders of the Corporation immediately prior to such transaction shall not hold, directly or indirectly, immediately following such transaction a majority of the Voting Power of (i) in the case of a merger or consolidation, the surviving or resulting corporation, (ii) in the case of a share exchange, the acquiring corporation or (iii) in the case of a division or a sale or other disposition of assets, each surviving, resulting or acquiring corporation which, immediately following the transaction, holds more than 10% of the consolidated assets of the Corporation immediately prior to the transaction; provided, however, that (i) if securities beneficially owned by a grantee are included in determining the Beneficial Ownership of a Person referred to in paragraph 6(a), (ii) a grantee is required to be named pursuant to Item 2 of the Schedule 14D-I (or any similar successor filing requirement) required to be filed by the bidder making a Tender Offer referred to in paragraph 6(b) or (iii) if a grantee is a "participant" as defined in Rule 14a-11 under the 1934 Act (or any successor rule) in a solicitation (other than a solicitation by the Corporation) referred to in paragraph 6(c), then no Section 7 Event with respect to such grantee shall be deemed to have occurred by reason of such event. (B) Acceleration of the Exercise Date of Stock Options. Subject to the provisions of Section 4 in the case of incentive stock options, unless the agreement referred to in Section 5(F), or an amendment thereto, shall otherwise provide, notwithstanding any other provision contained in the Plan, in case any "Section 7 Event" occurs all outstanding stock options (other than those held by a person referred to in the proviso to Section 7(A)(6)) shall become immediately and fully exercisable whether or not otherwise exercisable by their terms. (C) Extension of the Expiration Date of Stock Options. Subject to the provisions of Section 4 in the case of incentive stock options, unless the agreement referred to in Section 5(F), or an amendment thereto, shall otherwise provide, notwithstanding any other provision contained in the Plan, all stock options held by a grantee (other than a grantee referred to in the proviso to Section 7(A)(6)) whose employment with the Corporation or a Subsidiary terminates within one year of any Section 7 Event for any reason other than voluntary termination with the consent of the Corporation or a Subsidiary, retirement under any retirement plan of the Corporation or a Subsidiary or death, which are exercisable shall continue to be exercisable for a period of one year from the date of such termination of employment, but in no event after the expiration date of the stock option. SECTION 8 EFFECT OF THE PLAN ON THE RIGHTS OF EMPLOYEES AND EMPLOYER Neither the adoption of the Plan nor any action of the Board or the Committee pursuant to the Plan shall be deemed to give any employee any right to be granted a stock option under the Plan. Nothing in the Plan, in any stock option, or in any agreement providing for a stock option shall confer any right on any employee to continue in the employ of the Corporation or any Subsidiary or interfere in any way with the rights of the Corporation or any Subsidiary to terminate the employment of any employee at any time. SECTION 9 WITHHOLDING To the extent required by applicable Federal, state, local or foreign law, the person exercising the stock option shall make arrangements satisfactory to the Corporation, in its discretion, for the satisfaction of any withholding tax obligations that arise in connection with the Plan. The Corporation shall not be required to issue any Common Stock under the Plan until such obligations are satisfied. SECTION 10 AMENDMENT The right to alter and amend the Plan at any time and from time to time and the right to revoke or terminate the Plan are hereby specifically reserved to the Board; provided that no such alteration or amendment of the Plan shall, without shareholder approval (i) increase the number of shares which may be issued under the Plan as set forth in Section 3, (ii) increase the maximum number of shares as to which stock options may be granted and as to which shares may be awarded under the Plan to any one employee during any one calendar year as set forth in Section 4, (iii) materially increase the benefits accruing under the Plan to persons subject to the provisions of Section 16(b) of the 1934 Act, (iv) materially modify the requirements as to eligibility for participation in the Plan by persons subject to the provisions of Section 16(b) of the 1934 Act, (v) make any changes in the class of employees eligible to receive incentive stock options under the Plan or (vi) extend the duration of the Plan. No alteration, amendment, revocations or termination of the Plan shall, without the written consent of the holder of stock options under the Plan, adversely affect the rights of such holder with respect thereto. SECTION 11 EFFECTIVE DATE AND DURATION OF PLAN The effective date of the Plan shall be January 1, 1995, and the date of adoption of the Plan by the Board shall be December 15, 1994, provided that such adoption of the Plan by the Board is approved by a majority of the votes cast at a duly held meeting of shareholders held on or prior to December 1, 1995, at which a quorum representing a majority of the outstanding voting stock of the Corporation is, either in person or by proxy, present and voting. No stock option granted under the Plan may be exercised until after such approval. No stock option may be granted under the Plan subsequent to December 14, 2004. EX-13.1 4 Exhibit 13.1 SELECTED FINANCIAL DATA
1998 1997 1996 1995 1994 ================================================================================ (In thousands, except per share information) RESULTS OF OPERATIONS Total contract revenues $521,271 $446,432 $418,388 $354,728 $437,193 Operating income/(loss) (1,667) 8,020 7,663 5,180 (9,097) Net income/(loss) (2,419) 4,953 4,180 2,900 (7,945) Diluted net income/(loss) per share $ (0.30) $ 0.60 $ 0.50 $ 0.35 $ (0.95) Return on average equity (4.4)% 9.3% 8.5% 6.3% (16.3)% FINANCIAL CONDITION Total assets $151,861 $144,425 $126,082 $117,376 $134,794 Working capital $ 31,855 $ 36,220 $ 27,417 $ 25,186 $ 22,391 Current ratio 1.36 1.41 1.36 1.36 1.26 Long-term debt $ 3,138 $ -- $ -- $ -- $ 3,960 Shareholders' investment 52,862 55,862 50,752 47,631 44,731 Book value per outstanding share 6.47 6.79 6.19 5.70 5.35 Year-end closing share price $ 9.75 $ 9.75 $ 6.38 $ 5.00 $ 3.75 CASH FLOW Cash provided by/(used in) operating activities $ (1,379) $ 7,803 $ 1,167 $ 15,539 $ 5,415 Cash used in investing activities (11,416) (2,533) (3,739) (2,294) (5,436) Cash provided by/(used in) financing activities 1,935 124 (1,251) (2,547) (1,477) - -------------------------------------------------------------------------------- Increase/(decrease) in cash $(10,860) $ 5,394 $ (3,823) $ 10,698 $ (1,498) BACKLOG Funded $447,600 $393,200 $332,800 $299,900 $283,300 Total $735,300 $648,700 $543,700 $507,800 $468,300 SHARE INFORMATION Year-end shares outstanding 8,166 8,224 8,197 8,364 8,364 Average diluted shares outstanding during year 8,178 8,299 8,383 8,368 8,364 ================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS As discussed more fully in Note 2 to the consolidated financial statements, during the fourth quarter of 1998, the Company recorded losses totaling $10.9 million related to a construction project being performed by Baker Mellon Stuart Construction, Inc. ("BMSCI") for Universal City Development Partners ("UCDP") at the Universal Studios theme park in Orlando, Florida. Other BMSCI-related charges totaling $2.8 million were also recorded during the fourth quarter of 1998. Following these charges, the Company determined during the first quarter of 1999 that it will no longer participate in low-bid, high-risk construction projects for buildings or transportation infrastructure. Accordingly, the general construction activities of the Company's Buildings unit have been restructured, and its Transportation Construction (heavy and highway) business will be sold. In connection with this restructuring, the Company recorded a charge of $0.8 million during the first quarter of 1999. Total Contract Revenues Total contract revenues reached a record $521 million in 1998, up from $446 million in 1997. All of the Company's business units posted revenue improvements for 1998. The Buildings, Transportation, Energy and Civil units recorded the largest increases of $25 million, $22 million, $14 million and $13 million, respectively. In the Buildings unit, the UCDP project accounted for $60 million of revenues (or 11.5% of revenues for the Company) in 1998 versus only $17 million in 1997. Nearly equal revenue growth in each of the engineering and construction divisions contributed to the Transportation unit's improvement. International growth, including that from a new consolidated joint venture which provides operations and maintenance ("O&M") services to BP Amoco in Venezuela, caused the increase in the Energy unit. The Civil unit's improvement principally resulted from higher revenues on new O&M contracts in its Baker Support Services, Inc. ("BSSI") division. For 1997, total contract revenues increased from $418 million in 1996. The Transportation, Energy and Civil units recorded the largest revenue increases of $14 million, $12 million and $9 million, respectively. Revenue growth from new heavy and highway construction work, particularly in Chicago, accounted for the Transportation unit's improvement, while the Energy unit's offshore platform operations in the Gulf of Mexico fueled its growth. The Civil unit's net increase again resulted from higher revenues on new O&M contracts in its BSSI division, despite lower revenues in its engineering division due to the 1997 completion of its significant project in Mexico.
TOTAL CONTRACT REVENUES - 1998 A. Buildings 29% B. Civil 25% C. Energy 13% D. Environmental 5% E. Transportation 28%
Gross Profit Gross profit decreased to $47.2 million in 1998 from $51.9 million in 1997. As a percentage of total contract revenues, gross profit declined to 9% in 1998 compared to 12% in 1997. Both overall decreases are directly attributable to the construction project charges totaling $13.7 million recorded in the Buildings unit during the fourth quarter of 1998. The gross profit percentage increased for all of the Company's business units except for the Civil unit, which remained relatively flat, and the Buildings unit. The Energy and Transportation units registered the most significant overall improvements in 1998. The Energy unit's international growth, particularly in Venezuela, raised its gross profit percentage. Both the engineering and construction operations in the Transportation unit contributed to its improvement, with the engineering side providing the greater increase due to higher profitability from several new projects on which work commenced during 1998. After excluding the aforementioned 1998 construction losses, the Buildings unit's gross profit percentage still would have been lower for 1998 as the result of its completion of certain more profitable construction projects in late 1997 and early 1998. For 1997, gross profit increased from $48.6 million in 1996. As a percentage of total contact revenues, gross profit remained relatively constant at 12% in both 1997 and 1996. The gross profit percentage increased in 1997 for all of the Company's business units except the Energy unit. The Civil and Transportation units registered the most significant improvements in 1997. While the Civil unit raised the gross profit percentages for both its engineering and O&M businesses, the recovery in the Transportation unit was attributable to its unfavorable performance on certain construction projects during 1996. The percentage decrease in the Energy unit resulted primarily from lower margins associated with its new work added in 1997. Selling, General and Administrative Expenses Selling, general and administrative ("SG&A") expenses increased to $48.9 million in 1998 from $43.9 million in 1997. The 1998 increase principally reflected an investment in technological support costs, entry into new transportation markets, additional support costs related to the Energy unit's consolidated joint venture in Venezuela, and higher international marketing costs. Expressed as a percentage of total contract revenues, SG&A expenses decreased slightly to 9.4% in 1998 from 9.8% in 1997. SG&A expenses increased in 1997 from $40.9 million in 1996. The 1997 increase principally reflected international marketing costs and the Energy unit's investment in the Venezuela market. Expressed as a percentage of total contract revenues, SG&A expenses remained constant at 9.8% in both 1997 and 1996. Other Income and Expense Interest income decreased to $439,000 in 1998 from $552,000 in 1997, due to the combination of a lower daily average investment amount and slightly lower interest rates in 1998. Other income decreased to $42,000 in 1998 from $811,000 in 1997, primarily due to 1998 expense related to the minority interest in the income of a consolidated Energy unit joint venture and 1997 gains realized on the sales of certain investments. Interest expense increased to $145,000 in 1998 from $39,000 in 1997 as the result of financing the purchase of certain heavy and highway construction equipment during the second half of 1998. Interest income increased in 1997 from $402,000 in 1996, due to the combination of a higher daily average investment amount and slightly higher interest rates in 1997. Other income increased in 1997 from $50,000 in 1996, primarily due to gains realized on the sales of certain investments and equity income from a another Energy unit joint venture related to work in the Gulf of Mexico. Income Taxes The provision for income taxes resulted in an effective tax rate of (82)% in 1998, 47% in 1997, and 48% in 1996. The difference between these percentages and the 34% statutory U.S. federal rate is attributable primarily to state and foreign income taxes and foreign withholding taxes. The income tax expense for 1998 results from certain foreign and state taxes that cannot be offset against tax benefits derived from other jurisdictions, despite the Company's consolidated pre-tax loss. The 1996 provision rate was unfavorably impacted by higher foreign income taxes paid in that year. CONTRACT BACKLOG The Company's funded backlog, which consists of that portion of uncompleted work represented by signed contracts and for which the procuring agency has appropriated and allocated the funds to pay for the work, was $448 million at December 31, 1998, an increase from $393 million at the end of 1997. The overall increase in funded backlog is attributable to new work added and transfers from unfunded backlog during the year. Total backlog, which incrementally includes that portion of contract value for which options are still to be exercised (unfunded backlog), was $735 million at the end of 1998 versus $649 million at the end of 1997. With the exception of the Civil and Buildings units, each of the Company's business units entered 1999 with higher funded and total backlog than at the end of 1997. With reference to the Company's restructuring announced in April 1999, funded backlog related to the businesses that will be continued by the Company was $300 million and $252 million, and total backlog was $587 million and $508 million, as of year-end 1998 and 1997, respectively.
FUNDED BACKLOG - YEAR END 1998 A. Buildings 8% B. Civil 15% C. Energy 17% D. Environmental 5% E. Transportation 55%
LIQUIDITY AND CAPITAL RESOURCES Net cash used in operating activities was $1.4 million in 1998, compared to cash provided by operating activities of $7.8 million in 1997 and $1.2 million in 1996. The decrease for 1998 was primarily related to the Company's 1998 net loss. The 1997 improvement was mainly attributed to a combination of the Company's higher net income and the collection of retention amounts totaling $3.0 million on a significant construction project in the Buildings unit. Net cash used in investing activities was $11.4 million in 1998, compared to $2.5 million in 1997 and $3.7 million in 1996. These amounts solely comprise capital expenditures in 1996 and 1997, but the 1998 amount also includes $0.8 million paid during the fourth quarter of 1998 relative to the acquisition of GeoResearch, Inc. The 1998 capital expenditures totaling $10.6 million include computer equipment and software purchases totaling $3.9 million as compared with $1.4 million in 1997. During 1997 and 1996, the Company acquired most of its computer equipment under operating leases, but converted to the purchase of computer equipment for economic reasons in 1998. An additional $3.5 million of the 1998 expenditures is attributable to the purchase of heavy and highway construction equipment needed for new projects added during 1998. These factors account for the majority of the 1998 increase in capital expenditures. The 1997 decrease is attributable to higher 1996 expenditures for building improvements and office equipment related to the Buildings unit's 1996 relocation from Pittsburgh to Coraopolis, PA, and higher vehicle and equipment purchases during 1996 to meet the requirements of new BSSI O&M projects in the Civil unit. Net cash provided by financing activities was $1.9 million in 1998 and $0.1 million in 1997, compared to cash used in financing activities of $1.3 million in 1996. The 1998 proceeds from long-term debt related entirely to the aforementioned purchase of heavy and highway construction equipment, while the repayments of long-term debt correlate to both the financed construction equipment and the 1998 subsidiary acquisition. In late 1996, pursuant to an announced stock repurchase program, the Company paid $1.3 million to acquire 207,560 treasury shares. In 1998, the Company paid $0.8 million for an additional 96,379 treasury shares under this program. Working capital decreased to $31.9 million at December 31, 1998 from $36.2 million at December 31, 1997. The Company's current ratios were 1.36:1 and 1.41:1 at the end of 1998 and 1997, respectively. Both the working capital and current ratio at year-end 1998 were negatively impacted by the Buildings unit's construction-related charges recorded during the fourth quarter of 1998. In July 1998, the Company extended the term of its unsecured credit agreement with Mellon Bank, N.A. through May 31, 2001. This agreement provides for a commitment of $25 million, which covers borrowings and letters of credit. As of December 31, 1998, no borrowings were outstanding; however, letters of credit totaling $1.8 million were outstanding under the agreement. Management believes that the credit agreement will be adequate to meet its borrowing and letter of credit requirements for at least the next year. The Company is required to provide bid and performance bonding on certain construction contracts, and has a $500 million bonding line available through Travelers Casualty & Surety Company of America. Based on the Company's plan of restructuring announced in April 1999, management believes that its bonding line will be sufficient to meet its bid and performance needs for at least the next year. Short- and long-term liquidity is dependent upon appropriations of public funds for infrastructure and other government-funded projects, capital spending levels in the private sector, and the demand for the Company's services in the oil and gas markets. Additional external factors such as price fluctuations in the energy industry could affect the Company. The new federal transportation legislation (TEA-21) will provide a significant increase in funding for transportation infrastructure projects in 1999 and beyond. At this time, management believes that its funds generated from operations and its existing credit facility will be sufficient to meet its operating and capital expenditure requirements for at least the next year. YEAR 2000 COMPLIANCE The Company has completed an assessment of its information systems relative to the arrival of the 21st century. For internal systems, the Company generally utilizes modern technologies supplied and supported by leading hardware and software providers suited to Baker's areas of business. Year 2000 compliance is primarily being achieved through the normal and recurring process of system upgrades, the software costs of which are covered under related maintenance agreements. Vendors have asserted that the financial and project management systems for the Company's engineering and construction businesses, its BSSI subsidiary, and one of two such systems in the Energy unit are Year 2000 compliant. The other Energy unit system is currently being assessed and scheduled to be compliant by the end of the third quarter of 1999. Over 90% of the Company is served by a human resources system which the vendor has stated to be Year 2000 compliant. Validation testing of the Company's financial, project management and human resources systems is expected to be completed during the second and third quarters of 1999. The Company's interrelated systems (e.g., e-mail, file sharing) are linked by a network of servers. Upgrades to compliant versions are already in place for approximately 95% of the network. The remaining servers are scheduled to be upgraded to compliant versions or merged with existing compliant servers during the second quarter of 1999. The Company is in the process of evaluating other less critical operational support systems being used in all business units (e.g., mapping, CADD, cost estimating, databases, spreadsheets, and specialized and customized software) to identify any remaining issues for resolution. Any related issues are scheduled for resolution during the second and third quarters of 1999. Normal end-user computing needs were addressed with BIOS testing of all personal computers and a review of the operating systems and software packages. Patches and upgrade needs have been identified and are being applied with a scheduled completion date during the third quarter of 1999. The Company is a service-based organization and, as such, has little reliance on embedded technology (e.g., microcontrollers) for its key business processes. The relevance of embedded technology is limited to such items as elevators, HVAC, security, etc., which are components of the Company's leased facilities. Embedded technology is also integral to some client facilities which the Company operates and maintains under customer contracts. Responsibility for the Year 2000 compliance of such facilities rests with the customers. To assess the Year 2000 compliance of significant third parties, the Company has initiated a survey process to gather and evaluate information from significant business customers, vendors and subcontractors. Mailing of the survey was completed during the first quarter of 1999. The majority of responses are expected to be received by the end of the second quarter of 1999. The Company will continue to evaluate the readiness of its key suppliers and customers with follow-up requests to non-respondents and respondents that are not yet compliant; such requests will continue through the end of 1999. Management currently believes that its "most reasonably likely worst case Year 2000 scenario" poses the potential for payment delays from some customers, including agencies of the U.S. federal government, due to their lack of readiness for the new century. A formal assessment of the potential impact of this scenario has not yet been evaluated and is dependent upon the completion of the aforementioned customer survey process. Based on the customer survey results, the Company will also enhance its existing disaster recovery plans to include assessments of potential Year 2000 impacts. These contingency plans will address both internal factors related to staff, computer systems and facilities, as well as external factors related to suppliers, customers and service providers. The Company expects to have all necessary contingency plans in place by the end of 1999. Based upon information currently available, management does not believe that the estimated incremental costs associated with Year 2000 compliance will be material to the Company's consolidated results of operations or financial position.
CONSOLIDATED STATEMENT OF INCOME For the years ended December 31, 1998 1997 1996 ================================================================================ (In thousands, except per share amounts) - -------------------------------------------------------------------------------- Total contract revenues $521,271 $446,432 $418,388 Cost of work performed 474,027 394,527 369,826 - -------------------------------------------------------------------------------- Gross profit 47,244 51,905 48,562 Selling, general and administrative expenses 48,911 43,885 40,899 - -------------------------------------------------------------------------------- Income/(loss) from operation (1,667) 8,020 7,663 Other income/(expense): Interest income 439 552 402 Interest expense (145) (39) (76) Other, net 42 811 50 - -------------------------------------------------------------------------------- Income/(loss) before income (1,331) 9,344 8,039 Provision for income taxes 1,088 4,391 3,859 - -------------------------------------------------------------------------------- Net income/(loss) $ (2,419) $ 4,953 $ 4,180 ================================================================================ Basic and diluted net income/(loss) per share $ (0.30) $ 0.60 $ 0.50 ================================================================================ The accompanying notes are an integral part of this statement.
CONSOLIDATED BALANCE SHEET As of December 31, 1998 1997 ================================================================================ (In thousands) Assets - -------------------------------------------------------------------------------- Current Assets Cash $ 5,014 $ 15,874 Receivables 82,672 81,632 Cost of contracts in progress and estimated earnings, less billings 22,407 21,478 Prepaid expenses and other 10,192 5,799 - -------------------------------------------------------------------------------- Total current assets 120,285 124,783 - -------------------------------------------------------------------------------- Property, plant and equipment, net 17,458 10,985 - -------------------------------------------------------------------------------- Other Assets Goodwill and other intangible assets, net 7,507 6,521 Other assets 6,611 2,136 - -------------------------------------------------------------------------------- Total other assets 14,118 8,657 - -------------------------------------------------------------------------------- TOTAL ASSETS $ 151,861 $ 144,425 ================================================================================ Liabilities and Shareholders' Investment - -------------------------------------------------------------------------------- Current Liabilities Accounts payable $ 43,356 $ 45,868 Accrued employee compensation 9,141 9,987 Accrued insurance 6,155 4,905 Other accrued expenses 20,210 14,800 Excess of billings on contracts in progress over cost and estimated earnings 9,568 13,003 - -------------------------------------------------------------------------------- Total current liabilities 88,430 88,563 - -------------------------------------------------------------------------------- Other Liabilities Notes payable 3,138 -- Other 7,431 -- - -------------------------------------------------------------------------------- Total liabilities 98,999 88,563 ================================================================================ Shareholders' Investment Common Stock, par value $1, authorized 44,000,000 shares, issued 7,150,179 and 7,086,623 shares, in 1998 and 1997, respectively 7,150 7,087 Series B Common Stock, par value $1, authorized 6,000,000 shares, issued 1,319,114 and 1,343,983 shares, in 1998 and 1997, respectively 1,319 1,343 Additional paid-in capital 37,002 36,822 Retained earnings 9,447 11,866 Less 303,359 and 206,980 shares of Common Stock in treasury, at cost, in 1998 and 1997, respectively (2,056) (1,256) - -------------------------------------------------------------------------------- Total shareholders' investment 52,862 55,862 - -------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT $ 151,861 $ 144,425 ================================================================================ The accompanying notes are an integral part of this statement.
CONSOLIDATED STATEMENT OF CASH FLOWS For the years ended December 31, 1998 1997 1996 ================================================================================ (In thousands) Cash Flows from Operating Activities Net income/(loss) $ (2,419) $ 4,953 $ 4,180 Adjustments to reconcile net income/(loss) to net cash provided by/(used in) operating activities: Depreciation and amortization 5,049 4,483 4,851 Deferred income taxes (695) 1,827 2,629 Changes in assets and liabilities, net of acquisition: Increase in receivables and contracts in progress (8,276) (13,514) (14,275) Increase in accounts payable and accrued expenses 9,216 9,534 6,787 (Increase)/decrease in other net assets (4,254) 520 (3,005) - -------------------------------------------------------------------------------- Total adjustments 1,040 2,850 (3,013) - -------------------------------------------------------------------------------- Net cash provided by/(used in) operating activities (1,379) 7,803 1,167 - -------------------------------------------------------------------------------- Cash Flows from Investing Activities Additions to property, plant and equipment (10,573) (2,533) (3,739) Investment in GeoResearch, Inc. (843) -- -- - -------------------------------------------------------------------------------- Net cash used in investing activities (11,416) (2,533) (3,739) - -------------------------------------------------------------------------------- Cash Flows from Financing Activities Proceeds from long-term debt 3,516 -- -- Repayments of long-term debt (964) -- (12) Proceeds from exercise of stock options 183 124 21 Payments to acquire treasury stock (800) -- (1,260) - -------------------------------------------------------------------------------- Net cash provided by/(used in) financing activities 1,935 124 (1,251) - -------------------------------------------------------------------------------- Net increase/(decrease) in cash (10,860) 5,394 (3,823) Cash at beginning of year 15,874 10,480 14,303 - -------------------------------------------------------------------------------- Cash at end of year $ 5,014 $ 15,874 $ 10,480 ================================================================================ Supplemental Disclosure of Cash Flow Data Interest paid $ 165 $ 50 $ 73 Income taxes paid $ 2,588 $ 2,039 $ 950 ================================================================================ The accompanying notes are an integral part of this statement.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' INVESTMENT - -------------------------------------------------------------------------------- Series B Common Common Stock Stock Treasury Additional Par Par -------------- Paid-in Retained (In Thousands) Value $1 Value $1 Shares Amount Capital Earnings ================================================================================ Balance, Dec. 31, 1995 $7,012 $1,352 -- $ -- $36,534 $ 2,733 Net income -- -- -- -- -- 4,180 Series B Common Stock conversions to Common Stock 3 (3) -- -- -- -- Stock issued for Maguire acquisition 33 -- -- -- 129 -- Restricted stock issued 4 -- -- -- 14 -- Treasury stock purchases -- -- 208 1,260 -- -- Stock options exercised 4 -- -- -- 17 -- - -------------------------------------------------------------------------------- Balance, Dec. 31, 1996 7,056 1,349 208 1,260 36,694 6,913 Net income -- -- -- -- -- 4,953 Series B Common Stock conversions to Common Stock 6 (6) -- -- -- -- Restricted stock issued 3 -- -- -- 21 -- Issuance of Treasury stock -- -- (1) (4) 2 -- Stock options exercised 22 -- -- -- 102 -- Other -- -- -- -- 3 -- - -------------------------------------------------------------------------------- Balance, Dec. 31, 1997 7,087 1,343 207 1,256 36,822 11,866 Net income -- -- -- -- -- (2,419) Series B Common Stock conversions to Common Stock 24 (24) -- -- -- -- Restricted stock issued 4 -- -- -- 32 -- Treasury stock purchases -- -- 96 800 -- -- Stock options exercised 35 -- -- -- 148 -- - -------------------------------------------------------------------------------- Balance, Dec. 31, 1998 $7,150 $1,319 303 $2,056 $37,002 $ 9,447 ================================================================================ The accompanying notes are an integral part of this statement.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries, and joint ventures over which it maintains control. All intercompany accounts and transactions have been eliminated in consolidation. Accounting for Contracts Total contract revenues have been recorded on the percentage-of-completion method of accounting for the majority of engineering and construction contracts in the Buildings, Civil, Environmental and Transportation units. Contract revenues attributable to claims and unapproved change orders are recognized when realization is probable and the amounts can be reliably estimated. Earnings on fixed-price contracts are determined by multiplying the total estimated gross profit for the contracts by the percentage of physical completion to date (which approximates costs incurred to date in relation to total estimated costs), less earnings recognized in prior periods. Earnings under cost reimbursement contracts are principally recorded as costs are incurred. In the event that legal costs are expected to be incurred in connection with defending the Company's position related to claims or litigation on projects, such costs are accrued at the time they are probable of being incurred and reasonably estimable. As work is performed under long-term contracts, estimates of the costs are reviewed and, when necessary, revised on a current basis. Contract costs include costs of subcontracts, direct labor, supplies and overhead. Estimated losses on contracts in progress, if significant, are recorded as they are identified. Total contract revenues for the operations and maintenance contracts within the Civil and Energy units are primarily recognized as related services are provided. The Civil unit's government contracts are typically binding on the Company for a multi-year period and are renewable at the option of the respective government agency. Modifications to contract terms that result in retroactive adjustments to contract revenues are recognized when realization is probable. Accounting for Joint Ventures In the accompanying Consolidated Balance Sheet, the Company records its interest in all majority-owned, project-specific joint ventures based on the equity method of accounting for investments. The Company's proportionate share of majority-owned, project-specific joint venture revenue and cost of contracts is included in the accompanying Consolidated Statement of Income. The Company's investment in these joint ventures, for which the related projects are expected to be completed within one year, is included within other current assets in the accompanying Consolidated Balance Sheet. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses for the reporting period. Actual results could differ from those which result from using the estimates. The use of estimates is an integral part of applying percentage-of-completion accounting for contracts. Cash and Cash Equivalents Cash and cash equivalents include cash on hand or deposit and other highly liquid instruments with original maturities of three months or less. Any net outstanding checks within banking institutions are reclassified as accounts payable; such amount totaled $9,141,000 at December 31, 1998. Depreciation and Amortization Depreciation on property, plant and equipment is recorded using straight-line and accelerated methods over the estimated useful lives of the assets, which range from 3 to 31 years. Amortization of intangible assets is provided primarily on a straight-line basis over the estimated useful lives of the assets, which range from 5 to 10 years. Upon disposal of property items, the asset and related accumulated depreciation accounts are relieved of the amounts recorded therein for such items and any resulting gain or loss is reflected in income. Goodwill Goodwill, which represents the excess of cost over net assets of acquired companies, is being amortized on a straight-line basis over periods ranging from 10 to 30 years. Earnings Per Common Share Basic and diluted net income per share computations are based upon 8,178,067 weighted average shares outstanding for 1998. Basic net income per share computations are based upon weighted averages of 8,207,786 and 8,372,034 shares outstanding for the years 1997 and 1996, respectively. Diluted net income per share computations are based upon weighted averages of 8,299,083 and 8,382,592 shares outstanding for the years 1997 and 1996, respectively. Reclassifications Certain 1997 and 1996 financial statement amounts have been reclassified to conform with 1998 classifications. 2. CONSTRUCTION CHARGES AND RESTRUCTURING During the fourth quarter of 1998, the Company recorded losses related to the CityWalk construction project being performed by Baker Mellon Stuart Construction, Inc. ("BMSCI"), a wholly-owned subsidiary of the Company, for Universal City Development Partners ("UCDP") at the Universal Studios theme park in Orlando, Florida. This project involved the construction of a new entrance to the park, which comprises a shopping area, restaurants and a large cineplex, and represented BMSCI's largest active construction contract during 1998. Under this contract, BMSCI acted as the construction manager and self-performed a portion of the work. Following its inception in May 1997, the project suffered delays because its design and related drawings were changed substantially during the course of construction. On March 5, 1999, BMSCI was terminated by UCDP from this project, which was over 90% completed. UCDP alleges contract breaches related to the quality of work, contract administration and delays in project completion and seeks damages, including consequential damages related to project delays. Both parties filed lawsuits in this matter during the first quarter of 1999. BMSCI alleges unfair and deceptive trade practices, breach of implied warranty of plans and specifications, breach of contract, wrongful termination, tortious interference with business relationships, and breach of implied contract of good faith and fair dealing, and seeks damages, interest, court costs, and further relief. Certain subcontractors have also sued BMSCI and its surety, seeking reimbursement for costs incurred and related damages. Additional claims and litigation may be filed in connection with this matter. The losses recorded by the Company related to this project in the fourth quarter of 1998 totaled $10.9 million, and reflect costs incurred in excess of amounts provided for in the contract, estimated legal costs to defend the Company's position, the reversal of the cumulative gross profit totaling $1.1 million recorded through the third quarter of 1998, and certain other costs related to the termination. Through December 31, 1998, the Company has recorded adjusted revenues totaling $76.9 million ($60.2 million during 1998), and had been paid $67.0 million, in connection with this contract. As of March 5, 1999, the Company is aware of subcontractors' allegations, for amounts in excess of $12 million, representing work performed for which they have not been paid. Management and its counsel believe that under the provisions of BMSCI's agreements with it subcontractors, it is not probable that BMSCI will be required to make payments for such work to the subcontractors unless and until BMSCI is paid by UCDP. The Company is also aware of material asserted and unasserted claims by the subcontractors. In addition to the defenses described below, the Company's experience indicates that subcontractor claims of these types are often proven to be significantly in excess of amounts ultimately recoverable. BMSCI and its counsel believe it has valid claims against UCDP and defenses against claims by both UCDP and the subcontractors, and BMSCI intends to defend its position vigorously. No amounts have been accrued at December 31, 1998, associated with the ultimate resolution of this matter in excess of the items discussed above, since management and its counsel believe any such additional costs are neither probable of payment nor reasonably estimable at this time. The Company expects this matter to be resolved through a trial over a number of years. It is reasonably possible that BMSCI may recover all or a portion of the amounts expensed to date on this project. However, it is also reasonably possible that there may be an unfavorable resolution with respect to the UCDP litigation or the subcontractor allegations and claims; an unfavorable resolution with respect to either matter, or both, could have a material adverse effect on the Company's consolidated financial position, results of operations and cash flows in a future period. Other charges totaling $2.8 million were also recorded during the fourth quarter of 1998 related to the settlement of construction-related litigation and charges on other completed construction projects. In connection with the foregoing, the Company has determined that it will no longer participate in low-bid, high-risk construction projects for buildings or transportation infrastructure. Accordingly, the general construction activities of the Company's Buildings unit have been restructured, and the Company's Transportation Construction (heavy and highway) business will be sold. Existing low-bid, high-risk construction projects in the Buildings unit will be completed or sold. Management initiated activities related to the sale of the heavy and highway business during the second quarter of 1999. In connection with this restructuring, the Company recorded a charge of $0.8 million during the first quarter of 1999. 3. CONTRACTS The total cost of contracts in progress (used to determine cost of work performed) plus accumulated gross profit recorded was $1,007,668,000 and $858,705,000 at December 31, 1998 and 1997, respectively. Billings to date on contracts in progress at December 31, 1998 and 1997 were $994,829,000 and $850,231,000, respectively. Trade accounts receivable totaling $9,097,000 and $12,088,000 at December 31, 1998 and 1997, respectively, relate to retainage provisions under long-term contracts which will be due upon completion of the contracts. Based on management's estimates, substantially all of the retention balance at December 31, 1998 is expected to be collected in 1999. As of December 31, 1998 and 1997, accounts payable included amounts due to subcontractors of $4,623,000 and $8,888,000, respectively, which have been retained under contractual terms pending the completion and acceptance of the work performed by the subcontractors. Certain subsidiaries of the Company participate in joint ventures that are typically formed to accomplish a specific project and then dissolved upon completion of the project. The number of joint ventures in which the Company participates and the size, scope and duration of the projects vary between periods. The Company's equity investment in these joint ventures was $2,028,000 and $1,737,000 at December 31, 1998 and 1997, respectively. Consistent with industry practice, within each of the Company's operating units, credit is granted to customers for the payment of services rendered. Although the Company has a diversified client base, a substantial portion of its receivables and net underbillings reflected in the accompanying Consolidated Balance Sheet is dependent upon U.S. federal and state government appropriations. Internationally, the Company conducts business in certain countries where unstable governments subject the Company's related trade receivables, due from subsidiaries of major oil companies, to unique collection delays. Based upon past experience with these clients, management believes that these receivables will be fully collectible. 4. BUSINESS SEGMENT INFORMATION In 1998, the Company adopted Statement of Financial Accounting Standards No. ("SFAS") 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS 131 supersedes SFAS 14, "Financial Reporting for Segments of a Business Enterprise," replacing the "industry segment" approach with the "management" approach. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the Company's reportable segments. SFAS 131 also requires disclosures about products and services, geographic areas, and major customers. The adoption of SFAS 131 did not affect results of operations or financial position but did affect the disclosure of the segment information which follows. The Company has five operating business units. The Buildings, Energy and Environmental units each represent reportable segments under SFAS 131. The Transportation and Civil units each comprise two reportable segments. Accordingly, the Company has the following seven reportable segments: o The Buildings unit has historically provided a variety of services including design-build, construction management, planning, program management, general contracting, architectural and interior design, construction inspection and constructability reviews. o The Civil unit includes two reportable segments. The Civil-Engineering segment provides surveying, mapping, geographic information systems, planning, design, construction management and total program management. The Civil-Baker Support Services, Inc. ("BSSI") segment principally provides operations and maintenance services on U.S. military bases. o The Energy unit provides training, personnel recruitment, pre-operations engineering, field operations and maintenance, mechanical equipment maintenance and logistics management services for operating energy production facilities. o The Environmental unit provides environmental, health and safety related engineering and consulting services in both the public and private markets. o The Transportation unit includes two reportable segments. The Transportation-Engineering segment provides planning, design, construction management and inspection and management consulting services to highway, toll road and transit agencies. The Transportation-Construction segment acts as a general contractor for highways, bridges, track installation, sewer, water and other civil construction projects. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates the performance of its segments based on income before income taxes. The following tables reflect disclosures required by SFAS 131 for the Company's seven segments (in millions):
1998 1997 1996 ================================================================================ Total contract revenues: Buildings unit $151.6 $126.4 $127.4 Civil unit: Engineering 69.1 67.7 75.1 BSSI 61.8 50.5 34.3 Energy unit 68.6 54.8 43.2 Environmental unit 22.7 21.5 27.3 Transportation unit: Engineering 72.3 62.0 50.8 Construction 75.2 63.5 60.3 - -------------------------------------------------------------------------------- Total $521.3 $446.4 $418.4 ================================================================================ 1998 1997 1996 ================================================================================ Income/(loss) before taxes: Buildings unit $(13.9) $ 0.9 $ 0.9 Civil unit: Engineering 3.5 3.7 4.2 BSSI 0.1 -- (0.8) Energy unit 4.0 2.3 2.3 Environmental unit 1.0 0.4 0.5 Transportation unit: Engineering 2.9 1.0 2.3 Construction 0.7 0.6 (1.4) - -------------------------------------------------------------------------------- Subtotal - segments (1.7) 8.9 8.0 Corporate/Insurance 0.4 0.4 -- - -------------------------------------------------------------------------------- Total $ (1.3) $ 9.3 $ 8.0 ================================================================================ 1998 1997 ================================================================================ Segment assets: Buildings unit $ 30.5 $ 27.1 Civil unit: Engineering 18.7 16.2 BSSI 15.6 15.5 Energy unit 27.9 23.5 Environmental unit 5.1 3.7 Transportation unit: Engineering 21.7 17.7 Construction 20.6 20.2 - -------------------------------------------------------------------------------- Subtotal - segments 140.1 123.9 Corporate/Insurance 11.8 20.5 - -------------------------------------------------------------------------------- Total $151.9 $144.4 ================================================================================ 1998 1997 1996 ================================================================================ Capital expenditures: Buildings unit $ 0.3 $ 0.1 $ 0.5 Civil unit: Engineering 1.4 0.6 0.5 BSSI 0.8 0.3 1.0 Energy unit 1.2 0.4 0.5 Environmental nit 0.2 -- -- Transportation unit: Engineering 1.3 0.3 0.2 Construction 4.2 0.3 0.1 - -------------------------------------------------------------------------------- Subtotal - segments 9.4 2.0 2.8 Corporate 1.2 0.5 0.9 - -------------------------------------------------------------------------------- Total $ 10.6 $ 2.5 $ 3.7 ================================================================================ 1998 1997 1996 ================================================================================ Depreciation and amortization: Buildings unit $ 0.2 $ 0.2 $ 0.1 Civil unit: Engineering 0.7 0.4 0.5 BSSI 0.6 0.5 0.4 Energy unit 1.1 1.2 1.1 Environmental unit 0.1 0.1 0.2 Transportation unit: Engineering 0.6 0.5 0.5 Construction 0.7 0.5 1.0 - -------------------------------------------------------------------------------- Subtotal - segments 4.0 3.4 3.8 Corporate 1.0 1.1 1.1 - -------------------------------------------------------------------------------- Total $ 5.0 $ 4.5 $ 4.9 ================================================================================
The Company has determined that the intersegment revenues, interest income and expense, equity in the net income of investees accounted for by the equity method and the amount of investment in equity method investees, by segment, are immaterial for further disclosure in these financial statements. The enterprise-wide disclosures required by SFAS 131 are as follows:
1998 1997 1996 ================================================================================ Total contract revenues by type of service: Engineering $178.4 $164.2 $175.1 Construction 212.4 176.9 165.9 Operations & Maintenance 130.5 105.3 77.4 - -------------------------------------------------------------------------------- Total $521.3 $446.4 $418.4 ================================================================================ 1998 1997 1996 ================================================================================ Total contract revenues by geographic origin: Domestic $475.2 $403.6 $367.2 Foreign 46.1 42.8 51.2 - -------------------------------------------------------------------------------- Total $521.3 $446.4 $418.4 ================================================================================ 1998 1997 1996 ================================================================================ Total contract revenues by principal markets: United States government 27.1% 23.8% 22.5% Various state governmental and quasi-governmental agencies 34.4% 40.9% 46.6% Commercial, industrial and private clients 38.5% 35.3% 30.9% ================================================================================
The Company's business is substantially conducted in the U.S. The aforementioned contract with UCDP accounted for 11.5% of the Company's total contract revenues in 1998. No individual contract accounted for more than 10% of the Company's total contract revenues in 1997 or 1996. 5. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following (in thousands):
1998 1997 ================================================================================ Land $ 552 $ 552 Buildings and improvements 6,832 6,388 Equipment and vehicles 41,137 32,319 - -------------------------------------------------------------------------------- Total, at cost 48,521 39,259 Less - Accumulated depreciation 31,063 28,274 - -------------------------------------------------------------------------------- Net property, plant and equipment $17,458 $10,985 ================================================================================
6. GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill and other intangible assets consist of the following (in thousands):
1998 1997 ================================================================================ Goodwill, net of accumulated amortization of $2,867,000 and $2,437,000, respectively $ 6,091 $ 5,078 Other intangible assets, net of accumulated amortization of $2,344,000 and $1,817,000, respectively 1,416 1,443 - -------------------------------------------------------------------------------- Net intangible assets $ 7,507 $ 6,521 ================================================================================
Effective October 1, 1998, the Company acquired all of the outstanding shares of capital stock of GeoResearch, Inc. from its shareholder in a transaction accounted for as a purchase. While this transaction is not considered material for purposes of detailed disclosure, the Company recorded related intangible assets totaling $1,943,000 during the fourth quarter of 1998. 7. LONG-TERM DEBT AND BORROWING AGREEMENTS The Company has an unsecured credit agreement (the "Agreement") with Mellon Bank, N.A. (the "Bank"). The Agreement provides for a commitment of $25 million through May 31, 2001. The commitment includes the sum of the principal amount of revolving credit loans outstanding and the aggregate face value of outstanding letters of credit. As of December 31, 1998, no borrowings were outstanding; however, letters of credit totaling $1,792,000 were outstanding under the Agreement. The Agreement provides for the Company to borrow at the Bank's prime interest rate or at other indexed rates that may be lower, and for the Company to meet certain cash flow, leverage, interest coverage and tangible net worth requirements. Under the Agreement, the Company pays the Bank commitment fees of 3/8% per year based on the unused portion of the commitment. The maximum amount of borrowings outstanding under the Agreement during 1998 was $6,974,000. For 1998, the average daily balance outstanding when the Company was in a net borrowing position was $2,584,000 at a weighted average interest rate of 8.0%. The proceeds of all loans under the Agreement were used to meet various working capital requirements. The Company did not borrow under the Agreement during 1997. Other amounts totaling $3,961,000 included in other accrued expenses and long-term debt in the accompanying Consolidated Balance Sheet represent amounts due for construction equipment financed in 1998 as well as amounts due to the former owner of GeoResearch, Inc. These notes and obligations mature as follows: $823,000 in 1999, $627,000 in 2000, $954,000 in 2001, $915,000 in 2002, $370,000 in 2003, and $272,000 thereafter. The interest rates with respect to these notes ranged from 4.44% to 7.75% as of December 31, 1998. 8. CAPITAL STOCK In 1996, the Board of Directors authorized the repurchase of up to 500,000 shares of the Company's common stock in the open market. During 1998, the Company repurchased 96,379 treasury shares of Common Stock at market prices ranging from $7.53 to $8.87 per share, for a total price of $800,000. During 1996, the Company repurchased 207,560 treasury shares of Common Stock at market prices ranging from $5.63 to $6.25 per share, for a total price of $1,260,000. The Company made no treasury share repurchases during 1997. The Company's Common Stock is divided into two series, Common Stock and Series B Common Stock. Each share of Common Stock entitles the holder thereof to one vote on all matters submitted to the shareholders, and each share of Series B Common Stock entitles the holder thereof to ten votes on all such matters. The Company's Articles of Incorporation authorize the issuance of 300,000 shares of Cumulative Preferred Stock, par value $1 per share. At December 31, 1998 and 1997, there were no shares of such Preferred Stock outstanding. 9. LEASE COMMITMENTS Rent expense under noncancellable operating leases was $11,687,000 in 1998, $10,364,000 in 1997 and $9,972,000 in 1996. Minimum annual rentals payable under noncancellable operating leases in each of the five years after December 31, 1998 are $11,220,000, $9,250,000, $6,529,000, $3,241,000 and $894,000, respectively. These noncancellable leases relate to office space, computer equipment, office equipment, construction equipment, and vehicles, with lease terms ranging from one to 10 years. 10. INCOME TAXES The provision for income taxes consisted of the following (in thousands):
1998 1997 1996 ================================================================================ Current income taxes: Federal $ 18 $ 1,401 $ (176) State 246 139 -- Foreign 1,519 1,024 1,406 - -------------------------------------------------------------------------------- Total current income taxes 1,783 2,564 1,230 - -------------------------------------------------------------------------------- Deferred income taxes: Federal (799) 1,705 2,538 State 104 122 91 - -------------------------------------------------------------------------------- Total deferred income taxes (695) 1,827 2,629 - -------------------------------------------------------------------------------- Total provision for income taxes $ 1,088 $ 4,391 $ 3,859 ================================================================================
The following is a reconciliation of income taxes at the federal statutory rate to income taxes recorded by the Company (in thousands):
1998 1997 1996 ================================================================================ Computed income taxes at U.S. federal statutory rate $ (453) $ 3,177 $ 2,733 Foreign taxes, net of federal income tax benefit 1,003 676 928 State income taxes, net of federal income tax benefit 225 172 61 Nondeductible charges 313 300 249 Other, net -- 66 (112) - -------------------------------------------------------------------------------- Total provision for income taxes $ 1,088 $ 4,391 $ 3,859 ================================================================================
The domestic and foreign components of income before income taxes are as follows (in thousands):
1998 1997 1996 ================================================================================ Domestic $(4,203) $ 7,148 $ 3,530 Foreign 2,872 2,196 4,509 - -------------------------------------------------------------------------------- Total $(1,331) $ 9,344 $ 8,039 ================================================================================
The components of the Company's deferred income tax assets and liabilities at December 31, 1998 and 1997 are as follows (in thousands):
1998 1997 ================================================================================ Deferred income tax assets: Deductible temporary differences: Provision for expenses and losses $ 6,341 $ 2,763 Contract overbillings 666 705 Federal tax operating loss carryforward -- 98 Accrued vacation pay 1,301 1,404 Fixed and intangible assets 852 795 Minimum tax credits 379 570 Charitable contribution carryforward 307 230 Other 135 197 - -------------------------------------------------------------------------------- Total deferred income tax assets 9,981 6,762 - -------------------------------------------------------------------------------- Deferred income tax liabilities: Contract underbillings (7,507) (6,159) Undistributed foreign earnings (1,494) (1,017) - -------------------------------------------------------------------------------- Total deferred income liabilities (9,001) (7,176) - -------------------------------------------------------------------------------- Net deferred tax asset/(liability) $ 980 $ (414) ================================================================================
The Company's U.S. income tax returns have been examined and accepted by the Internal Revenue Service for the years 1990 through 1994. Management believes that adequate provisions have been made for income taxes at December 31, 1998. 11. CONTINGENCIES The Company is self-insured for its primary layer of professional liability insurance through a wholly-owned captive insurance subsidiary. The secondary layer of the professional liability insurance continues to be provided, consistent with industry practice, under a "claims-made" insurance policy placed with an independent insurance company. Under claims-made policies, coverage must be in effect when a claim is made. This insurance is subject to standard exclusions. The Company is self-insured up to a certain deductible limit with respect to its workers' compensation and general liability exposures. Provisions for losses expected for these exposures are recorded based upon the Company's estimates of the aggregate liability for claims incurred. Such estimates utilize certain actuarial assumptions followed in the insurance industry. Insurance coverage is obtained for catastrophic exposures as well as those risks required to be insured by law or by contract. The Company has been named as a defendant or co-defendant in legal proceedings wherein substantial damages are claimed. Such proceedings are not uncommon to the Company's business. After consultations with counsel, except as discussed in Note 2, management believes that the Company has recognized adequate provisions for these proceedings and their ultimate resolutions will not have a material adverse effect on the consolidated financial position or annual results of operations of the Company. The Company currently has two significant legal proceedings outstanding. The more significant of the two relates to BMSCI's construction contract with UCDP (see related discussion in Note 2). The other significant proceeding relates to a lawsuit brought in 1987 in the Supreme Court of the State of New York, Bronx County, by the Dormitory Authority of the State of New York against a number of parties, including the Company and one of its wholly-owned subsidiaries, that asserts breach of contract and alleges damages of $13,000,000. The Company, which was not a party to the contract underlying the lawsuit, contends that there is no jurisdiction with respect to the Company and that it cannot be held liable for any conduct of the subsidiary. Both the Company and the subsidiary are contesting liability issues and have filed cross-claims and third-party claims against other entities involved in the project. In accordance with the purchase agreement related to its 1998 acquisition of GeoResearch, Inc., the Company agreed to pay the former owner, who has continued as an employee of the Company, contingent consideration based on a formula tied to the operating profit of the combined geospatial businesses, in excess of a specified threshold, for the year ending December 31, 2001. The threshold contemplates substantial growth in the combined businesses over the years 1999 through 2001. This contingent consideration payment cannot exceed $5.3 million. Any such payment would serve to increase the goodwill associated with this acquisition. It is currently uncertain whether any contingent consideration payment will be required under the purchase agreement with GeoResearch, Inc. At December 31, 1998, certain subcontractors performing work on uncompleted Company and joint-venture construction contracts and certain contractors on construction management projects had not been required to furnish performance bonds. In the opinion of management, provision has been made for all costs that will be incurred as a result of such contractors not performing in accordance with their agreements. 12. EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST The Company maintains a defined contribution retirement program through an Employee Stock Ownership Plan ("ESOP"), in which substantially all employees are eligible to participate. In addition to providing a vehicle for investment in Company stock, the ESOP offers participants several other investment options. Contributions to the ESOP are derived from a 401(k) Salary Redirection Program with a Company matching contribution, and a discretionary contribution as determined by the Company's Board of Directors. Under the 401(k) Salary Redirection Program effective January 1, 1999, the Company began matching 100% of the first 5-1/2% of eligible salary contributed by participants. The Company's matching contributions are invested not less than 25% in Michael Baker Corporation Common Stock, with the remaining 75% being available to invest in Baker Common Stock or mutual funds, as directed by the participants. From July 1, 1997 through December 31, 1998, the Company's matching contributions were not permitted to be less than 50% invested in Baker Common Stock with the remaining 50% being available to invest in Baker Common Stock or mutual funds, as directed by the participants. Prior to July 1997, the Company's matching contributions were required to be invested 100% in Baker Common Stock. Company contributions under this program amounted to $4,312,000, $3,321,000 and $3,306,000 in 1998, 1997 and 1996, respectively. As of December 31, 1998, the market value of all ESOP investments was $91,037,000, of which 40% represented the market value of the ESOP's investment in Michael Baker Corporation Common Stock. The Company's ESOP held 44% of the shares and 73% of the voting power for the outstanding Common Stock and Series B Common Stock of the Company at the end of 1998. 13. STOCK OPTION PLANS As of December 31, 1998, the Company has two fixed stock option plans. Under the amended 1995 Stock Incentive Plan (the "Plan"), the Company may grant options for an aggregate of 1,500,000 shares of Common Stock to key employees. Under the 1996 Nonemployee Directors' Stock Incentive Plan (the "Directors Plan"), the Company may grant options for an aggregate of 150,000 shares of Common Stock to nonemployee board members. Under both plans, the exercise price of each option equals the market price of the Company's stock on the date of grant. Options are typically granted pursuant to an agreement with the employee, under which one-fourth of the options granted become immediately vested, and the remaining three-fourths vest in annual one-fourth increments under the Plan. The options under the Directors' Plan are fully vested at the date of grant. Vested options remain exercisable for a period of ten years from the grant date under both plans. Under the Plan, the Company granted special options during 1998, which vest in the year 2006, but whose vesting may be accelerated to the first quarter of the year 2001 if the Company meets its pre-established earnings per share goal for the year 2000. Under the Directors Plan, each nonemployee director was issued 500 restricted shares of Common Stock for a total of 3,500 and 4,500 shares of restricted stock issued in 1998 and 1997, respectively. Restrictions on the shares expire two years after the issue date. The following table summarizes all stock option activity for both plans in 1998, 1997 and 1996:
Average Shares exercise subject price to option per share - -------------------------------------------------------------------------------- Balance at December 31, 1995 151,788 $ 5.00 Options granted 67,947 $ 4.83 Options exercised (4,125) $ 5.00 Options forfeited (20,918) $ 4.97 - -------------------------------------------------------------------------------- Balance at December 31, 1996 194,692 $ 4.94 Options granted 179,593 $ 6.90 Options exercised (22,690) $ 5.48 Options forfeited (10,581) $ 5.76 - -------------------------------------------------------------------------------- Balance at December 31, 1997 341,014 $ 5.92 Options granted 402,397 $ 9.96 Options exercised (35,191) $ 5.20 Options forfeited (2,639) $ 6.46 - -------------------------------------------------------------------------------- Balance at December 31, 1998 705,581 $ 8.25 ================================================================================
The weighted average fair value of options granted during 1998, 1997 and 1996 was $5.37, $3.94 and $2.72, respectively. The following table summarizes information about stock options outstanding under both plans as of December 31, 1998:
Options Exercise Outstanding Average Exercisable granted in price options life* options - -------------------------------------------------------------------------------- Jan. 1995 $ 5.00 91,994 6.0 91,994 Feb. 1996 $ 4.81 43,518 7.2 31,227 May 1996 $ 5.03 5,000 7.4 5,000 Feb. 1997 $ 6.91 154,672 8.2 73,810 May 1997 $ 6.84 8,000 8.4 8,000 Feb. 1998 $ 9.53 113,366 9.2 28,336 Apr. 1998 $ 10.13 289,031 9.4 7,000 - -------------------------------------------------------------------------------- Total 705,581 8.2 245,367 ================================================================================ *Average life remaining in years
During 1996, the Company adopted SFAS 123, "Accounting for Stock-Based Compensation," for disclosure purposes only. As allowed under SFAS 123, the Company continues to apply APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations in its accounting for stock-based compensation plans. Accordingly, no compensation cost was recognized in 1998, 1997 or 1996. If compensation costs for the Company's stock incentive plans had been determined based on the fair value at the grant dates for awards under those plans, consistent with the method prescribed by SFAS 123, the Company's net income and diluted net income per share amounts would have been reduced. The Company's pro forma net income/(loss) amounts would have been $(2,669,000), $4,725,000 and $4,077,000 for the years ended December 31, 1998, 1997 and 1996, respectively. The Company's pro forma diluted net income/(loss) per share would have been $(0.33), $0.57 and $0.49 for the years ended December 31, 1998, 1997, and 1996, respectively. The fair value of options on the respective grant dates was estimated using a Black-Scholes option pricing model with certain assumptions. The key assumptions used include a weighted average risk-free interest rate of 5.9%, weighted average expected volatility of 49.4%, an expected option life of 6 years, and a 0% expected dividend yield. 14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of the unaudited quarterly results of operations for the two years ended December 31, 1998:
1998 - Three Months Ended (In thousands) March 31 June 30 Sept. 30 Dec. 31* - -------------------------------------------------------------------------------- Total contract revenues $111,097 $127,118 $135,803 $147,253 Gross profit 12,244 15,742 15,764 3,494 Income before income tax 1,378 3,123 3,947 (9,779) Net income/(loss) 730 1,655 2,093 (6,897) Diluted net income/(loss) per common share $ 0.09 $ 0.20 $ 0.25 $ (0.84) ================================================================================ *Includes Buildings unit operating charges totaling $13.7 million (see Note 2).
1997 - Three Months Ended (In thousands) March 31 June 30 Sept. 30 Dec. 31 - -------------------------------------------------------------------------------- Total contract revenues $ 94,092 $105,477 $116,627 $130,236 Gross profit 10,876 12,914 13,413 14,702 Income before income tax 1,109 2,634 2,942 2,659 Net income 577 1,369 1,530 1,477 Diluted net income per common share $ 0.07 $ 0.17 $ 0.18 $ 0.18 ================================================================================
REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Board of Directors of Michael Baker Corporation In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income, of shareholders' investment and of cash flows present fairly, in all material respects, the financial position of Michael Baker Corporation and its subsidiaries (the Company) at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Note 2 and Note 11 to the consolidated financial statements, the Company is involved in certain contingencies, the outcome of which cannot presently be determined. Accordingly, no provision for any liability that may result from these contingencies has been made in the accompanying consolidated financial statements. /s/ PricewaterhouseCoopers LLP - ------------------------------ PricewaterhouseCoopers LLP Pittsburgh, Pennsylvania April 20, 1999 SUPPLEMENTAL FINANCIAL INFORMATION Market Information - Common Shares The principal market on which the Michael Baker Corporation Common Stock is traded is the American Stock Exchange. High and low closing prices of the Common Stock for each quarter during 1998 and 1997 were as follows:
1998 1997 - -------------------------------------------------------------------------------- First Second Third Fourth First Second Third Fourth - -------------------------------------------------------------------------------- High 10 1/2 10 1/2 9 1/2 10 3/8 7 11/16 7 3/8 10 5/8 11 5/8 Low 8 1/2 9 1/16 6 11/16 7 1/4 6 3/8 6 1/2 6 3/4 9 ================================================================================
EX-21.1 5 SUBSIDIARIES OF THE REGISTRANT Exhibit 21.1 SUBSIDIARIES OF THE REGISTRANT ------------------------------ The following entities, unless otherwise indicated, are wholly-owned direct or indirect subsidiaries of the Registrant as of December 31, 1998:
State or Country Name of Organization ---- --------------- 1. Baker Environmental, Inc. Pennsylvania 2. Baker Heavy & Highway, Inc. Pennsylvania 3. Baker Mellon Stuart Construction, Inc. Pennsylvania 4. Mellon Stuart Building Services, Inc. Pennsylvania 5. Mellon Stuart Construction International, Inc. Pennsylvania 6. Michael Baker Development Corporation Pennsylvania 7. Michael Baker Global, Inc. Pennsylvania 8. Michael Baker Jr., Inc. Pennsylvania 9. Michael Baker Alaska, Inc. Alaska 10. Baker Construction, Inc. Delaware 11. Baker Global Project Services, Inc. Delaware 12. Baker Holding Corporation Delaware 13. Baker/OTS, Inc. Delaware 14. International Pipeline Services, Inc. Delaware 15. Michael Baker International, Inc. Delaware 16. Baker GeoResearch, Inc. District of Columbia 17. Baker Engineering, Inc. Illinois 18. Michael Baker Jr. Company Nevada 19. Michael Baker Architects/Engineers, P.C. New Jersey 20. Baker Engineering NY, Inc. New York 21. Baker/MO Services, Inc. Texas 22. Baker Support Services, Inc. Texas 23. Vermont General Insurance Company Vermont 24. Michael Baker Barbados Ltd. Barbados 25. Baker O&M International, Ltd. Cayman Islands 26. Baker/OTS International, Inc. Cayman Islands 27. Overseas Technical Services (Middle East) Ltd. Cayman Islands 28. Michael Baker de Mexico, S.A. de C.V. Mexico 29. OTS International Training Services Ltd. United Kingdom 30. Overseas Technical Services (Harrow) Ltd. United Kingdom 31. Baker/OTS Ltd. United Kingdom 32. SD Forty Five Ltd. United Kingdom 33. Hanseatic Oilfield Services Ltd. Vanuatu 34. OTS Finance and Management Ltd. Vanuatu 35. Overseas Technical Services International Ltd. Vanuatu
EX-23.1 6 CONSENT OF INDEPENDENT ACCOUNTANTS Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS ---------------------------------- We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 33-69306; No. 33-62887; No. 333-05987; and No. 333-59941) of Michael Baker Corporation of our report dated April 20, 1999, which appears within Exhibit 13.1 to Michael Baker Corporation's Annual Report on Form 10-K for the year ended December 31, 1998. /s/ PricewaterhouseCoopers, LLP - ------------------------------- PricewaterhouseCoopers, LLP Pittsburgh, Pennsylvania April 29, 1999 EX-27 7 FDS
5 1000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 5,014 0 82,672 0 22,407 120,285 48,521 (31,063) 151,861 88,430 3,138 0 0 8,166 37,002 151,861 521,271 521,271 474,027 474,027 0 0 145 (1,331) 1,088 (2,419) 0 0 0 (2,419) (0.30) (0.30)
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