UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003
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.)
Airside Business Park, 100 Airside Drive, Moon Township, PA 15108
----------------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(412) 269-6300
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(Registrant's telephone number, including area code)
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of July 31, 2003:
Common Stock 8,319,998 shares
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The condensed consolidated financial statements which follow have been prepared
by Michael Baker Corporation ("the Company"), without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. Although
certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations, the
Company believes that the disclosures are adequate to make the information
presented not misleading. The statements reflect all adjustments which are, in
the opinion of management, necessary for a fair presentation of the results for
the periods presented. All such adjustments are of a normal and recurring nature
unless specified otherwise. These condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and the
notes thereto included in the Company's latest Annual Report on Form 10-K.
This Quarterly Report on Form 10-Q, particularly the "Management's Discussion
and Analysis of Financial Condition and Results of Operations" section in Part
I, contains forward-looking statements concerning future operations and
performance of the Company. Forward-looking statements are subject to market,
operating and economic risks and uncertainties that may cause the Company'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, changes in industry trends, changes in the regulatory environment,
changes in anticipated levels of government spending on infrastructure,
management changes, successful implementation of information systems and changes
in loan relationships or sources of financing. Such forward-looking statements
are made pursuant to the Safe Harbor Provisions of the Private Securities
Litigation Reform Act of 1995.
-1-
MICHAEL BAKER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
For the three months ended
----------------------------
JUNE 30, 2003 June 30, 2002
------------- -------------
(In thousands, except
per share amounts)
Total contract revenues $ 104,799 $ 104,760
Cost of work performed 89,780 86,918
--------- ---------
Gross profit 15,019 17,842
Selling, general and administrative expenses 13,869 11,686
--------- ---------
Income from operations 1,150 6,156
Other income/(expense):
Interest income 12 79
Interest expense (228) (20)
Other, net (812) 10
--------- ---------
Income before income taxes 122 6,225
Provision for income taxes 54 2,739
--------- ---------
NET INCOME $ 68 $ 3,486
========= =========
BASIC NET INCOME PER SHARE $ 0.01 $ 0.42
DILUTED NET INCOME PER SHARE $ 0.01 $ 0.41
========= =========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-2-
MICHAEL BAKER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
For the six months ended
----------------------------
JUNE 30, 2003 June 30, 2002
------------- -------------
(In thousands, except
per share amounts)
Total contract revenues $ 204,098 $ 200,681
Cost of work performed 175,633 168,058
--------- ---------
Gross profit 28,465 32,623
Selling, general and administrative expenses 27,426 23,307
--------- ---------
Income from operations 1,039 9,316
Other income/(expense):
Interest income 16 171
Interest expense (314) (41)
Other, net (798) (76)
--------- ---------
(Loss)/income before income taxes (57) 9,370
(Benefit from)/provision for income taxes (28) 4,170
--------- ---------
NET (LOSS)/INCOME $ (29) $ 5,200
========= =========
BASIC NET INCOME PER SHARE $ 0.00 $ 0.63
DILUTED NET INCOME PER SHARE $ 0.00 $ 0.61
========= =========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-3-
MICHAEL BAKER CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS JUNE 30, 2003 Dec. 31, 2002
------ ------------- -------------
(In thousands)
CURRENT ASSETS
Cash and cash equivalents $ 7,407 $ 9,885
Receivables, net 80,842 65,742
Cost of contracts in progress and estimated earnings, less billings 55,058 29,723
Prepaid expenses and other 5,206 6,220
-------- --------
Total current assets 148,513 111,570
-------- --------
PROPERTY, PLANT AND EQUIPMENT, NET 18,433 17,459
OTHER ASSETS
Goodwill and other intangible assets, net 9,376 9,519
Other assets 6,847 6,549
-------- --------
Total other assets 16,223 16,068
-------- --------
TOTAL ASSETS $183,169 $145,097
======== ========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES
Current portion of long-term debt $ 33,257 $ --
Accounts payable 23,037 20,373
Accrued employee compensation 14,982 11,290
Accrued insurance 9,436 9,687
Income taxes payable 553 2,801
Other accrued expenses 18,024 22,208
Excess of billings on contracts in progress over cost and
estimated earnings 9,825 4,191
-------- --------
Total current liabilities 109,114 70,550
-------- --------
OTHER LIABILITIES 3,163 3,128
Commitments and contingencies -- --
-------- --------
Total liabilities 112,277 73,678
-------- --------
SHAREHOLDERS' INVESTMENT
Common Stock, par value $1, authorized 44,000,000 shares,
issued 8,711,235 and 8,694,360 shares at 6/30/03 and
12/31/02, respectively 8,711 8,694
Additional paid-in-capital 38,301 38,146
Retained earnings 27,382 27,411
Other comprehensive loss (495) (569)
Unearned compensation expense (54) --
Less - 391,237 and 310,837 shares of Common Stock in treasury,
at cost, at 6/30/03 and 12/31/02, respectively (2,953) (2,263)
-------- --------
Total shareholders' investment 70,892 71,419
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT $183,169 $145,097
======== ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-4-
MICHAEL BAKER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the six months ended
----------------------------
JUNE 30, 2003 June 30, 2002
------------- -------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss)/income $ (29) $ 5,200
Adjustments to reconcile net (loss)/income to net
cash used in operating activities:
Depreciation and amortization 2,553 2,067
Impairment of investment in Energy Virtual Partners 800 --
Changes in assets and liabilities:
Increase in receivables and contracts in progress (34,801) (6,866)
Decrease in accounts payable and accrued expenses (292) (1,814)
Decrease/(increase) in other net assets 92 (1,126)
-------- --------
Total adjustments (31,648) (7,739)
-------- --------
Net cash used in operating activities (31,677) (2,539)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (3,417) (4,766)
Investment in Energy Virtual Partners -- (1,000)
Receipt of litigation escrow -- 12,335
-------- --------
Net cash (used in)/provided by investing activities (3,417) 6,569
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from short-term debt 33,257 --
Payments to acquire treasury stock (690) --
Proceeds from the exercise of stock options 49 573
Repayments of long-term debt -- (2)
-------- --------
Net cash provided by financing activities 32,616 571
-------- --------
Net (decrease)/increase in cash and cash equivalents (2,478) 4,601
Cash and cash equivalents, beginning of year 9,885 18,482
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 7,407 $ 23,083
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW DATA
Interest paid $ 306 $ 25
Income taxes paid $ 3,357 $ 1,733
======== ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-5-
MICHAEL BAKER CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE PERIODS ENDED JUNE 30, 2003
(UNAUDITED)
NOTE 1 - EARNINGS PER SHARE
The following table summarizes the Company's weighted average shares outstanding
for the three and six-month periods ended June 30, 2003 and 2002. The additional
shares included in diluted shares outstanding are entirely attributable to stock
options.
For the three months ended For the six months ended
Weighted average ---------------------------- ----------------------------
shares outstanding: JUNE 30, 2003 June 30, 2002 JUNE 30, 2003 June 30, 2002
------------------- ------------- ------------- ------------- -------------
Basic 8,312,003 8,346,474 8,328,837 8,316,457
Diluted 8,360,555 8,539,427 8,328,837 8,521,368
========= ========= ========= =========
The Company had 328,790 and 139,022 stock options outstanding which were not
included in the computation of diluted shares outstanding as of June 30, 2003
and 2002, respectively, because the effect would have been antidilutive. Such
options could potentially dilute basic earnings per share in future periods. If
the Company would have earned a profit during the six months ended June 30,
2003, 48,357 common equivalent shares would have been added to basic weighted
average shares outstanding to compute diluted weighted average shares
outstanding.
NOTE 2 - CAPITAL STOCK
During 1996, the Board of Directors authorized the repurchase of up to 500,000
shares of the Company's Common Stock in the open market. In the first quarter of
2003, the Company reactivated this share repurchase program and repurchased
80,400 treasury shares at market prices ranging from $7.90 to $8.81 per share,
for a total price of $690,000. As of June 30, 2003, treasury shares totaling
414,689 had been repurchased under this program. In February 2003, the Board of
Directors authorized the Company to repurchase up to 500,000 additional shares.
NOTE 3 - BUSINESS SEGMENT INFORMATION
The Company has the following three reportable segments:
o The Engineering segment provides a variety of design and related consulting
services. Such services include design-build, construction management,
consulting, planning, program management, surveying, mapping, geographic
information systems, architectural and interior design, construction
inspection, constructability reviews, software development, site assessment
and restoration, strategic regulatory analysis, regulatory compliance, and
advanced management systems.
-6-
o The Energy segment provides a full range of Total Asset Management
services for operating energy production facilities worldwide. These
services range from complete outsourcing solutions to specific services
such as training, personnel recruitment, pre-operations engineering,
maintenance management systems, field operations and maintenance,
procurement, and supply chain management. Many of these service offerings
are enhanced by the utilization of this segment's OPCO(R) and managed
services operating models as service delivery methods.
o The Non-Core segment includes activity associated with the former buildings
and transportation construction operations that are being wound down, and
the former BSSI subsidiary, which was sold in June 2000.
The following tables reflect the required disclosures for the Company's
reportable segments (in millions):
For the three months ended For the six months ended
---------------------------- ----------------------------
JUNE 30, 2003 June 30, 2002 JUNE 30, 2003 June 30, 2002
------------- ------------- ------------- -------------
Total contract
revenues:
Engineering $ 61.6 $ 61.9 $ 120.3 $ 120.2
Energy 43.2 42.9 83.8 80.5
Non-Core -- -- -- --
------- ------- ------- -------
Total $ 104.8 $ 104.8 $ 204.1 $ 200.7
======= ======= ======= =======
For the three months ended For the six months ended
---------------------------- ----------------------------
JUNE 30, 2003 June 30, 2002 JUNE 30, 2003 June 30, 2002
------------- ------------- ------------- -------------
Income/(loss) from
operations without
Corporate expenses
allocated:
Engineering $ 3.5 $ 6.1 $ 6.4 $ 10.4
Energy 2.3 3.3 3.5 5.0
Non-Core (0.1) (0.5) 0.2 (0.6)
------- ------- ------- -------
Subtotal - segments 5.7 8.9 10.1 14.8
Corporate/Insurance (4.5) (2.7) (9.1) (5.5)
------- ------- ------- -------
Total $ 1.2 $ 6.2 $ 1.0 $ 9.3
======= ======= ======= =======
-7-
JUNE 30, 2003 Dec. 31, 2002
------------- -------------
Segment assets:
Engineering $ 91.0 $ 76.8
Energy 80.1 52.6
Non-Core 0.8 1.0
------- -------
Subtotal - segments 171.9 130.4
Corporate/Insurance 11.3 14.7
------- -------
Total $ 183.2 $ 145.1
======= =======
NOTE 4 - LONG-TERM DEBT AND BORROWING ARRANGEMENTS
The Company has an unsecured credit agreement ("the Agreement") with a
consortium of financial institutions. The Agreement provides for a commitment of
$40 million through September 30, 2004. 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 June 30, 2003, borrowings totaling
$32.3 million were outstanding under the Agreement, along with outstanding
letters of credit totaling $7.7 million.
On May 8, 2003, the Company entered into an agreement with its bank to provide a
Revolving Credit Note ("the Note") in the amount of $5 million through August 6,
2003. The Note provides the Company with additional liquidity that may be needed
in conjunction with changes in its billing process and system which have caused
temporary delays in both client billings and cash collections during the first
six months of 2003. As of June 30, 2003, borrowings totaling $1.0 million were
outstanding under the Note. The borrowings were subsequently repaid and the Note
has matured.
The increased level of borrowings at quarter end required the Company to seek
and obtain a waiver of several of its financial ratio covenants. Due to the
difficulty of accurately forecasting the amount of borrowings at September 30,
2003 as well as the lower level of earnings for the trailing four quarters,
management is not certain that it will be in compliance with the financial
covenants in the Agreement at September 30, 2003. Consequently, the Company's
borrowings have been reflected as current liabilities at June 30, 2003.
NOTE 5 - CONTINGENCIES
Insurance coverage is obtained for catastrophic exposures as well as those risks
required to be insured by law or contract. The Company requires its insurers to
meet certain minimum financial ratings at the time the coverages are placed;
however, insurance recoveries remain subject to the risk that the insurer will
be financially able to pay the claims as they arise. The Company is insured with
respect to its workers' compensation and general liability exposures subject to
deductibles or self-insured retentions. As a result of adverse market conditions
in the insurance industry, several of these deductibles were either required to
be increased by the Company because expiring coverages were no longer available,
or were voluntarily increased to avoid additional premium cost increases, in
connection with the Company's insurance coverage renewals effective July 1, 2002
and 2003. Loss provisions 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.
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
-8-
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's professional liability insurance coverage had been placed on a
claims-made basis with Reliance Insurance Group ("Reliance") for the period July
1, 1994 through June 30, 1999. On May 29, 2001, the Pennsylvania Insurance
Commissioner placed Reliance into rehabilitation, and on October 3, 2001,
Reliance was placed into liquidation. The Company is uncertain at this time what
effect these actions will have on any claim the Company or its subsidiaries may
have for insurance coverage under policies issued by Reliance with respect to
past years. Baker Environmental, Inc. ("BEI"), a wholly-owned subsidiary of the
Company, was subject to one substantial claim which fell within the Reliance
coverage period. This claim reflected an action by LTV Steel Company ("LTV")
against BEI, resulting from the failure of a landfill for which BEI provided
services. In December 2002, after a hearing in the U.S. District Court for the
Western District of Pennsylvania, out-of-court settlement discussions between
LTV and BEI commenced. In February 2003, LTV and BEI reached an out-of-court
settlement to provide a payment to LTV in the amount of $2.5 million, the effect
of which was recorded during the fourth quarter of 2002. This settlement was
approved by the bankruptcy court and payment was made in April 2003. Due to the
liquidation of Reliance, the Company is currently uncertain what amounts paid to
LTV will be recoverable under the insurance policy with Reliance. Accordingly,
the Company has recorded no receivable from Reliance; however, the Company is
pursuing a claim in the Reliance liquidation.
On July 24, 2001, the Company announced that it had become aware that certain
activities related to the operations of a 53% owned Nigerian subsidiary engaged
in energy-related operations are the subject of an inquiry by the U.S.
Department of Justice. The Company acquired the Nigerian subsidiary as part of
its acquisition of the Overseas Technical Services companies in 1993. The
inquiry appears to be focused upon payments made to certain individuals in
connection with the subsidiary's operations in Nigeria as they relate to
potential violations of the Foreign Corrupt Practices Act and other relevant
statutes. The Company has retained legal counsel to represent it in this matter
and has initiated an internal investigation of these issues. The Company has
been cooperating fully with the government's inquiry; however, there has been no
recent activity in this matter. At this time, the Company is uncertain but does
not expect the costs of its investigation, its cooperation with the government's
inquiry or the outcome thereof, to have a material adverse financial impact on
its future financial results. However, the government's inquiry has not been
concluded and the Company's assessment of the outcome may vary as the matter
proceeds.
The Company has been named as a defendant or co-defendant in other legal
proceedings wherein substantial damages are claimed. Such proceedings are not
uncommon to the Company's business. After consultations with counsel, management
believes that the Company has recognized adequate provisions for probable and
reasonably estimable liabilities associated with these proceedings, and that
their ultimate resolutions will not have a material adverse effect on the
consolidated financial position or annual results of operations of the Company.
At June 30, 2003, the Company had certain guarantees and indemnifications
outstanding which could result in future payments to third parties. These
guarantees generally result from the conduct
-9-
of the Company's business in the normal course. The Company's outstanding
guarantees were as follows at June 30, 2003:
Maximum Related liability
undiscounted balance recorded
(Dollars in millions) future payments at 6/30/03
--------------------- --------------- -----------------
Standby letters of credit:
Insurance related $ 7.6 $ 7.6
Other 0.1 --
Performance and payment bonds 26.5 --
Sale of certain construction assets Unlimited --
Sale of BSSI 2.0 --
========= =========
The Company's banks issue standby letters of credit ("LOCs") on behalf of the
Company under the Agreement discussed above. As of June 30, 2003, most of these
LOCs had been issued to insurance companies to serve as collateral for payments
the insurers are required to make under the Company's self-insurance programs.
These LOCs may be drawn upon in the event that the Company does not reimburse
the insurance companies for claims payments made on behalf of the Company. Such
LOCs renew automatically on an annual basis unless either the LOCs are returned
to the bank by the beneficiary or the Company's banks elect not to renew them.
Bonds are provided on behalf of the Company by Travelers Casualty and Surety
Company of America ("Travelers"). The beneficiaries under these performance and
payment bonds may request payment from Travelers in the event that the Company
does not perform under the project or if subcontractors are not paid. The
performance and payment bonds outstanding at June 30, 2003 included one bond
totaling $24.4 million related to the Company's former construction operations.
This bond will be terminated by Travelers when the related project is completed
and all appropriate releases are received from the client. The project related
to the remaining construction bond is completed; accordingly, this bond is
currently expected to be terminated during the third quarter of 2003. The
Company does not currently expect any amounts to be paid by Travelers under its
bonds outstanding at June 30, 2003.
During 2000, the Company sold certain assets associated with its former heavy &
highway construction business to A&L, Inc., and all of the outstanding stock of
its former BSSI subsidiary to SKE International LLC. These sale agreements
provided indemnifications to the buyers for breaches of certain obligations by
the Company. For the sale of heavy & highway assets, there was no dollar limit
on the indemnifications, and the terms vary but will ultimately be governed by
the statutes of limitations. Maximum payments for indemnifications under the
BSSI sale were limited to $2.0 million, and the terms are based on the varying
statutes of limitations plus 90 days. The Company
-10-
does not currently expect to make any future payments under these
indemnifications.
NOTE 6 - STOCK OPTIONS
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." SFAS 148 amends SFAS 123
to provide alternative methods of transition for companies that voluntarily
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS
123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. The Company subsequently
adopted the prospective method of applying SFAS 148. Under the prospective
method, the Company began expensing the fair value of all stock options granted,
modified or settled effective January 1, 2003. During the second quarter of
2003, the Company granted 14,000 options to members of its board of directors
and recognized related compensation expense in the amount of $58,000. No related
stock compensation expense was recorded during 2002 or the first quarter of
2003. The fair value of these options granted was estimated on the date of grant
using the Black-Scholes option-pricing model with an expected volatility of
40.6%, a risk-free interest rate of 5.5% and an expected life of 6 years. The
Company currently pays no dividends.
Prior to January 1, 2003, the Company utilized the intrinsic value method of
accounting for stock-based compensation, as originally promulgated by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and
as permitted under SFAS 123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation cost was recognized for stock options granted prior
to January 1, 2003. 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 pro forma net income and net income per share amounts would have been
as follows:
-11-
For the three months For the six months
ended June 30, ended June 30,
-------------------- ------------------
(In thousands) 2003 2002 2003 2002
-------------- --------- --------- -------- --------
Net income/(loss), as reported $ 68 $ 3,486 $ (29) $ 5,200
Deduct: Total stock-based employee
compensation expense determined under
fair value method for all awards, net of
related tax effects (7) 138 (94) (129)
------ ------- ------- -------
Pro forma net income/(loss) $ 61 $ 3,624 $ (123) $ 5,071
====== ======= ======= =======
Reported earnings per share:
Basic $ 0.01 $ 0.42 $ 0.00 $ 0.63
Diluted 0.01 0.41 0.00 0.61
Pro forma earnings/(loss) per share:
Basic 0.01 0.43 (0.01) 0.61
Diluted $ 0.01 $ 0.42 $ (0.01) $ 0.60
====== ======= ======= =======
NOTE 7 - COMPREHENSIVE INCOME
A reconciliation of the Company's net income and comprehensive income is as
follows:
For the three months ended For the six months ended
---------------------------- ----------------------------
JUNE 30, 2003 June 30, 2002 JUNE 30, 2003 June 30, 2002
------------- ------------- ------------- -------------
Net income/(loss) $ 68 $ 3,486 $ (29) $ 5,200
Other comprehensive income:
Foreign currency translation
adjustment 117 (35) 74 (22)
------ -------- ------- --------
Comprehensive income $ 185 $ 3,451 $ 45 $ 5,178
====== ======== ======= ========
NOTE 8 - GOODWILL
Goodwill and other intangible assets consist of the following (in thousands):
JUNE 30, 2003 Dec. 31, 2002
------------- -------------
Goodwill:
Engineering $ 1,006 $ 1,006
Energy 7,465 7,465
--------- ---------
Total goodwill 8,471 8,471
--------- ---------
Other intangible assets, net of accumulated
amortization of $1,095 and $952, respectively 905 1,048
--------- ---------
Goodwill and other intangible assets, net $ 9,376 $ 9,519
========= =========
-12-
Under SFAS 142, the Company's goodwill balance is no longer being amortized and
goodwill impairment tests are being performed at least annually. The Company
completed its annual impairment review during the second quarter of 2003, and no
impairment charge was required.
The Company's other intangible assets balance solely comprises a non-compete
agreement from the Company's 1998 purchase of Steen Production Services, Inc.
Future amortization expense on the other intangible assets balance is currently
estimated to be $286,000 for the years ending December 31, 2003 through 2005,
with the remaining balance of $190,000 being amortized in 2006.
NOTE 9 - OTHER RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement
Obligations," which requires that obligations associated with retirements of
tangible long-lived assets be recorded as liabilities when those obligations are
incurred. The Company adopted this standard as of January 1, 2003, and as a
result, has had no effect on its financial statements.
In July 2002, the FASB issued SFAS 146, "Accounting for Exit or Disposal
Activities," which addresses issues associated with exit or disposal activities
initiated after December 31, 2002. The Company adopted this statement as of
January 1, 2003, and as a result, has had no effect on its financial statements.
In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This Statement clarifies and
amends financial accounting and reporting requirements originally established in
SFAS 133. SFAS 149 provides greater clarification by requiring contracts with
comparable characteristics to be accounted for similarly. This statement is
effective for contracts entered into or modified after June 30, 2003 as well as
for hedging relationships designated after June 30, 2003. The Company does not
believe that the adoption of this statement will have a material impact on its
financial statements.
In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." This statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires issuers to classify financial instruments within its scope as
liabilities (or assets in some circumstances). SFAS 150 is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. The Company does not believe that the adoption of this statement will
have a material impact on its financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). FIN 45 clarifies the requirements of SFAS 5,
"Accounting for Contingencies," relating to the guarantor's accounting for and
disclosures of certain guarantees issued. The disclosure requirements of this
interpretation were effective for financial statements of interim or annual
periods ending after December 15, 2002. The Company adopted such disclosure
requirements in connection with the
-13-
issuance of its 2002 financial statements. The initial recognition and
measurement provisions of this interpretation are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002. The Company
adopted the recognition and measurement provisions of FIN 45 effective January
1, 2003. Such adoption has not had any effect on its financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 clarifies Accounting Research
Bulletin No. 51, "Consolidated Financial Statements," and requires that
unconsolidated variable interest entities be consolidated by their primary
beneficiaries if the entities do not effectively disperse risks among parties
involved. The primary beneficiary is the party that absorbs a majority of the
entity's expected losses or returns as a result of holding the variable
interest. This interpretation applies to variable interest entities in which an
enterprise obtains an interest, or which an enterprise creates, after January
31, 2003. For variable interest entities created before February 1, 2003, the
interpretation shall be applied for the first interim or annual reporting period
beginning after June 15, 2003. The Company plans to adopt this interpretation
effective July 1, 2003. Since it currently has no variable interest entities,
the Company does not believe that such adoption will have a material impact on
its financial statements.
NOTE 10 - RECLASSIFICATIONS
Certain reclassifications have been made to prior year income statement and
balance sheet amounts in order to conform to the current year presentation.
-14-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following tables reflect a summary of the Company's operating results
(excluding intercompany transactions) for ongoing operations and non-core
businesses for the periods ended June 30, 2003 and 2002 (in millions):
For the three months ended For the six months ended
---------------------------------- ----------------------------------
JUNE 30, 2003 June 30, 2002 JUNE 30, 2003 June 30, 2002
----------------------------------------------------------------------------------------------------------------------
Total contract revenues:
Engineering $ 61.6 $ 61.9 $ 120.3 $ 120.2
Energy 43.2 42.9 83.8 80.5
Non-Core* - - - -
----------------------------------------------------------------------------------------------------------------------
Total $ 104.8 $ 104.8 $ 204.1 $ 200.7
======================================================================================================================
For the three months ended For the six months ended
--------------------------------- --------------------------------
JUNE 30, 2003 June 30, 2002 JUNE 30, 2003 June 30, 2002
----------------------------------------------------------------------------------------------------------------------
Income/(loss) from operations
with Corporate expenses
allocated:
Engineering $ 0.6 $ 4.6 $ 0.4 $ 7.4
Energy 1.2 2.6 1.4 3.5
Non-Core* (0.1) (0.7) 0.2 (1.0)
----------------------------------------------------------------------------------------------------------------------
Subtotal - segments 1.7 6.5 2.0 9.9
Corporate/Insurance (0.5) (0.3) (1.0) (0.6)
----------------------------------------------------------------------------------------------------------------------
Total $ 1.2 $ 6.2 $ 1.0 $ 9.3
======================================================================================================================
* The Non-Core segment includes activity associated with the former buildings
and transportation construction operations that are being wound down, and
the former BSSI subsidiary, which was sold in June 2000.
TOTAL CONTRACT REVENUES
Total contract revenues were unchanged in the second quarter of 2003 relative to
the second quarter of 2002. In the Energy segment, revenues for the second
quarter of 2003 were also unchanged as compared to the second quarter of 2002.
The revenue benefit of two new overseas contracts that commenced during the
second half of 2002 was offset primarily by the Company exiting a portion of its
business relating to repairs and maintenance work of oil, gas, and electrical
generation equipment. OPCO(R) revenues composed 3% and 28% of Baker Energy's
total contract revenues for the second quarters of 2003 and 2002, respectively.
This OPCO decrease as a percentage of Energy revenues was the result of OPCO
contract attrition due to client property sales. Most of these former OPCO
properties are still being serviced by Baker Energy, but are being serviced as
labor and logistics work outside the OPCO model. Engineering revenues for the
second quarter of 2003 were unchanged from the second quarter of 2002.
Engineering's revenues were adversely impacted in the second quarter of 2003 by
continuing slowness in its private sector contract activity and delays in the
-15-
commencement of certain public sector projects due to state budget constraints.
As expected, the Company's Non-Core segment posted no revenues for the second
quarters of 2003 or 2002.
For the first six months of 2003, total contract revenues increased 2% over the
corresponding period in 2002. In the Energy segment, revenues increased 4% in
the first six months of 2003 as compared to the first six months of 2002. As
stated in the previous paragraph, the additional overseas contracts that
commenced during the second half of 2002 were the main contributors to the
increase in revenues, as again partially offset by the Company exiting a portion
of its maintenance business. OPCO composed 3% and 29% of Baker Energy's total
contract revenues for the first six months of 2003 and 2002, respectively.
Engineering revenues were unchanged in the first six months of 2003 as compared
to the first six months of 2002. As mentioned in the previous paragraph,
Engineering revenues were adversely impacted in the first six months of 2003 by
continuing slowness in its private sector contract activity and delays in the
commencement of certain public sector projects due to state budget constraints.
The Company's Non-Core segment posted no revenues for the first six months of
2003 or 2002.
GROSS PROFIT
Gross profit expressed as a percentage of revenues decreased to 14.3% for the
second quarter of 2003 from 17.0% in the second quarter of 2002. The Energy
segment's gross profit percentage decreased to 12.2% in the second quarter of
2003 from 15.0% in the second quarter of 2002. This decrease is primarily
attributable to an overall change in the mix of project work. Specifically,
Energy's higher-margin OPCO operations declined by 88%. The Engineering
segment's gross profit percentage was 16.9% for the second quarter of 2003
compared to 19.7% in the comparable period of 2002. The lower than expected
revenue volume discussed above was the most significant cause for the second
quarter 2003 reduction in Engineering's gross margin percentage; however, the
Engineering segment has also experienced higher medical, insurance and occupancy
costs in the second quarter of 2003 which have contributed to the lower margins.
In the Non-Core segment, the negative gross profit resulted from an additional
charge associated with the settlement of a construction-related claim.
Engineering's labor utilization rates have improved during the second quarter of
2003. With respect to the future of the Energy segment's OPCO business, the
Company recently announced a significant onshore OPCO-style agreement with a
major Energy customer, and has additional similar proposals outstanding.
Gross profit expressed as a percentage of revenues decreased to 13.9% for the
first six months of 2003 from 16.3% in the first six months of 2002. The Energy
segment's gross profit percentage decreased to 10.8% in the first six months of
2003 from 14.0% in the first six months of 2002. This decrease is primarily
attributable to an overall change in the mix of project work as discussed in the
previous paragraph. Specifically, Energy's higher-margin OPCO operations posted
a gross profit margin that was negligible in first six months of 2003 and the
related OPCO revenues were lower by 91%. Also contributing to Energy's gross
margin percentage decrease was an overseas contract for the implementation of a
computerized maintenance management system, which has performed below
expectations to date. The Engineering segment's gross profit
-16-
percentage was 16.8% for the first six months of 2003 compared to 18.7% in the
comparable period of 2002. Again, the lower than expected revenue volume was the
most significant cause for the reduction in Engineering's gross margin for the
first six months of 2003, while higher medical, insurance and occupancy costs
also contributed to the lower margins. To a lesser extent, final legal costs
associated with the settlement of the LTV matter (discussed in Note 5 to the
accompanying financial statements) resulted in first quarter 2003 costs. In the
Non-Core segment, the positive gross profit resulted from favorable developments
in certain casualty insurance claims related to the Company's former
construction operations, as slightly offset by charges associated with the
settlement of a construction-related claim.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses expressed as a percentage
of total contract revenues increased to 13.2% in the second quarter of 2003 from
11.2% in the second quarter of 2002. This overall increase in SG&A expenses
expressed as a percentage of total contract revenues results principally from
costs associated with the infrastructure and amortization of the Company's new
information systems, which were implemented effective January 1, 2003. The
Company continues to incur consulting expenses, and expects such expenses, as
well as certain additional data conversion costs, to continue throughout 2003.
Approximately $0.8 million of these costs were incurred during the second
quarter of 2003. In the Energy segment, SG&A expenses expressed as a percentage
of total revenues increased to 9.3% in the second quarter of 2003 from 9.1% in
2002. In the Engineering segment, SG&A expenses expressed as a percentage of
revenue increased to 15.9% for the second quarter of 2003 from 12.3% in 2002.
This percentage increase is primarily attributable to the unchanged Engineering
revenues coupled with costs associated with the aforementioned information
systems implementation. The Company's Non-Core operations incurred no SG&A
expenses in the second quarter of 2003 and $0.2 million in the second quarter of
2002. The 2002 Non-Core SG&A expenses related entirely to previously disclosed
litigation that has been resolved.
SG&A expenses expressed as a percentage of total contract revenues increased to
13.4% in the first six months of 2003 from 11.6% in the first six months of
2002. This overall increase is again attributable to the previously mentioned
costs associated with the infrastructure, amortization and continued consulting
and data conversion associated with the Company's new information systems.
Approximately $1.3 million of these costs were incurred during the first six
months of 2003. In the Energy segment, SG&A expenses expressed as a percentage
of revenues decreased to 9.1% in the first six months of 2003 from 9.6% in 2002.
This percentage decrease was due to higher revenues and a slower increase in
administrative costs for 2003. In the Engineering segment, SG&A expenses
expressed as a percentage of revenues increased to 16.4% in the first six months
of 2003 from 12.5% in 2002. This percentage increase is attributable to the
relatively unchanged Engineering revenues coupled with costs associated with the
aforementioned information systems implementation and the Engineering office
relocation that occurred during the first quarter of 2003. Moving costs totaling
$0.4 million associated with the first quarter 2003 office relocation will not
recur in future periods. For the Non-Core operations, no SG&A expenses were
incurred during the first six months of 2003 and $0.5 million was incurred
during the first six months of 2002. Again, these SG&A expenses in 2002 relate
entirely to previously disclosed litigation that has been resolved.
-17-
OTHER INCOME
Interest income was lower and interest expense was higher for the second quarter
and first half of 2003 as a result of the Company being in a net borrowed
position with its banks during the majority of the first half of 2003. The
Company was in an invested position with its bank during the first half of 2002.
This change resulted from changes in the Company's billing process and system,
which caused temporary delays in both client billings and cash collections
during the first half of 2003. (See additional discussion under the Liquidity
and Capital Resources section below). Other expenses for the second quarter and
first half of 2003 primarily related to an $0.8 million impairment of an
investment in Energy Virtual Partners, an Energy services business, whose board
recently voted to discontinue operations and liquidate the business. During the
first half of 2002, other expenses resulted almost entirely from minority
interest related to the income of two consolidated subsidiaries, partially
offset by income from an unconsolidated joint venture in the Energy segment.
INCOME TAXES
The Company had a benefit from income taxes of 50.0% for the first six months of
2003, versus a provision for income taxes of 44.5% for the first six months of
2002. The higher rate for 2003 reflects the Company's best estimate of domestic
and foreign income before taxes for the year ending December 31, 2003, which
represents a less favorable mix of domestic and foreign income before taxes.
CONTRACT BACKLOG
(In millions) JUNE 30, 2003 Dec. 31, 2002
==========================================================================
Engineering $ 444.7 $ 448.8
Energy 201.8 96.4
--------------------------------------------------------------------------
Total $ 646.5 $ 545.2
==========================================================================
Backlog consists of that portion of uncompleted work that is represented by
signed or executed contracts. Certain of the Company's contracts with the
Federal government and other clients may be terminated at will, or option years
may not be exercised; therefore, no assurance can be given that all backlog will
be realized.
Among the more significant new work added during the second quarter of 2003 was
a $9 million contract to provide construction management and inspection
services in the Engineering segment. In the Energy segment, backlog increased
during the second quarter of 2003 due to the addition of a four-year, $49
million OPCO contract to operate and maintain onshore oil and gas producing
properties.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $31.7 million for the first six months
of 2003 as compared to $2.5 million for the same period in 2002. This increase
in cash used was the direct result of increases in receivables and unbilled
revenues of $15.1 million and $25.3 million, respectively. These increases are
the result of changes in the Company's billing process and system, which
caused temporary delays in both billings and cash collections during the first
six months of 2003.
-18-
Effective January 1, 2003, the Company implemented a new billing system and
made certain related changes to its billing process. As a result of these
billing system and process changes, the Company experienced certain data
conversion problems and training issues, which caused delays in producing client
invoices during the first quarter of 2003. Since the new system was first used
to invoice clients in February 2003, the Company has undertaken various
corrective improvement measures, and has invoiced in excess of $160 million
through its new software. A secondary effect of the billing delays has been a
slower rate of cash collections, which created a 2003 cash requirement that has
been funded by utilization of the Company's credit facilities. The delays in
billing and resultant delays in cash collections have impacted both the Energy
and Engineering segments. As of June 30, 2003, the Company had total borrowings
under its credit facilities of $33.3 million.
Client billings improved during the second quarter of 2003 and management
attention continues to be focused on further improvements to this critical
process. The receivables balance is expected to decrease during the third
quarter of 2003 due to higher levels of cash collections. As the receivables
balance decreases, the related cash collected will be used to reduce current
liabilities, including the bank borrowings. Management currently expects that
the bank borrowings related to the billing and collection delays will be
significantly reduced by the end of the third quarter of 2003. Until then, the
Company expects that these delays will continue to adversely impact its net cash
used by operations, and that borrowings under its credit facility will reflect
this impact.
Net cash used in investing activities was $3.4 million for the first six months
of 2003, compared to net cash provided by investing activities of $6.6 million
for the first six months of 2002. The net cash used in investing activities for
the first six months of 2003 is entirely related to capital expenditures. The
net cash provided by investing activities for the first six months of 2002
reflected the receipt of $12.3 million of the funds placed in escrow during 2001
in connection with the ADF litigation, as reduced by capital expenditures of
$4.8 million and the $1.0 million investment in EVP. The capital expenditures
for the first six months of 2003 are attributable to leasehold improvements
totaling $2.4 million for the Company's largest Engineering office and $0.8
million relating to the new information systems, while the 2002 capital
expenditures reflect the Company's purchase and development of computer software
totaling $3.5 million related to the implementation of the new information
systems.
Net cash provided by financing activities was $32.6 million for the first six
months of 2003 versus $0.6 million for the same period in 2002. The net cash
provided by financing activities for the first six months of 2003 reflects
proceeds from short-term debt to fund the aforementioned working capital needs
in conjunction with changes in the Company's billing process and system and the
resultant billing and collection delays. The Company's borrowings totaled $33.3
million as of June 30, 2003. In addition, pursuant to the Company's stock
repurchase program, the Company paid $0.7 million to acquire 80,400 additional
treasury shares during the first quarter of 2003.
The Company has an unsecured credit agreement ("the Agreement") with a
consortium of financial institutions. The Agreement provides for a commitment of
$40 million through September 30, 2004. 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 June 30, 2003, borrowings totaling
-19-
$32.3 million were outstanding under the Agreement, along with outstanding
letters of credit totaling $7.7 million. The increased level of borrowings at
June 30, 2003 required the Company to seek and obtain a waiver of several of its
financial ratio covenants, most notably its debt to cash flow ratio. Due to the
difficulty of accurately forecasting the amount of borrowings at September 30,
2003 as well as the lower level of earnings for the trailing four quarters,
management is not certain that it will be in compliance with the financial
covenants in the Agreement at September 30, 2003. Consequently, the Company's
borrowings have been reflected as current liabilities at June 30, 2003. If a
combination of reduced borrowings and earnings improvement does not occur by
September 30, 2003, the Company may have to again seek a financial covenant
waiver from its banks. Management anticipates, but cannot give assurance, that
it will renegotiate its credit facility in the near future to extend the
maturity date and modify the financial ratios, as required, to reflect the
borrowings as long-term liabilities.
Effective May 8, 2003, the Company also secured additional short-term borrowing
capacity through August 6, 2003, in the form of a Revolving Credit Note ("the
Note") totaling $5 million through one of its banks. As of June 30, 2003,
borrowings totaling $1.0 million were outstanding under the Note. The borrowings
were subsequently repaid and the Note has matured.
The Company currently has a bonding line available through Travelers Casualty
and Surety Company of America ("Travelers"). At June 30, 2003, performance and
payment bonds totaling $26.5 million were outstanding under this line. Of this
outstanding amount, $24.4 million related to the Company's former construction
operations. This bond will be terminated by Travelers when the related project
is completed and all appropriate releases are received from the client. The
project related to the remaining construction bond is substantially completed;
accordingly, this bond is currently expected to be terminated during the third
quarter of 2003. Management believes that this bonding line will be sufficient
to meet its bid and performance bonding needs for at least the next year.
The Company utilizes operating leases to acquire assets used in its daily
business activities. These assets include office space, computer and related
equipment, and motor vehicles. The lease payments for use of these assets are
recorded as expenses, but do not appear as liabilities on the Company's
consolidated balance sheets.
The Company's professional liability insurance coverage had been placed on a
claims-made basis with Reliance Insurance Group ("Reliance") for the period July
1, 1994 through June 30, 1999. On May 29, 2001, the Pennsylvania Insurance
Commissioner placed Reliance into rehabilitation; and on October 3, 2001,
Reliance was placed into liquidation. The Company is uncertain at this time what
effect these actions will have on any claim the Company or its subsidiaries may
have for insurance coverage under policies issued by Reliance with respect to
past years. Baker Environmental, Inc. ("BEI"), a wholly-owned subsidiary of the
Company, was subject to one substantial claim which fell within the Reliance
coverage period. This claim reflected an action by LTV against BEI, resulting
from the failure of a landfill for which BEI provided services. In December
2002, after a hearing in the U.S. District Court for the Western District of
Pennsylvania, out-of-court settlement discussions between LTV and BEI commenced.
In February 2003, LTV and BEI reached an out-of-court settlement that provided
for payment to LTV in the amount of $2.5 million. This settlement was approved
by the bankruptcy court and payment was made in April 2003. Due to the
liquidation of
-20-
Reliance, the Company is currently uncertain what amounts paid to LTV will be
recoverable under the insurance policy with Reliance. Accordingly, the Company
recorded no receivable from Reliance; however, the Company is pursuing a claim
in the Reliance liquidation.
The Company views its short and long-term liquidity as being dependent upon its
results of operations, changes in working capital and its borrowing capacity.
These factors are further dependent upon appropriations of public funds for
infrastructure and other government-funded projects, capital spending levels in
the private sector, and the demand for the Company's services in the engineering
and energy markets. Additional external factors such as price fluctuations in
the energy industry could affect the Company. The Federal government's TEA-21
legislation has made significant transportation funding available to the various
state agencies since its approval in 1998. The Federal budget approved for the
U.S. government's 2002-2003 fiscal year included transportation funding equal to
that approved for its 2001-2002 fiscal year; however, certain state agencies may
not apply for Federal transportation funding during 2003 as they may be unable
to commit the required matching funds due to budget constraints. Transportation
funding is expected to receive significant attention during the Federal budget
approval process for its 2003-2004 fiscal year, as TEA-21 is up for
reauthorization. During 2002, the Company observed increased Federal spending
activity on Department of Defense and Homeland Security activities, including
FEMA. Additional government spending in these areas, or on transportation
infrastructure, could result in profitability and liquidity improvements for the
Company. Significant contractions in any of these areas could unfavorably impact
the Company's profitability and liquidity. After giving effect to the foregoing,
management believes that the combination of cash 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Currently, the Company's primary interest rate risk relates to its variable rate
debt obligations, which totaled $33.3 million as of June 30, 2003. Assuming a
10% increase in interest rates on the Company's variable rate obligations (i.e.,
an increase from the actual weighted average interest rate of 2.97% as of June
30, 2003, to a weighted average interest rate of 3.27%), annual interest expense
would be approximately $99,000 higher based on the outstanding balance of
variable rate obligations as of June 30, 2003. In addition, the Company has no
interest rate swap or exchange agreements.
The Company has several foreign subsidiaries that transact portions of their
local activities in currencies other than the U.S. Dollar. In assessing its
exposure to foreign currency exchange rate risk, the Company recognizes that the
majority of its foreign subsidiaries' assets and liabilities reflect ordinary
accounts receivable and payable balances. These receivable and payable balances
are substantially settled in the same currencies as the functional currencies of
the related foreign subsidiaries, thereby not exposing the Company to material
transaction gains and losses. Assuming
-21-
that foreign currency exchange rates could change unfavorably by 10%, the
Company would have no material exposure to foreign currency exchange rate risk.
The Company has no foreign currency exchange contracts.
Based on the nature of the Company's business, it has no direct exposure to
commodity price risk.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Company's principal executive officer and principal financial officer have
evaluated the effectiveness of the Company's "disclosure controls and
procedures," as such term is defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934, as amended, (the "Exchange Act") as of June 30, 2003.
Based upon their evaluation, the principal executive officer and principal
financial officer concluded that the Company's disclosure controls and
procedures are effective to provide reasonable assurance that information
required to be disclosed by the Company in the reports filed or submitted by it
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the SEC's rules and forms, and to provide
reasonable assurance that information required to be disclosed by the Company in
such reports is accumulated and communicated to the Company's management,
including its principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required disclosure.
(b) Changes in Internal Controls
There was no change in the Company's "internal control over financial reporting"
(as such term is defined in Rule 13a-15(f) under the Exchange Act) that occurred
during the quarter ended June 30, 2003, and that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As discussed more fully in Item 3 of the Company's Form 10-K for the year ended
December 31, 2002, Baker Environmental, Inc. ("BEI"), a wholly-owned subsidiary
of the Company, had been subject to a claim by LTV Steel Company ("LTV"),
resulting from the failure of a landfill for which BEI provided services. In
February 2003, LTV and BEI reached an out-of-court settlement under which LTV
was to be paid $2.5 million. At the time of the Company's 2002 Form 10-K filing,
such settlement was still pending approval by the Bankruptcy Court overseeing
the LTV bankruptcy proceeding. In late March 2003, the Bankruptcy Court approved
the settlement and payment was made by BEI to LTV during April 2003.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company's annual meeting of shareholders was held on April 24, 2003.
-22-
(b) Each of management's nominees to the board of directors, as listed in Item
4(c) below, was elected. There was no solicitation in opposition to
management's nominees.
(c) The Shareholders elected each of the Company's directors listed below to
one-year terms or until their respective successors have been elected. The
votes cast by holders of the Company's Common Stock in approving the
following directors were:
Name of Director Votes for Votes withheld
---------------------------------------------------------------------------
Robert N. Bontempo 7,371,257 530,404
Nicholas P. Constantakis 7,423,079 478,582
William Copeland 7,325,227 576,434
Donald P. Fusilli, Jr. 7,518,587 383,074
Roy V. Gavert, Jr. 7,434,774 466,887
Thomas D. Larson 7,249,419 652,242
John E. Murray, Jr. 7,311,146 590,515
Richard L. Shaw 7,156,335 745,326
===========================================================================
(d) The Shareholders voted to approve the new Long-Term Incentive Compensation
Plan by the votes listed below:
Votes for Votes against Abstentions
---------------------------------------------------------------------
6,789,452 1,103,467 8,742
=====================================================================
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herewith as a part of this Report:
Exhibit No. Description
----------- -----------
31.1 Certification of the Chief Executive Officer
pursuant to Rule 13a-14(a)
31.2 Certification of the Chief Financial Officer
pursuant to Rule 13a-14(a)
32.1 Certifications pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
The Company filed or furnished the following Current Reports on Form 8-K
during the quarter ended June 30, 2003:
-23-
o dated May 14, 2003, Item 7; and
o dated May 28, 2003, Items 7 and 9 (to furnish information required
Item 12 of Form 8-K, "Results of Operations and Financial Condition,"
in accordance with the interim guidance provided by the Securities and
Exchange Commission in Release No. 33-8216 issued March 27, 2003).
SIGNATURES
Pursuant to the requirements 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
/s/ William P. Mooney Dated: August 14, 2003
---------------------------------------
William P. Mooney
Executive Vice President and
Chief Financial Officer
/s/ Craig O. Stuver Dated: August 14, 2003
-----------------------------------------
Craig O. Stuver
Senior Vice President, Corporate Controller
and Treasurer (Chief Accounting Officer)
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