ITEM 1. BUSINESS
Forward-looking Statements
The statements contained in this Annual Report on Form 10-K that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including without limitation, statements regarding the Company's or its management's expectations, hopes, beliefs, intentions or strategies regarding the future. These forward-looking statements are based on the Company's current expectations and beliefs concerning future developments and their potential effects on the Company. There can be no assurance that future developments affecting the Company will be those anticipated by the Company. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond the control of the Company) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by such forward-looking statements. These risks and uncertainties include, but are not limited to, the continuing validity of the underlying assumptions and estimates of total forecasted project revenues, costs and profits and project schedules; the outcomes of pending or future litigation, arbitration or other dispute resolution proceedings; the availability of borrowed funds on terms acceptable to the Company; changes in federal and state appropriations for infrastructure projects; possible changes or developments in worldwide or domestic political, social, economic, business, industry, market and regulatory conditions or circumstances; and actions taken or not taken by third parties including the Company's customers, suppliers, business partners, and competitors and legislative, regulatory, judicial and other governmental authorities and officials. Also see "Risk Factors" on pages 9 and 10. Should one or more of these risks or uncertainties materialize, or should any of the Company's assumptions prove incorrect, actual results may vary in material respects from those projected in the forward-looking statements. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Introduction
Perini Corporation and its subsidiaries (the "Company", unless the context indicates otherwise) are engaged in the construction business. The Company was incorporated in 1918 as a successor to businesses which had been engaged in providing construction services since 1894. The Company currently provides general contracting, construction management and design-build services to private clients and public agencies throughout the United States and selected overseas locations. The Company's construction business involves two basic segments or operations: building and civil.
The general building and civil contracting services provided by the Company consist of planning and scheduling the manpower, equipment, materials and subcontractors required for the timely completion of a project in accordance with the terms, plans and specifications contained in a construction contract. The Company provides these services by using traditional general contracting arrangements, such as fixed price, guaranteed maximum price and cost plus award fee contracts and, to a lesser extent, construction management or design-build contracting arrangements. These contract types and the risks generally inherent therein are discussed below:
Fixed price contracts (“FP”), which include fixed unit price contracts, are generally used in competitively bid public civil construction projects and, to a lesser degree, building construction projects and generally commit the contractor to provide all of the resources required to complete a project for a fixed sum or at fixed unit prices. Usually FP contracts transfer more risk to the contractor but offer the opportunity, under favorable circumstances, for greater profits. With the Company’s publicly bid civil construction projects, fixed price contracts continue to represent a significant portion of the backlog. Also, design-build projects are generally performed under a FP contract.
Cost plus award fee contracts (“CPAF”) provide for reimbursement of the costs, as defined, of resources required to complete a project, but usually have a lower base fee and an incentive fee based on cost and/or schedule performance. CPAF contracts serve to minimize the contractor’s financial risk, but may limit profits.
Guaranteed maximum price contracts (“GMP”) provide for a cost plus fee arrangement up to a maximum agreed upon price. These contracts place risks on the contractor for amounts in excess of the GMP, but may permit an opportunity for greater profits than under CPAF contracts through sharing agreements with the owner on any cost savings that may be realized. A significant portion of the Company’s building work is performed under GMP contracts.
Construction management contracts (“CM”) under which a contractor agrees to manage a project for the owner for an agreed-upon fee which may be fixed or may vary based upon negotiated factors. The contractor generally provides services to supervise and coordinate the construction work on a project, but does not directly purchase contract materials, provide construction labor and equipment or enter into agreements with subcontractors. CM contracts serve to minimize the contractor’s financial risk, but may limit profit relative to the overall scope of a project.
Under certain situations which include, but are not limited to, contract type, project size, complexity or geographic location, the Company will continue to attempt to minimize its financial and/or operational risk, as it has in the past, by participating in construction joint ventures, often as the sponsor or manager of the project, for the purpose of bidding and, if awarded, performing the agreed upon construction services. These joint ventures are based on a joint venture agreement whereby each of the joint venture participants is usually committed to supply a predetermined percentage of capital, as required, and to share in the same predetermined percentage of income or loss of the project on a joint and several basis. Although joint venture arrangements tend to minimize the risk of loss, the Company's initial obligations to the joint venture may increase as a result of the joint and several nature of the arrangement if one of the other participants is financially unable to bear its portion of required capital contributions.
In the normal course of the business, the Company periodically evaluates its existing construction markets and seeks to identify any growing markets where it feels it has the expertise and management capability to successfully compete or decides to withdraw from markets which are no longer economically attractive.
Operating Structure
The building and civil segments operate as decentralized profit centers as more fully described below and independently identify, estimate and negotiate or submit bids to obtain projects and are accountable for the successful completion of projects awarded. Each segment has Company personnel assigned to perform the following functions: executive which coordinates and has overall responsibility for the other functions performed by the segment; work acquisition which includes business development, marketing, preconstruction services and the estimating process; operations which provides overall planning and supervision of the project teams including project staffing, such as project managers, superintendents, engineers, schedulers, equipment and safety personnel, as required for each project; and financial control which includes staffing of financial control personnel assigned to projects. These segments are supported by certain centralized corporate functions, including treasury, human resources, risk management, legal, internal audit, information technology, tax and accounting functions.
The building operation provides its services through regional offices located in several metropolitan areas: Boston, serving New England, the Mid-Atlantic and Southeast areas; and Phoenix and Las Vegas, serving Arizona, Nevada and California. The building operation also maintains satellite offices in Carlsbad, California, Celebration, Florida and Detroit, Michigan. The Company's building contracting services are provided by Perini Building Company, Inc., a wholly owned subsidiary. This company combines substantial resources and expertise to better serve clients within the building construction market and enhances Perini's name recognition in this market. The Company undertakes a broad range of building construction projects and is well known for its hospitality and gaming industry projects, and for its health care facilities, correctional facilities, sports complexes, multi-unit residential, commercial, civic, cultural and educational facilities. In addition, the Company completed the acquisition of James A. Cummings, Inc. ("Cummings"), an established building contractor in the South Florida region, in January 2003. Cummings will operate as a wholly owned subsidiary of the Company as part of the building construction segment.
Perini Management Services, Inc. ("PMSI", formerly Perini International Corporation), a wholly owned subsidiary, provides a broad range of construction services (primarily building) to United States government agencies in the U.S. and selected overseas locations, funded primarily in U.S. dollars. In addition, a joint venture managed by PMSI provides maintenance/modification and support services at ten nuclear power generating plant sites in the Midwest and in the East under a multi-year contract with a private client. In selected situations, PMSI pursues other work internationally. PMSI is combined with Perini Building Company to form the Company's building segment for financial reporting purposes.
The civil operation provides its services through regional offices located in the Boston and New York City metropolitan areas and undertakes large public civil projects in the East, with current emphasis on the major New York City and Boston metropolitan areas, and selectively in other geographic locations in the United States. The Company's civil contracting services are provided by "Perini Civil", which is an operating division of Perini Corporation, and include construction and rehabilitation of highways, bridges, subways, tunnels, airports, marine projects and waste water treatment facilities. The Company has been active in civil operations since 1894 and believes that it has particular expertise in large and complex civil construction projects. The Company believes that infrastructure rehabilitation is, and will continue to be, a significant market in 2003 and beyond.
Strategy
Overall, the Company continues to focus on optimizing value for its shareholders by actively pursuing higher margin projects in markets where it has considerable expertise and developing project opportunities through its strong client relationships, as well as managing its operations to achieve on-time delivery, tight cost controls, safe working conditions and high quality standards. The Company's current strategy is to concentrate on the civil construction market in the East and specialized niche building construction markets throughout the United States, with the goal in both markets to continue to increase profit margins. In addition, the Company is continuing the process of pursuing a strategy to profitably expand its construction business internally or through acquisition as it recently did with the acquisition of Cummings in January 2003. (See Note 14 of Notes to Consolidated Financial Statements.) The Company believes the best opportunities for growth in the coming years for its civil construction business are in the urban infrastructure market, particularly in metropolitan New York and Boston, and selectively in other large, complex projects throughout the United States. The Company's strategy in building construction is to take advantage of its positive reputation in certain niche markets and to expand into new markets compatible with its expertise. Internally, the Company plans to continue to improve efficiency through strict attention to project control procedures and the control of overhead expenses. Finally, the Company continues to expand its expertise to assist public owners to develop necessary facilities through creative alternative project delivery methods, including public/private ventures, design-build and design-build-operate-maintain ("DBOM") arrangements.
Revenues Information on lines of business and foreign business is included under the following captions of this Annual Report on Form 10-K for the year ended December 31, 2002.
Annual Report on Form 10-K Caption Page Number
Selected Consolidated Financial Information 19 - 20
Management's Discussion and Analysis 21 - 28
Note 12 of Notes to Consolidated Financial Statements entitled "Business Segments" 62 - 64
While the "Selected Consolidated Financial Information" presents certain business segment information for purposes of consistency of presentation for the five years ended December 31, 2002, additional business segment information required by Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information", for the three years ended December 31, 2002 is included in Note 12 of Notes to Consolidated Financial Statements.
A summary of revenues by business segment for each of the three years in the period ended December 31, 2002 is as follows (in thousands):
Revenues For Year Ended December 31, --------------------------------------------- 2002 2001 2000 ------------- ------------- -------------
Building $ 772,513 $ 1,199,439 $ 826,191 Civil 312,528 353,957 279,469 ------------- ------------- ------------- Total $1,085,041 $ 1,553,396 $ 1,105,660 ============= ============= =============
During 2002, the Company was active in the building, civil and, to a lesser extent, the international construction markets, and performed work for over 44 federal, state and local governmental agencies or authorities and private customers under approximately 78 separate contracts. A significant portion of the increase in building construction revenues during 2001 was due to the impact of the Mohegan Sun Phase II Expansion Project ("Mohegan Sun Project") initially obtained in 1999 (see comments under "Backlog" below) and two large hotel/casino projects in the southwestern region of the United States, all three of which were substantially complete in early 2002. Due to the Company's trend toward fewer but larger contracts, a material part of the Company's business has been dependent on a limited number of private customers and/or public agencies in recent years (see Note 12 of Notes to Consolidated Financial Statements).
Revenues by Client Source
Year Ended December 31, ------------------------------- 2002 2001 2000 -------- ------- --------
Private Owners 65% 73% 68% Federal Governmental Agencies 5 3 4 State, Local and Foreign Governments 30 24 28 -------- ------- -------- 100% 100% 100% ======== ======= ========
Historically, a high percentage of Company contracts have been of the fixed price and GMP type. A summary of revenues and backlog by type of contract for the most recent three years follows:
Revenues - Year Ended December 31, Backlog as of December 31, -------------------------------- ------------------------------
2002 2001 2000 2002 2001 2000 ---------- --------- --------- -------- -------- --------
35% 25% 32% Fixed Price 30% 41% 46% 65 75 68 CPAF, GMP or CM 70 59 54 ---------- --------- --------- -------- -------- -------- 100% 100% 100% 100% 100% 100% ========== ========= ========= ======== ======== ========
Backlog
The Company includes a construction project in its backlog at such times as a contract is awarded or a firm letter of commitment is obtained, and funding is in place. As a result, the backlog figures are firm, subject only to the cancellation provisions contained in the various contracts. Historically, these provisions have not had a material adverse effect on the Company.
As of December 31, 2002, the Company had a year end construction backlog of $990 million compared to $1.214 billion at December 31, 2001 and to the record year end backlog of $1.789 billion at December 31, 2000. The backlog is summarized below by geographic area and also by business segment:
Backlog (in thousands) as of December 31, -------------------------------------------------------------------------- 2002 2001 2000 ----------------------- ----------------------- ----------------------
Northeast $ 219,619 22% $ 548,728 45% $ 1,219,166 68% Mid-Atlantic 81,153 8 30,261 3 53,334 3 Southeast 106,742 11 9,058 1 115,165 6 Midwest 172,539 17 247,648 20 110,867 6 Southwest 134,381 14 141,478 12 206,796 12 West 198,251 20 135,709 11 885 - Foreign 77,490 8 100,653 8 82,518 5 ------------- ------- ------------- ------- ------------- -------
Total $ 990,175 100% $ 1,213,535 100% $ 1,788,731 100% ============= ======= ============= ======= ============= =======
The relatively high level of backlog in the Northeast region of the United States and overall record backlog at the end of 2000 was primarily due to the Mohegan Sun Project and several civil projects obtained as the Company continued to meet the needs of the growing infrastructure and rehabilitation market in this region, particularly the Metropolitan New York and Boston areas. The primary reasons for the decrease in backlog in the Northeast region and overall at the end of 2001 are due to the substantial completion of the Mohegan Sun Project and the slow down in the private and public works awards after the terrorist attacks in September of 2001. The primary reasons for the continued decrease in the level of backlog in the Northeast region and overall at the end of 2002 are a temporary decrease in the number of public works projects available to bid in Perini Civil's market area and increased competition encountered from other contractors when bidding on the reduced level of work available. The fluctuation in backlog in the other regions is partly due to the timing of the signing and start-up of new contracts rather than a longer term trend.
Backlog (in thousands) as of December 31, ----------------------------------------------------------------------------- 2002 2001 2000 ------------------------ ----------------------- -----------------------
Building $ 779,613 79% $ 738,546 61% $ 1,051,364 59% Civil 210,562 21 474,989 39 737,367 41 -------------- ------- ------------- ------ ------------- ------- Total $ 990,175 100% $ 1,213,535 100% $ 1,788,731 100% ============== ======= ============= ====== ============= =======
The Company estimates that approximately $260 million of its backlog at December 31, 2002 will not be completed in 2003.
The Contract Process
The Company identifies potential projects that it might be interested in pursuing from a variety of sources, including, but not limited to, advertisements by federal, state and local governmental agencies, meetings of the Company's business development personnel with potential customers to discuss their current and future construction projects or programs, meeting with knowledgeable participants in the construction industry such as architects, engineers, bankers and sureties, and general awareness of current events and trends in business and various levels of government spending and budgets.
After ascertaining the projects available, the Company further refines the list by considering other criteria, such as project size, duration, availability of estimating and project personnel, current backlog, perceived competitive advantages and disadvantages, prior experience on similar projects, contracting agency or owner, geographic location, type of contract and other financial and operational risk factors.
After deciding which contracts to pursue, the Company usually has to complete a prequalification process with the applicable agency or owner. The prequalification process generally limits bidders to those companies with operational experience and financial capability to effectively complete the particular project(s) in accordance with the plans, specifications and construction schedule.
The estimating process generally involves three phases. Initially, the Company performs a detailed review of the plans and specifications, summarizes the various types of work involved and related estimated quantities, determines the project duration or schedule, and highlights the unique and riskier aspects of the project. After the initial review, a decision is made to continue to pursue the project or not. Assuming the answer is positive, the Company performs the second phase of the estimating process which consists of estimating the cost and availability of labor, material, equipment, subcontractors and the project team required to complete the project on time and in accordance with the plans and specifications. The final phase consists of a detailed review of the estimate by management including, among other things, assumptions regarding cost, approach, means and methods, productivity and risk. After the final review of the cost estimate, management adds an amount for profit to arrive at the total bid amount.
Public bids to various governmental agencies are generally awarded to the lowest bidder. Bids or negotiated contracts with public or private owners are generally awarded to the lowest bidder, but many times other factors, such as shorter project schedules or prior experience with the owner, result in the award of the contract based upon factors other than price. Most public sector contracts provide for termination of the contract at the election of the contracting agency. In such events, the Company is generally entitled to receive reimbursement for all costs incurred on the project plus a reasonable profit. Many of the Company's contracts are subject to interim or final completion dates or milestones with liquidated damages assessed against the Company if the specified milestone dates are not achieved. Historically, such provisions have not had a material adverse effect on the Company.
During the normal course of most projects, the owner and sometimes the contractor initiate modifications or changes to the original contract to reflect, among other things, changes in specifications or design, method or manner of performance, facilities, equipment, materials, site conditions and period for completion of the work. Generally the scope and price of these modifications are documented in a "change order" to the original contract and reviewed, approved and paid in accordance with the normal change order provisions of the contract. Many times, the change orders define the scope of work and the contractor is directed to proceed, but the price of the work is subject to further negotiations after the work is performed by the contractor. Other times, an owner may direct the contractor to perform certain change order work when both scope and price are not approved in advance or are in dispute. If the owner decides the directive does not result in additional compensation to the contractor and the contractor believes the directives to be outside the scope of the original bid documents, or if the physical conditions found on the project site are different from those presented in the bid documents, or for any variety of other reasons the contractor believes the directive to perform the work creates costs that could not reasonably be anticipated from the bid documents, the contract permits the contractor to make a request for an adjustment to the contract price. Such adjustment requests are often called "contract claims". The process for resolving claims may vary from one contract to another but, in general, there is a process to attempt to resolve claims at the project supervisory level through the normal change order process or with higher levels of management within the organization of the contractor and the owner. Depending upon the terms of the contract, claim resolution may employ a variety of other resolution methods including mediation, binding or non-binding arbitration, or litigation. Regardless of the process, it is typical that when a potential claim arises on a project, the contractor has the contractual obligation to perform the work and must incur the related costs. The contractor does not recoup the costs until the claim is resolved. It is not uncommon for the claim resolution process to take months or years to resolve, especially if it involves litigation.
The Company's contracts generally involve work durations in excess of one year. Revenue on contracts in process is generally recorded under the percentage of completion contract accounting method. For a more detailed discussion of the Company's policy in these areas, see Note 1(d) of Notes to Consolidated Financial Statements, entitled "Method of Accounting for Contracts".
Because the Company's operating results are primarily generated from a limited number of significant active construction projects, operating results in any given fiscal quarter can vary depending on the timing of progress achieved and changes in the estimated profitability of the projects being reported. Progress on projects in certain areas may also be
delayed by weather conditions depending on the type of project, stage of completion and severity of the weather. Such delays, if they occur, may result in inconsistent quarterly operating results due to more or less progress than anticipated being achieved on certain projects. Therefore, the reported operating results for any one fiscal quarter may not be indicative of future results.
Competition
The construction business is highly competitive. Competition is based primarily on price, reputation for on time completion, quality and reliability, availability of surety capacity and financial strength of the contractor. While the Company experiences a great deal of competition from other large general contractors, some of which may be larger and have greater financial resources than the Company, as well as from a number of smaller local contractors, it believes it has sufficient technical, managerial and financial resources, combined with a positive reputation for performance, to be competitive in each of its major market areas.
Construction Costs
While the Company's construction business may experience some adverse consequences if shortages develop or if prices for materials, labor or equipment increase excessively, provisions in certain types of contracts often shift all or a major portion of any adverse impact to the owner. On fixed price contracts, the Company attempts to insulate itself from the unfavorable effects of inflation by incorporating escalating wage and price assumptions, where appropriate, into its construction bids. Construction and other materials used in the Company's construction activities are generally available locally from multiple sources and have been in adequate supply during recent years. Construction work in selected overseas areas primarily employs expatriate and local labor which can usually be obtained as required. The Company does not anticipate any significant impact in 2003 from material and/or labor shortages or price increases.
Certain Economic Trends
The Company's civil construction markets are dependent on the amount of civil infrastructure work funded by various governmental agencies which, in turn, may depend on the condition of the existing infrastructure, the need for new or expanded infrastructure and other federal, state or local government budget requirements. The building markets in which the Company participates are dependent on economic and demographic trends, as well as governmental policy decisions as they impact the specific geographic markets.
Government Regulations and Environmental Matters
The Company's operations are subject to compliance with regulatory requirements of federal, state and municipal authorities, including regulations covering labor relations, safety standards, affirmative action and the protection of the environment including requirements in connection with water discharge, air emissions and hazardous and toxic substance discharge. Under the Federal Clean Air Act and Clean Water Act, the Company must apply water or chemicals to reduce dust on road construction projects and to contain water contaminants in run-off water at construction sites. In certain circumstances, the Company may also be required to hire subcontractors to dispose of hazardous wastes encountered on a project in accordance with a plan approved in advance by the Owner. The Company believes that it is in substantial compliance with all applicable laws and regulations. However, future amendments to current laws or regulations imposing more stringent requirements could have a material adverse effect on the Company.
In addition, the Company believes it has minimal exposure to environmental liability as a result of the activities of Perini Environmental Services, Inc. ("Perini Environmental"), a wholly owned subsidiary of the Company that was phased out during 1997. Perini Environmental provided hazardous waste engineering and construction services to both private clients and public agencies nationwide. Perini Environmental was responsible for compliance with applicable laws in connection with its clean up activities and bore the risk associated with handling such materials. In addition to strict procedural guidelines for conduct of this work, the Company and Perini Environmental generally carried insurance or received satisfactory indemnification from customers to cover the risks associated with this business. During 2002, the Company also owned real estate in three states and as an owner, is subject to laws governing environmental responsibility
and liability based on ownership. The Company is not aware of any significant environmental liability associated with its ownership of real estate.
The Company has been named in five unresolved claims from former employees of subcontractors regarding exposure to asbestos on certain Company projects. All of these pending claims are covered by insurance.
Risk Factors
The Company and its business segments are subject to a number of risks, including those summarized below. Such risks could have a material adverse effect on the Company's financial condition, results of operations and cash flows. Also, see disclosure under "Forward-looking Statements" on page 2.
Highly Competitive Industry - The Company is involved in a very competitive business, especially with respect to those contracts awarded through the competitive bidding process. In certain instances, the Company competes against contractors that have greater financial and other resources than the Company.
Decrease in Governmental Funding of Infrastructure Projects - The Company’s civil construction markets are dependent on the amount of civil infrastructure work funded by various governmental agencies which, in turn, may depend on the condition of the existing infrastructure, the need for new or expanded infrastructure and other federal, state or local government budget requirements.
Negative Economic and Demographic Trends - The building markets in which the Company participates are dependent to some degree on economic and demographic trends, as well as government policy decisions as they impact the specific geographic markets.
Fixed Price and Fixed Unit Price Contracts Shift Risk of Increased Costs to Company - A substantial portion of the Company’s revenues and current backlog are based on fixed price or fixed unit price contracts that involve risks relating to the Company’s potential responsibility for increased cost of performance under the contract. Generally, under these contracts any increase in the Company’s unit cost not caused by a modification or compensable change to the original contract, whether due to inflation, inefficiency, faulty estimates or other factors, is absorbed by the Company. There are a number of other factors that could create differences in contract performance and results as compared to the original contract estimate for which the owner may be partially liable that include, among other things, differing site conditions, availability of materials and abnormal weather conditions.
Other Contract Provisions - All federal, state and local government contracts and many of the Company’s other contracts provide for termination of the contract at the convenience of the owner. In addition, many of the Company’s contracts are subject to specific completion schedule requirements with liquidated damages charged to the Company in the event the construction schedules are not achieved. Historically, such provisions have not had a material adverse effect on the Company.
Design-build projects carry additional risks such as design error and scope of work risks. It is the Company’s practice to actively manage the design effort and to obtain project-specific insurance for this risk.
The Contract Process May Shift Timing and Other Related Payment Risks to Company - Generally under the terms of a contract, the Company is required to perform extra or change order work as directed by the owner even if the owner hasn’t agreed in advance on the scope and/or price of the work to be performed. While this process may result in an approved change order to the original contract in accordance with the relevant contract terms, many times this process results in disputes either (1) over whether or not the work performed is beyond the scope of the work included in the original project plans and specifications or (2) if the parties agree that the work performed qualifies as extra work, the price the owner is willing to pay for the extra work. In addition, this process can result in the Company funding additional working capital for a lengthy period of time before an undisputed change order is approved and funded by the owner. When the parties disagree about extra work, the Company generally is at a disadvantage since it is contractually obligated to complete the work which may adversely impact the timely
scheduling of other project work, as well as the specified contract milestone date(s). Significant extra work that isn’t resolved on a timely basis or is resolved for less than anticipated amounts also adversely impacts the Company’s working capital, cash flow and possibly earnings.
Unsatisfactory Resolution of Certain Ongoing Litigation - As discussed in Item 3. Legal Proceedings included elsewhere in this Form 10-K, the Company is involved, either directly or indirectly, in construction contracts involving certain lawsuits, alternative dispute resolution or other proceedings (“proceedings”) that involve significant dollar amounts. The Company believes that the resolution of these proceedings will not have a material effect on the Company’s results of operations and financial condition based on the current status of the respective proceedings. However, if any one or all of these proceedings result in adverse decisions against the Company, it could have a material adverse effect on the Company’s business.
Real Estate Operations
Effective June 30, 1999, management adopted a plan to withdraw completely from the real estate development business and to wind down the operations of Perini Land and Development Company ("PL&D"), the Company's real estate development subsidiary. Accordingly, approximately 95% of the property has been liquidated since June 30, 1999. Remaining properties are classified on the balance sheet as either "Land held for sale, net" or included in "Other Assets". (See Note 5 of Notes to Consolidated Financial Statements.)
PL&D or Paramount Development Associates, Inc. ("Paramount"), a wholly owned subsidiary of PL&D, owned the following real estate properties during 2002:
Massachusetts
Raynham Woods Commerce Center, Raynham - During the late 1980's, Paramount acquired a 409-acre site (equivalent to 300 net saleable acres) located in Raynham, Massachusetts and completed infrastructure work on a major portion of the site which was being developed as a mixed-use corporate park. From 1989 through 2001, an aggregate of 156 net acres was sold to various users. Paramount sold 19 net acres during 2002 which leaves approximately 125 buildable acres for sale.
Arizona
Sabino Springs Estates, Tucson - During 1990, the Tucson Board of Supervisors unanimously approved a plan for this 410-acre residential golf course community close to the foothills on the east side of Tucson. In 1993, PL&D sold a major portion of the property to an international real estate company, who completed a championship golf course and clubhouse within the project in 1995. During 2002, PL&D completed the sale of the balance of the property.
Insurance and Bonding
All of the Company's properties and equipment, both directly owned or owned through joint ventures with others, are covered by insurance and management believes that such insurance is adequate. In addition, the Company maintains general liability, excess liability and workers' compensation insurance in amounts it believes are consistent with its risk of loss and industry practice. During 2000 and 2001, the Company was able to significantly limit its financial risk under its workers' compensation and general liability insurance coverage by purchasing traditional insurance policies in a favorable insurance market. Due to tight conditions in the insurance market, effective for the calendar year 2002 and continuing into 2003, the Company found it necessary to purchase workers' compensation and general liability policies at substantially higher premiums with a Company self-insured deductible limit of $250,000 per occurrence, with appropriate aggregate caps on losses retained.
As a normal part of the construction business, the Company is often required to provide various types of surety bonds as an additional level of security of its performance. The Company's ability to obtain surety bonds primarily depends upon its capitalization, working capital, past performance, management expertise and certain external factors including the overall capacity of the surety market. Surety companies consider such factors in relationship to the amount
of the Company's backlog and their underwriting standards, which may change from time to time. Since 2001, the surety industry has undergone significant changes with several companies withdrawing completely from the industry or significantly reducing their bonding commitment. In addition, certain re-insurers of surety risk have limited their participation in this market since 2001. The Company has surety arrangements with several sureties, one of which it has dealt with for over 75 years and another of which owns approximately 21% of the Company's outstanding common stock (see Note 13 of Notes to Consolidated Financial Statements). While this tightening of the surety industry has not had a significant impact on the Company's operations, the inability to obtain surety bonds would have a material adverse effect on the Company's future business.
Employees
The total number of personnel employed by the Company is subject to seasonal fluctuations, the volume of construction in progress and the relative amount of work performed by subcontractors. During 2002, the average number of employees was approximately 3,200 with a maximum of approximately 4,800 and a minimum of approximately 1,800.
The Company operates as a union contractor. As such, it is a signatory to numerous local and regional collective bargaining agreements, both directly and through trade associations, throughout the country. These agreements cover all necessary union crafts and are subject to various renewal dates. Estimated amounts for wage escalation related to the expiration of union contracts are included in the Company's bids on various projects and, as a result, the expiration of any union contract in the next fiscal year is not expected to have any material impact on the Company.
ITEM 2.
ITEM 2. PROPERTIES
Properties for sale applicable to the Company's previously discontinued real estate activities are described in detail in Item 1. Business on page 10. Properties used in operations are summarized below:
Aproximate Business Owned or Approximate Square Segment(s) Leased by Perini Acres Feet of Office Space ------------------ ------------------ --------------- --------------------- Principal Offices ------------------------ Framingham, MA Building and Civil Owned 9 100,000 Phoenix, AZ Building Leased - 22,700 Hawthorne, NY Civil Leased - 12,800 Las Vegas, NV Building Leased - 7,400 Celebration, FL Building Leased - 4,800 Carlsbad, CA Building Leased - 3,900 Detroit, MI Building Leased - 2,500 --------------- --------------------- 9 154,100 =============== =====================
Principal Permanent Storage Yards ------------------------ Bow, NH Civil Owned 70 Framingham, MA Building and Civil Owned 6 Las Vegas, NV Building Leased 2 --------------- ===============
The Company believes its properties are well maintained, in good condition, adequate and suitable for the Company's purpose and fully utilized.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Mergentime - Perini Joint Ventures vs. WMATA Matter
On May 11, 1990, contracts with two joint ventures in which Perini Corporation held a minority interest ("Joint Ventures") were terminated by the Washington Metropolitan Area Transit Authority ("WMATA") on two adjacent subway construction contracts in the District of Columbia. The contracts were awarded to the Joint Ventures in 1985 and 1986. However, Perini and Mergentime Corporation ("Mergentime"), the 60% managing partner, entered into an agreement in 1987 under which Perini withdrew from the Joint Ventures and Mergentime assumed complete control over the performance of both projects. This agreement did not relieve Perini of its responsibilities to WMATA as a Joint Venture partner. After Perini withdrew from the Joint Ventures, Mergentime and WMATA were embroiled in a dispute regarding progress on the projects. Each party blamed the other for delays that were impacting both cost and progress and the parties were unable to resolve their dispute. Ultimately, both construction contracts were terminated by WMATA and WMATA retained Perini, acting independently, to complete both projects.
Subsequently, the Joint Ventures brought an action in the United States District Court for the District of Columbia against WMATA, seeking damages for delays, unpaid extra work and wrongful termination and WMATA brought an action against the Joint Ventures seeking damages for additional costs to complete the projects. After a bench trial before two District Court Judges (the initial Judge died before the matter could be concluded), the District Court found the Joint Ventures liable to WMATA for damages in the amount of approximately $16.5 million and WMATA liable to the Joint Ventures for damages in the amount of approximately $4.3 million.
The Joint Ventures appealed the judgment to the United States Court of Appeals for the District of Columbia ("Court of Appeals"), arguing, among other things, that the second District Court Judge had issued his final decision
without fully familiarizing himself with the record of the initial District Court Judge. On February 16, 1999, the Court of Appeals vacated the District Court's final judgment and ordered the successor District Court Judge to review the findings of the initial Judge and hold further hearings in regard to the Joint Ventures' affirmative claims. In addition, the Court of Appeals held that statutory interest on any of the claims will not accrue until final judgment is entered sometime in the future. Later in 1999, the case was transferred to a new successor District Court Judge.
On February 28, 2001, the new successor District Court Judge informed the parties that in the absence of a new trial, he could not certify adequate familiarity with the record to complete the remaining proceedings; therefore, he ordered that the Joint Ventures' motion for a new trial be granted.
A new trial before the new successor District Court Judge was completed in January 2002 and a decision is still pending. The ultimate financial impact of the Judge's pending decision is not yet determinable; therefore, no provision for loss, if any, has been recorded in the financial statements.
Tutor-Saliba-Perini Joint Venture vs. Los Angeles MTA Matter
During 1995, a joint venture, Tutor-Saliba-Perini ("TSP"), in which Perini Corporation is a 40% minority partner and Tutor-Saliba Corporation of Sylmar, CA is the 60% managing partner, filed a complaint in the Superior Court of the State of California for the County of Los Angeles against the Los Angeles County Metropolitan Transportation Authority ("MTA") seeking to recover costs for extra work required by the MTA in connection with the construction of the Wilshire/Normandie Subway Station. TSP is seeking additional compensation from the MTA for claims related to the construction and in February 1999 the MTA countered with civil claims under the California False Claims Act against TSP, Tutor-Saliba Corporation, Perini Corporation and other parties. Ronald N. Tutor, the Chairman and CEO of Perini Corporation since March of 2000, is also the CEO and the sole stockholder of Tutor-Saliba Corporation (see Note 13).
Claims concerning the construction of the Wilshire/Normandie Subway Station were tried before a Jury in 2001. During trial, the Judge ruled that TSP had failed to comply with the Court's prior discovery orders and the Judge penalized TSP for its alleged non-compliance by dismissing TSP's claim and by ruling, without a Jury finding, that TSP was liable to the MTA for damages on the MTA's counterclaim. The Judge then instructed the Jury that TSP was liable to the MTA and charged the Jury with the responsibility of determining the amount of the damages based on the Judge's ruling. The Jury awarded the MTA approximately $29.6 million in damages.
On March 26, 2002, the Judge amended the award, ordering TSP to pay the MTA an additional $33.4 million in costs and attorney fees, with the aggregate $63.0 million award subject to interest at an annual rate of 10% from the date of the award.
TSP and the other plaintiffs/defendants in counterclaim have appealed the Judge's discovery sanction, the subsequent Jury award and the amended award. The ultimate financial impact of the Judge's ruling and/or the awards is not yet determinable. Therefore, no provision for loss, if any, has been recorded in the financial statements.
City of San Francisco vs. Tutor-Saliba, Perini & Buckley Joint Venture Matter
On November 1, 2002, the San Francisco City Attorney, on behalf of the City and County of San Francisco and the citizens of California ("Plaintiffs"), filed a civil action with a demand for a jury trial against Tutor-Saliba Corporation ("TSC"), the Tutor-Saliba, Perini & Buckley Joint Venture ("JV"), Perini Corporation ("Perini"), Buckley & Company, Inc. ("Buckley") and their bonding companies in the United States District Court in San Francisco relating to seven contracts for work on the expansion of the San Francisco International Airport. The Plaintiffs allege various overcharges, bidding violations, violations of minority contracting regulations, civil fraud, and violation of the California and San Francisco False Claims and California Unfair Competition Acts. In addition, the Plaintiffs allege that TSC has violated the United States Racketeer Influenced Corrupt Organizations Act. The Plaintiffs have asserted $30 million in damages and are seeking treble damages, various civil penalties and debarment of the JV and TSC from doing business with the City of San Francisco. The Plaintiffs have not allocated their claims for damages and penalties amongst the defendants or the seven contracts at issue, only two of which involved the JV. TSC is the managing partner of the JV, and in December
1997, Perini sold its entire 20% interest in the JV to TSC. TSC has agreed to indemnify Perini from any liability arising out of the joint venture, including legal fees and expenses.
Perini/Kiewit/Cashman Joint Venture - Central Artery/Tunnel Project Matter
Perini/Kiewit/Cashman Joint Venture ("PKC"), a joint venture in which Perini Corporation holds a 56% interest and is the managing partner, is currently pursuing a series of claims for additional contract time and/or compensation against the Massachusetts Highway Department ("MHD") for work performed by PKC on a portion of the Central Artery/Tunnel project in Boston, Massachusetts. The claims relate to the construction of the Northbound Mainline Central Artery Tunnel from Kneeland Street to Congress Street. During construction, MHD ordered PKC to perform changes to the work and issued related direct cost changes with an estimated value, excluding time delay and inefficiency costs, in excess of $100 million. In addition, PKC encountered a number of unforeseen conditions during construction that greatly increased PKC's cost of performance.
Certain of PKC's claims have been presented to a Disputes Review Board ("DRB") which consists of three construction experts chosen by the parties. To date, the DRB has ruled on a binding basis that PKC is entitled to additional compensation for its contract time delay claim in the amount of $17.4 million. A Judge of the Massachusetts Superior Court has issued a decision upholding the DRB's binding award to PKC. Although MHD challenged several of the DRB's decisions relative to the contract time delay award discussed above, PKC received a favorable ruling on March 20, 2002 from the Superior Court of the Commonwealth of Massachusetts that approved PKC's request to have MHD comply with the DRB's decision to award the $17.4 million for the time delay. The MHD has appealed the Superior Court decision to the Appeals Court of the Commonwealth of Massachusetts.
The DRB has also ruled on a binding basis that PKC is entitled to additional compensation for impacts and inefficiencies caused by MHD to PKC's underpinning work in the amount of $5.6 million and that PKC is entitled to additional compensation for impacts and inefficiencies caused by MHD to PKC's utility work in the amount of $11.5 million. PKC has filed applications in these actions seeking to confirm the awards and MHD has filed civil actions in Massachusetts Superior Court seeking to vacate these awards.
Under the Dispute Resolution Rules of the contract, either party may periodically terminate the services of some or all of the DRB members provided that members who are removed under this provision will remain on the DRB through the completion of any then pending claims. The MHD has chosen to remove the current DRB members under this provision and those members are in the process of completing hearings on all pending claims. Although the replacement DRB members have been agreed upon, proceedings before the current DRB and new DRB have been postponed pending resolution of the current negotiations discussed below.
The pending claims yet to be decided by the current/replacement DRB on a binding basis have an anticipated value of $43 million. The remaining claims to be decided by the replacement DRB on a non-binding basis have an anticipated value of $80 million.
On August 14, 2002 the Massachusetts Attorney General's office, pursuant to its authority under the Massachusetts False Claims Act, served a Civil Investigative Demand ("CID") on Perini and the other joint venture partners. The CID sought the production of certain construction claims documentation in connection with the Central Artery/Tunnel Contract No. C11A1. PKC vigorously denies that it submitted any false claims and is cooperating with the Attorney General's Office in the ongoing investigation.
In December 2002, PKC and MHD entered into an agreement whereby the parties agreed to attempt to resolve by negotiation and mediation all of the outstanding claims on the project. As part of the agreement, the MHD recommended for approval by the Massachusetts Turnpike Authority a contract modification that provides for provisional payments to PKC totaling $25 million against PKC's outstanding claims. To date, PKC has received $23.75 million of those provisional payments. The parties also agreed to stay the pending litigation and DRB proceedings during the negotiations. The ultimate financial impact of resolving all of the claims on this project is not yet determinable.
Perini Building Company, Inc. vs. Saginaw Chippewa Indian Tribe of Michigan Matter
In 1995, Perini Building Company, Inc. ("PBC"), a wholly owned subsidiary of Perini Corporation, was hired by the Saginaw Chippewa Indian Tribe ("Tribe") to construct a hotel/casino resort in Mt. Pleasant, Michigan. Since the design for the project was still in process at the time of contract, the parties planned to proceed with construction on a fast-track basis as the design was completed by the Tribe's architect. Although PBC completed a major portion of construction under this fast-track arrangement, a final design was never completed by the Tribe's architect. Ultimately, a dispute arose between the Tribe and the architect regarding the architect's failure to complete the design and the Tribe eventually terminated all contracts on the project, including its contract with the architect and its contract with PBC. Separate arbitration proceedings were then initiated between the Tribe and the architect and between the Tribe and PBC.
On June 5, 2000, the American Arbitration Association found in favor of PBC against the Tribe, awarding PBC approximately $8.9 million in damages, plus costs and attorney/consultants fees in the amount of approximately $1.2 million. On October 30, 2000, PBC filed an action to enforce the award in the Tribal Court of the Saginaw Chippewa Indian Tribe. On January 31, 2002, the Tribal Court refused to confirm the award, claiming that the Tribal Court does not have jurisdiction because the Tribe is immune from suit as a sovereign nation. The contract between PBC and the Tribe provides that PBC may seek enforcement of the award in United States Federal Court if the Tribal Court finds that it does not have jurisdiction. In February 2002, PBC filed an action to enforce the arbitration award in the United States District Court for Michigan ("USDC") and in March 2002 PBC moved for Summary Judgment of its claim in that action. In addition, in February 2002, PBC filed an appeal of the Tribal Court's refusal to enforce the award in the Saginaw Chippewa Appellate Court. The Tribe moved to dismiss the Federal Court action. On October 11, 2002, PBC's appeal to the Tribal Appellate Court was heard by a three judge panel.
Subsequent to the appeal hearing, negotiations between PBC and the Tribe produced a settlement of the dispute whereby PBC received a final cash payment in December 2002. Settlement of the dispute did not have a material impact on the Company's 2002 results of operations.
San Francisco State University vs. Perini Matter
This is an action originally brought in 1999 in San Francisco County Superior Court by San Francisco State University ("SFSU") against Perini and several subcontractors in conjunction with the design and construction of a student dormitory. SFSU alleged that the building suffered from water leakage and structural deficiencies. SFSU sought damages in excess of $85 million, including damages for leak repairs and mold abatement, damages for structural repairs, damages for economic losses, punitive damages and attorneys' fees. Perini asserted that the building was properly designed and constructed under the contractually identified building code.
Perini was defended by its insurance carriers under a reservation of rights. Perini had brought a third party action for comparative indemnity, equitable indemnity, implied contractual indemnity and declaratory relief against nine of Perini's subcontractors and lower-tier subcontractors.
The trial began on June 25, 2002 and proceeded until August 2, 2002 when all claims, counterclaims and crossclaims of all parties were settled and that settlement was approved by the Court. Under the terms of the settlement, Perini has paid to SFSU economic damages in the amount of $16.7 million and will make certain defined repairs and/or modifications to the building.
Also under the terms of the settlement, Perini's subcontractors and insurance carriers for both Perini and its subcontractors have contributed substantially to the total amount of the settlement. As a result, management believes that the settlement of this case will not have a material effect on the Company's results of operations or financial condition.
$21.25 Preferred Shareholders Class Action Lawsuit
On May 3, 2001 the Company, including several of its current and former directors ("Defendant Directors"), was served with a complaint entitled Frederick Doppelt, Arthur I. Caplan and Michael Miller v. Perini Corporation, et al, Supreme Court of the State of New York, County of New York, Civil Action No. 602156/01. Each plaintiff is a
holder of the Company's $21.25 Convertible Exchangeable Preferred Stock ("$21.25 Preferred Stock"). One plaintiff, Mr. Doppelt, is a current Director of the Company and one plaintiff, Mr. Caplan, is a former Director of the Company. Plaintiffs purport to bring the action individually and on behalf of the entire class of holders of the $21.25 Preferred Stock.
The Plaintiffs have asserted claims for breach of contract, breach of fiduciary duty, fraud and negligent misrepresentation. The Plaintiffs principally allege that the Company and its Defendant Directors improperly authorized the exchange of Series B Preferred Stock for Common Stock without first paying all accrued dividends on the $21.25 Preferred Stock. More specifically, Plaintiffs allege that the Company and its Defendant Directors violated the terms of the $21.25 Preferred Stock when, in March 2000, the Company authorized the exchange of Series B Preferred Stock for Common Stock. The Plaintiffs further allege that the Company and its Defendant Directors issued a false and misleading prospectus in 1987 relating to the issuance of the $21.25 Preferred Stock. The Plaintiffs seek payment of accrued dividends, claiming they are owed approximately $11.7 million as of May 3, 2001, and other unspecified punitive and exemplary damages.
On May 23, 2001, the Company and the Defendant Directors removed the action from the Supreme Court of New York to the United States District Court for the Southern District of New York. On June 26, 2001, the Plaintiffs filed an Amended Complaint whereby the Plaintiffs limited their Class Action to an action for breach of contract against the Company and an action for breach of fiduciary duty against the Defendant Directors. The Company and the Defendant Directors moved to dismiss all of Plaintiffs' claims. On March 12, 2002, all claims against the Company and the Defendant Directors were dismissed by the United States District Court for the Southern District of New York.
In April 2002, the Plaintiffs appealed the dismissal to the United States Court of Appeals for the Second Circuit. On December 23, 2002, the Plaintiffs' appeal was dismissed by the United States Court of Appeals for the Second Circuit.
On October 15, 2002, the Plaintiffs filed a new action for breach of fiduciary duty against the Defendant Directors in the United States District Court for the District of Massachusetts. On January 6, 2003, the Defendant Directors moved to dismiss all of the Plaintiffs' Massachusetts claims. The Defendant Directors are awaiting the Plaintiffs' response.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
Listed below are the names, offices held, ages and business experience of all executive officers of the Company.
Name, Offices Held and Age Year First Elected to Present Office and Business Experience
Ronald N. Tutor, Director, Chairman and Since March 29, 2000 he serves as a Director, Chairman and Chief Chief Executive Officer - 62 Executive Officer. Prior to that, he served as a Director and Chairman since July 1, 1999; a Director and Vice Chairman since January 1, 1998; and as a Director and Acting Chief Operating Officer since January 17, 1997. He is the Chairman, President and Chief Executive Officer of Tutor-Saliba Corporation, a California based construction contractor, since prior to 1995 and has actively managed that company since 1966.
Robert Band, Director, President and Since March 29, 2000 he serves as a Director, President and Chief Chief Operating Officer - 55 Operating Officer. Prior to that, he served as a Director, President and Chief Executive Officer since May 12, 1999. He has served as Executive Vice President and Chief Financial Officer since December 1997. Prior to
that, he served as President of Perini Management Services, Inc. (formerly Perini International Corporation) since January 1996 and as Senior Vice President, Chief Operating Officer of Perini International Corporation since April 1995. Previously, he served as Vice President Construction from July 1993 and in various operating and financial capacities since 1973, including Treasurer from May 1988 to January 1990.
Zohrab B. Marashlian, President, Perini He was elected to his current position in December 1997, which entails Civil Construction - 58 overall responsibility for the Company's civil construction operations. Prior to that, he served as President of the Company's Metropolitan New York Division since April 1995 and as Senior Vice President, Operations of the Company's Metropolitan New York Division since January 1994. Previously, he served in various project management capacities with the Company since 1985, including Project Manager and Vice President - Area Manager. Prior to that, he served in various capacities for the Company on projects in New York and overseas since 1971.
Craig W. Shaw, President, Perini He was elected to his current position in October 1999, which entails Building Company - 48 overall responsibility for the Company's building construction operations. Prior to that he served as President, Perini Building Company, Western U.S. Division since April 1995 and Senior Vice President, Construction for Perini Building Company's Western U.S. Division since January 1994 and as Vice President, Construction for Perini Building Company's Western U.S. Division since 1986. Previously, he served in various project management capacities with the Company since 1978, including Project Manager from 1979 to 1986.
The Company's officers are elected on an annual basis at the Board of Directors' Meeting immediately following the Annual Meeting of Stockholders in May, to hold such offices until the Board of Directors' Meeting following the next Annual Meeting of Stockholders and until their respective successors have been duly appointed or until their tenure has been terminated by the Board of Directors, or otherwise.
PART II.
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Market Information
The Company's Common Stock is traded on the American Stock Exchange under the symbol "PCR". The quarterly market high and low sales price ranges for 2002 and 2001 are summarized below:
2002 2001 ------------------------ ------------------------- High Low High Low ---------- --------- ----------- ---------- Market Price Range per Common Share: ------------------------------------ Quarter Ended March 31 $ 7.28 $ 5.75 $ 7.35 $ 2.94 June 30 6.40 3.40 10.00 5.90 September 30 4.58 3.50 9.40 5.45 December 31 4.44 3.00 7.60 6.10
Dividends
There were no cash dividends declared on the Company's Common Stock during 2002 and 2001. For additional information on dividend payments, see "Dividends" under Management's Discussion and Analysis in Item 7 below.
Holders
At February 24, 2003, there were 1,106 common stockholders of record based on the stockholders list maintained by the Company's transfer agent.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Selected Consolidated Financial Information
(In thousands, except per share data)
The following selected financial data has been derived from audited financial statements and should be read in conjunction with the consolidated financial statements, the related notes thereto and the independent auditors' report thereon, included elsewhere in this Form 10-K and in previously filed annual reports on Form 10-K of Perini Corporation.
2002 2001 2000 1999 1998 ---------------- --------------- ---------------- ---------------- --------------- OPERATING SUMMARY -----------------
CONTINUING OPERATIONS: Revenues: Building $ 772,513 $ 1,199,439 $ 826,191 $ 696,407 $ 679,296 Civil 312,528 353,957 279,469 323,077 332,026 ---------------- --------------- ---------------- ---------------- --------------- Total $ 1,085,041 $ 1,553,396 $ 1,105,660 $ 1,019,484 $ 1,011,322
Cost of Operations 1,026,391 1,495,834 1,053,328 969,015 957,651 ---------------- --------------- ---------------- ---------------- ---------------
Gross Profit $ 58,650 $ 57,562 $ 52,332 $ 50,469 $ 53,671 G&A Expense 32,770 28,061 24,977 26,635 27,397 ---------------- --------------- ---------------- ---------------- --------------- Income From Operations $ 25,880 $ 29,501 $ 27,355 $ 23,834 $ 26,274
Other (Income) Expense, Net 520 227 (949) (72) 652 Interest Expense 1,485 2,006 3,966 7,128 8,473 ---------------- --------------- ---------------- ---------------- --------------- Income From Continuing Operations Before Income Taxes $ 23,875 $ 27,268 $ 24,338 $ 16,778 $ 17,149
Provision (Credit) for Income Taxes 801 850 (43) 421 1,100 ---------------- --------------- ---------------- ---------------- --------------- Income From Continuing Operations $ 23,074 $ 26,418 $ 24,381 $ 16,357 $ 16,049 ---------------- --------------- ---------------- ---------------- ---------------
DISCONTINUED OPERATIONS: Loss From Operations $ - $ - $ - $ (694) $ (4,397) Loss on Disposal of Real Estate Business Segment - - - (99,311) - ---------------- --------------- ---------------- ---------------- --------------- Loss From Discontinued Operations $ - $ - $ - $ (100,005) $ (4,397) ---------------- --------------- ---------------- ---------------- ---------------
Net Income (Loss) $ 23,074 $ 26,418 $ 24,381 $ (83,648) $ 11,652 ================ =============== ================ ================ ===============
2002 2001 2000 1999 1998 ---------------- --------------- ---------------- ---------------- --------------- Per Share of Common Stock: Basic Earnings (Loss): Income From Continuing Operations $ 0.92 $ 1.07 $ 0.39 (1) $ 1.80 $ 1.91 Loss From Discontinued Operations - - - (0.12) (0.83) Estimated Loss on Disposal - - - (17.72) - ---------------- --------------- ---------------- ---------------- --------------- Total $ 0.92 $ 1.07 $ 0.39 $ (16.04) $ 1.08 ================ =============== ================ ================ ===============
Diluted Earnings (Loss): Income From Continuing Operations $ 0.91 $ 1.04 $ 0.39 (1) $ 1.80 $ 1.91 Loss From Discontinued Operations - - - (0.12) (0.83) Estimated Loss on Disposal - - - (17.72) - ---------------- --------------- ---------------- ---------------- --------------- Total $ 0.91 $ 1.04 $ 0.39 $ (16.04) $ 1.08 ================ =============== ================ ================ ===============
Cash Dividend Declared $ - $ - $ - $ - $ - ---------------- --------------- ---------------- ---------------- ---------------
Book Value $ 2.72 $ 2.40 $ 1.57 $ (11.31) $ 4.17 ---------------- --------------- ---------------- ---------------- ---------------
Weighted Average Common Shares Outstanding: Basic 22,664 22,623 18,521 5,606 5,318 ---------------- --------------- ---------------- ---------------- --------------- Diluted 22,939 23,442 18,527 5,606 5,318 ---------------- --------------------------------- ---------------- ---------------
FINANCIAL POSITION SUMMARY --------------------------
Working Capital $ 115,908 $ 93,369 $ 80,477 $ 48,430 $ 57,665 ---------------- --------------- ---------------- ---------------- ---------------
Current Ratio (2) 1.44:1 1.24:1 1.20:1 1.15:1 1.20:1 ---------------- --------------- ---------------- ---------------- ---------------
Long-term Debt, less current maturities $ 12,123 $ 7,540 $ 17,218 $ 41,091 $ 75,857 ---------------- --------------- ---------------- ---------------- ---------------
Stockholders' Equity (Deficit) $ 86,649 $ 79,408 $ 60,622 $ (36,618) $ 50,558 ---------------- --------------- ---------------- ---------------- ---------------
Ratio of Long-term Debt to Equity .14:1 .09:1 .28:1 n.a. 1.50:1 ---------------- --------------- ---------------- ---------------- ---------------
Redeemable Series B Cumulative Convertible Preferred Stock $ - $ - $ - $ 37,685 $ 33,540 ---------------- --------------- ---------------- ---------------- ---------------
Total Assets (2) $ 402,389 $ 501,241 $ 487,478 $ 385,767 $ 452,496 ---------------- ---------------- --------------- ---------------- ---------------
OTHER DATA ----------
Backlog at Year End $ 990,175 $ 1,213,535 $ 1,788,731 $ 1,658,077 $ 1,232,256 ---------------- --------------- ---------------- ---------------- ---------------
(1) As discussed in Note (1)(i) of Notes to Consolidated Financial Statements, Basic and Diluted Earnings Per Share for 2000 have been restated.
(2) As discussed in Note (1)(b) of Notes to Consolidated Financial Statements, the Company now presents its interests in joint ventures in the Consolidated Balance Sheets using the proportionate consolidation method. Accordingly, the Current Ratio and Total Assets included above have been restated for all periods presented to reflect this change.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company was incorporated in 1918 as a successor to businesses which had been engaged in providing construction services since 1894. The Company currently provides general contracting, construction management and design-build services to private clients and public agencies throughout the United States and selected overseas locations. The Company's construction business involves two basic segments or operations: building and civil. The general building and civil contracting services provided by the Company consist of planning and scheduling the manpower, equipment, materials and subcontractors required for the timely completion of a project in accordance with the terms and specifications contained in a construction contract. The Company provides these services by using traditional general contracting arrangements, such as fixed price, guaranteed maximum price and cost plus award fee contracts and, to a lesser extent, construction management or design-build contracting arrangements. The Company, in the normal conduct of its business, enters into partnership arrangements, referred to as "joint ventures," for certain construction projects. Each of the joint venture participants is usually committed to supply a predetermined percentage of capital, as required, and to share in a predetermined percentage of the income or loss of the project.
Critical Accounting Policies
The Company's significant accounting policies are described in Note 1 of Notes to Consolidated Financial Statements included in Item 15 of this Form 10-K.
Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company's construction business involves making significant estimates and assumptions in the normal course of business relating to its Company and joint venture contracts due to, among other things, the one-of-a-kind nature of most of its projects, long-term duration of its contract cycle and type of contract utilized. Therefore, management believes that "Method of Accounting for Contracts" is the most important and critical accounting policy. The most significant estimates with regard to these financial statements relate to the estimating of total forecasted construction contract revenues, costs and profits in accordance with accounting for long-term contracts (see Note 1(d) of Notes to Consolidated Financial Statements) and estimating potential liabilities in conjunction with certain contingencies, including the outcome of pending or future litigation, arbitration or other dispute resolution proceedings relating to contract claims (see Note 2 of Notes to Consolidated Financial Statements). Actual results could differ in the near term from these estimates and such differences could result in a material adverse effect on the Company's financial condition, results of operations and cash flows.
Method of Accounting for Contracts - Revenues and profits from the Company's contracts and construction joint venture contracts are recognized by applying percentages of completion for the period to the total estimated profits for the respective contracts. Percentage of completion is determined by relating the actual cost of the work performed to date to the current estimated total cost of the respective contracts. When the estimate on a contract indicates a loss, the Company's policy is to record the entire loss during the accounting period in which it is estimated. In the ordinary course of business, at a minimum on a quarterly basis, the Company prepares updated estimates of the total forecasted revenue, cost and profit or loss for each contract. The cumulative effect of revisions in estimates of the total forecasted revenue and costs, including unapproved change orders and claims, during the course of the work is reflected in the accounting period in which the facts that caused the revision become known. The financial impact of these revisions to any one contract is a function of both the amount of the revision and the percentage of completion of the contract. An amount equal to the costs incurred which are attributable to unapproved change orders and claims is included in the total estimated revenue when realization is probable. (For a further discussion of unapproved change orders and claims, see "The Contract Process" under Item 1 on pages 6 through 8 of this Form 10-K.) Profit from unapproved change orders and claims is recorded in the period such amounts are resolved.
Deferred contract revenue represents the excess of billings to date over the amount of contract costs and profits (or contract revenue) recognized to date on the percentage of completion accounting method on certain contracts. Unbilled work represents the excess of contract costs and profits (or contract revenue) recognized to date on the percentage of completion accounting method over billings to date on the remaining contracts. Unbilled work results when (1) the appropriate contract revenue amount has been recognized in accordance with the percentage of completion accounting method, but a portion of the revenue recorded cannot be billed currently due to the billing terms defined in the contract and/or (2) costs, recorded at estimated realizable value, related to unapproved change orders or claims are incurred. For unapproved change orders or claims that cannot be resolved in accordance with the normal change order process as defined in the contract, the Company may employ other dispute resolution methods, including mediation, binding and non-binding arbitration, or litigation (see Item 3, Legal Proceedings in this Form 10-K and Note 2, "Contingencies and Commitments", of Notes to Consolidated Financial Statements). The prerequisite for billing unapproved change orders and claims is the final resolution and agreement between the parties. At December 31, 2002, unbilled work related to Company and joint venture contracts is discussed in Note 1(d) of Notes to Consolidated Financial Statements.
Accounting for Construction Joint Ventures - Prior to 2002, the Company's interests in construction joint ventures were accounted for on the equity method in the Consolidated Balance Sheets and on the proportionate consolidation method in the Consolidated Statements of Income, with the Company's share of revenues and costs in these interests included in Revenues and Cost of Operations, respectively. Beginning in 2002, construction joint venture interests are accounted for using the proportionate consolidation method in the Consolidated Balance Sheets as well as the Consolidated Statements of Income, whereby the Company's proportionate share of each joint venture's assets, liabilities, revenues and cost of operations are included in the appropriate classifications in the consolidated financial statements. The Company believes the change, which results in presenting all joint venture activity using a consistent methodology in both the Consolidated Balance Sheets and Consolidated Statements of Income, is preferable.
Although this change impacted various classifications within Current Assets and Current Liabilities in the Consolidated Balance Sheets and the Consolidated Statements of Cash Flows, it had no impact on net working capital or other categories of long-term assets or liabilities in the Consolidated Balance Sheets. It also had no impact on the Consolidated Statements of Income or basic or diluted earnings per common share for any period presented. Prior year Consolidated Balance Sheets and Consolidated Statements of Cash Flows have been restated to conform to the 2002 presentation.
Defined Benefit Retirement Plan - The status of the Company's defined benefit pension plan obligations, related plan assets and cost is presented in Note 10 of Notes to Consolidated Financial Statements entitled "Employee Benefit Plans". Plan obligations and annual pension expense are determined by actuaries using a number of key assumptions which include, among other things, the discount rate, the estimated future return on plan assets and the anticipated rate of future salary increases. The discount rate of 7.25% used for purposes of computing the 2002 annual pension expense was determined at the beginning of the calendar year based on high-quality corporate bond yields as of that date. The Company plans to lower the discount rate used for computing the 2003 annual pension expense to 6.75% due to a decline in high-quality corporate bond yields as of the end of 2002.
The estimated return on plan assets is primarily based on historical long-term returns of equity and fixed income markets according to the Company's targeted allocation of plan assets (65% equity and 35% fixed income). While the weighted estimated return on asset rate has been 9% in recent years, the Company plans to lower this rate to 7.0% in 2003 based on recent equity market performance compared to long-term historical averages.
The plans' accumulated benefit obligation exceeded the fair value of plan assets on December 31, 2002 and 2001 in amounts greater than the accrued pension liability previously recorded. Accordingly, the Company increased its accrual by $13.7 million in 2002 and $5.9 million in 2001 with the offset to accumulated other comprehensive income (loss), a reduction of stockholders' equity.
As a result of the expected changes in assumptions for 2003 noted above and asset losses during 2002, the Company anticipates that pension expense will increase from $1.2 million in 2002 to $3.4 million in 2003. Cash contributions are anticipated to stay at the 2002 level of between $2 million and $3 million.
Related Party Transactions
As part of a $30 million equity infusion in January 1997, the Company entered into an agreement with Tutor-Saliba Corporation ("TSC"), a construction company based in California, and Ronald N. Tutor, Chief Executive Officer and sole stockholder of TSC, to provide certain management services. TSC participated in joint ventures with the Company before the agreement and continues to participate in joint ventures with the Company after the agreement. The Company's share of revenue from these joint ventures amounted to $48.8 million, $17.9 million and $4.6 million in 2002, 2001 and 2000, respectively. Primarily as a result of TSC participating in a $40 million equity infusion in March 2000, TSC currently owns approximately 12% of the Company's outstanding Common Stock. Mr. Tutor has been Chairman and Chief Executive Officer of the Company since March 2000. (For details of compensation to TSC and Mr. Tutor and other information on related party transactions, see Note 13 of Notes to Consolidated Financial Statements.)
Results of Operations -
2002 Compared to 2001
Net income for the year ended 2002 was $23.1 million, a 13% decrease from the record $26.4 million net income recorded in 2001. Basic earnings per common share were $0.92 for the year ended 2002 compared to $1.07 for the year ended 2001. Diluted earnings per common share were $0.91 per common share compared to $1.04 for the year ended 2001. Overall, the decrease in 2002 operating results reflects a continued strong but lower profit contribution from the building construction segment and an increased profit contribution from the civil construction segment.
Revenues from construction operations decreased by $468.4 million (or 30.2%), from $1,553.4 million in 2001 to $1,085.0 million in 2002. This decrease was due primarily to a decrease in building construction revenues of $426.9 million (or 35.6%), from $1,199.4 million in 2001 to $772.5 million in 2002. Civil construction revenues decreased $41.5 million (or 11.7%), from $354.0 million in 2001 to $312.5 million in 2002. The decrease in revenues from building construction operations was due primarily to the decrease in the Company's year-end backlog at December 31, 2001 compared to the record year-end backlog at December 31, 2000, including a decreased volume of work at the Mohegan Sun Project in Connecticut, as well as on two large hotel/casino projects in the southwestern United States, all of which were substantially completed in early 2002. The decrease in revenues from civil construction operations was also due primarily to the decrease in the Company's year-end backlog at December 31, 2001 compared to the record year-end backlog at December 31, 2000.
Income from construction operations (see Note 12 of Notes to Consolidated Financial Statements for business segment information) decreased by $2.9 million (or 8.2%), from $35.5 million in 2001 to $32.6 million in 2002. Building construction operating income decreased by $5.4 million, from $31.6 million in 2001 to $26.2 million in 2002, due primarily to the decrease in revenues discussed above. This decrease was partly offset by an increase in the average gross margin on building construction contracts from 4.0% in 2001 to 5.9% in 2002, due primarily to favorable close-out experience on several hotel/casino projects in 2002 and an upward profit revision on an overseas project. In addition, building construction operating income was negatively impacted by a $2.7 million (or 16.6%) increase in building construction-related general and administrative expenses primarily in connection with the pursuit of new work opportunities, including the opening of a new office near Orlando, Florida. Despite the decrease in revenues discussed above, civil construction operating income increased by $2.5 million, from $3.9 million in 2001 to $6.4 million in 2002, due primarily to an upward profit revision on a civil infrastructure project in New York City in 2002 as well as recognition of a smaller loss in 2002 compared to 2001 on a Central Artery/Tunnel "Big Dig" joint venture project in Boston, Massachusetts. In addition, civil construction operating income was negatively impacted by a $1.2 million (or 20.7%) increase in civil construction-related general and administrative expenses, due primarily to a reduced ability to allocate expenses to various joint ventures as well as an increase in outside professional fees.
Interest expense decreased by $0.5 million, from $2.0 million in 2001 to $1.5 million in 2002, due primarily to a reduction in the average amount of debt outstanding under the Company's Credit Agreement as well as lower interest rates in 2002.
The lower than normal tax rate for the three year period ended December 31, 2002 is primarily due to the utilization of tax loss carryforwards from prior years. Because of certain accounting limitations, the Company was not able to recognize a portion of the tax benefit related to the operating losses experienced in fiscal 1999, 1996 and 1995. As of December 31, 2002, an amount estimated to be approximately $79 million of future pretax earnings could benefit from minimal, if any, federal tax provisions. The net deferred tax assets reflect management's estimate of the amount that will, more likely than not, be realized (see Note 4 of Notes to Consolidated Financial Statements). In addition, the provision for income taxes in 2002 reflects the reversal of the federal alternative minimum tax provided in 2001 which is no longer required based on the provisions of the Job Creation and Worker Assistance Act of 2002, and the credit for income taxes in 2000 reflect the reversal of foreign taxes accrued in prior years that were no longer required.
Results of Operations -
2001 Compared to 2000
Net income for the year ended 2001 increased 8% to a record $26.4 million, compared to net income of $24.4 million for the year ended 2000. Basic earnings per common share were $1.07 for the year ended 2001, as compared to $0.39 for the year ended 2000. Diluted earnings per common share were $1.04 for the year ended 2001, as compared to $0.39 for the year ended 2000. Overall, the improved 2001 operating results reflect a continued strong and improved profit contribution from the building construction segment and, to a lesser extent, the positive impact of lower interest expense due primarily to continued reduction in the amount of long-term debt outstanding and lower interest rates in 2001.
Revenues from construction operations increased $447.7 million (or 40.5%), from $1,105.7 million in 2000 to a record $1,553.4 million in 2001. This increase was due primarily to an increase in building construction revenues of $373.2 million (or 45.2%), from $826.2 million in 2000 to $1,199.4 million in 2001. In addition, civil construction revenues increased $74.5 million (or 26.7%), from $279.5 million in 2000 to $354.0 million in 2001. The increase in revenues from building construction operations was due primarily to the Company's record year-end backlog at December 31, 2000, including an increase in the volume of work completed at the Mohegan Sun Project in Connecticut, as well as the construction of three large hotel/casino projects in the southwestern United States. The increase in revenues from civil construction operations also reflected the Company's record year-end backlog at December 31, 2000, including the start-up of several infrastructure projects in the metropolitan New York area.
Income from construction operations increased by $2.8 million (or 8.6%), from $32.7 million in 2000 to $35.5 million in 2001 due to an increase in income from building construction operations that more than offset a decrease in income from civil construction operations. Building construction operating income increased by $4.5 million (or 16.6%), from $27.1 million in 2000 to $31.6 million in 2001, due primarily to the increase in revenues discussed above which was largely offset by a decrease in the gross margin from 4.8% in 2000 to 4.0% in 2001 because 2000 included the favorable close-out of certain projects. In addition, building construction operating income was negatively impacted by a $3.6 million (or 28.3 %) increase in building construction-related general and administrative expenses primarily in connection with the pursuit of new work opportunities. Despite the increase in civil construction revenues discussed above, civil construction operating income decreased by $1.7 million (or 30.4%), from $5.6 million in 2000 to $3.9 million in 2001, due primarily to a downward profit revision on a Central Artery/Tunnel "Big Dig" project in Boston, Massachusetts.
Other (income) expense decreased by $1.1 million, from a net income of $0.9 million in 2000 to a net expense of $0.2 million in 2001, due primarily to a decrease in interest income as a result of a decrease in the level of short-term cash investments, as well as lower interest rates in 2001.
Interest expense decreased by $2.0 million, from $4.0 million in 2000 to $2.0 million in 2001, due primarily to
the continued reduction in the amount of long-term debt outstanding under the Company's credit facility as described in Note 3 of Notes to Consolidated Financial Statements, as well as lower interest rates in 2001.
Financial Condition
Cash and Working Capital
Cash and cash equivalents as reported in the accompanying Consolidated Statements of Cash Flows consist of amounts held by the Company as well as the Company's proportionate share of amounts held by construction joint ventures. Cash held by the Company is available for general corporate purposes while cash held by construction joint ventures is available only for joint venture-related uses. Cash held by construction joint ventures is distributed from time to time to the Company and to the other joint venture participants in accordance with their percentage interest after the joint venture partners determine that a cash distribution is prudent. Cash distributions received by the Company from its construction joint ventures are then available for general corporate purposes. At December 31, 2002, 2001 and 2000, cash held by the Company and available for general corporate purposes was $11.2 million, $7.2 million and $34.0 million, respectively, and the Company's proportionate share of cash held by joint ventures and available only for joint venture-related uses was $35.8 million, $49.3 million and $61.8 million, respectively.
During 2002, the Company used $9.5 million of cash on hand to fund operating activities ($3.6 million), investing activities ($0.6 million), and to reduce debt by a net amount of $5.3 million. The $3.6 million in cash used by operating activities was due primarily to the need to fund working capital requirements on certain joint venture construction contracts where unapproved change orders and/or contract claims remain to be resolved. (See Note 1(d) of Notes to Consolidated Financial Statements.)
During 2001, the Company used $39.2 million of cash on hand to fund operating activities ($24.2 million); investing activities ($5.5 million), primarily for the acquisition of property and equipment; and financing activities ($9.5 million), primarily to reduce debt by a net amount of $9.8 million. Cash generated from operating activities decreased from a positive $0.8 million in 2000 to a negative $24.2 million in 2001 due primarily to the need to fund working capital requirements on certain Company construction contracts where unapproved change orders and/or contract claims remain to be resolved. (See Note 1(d) of Notes to Consolidated Financial Statements.)
During 2000, the Company generated $0.8 million in cash from operating activities and $0.1 million in cash from investing activities. The funds generated plus $7.4 million in cash on hand were used for financing activities ($8.3 million) primarily to reduce debt. Financing activities in 2000 include net proceeds of $37.3 million received from the issuance of Common Stock in connection with the recapitalization of the Company as discussed in Note 7 of Notes to Consolidated Financial Statements, as well as net proceeds of $7.1 million received from a refinancing of the Company's corporate headquarters building. These funds were primarily used to pay down debt.
During 2000, the Company's liquidity was significantly enhanced by the sale of 9,411,765 shares of Common Stock for an aggregate of $40 million (before fees and expenses) (see Note 7 of Notes to Consolidated Financial Statements) and by the refinancing of the Company's corporate headquarters building for $7.5 million (before fees and expenses) (see Note 3 of Notes to Consolidated Financial Statements). These financing transactions enabled the Company to reduce its dependence on bank debt to fund the working capital needs of its core construction operations, resulting in a significant reduction in interest expense. Also, in January 2002, the Company entered into an agreement with a new bank group to refinance its existing credit facility with a new $45 million revolving credit facility. In February 2003, the credit facility was amended to increase the revolving credit facility from $45 million to $50 million (see Note 3 of Notes to Consolidated Financial Statements), which will provide the Company with greater flexibility in providing the working capital needed to support the anticipated growth of the Company's construction activities. The financial covenants to which the Company is subject include, among other things, maintaining specified working capital, tangible net worth and operating profit levels, interest coverage minimums, and limitations on indebtedness, all as defined in the loan documents. Also, during the past three years, the Company has made substantial progress on its strategy for resolving several major construction claims and liquidating its real estate assets.
The Company had $115.9 million of working capital at the end of 2002 compared to $93.4 million at the end of 2001 and $80.5 million at the end of 2000. The working capital current ratio was 1.44:1 at the end of 2002 compared to 1.24:1 at the end of 2001 and 1.20:1 at the end of 2000.
Long-term Debt
Long-term debt was $12.1 million at the end of 2002, up from $7.5 million in 2001, and down compared to $17.2 million in 2000 and $41.1 million in 1999.
Stockholders' Equity
As more fully described in Note 7 of Notes to Consolidated Financial Statements, effective March 29, 2000, the Company completed a recapitalization which included the sale of 9,411,765 shares of Common Stock for an aggregate of $40 million in cash (before fees and expenses) and the exchange of 100% of its Redeemable Series B Cumulative Convertible Preferred Stock for an aggregate of 7,490,417 shares of Common Stock. The effect of the recapitalization on the Company's stockholders' equity was to increase stockholders' equity by approximately $76.2 million, from a negative net worth of approximately $36.6 million at December 31, 1999 to a positive net worth of approximately $39.6 million upon completion of the recapitalization.
The Company's book value per common share was $2.72 at December 31, 2002, compared to $2.40 at December 31, 2001, and $1.57 at December 31, 2000. The major factors impacting stockholders' equity during the three year period under review were the recapitalization completed in 2000, the net income recorded in all three years and, to a lesser extent, preferred dividends paid in-kind or accrued, and common stock options exercised. Also, the Company was required to recognize an additional minimum pension liability of approximately $13.7 million in 2002 and $5.9 million in 2001 in accordance with SFAS No. 87, "Employers' Accounting for Pensions" which resulted in an aggregate $19.6 million Accumulated Other Comprehensive Loss deduction in stockholders' equity. (See Note 10 of Notes to Consolidated Financial Statements.) Adjustments to the amount of this additional minimum pension liability will be recorded in future years based upon periodic re-evaluation of the funded status of the Company's pension plans.
Dividends
(a) Common Stock
There were no cash dividends declared or paid on the Company’s outstanding Common Stock during the three years ended December 31, 2002.
(b) $21.25 Preferred Stock
In conjunction with the covenants of the Company’s prior Credit Agreements, the Company was required to suspend the payment of quarterly dividends on its $21.25 Preferred Stock until certain financial criteria were met. Quarterly dividends on the $21.25 Preferred Stock have not been paid since 1995 (although they have been fully accrued due to the “cumulative” feature of the $21.25 Preferred Stock).
The aggregate amount of dividends in arrears is approximately $15,405,000 at December 31, 2002, which represents approximately $154.05 per share of $21.25 Preferred Stock or approximately $15.41 per Depositary Share and is included in “Other Long-term Liabilities” in the Consolidated Balance Sheets. Under the terms of the $21.25 Preferred Stock, the holders of Depositary Shares are entitled to elect two additional Directors when dividends have been deferred for more than six quarters, and they have done so at each of the last five Annual Meetings.
As of December 31, 2000, the financial criteria in the Company’s Credit Agreement which restricted the payment of dividends were satisfied, thereby making the resumption of dividends possible if the Company believed that its working capital was sufficient to warrant the resumption of payment of the regular dividend or any of the dividends
in arrears on the $21.25 Preferred Stock. The Company does not currently have any plans or target date for when this action may occur. This decision is based on the following circumstances:
A strong working capital position provides the Company the option of performing large projects without a joint venture partner or to assume the sponsoring partner position resulting in a larger proportionate interest and a greater share of joint venture profits.
A significant amount of working capital is dedicated to the funding requirements of the Company’s construction backlog, including collection of receivables, and the timely resolution of unapproved change orders and contract claims.
The Company is currently in the process of pursuing a strategy to profitably expand its construction business internally or through acquisition, either of which will likely require additional capital. In January 2003, the Company completed the acquisition of James A. Cummings, Inc. for $20.0 million (see Note 14 of Notes to Consolidated Financial Statements).
The Board of Directors does not believe that it is, or will be, proper or prudent to pay or commit to pay dividends on the $21.25 Preferred Stock for the foreseeable future, and it is not obligated to do so under the terms of the $21.25 Preferred Stock.
(c) Series B Preferred Stock
For an analysis of in-kind dividends paid on the Series B Preferred Stock for the period from December 31, 1999 to March 29, 2000, the date on which the holders of Series B Preferred Stock exchanged their shares of Series B Preferred Stock into shares of the Company’s Common Stock, see Note 8(b) of Notes to Consolidated Financial Statements.
Outlook
Construction Operations - The construction backlog at the end of 2002 was $990 million (or $1.160 billion when adjusted for the addition of backlog from the January 2003 acquisition of James A. Cummings, Inc.) compared to $1.214 billion at the end of 2001. This decrease is the result of the impact that the events of September 2001 and a continuation of the economic slowdown have had on private and public works contract awards during this period. The Company is expecting an improving new work award period once the economic and geopolitical picture begins to improve. The demand for the Company’s preconstruction services remains at a high level, and plans for public works construction at the local, state and federal levels remain strong in its market areas. With three years of record earnings behind it, the Company plans to continue to focus on optimizing value for its shareholders by actively pursuing higher margin projects in markets where it has considerable expertise and developing project opportunities through its strong client relationships, as well as managing its operations to achieve on time delivery, tight cost controls, safe working conditions and high quality standards. The Company is also continuing to pursue a strategy to profitably expand its construction business internally or through acquisition.
Recapitalization and Liquidity - With the successful completion on March 29, 2000 of the “Recapitalization” described in Note 7 of Notes to Consolidated Financial Statements and with three years of record earnings, the Company’s financial condition, including in particular its stockholders’ equity, working capital and liquidity, have improved significantly. In addition, the terms of the Credit Agreement were amended in February 2003 to increase the revolving credit facility from $45 million to $50 million and to extend the term of the Credit Agreement from January 2004 to June 2005. The Company will continue to actively pursue the favorable conclusion of various unapproved change orders and construction claims, to focus new construction work acquisition efforts on various niche markets and geographic areas where the Company has a proven history of success, and to continue to seek ways to control overhead expenses.
Management believes that cash generated from operations, existing credit lines and timely resolution and payment of various unapproved change orders and construction claims referred to above should be adequate to meet the Company’s funding requirements for at least the next twelve months.
New Accounting Pronouncements
In June 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". The FASB also issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an Amendment of FASB Statement No. 123".
SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and is effective for exit or disposal activities that are initiated after December 31, 2002. The Company expects that the adoption of the provisions of SFAS No. 146 will not have a material impact on its consolidated financial position or results of operations.
SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based compensation and amends the disclosure requirements prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation". As permitted under SFAS No. 148, the Company adopted the disclosure requirements in 2002 and plans to evaluate the effect of the remaining provisions of SFAS No. 148 in 2003.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's exposure to market risk for changes in interest rates relates primarily to the Company's revolving credit debt (see Note 3 of Notes to Consolidated Financial Statements) and short-term investment portfolio. As of December 31, 2002, the Company had $5.0 million borrowed under its revolving credit agreement and $30.0 million of short-term investments classified as cash equivalents.
The Company borrows under its bank revolving credit facility for general corporate purposes, including working capital requirements and capital expenditures. Borrowings under the bank credit facility bear interest at the applicable LIBOR or base rate, as defined, and therefore, the Company is subject to fluctuations in interest rates. If the average effective 2002 borrowing rate of 4.5% changed by 10% (or 0.45%) during the next twelve months, the impact, based on the Company's ending 2002 revolving debt balance, would be an increase or decrease in net income and cash flow of approximately $23,000.
The Company's short-term investment portfolio consists primarily of highly liquid instruments with maturities of three months or less.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Independent Auditors' Report, Consolidated Financial Statements, and Supplementary Schedules are set forth in Item 15 in this Report and are hereby incorporated herein.
ITEM 9.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
See Form 8-K dated April 16, 2002 for disclosure of matters related to our change in auditors.
PART III.
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to the directors of the Company is set forth in the section entitled "Election of Directors" in the definitive proxy statement in connection with the Annual Meeting of Stockholders to be held on May 15, 2003 (the "Proxy Statement"), which section is incorporated herein by reference. The Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2002 pursuant to Regulation 14A of the Securities and Exchange Act of 1934, as amended. Information relating to the executive officers of the Company is set forth in Part I of this report under the caption "Executive Officers of the Registrant".
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In response to Items 11-13, reference is made to the information to be set forth in the sections entitled "Election of Directors", "Ownership of Common Stock by Directors, Officers and Preferred Stock Nominees", "Certain Other Beneficial Holders", "Securities Authorized for Issuance Under Equity Compensation Plans" and "Certain Transactions" in the Proxy Statement, which are incorporated herein by reference.
PART IV.
ITEM 14.
ITEM 14. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures
The Company's principal executive officer and principal financial officer have evaluated the Company's disclosure controls and procedures (as such term is defined in paragraph (c) of the Exchange Act Rules 13a-14 and 15d-14) as of a date within 90 days of the filing date of this annual report on Form 10-K. In conjunction with their initial evaluation, they formed a Disclosure Controls and Procedures Committee to formalize the Company's disclosure controls and procedures. Based on their latest evaluation, they have concluded that the Company's disclosure controls and procedures are operating effectively.
(b) Changes in internal controls
There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their latest evaluation.
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
PERINI CORPORATION AND SUBSIDIARIES
(a)1. The following financial statements and supplementary financial information are filed as part of this report: Pages Financial Statements of the Registrant
Consolidated Balance Sheets as of December 31, 2002 and 2001 35 - 36
Consolidated Statements of Income for the years ended December 31, 2002, 2001 and 2000 37
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2002, 2001 38 and 2000
Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000 39 - 40
Notes to Consolidated Financial Statements 41 - 65
Independent Auditors' Report 66
(a)2. The following financial statement schedules are filed as part of this report: Pages
Independent Auditors' Report on Schedule 67
Schedule II - Valuation and Qualifying Accounts and Reserves 68
All other schedules are omitted because of the absence of the conditions under which they are required or because the required information is included in the Consolidated Financial Statements or in the Notes thereto.
(a)3. Exhibits
The exhibits which are filed with this report or which are incorporated herein by reference are set forth in the Exhibit Index which appears on pages 69 through 71. The Company will furnish a copy of any exhibit not included herewith to any holder of the Company's Common and Preferred Stock upon request.
(b) Reports on Form 8-K
A report on Form 8-K was filed on December 20, 2002 that reported on the Company's signing of a Stock Purchase and Sale Agreement to acquire James A. Cummings, Inc., a privately held construction company based in Fort Lauderdale, Florida, for $20 million in cash in "Item 5. Other Events" in said Form 8-K.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Perini Corporation (Registrant)
Dated: March 31, 2003 By: /s/Robert Band Robert Band President and Chief Operating 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 Company and in the capacities and on the dates indicated.
Signature Title Date
(i) Principal Executive Officer Ronald N. Tutor Chairman and Chief Executive Officer March 31, 2003
By: /s/Ronald N. Tutor Ronald N. Tutor
(ii) Principal Financial Officer Robert Band President and Chief Operating Officer March 31, 2003
By: /s/Robert Band Robert Band
(iii) Principal Accounting Officer Michael E. Ciskey Vice President and Controller March 31, 2003
By: /s/Michael E. Ciskey Michael E. Ciskey
(iv) Directors
Ronald N. Tutor ) Peter Arkley ) Robert Band ) /s/Robert Band Wayne L. Berman ) Robert Band Frederick Doppelt ) Attorney in Fact Robert A. Kennedy ) Dated: March 31, 2003 Michael R. Klein ) Raymond R. Oneglia )
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, Ronald N. Tutor, certify that:
1. I have reviewed this annual report on Form 10-K of Perini Corporation (the "registrant");
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 31, 2003 /s/Ronald N. Tutor
Ronald N. Tutor, Chairman and Chief Executive Officer
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, Robert Band, certify that:
1. I have reviewed this annual report on Form 10-K of Perini Corporation (the "registrant");
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 31, 2003 /s/Robert Band
Robert Band, President, Chief Operating Officer and Principal Financial Officer
Consolidated Balance Sheets
December 31, 2002 and 2001
(In thousands, except share data)
Assets 2002 2001 ------------ ------------ CURRENT ASSETS: Cash, including cash equivalents of $30,042 and $36,686 (Note 1) $ 47,031 $ 56,542 Accounts and notes receivable, including retainage of $66,284 and $97,610 218,172 318,174 Unbilled work (Note 1) 112,563 97,425 Land held for sale, net (Note 5) 2,173 11,740 Other current assets 1,992 1,949 ------------ ------------ Total current assets $381,931 $485,830 ------------ ------------
PROPERTY AND EQUIPMENT, at cost (Note 1): Land $ 489 $ 489 Buildings and improvements 13,496 12,850 Construction equipment 12,338 10,240 Other equipment 7,577 7,594 ------------ ------------ $ 33,900 $ 31,173
Less - Accumulated depreciation 19,858 18,768 ------------ ------------
Total property and equipment, net $ 14,042 $ 12,405 ------------ ------------
OTHER ASSETS (Notes 5 and 6) $ 6,416 $ 3,006 ------------ ------------
$402,389 $501,241 ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
Liabilities and Stockholders' Equity 2002 2001 -------------- -------------- CURRENT LIABILITIES: Current maturities of long-term debt (Note 3) $ 416 $ 10,249 Accounts payable, including retainage of $37,357 and $72,275 162,456 265,008 Deferred contract revenue (Note 1) 65,868 72,129 Accrued expenses 37,283 45,075 -------------- -------------- Total current liabilities $ 266,023 $ 392,461 -------------- --------------
LONG-TERM DEBT, less current maturities included above (Note 3) $ 12,123 $ 7,540 -------------- --------------
OTHER LONG-TERM LIABILITIES (Notes 6, 8 and 10) $ 37,594 $ 21,832 -------------- --------------
CONTINGENCIES AND COMMITMENTS (Note 2)
STOCKHOLDERS' EQUITY (Notes 1, 7, 8, 9 and 10): Preferred stock, $1 par value - Authorized - 1,000,000 shares Designated, issued and outstanding - 99,990 shares of $21.25 convertible exchangeable preferred stock ($24,998 aggregate liquidation preference) $ 100 $ 100 Series A junior participating preferred stock, $1 par value - Designated - 200,000 shares Issued - none - - Stock purchase warrants 2,233 2,233 Common stock, $1 par value - Authorized - 40,000,000 shares Issued - 22,724,664 shares 22,725 22,725 Paid-in surplus 95,546 97,671 Retained earnings (deficit) (13,417) (36,491) Less - common stock in treasury, at cost - 60,529 shares (965) (965) -------------- -------------- $ 106,222 $ 85,273 Accumulated other comprehensive loss (19,573) (5,865) -------------- -------------- Total stockholders' equity $ 86,649 $ 79,408 -------------- --------------
$ 402,389 $ 501,241 ============== ==============
Consolidated Statements of Income
For the Years Ended December 31, 2002, 2001 and 2000
(In thousands, except per share data)
2002 2001 2000 --------------- --------------- -------------
Revenues (Note 12) $ 1,085,041 $ 1,553,396 $ 1,105,660
Cost of Operations 1,026,391 1,495,834 1,053,328 --------------- --------------- -------------
Gross Profit $ 58,650 $ 57,562 $ 52,332
General and Administrative Expenses 32,770 28,061 24,977 --------------- --------------- -------------
INCOME FROM OPERATIONS (Note 12) $ 25,880 $ 29,501 $ 27,355
Other (Income) Expense, Net (Note 6) 520 227 (949) Interest Expense (Note 3) 1,485 2,006 3,966 --------------- --------------- -------------
Income before Income Taxes $ 23,875 $ 27,268 $ 24,338
Provision (Credit) for Income Taxes (Notes 1 and 4) 801 850 (43) --------------- --------------- -------------
NET INCOME $ 23,074 $ 26,418 $ 24,381 =============== =============== =============
NET INCOME AVAILABLE FOR COMMON STOCKHOLDERS (Note 1) $ 20,949 $ 24,293 $ 7,299 =============== =============== =============
BASIC EARNINGS PER COMMON SHARE (Note 1) $ 0.92 $ 1.07 $ 0.39 =============== =============== =============
DILUTED EARNINGS PER COMMON SHARE (Note 1) $ 0.91 $ 1.04 $ 0.39 =============== =============== =============
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 2002, 2001 and 2000
(In thousands, except per share data)
Accumulated Stock Retained Other Preferred Purchase Common Paid-In Earnings Treasury Comprehensive Stock Warrants Stock Surplus (Deficit) Stock Loss Total ----------------------------------------------------------------------------------------------------------------------------------------- Balance - December 31, 1999 $ 100 $ 2,233 $ 5,743 $43,561 $(87,290) $ (965) $ - $(36,618) ----------------------------------------------------------------------------------------------------------------------------------------- Net Income - - - - 24,381 - - 24,381
Preferred Stock dividends accrued ($21.25 per share*) - - - (2,125) - - - (2,125)
Series B Preferred Stock dividends in kind issued (Note 8) - - - (1,161) - - - (1,161)
Accretion related to Series B Preferred Stock (Note 8) - - - (96) - - - (96)
Net proceeds received from issuance of Common Stock (Note 7) - - 9,412 27,887 - - - 37,299
Exchange of Series B Preferred Stock for Common Stock (Note 7) - - 7,490 31,452 - - - 38,942
----------------------------------------------------------------------------------------------------------------------------------------- Balance - December 31, 2000 $ 100 $ 2,233 $ 22,645 $99,518 $(62,909) $ (965) $ - $ 60,622 ----------------------------------------------------------------------------------------------------------------------------------------- Net Income - - - - 26,418 - - 26,418
Other comprehensive income (loss): Minimum pension liability (Note 10) - - - - - - (5,865) (5,865) ----------- Total comprehensive income 20,553 -----------
Preferred Stock dividends accrued ($21.25 per share*) - - - (2,125) - - - (2,125)
Common Stock options exercised - - 80 278 - - - 358 ----------------------------------------------------------------------------------------------------------------------------------------- Balance - December 31, 2001 $ 100 $ 2,233 $ 22,725 $97,671 $(36,491) $ (965) $ (5,865) $ 79,408 ----------------------------------------------------------------------------------------------------------------------------------------- Net Income - - - - 23,074 - - 23,074
Other comprehensive income (loss): Minimum pension liability (Note 10) - - - - - - (13,708) (13,708) ----------- Total comprehensive income 9,366 -----------
Preferred Stock dividends accrued ($21.25 per share*) - - - (2,125) - - - (2,125)
----------------------------------------------------------------------------------------------------------------------------------------- Balance - December 31, 2002 $ 100 $ 2,233 $ 22,725 $95,546 $(13,417) $ (965) $ (19,573) $ 86,649 -----------------------------------------------------------------------------------------------------------------------------------------
*Equivalent to $2.125 per Depositary Share (see Note 8).
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2002, 2001 and 2000
(In thousands)
2002 2001 2000 ------------ ------------ ----------- Cash Flows from Operating Activities:
Net income $ 23,074 $ 26,418 $24,381
Adjustments to reconcile net income to net cash from operating activities -
Depreciation 2,457 1,915 1,617
Amortization of deferred debt expense and other deferred expenses 745 687 574
Cash provided from (used by) changes in components of working capital other than cash and current maturities of long-term debt:
(Increase) decrease in: Accounts and notes receivable 102,322 (49,253) (87,467) Unbilled work (15,138) (1,008) (25,850) Other current assets (43) 309 2,215 Increase (decrease) in: Accounts payable (102,552) 13,606 106,655 Deferred contract revenue (6,261) 4,159 (18,658) Accrued expenses (7,792) (18,656) 3,319
Other long-term liabilities (405) (2,321) (5,652)
Other items, net (39) (101) (332) ------------ ------------ -----------
NET CASH (USED BY) PROVIDED FROM OPERATING ACTIVITIES $ (3,632) $(24,245) $ 802 ------------ ------------ -----------
Cash Flows from Investing Activities:
Proceeds from sale of property and equipment $ 455 $ 199 $ 435
Acquisition of property and equipment (4,510) (4,528) (1,793)
Proceeds from (investment in) land held for sale, net 4,072 (1,126) 2,081
Investment in other activities (646) (57) (609) ------------ ------------ -----------
NET CASH (USED BY) PROVIDED FROM INVESTING ACTIVITIES $ (629) $ (5,512) $ 114 ------------ ------------ -----------
Consolidated Statements of Cash Flows (Continued)
For the Years Ended December 31, 2002, 2001 and 2000
(In thousands)
2002 2001 2000 ------------- -------------- ------------- Cash Flows from Financing Activities:
Proceeds from issuance of common stock, net $ - $ - $ 37,299
Proceeds from long-term debt 5,000 572 7,757
Reduction of long-term debt (10,250) (10,399) (53,390)
Proceeds from exercise of common stock options - 358 - ------------- -------------- -------------
NET CASH USED BY FINANCING ACTIVITIES $ (5,250) $ (9,469) $ (8,334) ------------- -------------- -------------
Net Decrease in Cash $ (9,511) $ (39,226) $ (7,418)
Cash and Cash Equivalents at Beginning of Year 56,542 95,768 103,186 ------------- -------------- -------------
Cash and Cash Equivalents at End of Year (Note (1)(j)) $ 47,031 $ 56,542 $ 95,768 ============= ============== =============
Supplemental Disclosures of Cash Paid During the Year For:
Interest $ 2,441 $ 2,063 $ 4,242 ============= ============== =============
Income tax payments $ 1,885 $ 1,130 $ 1,320 ============= ============== =============
Supplemental Disclosure of Noncash Transactions:
Dividends paid in shares of Series B Preferred Stock (Note 8) $ - $ - $ 1,161 ============= ============== =============
Exchange of Series B Preferred Stock into Common Stock at $5.50 per share (Note 7) $ - $ - $ 38,942 ============= ============== =============
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2002, 2001 and 2000
[1] Summary of Significant Accounting Policies
[a] Nature of Business
The Company was incorporated in 1918 as a successor to businesses which had been engaged in providing construction services since 1894. The Company currently provides general contracting, construction management and design-build services to private clients and public agencies throughout the United States and selected overseas locations. The Company’s construction business involves two basic segments or operations: building and civil. The general building and civil contracting services provided by the Company consist of planning and scheduling the manpower, equipment, materials and subcontractors required for the timely completion of a project in accordance with the terms and specifications contained in a construction contract. The Company provides these services by using traditional general contracting arrangements, such as fixed price, guaranteed maximum price and cost plus award fee contracts and, to a lesser extent, construction management or design-build contracting arrangements.
In an effort to limit its financial and/or operational risk on certain large or complex projects, the Company participates in construction joint ventures, often as sponsor or manager of the project, for the purpose of bidding and, if awarded, providing the agreed upon construction services. Each participant usually agrees in advance to provide a predetermined percentage of capital, as required, and to share in the same percentage of profit or loss of the project.
[b] Principles of Consolidation
The consolidated financial statements include the accounts of Perini Corporation and its wholly owned subsidiaries (the “Company”). All significant intercompany transactions and balances have been eliminated in consolidation.
Prior to 2002, the Company’s interests in construction joint ventures were accounted for on the equity method in the Consolidated Balance Sheets and on the proportionate consolidation method in the Consolidated Statements of Income. Beginning in 2002, construction joint venture interests are accounted for using the proportionate consolidation method in the Consolidated Balance Sheets as well as the Consolidated Statements of Income, whereby the Company’s proportionate share of each joint venture’s assets, liabilities, revenues and cost of operations are included in the appropriate classifications in the consolidated financial statements. The Company believes the change, which results in presenting all joint venture activity using a consistent methodology in both the Consolidated Balance Sheets and Consolidated Statements of Income, is preferable.
Although this change impacted various classifications within Current Assets and Current Liabilities in the Consolidated Balance Sheets and the Consolidated Statements of Cash Flows, it had no impact on net working capital or other categories of long-term assets or liabilities in the Consolidated Balance Sheets. It also had no impact on the Consolidated Statements of Income or basic or diluted earnings per common share for any period presented. Prior year Consolidated Balance Sheets and Consolidated Statements of Cash Flows have been restated to conform to the 2002 presentation.
[c] Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company’s construction business involves making significant estimates and assumptions in the normal course of business relating to its Company and joint venture construction contracts due to, among other things, the one-of-a-kind nature of most of its projects, long-term duration of its contract cycle and type of contract utilized. The most significant estimates with regard to these financial statements relate to the estimating of total forecasted construction contract revenues, costs and profits in accordance with accounting for long-term contracts (see Note 1(d) below) and estimating potential liabilities in conjunction with certain contingencies, including the outcome of pending or future litigation, arbitration or other dispute resolution proceedings (see Note 2 below). Actual results could differ in the near term from these estimates and such differences could have a material adverse effect on the Company’s financial condition, results of operations and cash flows.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2002, 2001 and 2000 (continued)
[1] Summary of Significant Accounting Policies (continued)
[d] Method of Accounting for Contracts
Revenues and profits from the Company’s contracts and construction joint venture contracts are generally recognized by applying percentages of completion for the period to the total estimated profits for the respective contracts. The percentages of completion are determined by relating the actual cost of the work performed to date to the current estimated total cost of the respective contracts. However, on construction management contracts, profit is generally recognized in accordance with the contract terms, usually on the as billed method, which is generally consistent with the level of effort incurred over the contract period. When the estimate on a contract indicates a loss, the Company’s policy is to record the entire loss during the accounting period in which it is estimated. In the ordinary course of business, at a minimum on a quarterly basis, the Company prepares updated estimates of the total forecasted revenue, cost and profit or loss for each contract. The cumulative effect of revisions in estimates of total cost or revenue, including unapproved change orders and claims, during the course of the work is reflected in the accounting period in which the facts that caused the revision become known. An amount equal to the costs incurred which are attributable to unapproved change orders and claims is included in the total estimated revenue when realization is probable. Profit from unapproved change orders and claims is recorded in the period such amounts are resolved.
In accordance with normal practice in the construction industry, the Company includes in current assets and current liabilities amounts related to construction contracts realizable and payable over a period in excess of one year. Deferred contract revenue represents the excess of billings to date over the amount of contract costs and profits recognized to date on the percentage of completion accounting method on certain contracts. Unbilled work represents the excess of contract costs and profits recognized to date on the percentage of completion accounting method over billings to date on the remaining contracts. Unbilled work at December 31, 2002 and 2001, consisted of the following (in thousands):
2002 2001 ------------- ------------ Unbilled costs and profits incurred to date $ 19,498 * $ 23,784 * Unapproved change orders 30,289 25,638 Claims 62,776 48,003 ------------- ------------ $112,563 $ 97,425 ============= ============
*Represents the excess of contract costs and profits recognized to date on the percentage of completion accounting method over billings to date on certain contracts.
The prerequisite for billing “Unbilled costs and profits incurred to date” is provided in the defined billing terms of each of the applicable contracts. The prerequisite for billing "Unapproved change orders" or "Claims" is the final resolution and agreement between the parties. The amount of unbilled work at December 31, 2002 estimated by management to be collected beyond one year is approximately $22.1 million.
[e] Property and Equipment
Land, buildings and improvements, construction and computer-related equipment and other equipment are recorded at cost. Depreciation is provided primarily using accelerated methods for construction and computer-related equipment over lives from three to seven years and the straight-line method for the remaining depreciable property over lives from three to thirty years.
[f] Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Recoverability is evaluated by comparing the carrying value of the asset to the undiscounted cash flows associated with the affected assets. When this comparison indicates that the carrying value of the asset is greater than the undiscounted cash flows, a loss is recognized for the difference between the carrying value and estimated fair value. Fair value is determined based on market quotes, if available, or is based on valuation techniques.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2002, 2001 and 2000 (continued)
[1] Summary of Significant Accounting Policies (continued)
[g] Goodwill
Effective January 1, 2002, the accounting for goodwill changed to comply with SFAS No. 142, “Goodwill and Other Intangible Assets”. Goodwill in the amount of approximately $1 million is included in “Other Assets” in the accompanying Consolidated Balance Sheets and represents the excess of the costs of subsidiaries acquired over the fair value of their net assets as of the dates of acquisition (see Note 6). While these amounts were being amortized on a straight-line basis over 40 years through 2001 at an annual rate of $63,000, amortization was discontinued in 2002 in accordance with SFAS No. 142. Goodwill is now subject to an assessment for impairment by applying a fair value test, at a minimum, on an annual basis. Based on the initial and annual impairment tests completed during 2002, the Company concluded that goodwill was not impaired. Therefore, the implementation of SFAS No. 142 did not have a material impact on the Company’s financial statements.
[h] Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes,” (see Note 4). Deferred income tax assets and liabilities are recognized for the effects of temporary differences between the financial statement carrying amounts and the income tax basis of assets and liabilities using enacted tax rates. In addition, future tax benefits, such as net operating loss carryforwards, are recognized currently to the extent such benefits are more likely than not to be realized as an economic benefit in the form of a reduction of income taxes in future years.
[i] Earnings Per Common Share
Earnings per common share amounts were calculated in accordance with SFAS No. 128, “Earnings Per Share”. Basic earnings per common share (“EPS”) was computed by dividing net income less dividends, other requirements related to Preferred Stock and the loss on the induced conversion of Series B Preferred in 2000 by the weighted average number of common shares outstanding. Diluted earnings per common share was computed by giving effect to all dilutive potential common shares outstanding. For all of the applicable periods presented, the assumed conversion of the Company’s Depositary Convertible Exchangeable Preferred Shares, Series B Preferred Shares and Stock Purchase Warrants into common stock was not included in the computation of diluted earnings per common share since the effect would be antidilutive.
Basic and diluted earnings per common share for each of the three years in the period ending December 31, 2002 are calculated as follows (in thousands except per share amounts):
2000, 2002 2001 As Restated ---------------- ---------------- ---------------
Net Income $ 23,074 $ 26,418 $ 24,381 ---------------- ---------------- --------------- Less: Accrued dividends on $21.25 Preferred Stock (Note 8) $ (2,125) $ (2,125) $ (2,125) Dividends declared on Series B Preferred Stock (Note 8) - - (1,161) Accretion deduction required to reinstate mandatory redemption value of Series B Preferred Stock over a period of 8-10 years (Note 8) - - (96) Loss on the induced conversion of Series B Preferred (Note 7) - - (13,700) ---------------- ---------------- --------------- $ (2,125) $ (2,125) $ (17,082) ---------------- ---------------- ---------------
Net income available for common stockholders $ 20,949 $ 24,293 $ 7,299 ================ ================ ===============
Weighted average shares outstanding for basic EPS 22,664 22,623 18,521 Effect of dilutive stock options outstanding 275 819 6 ---------------- ---------------- --------------- Weighted average shares outstanding for diluted EPS 22,939 23,442 18,527 ---------------- ---------------- ---------------
Basic earnings per Common Share $ 0.92 $ 1.07 $ 0.39 ================ ================ =============== Diluted earnings per Common Share $ 0.91 $ 1.04 $ 0.39 ================ ================ ===============
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2002, 2001 and 2000 (continued)
[1] Summary of Significant Accounting Policies (continued)
[i] Earnings Per Common Share (continued)
Subsequent to the issuance of the 2001 financial statements, management has determined that EITF D-42, The Effect on the Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock, required that the fair value of the common shares issued in excess of the common shares issuable under the original conversion terms as a result of the recapitalization discussed in Note 7, should have been subtracted from net income to determine net earnings available for common stockholders for the purpose of computing earnings per share. This charge had previously been excluded from the calculation. Accordingly, actual basic and diluted earnings per share for 2000 have been restated from $1.13 per share to $0.39 per share.
[j] Cash and Cash Equivalents
Cash equivalents include short-term, highly liquid investments with original maturities of three months or less.
Cash and cash equivalents as reported in the accompanying Consolidated Balance Sheets consist of amounts held by the Company that are available for general corporate purposes and the Company’s proportionate share of amounts held by construction joint ventures that are available only for joint venture-related uses. Cash held by construction joint ventures is distributed from time to time to the Company and to the other joint venture participants in accordance with their percentage interest after the joint venture partners determine that a cash distribution is prudent. Cash distributions received by the Company from its construction joint ventures are then available for general corporate purposes. At December 31, 2002 and 2001, cash and cash equivalents consisted of the following (in thousands):
2002 2001 ----------- -----------
Corporate cash and cash equivalents (available for general corporate purposes) $ 11,220 $ 7,164
Company's share of joint venture cash and cash equivalents (available only for joint venture purposes, including future distributions) 35,811 49,378 ----------- ----------- $ 47,031 $ 56,542 =========== ===========
[k] Stock-Based Compensation
The Company accounts for stock options granted to employees and directors using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and related Interpretations. No stock-based employee compensation cost is reflected in net income since all stock options granted by the Company had an exercise price equal to or greater than the fair market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation", to stock-based employee and director compensation (in thousands). The effect of applying SFAS No. 123 in this pro forma disclosure may not be indicative of future charges.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2002, 2001 and 2000 (continued)
[1] Summary of Significant Accounting Policies (continued)
[k] Stock-Based Compensation (continued)
Year Ended December 31, ----------------------------------------- 2002 2001 2000 ------------ ------------- -------------
Net income, as reported $ 23,074 $ 26,418 $ 24,381 Less: Total stock-based employee compensation expense determined under fair value based method for all awards (2,831) (2,846) (3,194) ------------ ------------- ------------- Net income, pro forma $ 20,243 $ 23,572 $ 21,187 ============ ============= =============
Basic earnings per share: As reported (See Note (1)(i)) $ 0.92 $ 1.07 $ 0.39 Pro forma $ 0.80 $ 0.94 $ 0.22
Diluted earnings per share: As reported (See Note (1)(i)) $ 0.91 $ 1.04 $ 0.39 Pro forma $ 0.79 $ 0.91 $ 0.22
[l] Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents approximate fair value due to the short term nature of these items. The carrying value of receivables and other amounts arising out of normal contract activities, including retentions, which may be settled beyond one year, is estimated to approximate fair value. See Note 3, “Financial Commitments” for disclosure of the fair value of long-term debt.
[m] Reclassifications
Certain prior year amounts have been reclassified to be consistent with the current year classifications.
[n] New Accounting Pronouncements
In June 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". The FASB also issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an Amendment of FASB Statement No. 123".
SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and is effective for exit or disposal activities that are initiated after December 31, 2002. The Company expects that the adoption of the provisions of SFAS No. 146 will not have a material impact on its consolidated financial position or results of operations.
SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based compensation and amends the disclosure requirements prescribed by SFAS No. 123, “Accounting for Stock-Based Compensation”. As permitted under SFAS No. 148, the Company adopted the disclosure requirements in 2002 and plans to evaluate the effect of the remaining provisions of SFAS No. 148 in 2003.
[2] Contingencies and Commitments
(a) Mergentime - Perini Joint Ventures vs. WMATA Matter
On May 11, 1990, contracts with two joint ventures in which Perini Corporation held a minority interest (“Joint Ventures”) were terminated by the Washington Metropolitan Area Transit Authority (“WMATA”) on two adjacent subway construction contracts in the District of Columbia. The contracts were awarded to the Joint Ventures in 1985 and 1986. However, Perini and Mergentime Corporation (“Mergentime”), the 60% managing partner, entered into an
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2002, 2001 and 2000 (continued)
[2] Contingencies and Commitments (continued)
(a) Mergentime - Perini Joint Ventures vs. WMATA Matter (continued)
agreement in 1987 under which Perini withdrew from the Joint Ventures and Mergentime assumed complete control over the performance of both projects. This agreement did not relieve Perini of its responsibilities to WMATA as a Joint Venture partner. After Perini withdrew from the Joint Ventures, Mergentime and WMATA were embroiled in a dispute regarding progress on the projects. Each party blamed the other for delays that were impacting both cost and progress and the parties were unable to resolve their dispute. Ultimately, both construction contracts were terminated by WMATA and WMATA retained Perini, acting independently, to complete both projects.
Subsequently, the Joint Ventures brought an action in the United States District Court for the District of Columbia against WMATA, seeking damages for delays, unpaid extra work and wrongful termination and WMATA brought an action against the Joint Ventures seeking damages for additional costs to complete the projects. After a bench trial before two District Court Judges (the initial Judge died before the matter could be concluded), the District Court found the Joint Ventures liable to WMATA for damages in the amount of approximately $16.5 million and WMATA liable to the Joint Ventures for damages in the amount of approximately $4.3 million.
The Joint Ventures appealed the judgment to the United States Court of Appeals for the District of Columbia (“Court of Appeals”), arguing, among other things, that the second District Court Judge had issued his final decision without fully familiarizing himself with the record of the initial District Court Judge. On February 16, 1999, the Court of Appeals vacated the District Court’s final judgment and ordered the successor District Court Judge to review the findings of the initial Judge and hold further hearings in regard to the Joint Venture’s affirmative claims. In addition, the Court of Appeals held that statutory interest on any of the claims will not accrue until final judgment is entered sometime in the future. Later in 1999, the case was transferred to a new successor District Court Judge.
On February 28, 2001, the new successor District Court Judge informed the parties that in the absence of a new trial, he could not certify adequate familiarity with the record to complete the remaining proceedings; therefore, he ordered that the Joint Ventures’ motion for a new trial be granted.
A new trial before the new successor District Court Judge was completed in January 2002 and a decision is still pending. The ultimate financial impact of the Judge's pending decision is not yet determinable; therefore, no provision for loss, if any, has been recorded in the financial statements.
(b) Tutor-Saliba-Perini Joint Venture vs. Los Angeles MTA Matter
During 1995, a joint venture, Tutor-Saliba-Perini (“TSP”), in which Perini Corporation is a 40% minority partner and Tutor-Saliba Corporation of Sylmar, CA is the 60% managing partner, filed a complaint in the Superior Court of the State of California for the County of Los Angeles against the Los Angeles County Metropolitan Transportation Authority (“MTA”) seeking to recover costs for extra work required by the MTA in connection with the construction of the Wilshire/Normandie Subway Station. TSP is seeking additional compensation from the MTA for claims related to the construction and in February 1999 the MTA countered with civil claims under the California False Claims Act against TSP, Tutor-Saliba Corporation, Perini Corporation and other parties. Ronald N. Tutor, the Chairman and CEO of Perini Corporation since March of 2000, is also the CEO and the sole stockholder of Tutor-Saliba Corporation (see Note 13).
Claims concerning the construction of the Wilshire/Normandie Subway Station were tried before a Jury in 2001. During trial, the Judge ruled that TSP had failed to comply with the Court’s prior discovery orders and the Judge penalized TSP for its alleged non-compliance by dismissing TSP’s claim and by ruling, without a Jury finding, that TSP was liable to the MTA for damages on the MTA’s counterclaim. The Judge then instructed the Jury that TSP was liable to the MTA and charged the Jury with the responsibility of determining the amount of the damages based on the Judge’s ruling. The Jury awarded the MTA approximately $29.6 million in damages.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2002, 2001 and 2000 (continued)
[2] Contingencies and Commitments (continued)
(b) Tutor-Saliba-Perini Joint Venture vs. Los Angeles MTA Matter (continued)
On March 26, 2002, the Judge amended the award, ordering TSP to pay the MTA an additional $33.4 million in costs and attorney fees, with the aggregate $63.0 million award subject to interest at an annual rate of 10% from the date of the award.
TSP and the other plaintiffs/defendants in counterclaim have appealed the Judge’s discovery sanction, the subsequent Jury award and the amended award. The ultimate financial impact of the Judge’s ruling and/or the awards is not yet determinable. Therefore, no provision for loss, if any, has been recorded in the financial statements.
(c) City of San Francisco vs. Tutor-Saliba, Perini & Buckley Joint Venture Matter
On November 1, 2002, the San Francisco City Attorney, on behalf of the City and County of San Francisco and the citizens of California (“Plaintiffs”), filed a civil action with a demand for a jury trial against Tutor-Saliba Corporation (“TSC”), the Tutor-Saliba, Perini & Buckley, Joint Venture (“JV”), Perini Corporation (“Perini”), Buckley & Company, Inc. (“Buckley”) and their bonding companies in the United States District Court in San Francisco relating to seven contracts for work on the expansion of the San Francisco International Airport. The Plaintiffs allege various overcharges, bidding violations, violations of minority contracting regulations, civil fraud, and violation of the California and San Francisco False Claims and California Unfair Competition Acts. In addition, the Plaintiffs allege that TSC has violated the United States Racketeer Influenced Corrupt Organizations Act. The Plaintiffs have asserted $30 million in damages and are seeking treble damages, various civil penalties and debarment of the JV and TSC from doing business with the City of San Francisco. The Plaintiffs have not allocated their claims for damages and penalties amongst the defendants or the seven contracts at issue, only two of which involved the JV. TSC is the managing partner of the JV, and in December 1997, Perini sold its entire 20% interest in the JV to TSC. TSC has agreed to indemnify Perini from any liability arising out of the joint venture, including legal fees and expenses.
(d) Perini/Kiewit/Cashman Joint Venture - Central Artery/Tunnel Project Matter
Perini/Kiewit/Cashman Joint Venture (“PKC”), a joint venture in which Perini Corporation holds a 56% interest and is the managing partner, is currently pursuing a series of claims for additional contract time and/or compensation against the Massachusetts Highway Department (“MHD”) for work performed by PKC on a portion of the Central Artery/Tunnel project in Boston, Massachusetts. The claims relate to the construction of the Northbound Mainline Central Artery Tunnel from Kneeland Street to Congress Street. During construction, MHD ordered PKC to perform changes to the work and issued related direct cost changes with an estimated value, excluding time delay and inefficiency costs, in excess of $100 million. In addition, PKC encountered a number of unforeseen conditions during construction that greatly increased PKC’s cost of performance.
Certain of PKC’s claims have been presented to a Disputes Review Board (“DRB”) which consists of three construction experts chosen by the parties. To date, the DRB has ruled on a binding basis that PKC is entitled to additional compensation for its contract time delay claim in the amount of $17.4 million. A Judge of the Massachusetts Superior Court has issued a decision upholding the DRB’s binding award to PKC. Although MHD challenged several of the DRB’s decisions relative to the contract time delay award discussed above, PKC received a favorable ruling on March 20, 2002 from the Superior Court of the Commonwealth of Massachusetts that approved PKC’s request to have MHD comply with the DRB’s decision to award the $17.4 million for the time delay. The MHD has appealed the Superior Court decision to the Appeals Court of the Commonwealth of Massachusetts.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2002, 2001 and 2000 (continued)
[2] Contingencies and Commitments (continued)
(d) Perini/Kiewit/Cashman Joint Venture - Central Artery/Tunnel Project Matter (continued)
The DRB has also ruled on a binding basis that PKC is entitled to additional compensation for impacts and inefficiencies caused by MHD to PKC’s underpinning work in the amount of $5.6 million and that PKC is entitled to additional compensation for impacts and inefficiencies caused by MHD to PKC’s utility work in the amount of $11.5 million. PKC has filed applications in these actions seeking to confirm the awards and MHD has filed civil actions in Massachusetts Superior Court seeking to vacate these awards.
Under the Dispute Resolution Rules of the contract, either party may periodically terminate the services of some or all of the DRB members provided that members who are removed under this provision will remain on the DRB through the completion of any then pending claims. The MHD has chosen to remove the current DRB members under this provision and those members are in the process of completing hearings on all pending claims. Although the replacement DRB members have been agreed upon, proceedings before the current DRB and the new DRB have been postponed pending resolution of the current negotiations discussed below.
The pending claims yet to be decided by the current/replacement DRB on a binding basis have an anticipated value of $43 million. The remaining claims to be decided by the replacement DRB on a non-binding basis have an anticipated value of $80 million.
On August 14, 2002 the Massachusetts Attorney General’s office, pursuant to its authority under the Massachusetts False Claims Act, served a Civil Investigative Demand (“CID”) on Perini and the other joint venture partners. The CID sought the production of certain construction claims documentation in connection with the Central Artery/Tunnel Contract No. C11A1. PKC vigorously denies that it submitted any false claims and is cooperating with the Attorney General’s Office in the ongoing investigation
In December 2002, PKC and MHD entered into an agreement whereby the parties agreed to attempt to resolve by negotiation and mediation all of the outstanding claims on the project. As part of the agreement, the MHD recommended for approval by the Massachusetts Turnpike Authority a contract modification that provides for provisional payments to PKC totaling $25 million against PKC’s outstanding claims. To date, PKC has received $23.75 million of those provisional payments. The parties also agreed to stay the pending litigation and DRB proceedings during the negotiations. The ultimate financial impact of resolving all of the claims on this project is not yet determinable.
(e) $21.25 Preferred Shareholders Class Action Lawsuit
On May 3, 2001 the Company, including several of its current and former directors (“Defendant Directors”), was served with a complaint entitled Frederick Doppelt, Arthur I. Caplan and Michael Miller v. Perini Corporation, et al, Supreme Court of the State of New York, County of New York, Civil Action No. 602156/01. Each plaintiff is a holder of the Company’s $21.25 Convertible Exchangeable Preferred Stock (“$21.25 Preferred Stock”). One plaintiff, Mr. Doppelt, is a current Director of the Company and one plaintiff, Mr. Caplan, is a former Director of the Company. Plaintiffs purport to bring the action individually and on behalf of the entire class of holders of the $21.25 Preferred Stock.
The Plaintiffs have asserted claims for breach of contract, breach of fiduciary duty, fraud and negligent misrepresentation. The Plaintiffs principally allege that the Company and its Defendant Directors improperly authorized the exchange of Series B Preferred Stock for Common Stock without first paying all accrued dividends on the $21.25 Preferred Stock. More specifically, Plaintiffs allege that the Company and its Defendant Directors violated the terms of the $21.25 Preferred Stock when, in March 2000, the Company authorized the exchange of Series B Preferred Stock for Common Stock. The Plaintiffs further allege that the Company and its Defendant Directors issued a false and misleading prospectus in 1987 relating to the issuance of the $21.25 Preferred Stock. The Plaintiffs seek payment of accrued dividends, claiming they are owed approximately $11.7 million as of May 3, 2001, and other
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2002, 2001 and 2000 (continued)
[2] Contingencies and Commitments (continued)
(e) $21.25 Preferred Shareholders Class Action Lawsuit (continued)
unspecified punitive and exemplary damages.
On May 23, 2001, the Company and the Defendant Directors removed the action from the Supreme Court of New York to the United States District Court for the Southern District of New York. On June 26, 2001, the Plaintiffs filed an Amended Complaint whereby the Plaintiffs limited their Class Action to an action for breach of contract against the Company and an action for breach of fiduciary duty against the Defendant Directors. The Company and the Defendant Directors moved to dismiss all of Plaintiffs’ claims. On March 12, 2002, all claims against the Company and the Defendant Directors were dismissed by the United States District Court for the Southern District of New York.
In April 2002, the Plaintiffs appealed the dismissal to the United States Court of Appeals for the Second Circuit. On December 23, 2002, the Plaintiffs’ appeal was dismissed by the United States Court of Appeals for the Second Circuit.
On October 15, 2002, the Plaintiffs filed a new action for breach of fiduciary duty against the Defendant Directors in the United States District Court for the District of Massachusetts. On January 6, 2003, the Defendant Directors moved to dismiss all of the Plaintiffs’ Massachusetts claims. The Defendant Directors are awaiting the Plaintiffs’ response.
(f) Other
Contingent liabilities also include liability of contractors for performance and completion of both Company and joint venture construction contracts. In addition to the legal matters described above, the Company is involved in various lawsuits, arbitration and alternative dispute resolution (“ADR”) proceedings. In the opinion of management, the resolution of these proceedings will not have a material effect on the Company’s results of operations or financial condition.
[3] Financial Commitments
Long-term Debt
Long-term debt of the Company at December 31, 2002 and 2001 consists of the following (in thousands):
2002 2001 ------------ ------------
Borrowing under revolving credit facility at an average rate of 4.5% in 2002 $ 5,000 $ - Term loan under credit facility at an average rate of 6.8% in 2001 - 9,764 Mortgage on corporate headquarters building, at a rate of approximately 9%, payable in equal monthly installments over a ten year period, with a balloon payment of approximately $5.3 million in 2010 7,162 7,322 Other indebtedness 377 703 ------------ ------------ Total $ 12,539 $ 17,789 Less - current maturities 416 10,249 ------------ ------------ Net long-term debt $ 12,123 $ 7,540 ============ ============
Payments required under these obligations amount to approximately $416,000 in 2003, $272,000 in 2004, $5,241,000 in 2005, $241,000 in 2006, $247,000 in 2007 and $6,122,000 in 2008 and beyond.
On January 23, 2002, the Company entered into an agreement with two banks to refinance its former credit facility with a new credit agreement (the “Credit Agreement”). The Credit Agreement provides for a $45 million revolving credit facility through January 2004 which, if not extended or repaid, converts amounts then outstanding to a three year term
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2002, 2001 and 2000 (continued)
[3] Financial Commitments (continued)
loan with equal quarterly principal payments.
The Credit Agreement provides that the Company can choose from interest rate alternatives including a prime-based rate, as well as options based on LIBOR (London inter-bank offered rate). Up to $5.0 million of the unborrowed revolving commitment is available for letters of credit.
The Credit Agreement requires, among other things, maintaining specified working capital, tangible net worth and operating profit levels, interest coverage minimums, and limitations on indebtedness. The Credit Agreement also provides that collateral shall consist of all available assets not included as collateral in other agreements.
In February 2003, the terms of the Credit Agreement were amended to increase the revolving credit facility from $45 million to $50 million; to extend the term of the Credit Agreement from January 2004 to June 2005; to increase the amount of unborrowed revolving commitment available for letters of credit from $5.0 million to $7.5 million; and to adjust certain financial covenants. Other terms of the Credit Agreement remained the same, including the provision that amounts due in June 2005, if not extended or repaid, convert to a three year term loan.
The fair value of the balance outstanding under the Credit Agreement approximates the carrying value due to the variable nature of the interest rates. For fixed rate debt, fair value is determined based on discounted cash flows for the debt at Company’s current incremental borrowing rate for similar types of debt. The estimated fair value of fixed rate debt at December 31, 2002 is $8.2 million.
Leases
The Company leases certain construction equipment, vehicles and office space under non-cancelable operating leases. Future minimum rent payments under non-cancelable operating leases as of December 31, 2002 are as follows (in thousands):
Amount ------------
2003 $ 3,595 2004 3,036 2005 2,516 2006 1,432 2007 802 Thereafter 1,301 ------------ Subtotal $ 12,682
Less - Sublease rental agreements (836) ------------
Total $ 11,846 ============
Rental expense under long-term operating leases of construction equipment, vehicles and office space was $3,781,000 in 2002, $3,146,000 in 2001 and $2,567,000 in 2000.
Although not material to the Company's consolidated financial position or results of operations, the Company also leases certain construction equipment under capital lease arrangements from time to time. Amounts relating to capital leases are included in the accompanying Consolidated Balance Sheets under "Construction Equipment" and "Long-term Debt".
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2002, 2001 and 2000 (continued)
[4] Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109. This standard determines deferred income taxes based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities, given the provisions of enacted tax laws.
The provision (credit) for income taxes expense is comprised of the following (in thousands):
Federal State Foreign Total ----------- ------------- ------------ ------------ Current $ (249) $ 1,050 $ - $ 801 Deferred - - - - ----------- ------------- ------------ ------------ $ (249) $ 1,050 $ - $ 801 =========== ============= ============ ============ Current $ 360 $ 490 $ - $ 850 Deferred - - - - ----------- ------------- ------------ ------------ $ 360 $ 490 $ - $ 850 =========== ============= ============ ============ Current $ 580 $ 209 $ (832) $ (43) Deferred - - - - ----------- ------------- ------------ ------------ $ 580 $ 209 $ (832) $ (43) =========== ============= ============ ============
The table below reconciles the difference between the statutory federal income tax rate and the effective rate provided for income before income taxes in the consolidated statements of income.
2002 2001 2000 ------------- ------------ -------------
Statutory federal income tax rate 35% 35% 34% State income taxes, net of federal tax benefit 3 1 1 Foreign taxes 0 0 (3) Recognition of tax benefit (35) (33) (32) ------------- ------------ ------------- Effective tax rate 3% 3% 0% ============= ============ =============
The following is a summary of the significant components of the Company's deferred tax assets and liabilities as of December 31, 2002 and 2001 (in thousands):
2002 2001 ------------ ------------ Deferred Tax Assets Provision for estimated real estate losses $ 175 $ 7,728 Contract losses 1,985 231 Timing of expense recognition 383 3,026 Net operating loss and capital loss carryforwards 33,689 31,759 Alternative minimum tax credit carryforwards 2,960 3,310 General business tax credit carryforwards 3,045 3,533 Other, net 953 868 ------------ ------------ $ 43,190 $ 50,455 Valuation allowance for deferred tax assets* (28,208) (35,854) ------------ ------------ Deferred tax assets $ 14,982 $ 14,601 ------------ ------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2002, 2001 and 2000 (continued)
[4] Income Taxes (continued)
2002 2001 ------------ ------------ Deferred Tax Liabilities Joint ventures - construction $ (14,569) $ (11,999) Joint ventures - real estate - (29) Capitalized carrying charges (413) (2,573) ------------ ------------ Deferred tax liabilities $ (14,982) $ (14,601) ------------ ------------
Net deferred tax asset (liability) $ - $ - ============ ============
* A valuation allowance is provided to reduce the deferred tax assets to a level which, more likely than not, will be realized. The ultimate realization of deferred tax assets is dependent on the generation of future taxable income during the periods in which those temporary differences become deductible. The net deferred tax assets reflect management’s estimate of the amount which will, more likely than not, be realized from future taxable income.
As a result of not providing federal income tax benefit applicable to losses recorded in certain prior years for financial reporting purposes, benefit from these losses is realized in 2002, 2001 and 2000 by not having to provide federal income tax of approximately $8.5 million, $9.0 million and $8.0 million, respectively. At December 31, 2002, approximately $79 million of future pretax book earnings could benefit from minimal, if any, federal tax provisions.
At December 31, 2002, the Company has unused tax credits and net operating loss carryforwards for income tax reporting purposes which expire as follows (in thousands):
Unused Net Operating Investment Loss Tax Credits Carryforwards -------------- ----------------
2003 $ 3,045 $ - 2004 - 2006 - 1,404 2007 - 2021 - 94,849 -------------- ---------------- $ 3,045 $ 96,253 ============== ================
Net operating loss carryforwards and unused tax credits may be limited in the event of certain changes in ownership interests of significant stockholders. In addition, approximately $1.4 million of the net operating loss carryforwards can only be used against the taxable income of the corporation in which the loss was recorded for tax and financial reporting purposes.
[5] Land Held for Sale, Net
Effective June 30, 1999, management adopted a plan to withdraw completely from the real estate development business and to wind down the operations of Perini Land and Development Company ("PL&D"), the Company's wholly owned real estate development subsidiary. Accordingly, both the historical and current real estate results were presented as a discontinued operation in accordance with accounting principles generally accepted in the United States of America. A $99,311,000 non-cash provision, which represents the estimated loss on disposal of this business segment, was recorded at that time. Although the Company had a reasonable expectation that the plan, when adopted, could be executed within a twelve-month period, the plan was not entirely completed because potential buyers who had executed purchase and sale agreements with the Company withdrew from the purchase of two properties, namely the bulk sale of the Massachusetts properties and the sale of the Perini Central property in Phoenix, AZ. In addition, a program to pursue the bulk sale of the Sabino Springs property in Tucson, Arizona took longer than originally anticipated. With the sale
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2002, 2001 and 2000 (continued)
[5] Land Held for Sale, Net (continued)
of the Perini Central property in 2001 and the bulk sale of the Sabino Springs property in the fourth quarter of 2002, the remaining land to be sold at December 31, 2002 consists of certain fully-developed parcels in Raynham, Massachusetts. Management's current plan is to continue to market the remaining land for sale as a bulk sale or as individual parcels over an estimated 36 to 48 month "sell off" period.
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" and management's revised plans, the remaining inventory of land has been classified as "Land held for sale, net" in the accompanying Consolidated Balance Sheets as of December 31, 2002 with the amount estimated to be sold during the next twelve months included in Current Assets and the balance included in "Other Assets" (see Note 6 "Other Assets"). Operating results from the remaining land are included in "Other (Income) Expense, Net".
Real estate revenues related to continuing operations were $8,304,000 in 2002 which were offset by related costs and expenses of a similar amount. Real estate revenues related to discontinued operations were $1,936,000 in 2001 and $3,491,000 in 2000. Also, in accordance with SFAS No. 144, land held for sale is stated at the lower of its carrying amount ($5,348,000) or its fair value less cost to sell. A provision to reflect a write-down of the carrying amount of the remaining land to fair value less cost to sell was not required during 2002.
[6] Other Assets, Other Long-term Liabilities and Other (Income) Expense, Net
Other Assets, Other Long-term Liabilities and Other (Income) Expense, Net consist of the following (in thousands) for the periods presented:
Other Assets 2002 2001 ------------- ------------- Land held for sale, net (Note 5) $ 3,175 $ - Deferred expenses 1,801 1,900 Goodwill (Note 1) 1,017 1,017 Other investments 63 63 Intangible asset (Note 10) 360 26 ------------- ------------- $ 6,416 $ 3,006 ============= =============
Other Long-term Liabilities 2002 2001 ------------- ------------- Accrued dividends on $21.25 Preferred Stock (Note 8) $ 15,405 $ 13,280 Employee benefit related liabilities 2,256 2,661 Minimum pension liability adjustment (Note 10) 19,933 5,891 ------------- ------------- $ 37,594 $ 21,832 ============= =============
Other (Income) Expense, Net 2002 2001 2000 ------------- ------------- ------------ Interest income $ (297) $ (404) $ (1,216) Bank fees 302 328 341 Miscellaneous (income) expense, net 515 303 (74) ------------- ------------- ------------ $ 520 $ 227 $ (949) ============= ============= ============
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2002, 2001 and 2000 (continued) [7] Recapitalization
On March 29, 2000 (the “Closing Date”), the Company completed the sale of 9,411,765 shares of its common stock, par value $1.00 (the “Common Stock”), for an aggregate of $40 million, or $4.25 per share (the “Purchase”), to an investor group led by Tutor-Saliba Corporation (“TSC”), and including O&G Industries, Inc. (“O&G”), and National Union Fire Insurance Company of Pittsburgh, Pa., a wholly owned subsidiary of American International Group, Inc. (“National Union” and together with TSC and O&G, the “New Investors”) pursuant to a Securities Purchase Agreement dated as of February 5, 2000 by and among the Company and the New Investors. Tutor-Saliba Corporation is owned and controlled by Ronald N. Tutor, who serves as Chairman of the Company’s Board of Directors and Chief Executive Officer. (See Note 13 for disclosure of “Related Party Transactions” between the New Investors and the Company.)
In connection with the Purchase, TSC acquired 2,352,942 shares of Common Stock for a total consideration of $10,000,000, O&G acquired 2,352,941 shares of Common Stock for a total consideration of $10,000,000 and National Union acquired 4,705,882 shares of Common Stock for a total consideration of $20,000,000.
Concurrent with the closing of the Purchase and as a condition thereto, the Company converted, pursuant to what was considered to be an induced conversion from an accounting perspective, 100% of its Redeemable Series B Cumulative Convertible Preferred Stock (the “Series B Preferred Stock”) (which had a current accreted face amount of approximately $41.2 million) for an aggregate of 7,490,417 shares of common stock at an exchange price of $5.50 per share (the “Exchange” and together with the Purchase, the “Transaction”) pursuant to certain Exchange Agreements by and between the Company and each of The Union Labor Life Insurance Company, acting on behalf of its Separate Account P (“ULLICO”), PB Capital Partners, L.P. (“PB Capital”) and The Common Fund for Non-Profit Organizations (“The Common Fund”). The holders of the Series B Preferred Stock had previously been entitled to convert their shares to common stock at an exchange price of $9.68. The Company recognized a charge to earnings available to common shareholders of $13.7 million relative to this transaction in the Company’s calculation of basic and diluted earnings per share in 2000 (see Note (1)(i)).
In connection with the Transaction, the Company amended its By-Laws to remove provisions creating an Executive Committee of the Board of Directors and granting certain powers to it and amended its Restated Articles of Organization as of the Closing Date to increase the number of authorized shares of Common Stock from 15,000,000 shares to 40,000,000 shares and to amend the Series B Preferred Stock Certificate of Vote. The Company also entered into a Shareholders’ Agreement and a Registration Rights Agreement, each by and among the Company, the New Investors, Ronald N. Tutor, BLUM Capital Partners, L.P., PB Capital, The Common Fund and ULLICO dated as of the Closing Date. The Shareholders’ Agreement contains provisions that define, among other things, certain put and call rights and rights of first refusal between National Union and TSC, tag-along rights of the New Investors and former holders of Series B Preferred Stock and certain procedures to protect the Company’s use of its net operating losses (“NOLs”) for tax purposes. Since the Common Stock issued in connection with the Transaction was not registered under the Securities Act, the Registration Rights Agreement contains provisions that define the rights of the New Investors and former holders of Series B Preferred Stock to require the Company, under certain circumstances, to register some or all of the shares under the Securities Act after March 29, 2003. In addition, the Company entered into an Amendment to the Shareholder Rights Agreement dated as of the Closing Date whereby the Transaction would not trigger the dilutive provisions of the Agreement.
A Special Committee of the Company’s Board of Directors approved the Transaction after receiving a fairness opinion from an investment banking firm. A majority of outstanding common shares, including a majority of shares held by disinterested shareholders, were voted in favor of the Transaction at a Special Meeting of Stockholders held on March 29, 2000.
The shares of Common Stock issued in the Purchase represent approximately 42% of the Company’s voting rights and the New Investors have the right to nominate three members to the Company’s Board of Directors. The former holders of the Series B Preferred Stock now control approximately 33% of the Company’s voting rights and continue to be entitled to nominate two members to the Company’s Board of Directors.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2002, 2001 and 2000 (continued)
[7] Recapitalization (continued)
In connection with the Transaction and as a condition thereto, the Company also entered into an Amended and Restated Credit Agreement with its lenders that extended the credit facility from January 2001 to January 2003 (see Note 3). The effect of the Transaction on Stockholders’ Equity was to increase Stockholders’ Equity by approximately $76.2 million, $37.3 million from the Purchase (gross proceeds of $40.0 million less related capital expenses of $2.7 million) and $38.9 million from the Exchange (current accreted value of $41.2 million less non-accreted capital expenses of $2.3 million). See the Consolidated Statement of Stockholders’ Equity for the year ended December 31, 2000.
[8] Capital Stock and Stock Purchase Warrants
(a) $21.25 Convertible Exchangeable Preferred Stock ("$21.25 Preferred Stock")
In June 1987, net proceeds of approximately $23,631,000 were received from the sale of 1,000,000 Depositary Convertible Exchangeable Preferred Shares (each Depositary Share representing ownership of 1/10 of a share of $21.25 Convertible Exchangeable Preferred Stock, $1 par value) at a price of $25 per Depositary Share. Annual dividends are $2.125 per Depositary Share and are cumulative. Generally, the liquidation preference value is $25 per Depositary Share plus any accumulated and unpaid dividends. The $21.25 Preferred Stock of the Company, as evidenced by ownership of Depositary Shares, is convertible at the option of the holder, at any time, into Common Stock of the Company at a conversion price of $37.75 per share of Common Stock. The $21.25 Preferred Stock is redeemable at the option of the Company at any time at $25 per share plus any unpaid dividends. The $21.25 Preferred Stock is also exchangeable at the option of the Company, in whole but not in part, on any dividend payment date into 8 1/2% convertible subordinated debentures due in 2012 at a rate equivalent to $25 principal amount of debentures for each Depositary Share. In conjunction with the covenants of certain of the Company’s prior Credit Agreements, the Company was required to suspend the payment of quarterly dividends on its $21.25 Preferred Stock (equivalent to $2.125 per Depositary Share) until certain financial criteria were met. Dividends on the $21.25 Preferred Stock have not been declared since 1995 (although they have been fully accrued due to the “cumulative” feature of the $21.25 Preferred Stock). The aggregate amount of dividends in arrears is approximately $15,405,000 at December 31, 2002, which represents approximately $154.05 per share of $21.25 Preferred Stock or approximately $15.41 per Depositary Share and is included in “Other Long-term Liabilities” in the accompanying Consolidated Balance Sheets. Under the terms of the $21.25 Preferred Stock, the holders of the Depositary Shares were entitled to elect two additional Directors since dividends had been deferred for more than six quarters and have done so at each of the last five Annual Meetings of Stockholders.
(b) Redeemable Series B Cumulative Convertible Preferred Stock
At a special stockholders’ meeting on January 17, 1997, the Company’s stockholders approved two proposals that allowed the Company to close an equity transaction with a private investor group. The transaction included, among other things, classification by the Board of Directors of 500,000 shares of Preferred Stock of the Company as Redeemable Series B Cumulative Convertible Preferred Stock, par value $1.00 per share, (the “Series B Preferred Stock”), issuance of 150,150 shares of Series B Preferred Stock at $200 per share (or $30 million) to the investor group, (with the remainder of the shares set aside for possible future payment-in-kind dividends to the holders of the Series B Preferred Stock), amendments to the Company’s By-Laws that redefined the Executive Committee and added certain powers (generally financial in nature), including the power to give overall direction to the Company’s Chief Executive Officer, appointment of three new members, recommended by the investor group, to the Board of Directors, and appointment of these same new directors to constitute a majority of the Executive Committee referred to above. Tutor-Saliba Corporation, a corporation controlled by the Chairman of the Board of Directors of the Company, who was also a member of the Executive Committee, is a participant in certain construction joint ventures with the Company (see Note 13 “Related Party Transactions”).
In-kind dividends on the Series B Preferred Stock were paid at an annual rate of 10% of the liquidation preference of $200.00 per share with additional shares of Series B Preferred Stock compounded on a quarterly basis. According to the terms of the Series B Preferred Stock, it (i) ranked junior in cash dividend and
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2002, 2001 and 2000 (continued)
[8] Capital Stock and Stock Purchase Warrants (continued)
(b) Redeemable Series B Cumulative Convertible Preferred Stock (continued)
liquidation preference to the $21.25 Convertible Exchangeable Preferred Stock and senior to Common Stock, (ii) provided that no cash dividends will be paid on any shares of Common Stock except for certain limited dividends beginning in 2001, (iii) was convertible into shares of Common Stock at an initial conversion price of approximately $9.68 per share (equivalent to 3,101,571 shares on January 17, 1997), (iv) had the same voting rights as shareholders of Common Stock immediately equal to the number of shares of Common Stock into which the Series B Preferred Stock could be converted, (v) generally had a liquidation preference of $200 per share of Series B Preferred Stock, (vi) was optionally redeemable by the Company after three years at a redemption price equal to the liquidating value per share and higher amounts if a Special Default, as defined, had occurred, (vii) was mandatorily redeemable by the Company if a Special Default had occurred and a holder of the Series B Preferred Stock requested such a redemption, (viii) was mandatorily redeemable by the Company for approximately one-third of the shares still outstanding on January 17, 2005 and one-third of the shares in each of the next two years.
The initial proceeds ($30,030,000) received upon the issuance of 150,150 Series B Preferred Shares were reduced by related expenses of approximately $3.5 million. Due to the redeemable feature of the Series B Preferred Stock, this reduction had to be added back (or accreted) to reinstate its mandatory redemption value over a period of 8-10 years, with an offsetting charge to paid-in surplus.
Concurrent with the Purchase described in Note 7 above and as a condition thereto, the Company exchanged 100% of its Series B Preferred Stock for Common Stock, $1.00 par value. See Note 7 for details of the Exchange and other changes related to the Series B Preferred Stock.
An analysis of Series B Preferred Stock transactions from December 31, 1999 to the March 29, 2000 Exchange date follows:
Number of Shares Amount ---------------- --------------- (in thousands) Balance at December 31, 1999 200,184 $ 37,685 10% in-kind dividends issued 5,802 1,161 Accretion - 96 ---------------- --------------- Balance March 29, 2000 205,986 $ 38,942 ================ ===============
(c) Series A Junior Participating Preferred Stock
Under the terms of the Company’s Shareholder Rights Plan, as amended, the Board of Directors of the Company declared a distribution on September 23, 1988 of one Preferred Stock purchase right (a “Right”) for each outstanding share of Common Stock. Under certain circumstances, each Right will entitle the holder thereof to purchase from the Company one one-hundredth of a share (a “Unit”) of Series A Junior Participating Cumulative Preferred Stock, $1 par value (the “Preferred Stock”), at an exercise price of $100 per Unit, subject to adjustment. The Rights will not be exercisable or transferable apart from the Common Stock until the earlier to occur of (i) 10 days following a public announcement that a person or group (an “Acquiring Person”) has acquired 20% or more of the Company’s outstanding Common Stock (the “Stock Acquisition Date”), (ii) 10 business days following the announcement by a person or group of an intention to make an offer that would result in such persons or group becoming an Acquiring Person or (iii) the declaration by the Board of Directors that any person is an “Adverse Person”, as defined under the Plan. The Rights will not have any voting rights or be entitled to dividends.
Upon the occurrence of a triggering event as described above, each Right will be entitled to that number of Units of Preferred Stock of the Company having a market value of two times the exercise price of the Right. If the Company is acquired in a merger or 50% or more of its assets or earning power is sold, each Right will be entitled to receive Common Stock of the acquiring company having a market value of two times the exercise
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2002, 2001 and 2000 (continued)
[8] Capital Stock and Stock Purchase Warrants (continued)
(c) Series A Junior Participating Preferred Stock (continued)
price of the Right. Rights held by such a person or group causing a triggering event may be null and void. The Rights are redeemable at $.02 per Right by the Board of Directors at any time prior to the occurrence of a triggering event.
On January 17, 1997, the Board of Directors amended the Company’s Shareholder Rights Plan to (i) permit the acquisition of the Series B Preferred Stock by certain investors (see Note 8(b) above), any additional Preferred Stock issued as a dividend thereon, any Common Stock issued upon conversion of the Series B Preferred Stock and certain other events without triggering the distribution of the Rights; (ii) lower the threshold for the occurrence of a Stock Acquisition Date from 20% to 10%; and (iii) extend the expiration date of the Plan from September 23, 1998 to January 21, 2007. In addition, the Board of Directors amended the Company’s Shareholder Rights Plan, effective March 29, 2000, to permit the Purchase and Exchange as described in Note 7 above and certain other events without triggering the distribution of the Rights.
(d) Stock Purchase Warrants
In connection with an Amended Credit Agreement effective January 17, 1997 with the Company’s bank group at that time, the bankers received Stock Purchase Warrants to purchase up to 420,000 shares of the Company’s Common Stock, $1.00 par value, at a purchase price of $8.30 per share, at any time during the ten year period ending January 17, 2007. The grant date present value of the Stock Purchase Warrants ($2,233,000) was calculated using the Black-Scholes option pricing model and was accounted for by an increase in Stockholders’ Equity, with the offset being a valuation account netted against the related Revolving Credit Loans. The valuation account was amortized over the three year term of the Credit Agreement, with the offsetting charge being to Other (Income) Expense, Net.
[9] Stock Options
Effective May 25, 2000, the Company’s stockholders approved the adoption of the Special Equity Incentive Plan which provides that up to 3,000,000 shares of the Company’s Common Stock will be available for the granting of non-qualified stock options to key executives, employees and directors of the Company. Options are granted at not less than the fair market value on the date of grant, as defined. Options granted during the years ended December 31, 2000 and 2001 were granted at amounts ranging from fair market value to $1.50 per share in excess of fair market value. Options generally expire 10 years from the date of grant. Options outstanding under the Special Equity Incentive Plan are exercisable in three equal annual installments, on the date of grant and on the first and second anniversary of the date of grant, except for options granted on May 25, 2000 to purchase 62,700 shares that are exercisable in full on the third anniversary of the date of grant. A summary of stock option activity related to the Company’s Special Equity Incentive Plan is as follows:
Option Price Per Share ----------------------------- Shares Number Weighted Available of Shares Range Average to Grant ------------ -------------- ------------ ------------- Approved May 25, 2000 -- -- -- 3,000,000 Granted 2,792,700 $3.13-$4.50 $4.47 (2,792,700) ------------ ------------- Outstanding at December 31, 2000 2,792,700 $3.13-$4.50 $4.47 207,300 Granted 20,000 $8.10 $8.10 (20,000) Exercised (79,666) $4.50 $4.50 - ------------ ------------- Outstanding at December 31, 2001 and 2002 2,733,034 $3.13-$8.10 $4.50 187,300 ============ =============
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2002, 2001 and 2000 (continued)
[9] Stock Options (continued)
At December 31, 2001, 481,610 shares of the Company's authorized but unissued Common Stock were reserved for issuance to employees under its 1982 Stock Option Plan. Options under this plan were granted at fair market value on the date of grant, as defined, and generally become exercisable in two equal annual installments on the second and third anniversary of the date of grant and expire eight to ten years from the date of grant. Options for 184,000 shares of Common Stock granted in 1992 and options for 10,000 shares of Common Stock granted in 1994 expired in 2002. In addition, during 2002 the provisions of the 1982 Stock Option Plan expired. Therefore, at December 31, 2002, the only shares of the Company's authorized but unissued Common Stock still reserved for issuance under the 1982 Stock Option Plan were the 67,500 shares applicable to the remaining outstanding options. A summary of stock option activity related to the Company's 1982 Stock Option Plan is as follows:
Option Price Per Share ----------------------------- Shares Number Weighted Available of Shares Range Average to Grant ------------ -------------- ------------ ------------ Outstanding at December 31, 2000 and 2001 261,500 $ 5.29-$16.44 $ 13.43 220,110 Canceled (194,000) $13.00-$16.44 $ 16.26 (220,110) ------------ ------------ Outstanding at December 31, 2002 67,500 $ 5.29 $ 5.29 - ============ ============
In addition, the Company has authorized but unissued Common Stock reserved for certain other options granted as follows:
Grant Options Exercise Grantee Date Outstanding Price --------------------------------------------------- ------------ --------------- ------------
Members of former Board Executive Committee, as Redefined (see Note 8) 01/17/97 225,000 $8.38
Certain Executive Officers 01/19/98 135,000 $8.66
Member of former Board Executive Committee 12/10/98 45,000 $5.29 01/04/99 30,000 $5.13
The terms of these options are generally similar to options granted under the 1982 Plan, including the exercise price being equal to fair market value, as defined, at date of grant, and timing of installment exercise dates, except for the timing of the exercisability of the January 1997 options, which was May 17, 2000.
Options outstanding at December 31, 2002 and related weighted average price and life information follows:
Remaining Grant Options Options Exercise Life (Years) Date Outstanding Exercisable Price -------------------- ---------- --------------- ------------- ---------- 3 01/17/97 225,000 225,000 $8.38 4 01/19/98 135,000 135,000 $8.66 4 12/10/98 112,500 112,500 $5.29 5 01/04/99 30,000 30,000 $5.13 8 03/29/00 2,000,000 2,000,000 $4.50 8 05/25/00 234,700 172,000 $4.13 8 09/12/00 378,334 378,334 $4.50 8 11/15/00 100,000 100,000 $4.50 9 07/09/01 20,000 13,334 $8.10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2002, 2001 and 2000 (continued)
[9] Stock Options (continued)
When options are exercised, the proceeds are credited to stockholders' equity. In addition, the income tax savings attributable to nonqualified options exercised are credited to paid-in surplus.
The Company has elected the optional pro forma disclosures under SFAS No. 123, "Accounting for Stock-Based Compensation" as if the Company adopted the cost recognition requirements in 1995 (see Note 1(k)). The Company has no options outstanding relating to either 1995 or 1996. The estimated values shown below and utilized in the Company's pro forma SFAS No. 123 disclosures are based on the Black-Scholes option pricing model for options granted in 1997 through 2002.
Assumptions ------------------------------------------------------------------ Expected Risk-free Grant Date Fair Value Dividend Yield Volatility Interest Rate Expected Life -------------- -------------- ------------------------------- --------------- ---------------
01/17/97 $ 1,070,127 0% 39% 6.50% 8 07/08/97 $ 44,086 0% 38% 6.31% 8 01/19/98 $ 1,027,758 0% 37% 5.57% 8 12/10/98 $ 399,485 0% 39% 4.63% 8 01/04/99 $ 75,600 0% 37% 4.82% 8 03/29/00 $ 6,180,000 0% 54% 6.17% 10 05/25/00 $ 125,400 0% 49% 6.38% 10 05/25/00 $ 382,000 0% 54% 6.38% 10 09/12/00 $ 1,358,800 0% 55% 5.78% 10 11/15/00 $ 245,000 0% 53% 5.71% 10 07/09/01 $ 124,600 0% 66% 5.34% 10
[10] Employee Benefit Plans
The Company has a defined benefit pension plan that covers its executive, professional, administrative and clerical employees, subject to certain specified service requirements. The plan is noncontributory and benefits are based on an employee’s years of service and “final average earnings”, as defined. The plan provides reduced benefits for early retirement and takes into account offsets for social security benefits. All employees are vested after five years of service. The Company also has an unfunded supplemental retirement plan for certain employees whose benefits under the defined benefit pension plan are reduced because of compensation limitations under federal tax laws. In accordance with SFAS No. 132, “Employers’ Disclosures About Pensions and Other Post-Retirement Benefits”, pension disclosure as presented below includes aggregated amounts for both of the Company’s plans, except where otherwise indicated.
Net pension cost for 2002, 2001 and 2000 follows (in thousands):
2002 2001 2000 ------------ ------------ -------------
Service cost - benefits earned during the period $ 1,459 $ 1,094 $ 963 Interest cost on projected benefit obligation 4,529 4,404 4,259 Expected return on plan assets (4,899) (4,831) (4,633) Amortization of transition obligation - - 6 Amortization of prior service costs 25 (26) (4) Recognized actuarial loss 56 68 33 ------------ ------------ ------------- Net pension cost $ 1,170 $ 709 $ 624 ============ ============ =============
Actuarial assumptions used: Discount rate 7.25% 7.50% 7.75% Rate of increase in compensation 6.00% 6.00% 6.00% Long-term rate of return on assets 9.00% 9.00% 9.00%
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2002, 2001 and 2000 (continued)
[10] Employee Benefit Plans (continued)
The following tables provide a reconciliation of the changes of the fair value of assets in the plan and plan benefit obligations during the two year period ended December 31, 2002, and a statement of the funded status as of December 31, 2002 and 2001 (in thousands):
Reconciliation of Fair Value of Plan Assets 2002 2001 ------------- ------------
Balance at beginning of year $ 46,164 $ 52,567 Actual return on plan assets (6,387) (2,994) Employer contribution 2,370 159 Benefit payments (3,620) (3,568) ------------- ------------ Balance at end of year $ 38,527 $ 46,164 ============= ============
Reconciliation of Projected Benefit Obligation 2002 2001 ------------- ------------ Balance at beginning of year $ 64,244 $ 59,992 Service cost 1,459 1,094 Interest cost 4,529 4,404 Plan amendments 298 - Actuarial loss 3,893 2,322 Benefit payments (3,620) (3,568) ------------- ------------ Balance at end of year $ 70,803 $ 64,244 ============= ============
Funded Status 2002 2001 ------------- ------------ Funded status at December 31, $ (32,276) $ (18,080) Unrecognized prior service cost 299 26 Unrecognized loss 28,098 12,975 ------------- ------------ Net amount recognized, before additional minimum liability $ (3,879) $ (5,079) ============= ============
The following table presents amounts included in the Consolidated Balance Sheets as of December 31, 2002 and 2001 (in thousands):
2002 2001 ------------ ------------
Accrued benefit liability $ (23,812) $ (10,970) Intangible asset (Note 6) 360 26 Accumulated other comprehensive income 19,573 5,865 ------------ ------------ Net amount recognized at year end $ (3,879) $ (5,079) ============ ============
Other comprehensive income attributable to a change in the additional minimum pension liability recognized pursuant to SFAS No. 87, "Employers' Accounting for Pensions" amounted to $13.7 million in 2002 and $5.9 million in 2001. The cumulative amount of $19.6 million generally represents the excess of the accumulated benefit obligations of the Company's pension plans over the fair value of the plans' assets as of December 31, 2002 compared to the unfunded accrued pension liability previously recognized. This amount is reflected as a long-term liability as of December 31, 2002 (see Note 6) with the offset being a reduction in stockholders' equity. Subsequent adjustments to the amount of
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2002, 2001 and 2000 (continued)
[10] Employee Benefit Plans (continued)
this additional minimum pension liability will be recorded in future years, if required, based upon periodic re-evaluation of the funded status of the Company's pension plans.
The Company's plans have benefit obligations in excess of the fair value of the plans' assets. Plan assets generally include equity and fixed income funds. The following table provides information relating to each of the plan's benefit obligations compared to the fair value of its assets as of December 31, 2002 and 2001 (in thousands):
2002 2001 ------------------------------------------ ------------------------------------------ Benefit Benefit Pension Equalization Pension Equalization Plan Plan Total Plan Plan Total ------------ -------------- ------------ ------------ -------------- ------------
Projected benefit obligation $ 68,107 $ 2,696 $ 70,803 $ 61,470 $ 2,774 $ 64,244 Accumulated benefit obligation $ 59,986 $ 2,353 $ 62,339 $ 54,894 $ 2,240 $ 57,134 Fair value of plan assets $ 38,527 $ - $ 38,527 $ 46,164 $ - $ 46,164
Projected benefit obligation greater than Fair value of plan assets $ 29,580 $ 2,696 $ 32,276 $ 15,306 $ 2,774 $ 18,080 ------------ -------------- ------------ ------------ -------------- ------------
Accumulated benefit obligation greater than Fair value of plan assets $ 21,459 $ 2,353 $ 23,812 $ 8,730 $ 2,240 $ 10,970 ------------ -------------- ------------ ------------ -------------- ------------
The Company has a contributory Section 401(k) plan which covers its executive, professional, administrative and clerical employees, subject to certain specified service requirements. The 401(k) expense provision approximated $0.7 million in 2002, $0.1 million in 2001 and $0.6 million in 2000. Prior to 2002, the Company’s contribution was generally based on a specified percentage of profits, subject to certain limitations, as well as approval by the Company’s Board of Directors of any discretionary Company contributions to the Section 401(k) plan. Beginning in 2002, the Company’s contribution is based on a non-discretionary match of employees’ contributions, as defined.
In addition, the Company has an incentive compensation plan for key employees which is generally based on the Company’s achievement of a certain level of profit.
The Company also contributes to various multi-employer union retirement plans under collective bargaining agreements which provide retirement benefits for substantially all of its union employees. The aggregate amounts provided in accordance with the requirements of these plans were approximately $7.3 million in 2002, $8.8 million in 2001 and $4.9 million in 2000. The Multi-employer Pension Plan Amendments Act of 1980 defines certain employer obligations under multi-employer plans. Information regarding union retirement plans is not available from plan administrators to enable the Company to determine its share of unfunded vested liabilities.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2002, 2001 and 2000 (continued)
[11] Unaudited Quarterly Financial Data
The following table sets forth unaudited quarterly financial data for the years ended December 31, 2002 and 2001 (in thousands, except per share amounts):
2002 by Quarter ----------------------------------------------------------------- 1st 2nd 3rd 4th ------------ ------------ ----------- ------------ Revenues $321,370 $268,307 $ 232,805 $ 262,559 ------------ ------------ ----------- ------------ Gross profit $ 12,999 $ 12,363 $ 12,376 $ 20,912 ------------ ------------ ----------- ------------ Net income $ 5,215 $ 4,690 $ 3,644 $ 9,525 ------------ ------------ ----------- ------------
Basic earnings per common share $ 0.21 $ 0.18 $ 0.14 $ 0.39 ------------ ------------ ----------- ------------
Diluted earnings per common share $ 0.20 $ 0.18 $ 0.14 $ 0.39 ------------ ------------ ----------- ------------
2001 by Quarter ----------------------------------------------------------------- 1st 2nd 3rd 4th ------------ ------------ ----------- ------------ Revenues $352,178 $421,222 $ 417,476 $ 362,520 ------------ ------------ ----------- ------------ Gross profit $ 13,499 $ 14,857 $ 13,608 $ 15,598 ------------ ------------ ----------- ------------ Net income $ 6,820 $ 7,359 $ 5,843 $ 6,396 ------------ ------------ ----------- ------------
Basic earnings per common share $ 0.28 $ 0.30 $ 0.23 $ 0.26 ------------ ------------ ----------- ------------
Diluted earnings per common share $ 0.28 $ 0.29 $ 0.22 $ 0.25 ------------ ------------ ----------- ------------
[12] Business Segments
Business segment information presented below was determined in accordance with SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information".
The Company provides general contracting, construction management and design-build services to private clients and public agencies throughout the United States and selected overseas locations. The Company’s construction business involves two basic segments: building and civil. The building operation services both private clients and public agencies from offices located in Boston, Phoenix, Las Vegas, Detroit and Celebration, FL and includes a broad range of building construction projects, such as hotels, casinos, health care facilities, correctional facilities, sports complexes, multi-unit residential, commercial, civic, cultural and educational facilities. The civil operation is focused on public civil work in the East and selectively in other geographic locations and includes large, ongoing urban infrastructure repair and replacement projects such as highway and bridge rehabilitation, mass transit projects and waste water treatment facilities. During the years 2000 through 2002, the Company’s chief operating decision making group consisted of the Chairman and Chief Executive Officer, the President and Chief Operating Officer, the President of Perini Building Company and the President of Perini Civil Construction. This group decides how to allocate resources and assess performance of the business segments. Generally, the Company evaluates performance of its operating segments on the basis of income from operations and cash flow. The accounting policies applied by each of the segments are the same as those described in the Summary of Significant Accounting Policies (see Note 1). The following tables set forth certain business and geographic segment information relating to the Company’s operations for each of the three years in the period ended December 31, 2002 (in thousands):
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2002, 2001 and 2000 (continued)
[12] Business Segments (continued)
2002 Reportable Segments ---------------------------------------------- Consolidated Building Civil Totals Corporate Total --------------- ------------- -------------- ------------ ---------------
Revenues $ 772,513 $ 312,528 $1,085,041 $ - $ 1,085,041 Income from Operations $ 26,225 $ 6,390 $ 32,615 $ (6,735) (a) $ 25,880 Assets $ 158,241 $ 223,036 $ 381,277 $ 21,112 (b) $ 402,389 Capital Expenditures $ 2,175 $ 2,335 $ 4,510 $ - $ 4,510
2001 Reportable Segments ---------------------------------------------- Consolidated Building Civil Totals Corporate Total --------------- ------------- -------------- ------------ ---------------
Revenues $ 1,199,439 $ 353,957 $1,553,396 $ - $ 1,553,396 Income from Operations $ 31,612 $ 3,918 $ 35,530 $ (6,029) (a) $ 29,501 Assets $ 234,022 $ 246,326 $ 480,348 $ 20,893 (b) $ 501,241 Capital Expenditures $ 1,408 $ 3,120 $ 4,528 $ - $ 4,528
2000 Reportable Segments ---------------------------------------------- Consolidated Building Civil Totals Corporate Total --------------- ------------- -------------- ------------ ---------------
Revenues $ 826,191 $ 279,469 $1,105,660 $ - $ 1,105,660 Income from Operations $ 27,076 $ 5,624 $ 32,700 $ (5,345) (a) $ 27,355 Assets $ 224,502 $ 215,886 $ 440,388 $ 47,090 (b) $ 487,478 Capital Expenditures $ 727 $ 1,066 $ 1,793 $ - $ 1,793
(a) In all years, consists of corporate general and administrative expenses.
(b) In all years, corporate assets consist principally of cash, cash equivalents, marketable securities, land held for sale and other investments available for general corporate purposes.
Revenues from the Mohegan Sun Project in the building segment totaled approximately $153 million (or 14% of consolidated revenues) in 2002, $457 million (or 29%) in 2001 and $319 million (or 29%) in 2000. Revenues from various agencies of the City of New York in the civil segment totaled approximately $185 million (or 17%) in 2002, $185 million (or 12%) in 2001, and $117 million (or 11%) in 2000.
Information concerning principal geographic areas is as follows:
Revenues -------------------------------------------- 2002 2001 2000 ------------- -------------- -------------
United States $ 1,029,097 $ 1,516,810 $ 1,065,304 Foreign and U.S. Territories 55,944 36,586 40,356 ------------- -------------- -------------
Total $ 1,085,041 $ 1,553,396 $ 1,105,660 ============= ============== =============
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2002, 2001 and 2000 (continued)
[12] Business Segments (continued)
Income (Loss) from Operations --------------------------------------------
2002 2001 2000 ------------- -------------- -------------
United States $ 26,731 $ 32,654 $ 35,106 Foreign and U.S. Territories 5,884 2,876 (2,406) Corporate (6,735) (6,029) (5,345) ------------- -------------- -------------
Total $ 25,880 $ 29,501 $ 27,355 ============= ============== =============
Long-lived assets outside the United States are immaterial and therefore not presented here.
There have been no differences from the last annual report in the basis of measuring segment profit or loss. The decrease in assets related to the building segment in 2002 compared to 2001 is due primarily to a decrease in retainage receivable on several large projects. This decrease is transitory and is not indicative of any long-term trend.
[13] Related Party Transactions
Effective with the issuance of Series B Preferred Stock in 1997, the Company entered into an agreement with Tutor-Saliba Corporation (“TSC”), a California corporation engaged in the construction industry, and Ronald N. Tutor, Chief Executive Officer and sole stockholder of TSC, to provide certain management services, as defined. At January 17, 1997, TSC held 351,318 shares of the Company’s $1.00 par value Common Stock. TSC participates in joint ventures with the Company, the Company’s share of which contributed $48.8 million, $17.9 million, and $4.6 million to the Company’s consolidated revenues in 2002, 2001 and 2000, respectively. Mr. Tutor was appointed as one of the three new directors in accordance with the terms of the Series B Preferred Stock transaction, a member of the Executive Committee of the Board and, during 1997, acting Chief Operating Officer of the Company. Effective January 1, 1998, Mr. Tutor was elected Vice Chairman of the Board of Directors and effective July 1, 1999 was elected Chairman of the Board of Directors. Effective March 29, 2000, Mr. Tutor was appointed Chief Executive Officer of the Company. Compensation for the management services consists of payment of $250,000 per year to TSC, options granted to Mr. Tutor, and incentive compensation of $231,000 awarded to Mr. Tutor in 2002 and $250,000 awarded to Mr. Tutor in 2001. All of the stock options granted to Mr. Tutor were granted at or above fair market value on the date of grant and are summarized as follows:
Option Grant Price Per Number Expiration Date Share of Shares Date ----------- ------------ ------------ ------------
01/17/97 $8.38 150,000 01/16/05 12/10/98 $5.29 45,000 12/09/06 01/04/99 $5.13 30,000 01/03/07 03/29/00 $4.50 1,000,000 03/28/10
In late 2000, the Company entered into a joint venture arrangement with TSC, the sponsoring partner, whereby the Company was to primarily provide certain prequalification and proposal support services to the joint venture in return for a fixed fee of $500,000 payable subsequent to the award and start-up of the project. In addition, the agreement provided that the Company would not be liable for any costs, losses, liabilities or damages that may arise from the project. The Company recorded the $500,000 fixed fee as income in 2001 when its commitment to the joint venture
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2002, 2001 and 2000 (continued)
[13] Related Party Transactions (continued)
was fulfilled. Payment of the fee was received from TSC in February, 2002. In late 2001, the Company entered into a similar joint venture arrangement with TSC, the sponsoring partner, whereby the Company was to primarily provide certain prequalification and proposal support services to the joint venture in return for a fixed fee of $200,000 payable subsequent to the award and start-up of the project. In addition, the agreement provided that the Company would not be liable for any costs, losses, liabilities or damages that may arise from the project. The Company recorded the $200,000 fixed fee as income in 2002 when the contract was awarded to the joint venture. Payment of the fee was received from TSC in February, 2002.
In late 2002, the Company entered into an arrangement with TSC whereby TSC provided a financial guarantee in order for the Company to secure a performance and payment bond on a building project with an estimated contract value of approximately $135 million. As compensation for the financial guarantee, the Company paid TSC a fee of $1.0 million in February 2003.
The new investors that provided $40 million of new equity in the Company on March 29, 2000 as described in Note 7 consist of Tutor-Saliba Corporation (see above), O&G Industries, Inc. (“O&G”), a participant in certain construction joint ventures with the Company, and National Union Fire Insurance Company of Pittsburgh, Pa., a wholly owned subsidiary of American International Group, Inc. (“AIG”), one of the Company’s sureties and a provider of insurance and insurance related services to the Company. After this investment, the cumulative holdings of each of the new investors were as follows:
Number of Percentage of Total Shares Shares Outstanding ------------- ------------------------- TSC 2,704,260 12.0% O&G 2,502,941 11.1% AIG 4,705,882 20.8%
Each of the new investors is entitled to appoint a member to the Company's Board of Directors. O&G participates in joint ventures with the Company, the Company's share of which contributed $0.6 million to the Company's consolidated revenues in 2001. Payments to AIG for surety, insurance and insurance related services approximated $9.5 million in 2002, $8.2 million in 2001 and $4.6 million in 2000.
[14] Subsequent Events
On January 23, 2003, the Company completed the acquisition of James A. Cummings, Inc., a privately held construction company based in Fort Lauderdale, Florida, for $20 million in cash, financed in part through the Company's credit facility. James A. Cummings, Inc. is an established building construction and construction management company in the South Florida region specializing in the construction of schools, public and commercial facilities. At January 1, 2003, James A. Cummings, Inc. had a firm backlog of approximately $170 million. The acquisition will be effective as of January 1, 2003 and, accordingly, James A. Cummings, Inc. will be included in the Company's consolidated results of operations and financial position beginning in the first quarter of 2003.
Independent Auditors' Report
To the Stockholders of Perini Corporation:
We have audited the accompanying consolidated balance sheets of PERINI CORPORATION (a Massachusetts corporation) and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2002. 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 in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Perini Corporation and subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States.
As discussed in Note (1)(b) to the consolidated financial statements, in 2002 the Company changed its method of reporting its interests in construction joint ventures in the Consolidated Balance Sheets from the equity method to the proportionate consolidation method and retroactively restated the 2001 and 2000 consolidated financial statements for the change. As discussed in Note (1)(i) to the consolidated financial statements, basic and diluted earnings per share for the year ended December 31, 2000 have been restated.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 21, 2003
Independent Auditors' Report on Schedule
To the Stockholders of Perini Corporation:
We have audited, in accordance with auditing standards generally accepted in the United States, the consolidated financial statements included in this Form 10-K, and have issued our report thereon dated March 21, 2003, which expresses an unqualified opinion and includes an explanatory paragraph concerning a retroactive change in presentation of the Company's joint ventures in the consolidated balance sheets from the equity method to the proportionate consolidation method and the restatement of basic and diluted earnings per share for the year ended December 31, 2000. Our audits were made for the purpose of forming an opinion on the consolidated financial statements taken as a whole. The supplemental schedule listed in the accompanying index is the responsibility of the Company's management and is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not part of the consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the consolidated financial statements and, in our opinion, fairly states, in all material respects, the financial data required to be set forth therein in relation to the consolidated financial statements taken as a whole.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 21, 2003
Schedule II Perini Corporation and Subsidiaries
Valuation and Qualifying Accounts and Reserves
for the Years Ended December 31, 2002, 2001 and 2000
(In Thousands of Dollars)
Additions --------------------------- Balance at Charged Charged to Deductions Balance Beginning to Costs & Other from at End of Year Expenses Accounts Reserves of Year ------------ ------------ ------------- ------------- ------------ Description
Year Ended December 31, 2002 Reserve for real estate investments $ 9,972 $ -- $ -- $ 7,457 (1) $ 2,515 ============ ============ ============= ============= ============
Year Ended December 31, 2001 Reserve for real estate investments $ 17,621 $ -- $ -- $ 7,649 (1) $ 9,972 ============ ============ ============= ============= ============
Year Ended December 31, 2000 Reserve for real estate investments $ 23,622 $ -- $ -- $ 6,001 (1) $ 17,621 ============ =========================== ============= ============
(1) Represents sales or other dispositions of real estate properties.
Exhibit Index
The following designated exhibits are, as indicated below, either filed herewith or have heretofore been filed with the Securities and Exchange Commission under the Securities Act of 1933 or the Securities Act of 1934 and are referred to and incorporated herein by reference to such filings.
Exhibit 3. Articles of Incorporation and By-laws
Incorporated herein by reference:
3.1 Restated Articles of Organization - As amended through March 29, 2000 - Exhibit 3.1 to Form 8-K filed on April 12, 2000.
3.2 By-laws - As amended and restated as of March 29, 2000 - Exhibit 3.2 to Form 8-K filed on April 12, 2000.
Exhibit 4. Instruments Defining the Rights of Security Holders, Including Indentures
Incorporated herein by reference:
4.1 Certificate of Vote of Directors Establishing a Series of a Class of Stock determining the relative rights and preferences of the $21.25 Convertible Exchangeable Preferred Stock - Exhibit 4(a) to Amendment No. 1 to Form S-2 Registration Statement filed June 19, 1987; SEC Registration Statement No. 33-14434.
4.2 Form of Deposit Agreement, including form of Depositary Receipt - Exhibit4(b) to Amendment No. 1 to Form S-2 Registration Statement filed June19, 1987; SEC Registration Statement No. 33-14434.
4.3 Form of Indenture with respect to the 8 1/2% Convertible Subordinated Debentures Due June 15, 2012, including form of Debenture - Exhibit 4(c) to Amendment No. 1 to Form S-2 Registration Statement filed June 19, 1987; SEC Registration Statement No. 33-14434.
4.4 Shareholder Rights Agreement dated as of September 23, 1988, as amended and restated as of May 17, 1990, as amended and restated as of January 17, 1997, between Perini Corporation and State Street Bank and Trust Company, as Rights Agent - Exhibit 4.4 to Amendment No. 1 to Registration Statement on Form 8-A/A filed on January 29, 1997, and as further amended as of March 29, 2000 - Exhibit 4.3 to Form 8-K filed on April 12, 2000.
4.13 Exchange Agreement by and between Perini Corporation and The Union Labor Life Insurance Company, acting on behalf of its Separate Account P, dated as of February 7, 2000 - Exhibit 10.1 to Form 8-K filed on April 12, 2000.
Exhibit Index
(Continued)
4.14 Exchange Agreement by and between Perini Corporation and PB Capital Partners, L.P., dated as of February 14, 2000 - Exhibit 10.2 to Form 8-K filed on April 12, 2000.
4.15 Exchange Agreement by and between Perini Corporation and The Common Fund for Non-Profit Organizations, dated as of February 14, 2000 - Exhibit 10.3 to Form 8-K filed on April 12, 2000.
4.16 Registration Rights Agreement by and among Perini Corporation, Tutor- Saliba Corporation, Ronald N. Tutor, O&G Industries, Inc. and National Union Fire Insurance Company of Pittsburgh, Pa., BLUM Capital Partners, L.P., PB Capital Partners, L.P., The Common Fund for Non-Profit Organizations, and The Union Labor Life Insurance Company, acting on behalf of its Separate Account P, dated as of March 29, 2000 - Exhibit 4.1 to Form 8-K filed on April 12, 2000.
4.17 Shareholders' Agreement by and among Perini Corporation, Tutor-Saliba Corporation, Ronald N. Tutor, O&G Industries, Inc. and National Union Fire Insurance Company of Pittsburgh, Pa., BLUM Capital Partners, L.P., PB Capital Partners, L.P., The Common Fund for Non-Profit Organizations, and The Union Labor Life Insurance Company, acting on behalf of its Separate Account P, dated as of March 29, 2000 - Exhibit 4.2 to Form 8-K filed on April 12, 2000.
Exhibit 10. Material Contracts
Incorporated herein by reference:
10.2 Perini Corporation Amended and Restated General Incentive Compensation Plan (1997) - Exhibit 10.2 to 1997 Form 10-K filed on March 30, 1998.
10.3 Perini Corporation Amended and Restated Construction Business Unit Incentive Compensation Plan - Exhibit 10.3 to 1997 Form 10-K filed on March 30, 1998.
10.16 Management Agreement dated as of January 17, 1997 by and among the Company, Ronald N. Tutor and Tutor-Saliba Corporation - filed herewith.
10.31 Amendment No. 2 dated as of December 31, 1999 to the Management Agreement by and among the Company, Ronald N. Tutor and Tutor-Saliba Corporation - Exhibit 10.31 to Form 10-Q filed on May 9, 2000.
10.32 Special Equity Incentive Plan - Exhibit A to Registrant's Proxy Statement for Annual Meeting of Stockholders dated April 19, 2000.
Exhibit Index
(Continued)
10.33 Securities Purchase Agreement by and among Perini Corporation and Tutor- Saliba Corporation, O&G Industries, Inc. and National Union Fire Insurance Company of Pittsburgh, PA, dated as of February 5, 2000 - Exhibit 10.1 to Form 8-K filed on February 9, 2000.
10.34 Promissory Note dated as of September 6, 2000 by and among Mt. Wayte Realty, LLC (a wholly-owned subsidiary of Perini Corporation) and The Manufacturers Life Insurance Company (U.S.A.) - Exhibit 10.34 to Form 10-Q filed on November 6, 2000.
10.35 Credit Agreement dated January 23, 2002 among Perini Corporation, Fleet National Bank, as Administrative Agent, Fleet National Bank, as Arranger, and the Lenders Party Hereto - Exhibit 10.35 to Form 10-K filed on March 21, 2002.
10.36 Amendment No. 4 dated as of December 31, 2001 to the Management Agreement by and among the Company, Ronald N. Tutor and Tutor-Saliba Corporation - filed herewith.
10.37 Stock Purchase and Sale Agreement dated December 16, 2002 by and among the Company, James A. Cummings, Inc., James A. Cummings, William R. Derrer and Michael F. Lanciault - filed herewith.
10.38 Employment Agreement dated January 23, 2003 by and among the Company, James A. Cummings, Inc. and James A. Cummings - filed herewith.
10.39 First Amendment and Waiver dated February 14, 2003 to Credit Agreement among Perini Corporation, Fleet National Bank, as Administrative Agent, and the Lenders - filed herewith.
Exhibit 18. Preferability Letter Re: Change in Accounting Principles - filed herewith.
Exhibit 21. Subsidiaries of Perini Corporation - filed herewith.
Exhibit 23. Consent of Independent Auditors - filed herewith.
Exhibit 24. Power of Attorney - filed herewith.
Exhibit 99. Additional Exhibits
99.1 Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - filed herewith.
99.2 Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - filed herewith.