Securities and Exchange Commission Commission File No. 1-6314
Washington, DC 20549
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Act of 1934.
For the fiscal year ended December 31, 20022003
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from __________ to ____________
Perini Corporation
(Exact name of registrant as specified in its charter)
Massachusetts 04-1717070
(State of Incorporation) (IRS Employer Identification No.)
73 Mt. Wayte Avenue, Framingham, Massachusetts 01701
(Address of principal executive offices) (Zip Code)
(508) 628-2000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of each exchange on which registered
Common Stock, $1.00 par value The American Stock Exchange
$2.125 Depositary Convertible Exchangeable The American Stock Exchange
Preferred Shares, each representing 1/10th
Share of $21.25 Convertible Exchangeable
Preferred Stock, $1.00 par value
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.X
Indicate by check mark if registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes No X
The aggregate market value of voting Common Stock held by nonaffiliates of the registrant is $20,659,948$41,909,800 as of June 28, 2002,30, 2003, the last business day of the registrant's most recently completed second quarter. The Company does not have any non-voting Common Stock.
The number of shares of Common Stock, $1.00 par value per share, outstanding at February 24, 2003 is 22,664,135.23, 2004 was 23,043,335.
Portions of the annualdefinitive proxy statement forrelating to the year ended December 31, 2001registrant's annual meeting of stockholders to be held on May 13, 2004 are incorporated by reference ininto Part III.III of this report.
PERINI CORPORATION
INDEX TO ANNUAL REPORT
ON FORM 10-K
PAGE
PART I
Item 1: Business 2 - 1120
Item 2: Properties 1221
Item 3: Legal Proceedings 1221 - 1625
Item 4: Submission of Matters to a Vote of Security Holders 1625 - 1726
PART II
Item 5: Market for the Registrant's Common Stock and Related Stockholder Matters 1827
Item 6: Selected Financial Data 1928 - 2029
Item 7: Management's Discussion and Analysis of Financial Condition and Results of
Operations 2130 - 2843
Item 7A: Quantitative and Qualitative Disclosure About Market Risk 2843
Item 8: Financial Statements and Supplementary Data 2844
Item 9: Change in and Disagreements with Accountants on Accounting and Financial
Disclosure 2844
Item 9A: Controls and Procedures 44
PART III
Item 10: Directors and Executive Officers of the Registrant 2945
Item 11: Executive Compensation 2945
Item 12: Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters 2945
Item 13: Certain Relationships and Related Transactions 2945
Item 14: Principal Accountant Fees and Services 45
PART IV
Item 14: Controls and Procedures 30
Item 15: Exhibits, Financial Statement Schedules and Reports on Form 8-K 30 - 3146
Signatures 32
Certifications 33 - 3447
PART I.I.
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'sCompany’s or its management'sour management’s expectations, hopes, beliefs, intentions or strategies regarding the future. These forward-looking statements are based on the Company'sour current expectations and beliefs concerning future developments and their potential effects on the Company.us. There can be no assurance that future developments affecting the Companyus will be those anticipated by the Company.that we have anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond the control of the Company)our control) 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 us; the Company;ability to retain certain members of management; the ability to obtain surety bonds to secure our performance under certain construction contracts; possible labor disputes or work stoppages within the construction industry; 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'sour customers, suppliers, business partners, and competitors and legislative, regulatory, judicial and other governmental authorities and officials. Also see "Risk Factors"“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 undertakes12 through 20. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.otherwise, except as may be required under applicable securities laws.
IntroductionGeneral
Perini Corporation and its subsidiaries (the "Company",(or “Perini,” “we,” “us,” and “our,” unless the context indicates otherwise) are engaged in the construction business. The Company was incorporated in 1918 asis a successor to businesses which had been engaged in providingleading construction services since 1894. The Company currently providescompany, based on revenues, as ranked byEngineering News-Record, offering diversified general contracting, construction management and design-build services to private clients and public agencies throughout the world. We have provided construction services since 1894 and have established a strong reputation within our markets by executing large, complex projects on time and within budget while adhering to strict quality control measures. We offer general contracting, preconstruction planning and comprehensive project management services, including the planning and scheduling of the manpower, equipment, materials and subcontractors required for a project. We also offer self-performed construction services including site work, concrete forming and placement and steel erection. During 2003, we performed work on over 100 construction projects for over 75 federal, state and local government agencies or authorities and private customers. Our headquarters are in Framingham, Massachusetts, and we have seven other principal offices throughout the United States. Our common stock is currently listed on the American Stock Exchange under the symbol “PCR.” Our common stock has been cleared to apply for listing on the New York Stock Exchange and we expect this listing change to commence on April 1, 2004. Our $21.25 Preferred Stock will remain listed on the American Stock Exchange.
Our business is conducted through three primary segments: building, civil, and management services. Our building segment, comprised of Perini Building Company and James A. Cummings, Inc., or Cummings, focuses on large, complex projects in the hospitality and gaming, sports and entertainment, educational, transportation and healthcare markets. Our civil segment is involved in public works construction primarily in the northeastern United States, including the repair, replacement and reconstruction of the United States public infrastructure such as highways, bridges and mass transit systems. Our management services segment provides diversified construction, design-build and maintenance services to the U.S. military and government agencies as well as power producers, surety companies and multi-national corporations.
Historically, we have evaluated our operating results based on two reportable segments: building and civil. During the fourth quarter of 2003, we adjusted the responsibilities of certain of our executive officers and, in accordance with Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information,” we reevaluated the criteria for determining our reportable segments. We have determined that a third business segment, management services, will be included as a reportable segment prospectively to align our reportable segments with current management responsibilities. Previously, our management services operations were included as part of our building segment. The management services segment will aggregate contracts that have a higher than normal geopolitical and operational risk and a corresponding potential for greater than normal gross margin volatility. Segment information for 2002 and 2001 presented in the tables set forth below or otherwise in this Annual Report on Form 10-K have been reclassified to reflect this change.
Building Segment
Our building segment has significant experience providing services to a number of high growth, specialized building markets, including the hospitality and gaming, sports and entertainment, education, transportation and healthcare markets. We believe our success within the building segment results from our proven ability to manage and perform large, complex projects with aggressive fast-track schedules, elaborate designs and advanced systems while providing accurate budgeting and strict quality control. Although price is a key competitive factor, we believe our strong reputation, long-standing customer relationships and significant level of repeat and referral business have enabled us to achieve our leading position.
We believe the hospitality and gaming market provides significant opportunities for growth. We are a recognized leader in this market, specializing in the construction of high-end destination resorts and casinos and Native American developments. We work with hotel operators, Native American tribal councils, developers and architectural firms to provide diversified construction services to meet the challenges of new construction and renovation of hotel and resort properties. We believe that our reputation for completing projects on time is a significant competitive advantage in this market, as any delay in project completion may result in significant loss of revenues for the customer. InEngineering News-Record’s, or ENR’s, 2003 rankings, we ranked as the nation’s 26th largest contractor in the general building market, 3rd largest builder in the hotel, motel and convention center market and as one of the top 25 builders in the sports, entertainment and government office buildings markets, based on revenue.
As a result of our reputation and track record, we have been involved in many marquee projects. These include hospitality and gaming projects such as the Paris Hotel and Casino in Las Vegas, NV; the Gaylord Palms Resort and Convention Center in Orlando, FL; and the Grand Resorts Hotel/Casino Expansion in Atlantic City, NJ. In the sports and entertainment market, we have been involved in projects such as the Bank One Ballpark in Phoenix, AZ and The Palace at Auburn Hills in Auburn Hills, MI. In our other end markets, we have been involved in large, complex projects such as the Airport Parking Garage and Rental Car Facility in Ft. Lauderdale, FL; the Florida International University Health & Life Sciences Building in Miami, FL; and the South Shore Hospital expansion in Weymouth, MA.
In January 2003, we acquired Cummings to expand our presence in the southeast region of the United States. Cummings, which is now our wholly owned subsidiary, specializes in the construction of schools, municipal buildings and commercial developments.
Civil Segment
Our civil segment specializes in new public works construction and the repair, replacement and reconstruction of infrastructure, principally in the metropolitan New York and Boston markets. Our civil contracting services include construction and rehabilitation of highways, bridges, light rail transit systems, subways, airports and wastewater treatment facilities. Our customers primarily award contracts through one of two methods: the traditional public “competitive bid” method, in which price is the major determining factor, or through a request for proposals where contracts are awarded based on a combination of technical capability and price. Traditionally, our customers require each contractor to pre-qualify for construction business by meeting criteria that include technical capabilities, financial strength and corporate integrity. We believe that our corporate integrity, financial strength and outstanding record of performance on challenging civil works projects enables us to pre-qualify for projects in situations where smaller, less diversified contractors are
unable to meet the qualification requirements. We believe this is a competitive advantage that makes us an attractive partner on the largest infrastructure projects and prestigious DBOM (design-build-operate-maintain) contracts, which combine the nation’s top contractors with engineering firms, equipment manufacturers and project development consultants in a competitive bid selection process to execute highly sophisticated public works projects.
We have been active in civil construction since 1894 and believe we have developed a particular expertise in large, complex civil construction projects. ENR’s 2003 rankings place us as the 20th largest builder of general transportation projects in the country and as a top 25 builder in mass transit and rail, bridges and highways. We have completed or are currently working on some of the most significant civil construction projects in the northeast including a portion of Boston’s “Big Dig” project, the Williamsburg Bridge reconstruction, New Jersey Light Rail Transit, the Triborough Bridge, Jamaica Station and the Long Island Expressway.
Management Services Segment
Our management services segment provides diversified construction, design-build and maintenance services to the U.S. military and government agencies, power suppliers, surety companies and multi-national corporations in the United States and selectedoverseas. We believe customers choose our services based on our ability to plan and execute rapid response assignments and multi-year contracts through our diversified construction and design-build abilities. Furthermore, we believe we have demonstrated consistently superior performance on competitively bid or negotiated multi-year, multi-trade, task order and ID/IQ (Indefinite Delivery/Indefinite Quantity) construction programs. Most recently, we have been chosen by the federal government for significant projects related to defense and reconstruction projects in Iraq and Afghanistan. For example, we are currently working on the reconstruction of electric power facilities in southern Iraq. In addition, we recently completed a project to construct the entire infrastructure for a 6,000-person base for the new Afghan army and have recently begun construction of similar facilities at another base.
We believe we are well positioned to capture additional projects that involve long-term contracts and provide a recurring source of revenues as government expenditures for defense and homeland security increase in response to the global threat of terrorism. For example, we have a multi-year contract with the U.S. Department of State, Office of Overseas Buildings Operations, to perform design-build security upgrades at U.S. embassies and consulates throughout the world including Argentina, Brazil, Czech Republic, Laos, Pakistan, the Philippines and Taiwan. In addition, our proven abilities with federal government projects have enabled us to win contracts from private defense contractors who are executing projects for the federal government. For example, we have been awarded design and construction contracts by Raytheon Integrated Defense Systems for upgrades to radar facilities at Beale Air Force Base in California and the Cobra Dane Facility on Shemya Island, Alaska, to meet the requirements of a new early warning radar system.
We also provide diversified management services to power producers, surety companies and multi-national corporations. Under a five-year contract expiring at the end of 2006, we provide planning, management, maintenance and modification services at 10 nuclear power generating stations, including 17 operating units. We are also under agreement with a major North American surety company to provide rapid response, contract completion services. Upon notification from the surety of a contractor bond default, we provide management or general contracting services to fulfill the contractual and financial obligations of the surety.
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, 2003.
Annual Report
on Form 10-K
Caption Page Number
----------------------
Selected Consolidated Financial Information 28 - 29
Management's Discussion and Analysis 30 - 43
Note 11 of Notes to Consolidated Financial Statements entitled "Business Segments" 75 - 77
While the “Selected Consolidated Financial Information” presents certain business segment information for purposes of consistency of presentation for the five years ended December 31, 2003, 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, 2003 is included in Note 11 of Notes to Consolidated Financial Statements.
Our construction services are targeted toward end markets that are diversified across project types, client characteristics and geographic locations. Revenues by business segment for each of the three years in the period ended December 31, 2003 are set forth below:
Revenues by Segment
Year Ended December 31,
---------------------------------------------
2003 2002 2001
------------- ------------- -------------
(in thousands)
Building $ 898,254 $ 631,860 $ 1,120,161
Civil 176,877 312,528 353,957
Management Services 298,972 140,653 79,278
------------- ------------- -------------
Total $1,374,103 $ 1,085,041 $ 1,553,396
============= ============= =============
Revenues by end market for the building segment for each of the three years in the period ended December 31, 2003 are set forth below:
Building Segment Revenues by End Market
------------------------------------------------
2003 2002 2001
------------- ------------ -------------
(in thousands)
Hospitality and Gaming $ 541,575 $ 513,374 $ 1,013,206
Sports and Entertainment 126,705 72,729 22,699
Education Facilities 98,730 1,181 8,460
Transportation Facilities 46,266 14,096 18,134
Healthcare Facilities 53,351 11,264 28,121
Other 31,627 19,216 29,541
------------- ------------ -------------
Total $ 898,254 $ 631,860 $ 1,120,161
============= ============ =============
Revenues by end market for the civil segment for each of the three years in the period ended December 31, 2003 are set forth below:
Civil Segment Revenues by End Market
-----------------------------------------------
2003 2002 2001
------------ ------------ -------------
(in thousands)
Highways $ 64,322 $ 92,486 $ 142,144
Bridges 16,519 72,312 65,117
Mass Transit 84,967 145,160 146,397
Wastewater Treatment and Other 11,069 2,570 299
------------ ------------ -------------
Total $176,877 $312,528 $ 353,957
============ ============ =============
Revenues by end market for the management services segment for each of the three years in the period ended December 31, 2003 are set forth below:
Management Services Segment
Revenues by End Market
-----------------------------------------------
2003 2002 2001
------------- ------------ ------------
(in thousands)
U.S. Government Services $218,688 $ 46,749 $ 37,348
Power Facilities Maintenance 51,724 74,948 28,616
Other 28,560 18,956 13,314
------------- ------------ ------------
Total $298,972 $140,653 $ 79,278
============= ============ ============
We provide our services to a broad range of private and public customers. The allocation of our revenues by client source for each of the three years in the period ended December 31, 2003 are set forth below:
Revenues by Client SourceYear Ended December 31,
-------------------------------
2003 2002 2001
-------- ------- --------
Private Owners 61% 65% 73%
State and Local Governments 23 30 24
Federal Governmental Agencies 16 5 3
-------- ------- --------
100% 100% 100%
======== ======= ========
Private Owners. We derived approximately 61% of our revenues from private customers during 2003. Our private customers include major hospitality and gaming resort owners, Native American sovereign nations, private developers, healthcare and retirement companies and a leading owner and operator of power facilities. We provide services to our private customers primarily through negotiated contract arrangements, as opposed to competitive bids.
State and Local Governments. We derived approximately 23% of our revenues from state and local government customers during 2003. Our state and local government customers include state transportation departments, state and local correctional departments, metropolitan authorities, cities, municipal agencies, school districts and public universities. We provide services to our state and local customers primarily pursuant to contracts awarded through competitive bidding processes. Our civil contracting services are concentrated in the northeast, principally in the metropolitan New York and Boston markets. Our building construction services for state and local government customers, which have included schools and dormitories, correctional and healthcare facilities, parking structures and municipal buildings, are in locations throughout the country. Since our acquisition of Cummings in January 2003, we have been particularly active in providing construction services for local government customers in Florida.
Federal Governmental Agencies. We derived approximately 16% of our revenues from federal governmental agencies during 2003. These agencies have included the State Department, the U.S. Navy and the U.S. Army Corps of Engineers. We provide services to federal agencies primarily pursuant to contracts for specific or multi-year assignments that involve new construction or infrastructure improvements. A substantial portion of our revenues from federal agencies is derived from projects in overseas locations. Our share of revenues derived from federal customers has increased steadily in recent years. We expect this trend to continue for the foreseeable future as a result of our expanding base of experience and relationships with federal agencies, together with favorable market and expenditure trends for defense, security and reconstruction work.
We include a construction project in our backlog at such time 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 us.
As of December 31, 2003, we had a construction backlog of $1.666 billion compared to $990 million at December 31, 2002 and $1.214 billion at December 31, 2001. Backlog is summarized below by business segment as of December 31, 2003 and 2002:
Backlog by Business Segment
--------------------------------------------------
December 31, December 31,
2003 2002
------------------------ -----------------------
(dollars in thousands)
Building $ 896,799 54% $ 525,433 53%
Civil 305,698 18 210,562 21
Management Services 463,967 28 254,180 26
-------------- ------- ------------- ------
Total $ 1,666,464 100% $ 990,175 100%
============== ======= ============= ======
We estimate that approximately $460 million, or 28%, of our backlog at December 31, 2003 will not be completed in 2004.
Backlog by end market for the building segment as of December 31, 2003 and 2002 is set forth below:
Building Segment Backlog by End Market
-------------------------------------------------------
December 31, December 31,
2003 2002
-------------------------- -------------------------
(dollars in thousands)
Hospitality and Gaming $ 608,161 68% $ 341,115 65%
Sports and Entertainment 9,235 1 115,759 22
Education Facilities 116,013 13 13,805 3
Transportation Facilities 45,529 5 2,931 --
Healthcare Facilities 26,048 3 42,504 8
Other 91,813 10 9,319 2
--------------- ------- --------------- -------
Total $ 896,799 100% $ 525,433 100%
=============== ======= =============== =======
Backlog by end market for the civil segment as of December 31, 2003 and 2002 is set forth below:
Civil Segment Backlog by End Market
------------------------------------------------------------
December 31, December 31,
2003 2002
---------------------------- ----------------------------
(dollars in thousands)
Highways $ 24,736 8% $ 65,260 31%
Bridges 102,155 33 20,815 10
Mass Transit 60,603 20 106,473 51
Wastewater Treatment and Other 118,204 39 18,014 8
------------ ------------ ------------ ------------
Total $305,698 100% $210,562 100%
============ ============ ============ ============
Backlog by end market for the management services segment as of December 31, 2003 and 2002 is set forth below:
Management Services Segment Backlog by End Market
-------------------------------------------------------------
December 31, December 31,
2003 2002
----------------------------- ----------------------------
(dollars in thousands)
U.S. Government Services $305,496 66% $ 69,904 27%
Power Facilities Maintenance 150,308 32 175,032 69
Other 8,163 2 9,244 4
------------- ------------ ------------ ------------
Total $463,967 100% $254,180 100%
============= ============ ============ ============
The Company's construction business involves two basicindustry is highly competitive and the markets in which we compete have numerous and often larger companies that provide similar services. In certain end markets of the building segment, such as hospitality and gaming, we are one of the largest providers of construction services in the United States, but within other end markets of the building segment, and within the civil and management services segments, or operations:there are competitors with significantly greater capabilities and resources. In our building segment, we compete with a variety of national and civil.regional contractors. In the west, our primary competitors are Marnell-Carrao, Huntcor and McCarthy. In the northeast, our primary competitors are Suffolk, Gilbane and Turner and in the southeast our primary competitors include Centex-Rooney, James B. Pirtle and Whiting-Turner. In our management services segment, we compete principally with national engineering and construction firms such as Fluor, Bechtel, Washington Group International and Kellogg Brown & Root. In our civil segment, we compete principally with large civil construction firms that operate in the northeast, including Slattery/Skanska, Granite Construction/Halmar, Tully and Schiavone. We believe price, experience, reputation, responsiveness, customer relationships, project completion track record and quality of work are key factors in customers awarding contracts across our end markets.
Type of Contracts
The general buildingcontracting and civil contractingmanagement services provided by the Companywe provide 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 providesWe provide 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:
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.
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-KCaptionPage NumberSelected 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 SourceYear 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 Companyour contracts have been of the fixed price and GMP type. A summary of revenues and backlog by type of contract for each of the most recent three years in the period ended December 31, 2003 follows:
Revenues - Year Ended
December 31, Backlog as of
December 31,
- -------------------------------- ----------------------------------------------------------
2003 2002 2001
2000 2002 2001 2000
- ---------- --------- --------- -------- -------- --------------- ------- -------
35% 25% 32%
Fixed Price 30 30% 41%
46%
65 75 68 CPAF,Cost Plus, GMP or CM 70 70 59
54
- ---------- --------- --------- -------- -------- --------------- ------- -------
100% 100% 100%
======= ======= =======
Revenues for the
Year Ended December 31,
----------------------------
2003 2002 2001
------- ------- -------
Fixed Price 18% 35% 25%
Cost Plus, GMP or CM 82 65 75
------- ------- -------
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 identifiesWe identify 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, meetingsthrough the efforts of the Company'sour business development personnel and through meetings with potential customers to discuss their current and future construction projects or programs, meeting with knowledgeableother 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.
engineers. After ascertaining thedetermining which projects are available, the Company further refines the list by considering other criteria,we make a decision on which projects to pursue based on such factors 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, source of project funding, geographic location and type of contract and other financial and operational risk factors.contract.
After deciding which contracts to pursue, the Company usually haswe generally have to complete a prequalification process with the applicable agency or owner.customer. 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 generallytypically involves three phases. Initially, the Company performswe perform a detailed review of the plans and specifications, summarizessummarize the various types of work involved and related estimated quantities, determinesdetermine the project duration or schedule and highlightshighlight the unique and riskier aspects of the project. After the initial review, a decision is madewe decide whether or not to continue to pursue the project or not. Assumingproject. If the answer is positive, the Company performswe perform 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. BidsRequests for proposals or negotiated contracts with public or private ownerscustomers are generally awarded to the lowest bidder, but many times otherbased on a combination of technical capability and price, taking into consideration factors such as shorter project schedules orschedule and prior experience withexperience.
During the owner, result in the awardconstruction phase 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 alla project, we monitor our progress by comparing actual costs incurred onand quantities completed to date with budgeted amounts and the project plusschedule and periodically, at a reasonable profit. Manyminimum on a quarterly basis, prepare an updated estimate of total forecasted revenue, cost and profit for 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.project.
During the normal course of most projects, the ownercustomer 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"“change order” to the original contract and reviewed, approved and paid in accordance with the normal change order provisions of the contract.
Many times we are required to perform extra or change order work as directed by the change orders definecustomer even if the customer has not agreed in advance on the scope of work and the contractor is directed to proceed, but theor price of the work is subject to further negotiations afterbe performed. This process may result in disputes over whether the work performed 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 outsidebeyond the scope of the work included in the original bid documents,project plans and specifications or, if the physical conditions found oncustomer agrees that the project sitework performed qualifies as extra work, the price the customer is willing to pay for the extra work. Even when the customer agrees to pay for the extra work, we may be required to fund the cost of such work for a lengthy period of time until the change order is approved and funded by the customer. Also, these unapproved change orders, contract disputes or claims result in costs being incurred by us that cannot be billed currently and, therefore, are different from those presentedreflected as “Unbilled Work” in our balance sheet. See Note 1(d) of Notes to Consolidated Financial Statements. In addition, any delay caused by the bid documents, or for any varietyextra work may adversely impact the timely scheduling of other reasons the contractor believes the directiveproject work and our ability to perform the work creates costs that could not reasonably be anticipated from the bid documents, themeet specified contract permits the contractor to make a request for an adjustment to the contract price. Such adjustment requests are often called "contract claims".milestone dates.
The process for resolving claims may vary from one contract to another but, in general, there is a process towe attempt to resolve claims at the project supervisory level through the normal change order process or with higher levels of management within theour organization of the contractor and the owner.customer’s organization. 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 haswe typically have the contractual obligation to perform the work and must incur the related costs. The contractor doesWe do 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'sOur contracts generally involve work durations in excess of one year. Revenue onfrom our contracts in process is generally recorded under the percentage of completion contract accounting method. For a more detailed discussion of the Company'sour policy in these areas, see Note 1(d) of Notes to Consolidated Financial Statements, entitled "Method“Method of Accounting for Contracts"Contracts”.
While our 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 customer. On fixed price contracts, we attempt to insulate ourselves from the unfavorable effects of inflation by incorporating escalating wage and price assumptions, where appropriate, into our construction bids and by obtaining firm fixed price quotes from major subcontractors and material suppliers at the time of the bid period. Construction and other materials used in our 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.
Our properties and operations are subject to federal, state and municipal laws and regulations relating to the protection of the environment, including requirements for water discharges, air emissions, the use, management and disposal of solid or hazardous materials or wastes and the cleanup of contamination. For example, we must apply water or chemicals to reduce dust on road construction projects and to contain contaminants in storm run-off water at construction
sites. In certain circumstances, we 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. We believe that we are in substantial compliance with all applicable laws and regulations. However, future requirements or amendments to current laws or regulations imposing more stringent requirements could require us to incur costs to maintain or achieve compliance.
In addition, some environmental laws, such as the U.S. federal “Superfund” law and similar state statutes, can impose liability for the entire cost of cleanup of contaminated sites upon any of the current or former owners or operators or upon parties who sent wastes to these sites, regardless of who owned the site at the time of the release or the lawfulness of the original disposal activity. Contaminants have been detected at some of the sites that we own, or where we worked as a contractor in the past, and we have incurred costs for investigation or remediation of hazardous substances. We also believe that our liability for these sites will not be material, either individually or in the aggregate, and have pollution legal liability insurance available for such matters. We believe that we have minimal exposure to environmental liability as a result of the activities of Perini Environmental Services, Inc., or Perini Environmental, a wholly owned subsidiary of Perini 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 activities; however, Perini and Perini Environmental generally carried insurance or received indemnification from customers to cover the risks associated with the remediation business.
We currently own real estate in three states and as an owner, are subject to laws governing environmental responsibility and liability based on ownership. We are not aware of any significant environmental liability associated with our ownership of real estate.
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, or PL&D, our wholly owned real estate development subsidiary. Accordingly, approximately 97.5% of the property has been liquidated since June 30, 1999. As of December 31, 2002 and 2003, the only land remaining to be sold consists of certain fully developed parcels in Raynham, Massachusetts. This property is included in “Other Assets” on the Consolidated Balance Sheet. (See Note 13 of Notes to Consolidated Financial Statements.)
All of our 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, we maintain general liability, excess liability and workers’ compensation insurance in amounts that we believe are consistent with our risk of loss and industry practice. During 2001, we were able to significantly limit our financial risk under our 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, we found it necessary to purchase workers’ compensation and general liability policies at substantially higher premiums with a self-insured deductible limit of $250,000 per occurrence, with appropriate aggregate caps on losses retained.
As a normal part of the construction business, we are often required to provide various types of surety bonds as an additional level of security of our performance. We have surety arrangements with several sureties, one of which we have dealt with for over 75 years and another of which owns approximately 21% of our outstanding common stock. (See Note 12 of Notes to Consolidated Financial Statements.)
The total number of personnel employed by us is subject to seasonal fluctuations, the volume of construction in progress and the relative amount of work performed by subcontractors. During 2003, the average number of employees was approximately 2,400 with a maximum of approximately 3,500 and a minimum of approximately 1,600.
We operate primarily as a union contractor. As such, we are 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 our 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 us. As of December 31, 2003, approximately 825 of our total of 1,725 employees were union employees. During the past several years, we have not experienced any work stoppages caused by our union employees.
We are subject to a number of risks, including those summarized below. Such risks could have a material adverse effect on our financial condition, results of operations and cash flows. Also, see disclosure under “Forward-looking Statements” on page 2.
We are subject to significant legal proceedings, which, if determined adversely to us, could harm our reputation, preclude us from bidding on future projects and/or have a material adverse effect on us.
We are involved in various lawsuits, including the legal proceedings described under Item 3 -- “Legal Proceedings.” Some of these proceedings involve claims and judgments against us for significant amounts. For example, the litigation with the Los Angeles MTA has resulted in an award against the Tutor-Saliba-Perini joint venture (a joint venture in which we have a 40% interest), Tutor-Saliba and us, jointly and severally, for $63.0 million plus accrued interest. This award is currently being appealed by the joint venture. We do not believe that this or any other pending litigation will ultimately result in a final judgment against us that would materially adversely affect us. Litigation is, however, inherently uncertain and it is not possible to predict what the final outcome will be of any legal proceeding. A final judgment against us would require us to record the related liability and fund the payment of the judgment and, if such adverse judgment is significant, it could have a material adverse effect on us.
In addition, legal proceedings resulting in judgments or findings against us may harm our reputation and prospects for future contract awards. For example, we are defendants in a civil action brought by the San Francisco City Attorney on behalf of the City and County of San Francisco and the citizens of California, in which it is alleged, among other things, that we violated various bidding practices and minority contracting regulations and committed acts of fraud. If a final judgment is determined adversely to us, it may harm our reputation among other municipalities, which could preclude us from being qualified to bid on future municipal projects.
Our contracts require us to perform extra or change order work, which can result in disputes and adversely effect our working capital, profits and cash flows.
Our contracts generally require us to perform extra or change order work as directed by the customer even if the customer has not agreed in advance on the scope or price of the work to be performed. This process may result in disputes over whether the work performed is beyond the scope of the work included in the original project plans and specifications or, if the customer agrees that the work performed qualifies as extra work, the price the customer is willing to pay for the extra work. Even when the customer agrees to pay for the extra work, we may be required to fund the cost of such work for a lengthy period of time until the change order is approved and funded by the customer.
Also, these unapproved change orders, contract disputes or claims result in costs being incurred by us that cannot be billed currently and therefore, are reflected as “unbilled work” in our balance sheet. See Note 1(d) of Notes to Consolidated Financial Statements. To the extent actual recoveries with respect to unapproved change orders, contract disputes or claims are lower than our estimates, the amount of any shortfall will reduce our revenues and the amount of unbilled work recorded on our balance sheet, and could have a material adverse effect on our working capital, results of operations and cash flows. In addition, any delay caused by the extra work may adversely impact the timely scheduling of other project work and our ability to meet specified contract milestone dates. For example, we are currently, along with our joint venture partners, pursuing a series of claims for additional contract time and compensation against the Massachusetts Highway Department for work performed by the joint venture on a portion of the Central Artery/Tunnel project in Boston, Massachusetts. During construction, the Massachusetts Highway Department ordered the joint venture 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, we encountered a number of unforeseen conditions during construction that greatly increased our cost of performance. See Item 3.-- “Legal Proceedings.”
Economic, political and other risks associated with our international operations involve risks not faced by our domestic competitors, which could adversely affect our revenue and earnings.
Approximately 18% of our revenue for the year ended December 31, 2003 was derived from our work on projects located outside of the United States. We expect non-U.S. projects to continue to contribute to our revenue and earnings for the foreseeable future. Our international operations expose us to risks inherent in doing business outside the United States, including:
Any of these factors could harm our international operations and, consequently, our business and consolidated operating results. Specifically, failure to successfully manage international growth could result in higher operating costs than anticipated or could delay or preclude altogether our ability to generate revenues in key international markets.
A decrease in U.S. government funding or change in government plans, particularly with respect to rebuilding Iraq and Afghanistan, as well as the risks associated with undertaking projects in these countries, could adversely affect the continuation of existing projects or the number of projects available to us in the future.
We recently performed design-build security upgrades at United States embassies and consulates throughout the world, and we are currently engaged in significant building and infrastructure reconstruction activities in Iraq and Afghanistan. The United States federal government has recently approved a spending bill for the reconstruction and defense of Iraq and has allocated significant funds to the defense of United States interests around the world from the threat of terrorism. A decrease in government funding of these projects or a decision by the federal government to reduce or eliminate the use of outside contractors to perform this work would decrease the number of projects available to us and limit our ability to obtain new contracts in this area.
In addition, our projects in Iraq, Afghanistan and other areas of political and economic instability carry with them specific security and operational risks. Intentional or unintentional acts in those countries could result in damage to our construction sites or harm to our employees and could result in our decision to withdraw our operations from the area. Also, as a result of these acts, the federal government could decide to cancel or suspend our operations in these areas.
Increased regulation of the hospitality and gaming industry could reduce the number of future hospitality and gaming projects available, which, in turn, could adversely impact our future earnings.
The hospitality and gaming industry is regulated extensively by federal and state regulatory bodies, including state gaming commissions, the National Indian Gaming Commission and state and federal taxing and law enforcement agencies. From time to time, legislation is proposed in the legislatures of some of these jurisdictions that, if enacted, could adversely affect the tax, regulatory, operational or other aspects of the hospitality and gaming industry. Legislation of this type may be enacted in the future. The federal government has also previously considered a federal tax on casino revenues and may consider such a tax in the future. In addition, companies that operate in the hospitality and gaming industry are
currently subject to significant state and local taxes and fees in addition to normal federal and state corporate income taxes, and such taxes and fees are subject to increase at any time. For example, a new tax law enacted in Nevada on July 22, 2003 increased the taxes applicable to Nevada gaming operations. Similar legislation or new hospitality and gaming regulations could deter future hospitality and gaming construction projects in jurisdictions in which we derive significant revenue. As a result, the enactment of such legislation or regulations could adversely impact our future earnings.
A decrease in government funding of infrastructure projects could reduce revenues within our civil construction business segment.
Our civil construction markets are dependent on the amount of infrastructure work funded by various governmental agencies which, in turn, depends on the condition of the existing infrastructure, the need for new or expanded infrastructure and federal, state or local government spending levels. A decrease in government funding of infrastructure projects could decrease the number of civil construction projects available and limit our ability to obtain new contracts, which could reduce revenues within our civil construction segment..
If we are unable to accurately estimate the overall risks, revenues or costs on a contract, we may achieve a lower than anticipated profit or incur a loss on the contract.
We generally enter into four principal types of contracts with our clients: fixed price contracts, cost plus award fee contracts, guaranteed maximum price contracts, and, to a lesser extent, construction management or design-build contracts. A significant portion of our revenues and backlog are derived from fixed price contracts. For example, approximately 18% of our revenues for the year ended December 31, 2003 were derived from fixed price contracts. Fixed price contracts require us to perform the contract for a fixed price irrespective of our actual costs. As a result, we realize a profit on these contracts only if we successfully control our costs and avoid cost overruns. Cost plus award fee contracts provide for reimbursement of the costs required to complete a project, but generally have a lower base fee and an incentive fee based on cost and/or schedule performance. If our costs exceed the revenues available under such a contract or are not allowable under the provisions of the contract, we may not receive reimbursement for these costs. Guaranteed maximum price contracts provide for a cost plus fee arrangement up to a maximum agreed-upon price. These contracts also place the risk on us for cost overruns that exceed the guaranteed maximum price. Construction management and design-build contracts are those under which we agree to manage a project for the client for an agreed upon fee, which may be fixed or may vary based upon negotiated factors. Profitability on these types of contracts is driven by changes in the scope of work or design issues, which could cause cost overruns beyond our control and limit profits on these contracts.
Cost overruns, whether due to inefficiency, faulty estimates or other factors, result in lower profit or a loss on a project. A significant number of our contracts are based in part on cost estimates that are subject to a number of assumptions. If our estimates of the overall risks, revenues or costs prove inaccurate or circumstances change, then we may incur a lower profit or a loss on the contract.
The percentage-of-completion method of accounting for contract revenue may result in material adjustments, which could result in a charge against our earnings.
We recognize contract revenue using the percentage-of-completion method. Under this method, estimated contract revenue is recognized by applying the percentage of completion of the project for the period to the total estimated revenue for the contract. Estimated contract losses are recognized in full when determined. Total contract revenue and cost estimates are reviewed and revised at a minimum on a quarterly basis as the work progresses and as change orders are approved. Adjustments based upon the percentage of completion are reflected in contract revenue in the period when these estimates are revised. To the extent that these adjustments result in an increase, a reduction or an elimination of previously reported contract profit, we recognize a credit or a charge against current earnings, which could be material.
We are subject to a number of risks as a government contractor, which could either harm our reputation, result in fines or penalties against us and/or adversely impact our financial condition.
We are a major provider of services to government agencies and therefore are exposed to risks associated with government contracting. For example, we must comply with and are affected by laws and regulations relating to the formation, administration and performance of government contracts, such as the Federal Acquisition Regulation, the Cost
Accounting Standards and Department of Defense security regulations. A violation of these laws or regulations could require us to pay fines and penalties, result in the termination of existing contracts or result in our being suspended from future government contracts. If a government agency determines that we or one of our subcontractors engaged in improper conduct, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines and suspension or prohibition from doing business with the government, any of which could impact our future earnings or harm our reputation.
Government agencies generally can terminate or modify their contract with us at their convenience and some government contracts must be renewed annually. If a government agency terminates or fails to renew a contract, our backlog may be reduced. If a government agency terminates a contract due to our unsatisfactory performance, it could result in liability to us and harm our ability to compete for future contracts.
We have been, are and will be in the future, the subject of audits and cost reviews by contracting agencies, such as the United States Defense Contract Audit Agency, or the DCAA. These agencies review a contractor’s performance and may disallow costs if the agency determines that we accounted for such costs in a manner inconsistent with Cost Accounting Standards or other regulatory and contractual requirements. Therefore, a negative audit could result in a substantial adverse adjustment to our revenues and costs, harm our reputation and result in civil and criminal penalties.
Our participation in construction joint ventures exposes us to liability and/or reputational harm for failures of our partners.
We sometimes enter into joint venture arrangements with outside partners on a joint and several basis so that we can jointly bid on and execute a particular project and reduce our financial or operational risk with respect to such projects. Success on these joint projects depends in large part on whether our joint venture partners satisfy their contractual obligations. If a joint venture partner fails to perform or is financially unable to bear its portion of required capital contributions, we could be required to make additional investments and provide additional services in order to make up for our partner’s shortfall. Further, if we are unable to adequately address our partner’s performance issues, the client may terminate the project, which could result in legal liability to us, harm our reputation and reduce profit on a project.
Our pension plan is underfunded and we may be required to make significant future contributions to the plan.
Our defined benefit pension plan is a non-contributory pension plan covering substantially all of our employees. As of December 31, 2003, our pension plan was underfunded by approximately $37.2 million. We are required to make cash contributions to our pension plan to the extent necessary to comply with minimum funding requirements imposed by employee benefit and tax laws. The amount of any such required contributions is determined based on an annual actuarial valuation of the plan as performed by the plan’s actuaries. During 2003, we voluntarily contributed $3.0 million in cash to our defined benefit pension plan. The amount of future contributions will depend upon asset returns, then-current discount rates and a number of other factors, and, as a result, the amount we may elect or be required to contribute to our pension plan in the future may increase significantly. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations--Critical Accounting Policies--Defined Benefit Retirement Plan.”
The construction services industry is highly schedule driven, and our failure to meet schedule requirements of our contracts could adversely affect our reputation and/or expose us to financial liability.
Many of our contracts are subject to specific completion schedule requirements with liquidated damages charged to us in the event the construction schedules are not achieved. Failure to meet any such schedule requirements could cause us to suffer damage to our reputation within our industry and client base, as well as pay significant liquidated damages.
Procurement of new project awards is very competitive and our failure to compete effectively couldreduce our market share and profits.
New project awards are often determined through either a competitive bid basis or a negotiated basis. Bids or negotiated contracts with public or private owners are generally awarded based upon price, but many times other factors, such as shorter project schedules or prior experience with the owner, result in the award of the contract. Within our
industry, we compete with many national, regional and local construction firms. Some of these competitors have achieved greater market penetration than we have in the markets in which we compete, and some have greater financial and other resources than we do. As a result, we may need to accept lower contract margins or more fixed price or unit price contracts in order for us to compete against competitors that have the ability to accept awards at lower prices or have a pre-existing relationship with the owner. If we are unable to compete successfully in such markets, our relative market share and profits could be reduced.
Economic downturns could reduce the level of consumer spending within the hospitality and gaming industry which could adversely affect demand for our services.
Consumer spending in the hospitality and gaming industry is discretionary and may decline during economic downturns, when consumers have less disposable income. Even an uncertain economic outlook may adversely affect consumer spending in hospitality and gaming operations, as consumers may spend less in anticipation of a potential economic downturn. Decreased spending in the hospitality and gaming market could deter new projects within the industry and the expansion or renovation of existing hospitality and gaming facilities, which could impact our revenues and earnings.
An inability to obtain bonding could limit the number of projects we are able to pursue.
As is customary in the construction business, we often are required to provide surety bonds to secure our performance under construction contracts. Our ability to obtain surety bonds primarily depends upon our 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 our 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. Therefore, we may be unable to obtain surety bonds, which could adversely affect our results of operations and revenues.
Conflicts of interest may arise with respect to our Chairman and Chief Executive Officer.
Ronald N. Tutor, our chief executive officer and chairman of our Board of Directors, is the sole shareholder and chief executive officer of Tutor-Saliba Corporation, or Tutor-Saliba, a California corporation that beneficially owns approximately 27% of our common stock. Mr. Tutor also devotes a substantial amount of time to the business activities of Tutor-Saliba. Tutor-Saliba is engaged in the construction industry, and we have participated in joint ventures with Tutor-Saliba and expect to continue to do so. Although our joint ventures with Tutor-Saliba are discussed with our Audit Committee, transactions we enter into with Tutor-Saliba could be influenced by Mr. Tutor. As in any joint venture, we could have disagreements with Tutor-Saliba over the operation of the joint ventures or the joint ventures could be involved in disputes with third parties, such as the litigation described under Item 3. – “Legal Proceedings,” where we may or may not have an identity of interest with Tutor-Saliba. When such situations arise, we may feel constrained in aggressively pursuing all options available to us because of Mr. Tutor’s importance to us as our Chief Executive Officer and Chairman and a significant shareholder. If we face such a situation and elect to pursue options against Tutor-Saliba, it is possible that Mr. Tutor or we could terminate his management relationship with us, which could harm our reputation and impact our ability to procure future projects.
We could incur significant costs as a result of liability under environmental laws.
Our operations are subject to environmental laws and regulations governing among other things, the discharge of pollutants to air and water, the handling, storage and disposal of solid or hazardous materials or wastes and the remediation of contamination, sometimes associated with leaks or releases of hazardous substances. For example, we own, lease, or have used, in our construction, real estate and environmental remediation operations property upon which solid or hazardous wastes may have been disposed of or released. Any release of such materials or wastes by us or by third parties who operated on these properties may result in liability for investigation or remediation costs. In addition, violations of these environmental laws and regulations could subject us and our management to fines, civil and criminal penalties, cleanup costs and third party property damage or personal injury claims.
Various federal, state and local environmental laws and regulations may impose liability for the entire cost of investigation and clean-up of hazardous or toxic substances. These laws may impose liability without regard to ownership at the time of the contamination or whether or not we caused the presence of contaminants.
If we are unable to attract and retain key personnel, our reputation may be harmed and our future earnings may be negatively impacted.
Our business substantially depends on the continued service of key members of our management, particularly Ronald N. Tutor, Robert Band, Craig W. Shaw, Zohrab B. Marashlian and Michael E. Ciskey, who, collectively, have an average of 29 years in the construction industry and 23 years with us. The loss of the services of any of our key senior management could have a material adverse effect on us. Our future success will also depend on our ability to attract and retain highly skilled personnel, such as engineering, project management and senior management professionals. Competition for these employees is intense, and we could experience difficulty from time to time in hiring and retaining the personnel necessary to support our business. If we do not succeed in retaining our current employees and attracting new high quality employees, our reputation may be harmed and our future earnings may be negatively impacted.
Work stoppages and other labor problems could adversely affect portions of our business, financial position, results of operations and cash flows.
We are a signatory to numerous local and regional collective bargaining agreements, both directly and through trade associations. Future agreements reached in collective bargaining could increase our operating expenses and reduce our profits as a result of increased wages and benefits. If the industry were unable to negotiate with any of the unions, it could result in strikes, work stoppages or increased operating costs as a result of higher than anticipated wages or benefits. If the unionized workers engage in a strike or other work stoppage, or other employees become unionized, we could experience a disruption of our operations and higher ongoing labor costs, which could adversely affect portions of our business, financial position, results of operations and cash flows.
We are subject to restrictive covenants under our credit facility that could limit our flexibility in managing the business.
Our credit facility imposes operating and financial restrictions on us. These restrictions include, among other things, limitations on our ability to:
In addition, our credit facility prohibits us from incurring debt, other than debt incurred for financing our corporate headquarters, insurance premiums and construction equipment, from other sources without the consent of our lenders. The amount available to us under our credit facility at December 31, 2003 was $67.2 million.
Our credit facility contains financial covenants that require us to maintain a minimum working capital ratio, tangible net worth and operating profit levels. Our credit facility also requires us to comply with a minimum interest coverage ratio. Our ability to borrow funds for any purpose will depend on our satisfying these tests.
If we are unable to meet the terms of the financial covenants or fail to comply with any of the other restrictions contained in our credit facility, an event of default could occur. An event of default, if not waived by our lenders, could
result in the acceleration of any outstanding indebtedness, causing such debt to become immediately due and payable. If such an acceleration occurs, we may not be able to repay such indebtedness on a timely basis. As our credit facility is secured by substantially all of our assets, acceleration of this debt could result in foreclosure of those assets. In the event of a foreclosure, we would be unable to conduct our business and may be forced to discontinue ongoing operations.
We may have difficulty raising needed capital in the future, which could limit our available working capital and our ability to make acquisitions or future investments.
We may require additional financing in order to make future investments, make acquisitions or provide needed additional working capital. Our ability to arrange such financing in the future will depend in part upon prevailing capital market conditions, as well as conditions in our business and our operating results; such factors may impact our efforts to arrange additional financing on terms satisfactory to us. We have pledged substantially all of our assets as collateral in connection with our credit facility. As a result, we may have difficulty obtaining additional financing in the future if such financing requires us to pledge our assets as collateral. If additional financing is obtained by the issuance of additional shares of common stock, control of Perini may change and stockholders may suffer dilution. If adequate funds are not available, or are not available on acceptable terms, we may not be able to make future investments, take advantage of acquisition or other opportunities, or otherwise respond to competitive challenges.
Timing of the award and performance of a new contract would have an adverse effect on our operating results.
At any point in time, a substantial portion of our revenues is directly or indirectly derived from a limited number of large construction projects. It is generally very difficult to predict whether and when we will receive such awards as these contracts frequently involve a lengthy and complex bidding and selection process which is affected by a number of factors, such as market conditions, financing arrangements and governmental approvals. Because a significant portion of our revenue is generated from large projects, our results of operations and cash flows can fluctuate from quarter to quarter depending on the timing of our new contract awards.
In addition, timing of the revenues, earnings and cash flows from our projects can be delayed by a number of factors, including weather conditions, delays in receiving material and equipment from vendors and changes in the scope of work to be performed. Such delays, if they occur, could have an adverse effect on our operating results for a particular period.
We may not be able to fully realize the revenue value reported in our backlog.
As of December 31, 2003, our backlog was approximately $1.67 billion. We include a construction project in our backlog at such time as a contract is awarded or a firm letter of commitment is obtained and funding is in place. The revenue projected in our backlog may not be realized or, if realized, may not result in profits. For example, if a project reflected in our backlog is terminated, suspended or reduced in scope, it would result in a reduction to our backlog which would reduce, potentially to a material extent, the revenue and profit we actually receive from contracts in backlog. If a client cancels a project, we may be reimbursed for certain costs but typically have no contractual right to the total revenues reflected in our backlog. Significant cancellations or delays of projects in our backlog could have a material adverse effect on our cash flows and profits.
We have not paid dividends on our $21.25 Preferred Stock in several years and are currently in litigation with certain of our preferred stockholders.
Under the terms of our $21.25 Preferred Stock, the holders of shares of our $21.25 Preferred Stock are entitled to receive an annual cash dividend of $21.25 per share when and as declared by the Board of Directors out of funds legally available for such purposes. We have not paid dividends on our $21.25 Preferred Stock since 1995, though they have been fully accrued due to the “cumulative” feature of the $21.25 Preferred Stock. The holders of our $21.25 Preferred Stock have the right to elect two directors to our board in the event that dividends are in arrears for at least six quarters, and they have done so at each of our last six annual meetings of stockholders. We are currently in litigation with certain holders of our $21.25 Preferred Stock. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations--Dividends” and “Item 3. --Legal Proceedings--$21.25 Preferred Shareholders Class Action Lawsuit.” If this litigation results in a final judgment against us, and such adverse judgment is significant, it could have a material adverse
effect on our cash flows and profits.
Our acquisition strategy involves a number of risks, the realization of which could adversely impact our future revenues and the revenues of the businesses that we acquire.
As a part of our growth strategy, we plan to pursue selective strategic acquisitions of businesses. This strategy involves risks, including diversion of management’s attention, potential loss of key employees of acquired businesses and difficulties in integrating operations and systems. We cannot be certain that we will be able to locate suitable acquisitions or consummate any such transactions on terms and conditions acceptable to us or that such transactions will be successful. An inability to successfully integrate acquired businesses into our operations could result in significant losses for us.
The sale of our common stock in a pending secondary offering may depress the market price of our common stock.
We are currently participating in a secondary stock offering requested by certain selling stockholders whereby a minimum of approximately 5.9 million and a maximum of 6.8 million shares of previously unregistered shares of our common stock could be sold by such stockholders. As of December 31, 2003, the number of shares of our outstanding common stock freely tradeable on the American Stock Exchange and not owned by our officers, directors, or affiliates was approximately 5.5 million. The sale of the shares of common stock in the secondary offering could depress the market price of our common stock.
Future sales of a substantial amount of our common stock may cause our stock price to decline.
Upon completing the secondary offering referred to above, we will have approximately 22.9 million shares of common stock outstanding. Our principal stockholders, directors and executive officers will own approximately 11.5 million of these shares. These stockholders will be free to sell those shares, subject to the limitations of Rule 144 or Rule 144(k) under the Securities Act of 1933, as amended and applicable restrictions on transfer contained in our shareholders agreement. In addition, after giving effect to the sale of shares in the secondary offering (excluding any exercise of the over-allotment option granted to the underwriters), the holders of approximately 11.8 million of our shares have the right to require us to register all or part of their shares under registration rights agreements. See Note 7 of Notes to Consolidated Financial Statements for a more detailed discussion of the registration rights agreements. Registration of these restricted shares of common stock would permit their sale into the public market immediately. We cannot predict when these stockholders may sell their shares or in what volumes. However, the market price of our common stock could decline significantly if these stockholders sell a large number of shares into the public market after the offering or if the market believes that these sales may occur.
We may also issue our common stock from time to time as consideration for future acquisitions and investments. In the event any such acquisition or investment is significant, the number of shares of our common stock that we may issue could in turn be significant. In addition, we may also grant registration rights covering those shares in connection with any such acquisitions and investments.
Limited trading volume of our common stock may contribute to its price volatility.
Our common stock is traded on the American Stock Exchange. For the fourth quarter of 2003, the average daily trading volume for our common stock as reported by the American Stock Exchange was approximately 22,400 shares. Even if we achieve a wider dissemination by means of the shares offered pursuant to the secondary offering referred to above, we are uncertain as to whether a more active trading market in our common stock will develop. As a result, relatively small trades may have a significant impact on the price of our common stock.
Our stock price has been and may continue to be volatile and may result in substantial losses for investors.
The market price of our common stock has been, and is likely to continue to be, volatile. Since January 1, 2003, the market price for our common stock has been as high as $14.90 per share and as low as $3.62 per share. Additionally,
the stock market in general has been highly volatile since 2000. This volatility in stock price often has been unrelated to our operating performance.
In addition, the trading price of our common stock could be subject to wide fluctuations in response to:
Fluctuations in our stock price as a result of any of the foregoing factors may result in substantial losses for investors.
Fluctuations in our quarterly revenues and operating results may lead to reduced prices for our stock.
Because the Company'sour 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.conditions. 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,projects, which may in turn lead to reduced prices for our stock.
Ownership of our common stock is concentrated among a few stockholders who could act in a way that favors their interests to the reported operating results fordetriment of our interests and those of other stockholders.
Following the secondary offering referred to above and assuming that all of the selling stockholders sell all of the shares of common stock being registered in the secondary offering, the percentage of shares owned by our executive officers, directors and 5% stockholders would be reduced to 50.2%. These stockholders have the power to control the election of most of our directors, and the approval of any one fiscal quarteraction requiring majority approval of our common stockholders, including certain amendments to our charter. In addition, without the consent of these stockholders, we may not be indicativeable to enter into transactions that could be beneficial to us or our other stockholders.
Provisions of future results.
CompetitionMassachusetts law and of our charter and bylaws may make a takeover of us more difficult, which could impede the ability of our stockholders to benefit from a change in control or to change our management and Board of Directors.
The construction businessProvisions in our restated articles of organization and bylaws and in the Massachusetts corporate law may make it difficult and expensive for a third party to pursue a tender offer, change in control or takeover attempt which is highly competitive. Competition is based primarily on price, reputationopposed by our management and Board of Directors. Public stockholders who might desire to participate in such a transaction may not have an opportunity to do so. Our bylaws provide for on time completion, quality and reliability, availabilitya staggered Board of surety capacity and financial strengthDirectors which makes it difficult for stockholders to change the composition of the contractor. WhileBoard of Directors in any one year. Our Board of Directors has the Company experiencesauthority to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to effect a great dealchange in control or takeover of competition from other large general contractors, somePerini. Also, we have adopted a rights plan that limits the ability of which may be larger and have greater financial resourcesany person to acquire more than 10% of our common stock, except in limited circumstances. These anti-takeover provisions could substantially impede the Company, as well asability of public stockholders to benefit from a number of smaller local contractors, it believes it has sufficient technical, managerialchange in control or to change our management 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.
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.
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 amountDirectors.
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.
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 our construction operations are summarized below:
Aproximate
Business Owned or Approximate Approximate Square
Segment(s) Leased by Perini Acres Feet of Office Space
------------------ ------------------ --------------- ---------------------------------------------------------- ---------------- ------------- -------------------
Principal Offices
- -----------------------------------------------
Framingham, MA Building, Civil and CivilManagement Owned 9 100,000
Services
Phoenix, AZ Building Leased - 22,700
Hawthorne,Peekskill, NY Civil Owned 2 21,000
Ft. Lauderdale, FL Building Leased - 12,80017,500
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
=============== =====================------------- -------------------
11 179,800
============= ===================
Principal Permanent
Storage Yards
- -----------------------------------------------
Bow, NH Civil Owned 70
Framingham, MA Building and Civil Owned 6
Peekskill, NY Civil Owned 3
Las Vegas, NV Building Leased 2
---------------
78
===============-------------
81
=============
The Company believes itsWe believe our properties are well maintained, in good condition, adequate and suitable for the Company'sour purpose and fully utilized. Properties for sale applicable to our previously discontinued real estate activities are described above under “Real Estate Operations.”
On May 11, 1990, contracts with two joint ventures in which Perini Corporation held a minority40% interest ("Joint Ventures") were terminated by the Washington Metropolitan Area Transit Authority, ("WMATA")or WMATA, on two adjacent subway construction contractsprojects in the District of Columbia. The contracts were awarded to the Joint Venturesjoint ventures in 1985 and 1986. However, Perini and Mergentime Corporation, ("Mergentime"),or Mergentime, the 60% managing partner, entered into an agreement in 1987 under which Perini withdrew from the Joint Venturesjoint 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 Venturejoint venture partner. After Perini withdrew from the Joint Ventures,joint ventures, Mergentime and WMATA were embroiled inhad 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,After both construction contracts were terminated, by WMATA and WMATA retained Perini, acting independently, to complete both projects.
Subsequently, the Joint Venturesjoint 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 Venturesjoint 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 Venturesjoint ventures liable to WMATA for damages in the amount of approximately $16.5 million and WMATA liable to the Joint Venturesjoint ventures for damages in the amount of approximately $4.3 million.
The Joint Venturesjoint 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. Onand on February 16, 1999, the Court of Appeals vacated the District Court'sCourt’s final judgment and ordered the successor District Court Judge to review theits prior findings of the initial Judge and hold further hearings in regard to the Joint Ventures'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 newa 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 thatgranted the Joint Ventures'joint ventures’ motion for a new trial be granted.
trial. The joint ventures are seeking $28.9 million, plus interest, from WMATA, and WMATA is seeking $29.3 million from the joint ventures. 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'sJudge’s pending decision is not yet determinable; therefore, no provision for loss, if any, has been recorded in the financial statements.
During 1995, a joint venture, Tutor-Saliba-Perini, ("TSP"),or TSP, in which Perini Corporation is athe 40% minority partner and Tutor-Saliba Corporation of Sylmar, CACalifornia 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")or the 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 constructioncertain tunnel and instation projects. In February 1999 the MTA countered with civil claims under the California False Claims Act against TSP, Tutor-Saliba Corporation,and Perini Corporationjointly and other parties.severally. Ronald N. Tutor, the Chairman and CEOChief Executive Officer of Perini Corporation since March of 2000, is also the CEOchief executive officer and the sole stockholder of Tutor-Saliba Corporation (see Note 13).Corporation.
Claims concerning the construction of the Wilshire/Normandie Subway StationMTA projects were tried before a Juryjury in 2001. During trial, the Judge ruled that TSP had failed to comply with the Court'sCourt’s prior discovery orders and the Judge penalized TSP, Tutor-Saliba and Perini for itsthe alleged non-compliance by dismissing TSP's claimTSP’s claims and by ruling, without a Juryjury finding, that TSP, wasTutor-Saliba and Perini were liable to the MTA for damages on the MTA's counterclaim.MTA’s counterclaims. The Judge then instructed the Juryjury that TSP, wasTutor-Saliba and Perini were liable to the MTA and charged the Juryjury with the responsibility of determining the amount of the damages based on the Judge'sJudge’s ruling. The Juryjury 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 the counterclaim have appealed the Judge'sJudge’s discovery sanction, the subsequent Juryjury award and the amended award. Oral arguments on the appeal are anticipated to be set some time in the Summer 2004. The ultimate financial impact of the Judge'sJudge’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
OnIn 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 Perini, Tutor-Saliba Corporation, ("TSC"),or 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 contractsprojects for work on the expansion of the San Francisco International Airport. A second amended complaint was filed in July 2003 which, among other things, added Ronald N. Tutor as a defendant. The Plaintiffsjoint venture was established by TSC, Perini and Buckley through two joint venture agreements dated October 28, 1996 and February 11, 1997. The joint venture had agreements with the Owner to perform work (“Contracts”) on only two of the above projects (“Projects”) and, as part of those Contracts, the joint venture provided performance and payment bonds to the Owner (“Bonds”).
In the second amended complaint, the plaintiffs allege, among other things, 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 Plaintiffsplaintiffs allege that TSC hasthe defendants have violated the United States Racketeer Influenced Corrupt Organizations Act. The Plaintiffsplaintiffs have asserted $30 million in damages and are seeking treble damages, punitive and exemplary damages, various civil penalties and debarmenta declaration that TSC and the joint venture are irresponsible bidders. It is unclear based on the plaintiff’s current complaint what portion of the JV and TSC from doing business withplaintiff’s claims relate to the City of San Francisco.two projects that the joint venture participated in.
On October 3, 2003, the Court granted the defendants’ motion to specify damages allegedly sustained for each contract. The Plaintiffs have not allocated their claims for damages and penalties amongstdefendants’ motion to dismiss the defendants or the seven contracts at issue, only two of which involved the JV.plaintiff’s second amended complaint is pending.
TSC is the managing partner of the JV,joint venture and, in December
1997, Perini sold its entire 20% interest in the JVjoint venture to TSC. As part of that sale agreement, TSC has agreed to indemnify Perini from any liability that Perini is required to pay by reason of or arising out of any event or occurrence subsequent to the date of the sale of Perini’s interest in the joint venture including legal feesin any way connected with the joint venture agreements, the Contracts, the Projects and expenses.the Bonds. It is unclear based on the plaintiff’s current complaint whether the claims against the joint venture arise out of events that occurred subsequent to the date of the sale of Perini’s interest. The ultimate financial impact of this action is not yet determinable.
Perini/Kiewit/Cashman Joint Venture - Central Artery/Tunnel Project Matter
Perini/Kiewit/Cashman Joint Venture, ("PKC"),or 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")or 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'sPKC’s cost of performance.
Certain of PKC'sPKC’s claims have been presented to a Disputes Review Board, ("DRB")or the 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 onOn March 20, 2002, from the Superior Court of the Commonwealth of Massachusetts that approved PKC'sPKC’s request to have MHD comply with the DRB's decision to award theDRB’s $17.4 million for the time delay.award. 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 awards totaling $17.1 million for impacts and inefficiencies caused by MHD to PKC's underpinning work in the amountcertain 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’s work. 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 resolutioncompletion of the current negotiationsnegotiation and mediation discussed below.
The pending claims yet to be decided by the current/replacementcurrent DRB on a binding basis have an anticipated value of $43$49.4 million. The remaining claims to be decided by the replacement DRB on a non-binding basis have an anticipated value of $80$72.6 million.
On August 14, 2002 the Massachusetts Attorney General'sGeneral’s office, pursuant to its authority under the Massachusetts False Claims Act, served a Civil Investigative Demand ("CID"(“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'sGeneral’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'sPKC’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 Perini began mediation on
all claims in September 2003. Management has made an estimate of the claimstotal anticipated cost recovery on this project and it 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 byincluded in revenue recorded to date. To the Saginaw Chippewa Indian Tribe ("Tribe") to construct a hotel/casino resort in Mt. Pleasant, Michigan. Sinceextent new facts become known or 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 feescost recovery included in the amountclaim settlement varies from this estimate, the impact of approximately $1.2 million. On October 30, 2000, PBC filed an action to enforce the awardchange will be reflected in the Tribal Court of the Saginaw Chippewa Indian Tribe. On January 31, 2002, the Tribal Court refused to confirm the award, claimingfinancial statements at 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.time.
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.
This is an action originally broughta binding arbitration proceeding arising out of a contract between the Redondo/Perini Joint Venture, or RPJV, a joint venture in 1999 in San Francisco County Superior Court by San Francisco State University ("SFSU") againstwhich Perini and several subcontractors in conjunction withRedondo Construction Corp., or Redondo, each have a 50% interest and the Siemens Transportation Partnership, S.E., Puerto Rico, or STP. STP is constructing a public metropolitan passenger rail transportation project for the Commonwealth of Puerto Rico and RPJV is responsible for 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 termsportion of the settlement, Perini has paidproject.
On March 19, 2002, Redondo filed a petition for reorganization under 11 U.S.C. Chapter 11 in U.S. Bankruptcy Court for the District of Puerto Rico.
On December 23, 2002, RPJV filed an arbitration demand against STP seeking the recovery of approximately $38 million of additional costs related to SFSU economicdesign changes and the late completion of the design. On January 31, 2003, STP filed a counter-demand against RPJV seeking the recovery of damages allegedly related to defects in design and construction and the late completion of RPJV’s work in the amount of $16.7approximately $17.9 million and will make certain defined repairs and/or modificationsalong with the repayment of approximately $22.6 million for alleged advances previously paid to the building.RPJV.
Also underOn October 31, 2003, the termsparties each revised their statement of damages. RPJV’s total claim is now approximately $71 million. STP’s revised claim is approximately $69.5 million, including its claim for alleged advances already paid.
Discovery has begun, an arbitration panel has been chosen and arbitration evidentiary hearings are scheduled to begin on March 15, 2004. Management has made an estimate of the total anticipated cost recovery on this project and it is included in revenue recorded to date. To the extent new facts become known or the final cost recovery included in the claim settlement Perini's subcontractors and insurance carriers for both Perini and its subcontractors have contributed substantially tovaries from this estimate, the total amountimpact of the settlement. As a result, management believeschange will be reflected in the financial statements at that the settlement of this case will not have a material effect on the Company's results of operations or financial condition.time.
On May 3, 2001 the Company, including several of its current and former directors ("Defendant Directors"), was served with a complaint entitled October 15, 2002, Frederick Doppelt, Arthur I. Caplan and Michael MillerLeland D. Zulch filed a lawsuit individually, and as representatives of a class of holders of our Depositary Shares against certain current and former directors of Perini. This lawsuit is captioned Doppelt, et al. v. Perini Corporation,Tutor, et alal., SupremeUnited States District Court for the District of the State of New York, County of New York, Civil ActionMassachusetts, No. 602156/01. Each plaintiff is a
holder of the Company's $21.25 Convertible Exchangeable Preferred Stock ("$21.25 Preferred Stock"). One plaintiff,02CV12010MLW. Mr. Doppelt is a current Directordirector of the CompanyPerini and one plaintiff, Mr. Caplan is a former Directordirector of Perini. Specifically, the Company. Plaintiffs purportoriginal complaint alleged that the defendants breached their fiduciary duties owed to bring the action individually and on behalf of the entire class of holders of the $21.25 Preferred Stock.
Depositary Shares and to Perini. The Plaintiffs have asserted claims for breach of contract, breach of fiduciary duty, fraud and negligent misrepresentation. The Plaintiffsplaintiffs principally allege that the Company and its Defendant Directorsdefendants improperly authorized the exchange of Series B Preferred Stock for Common Stock without first paying allcommon stock while simultaneously refusing to pay accrued dividends due on the $21.25 Preferred Stock. More specifically, Plaintiffs allegeDepositary Shares.
On January 6, 2003, the defendants moved to dismiss the lawsuit. Among other things, the defendants argued that: (1) they did not owe fiduciary duties to the holders of the Depositary Shares and (2) the claims of breach of fiduciary duty owed to Perini must be dismissed because the claim could only be brought as a derivative action.
On March 21, 2003, the plaintiffs filed an opposition to the motion to dismiss and in May 2003 the plaintiffs asked the Court for leave to file an amended complaint.
In June 2003 the plaintiffs were given leave to file an amended complaint. The amended complaint filed in July 2003 adds an allegation that the Company and its Defendant Directors violateddefendants have further breached their fiduciary duties by authorizing a tender offer for the termspurchase of up to 90% 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 allegeDepositary Shares and an allegation that the Companycollective actions of the defendants constitute unfair and its Defendant Directors issueddeceptive business practices under the provisions of the Massachusetts Consumer Protection Act. The amended complaint withdrew the allegation of a false and misleading prospectus in 1987 relatingbreach of fiduciary duty owed to Perini, but retained the allegation
with respect to a breach of those duties owed to the issuanceholders of the $21.25 Preferred Stock.Depositary Shares. The Plaintiffsplaintiffs seek payment of accrued dividends, claiming they are owed approximately $11.7 million as of May 3, 2001,damages in an amount not less than $15,937,500, trebled, plus interest, costs, fees and other unspecified punitive and exemplary damages.
On May 23,August 29, 2003, the defendants filed a motion to dismiss the amended complaint. The plaintiffs filed an opposition thereto and on October 14, 2003, the defendants filed their reply.
In 2001, a similar lawsuit was filed by some of the Company and the Defendant Directors removed the action from the Supreme Court of New York tosame plaintiffs in the United States District Court for the Southern District of New York. On June 26, 2001,York, which claimed that we breached our contract with the Plaintiffs filed an Amended Complaint wherebyholders of Depositary Shares. In 2002, the Plaintiffs limited their Class Action to an action for breach of contract against the Companycase was dismissed 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 dismissedupon appeal by the United States District Court for the Southern District of New York.
In April 2002, the Plaintiffs appealed the dismissalplaintiffs to the United States Court of Appeals for the Second Circuit. On December 23, 2002,Circuit, the Plaintiffs' appeal was dismissed by the United States Court of Appeals foraffirmed the Second Circuit.dismissal.
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.
None.
Listed below are the names, offices held, ages and business experience of all our executive officers of the Company.officers.
Name, Offices Held and Age Year First Elected to Present Office and Business Experience Ronald N. Tutor, Director, Chairman andSinceHe has served as our Chief Executive Officer since March29,2000he servesand asa Director, Chairman and Chiefone Chief Executive Officer -62 Executive Officer. Prior to that, he63 of our Directors since January, 1997. He has also served asa Director andour Chairman since July1, 1999; a Director and1999, Vice Chairmansincefrom January1, 1998;1998 to July 1999, andas a Director and Acting Chief Operating Officer sincechief operating officer from January17, 1997. He is the Chairman, President and1997 until March 2000 when he became Chief ExecutiveOfficerOfficer. Mr. Tutor has served as 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 andSince March 29, 2000 he servesHe has served as a DirectorPresident and Chiefsince May 1999. He has also served as chief Chief Operating Officer -55 Operating Officer. Prior to that,56 operating officer since March 2000 and as our president since May 1999. Previously, he served asa Director, President andChief Executive Officersincefrom May12, 1999. He has served as1999 until March 2000, Executive Vice President and Chief Financial Officersincefrom December1997. Prior to
that, he served as1997 until May 1999, and President of Perini Management Services, Inc.(formerly Perini International Corporation)since January1996 and as Senior Vice President, Chief Operating Officer of Perini International Corporation since April 1995.1996. Previously, he servedas Vice President Construction from July 1993 andin various operating and financial capacities since 1973, including Treasurer from May 1988 to January 1990. Michael E. Ciskey, Vice President and He has served as our Chief Financial Officer since November 2003 and as Chief Financial Officer - 53 Vice President since May 1984. He served as Corporate Controller from April 1999 until November 2003, Operations Controller from May 1998 until April 1999 and as Division Controller for various Perini civil construction business units from 1984 until 1998. Zohrab B. Marashlian, President, Perini He was elected to his current position in December 1997, which entails Civil Construction -5859 overall responsibility forthe Company'sPerini's civil construction operations.Prior to that,From April 1995 until December 1997, he served as President ofthe Company'sPerini's Metropolitan New York Divisionsince April 1995and from January 1994 to December 1997, he served as Senior Vice President, Operations ofthe Company'sPerini's Metropolitan New YorkDivision since January 1994.Division. Previously, he served in various project management capacities withthe CompanyPerini since1985, 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 since1971.
Craig W. Shaw, President, Perini He was elected to his current position in October 1999, which entails Building Company -4849 overall responsibility forthe Company'sPerini's building construction operations.Prior to thatFrom April 1995 until October 1999, he served as President, Perini Building Company, Western U.S. Division,sincefrom January 1994 to April 1995andhe served as Senior Vice President, Construction for Perini Building Company's Western U.S. Division,sinceand from 1986 to January 1994andhe served as Vice President, Construction for Perini Building Company's Western U.S.Division since 1986.Division. Previously, he served in various project management capacities withthe CompanyPerini since1978, including Project Manager from 1979 to 1986.1978.
The Company'sOur officers are elected on an annual basis at the Board of Directors'Directors’ Meeting immediately following the Annual Meeting of Stockholders in May, to hold such offices until the Board of Directors'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,his or otherwise.her earlier resignation or removal.
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Market Information
The Company's Common StockOur common stock is traded on the American Stock Exchange under the symbol "PCR"“PCR”. Our common stock has been cleared to apply for listing on the New York Stock Exchange and we expect this listing to commence on April 1, 2004. The quarterly market high and low sales price rangesprices for 2002our common stock in 2003 and 20012002 are summarized below:
2003 2002 2001
------------------------ -------------------------
High Low High Low
---------- --------- ----------- ----------
Market Price Range per Common Share:
- ------------------------------------
Quarter Ended
March 31 $ 4.70 $ 3.62 $ 7.28 $ 5.75
$ 7.35 $ 2.94
June 30 9.05 3.80 6.40 3.40
10.00 5.90
September 30 8.99 6.26 4.58 3.50
9.40 5.45
December 31 10.10 6.95 4.44 3.00 7.60 6.10
Dividends
There were noWe have not paid any cash dividends declared on our common stock since 1990. For the Company's Common Stock during 2002foreseeable future, we intend to retain any earnings in our business and 2001. For additional informationwe do not anticipate paying any cash dividends. In addition, under the terms of our preferred stock, we cannot pay dividends on dividend payments, see "Dividends" under Management's Discussionour common stock until all accrued dividends on our preferred stock have been paid. Whether or not to declare any dividends will be at the discretion of our Board of Directors, considering then existing conditions, including our financial condition and Analysis in Item 7 below.results of operations, capital requirements, bonding prospects, contractual restrictions, business prospects and other factors that our Board of Directors considers relevant.
Holders
At February 24, 2003,23, 2004, there were 1,1061,043 holders of record of our common stockholdersstock, including record holders on behalf of recordan indeterminate number of beneficial owners, based on the stockholders list maintained by the Company'sour transfer agent.
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 consolidated financial statements and should be read in conjunction with the consolidated financial statements, the related notes thereto and the independent auditors' report thereon, and "Management's Discussion and Analysis of Financial Condition and Results of Operations," which are included elsewhere in this Form 10-K and in previously filed annual reports on Form 10-K of Perini Corporation. Backlog and new business awarded are not measures defined in generally accepted accounting principles and have not been derived from our consolidated financial statements.
2003 2002 2001 2000 1999
1998--------------- --------------- --------------- -------------- ----------------
--------------- ---------------- ---------------- ---------------
(In thousands, except per share data)
OPERATING SUMMARY
- -----------------
CONTINUING OPERATIONS:
Revenues:
Building $ 772,513898,254 $ 1,199,439631,860 $ 826,1911,120,161 $ 696,407740,555 $ 679,296633,126
Civil 176,877 312,528 353,957 279,469 323,077
332,026Management Services 298,972 140,653 79,278 85,636 63,281
--------------- --------------- --------------- -------------- ----------------
--------------- ---------------- ---------------- ---------------
Total $ 1,374,103 $ 1,085,041 $ 1,553,396 $ 1,105,660 $ 1,019,484
$ 1,011,322
Cost of Operations 1,303,851 1,026,391 1,495,834 1,053,328 969,015
957,651--------------- --------------- --------------- -------------- ----------------
--------------- ---------------- ---------------- ---------------
Gross Profit $ 70,252 $ 58,650 $ 57,562 $ 52,332 $ 50,469
$ 53,671
G&A Expense 39,762 32,770 28,061 24,977 26,635
27,397--------------- --------------- --------------- -------------- ---------------- --------------- ---------------- ---------------- ---------------
Income From Construction Operations $ 30,490 $ 25,880 $ 29,501 $ 27,355 $ 23,834
$ 26,274
Other (Income) Expense, Net (1,435) 520 227 (949) (72)
652
Interest Expense 1,003 1,485 2,006 3,966 7,128
8,473--------------- --------------- --------------- -------------- ---------------- --------------- ---------------- ---------------- ---------------
Income From Continuing
Operations Before Income Taxes $ 30,922 $ 23,875 $ 27,268 $ 24,338 $ 16,778
$ 17,149
Provision (Credit)(Provision) Credit for Income Taxes 801 850 (43) 421 1,10013,096 (801) (850) 43 (421)
--------------- --------------- --------------- -------------- ---------------- --------------- ---------------- ---------------- ---------------
Income From Continuing Operations $ 44,018 $ 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) $ 44,018 $ 23,074 $ 26,418 $ 24,381 $ (83,648)
=============== =============== =============== ============== ================
Income Available for Common Stockholders (1) $ 11,652
================ =============== ================ ================ ===============
2002 2001 2000 1999 1998 ---------------- --------------- ---------------- ---------------- ---------------49,619 $ 20,949 $ 24,293 $ 7,299 $ (89,917) Per Share of Common Stock: Basic Earnings (Loss): Income From Continuing Operations $ 2.18 $ 0.92 $ 1.07 $ 0.39(1)$ 1.80$ 1.91Loss From Discontinued Operations - - -(0.12) (0.83) Estimated Loss on Disposal-- - (17.72) -(17.84) --------------- --------------- --------------- -------------- ------------------------------- ---------------- ---------------- ---------------Total $ 2.18 $ 0.92 $ 1.07 $ 0.39 $ (16.04)$ 1.08=============== =============== =============== ============== =============================== ================ ================ ===============Diluted Earnings (Loss): Income From Continuing Operations $ 2.10 $ 0.91 $ 1.04 $ 0.39(1)$ 1.80$ 1.91Loss From Discontinued Operations - - -(0.12) (0.83) Estimated Loss on Disposal-- - (17.72) -(17.84) --------------- --------------- --------------- -------------- ------------------------------- ---------------- ---------------- ---------------Total $ 2.10 $ 0.91 $ 1.04 $ 0.39 $ (16.04)$ 1.08=============== =============== =============== ============== =============================== ================ ================ ===============Cash Dividend Declared $ - $ - $ - $ - $ -------------------------------- --------------- --------------- -------------- -------------------------------- ---------------Book Value $ 4.65 $ 2.72 $ 2.40 $ 1.57 $ (11.31)$ 4.17--------------- --------------- --------------- -------------- ------------------------------- ---------------- ---------------- ---------------Weighted Average Common Shares Outstanding: Basic 22,763 22,664 22,623 18,521 5,6065,318--------------- --------------- --------------- -------------- ------------------------------- ---------------- ---------------- ---------------Diluted 23,583 22,939 23,442 18,527 5,6065,318 ------------------------------- --------------- --------------------------------- ----------------
2003 2002 2001 2000 1999
--------------- --------------- --------------- -------------- ----------------
(In thousands)
FINANCIAL POSITION SUMMARY
- --------------------------
Working Capital $ 125,397 $ 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 1.20:11.31x 1.44x 1.24x 1.20x 1.15x
--------------- --------------- --------------- -------------- ---------------- --------------- ---------------- ---------------- ---------------
Long-term Debt, less current maturities $ 8,522 $ 12,123 $ 7,540 $ 17,218 $ 41,091
$ 75,857--------------- --------------- --------------- -------------- ---------------- --------------- ---------------- ---------------- ---------------
Stockholders' Equity (Deficit) $ 120,560 $ 86,649 $ 79,408 $ 60,622 $ (36,618)
$ 50,558--------------- --------------- --------------- -------------- ---------------- --------------- ---------------- ---------------- ---------------
Ratio of Long-term Debt to Equity .14:1 .09:1 .28:1.07x .14x .09x .28x n.a.
1.50:1--------------- --------------- --------------- -------------- ---------------- --------------- ---------------- ---------------- ---------------
Redeemable Series B Cumulative
Convertible Preferred Stock $ - $ - $ - $ - $ 37,685
$ 33,540--------------- --------------- --------------- -------------- ---------------- --------------- ---------------- ---------------- ---------------
Total Assets (2)$ 565,443 $ 402,389 $ 501,241 $ 487,478 $ 385,767
$ 452,496
------------------------------ ---------------- --------------- ---------------- --------------- ---------------
OTHER DATA
- ----------
Backlog at Year End (2) $ 1,666,464 $ 990,175 $ 1,213,535 $ 1,788,731 $ 1,658,077
--------------- --------------- --------------- -------------- ----------------
New Business Awarded (3) $ 1,232,2562,050,392 $ 861,681 $ 978,200 $ 1,236,314 $ 1,445,305
--------------- --------------- --------------- -------------- ----------------
--------------- ---------------- ---------------- ---------------
(1) As discussed in Note (1)(i)Income available for common stockholders includes adjustments to net income for (a) accrued and unpaid dividends on our $21.25 Preferred Stock, or $2.125 Depositary Shares, (b) the reversal of Notes to Consolidated Financial Statements, Basicpreviously accrued 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 venturesunpaid dividends in the Consolidated Balance Sheets usingamount of approximately $7.3 million applicable to 440,627 of the proportionate consolidation method. Accordingly,$2.125 Depositary Shares purchased and retired by us on June 9, 2003, (c) in-kind dividends declared and paid on Series B Preferred Stock until its exchange for shares of common stock on March 29, 2000 and (d) the Current Ratio$13.7 million assigned to the induced conversion of the Series B Preferred Stock into common stock on March 29, 2000.
(2) A construction project is included in our backlog at such time as a contract is awarded or a firm letter of commitment is obtained and Total Assets includedfunding is in place. Backlog is not a measure defined in generally accepted accounting principles, or GAAP, and our backlog may not be comparable to the backlog of other companies. Management uses backlog to assist in forecasting future results.
(3) New business awarded consists of the original contract price of projects added to our backlog in accordance with Note (2) above have been restated for all periods presentedplus or minus subsequent changes to reflect this change.the estimated total contract price of existing contracts. Management uses new business awarded to assist in forecasting future results.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSGeneral
The Company wasWe were incorporated in 1918 as a successor to businesses which had been engaged in providing construction services since 1894. The Company currently providesWe provide diversified general contracting, construction management and design-build services to private clients and public agencies throughout the United States and selected overseas locations. The Company'sworld. Our construction business involves twois now conducted through three basic segments or operations: building, civil and civil.management services. The general buildingcontracting and civilmanagement services that we provide consist of general contracting, preconstruction planning and comprehensive management services, provided by the Company consist ofincluding 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 providesWe also offer self-performed construction services including site work, concrete forming and placement and steel erection. We provide 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, inIn the normal conduct of itsour business, enterswe enter into partnership arrangements, referred to as "joint“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.
Recent Developments
Acquisition of James A. Cummings, Inc.
On January 23, 2003, we completed the acquisition of James A. Cummings, Inc., or Cummings, a privately held construction company based in Fort Lauderdale, Florida. The acquisition was effective as of January 1, 2003 and, accordingly, the financial results of Cummings are included in our consolidated financial statements since that date. See Note 3 of Notes to Consolidated Financial Statements for a further discussion and analysis of the acquisition of Cummings and related pro forma financial information.
Amendments to Revolving Credit Facility
In February 2003, the terms of our existing revolving credit facility were amended to, among other things, increase the revolving credit facility from $45 million to $50 million and to extend the term of our credit facility from January 2004 to June 2005. The credit facility, as amended, provides us with greater flexibility in providing the working capital needed to support the anticipated growth of our construction activities. On November 5, 2003 and January 31, 2004, the terms of our revolving credit facility were further amended to provide a temporary $20 million increase in the revolving credit facility from $50 million to $70 million until April 30, 2004, to support the procurement requirements of a major project. At December 31, 2003, we had $67.2 million available to borrow under our credit facility.
Results of Tender Offer for our $21.25 Preferred Stock
On June 9, 2003, we completed a tender offer for our $2.125 Depositary Convertible Exchangeable Preferred Shares, or Depositary Shares, each of which represent 1/10th of a share of $21.25 Convertible Exchangeable Preferred Stock, or the $21.25 Preferred Stock. As a result of this transaction, we purchased 440,627 of our Depositary Shares (representing approximately 44.1% of the outstanding $21.25 Preferred Stock) at a purchase price of $25.00 per Depositary Share, net to the seller without interest. See Note 8 of Notes to Consolidated Financial Statements. Including related expenses, this transaction resulted an $11.3 million decrease in stockholders’ equity. Also as a result of this transaction, approximately $7.3 million of previously accrued and unpaid dividends on the $21.25 Preferred Stock was reversed and restored to paid-in surplus in the Consolidated Balance Sheets. Since these accrued dividends had previously been deducted from net income in the computation of earnings per share in prior years, the reversal of these accrued dividends resulted in the addition of $7.3 million to income available for common stockholders in the computation of earnings per share for the year ended December 31, 2003.
Business Segments Redefined
Historically, we have evaluated our operating results based on two reportable segments: building and civil. During the fourth quarter of 2003, we adjusted the responsibilities of certain of our executive officers and, in accordance with Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information,” we reevaluated the criteria for determining our reportable segments. We have determined that a third business segment, management services, will be included as a reportable segment prospectively to align our reportable segments with current management responsibilities. Previously, our management services operations were included as part of our building segment. The management services segment will aggregate contracts that have a higher than normal geopolitical and operational risk and corresponding potential for greater than normal gross margin volatility. See Note 11 of Notes to Consolidated Financial Statements for an analysis of operating results by segment.
Secondary Stock Offering
Pursuant to the exercise of registration rights by certain of our stockholders, we have filed a registration statement for an underwritten secondary offering with respect to 5,910,800 shares of our common stock held by such stockholders. The registration statement is pending with the Securities and Exchange Commission and it has not yet become effective. The shares of common stock are being sold by the selling stockholders and we will not receive any proceeds from the sale. We expect the offering to be completed in the second quarter of 2004. We have accrued estimated costs in the amount of $991,000 in connection with the secondary offering and that amount has been charged against paid-in surplus as of December 31, 2003.
New Contract Awards
In December 2003, our task order with the U.S. Army Corps of Engineers (COE) for additional power restoration work in Iraq was increased from an award of $66 million to a total task order value of $220 million. The task order was awarded under our contingent contract with COE’s Transatlantic Program Center to provide design-build, general construction and operations and maintenance services in the U.S. Central Command’s area of operations. The maximum potential value of the contract, which was originally $100 million, has been increased to $500 million, subject to identification and award of specific contract task orders.
On January 14, 2004, we were awarded a new contract for the COE Transatlantic Programs Center. The contract is an indefinite-delivery/indefinite quantity (IDIQ) contract for design and construction work through the U.S. Central Command Area of Responsibility which includes 25 countries, including Iraq and Afghanistan. The maximum potential value of the contract is $1.5 billion, with a maximum value of $500 million for the base year and $250 million each for four option years, subject to identification and award of specific contract task orders.
The Company'sOur 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'sOur construction business involves making significant estimates and assumptions in the normal course of business relating to its Companyour contracts and our joint venture contracts due to, among other things, the one-of-a-kind nature of most of itsour projects, the long-term duration of itsour contract cycle and the type of contract utilized. Therefore, management believes that "Method“Method of Accounting for Contracts"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 be material.
Our estimates of contract revenue and cost are highly detailed. We believe, based on our experience that our current systems of management and accounting controls allow management to produce materially reliable estimates of total contract revenue and cost during any accounting period. However, many factors can and do change during a contract performance period which can result in a change to contract profitability from one financial reporting period to another. Some of the factors that can change the estimate of total contract revenue and cost include differing site conditions (to the extent that contract remedies are unavailable), the availability of skilled contract labor, the performance of major material adverse effectsuppliers to deliver on time, the Company'sperformance of major subcontractors, unusual weather conditions and the accuracy of the original bid estimate. Because we have many contracts in process at any given time, these changes in estimates can offset each other without impacting overall profitability. However, large changes in cost estimates on larger, more complex civil construction projects can have a material impact on our financial condition,statements and are reflected in our results of operations when they become known.
When recording revenue on contracts relating to unapproved change orders and cash flows.claims, we include in revenue an amount equal to the amount of costs incurred by us to date for contract price adjustments that we seek to collect from customers for delays, errors in specifications or designs, change orders in dispute or unapproved as to scope or price, or other unanticipated additional costs, in each case when recovery of the costs are considered probable. When determining the likelihood of eventual recovery, we consider such factors as evaluation of entitlement, settlements reached to date and our experience with the customer. The settlement of these issues often takes years depending upon whether the item can be resolved directly with the customer or involves litigation or arbitration . When new facts become known, an adjustment to the estimated recovery is made and reflected in the current period results.
The amount of unapproved change order and claim revenue is included in our balance sheet as Unbilled Work. The amount of Unbilled Work relating to unapproved change orders and claims included in our balance sheet at December 31, 2003 and 2002 is summarized below:
December 31,
-----------------------------
2003 2002
------------- -------------
(in thousands)
Unapproved Change Orders $ 17,936 $ 30,289
Claims 64,515 62,776
------------- -------------
$ 82,451 $ 93,065
============= =============
Of the balance of unapproved change orders and claims included in Unbilled Work at December 31, 2003 and December 31, 2002, approximately $36.0 million and $40.0 million respectively, are amounts subject to pending litigation or dispute resolution proceedings as described in “Item 3 – Legal Proceedings” and Note 2, “Contingencies and Commitments” of Notes to Consolidated Financial Statements for the respective periods. These amounts are management’s estimate of the probable recovery from the disputed claims considering such factors as evaluation of entitlement, settlements reached to date and knowledge of customer. In the event that future facts and circumstances, including the resolution of disputed claims, cause us to reduce the aggregate amount of our estimated probable recovery from the disputed claims, we will record the amount of such reduction against future earnings in the relevant period
Method of Accounting for Contracts -– Revenues and profits from the Company'sour 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'sour 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 prepareswe prepare 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. (ForFor a further discussion of unapproved change orders and claims, see "The Contract Process" under Item 1, on pages 6 through 8“Business – Types of Contracts and The Contract Process” in this Form 10-K.) Profit from unapproved change orders and claims is recorded in the accounting 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 Companywe may employ other dispute resolution methods, including mediation, binding and non-binding arbitration, or litigation (seelitigation. See Item 3 Legal Proceedings– “Legal Proceedings” in this Form 10-K and Note 2, "Contingencies“Contingencies and Commitments"Commitments”, of Notes to Consolidated Financial Statements).Statements. The prerequisite for billing unapproved change orders and claims is the final resolution and agreement between the parties. At December 31, 2002, unbilledUnbilled work related to Companyour contracts and joint venture contracts at December 31, 2003 is discussed in Note 1(d) of Notes to Consolidated Financial Statements.
Accounting for Construction Joint Ventures - PriorIncome Taxes – Information relating to our provision (credit) for income taxes and the status of our deferred tax assets and liabilities is presented in Note 5, “Income Taxes”, of Notes to Consolidated Financial Statements. A key assumption in the determination of our book tax provision (credit) is the amount of the valuation allowance required to reduce the related deferred tax assets. A valuation allowance reduces the deferred tax assets to a level which will, more likely than not, be realized. Whether the deferred tax assets will be realized depends on the generation of future taxable income during the periods in which the deferred tax asset become deductible. The net deferred tax assets reflect management’s estimate of the amount which will, more likely than not, reduce future taxable income.
As of December 31, 2002, management believed that a valuation allowance was required to reduce the deferred tax assets, primarily relating to certain net operating loss carryforwards (“NOLs”), for the following reasons:
During the first quarter of 2003, we reduced the valuation allowance by $7.0 million and recognized a $7.0 million tax benefit based on the equity method inexpectation that we would be able to utilize at least a portion of the Consolidated Balance Sheets andpreviously
unrecognized NOLs due to the impact of not having a Section 382 restriction as of the end of the three year testing period. During the fourth quarter of 2003, we further reduced the valuation allowance by $7.9 million based on the proportionate consolidation methodexpectation that we would be able to utilize an additional amount of our NOLs in future years due to a significant increase in backlog as a result of a robust new work acquisition period experienced during the Consolidated Statementssecond half 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.2003.
Although this change impacted various classifications within Current AssetsAs of December 31, 2003, management estimates that a valuation allowance of approximately $8.4 million was required to reduce the deferred tax assets, primarily relating to NOLs, to a level we currently believe will be utilized to offset future taxable income based on our current backlog and Current Liabilities inforecasts. The valuation allowance is required due to our inability to predict on a longer term basis that we will “more likely than not” acquire the Consolidated Balance Sheetsadditional amount of profitable new work required to utilize additional NOLs and the Consolidated Statementsongoing concern that an adverse outcome on one or more 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 restatedlegal matters referred to conformabove could significantly limit our ability to the 2002 presentation.utilize additional NOLs.
Defined Benefit Retirement Plan -– The status of the Company'sour defined benefit pension plan obligations, related plan assets and cost is presented in Note 10 of Notes to Consolidated Financial Statements entitled "Employee“Employee Benefit Plans"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%6.75% used for purposes of computing the 20022003 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 plansWe plan to lower the discount rate used for computing the 20032004 annual pension expense to 6.75%6.25% due to a decline in high-quality corporate bond yields as of the end of 2002.2003.
The estimated return on plan assets is primarily based on historical long-term returns of equity and fixed income markets according to the Company'sour targeted allocation of plan assets (65%(70% equity and 35%30% fixed income). While the weighted estimated return on asset rate has been approximately 9% in recent years, the Company plans to lower this rate to 7.0%7.5% in 20032004 based on recent equity market performance compared to long-term historical averages.
The plans'plans’ accumulated benefit obligation exceeded the fair value of plan assets on December 31, 2003, 2002 and 2001 in amounts greater than the accrued pension liability previously recorded. Accordingly, the Companywe increased itsour accrual by $4.4 million in 2003, $13.7 million in 2002 and $5.9 million in 2001 with the $24.0 million offset to accumulated other comprehensive income (loss),loss, a reduction of stockholders'stockholders’ equity.
As a result of the expected changes in assumptions for 20032004 noted above and asset losses during 2003 and 2002, the Company anticipateswe anticipate that pension expense will increase from $1.2$2.7 million in 20022003 to $3.4$4.7 million in 2003.2004. Cash contributions are anticipated to stay atbe $4 million in 2004, but using our current assumptions regarding asset performance and the 2002 level of between $2 million and $3 million.interest rate environment, cash contributions will likely increase significantly in the future.
Related Party Transactions
As part ofa condition to a $30 million equity infusion in January 1997, the Companywe entered into an agreement with Tutor-Saliba Corporation ("TSC")(or 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 Companyus before the agreement and continues to participate in joint ventures with the Companyus after the agreement. The Company'sOur share of revenue from these joint ventures amounted to $49.0 million, $48.8 million and $17.9 million in 2003, 2002 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'sour outstanding Common Stock. Mr. Tutor has been our Chairman and Chief Executive Officer of the Company since March 2000. (ForFor details of compensation to TSC and Mr. Tutor, arrangements with TSC and other information on related party transactions, see Note 1312 of Notes to Consolidated Financial Statements.)
Results of Operations
--2003
Compared to 2002
Net income for the year ended December 31, 2003 was a record $44.0 million, a 90% increase from the $23.1 million net income recorded in 2002. The overall increase in net income of $20.9 million was due primarily to the
recognition of a $14.9 million tax benefit based on the expectation that we will be able to fully utilize our net operating loss (NOL) carryforwards in future years. In addition, the record net income in 2003 reflects the impact of an increased volume of work acquired and put in place in 2003, in particular our contract awards in Iraq and Afghanistan, as well as the acquisition of Cummings in January 2003.
Basic earnings per common share were $2.18 for the year ended 2003 compared to $0.92 for the year ended 2002. Diluted earnings per common share were $2.10 for the year ended 2003 compared to $0.91 for the year ended 2002. As discussed above, as a result of the completion of our tender offer on our $21.25 Preferred Stock in June 2003, $7.3 million in previously accrued preferred stock dividends was reversed and added back to income available for common stockholders in the computation of earnings per share for the year ended December 31, 2003. Accordingly, basic and diluted earnings per common share calculations for the year ended December 31, 2003 were favorably impacted by $0.32 and $0.31 per share, respectively, due to the reversal of a pro rata portion of accumulated but unpaid dividends on our $21.25 Preferred Stock as a result of the tender offer completed in 2003.
Assuming an effective income tax rate of 39% and also assuming that we completed our tender offer for our $21.25 Preferred Stock prior to January 1, 2002, pro forma net income for the year ended December 31, 2003 would have been $18.9 million, compared to $14.6 million for the year ended December 31, 2002. Similarly, pro forma basic earnings per share for the year ended December 31, 2003 would have been $0.78, compared to $0.59 for the year ended December 31, 2002. Pro forma diluted earnings per share for the year ended December 31, 2003 would have been $0.75, compared to $0.58 for the year ended December 31, 2002. The reconciliation of reported net income to pro forma net income for the years ended December 31, 2003 and 2002 is set forth below:
Year Ended December 31,
-----------------------------
2003 2002
------------- ------------
(In thousands,
except per share data)
Reported net income $ 44,018 $ 23,074
Less: Credit (provision) for income taxes 13,096 (801)
------------- ------------
Income before income taxes 30,922 23,875
Provision for income taxes assuming 39% effective rate 12,060 9,311
------------- ------------
Pro forma net income 18,862 14,564
Less: Dividends accrued on Preferred Stock
assuming the tender offer took place prior to
January 1, 2002 (1,188) (1,188)
------------- ------------
Pro forma total available for common stockholders $ 17,674 $ 13,376
============= ============
Pro forma basic earnings per common share $ 0.78 $ 0.59
============= ============
Pro forma diluted earnings per common share $ 0.75 $ 0.58
============= ============
To supplement our consolidated financial statements presented on a generally accepted accounting principles (GAAP) basis, we sometimes use non-GAAP measures of net income, earnings per share and other measures that we believe are appropriate to enhance an overall understanding of our historical financial performance and future prospects. The non-GAAP results, which are adjusted to exclude certain costs, expenses, gains and losses from the comparable GAAP measures, are an indication of our baseline performance before gains, loses or other charges that are considered by management to be outside of our core operating results. These non-GAAP results are among the indicators management uses as a basis for evaluating our financial performance as well as for forecasting future periods. For these reasons, management believes these non-GAAP measures can be useful to investors, potential investors and others. The presentation of this additional information is not meant to be considered in isolation or as a substitute for net income or earnings per share prepared in accordance with GAAP.
Overall revenues increased by $289.1 million (or 26.6%), from $1,085.0 million in 2002 to $1,374.1 million in 2003. This increase was due primarily to a increase in building construction revenues of $266.3 million (or 42.1%), from $631.9 million in 2002 to $898.2 million in 2003, due primarily to the impact of the Cummings acquisition in January 2003 and improved new work acquisition results during the second and third quarters of 2003. Management services revenues increased by $158.4 million (or 112.7%), from $140.6 million in 2002 to $299.0 million in 2003, due primarily to the new contracts we were awarded in 2003 related to the rebuilding of Iraq and Afghanistan. These increases were partly offset by a decrease in civil construction revenues of $135.6 million (or 43.4%), from $312.5 million in 2002 to $176.9 million in 2003. The decrease in revenues from civil construction operations primarily reflects the decrease in the Company’s year-end backlog at December 31, 2002 compared to the year-end backlog at December 31, 2001, as the pace of new contract awards slowed during 2002 and the first half of 2003 due to a temporary decrease in the number of public works projects available to bid and increased competition from other contractors when bidding on the reduced level of work available.
Revenues for the
Year Ended December 31,
---------------------------- Increase %
2003 2002 (Decrease) Change
------------ ------------ ------------ -------------
(In millions)
Building $ 898.2 $ 631.9 $ 266.3 42.1 %
Civil 176.9 312.5 (135.6) (43.4)%
Management Services 299.0 140.6 158.4 112.7 %
------------ ------------ ------------
Total $ 1,374.1 $ 1,085.0 $ 289.1 26.6 %
============ ============ ============
Income from operations (excluding corporate) increased by $6.7 million (or 20.6%), from $32.6 million in 2002 to $39.3 million in 2003. Management services income from operations increased by $12.0 million (or 102.6%), from $11.7 million in 2002 to $23.7 million in 2003, due primarily to the increase in revenues related to the rebuilding of Iraq and Afghanistan. Despite the favorable impact of the Cummings acquisition, building construction income from operations decreased by $2.1 million (or 14.5%), from $14.5 million in 2002 to $12.4 million in 2003. Building construction income from operations was negatively impacted by a $1.0 million increase in building construction-related general and administrative expenses (exclusive of Cummings) primarily in connection with the pursuit of new work opportunities including the opening or expansion of new regional offices in Florida and California. Civil construction income from operations decreased by $3.2 million (or 50.0%), from $6.4 million in 2002 to $3.2 million in 2003, due primarily to the decrease in revenues discussed above partly offset by a higher gross profit margin in 2003 primarily because 2002 included recognition of our share of a loss on a Central Artery “Big Dig” joint venture project in Boston, Massachusetts. Income from operations was negatively impacted by a $2.1 million increase in corporate general and administrative expenses, from $6.7 million in 2002 to $8.8 million in 2003, due primarily to an aggregate increase in several items including corporate incentive compensation, outside professional fees relating to the annual audit of the Company’s financial statements and to the $21.25 Preferred Shareholders Class Action Lawsuit (see Note 2(f) of Notes to Consolidated Financial Statements), and certain corporate insurance premium costs.
Income from Construction
Operations for the
Year Ended December 31,
----------------------------- Increase %
2003 2002 (Decrease) Change
------------ ------------- ------------- ------------
(In millions)
Building $ 12.4 $ 14.5 $ (2.1) (14.5)%
Civil 3.2 6.4 (3.2) (50.0)%
Management Services 23.7 11.7 12.0 102.6 %
------------ ------------- -------------
Subtotal $ 39.3 $ 32.6 $ 6.7 20.6 %
Less: Corporate (8.8) (6.7) 2.1 31.3 %
------------ ------------- -------------
Total $ 30.5 $ 25.9 $ 4.6 17.8 %
============ ============= =============
Other (income) expense increased by $1.9 million, from an expense of $0.5 million in 2002 to income of $1.4 million in 2003, due primarily to a $2.2 million net gain recorded from the sale of certain parcels of developed land held for sale. Based on our remaining inventory of developed land held for sale and the anticipated potential selling prices for those parcels, we believe that the net gain recorded in 2003 is of a non-recurring nature and is not indicative of expected future results.
Interest expense decreased by $0.5 million, from $1.5 million in 2002 to $1.0 million in 2003, due to a lower average borrowing level in 2003 as a result of improved cash flow from operations as well as lower interest rates.
The credit for income taxes in 2003 is due primarily to the recognition of a $14.9 million tax benefit in accordance with SFAS No. 109, “Accounting for Income Taxes” based on the expectation that we will be able to fully utilize our NOL carryforwards in future years. In addition, the (provision) credit for income taxes reflects a lower-than-normal tax rate in both years due primarily to the realization of a portion of the federal tax benefit not recognized in prior years due to certain accounting limitations. Also, the provision for income taxes in 2002 reflects the reversal of the federal alternative minimum tax provided in 2001 which was no longer required based on the provisions of the Job Creation and Worker Assistance Act of 2002. As a result of the recognition of the $14.9 million NOL tax benefit, basic and diluted earnings per common share calculations for the year ended December 31, 2003 were favorably impacted by $0.65 and $0.63 per share, respectively.
Net income for the year ended 2002 was $23.1 million, a 13%12.5% 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 contributioncontributions from both the management services and civil construction segment.segments.
Revenues from construction operationsOverall, revenues 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$488.2 million (or 35.6%43.6%), from $1,199.4$1,120.1 million in 2001 to $772.5$631.9 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'sour 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'sour year-end backlog at
December 31, 2001 compared to the record year-end backlog at December 31, 2000. These decreases were partly offset by an increase in management services revenues of $61.3 million (or 77.3%), from $79.3 million in 2001 to $140.6 million in 2002, due primarily to a higher volume of work on power facilities maintenance projects due to a higher number of scheduled plant shutdowns in 2002.
Revenues for the
Year Ended December 31,
---------------------------- Increase %
2002 2001 (Decrease) Change
------------ ------------ ------------- ------------
(In millions)
Building $ 631.9 $ 1,120.1 $ (488.2) (43.6)%
Civil 312.5 354.0 (41.5) (11.7)%
Management Services 140.6 79.3 61.3 77.3 %
------------ ------------ -------------
Total $ 1,085.0 $ 1,553.4 $ (468.4) (30.2)%
============ ============ =============
Income from construction operations (see Note 12 of Notes to Consolidated Financial Statements for business segment information)(excluding corporate) decreased by $2.9 million (or 8.2%), from $35.5 million in 2001 to $32.6 million in 2002. Building construction operating income from operations decreased by $5.4$12.1 million, from $31.6$26.6 million in 2001 to $26.2$14.5 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%3.5% in 2001 to 5.9%4.7% 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.2002. In addition, building construction operating income from operations was negatively impacted by a $2.7$1.8 million (or 16.6%13.7%) 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. DespiteManagement services income from operations increased by $6.7 million, from $5.0 million in 2001 to $11.7 million in 2002, due primarily to the decreaseincrease in revenues discussed above civilas well as favorable cost experience on a fixed price overseas project. Civil construction operating income from operations increased by $2.5 million, from $3.9 million in 2001 to $6.4 million in 2002, due primarily to an upward profit revisionfavorable cost experience on a fixed price 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"“Big Dig” joint venture project in Boston, Massachusetts. In addition, civil construction operating income from operations 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.legal fees attributable to increased work on pending litigation matters and new work acquisition efforts.
Income from Construction
Operations for the
Year Ended December 31,
---------------------------- Increase %
2002 2001 (Decrease) Change
------------ ------------ ------------- ------------
(In millions)
Building $ 14.5 $ 26.6 $ (12.1) (45.5)%
Civil 6.4 3.9 2.5 64.1 %
Management Services 11.7 5.0 6.7 134.0 %
------------ ------------ -------------
Subtotal $ 32.6 $ 35.5 $ (2.9) (8.2)%
Less: Corporate (6.7) (6.0) 0.7 11.7 %
------------ ------------ -------------
Total $ 25.9 $ 29.5 $ (3.6) (12.2)%
============ ============ =============
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'sCompany’s Credit Agreement as well as lower interest rates in 2002.
The lower than normal tax rate for the threetwo 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 waswe were 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'smanagement’s estimate of the amount that will, more likely than not, be realized (seerealized. See Note 45 of Notes to Consolidated Financial Statements).Statements. In addition, the provision for income taxes in 2002 reflects the reversal of the federal alternative minimum tax provided in 2001 which isthat was no longer required based on the provisions of the Job Creation and Worker Assistance Act of 2002,2002.
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 Companyus as well as the Company'sour proportionate share of amounts held by construction joint ventures. Cash held by the Companyus 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 Companyus 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 Companyus from itsour construction joint ventures are then available for general corporate purposes. At December 31, 2003, 2002 2001 and 2000,2001, cash held by the Companyus and available for general corporate purposes was $33.4 million, $11.2 million $7.2 million and $34.0$7.2 million, respectively, and the Company'sour proportionate share of cash held by joint ventures and available only for joint venture-related uses was $34.4 million, $35.8 million $49.3 million and $61.8$49.3 million, respectively.
Billing procedures in the construction industry generally are based on the specific billing terms of a contract and are often not correlated with performance. For example, billings may be based on various measures of performance, such as cubic yards excavated, architect’s estimates of completion, costs incurred on cost-plus type contracts or weighted progress from a cost loaded construction time schedule. Billings are generally on a monthly basis and are reviewed and approved by the customer prior to submission. Therefore, once a bill is submitted, we are generally able to collect amounts owed to us in accordance with the payment terms of the contract. In addition, contractor’s receivables usually include retentions, or amounts that are not due until contracts are completed or until specified contract conditions or guarantees are met. Retentions are governed by contract provisions and are typically a fixed percentage (for example, 5% or 10%) of each billing. We generally follow the policy of paying our vendors and subcontractors on a particular project after we receive payment from our customer.
A summary of cash flows for each of the years ended December 31, 2003, 2002 and 2001 is set forth below:
Year Ended December 31,
-------------------------------
2003 2002 2001
-------- -------- ---------
(In millions)
Cash flows from:
Operating activities $ 42.6 $ (3.6) $ (24.3)
Investing activities (7.9) (0.6) (5.5)
Financing activities (13.9) (5.3) (9.5)
-------- -------- ---------
Net increase (decrease) in cash $ 20.8 $ (9.5) $ (39.3)
Cash at beginning of year 47.0 56.5 95.8
-------- -------- ---------
Cash at end of year $ 67.8 $ 47.0 $ 56.5
======== ======== =========
During 2003, we generated $42.6 million in cash flow from operating activities and $5.0 million in net proceeds from the sale of certain remaining parcels of developed land held for sale to fund the $11.3 million required to complete our tender offer for our Depositary Shares, to reduce debt by a net amount of $3.5 million, as well as to fund a net $12.9 million used by investing activities, primarily for the acquisition of Cummings in January and to acquire construction equipment and an office building and equipment storage facility to be used by our civil construction operations. As a
result, our consolidated cash balance increased by $20.8 million, from $47.0 million at December 31, 2002 to $67.8 million at December 31, 2003. As more fully discussed in Note 2(d) of Notes to Consolidated Financial Statements, in the first quarter of 2003, we received our proportionate share of provisional payments against outstanding claims on the Big Dig Project, as a result of an agreement reached in December 2002. Our share of this payment ($13.3 million) was a significant contributor to the $42.6 million in cash flow generated from operating activities in 2003.
During 2002, the Companywe 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 Companywe 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 Companyof our 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,Working capital increased, from $115.9 million at the Company generated $0.8end of 2002 to $125.4 million in cashat December 31, 2003. The current ratio decreased 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) primarily1.44x compared to reduce debt. Financing activities in 2000 include net proceeds of $37.3 million received from1.31x during 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 thesame period. Since December 31, 2001, working capital needshas increased by $32.0 million (or 34%) from $93.4 million to $125.4 million at December 31, 2003, and the current ratio has improved to 1.31x from 1.24x during the same period. As of its core construction operations, resultingDecember 31, 2003, accounts receivable amounted to $328.0 million and comprised approximately 62% of our total current assets. This compares to accounts receivable of $218.2 million, or approximately 57% of our total current assets at December 31, 2002. The approximate $110 million increase in a significant reduction in interest expense. Also, inaccounts receivable at December 31, 2003 primarily reflects the increased revenues during the fourth quarter of 2003.
In January 2002, the Companywe entered into an agreement with a new bank group to refinance itsour existing credit facility with a new $45 million revolving credit facility. In February 2003, the terms of our revolving credit facility waswere amended to, among other things, increase the revolving credit facility from $45 million to $50 million (see Note 3and to extend the term of Notesour credit facility from January 2004 to Consolidated Financial Statements), which willJune 2005. On November 5, 2003 and January 31, 2004, the terms of our revolving credit facility were further amended to provide a temporary $20 million increase in the Company with greater flexibility in providing the working capital neededrevolving credit facility from $50 million to $70 million until April 30, 2004, to support the anticipated growthprocurement requirements of the Company's construction activities.a major project.
The terms of our credit facility require us to meet certain financial covenants, to which the Company is subject include, among other things, maintaining specifiedincluding:
The terms of our credit facility also prohibit us from incurring additional indebtedness without the consent of our lenders, other than financing for our corporate headquarters, insurance premiums and construction equipment, and impose limitations on indebtedness, allthe level of capital expenditures that we may make for a period, as defined inwell as the loan documents. Also, duringpurchase and sale of assets outside of 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.normal course of business.
Our obligations under our credit facility are guaranteed by substantially all of our current and future subsidiaries, and secured by substantially all of our and our subsidiaries’ assets, including a pledge of all of the capital stock of our subsidiaries. At December 31, 2003, we had $67.2 million available to borrow under our credit facility and $2.8 million in outstanding letters of credit.
Long-term Debt
Long-term debt at December 31, 2003 was $8.5 million, a decrease of $3.6 million from December 31, 2002, despite our completion in June of a tender offer for our Depositary Shares which required a cash outlay of approximately $11.3 million (including related expenses) and the acquisition of Cummings which required a net cash outlay of approximately $8.6 million. The Company had $115.9 million of working capitallong-term debt to equity ratio was .07x at the end of 2002December 31, 2003, compared to $93.4 million.14x 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
December 31, 2002. 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 million2000.
Contractual Obligations
Our outstanding contractual obligations as of December 31, 2003 are summarized in 1999.the following table:
Payments Due by Period
--------------------------------------------------------------------------
(In thousands)
Less Than More Than
Total 1 Year 1-3 Years 3-5 Years 5 Years
---------- ------------- ------------ ------------ -------------
Total debt $ 9,012 (a) $ 490 $ 634 $ 2,026 $ 5,862
Operating leases, net 12,181 4,279 5,481 1,940 481
Purchase obligations - - - - -
Other long-term liabilities:
Accrued dividends on
$21.25 Preferred Stock 9,805 - - - 9,805 (b)
Employee benefit related
liabilities 2,043 158 316 316 1,253
Minimum pension
liability adjustments 25,488 4,000 8,000 (c) 8,000 (c) 5,488 (c)
---------- ------------- ------------ ------------ -------------
Total contractual obligations $ 58,529 $ 8,927 $ 14,431 $ 12,282 $ 22,889
========== ============= ============ ============ =============
(a) Includes capital leases in the amount of $325.
(b) Assumes current policy described below under "Dividends -- $21.25 Preferred Stock" does not change during the 5-year period.
(c) Assumes annual pension fund contributions equal to the contribution amount anticipated in 2004.
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'sOur book value per common share was $4.65 at December 31, 2003, compared to $2.72 at December 31, 2002, compared toand $2.40 at December 31, 2001, and $1.57 at December 31, 2000.2001. The major factors impacting stockholders'stockholders’ equity during the three year period under review were the recapitalization completed in 2000, the net income recorded in all three years, the cost of our tender offer ($11.3 million) completed in June 2003, including the reversal of dividends ($7.3 million) previously accrued related to the Preferred Stock tendered, and, to a lesser extent,
preferred stock dividends paid in-kind or accrued, and common stock options exercised. Also, the Company waswe were required to recognize an additional minimum pension liability of approximately $4.4 million in 2003, $13.7 million in 2002 and $5.9 million in 2001 in accordance with SFAS No. 87, "Employers'“Employers’ Accounting for Pensions"Pensions” which resulted in an aggregate $19.6$24.0 million Accumulated Other Comprehensive Loss deduction in stockholders'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'sour pension plans.
Dividends
(a) Common Stock
There were no cash dividends declared or paid on the Company’sour outstanding Common Stock during the three years ended December 31, 2002.2003.
(b) $21.25$21.25 Preferred Stock In conjunction with the
The covenants of the Company’sin our prior Credit Agreements, the Company wascredit agreements required us to suspend the payment of quarterly dividends on itsour $21.25 Preferred Stock in 1995 until certain financial criteria were met. QuarterlyWhile 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).
TheStock. As of December 31, 2002, the aggregate amount of dividends in arrears iswas approximately $15,405,000 at December 31, 2002,$15.4 million, which representsrepresented 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”other long-term liabilities in the Consolidated Balance Sheets. On June 9, 2003, we completed a tender offer for our Depositary Shares pursuant to which we purchased 440,627 Depositary Shares for $25 per share. See “-Recent Developments.” As a result of this transaction, approximately $7.3 million of previously accrued and unpaid dividends was reversed and restored to paid-in surplus in the Consolidated Balance Sheets. Accordingly, the aggregate amount of dividends in arrears at December 31, 2003 is $9.8 million, which represents approximately $175.32 per share of $21.25 Preferred Stock or approximately $17.53 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 arebecame entitled to elect two additional Directors whenonce dividends have beenwere deferred for more than six quarters, and they have done so at each of the last five Annual Meetings.six annual meetings of stockholders.
AsOur Board 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 believedDirectors has not decided that itsour working capital was sufficient toand other conditions warrant the resumption of payment of the regular dividend or any of the dividends
in arrears on the $21.25 Preferred Stock. The Company doesWe do not currently have any plans or target date for when this action may occur. This decision is based onresuming the dividend, given the following circumstances:
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,
(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
and each of our business segments ended 2003 with a higher backlog than it began the year with as illustrated in the following table:
Backlog at New Business Revenue Backlog at
December 31, 2002 Awarded (1) Recognized December 31, 2003
-------------------- --------------- -------------- ---------------------
(in thousands)
Building $ 525,433 $ 1,269,620 (2) $ (898,254) $ 896,799
Civil 210,562 272,013 (176,877) 305,698
Management Services 254,180 508,759 (298,972) 463,967
-------------------- --------------- -------------- ---------------------
Total $ 990,175 $ 2,050,392 $ (1,374,103) $ 1,666,464
==================== =============== ============== =====================
(1) New business awarded consists of the original contract price of projects added to $1.214 billion atour backlog plus or minus subsequent changes to the endestimated total contract price of 2001. This decrease is theexisting contracts.
(2) Includes $170,877 of backlog added as a result of the impact that the eventsacquisition of September 2001 andCummings.
We remain encouraged by a continuationcontinued high level 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’sour preconstruction services, remains at a high level, and plans for public works construction at the local, state and federal levels remain strong in itsour market areas. With three years
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
nbsp; In June 2002,January 2003, the Financial Accounting Standards Board ("FASB")FASB issued SFASFIN No. 146, "Accounting for Costs Associated with Exit46, “Consolidation of Variable Interest Entities, an Interpretation of ARB 51". In December 2003, the FASB revised FIN No. 46 to reflect decisions it made regarding a number of implementation issues. FIN No. 46, addresses consolidation by business enterprises of variable interest entities, or Disposal Activities". The FASB also issued SFAS No. 148, "Accounting for Stock-Based Compensation - TransitionVIEs. FIN 46 applies immediately to VIEs created or obtained after January 31, 2003 and Disclosure - an Amendment of FASB Statement No. 123".
SFAS No. 146 addresses financial accounting and reporting for costs associated with exitit applies in the first fiscal year or disposal activities and is effective for exit or disposal activities that are initiatedinterim period ending after December 31, 2002. The Company expects15, 2003, to VIEs in which an enterprise holds a variable interest that the adoption of the provisions of SFAS No. 146 willis acquired before February 1, 2003. This pronouncement is currently not anticipated to have a material impacteffect on itsour 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.
The Company'snbsp; Our exposure to market risk for changes in interest rates relates primarily to the Company'sour revolving credit debt (see Note 34 of Notes to Consolidated Financial Statements) and short-term investment portfolio. AsDuring 2003, we had an average daily borrowing of December 31, 2002, the Company had $5.0approximately $5.5 million borrowed under itsour revolving credit agreement and $30.0$60.0 million of short-term investments classified as cash equivalents.equivalents as of December 31, 2003.
The Company borrowsnbsp; We borrow under its bankour 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 iswe are subject to fluctuations in interest rates. If theBased on our 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 2002and our average daily revolving debt balance in 2003, a change of 1% (or 100 basis points) in our effective borrowing rate would beresult in an increase or decrease in net income and cash flow of approximately $23,000.$55,000 per year.
The Company'snbsp; Our short-term investment portfolio consists primarily of highly liquid instruments with maturities of three months or less.less, all classified as cash and cash equivalents in the accompanying consolidated financial statements.
nbsp; The Independent Auditors'Auditors’ Report, Consolidated Financial Statements, and Supplementary Schedules are set forth in Item 15 in this Reportreport and are hereby incorporated herein.in this Item 8 by reference.
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.None.
PART III.
nbsp; As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as of the end of the period covered by this report, we carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. In designing and evaluating our disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating and implementing possible controls and procedures. The effectiveness of our disclosure controls and procedures is necessarily limited by the staff and other resources available to us and, although we have designed our disclosure controls and procedures to address the geographic diversity of our operations, this diversity inherently may limit the effectiveness of those controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective, in that they provide reasonable assurance that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
nbsp; There was no change in our internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. In connection with these rules, we will continue to review and document our disclosure controls and procedures, including our internal controls and procedures for financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
nbsp; Information relating to theour directors of the Company is set forth in the sectionsections entitled "Election“Election of Directors"Directors” and “Corporate Governance” in the definitive proxy statement in connection with theour Annual Meeting of Stockholders to be held on May 15, 200313, 2004 (the "Proxy Statement"“Proxy Statement”), which section issections are 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 theour executive officers of the Company is set forth in Part I of this report under the caption "Executive“Executive Officers of the Registrant"Registrant”.
nbsp; The information appearing under the caption “Executive Compensation” in the Proxy Statement is hereby incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In response to Items 11-13, reference is made tonbsp; The information appearing under the information to be set forth in the sections entitled "Election of Directors", "Ownershipcaptions “Ownership of Common Stock by Directors, Officers and Preferred Stock Nominees", "CertainNominees” and “Certain Other Beneficial Holders", "Securities Authorized for Issuance Under Equity Compensation Plans" and "Certain Transactions"Holders” in the Proxy Statement which areis hereby incorporated herein by reference.
nbsp; The information appearing under the caption “Certain Transactions” in the Proxy Statement is hereby incorporated herein by reference.
nbsp; The information appearing under the caption “Accountant’s Fees” in the Proxy Statement is hereby incorporated herein by reference.
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.
PERINI CORPORATION AND SUBSIDIARIES
(a)1. The following consolidated financial statements and supplementary financial information are filed as part
of
this report:
Pages
Consolidated Financial Statements of the Registrant
Consolidated Balance Sheets as of December 31, 2003 and 2002 and 2001 3548 - 3649
Consolidated Statements of Income for the years ended December 31, 2003, 2002 and 2001 and 2000 3750
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2003, 2002 2001 3851
and 20002001
Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001 and 2000 3952 - 4053
Notes to Consolidated Financial Statements 4154 - 6579
Independent Auditors' Report 6680
(a)2. The following consolidated 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 6881
Independent Auditors' Report on Schedule 82
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 6983 through 71. The Company87. We will furnish a copy of any exhibit not
included herewith to any holder of the Company's Common and Preferred Stockour common or preferred stock upon request.
(b) Reports on Form 8-K
A report on Form 8-K was filed on December 20, 200219, 2003 that reported on our press release announcing the
Company's signingproposed sale by certain of a Stock
Purchase and Sale Agreement to acquire James A. Cummings, Inc., a privately held construction company
based in Fort Lauderdale, Florida, for $20our existing stockholders of 5.9 million in cashshares of our common stock in
"Item 5. Other Events"Events and Regulation FD Disclosure" in said Form 8-K.
A report on Form 8-K was filed on December 23, 2003 that reported on our determination that a new
business segment, management services, will be included as a reportable segment prospectively, in
"Item 5. Other Events and Regulation FD Disclosure" in said Form 8-K.
SignaturesPursuant 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: March31, 200310, 2004 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 March31, 200310, 2004 By: /s/Ronald N. Tutor Ronald N. Tutor (ii) Principal Financial OfficerRobert BandMichael E. Ciskey Vice President and ChiefOperatingFinancial Officer March31, 200310, 2004 By: /s/Robert BandMichael E. CiskeyRobert BandMichael E. Ciskey (iii) Principal Accounting Officer Michael E. Ciskey Vice President andControllerChief Financial Officer March31, 200310, 2004 By: /s/Michael E. Ciskey Michael E. Ciskey (iv) Directors Ronald N. Tutor ) Peter Arkley ) Robert Band ) James A. Cummings ) /s/Robert BandWayne L. BermanFrederick Doppelt ) Robert BandFrederick Doppelt ) Attorney in FactRobert A. Kennedy )Dated: March 31, 2003Attorney in Fact Michael R. Klein ) Raymond R. Oneglia ) Dated: March 10, 2004
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. TutorRonald 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 BandRobert Band, President, Chief Operating Officer and Principal Financial OfficerConsolidated Balance Sheets
December 31,20022003 and20012002
(In thousands, except share data)Assets 2003 20022001------------ ------------ CURRENT ASSETS: Cash, including cash equivalents of$30,042$60,462 and$36,686$30,042 (Note 1) $ 67,823 $ 47,031$ 56,542Accountsand notesreceivable, including retainage of $86,273 and $66,284and $97,610328,025 218,172318,174Unbilled work (Note 1) 116,572 112,56397,425 Land held for sale, netDeferred tax asset (Note 5)2,173 11,74010,844 - Other current assets1,992 1,9492,479 4,165 ------------ ------------ Total current assets $525,743 $381,931$485,830------------ ------------ PROPERTY AND EQUIPMENT, at cost (Note 1): Land $4891,041 $ 489 Buildings and improvements 16,685 13,49612,850Construction equipment 12,428 12,33810,240Other equipment 8,569 7,5777,594------------ ------------ $33,90038,723 $31,17333,900 Less - Accumulated depreciation 22,125 19,85818,768------------ ------------ Total property and equipment, net $14,04216,598 $12,40514,042 ------------ ------------ OTHERASSETSASSETS: Goodwill (Notes51 and 3) $ 14,007 $ 1,017 Deferred tax asset (Note 5) 4,161 - Other (Note 6) 4,934 5,399 ------------ ------------ Total other assets $ 23,102 $ 6,416$ 3,006------------ ------------ $ 565,443 $402,389$501,241============ ============The accompanying notes are an integral part of these consolidated financial statements.
Liabilities and Stockholders' Equity 2003 20022001-------------- -------------- CURRENT LIABILITIES: Current maturities of long-term debt (Note3)4) $416490 $10,249416 Accounts payable, including retainage of $64,141 and $37,357and $72,275318,448 162,456265,008Deferred contract revenue (Note 1) 48,431 65,86872,129Accrued expenses 32,977 37,28345,075-------------- -------------- Total current liabilities $266,023400,346 $392,461266,023 -------------- -------------- LONG-TERM DEBT, less current maturities included above (Note3)4) $12,1238,522 $7,54012,123 -------------- -------------- OTHER LONG-TERM LIABILITIES (Notes 6, 8 and 10) $37,59436,015 $21,83237,594 -------------- -------------- CONTINGENCIES AND COMMITMENTS (Note 2) STOCKHOLDERS' EQUITY (Notes 1, 7, 8, 9 and 10): Preferred stock, $1 par value - Authorized - 1,000,000 shares Designatedissued- 100,000 shares Issued and outstanding - 55,927 shares and 99,990 shares of $21.25 convertible exchangeable preferred stock ($24,99813,982 aggregate liquidationpreference)preference at December 31, 2003) $10056 $ 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 - 22,946,064 shares and 22,724,664 shares22,72522,946 22,725 Paid-in surplus 90,296 95,54697,671Retained earnings (deficit) 30,007 (13,417)(36,491)Less - common stock in treasury, at cost - 60,529 shares (965) (965) -------------- -------------- $106,222144,573 $85,273106,222 Accumulated other comprehensive loss (24,013) (19,573)(5,865)-------------- -------------- Total stockholders' equity $86,649120,560 $79,40886,649 -------------- -------------- $402,389565,443 $501,241402,389 ============== ==============Consolidated Statements of Income
For the Years Ended December 31, 2003, 20022001and20002001
(In thousands, exceptpershare data)2003 2002 20012000--------------- ------------------------------------------- Revenues (Note12)11) $ 1,374,103 $ 1,085,041 $ 1,553,396$ 1,105,660Cost of Operations 1,303,851 1,026,391 1,495,8341,053,328--------------- ------------------------------------------- Gross Profit $ 70,252 $ 58,650 $ 57,562$ 52,332General and Administrative Expenses 39,762 32,770 28,06124,977--------------- ------------------------------------------- INCOME FROM CONSTRUCTION OPERATIONS (Note12)11) $ 30,490 $ 25,880 $ 29,501$ 27,355Other (Income) Expense, Net (Note 6) (1,435) 520 227(949)Interest Expense (Note3)4) 1,003 1,485 2,0063,966--------------- ------------------------------------------- Income before Income Taxes $ 30,922 $ 23,875 $ 27,268$ 24,338 Provision (Credit)Credit (Provision) for Income Taxes (Notes 1 and4) 801 850 (43)5) 13,096 (801) (850) --------------- ------------------------------------------- NET INCOME $ 44,018 $ 23,074 $ 26,418$ 24,381=============== =========================================== Less: Accrued Dividends on $21.25 Preferred Stock (Note 8) (1,653) (2,125) (2,125) Plus: Reversal of Accrued Dividends on $21.25 Preferred Stock based on results of 2003 tender offer (Note 8) 7,254 - - --------------- --------------- --------------- NET INCOME AVAILABLE FOR COMMON STOCKHOLDERS(Note 1)$ 49,619 $ 20,949 $ 24,293$ 7,299=============== =========================================== BASIC EARNINGS PER COMMON SHARE (Note 1) $ 2.18 $ 0.92 $ 1.07$ 0.39=============== =========================================== DILUTED EARNINGS PER COMMON SHARE (Note 1) $ 2.10 $ 0.91 $ 1.04$ 0.39=============== =========================================== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (Note 1): BASIC 22,763 22,664 22,623 Effect of Dilutive Stock Options and Warrants Outstanding 820 275 819 --------------- --------------- --------------- DILUTED 23,583 22,939 23,442 --------------- --------------- ---------------The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of
Stockholders'Stockholders’ Equity
For the Years Ended December 31, 2003, 20022001and20002001
(Inthousands, except per share data)thousands)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$99,518$ 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$97,671$ 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$95,546$ 95,546 $(13,417) $ (965) $ (19,573) $ 86,649 - ----------------------------------------------------------------------------------------------------------------------------------------- Net Income - - - - 44,018 - - 44,018 Other comprehensive income (loss): Minimum pension liability (Note 10) - - - - - - (4,440) (4,440) ----------- Total comprehensive income 39,578 ----------- Preferred Stock dividends accrued ($21.25 per share*) - - - (1,048) (605) - - (1,653) Preferred Stock tendered (Note 8) (44) - - (11,217) - - - (11,261) Reversal of dividends previously accrued on Preferred Stock tendered (Note 8) - - - 7,243 11 - - 7,254 Common Stock options exercised - - 221 763 - - - 984 Estimated cost of stock registration (Note 15) - - - (991) - - - (991) ----------------------------------------------------------------------------------------------------------------------------------------- Balance - December 31, 2003 $ 56 $ 2,233 $ 22,946 $ 90,296 $ 30,007 $ (965) $ (24,013) $ 120,560 - -----------------------------------------------------------------------------------------------------------------------------------------*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, 2003, 20022001and20002001
(In thousands)2003 2002 20012000------------ ----------------------------------- Cash Flows from Operating Activities: Net income $ 44,018 $ 23,074 $ 26,418$24,381Adjustments to reconcile net income to net cash from operating activities - Depreciation 2,773 2,457 1,9151,617Amortization of deferred debt expense and other deferred expenses 616 745 687574Cash provided from (used by) changes in components of working capital other than cash,andcurrent maturities of long-termdebt:debt, deferred tax asset and land held for sale, net: (Increase) decrease in: Accountsand notesreceivable (88,544) 102,322 (49,253)(87,467)Unbilled work (3,422) (15,138) (1,008)(25,850)Other current assets (333) (43) 3092,215Increase (decrease) in: Accounts payable 132,507 (102,552) 13,606106,655Deferred contract revenue (21,211) (6,261) 4,159(18,658)Accrued expenses (5,929) (7,792) (18,656)3,319Net deferred tax asset (15,005) - - Gain on sale of land held for sale (2,207) - - Other long-term liabilities (370) (405) (2,321)(5,652)Other items, net (317) (39) (101)(332)------------ ----------------------------------- NET CASH PROVIDED FROM (USED BY)PROVIDED FROMOPERATING ACTIVITIES $ 42,576 $ (3,632) $(24,245)$ 802------------ ----------------------------------- Cash Flows from Investing Activities: Acquisition of James A. Cummings, Inc., net of cash balance acquired $ (8,613) $ - $ - Acquisition of property and equipment (5,399) (4,510) (4,528) Proceeds from sale of property and equipment$793 455$199$ 435 Acquisition of property and equipment (4,510) (4,528) (1,793)Proceeds from (investment in) land held for sale, net 4,996 4,072 (1,126)2,081Proceeds from sale of marketable securities 380 - - Investment in other activities (37) (646) (57)(609)------------ ----------------------------------- NET CASH(USED BY) PROVIDED FROMUSED BY INVESTING ACTIVITIES $ (7,880) $ (629) $ (5,512)$ 114------------ -----------------------------------Consolidated Statements of Cash Flows (Continued)
For the Years Ended December 31, 2003, 20022001and20002001
(In thousands)2003 2002 20012000------------- ----------------------------------------- Cash Flows from Financing Activities:Proceeds from issuancePurchase ofcommonpreferred stocknetpursuant to tender offer $ (11,261) $ - $ -$ 37,299Proceeds from long-term debt 1,883 5,000 5727,757Reduction of long-term debt (5,410) (10,250) (10,399)(53,390)Proceeds from exercise of common stock options 984 - 358 Expenditure for stock registration (100) - - ------------- ----------------------------------------- NET CASH USED BY FINANCING ACTIVITIES $ (13,904) $ (5,250) $ (9,469)$ (8,334)------------- ----------------------------------------- NetDecreaseIncrease (Decrease) in Cash $ 20,792 $ (9,511) $ (39,226)$ (7,418)Cash and Cash Equivalents at Beginning of Year 47,031 56,542 95,768103,186------------- ----------------------------------------- Cash and Cash Equivalents at End of Year (Note(1)(j)1(j)) $ 67,823 $ 47,031 $ 56,542$ 95,768============= ========================================= Supplemental Disclosures of Cash Paid During the Year For: Interest $ 1,060 $ 2,441 $ 2,063$ 4,242============= ========================================= Income tax payments $ 974 $ 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, 2003, 20022001and20002001[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 Companycurrentlyprovides diversified general contracting, construction management and design-build services to private clients and public agencies throughout theUnited States and selected overseas locations.world. The Company’s construction businessinvolves twois now conducted through three basic segments or operations: building, civil andcivil.management services. The Company offers generalbuilding and civilcontracting,services provided by the Company consist ofpreconstruction planning and comprehensive project management services, including the planning and scheduling of 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 also offers self-performed construction services, including site work, concrete forming and placement and steel erection. The Company provides these services by using traditional general contracting arrangements, such as fixed price, guaranteed maximum price and cost plusawardfee 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, theThe Company’s interests in construction joint ventureswere 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 interestsare accounted for using the proportionate consolidation methodin 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 SheetsAll significant intercompany transactions andConsolidated 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 Flowsbalances have beenrestated to conform to the 2002 presentation.eliminated in consolidation.[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 itsCompanycontracts and joint ventureconstructioncontracts due to, among other things, the one-of-a-kind nature of most of its projects, the long-term duration of its contract cycle and the 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(seerelating to contract claims. (See Note 2below).below.) Actual results could differ in the near term from these estimates and such differences couldhave a material adverse effect on the Company’s financial condition, results of operations and cash flows.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSFor the Years Ended December 31, 2002, 2001 and 2000 (continued)be material.
[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 percentagesPercentage of completionareis 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 the totalcost orforecasted 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 therevision 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 incurredNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2003, 2002 and 2001 (continued)[1] Summary of Significant Accounting Policies (continued)
[d] Method of Accounting for Contracts (continued)
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 (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. Unbilled work related to the Company’s contracts and joint venture contracts at December 31,
20022003 and2001,2002, consisted of the following (in thousands):2003 20022001-------------------------------------- Unbilled costs and profits incurred todatedate* $19,498 *34,121 $23,784 *19,498 Unapproved change orders 17,936 30,28925,638Claims 64,515 62,77648,003-------------------------------------- $116,572 $112,563$ 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.
Of the balance of “unapproved change orders” and “claims” included above in unbilled work at December 31, 2003 and December 31, 2002 approximately $36.0 and $40.0 million respectively, are amounts subject to pending litigation or dispute resolution proceedings as described in Item 3 – “Legal Proceedings” and Note 2, “Contingencies and Commitments” of Notes to Consolidated Financial Statements for the respective periods. These amounts are management’s estimate of the probable recovery from the disputed claims considering such factors as evaluation of entitlement, settlements reached to date and knowledge of customer. In the event that future facts and circumstances, including the resolution of disputed claims, cause us to reduce the aggregate amount of our estimated probable recovery from the disputed claims, we will record the amount of such reduction against future earnings in the relevant period.
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“Unapproved changeorders"orders” or"Claims"“Claims” is the final resolution and agreement between the parties. The amount of unbilled work at December 31,20022003 estimated by management to be collected beyond one year is approximately$22.1$19.0 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, 2003, 2002 and 2001and 2000(continued)[1] Summary of Significant Accounting Policies (continued)
[g] Goodwill
Effective January 1,As of December 31, 2002,the accounting for goodwill changed to comply with SFAS No. 142, “Goodwill and Other Intangible Assets”.Goodwill in the amount of approximately$1$1.0 millioniswas includedin “Other Assets”in the accompanying Consolidated Balance Sheets andrepresentsrepresented the excess of the costs of subsidiaries acquired over the fair value of their net assets as of the dates ofacquisition (seeacquisition. Effective January 1, 2003, the Company acquired 100% of the outstanding stock of James A. Cummings, Inc., a privately held construction company based in Ft. Lauderdale, FL. (See Note6). While these amounts were being amortized on3.) As astraight-line basis over 40 years through 2001 at an annual rateresult of$63,000, amortizationthis transaction, approximately $13.0 million of additional goodwill wasdiscontinuedrecorded in2002 in2003, bringing the total amount of goodwill to approximately $14.0 million as of December 31, 2003.In accordance with SFAS No.
142. Goodwill is now subject to an assessment142, “Goodwill and Other Intangible Assets”, the Company assesses the amount of goodwill for impairment by applying a fair value test, at a minimum,on an annual basis.annually as of December 31. Based on the initial and annual impairment tests completed during 2002 and 2003, 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 IncomeTaxes,” (seeTaxes”. (See Note4)5). 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 usingenactedtaxrates.rates expected to be in effect when such differences reverse. 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, “EarningsPerper Share”. Basic earnings per common share(“EPS”)was computed by dividing net income less dividendsother requirements related toaccrued on the $21.25 Preferred Stock during all years presented plus the reversal in 2003 of approximately $7.3 million of previously accrued andthe lossunpaid dividends on theinduced conversion$21.25 Preferred Stock no longer required based on the results ofSeries B Preferredthe tender offer completed in2000June 2003 (see Notes 8 and 14) by the weighted average number of common shares outstanding. Diluted earnings per common share was similarly computedbyafter giving consideration to the dilutive effectto all dilutive potentialof stock options and warrants outstanding on the weighted average number of common shares outstanding.For allOptions to purchase 135,000 shares of
the applicable periods presented, the assumed conversionCommon Stock at a price ofthe Company’s Depositary Convertible Exchangeable Preferred Shares, Series B Preferred Shares and Stock Purchase Warrants into common stock was$8.66 per share were outstanding at December 31, 2003, but were not included in the computation of diluted earnings percommonsharesincebecause theeffect would be antidilutive.
Basic and diluted earnings per common share for eachoptions’ exercise price was greater than the average market price of thethree years in the period endingCommon Stock. Options to purchase 3,172,834 shares of Common Stock at prices ranging from $4.50 to $8.66 per share were outstanding at 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 valuebut were not included in the computation ofSeries 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 STATEMENTSFor 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 anddiluted earnings per sharefor 2000 have been restatedbecause the options’ exercise price was greater than the average market price of the Common Stock. Options to purchase 574,000 shares of Common Stock at prices ranging from$1.13$8.10 to $16.44 were outstanding at December 31, 2001 but were not included in the computation of diluted earnings per shareto $0.39 per share.because the options’ exercise price was greater than the average market price of the Common Stock. In addition, the effect of the assumed conversion of the Company’s outstanding $21.25 Preferred Stock into Common Stock is antidilutive for all years presented and the effect of the assumed conversion of the Company’s Stock Purchase Warrants is antidilutive for 2002 and 2001.[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,
20022003 and2001,2002, cash and cash equivalents consisted of the following (in thousands):NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2003, 2002 and 2001 (continued)[1] Summary of Significant Accounting Policies (continued)
[j] Cash and Cash Equivalents (continued)
2003 20022001----------- ----------- Corporate cash and cash equivalents (available for general corporate purposes) $11,22033,426 $7,16411,220 Company's share of joint venture cash and cash equivalents (available only for joint venture purposes, including future distributions) 34,397 35,81149,378----------- ----------- $47,03167,823 $56,54247,031 =========== ===========[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 STATEMENTSFor 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, ----------------------------------------- 2003 2002 20012000------------ ------------- ------------- Net income, as reported $ 44,018 $ 23,074 $ 26,418$ 24,381Plus: Total stock-based employee compensation recognized under APB No. 25 - - - 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 $ 44,018 $ 20,243 $ 23,572$ 21,187============ ============= ============= Basic earnings per share: As reported(See Note (1)(i))$ 2.18 $ 0.92 $ 1.07$ 0.39Pro forma $ 2.18 $ 0.80 $ 0.94$ 0.22Diluted earnings per share: As reported(See Note (1)(i))$ 2.10 $ 0.91 $ 1.04$ 0.39Pro forma $ 2.10 $ 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 Note3, “Financial Commitments”4 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.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2003, 2002 and 2001 (continued)[1] Summary of Significant Accounting Policies (continued)
[n] New Accounting Pronouncements
InJune 2002,January 2003, theFinancial Accounting Standards Board ("FASB")FASB issuedSFASFIN No.146, "Accounting for Costs Associated with Exit46, “Consolidation of Variable Interest Entities, an Interpretation of ARB 51". In December 2003, the FASB revised FIN No. 46 to reflect decisions it made regarding a number of implementation issues. FIN No. 46, addresses consolidation by business enterprises of variable interest entities (“VIEs”). FIN 46 applies immediately to variable interest entities created orDisposal Activities". The FASB also issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transitionobtained after January 31, 2003 andDisclosure - an Amendment of FASB Statement No. 123".
SFAS No. 146 addresses financial accounting and reporting for costs associated with exitit applies in the first fiscal year ordisposal activities and is effective for exit or disposal activities that are initiatedinterim period ending after December31, 2002. The Company expects15, 2003, to VIEs in which an enterprise holds a variable interest thatthe adoption of the provisions of SFAS No. 146 willis acquired before February 1, 2003. This pronouncement is currently not anticipated to have a materialimpacteffect onitsour 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 PeriniCorporationheld aminority40% interest(“Joint Ventures”)were terminated by the Washington Metropolitan Area Transit Authority,(“WMATA”)or WMATA, on twoadjacentsubway constructioncontractsprojects in the District of Columbia. The contracts were awarded to theJoint Venturesjoint ventures in 1985 and 1986. However, Perini and Mergentime Corporation,(“Mergentime”),or Mergentime, the 60% managing partner, entered into an
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSFor 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 Venturesjoint ventures and Mergentime assumed complete control over the performance of both projects. This agreement did not relieve Perini of its responsibilities to WMATA as aJoint Venturejoint venture partner. After Perini withdrew from theJoint Ventures,joint ventures, Mergentime and WMATAwere embroiled inhad 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,After both construction contracts were terminated,by WMATA andWMATA retained Perini, acting independently, to complete both projects.Subsequently, the
Joint Venturesjoint 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 theJoint Venturesjoint 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 theJoint Venturesjoint ventures liable to WMATA for damages in the amount of approximately $16.5 million and WMATA liable to theJoint Venturesjoint ventures for damages in the amount of approximately $4.3 million.The
Joint Venturesjoint 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. Onand on February 16, 1999, the Court of Appeals vacated the District Court’s final judgment and ordered thesuccessorDistrict CourtJudgeto reviewtheits prior findingsof the initial Judgeand hold further hearings in regard to theJoint Venture’sjoint 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 newa successor District Court Judge informed the parties thatin the absence of a new trial,he could not certify adequate familiarity with the record to complete the remaining proceedings; therefore, heordered thatgranted theJoint Ventures’joint ventures’ motion for a newtrial be granted.trial. The joint ventures are seeking $28.9 million, plus interest, from WMATA, and WMATA is seeking $29.3 million from the joint ventures. A new trial
before the new successor District Court Judgewas completed in January 2002 and a decision is still pending. The ultimate financial impact of theJudge'sJudge’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”),or TSP, in which PeriniCorporationisathe 40% minority partner and Tutor-Saliba Corporation of Sylmar,CACalifornia 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”)or the MTA, seeking to recover costs for extra work required by the MTA in connection with the construction ofthe Wilshire/Normandie Subway Station. TSP is seeking additional compensation from the MTA for claims related to the constructioncertain tunnel andinstation projects. In February 1999 the MTA countered with civil claims under the California False Claims Act against TSP, Tutor-SalibaCorporation,and PeriniCorporationjointly andother parties.severally. Ronald N. Tutor, the Chairman andCEOChief Executive Officer of PeriniCorporationsince Marchof2000, is also theCEOchief executive officer and the sole stockholder of Tutor-SalibaCorporation (see Note 13).Corporation.Claims concerning the construction of the
Wilshire/Normandie Subway StationMTA projects were tried before aJuryjury 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, Tutor-Saliba and Perini foritsthe alleged non-compliance by dismissing TSP’sclaimclaims and by ruling, without aJuryjury finding, that TSP,wasTutor-Saliba andNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2003, 2002 and 2001 (continued)[2] Contingencies and Commitments (continued)
(b) Tutor-Saliba-Perini Joint Venture vs. Los Angeles MTA Matter (continued)
Perini were liable to the MTA for damages on theMTA’s counterclaim.MTA's counterclaims. The Judge then instructed theJuryjury that TSP,wasTutor-Saliba and Perini were liable to the MTA and charged theJuryjury with the responsibility of determining the amount of the damages based on theJudge’sJudge's ruling. TheJuryjury awarded the MTA approximately $29.6 million in damages.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSFor 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 the counterclaim have appealed the Judge’s discovery sanction, the subsequent
Juryjury award and the amended award. Oral arguments on the appeal are anticipated to be set some time in the Summer 2004. 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
In November1,2002, 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 Perini, Tutor-Saliba Corporation,(“TSC”),or 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 sevencontractsprojects for work on the expansion of the San Francisco International Airport. A second amended complaint was filed in July 2003 which, among other things, added Ronald N. Tutor as a defendant. ThePlaintiffsjoint venture was established by TSC, Perini and Buckley through two joint venture agreements dated October 28, 1996 and February 11, 1997. The joint venture had agreements with the Owner to perform work (“Contracts”) on only two of the above projects (“Projects”) and, as part of those Contracts, the joint venture provided performance and payment bonds to the Owner (“Bonds”).In the second amended complaint, the plaintiffs allege, among other things, 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
Plaintiffsplaintiffs allege thatTSC hasthe defendants have violated the United States Racketeer Influenced Corrupt Organizations Act. ThePlaintiffsplaintiffs have asserted $30 million in damages and are seeking treble damages, punitive and exemplary damages, various civil penalties anddebarmenta declaration that TSC and the joint venture are irresponsible bidders. It is unclear based on the plaintiff’s current complaint what portion of theJV and TSC from doing business withplaintiff’s claims relate to theCity of San Francisco.two projects that the joint venture participated in.On October 3, 2003, the Court granted the defendants’ motion to specify damages allegedly sustained for each contract. The
Plaintiffs have not allocated their claims for damages and penalties amongstdefendants’ motion to dismiss thedefendants or the seven contracts at issue, only two of which involved the JV.plaintiff’s second amended complaint is pending.TSC is the managing partner of the
JV,joint venture and, in December 1997, Perini sold its entire 20% interest in theJVjoint venture to TSC. As part of that sale agreement, TSChasagreed to indemnify Perini from any liability that Perini is required to pay by reason of or arising out of any event or occurrence subsequent to the date of the sale of Perini’s interest in the joint ventureincluding legal feesin any way connected with the joint venture agreements, the Contracts, the Projects andexpenses.the Bonds. It is unclear based on the plaintiff’s current complaint whether the claims against the joint venture arise out of events that occurred subsequent to the date of the sale of Perini’s interest. The ultimate financial impact of this action is not yet determinable.(d) Perini/Kiewit/Cashman Joint Venture - Central Artery/Tunnel Project Matter
Perini/Kiewit/Cashman Joint Venture,(“PKC”),or PKC, a joint venture in which PeriniCorporationholds 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”)or 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.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2003, 2002 and 2001 (continued)[2] Contingencies and Commitments (continued)
(d) Perini/Kiewit/Cashman Joint Venture - Central Artery/Tunnel Project Matter (continued)
Certain of PKC’s claims have been presented to a Disputes Review Board,(“DRB”)or the 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 onOn March 20, 2002,fromthe Superior Court of the Commonwealth of Massachusettsthatapproved PKC’s request to have MHD comply with the DRB’sdecision to award the$17.4 millionfor the time delay.award. The MHD has appealed the Superior Court decision to the Appeals Court of the Commonwealth of Massachusetts.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSFor 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 awards totaling $17.1 million for impacts and inefficiencies caused by MHD to certain of 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.work. 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
resolutioncompletion of thecurrent negotiationsnegotiation and mediation discussed below.The pending claims yet to be decided by the
current/replacementcurrent DRB on a binding basis have an anticipated value of$43$49.4 million. The remaining claims to be decided by the replacement DRB on a non-binding basis have an anticipated value of$80$72.6 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
investigationinvestigation.In December 2002, PKC and MHD entered into an agreement
whereby the parties agreedto 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 resolvingPerini began mediation on all claims in September 2003. Management has made an estimate of theclaimstotal anticipated cost recovery on this project and it isnot yet determinable.included in revenue recorded to date. To the extent new facts become known or the final cost recovery included in the claim settlement varies from this estimate, the impact of the change will be reflected in the financial statements at that time.(e)
$21.25 Preferred Shareholders Class Action LawsuitRedondo/Perini Joint Venture vs. Siemens Transportation Matter
This is a binding arbitration proceeding arising out of a contract between the Redondo/Perini Joint Venture, or RPJV, a joint venture in which Perini and Redondo Construction Corp., or Redondo, each have a 50% interest and the Siemens Transportation Partnership, S.E., Puerto Rico, or STP. STP is constructing a public metropolitan passenger rail transportation project for the Commonwealth of Puerto Rico and RPJV is responsible for the design and construction of a portion of the project.On
May 3, 2001March 19, 2002, Redondo filed a petition for reorganization under 11 U.S.C. Chapter 11 in U.S. Bankruptcy Court for theCompany, including severalDistrict ofits currentPuerto Rico.On December 23, 2002, RPJV filed an arbitration demand against STP seeking the recovery of approximately $38 million of additional costs related to design changes and
former directors (“Defendant Directors”), was served with a complaint entitledFrederick Doppelt, Arthur I. Caplan and Michael Miller v. Perini Corporation, et al,Supreme Courtthe late completion of theStatedesign. On January 31, 2003, STP filed a counter-demand against RPJV seeking the recovery ofNew York, Countydamages allegedly related to defects in design and construction and the late completion ofNew York, Civil Action No. 602156/01. Each plaintiff is a holderRPJV’s work in the amount of approximately $17.9 million along with theCompany’s $21.25 Convertible Exchangeable Preferred Stock (“$21.25 Preferred Stock”). One plaintiff, Mr. Doppelt, is a current Directorrepayment ofthe 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 otherNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2003, 2002 and 2001and 2000(continued)
[2] Contingencies and Commitments (continued)
(e) Redondo/Perini Joint Venture vs. Siemens Transportation Matter (continued)
approximately $22.6 million for alleged advances previously paid to RPJV.On October 31, 2003, the parties each revised their statement of damages. RPJV’s total claim is now approximately $71 million. STP’s revised claim is approximately $69.5 million, including its claim for alleged advances already paid.
Discovery has begun, an arbitration panel has been chosen and arbitration evidentiary hearings are scheduled to begin on March 15, 2004. Management has made an estimate of the total anticipated cost recovery on this project and it is included in revenue recorded to date. To the extent new facts become known or the final cost recovery included in the claim settlement varies from this estimate, the impact of the change will be reflected in the financial statements at that time.
(f) $21.25 Preferred Shareholders Class Action Lawsuit
(continued)
On October 15, 2002, Frederick Doppelt, Arthur I. Caplan and Leland D. Zulch filed a lawsuit individually, and as representatives of a class of holders of our Depositary Shares against certain current and former directors of Perini. This lawsuit is captioned Doppelt, et al. v. Tutor, et al., United States District Court for the District of Massachusetts, No. 02CV12010MLW. Mr. Doppelt is a current director of Perini and Mr. Caplan is a former director of Perini. Specifically, the original complaint alleged that the defendants breached their fiduciary duties owed to the holders of the Depositary Shares and to Perini. The plaintiffs principally allege that the defendants improperly authorized the exchange of Series B Preferred Stock for common stock while simultaneously refusing to pay accrued dividends due on the Depositary Shares.On January 6, 2003, the defendants moved to dismiss the lawsuit. Among other things, the defendants argued that: (1) they did not owe fiduciary duties to the holders of the Depositary Shares and (2) the claims of breach of fiduciary duty owed to Perini must be dismissed because the claim could only be brought as a derivative action.
On March 21, 2003, the plaintiffs filed an opposition to the motion to dismiss and in May 2003 the plaintiffs asked the Court for leave to file an amended complaint.
In June 2003 the plaintiffs were given leave to file an amended complaint. The amended complaint filed in July 2003 adds an allegation that the defendants have further breached their fiduciary duties by authorizing a tender offer for the purchase of up to 90% of the Depositary Shares and an allegation that the collective actions of the defendants constitute unfair and deceptive business practices under the provisions of the Massachusetts Consumer Protection Act. The amended complaint withdrew the allegation of a breach of fiduciary duty owed to Perini, but retained the allegation with respect to a breach of those duties owed to the holders of the Depositary Shares. The plaintiffs seek damages in an amount not less than $15,937,500, trebled, plus interest, costs, fees and other unspecified punitive and exemplary damages.
On
May 23,August 29, 2003, the defendants filed a motion to dismiss the amended complaint. The plaintiffs filed an opposition thereto and on October 14, 2003, the defendants filed their reply.In 2001, a similar lawsuit was filed by some of the
Company and the Defendant Directors removed the action from the Supreme Court of New York tosame plaintiffs in the United States District Court for the Southern District of NewYork. On June 26, 2001,York, which claimed that we breached our contract with thePlaintiffs filed an Amended Complaint wherebyholders of Depositary Shares. In 2002, thePlaintiffs limited their Class Action to an action for breach of contract against the Companycase was dismissed andan 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 dismissedupon appeal by theUnited States District Court for the Southern District of New York.
In April 2002, the Plaintiffs appealed the dismissalplaintiffs to the United States Court of Appeals for the SecondCircuit. On December 23, 2002,Circuit, thePlaintiffs’ appeal was dismissed by the United StatesCourt of Appealsforaffirmed theSecond Circuit.dismissal.[3] Acquisition of James A. Cummings, Inc.
On
October 15, 2002,January 23, 2003, thePlaintiffs filedCompany completed the acquisition of 100% of the outstanding common stock of James A. Cummings, Inc. (“Cummings”), anew actionprivately held construction company based in Fort Lauderdale, Florida, forbreach of fiduciary duty against$20 million in cash, financed in part through theDefendant DirectorsCompany’s credit facility. Cummings is an established building construction and construction management company in theUnited States District Court forSouth Florida region specializing in theDistrictconstruction ofMassachusetts. On January 6, 2003,schools, municipal buildings, and commercial facilities. Cummings strong regional reputation, successful in-place management team and focus on growing niche markets should effectively extend theDefendant Directors moved to dismiss allCompany’s expansion into the Southeast region of thePlaintiffs’ Massachusetts claims.UnitedNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2003, 2002 and 2001 (continued)[3] Acquisition of James A. Cummings, Inc. (continued)
States. At January 1, 2003, Cummings had a firm backlog of approximately $170 million. TheDefendant Directorsacquisition was effective as of January 1, 2003 and, accordingly, Cummings' financial results areawaitingincluded in thePlaintiffs’ 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’sCompany's consolidated results of operations and financial position since that date.The transaction was accounted for using the purchase method of accounting as required by FASB Statement No. 141, “Business Combinations”. Goodwill and identifiable intangible assets recorded in the acquisition were tested during 2003 and will be tested periodically in the future for impairment as required by FASB Statement No. 142 “Goodwill and Other Intangible Assets”. The allocation of acquisition costs, which consists of the $20 million cash consideration referred to above and $565,000 of other direct acquisition costs, is as follows (in thousands):
Current assets $ 34,419 Property and equipment, net 394 Other long-term assets 23 Goodwill 12,990 Other identifiable intangible assets 575 ------------ Total assets acquired $ 48,401 Less - Liabilities assumed (27,836) ------------ Total Consideration and Acquisition Costs $ 20,565 ============Other identifiable intangible assets represent the estimated costs incurred in obtaining the backlog referred to above and are being amortized over the average two year operating cycle of the related contracts. Approximately $288,000 was amortized during 2003. The $13.0 million of "Goodwill" referred to above has been allocated to the building construction segment and will be fully deductible for tax purposes.
Since the acquisition was effective as of January 1, 2003, the Company's 2003 year to date results include Cummings for the full year. Therefore, the following pro forma financial information is presented for the comparative years ended December 31, 2002 and 2001 (in thousands, except per share data):
Year Ended December 31, ------------------------------ 2002 2001 -------------- ------------- Pro forma (unaudited) Revenues $ 1,182,413 $ 1,664,490 Gross profit $ 65,030 $ 64,358 Net income $ 25,694 $ 29,309 Basic earnings per common share $ 1.04 $ 1.20 Diluted earnings per common share $ 1.03 $ 1.16The pro forma results have been prepared for comparative purposes only and include certain adjustments such as increased interest expense on acquisition debt and additional amortization expenses related to intangible assets arising from the acquisition. The pro forma results are not necessarily indicative either of the results of operations that actually would have resulted had the acquisition been in effect on January 1, 2001 or
financial condition.of future results.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2003, 2002 and 2001 (continued)[
3]4] Financial CommitmentsLong-term Debt
Long-term debt of the Company at December 31,
20022003 and20012002 consists of the following (in thousands):2003 20022001------------ ------------ Borrowing under revolving credit facility at an average rate of 3.8% in 2003 and 4.5% in 2002 $5,000- $- Term loan under credit facility at an average rate of 6.8% in 2001 - 9,7645,000 Mortgage on corporate headquarters building, at a rate ofapproximately 9%,8.96% payable in equal monthly installments over a ten year period, with a balloon payment of approximately $5.3 million in 2010 6,999 7,1627,322Mortgage on office building at a rate of 5.68% payable in equal monthly installments over a five year perios, with a balloon payment of $1.4 million in 2008 1,665 - Other indebtedness 348 377703------------ ------------ Total $12,5399,012 $17,78912,539 Less - current maturities 490 41610,249------------ ------------ Net long-term debt $12,1238,522 $7,54012,123 ============ ============Payments required under these obligations amount to approximately
$416,000 in 2003, $272,000$490,000 in 2004,$5,241,000$353,000 in 2005,$241,000$281,000 in 2006,$247,000$305,000 in 2007,and $6,122,000$1,721,000 in 2008 and $5,862,000 in 2009 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
providesprovided 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 STATEMENTSFor 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
specifieda minimum working capital ratio, tangible net worth and operating profit levels, interest coverage minimums, and limitations onindebtedness.indebtedness and certain capital expenditures. 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. On November 5, 2003 and January 31, 2004, the terms of the revolving credit facility were further amended to provide a temporary $20 million increase in the facility, from $50 million to $70 million, until April 30, 2004 to support the procurement requirements of a major project.
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 the Company’s current incremental borrowing rate for similar types of debt. The estimated fair value of fixed rate debt at December 31, 2003 and 2002 is $9.7 million and $8.2
million.million, respectively, compared to the carrying amount of $9.0 million and $7.5 million, respectively.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,
20022003 are as follows (in thousands):NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2003, 2002 and 2001 (continued)[4] Financial Commitments (continued)
Amount ------------20032004 $3,595 2004 3,0364,425 20052,5163,593 20061,4322,196 20078021,422 2008 933 Thereafter1,301732 ------------ Subtotal $12,68213,301 Less - Sublease rental agreements(836)(1,120) ------------ Total $11,84612,181 ============Rental expense under long-term operating leases of construction equipment, vehicles and office space was $4,625,000 in 2003, $3,781,000 in 2002 and $3,146,000 in
2001 and $2,567,000 in 2000.2001.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 STATEMENTSFor the Years Ended December 31, 2002, 2001 and 2000 (continued)[
4]5] Income TaxesThe 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)credit (provision) for income taxesexpenseis comprised of the following (in thousands):Federal StateForeignTotal ----------- ------------- ------------------------20022003 - ---- Current $(249)(529) $1,050(1,380) $ (1,909) Deferred 16,023 (1,018) 15,005 ----------- ------------- ------------ $ 15,494 $ (2,398) $ 13,096 =========== ============= ============ 2002 - ---- Current $801249 $ (1,050) $ (801) Deferred-- - - ----------- ------------- ------------------------$(249)249 $1,050(1,050) $- $ 801(801) =========== ============= ========================2001 - ---- Current $360(360) $490(490) $- $ 850(850) Deferred-- - - ----------- ------------- ------------------------$360(360) $490(490) $- $ 850(850) =========== ============= ========================2000Current $ 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2003, 2002 and 2001 (continued)[5] Income Taxes (continued)
2003 2002 20012000------------- ------------ ------------- Statutory federal income tax rate 35% 35%34%35% State income taxes, net of federal tax benefit 313 1 Foreign taxes 0 0(3)0 Recognition of current year tax benefit (35) (35) (33)(32)Reversal of valuation allowance (45) 0 0 ------------- ------------ ------------- Effective tax rate (42)% 3% 3%0%============= ============ =============The following is a summary of the significant components of the
Company'sCompany’s deferred tax assets and liabilities as of December 31,20022003 and20012002 (in thousands):2003 20022001------------ ------------ Deferred Tax Assets Provision for estimated real estate losses $175101 $7,728175 Contract losses 2,392 1,985231Timing of expense recognition383 3,02610,234 7,383 Net operating loss and capital loss carryforwards 22,325 33,68931,759Alternative minimum tax credit carryforwards 3,619 2,9603,310General business tax credit carryforwards - 3,0453,533Other, net 1,068 953868------------ ------------ $43,19039,739 $50,45550,190 Valuation allowance for deferred tax assets*(28,208) (35,854)(8,400) (35,208) ------------ ------------ Deferred tax assets $14,98231,339 $14,60114,982 ------------ ------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSFor the Years Ended December 31, 2002, 2001 and 2000 (continued)
[4] Income Taxes (continued)2002 2001 ------------ ------------Deferred Tax Liabilities Joint ventures - construction $(14,569)(15,883) $(11,999) Joint ventures - real estate - (29)(14,569) Capitalized carrying charges (451) (413)(2,573)------------ ------------ Deferred tax liabilities $(14,982)(16,334) $(14,601)(14,982) ------------ ------------ Net deferred tax asset(liability)$-15,005 $ - ============ ============The net deferred asset as of December 31, 2003 is classified in the Consolidated Balance Sheet based on when the future benefit is expected to be realized as follows (in thousands):
Short-term "Deferred tax asset" $ 10,844 Long-term "Deferred tax asset" 4,161 ------------- $ 15,005 =============* 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,would, 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
iswas realized in 2003, 20022001and20002001 by not having to provide federal income tax of approximately $11.0 million, $8.5 million and $9.0 million,and $8.0 million,respectively.AtIn addition, during the year ended December 31,2002, approximately $79 million of future pretax book earnings could benefit from minimal, if any, federal tax provisions.
At December 31, 2002,2003, the Companyhas unusedrecognized an additional $14.9 million taxcredits andbenefit based on the expectation that the Company will be able to utilize an additional amount of its net operating loss carryforwardsfor 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 limitedinthe 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 salefuture years.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2003, 2002 and 2001and 2000(continued)[5]
Land Held for Sale, NetIncome Taxes (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 atAt December 31,2002 consists2003, the Company has unused net operating loss carryforwards for tax reporting purposes ofcertain fully-developed parcels in Raynham, Massachusetts. Management's current plan is to continue to marketapproximately $63.8 million, of which $1.4 million expires during theremaining land for sale as a bulk sale or as individual parcels over an estimated 36 to 48 month "sell off"2004 – 2006 period and $62.4 million expires during the 2007 – 2021 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 ofAt December 31,2002 with2003, theamount 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 heldCompany also has unused alternative minimum tax credit carryforwards forsale 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.income tax reporting purposes that have no expiration date.[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 2003 20022001------------- ------------- Land held for sale, net (Note5)13) $ 2,762 $ 3,175$ -Deferred expenses 1,510 1,8011,900 Goodwill (Note 1) 1,017 1,017Other investments 63 63 Intangibleasset (Noteassets (Notes 3 and 10) 599 36026------------- ------------- $6,4164,934 $3,0065,399 ============= ============= Other Long-term Liabilities 2003 20022001------------- ------------- Accrued dividends on $21.25 Preferred Stock (Note 8) $15,4059,805 $13,28015,405 Employee benefit related liabilities 1,885 2,2562,661Minimum pension liability adjustment (Note 10) 24,325 19,9335,891------------- ------------- $37,59436,015 $21,83237,594 ============= ============= Other (Income) Expense, Net2003 2002 20012000------------- ------------- ------------ Gain from land sales, net (Note 13) $ (2,207) $ - $ - Interest income$(226) (297)$(404)$ (1,216)Bank fees 483 302 328341Miscellaneous (income) expense, net 515 515 303(74)------------- ------------- ------------ $ (1,435) $ 520 $ 227$ (949)============= ============= ============NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2003, 2002 and 2001and 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”AIG” 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. A summary of the shares of common stock issued to and the proceeds received from the New Investors follows:Number of Proceeds Shares (in thousands) --------------- ---------------- TSC 2,352,942 $ 10,000 O&G 2,352,941 10,000 AIG 4,705,882 20,000 --------------- ---------------- 9,411,765 $ 40,000 =============== ================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
1312 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)).2000.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 andamended 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 40,000,000shares and to amend the Series B Preferred Stock Certificate of Vote.shares. 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,BLUMBlum 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. (See Note 15 “Subsequent Event” that describes a secondary offering in process based on the provisions of the Registration Rights Agreement.) 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 theAgreement.Agreement (see Note (8)(b)).As of March 29, 2000, the shares of Common Stock issued in the Purchase represented approximately 42% of the Company’s voting rights and the shares of Common Stock issued to the former holders of the Series B Preferred Stock
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2003, 2002 and 2001 (continued)[7] Recapitalization (continued)
represented approximately 33% of the Company’s voting rights. The New Investors have the right to nominate three members to the Company’s Board of Directors and the former holders of the Series B Preferred Stock continue to be entitled to nominate two members to the Company’s Board of Directors.
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 STATEMENTSFor 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). Theeffect 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$2.125 Depositary Shares are 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$9,805,000 at December 31,2002,2003, which represents approximately$154.05$175.32 per share of $21.25 Preferred Stock or approximately$15.41$17.53 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 lastfivesix Annual Meetings of Stockholders.
(b) Redeemable Series B CumulativeOn June 9, 2003, the Company completed its tender offer to purchase up to 900,000 shares, or approximately 90% of its outstanding $2.125 Depositary Convertible Exchangeable PreferredStockAtShares (the “Depositary Shares”), each of which represents 1/10th of aspecial stockholders’ meeting on January 17, 1997,share of the Company’sstockholders 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$21.25 Preferred Stock, at$200a purchase price of $25.00 per share,(or $30 million)net to theinvestor group, (withseller in cash without interest. The tender offer which commenced on March 31, 2003, expired on June 9, 2003, at which time theremainderCompany purchased 440,627 Depositary Shares. The completion of theshares set aside for possible future payment-in-kindself tender offer resulted in the Company purchasing and immediately retiring 440,627 Depositary Shares, a reduction of approximately $11.3 million, including related expenses, in Stockholders’ Equity, and a reversal of approximately $7.3 million of previously accrued and unpaid dividends relating to theholderspurchased shares that was restored to paid-in surplus. In addition, the $7.3 million of previously accrued and unpaid dividends was added to net income to determine net income available for common stockholders for theSeries B Preferred Stock), amendments topurpose of computing earnings per common share for theCompany’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 andyear ended December 31, 2003.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2003, 2002 and 2001and 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 RightsPlan,Agreement, 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 thePlan.Agreement. 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 STATEMENTSFor 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
PlanAgreement 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 thePlanAgreement from September 23, 1998 to January 21, 2007. In addition, the Board of Directors amended the Company’s Shareholder RightsPlan,Agreement, 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)(c) Stock Purchase Warrants
In connection with an Amended Credit Agreement effective January 17, 1997 with the Company’s bank group at that time, thebankersbanks 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, subject to certain anti-dilution adjustments in the event of certain distributions and other corporate events, 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 and charged against income over the three year term of the Credit Agreement ended in 2000.In conjunction with the
offsetting charge beingissuance of the Stock Purchase Warrants, the Company entered into a rights agreement with the warrantholders whereby the Company granted the warrantholders the right toOther (Income) Expense, Net.require it, upon request by holders of a majority of warrants and common stock received upon exercise of warrants, subject to the terms and conditions set forth in the agreement, to register the resale of shares of the common stock held by them upon exercise of their warrants. Under the agreement, the Company generally agreed to pay the fees and expenses of the selling stockholders in connection with any such registration.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2003, 2002 and 2001 (continued)[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 generally 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 anniversarygrant. As of December 31, 2003, all of thedate of grant.2,503,300 options outstanding were exercisable. 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$3.13 - $4.50 $4.47 (2,792,700) ------------ ------------- Outstanding at December 31, 2000 2,792,700$3.13-$4.50$3.13 - $4.50 $4.47 207,300 Granted 20,000$8.10 $8.10$6.85 $6.85 (20,000) Exercised (79,666) $4.50 $4.50 - ------------ ------------- Outstanding at December 31, 2001 and 2002 2,733,034$3.13-$8.10$3.13 - $6.85 $4.50 187,300============ =============2003 2,503,300 $3.13 - $6.85 $4.49 195,634 ============ =============
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSFor the Years EndedExercised (221,400) $3.13 - $4.50 $4.45 - Terminated (8,334) $4.50 $4.50 8,334 ------------ ------------- Outstanding at December 31,2002, 2001 and 2000 (continued)
[9] Stock Options (continued)
At December 31, 2001, 481,610 sharesShares of the Company'sCompany’s authorized but unissued Common Stock werehave been 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 2002Although the provisions of the 1982 Stock Option Plan expired. Therefore, at December 31,expired during 2002, the onlyCompany still has 67,500 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. As of December 31, 2003, all of the 67,500 options outstanding were exercisable. A summary of stock option activity related to the Company'sCompany’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-$16.445.29 - $16.44 $ 13.43 220,110
Canceled (194,000) $13.00-$16.44$13.00 - $16.44 $ 16.26 (220,110)
------------ -------------------------
Outstanding at December 31, 2002 and 2003 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 $5.13NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2003, 2002 and 2001 (continued)
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. As of December 31, 2003, all of the 435,000 options outstanding were exercisable.
Options outstanding at December 31, 20022003 and related weighted average price and life information follows:
Weighted
Average
Remaining Grant Options Options Exercise
Life (Years) Date Outstanding Exercisable Price
- -------------------- ---------- --------------- ------------- ---------------------
32 01/17/97 225,000 225,000 $8.38
43 01/19/98 135,000 135,000 $8.66
43 12/10/98 112,500 112,500 $5.29
54 01/04/99 30,000 30,000 $5.13
87 03/29/00 2,000,000 2,000,0001,939,600 1,939,600 $4.50
87 05/25/00 234,700 172,000 $4.13
8216,700 216,700 $4.15
7 09/12/00 378,334 378,334227,000 227,000 $4.50
87 11/15/00 100,000 100,000 $4.50
9 07/09/8 08/13/01 20,000 13,334 $8.1020,000 $6.85
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSFor the Years Ended December 31, 2002, 2001 and 2000 (continued)
[9] Stock Options (continued)
When options are exercised, the proceeds are credited to stockholders'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“Accounting for Stock-Based Compensation"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'sCompany’s pro forma SFAS No. 123 disclosures are based on the Black-Scholes option pricing model for options granted in 1997 through 2002.2003.
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
07/09/08/13/01 $ 124,600 0% 66% 5.34% 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2003, 2002 and 2001 (continued)
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. 132,132R, “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 2003, 2002 2001 and 20002001 follows (in thousands):
2003 2002 2001
2000------------- ------------ ------------ -------------
Service cost - benefits earned during the period $ 1,828 $ 1,459 $ 1,094 $ 963
Interest cost on projected benefit obligation 4,674 4,529 4,404 4,259
Expected return on plan assets (4,545) (4,899) (4,831) (4,633)
Amortization of transition obligation - - 6
Amortization of prior service costs 35 25 (26) (4)
Recognized actuarial loss 665 56 68
33------------- ------------ ------------ -------------
Net pension cost $ 2,657 $ 1,170 $ 709
$ 624============= ============ ============
=============
Actuarial assumptions used:used to determine net pension cost:
Discount rate 6.75% 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%8.50% 9.00% 9.00%The expected long-term rate of return on assets assumption will decrease to 7.50% effective January 1, 2004. The expected long-term rate of return on assets assumption was developed considering historical and future expectations for returns for each asset class.
The target asset allocation for the Company's pension plan by asset category for 2004 and the actual asset allocation at December 31, 2003 and 2002 by asset category are as follows:
Percentage of Plan Assets at December 31,
------------------------------------------------
Target
Allocation
Asset Category 2004 2003 2002
- -------------------------------- ------------ ------------- ------------
Equity securities:
Domestic 70.00% 72.20% 57.54%
International 0.00% 0.00% 10.09%
Fixed income securities 30.00% 27.78% 32.37%
Real estate 0.00% 0.00% 0.00%
Other 0.00% 0.02% 0.00%
------------ ------------- ------------
Total 100.00% 100.00% 100.00%
============ ============= ============
The target asset allocation was established to attempt to maximize returns with consideration of the long-term nature of the obligations and to reducing the level of overall market volatility through the allocation to fixed income investments. During the year, the asset allocation is reviewed for adherence to the target asset allocation and the portfolio of investments is rebalanced periodically.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2003, 2002 and 2001 and 2000 (continued)
Within the equity portfolio, the investments are primarily large capitalization domestic equities; however, the plan’s asset manager may invest in equities with small and medium capitalizations. The equity assets are invested in a broadly diversified portfolio with approximately 125 individual securities. Currently there is no allocation to international equities. Within the fixed income portfolio, the investments are entirely investment grade U.S. fixed income securities including both U.S. Government and U.S. Credit securities.
The Company expects to contribute $4 million to its pension plan in 2004.
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, 2002,2003, and a statement of the funded status as of December 31, 20022003 and 20012002 (in thousands):
Reconciliation of Fair Value of Plan Assets
2003 2002
2001
------------------------- ------------
Balance at beginning of year $ 46,16438,527 $ 52,56746,164
Actual return on plan assets 3,403 (6,387) (2,994)
Employer contribution 3,157 2,370 159
Benefit payments (3,713) (3,620)
(3,568)
------------------------- ------------
Balance at end of year $ 41,374 $ 38,527
$ 46,164
========================= ============
Reconciliation of Projected Benefit Obligation
2003 2002
2001
------------------------- ------------
Balance at beginning of year $ 64,24470,803 $ 59,99264,244
Service cost 1,828 1,459 1,094
Interest cost 4,674 4,529 4,404
Plan amendments - 298 -
Actuarial loss 4,984 3,893 2,322
Benefit payments (3,713) (3,620)
(3,568)
------------------------- ------------
Balance at end of year $ 78,576 $ 70,803
$ 64,244
============= ============ ============
Actuarial assumptions used to determine benefit obligations:
2003 2002
------------ ------------
Discount rate 6.25% 6.75%
Rate of increase in compensation 6.00% 6.00%
Funded Status
2003 2002
2001
------------------------- ------------
Funded status at December 31, $ (32,276)(37,202) $ (18,080)(32,276)
Unrecognized prior service cost 263 299 26
Unrecognized loss 33,559 28,098
12,975
------------------------- ------------
Net amountliability recognized, before additional minimum liability $ (3,380) $ (3,879)
$ (5,079)
========================= ============
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2003, 2002 and 2001 (continued)
The following table presents amounts included in the Consolidated Balance Sheets as of December 31, 20022003 and 20012002 (in thousands):
2003 2002 2001
------------ ------------
Accrued benefit liability $ (23,812)(27,705) $ (10,970)(23,812)
Intangible asset (Note 6) 312 360 26
Accumulated other comprehensive income 24,013 19,573 5,865
------------ ------------
Net amount recognized at year end $ (3,879)(3,380) $ (5,079)(3,879)
============ ============Other comprehensive income attributable to a change in the additional minimum pension liability recognized pursuant to SFAS No. 87, "Employers'“Employers’ Accounting for Pensions"Pensions” amounted to $4.4 million in 2003, $13.7 million in 2002 and $5.9 million in 2001. The cumulative amount of $19.6$24.0 million generally represents the excess of the accumulated benefit obligations of the Company'sCompany’s pension plans over the fair value of the plans'plans’ assets as of December 31, 20022003 compared to the unfunded accrued pension liability previously recognized. This amount is reflected as a long-term liability as of December 31, 20022003 (see Note 6) with the offset being a reduction in stockholders'stockholders’ equity. Subsequent adjustments to the amount of
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSFor 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'sCompany’s pension plans.
The Company'sCompany’s plans have benefit obligations in excess of the fair value of the plans'plans’ assets. Plan assets generally include equity and fixed income funds. The following table provides information relating to each of the plan'splan’s benefit obligations compared to the fair value of its assets as of December 31, 20022003 and 20012002 (in thousands):
2003 2002
2001
------------------------------------------ ------------------------------------------------------------------------------- -------------------------------------
Benefit Benefit
Pension Equalization Pension Equalization
Plan Plan Total Plan Plan Total
------------ -------------- ------------ ------------ -------------- ---------------------- ------------- ---------- ----------- ------------- ----------
Projected benefit obligation $ 75,232 $ 3,344 $ 78,576 $ 68,107 $ 2,696 $ 70,803
$ 61,470 $ 2,774 $ 64,244
Accumulated benefit obligation $ 66,359 $ 2,720 $ 69,079 $ 59,986 $ 2,353 $ 62,339
$ 54,894 $ 2,240 $ 57,134
Fair value of plan assets $ 41,374 $ - $ 41,374 $ 38,527 $ - $ 38,527 $ 46,164 $ - $ 46,164
Projected benefit obligation
greater than Fair value of
plan assets $ 33,858 $ 3,344 $ 37,202 $ 29,580 $ 2,696 $ 32,276
$ 15,306 $ 2,774 $ 18,080
------------ -------------- ------------ ------------ -------------- ---------------------- ------------- ---------- ----------- ------------- ----------
Accumulated benefit obligation
greater than Fair value of
plan assets $ 24,985 $ 2,720 $ 27,705 $ 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 2003 and 2002, and $0.1 million in 2001 and $0.6 million in 2000.2001. 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, theThe Company has an incentive compensation plan for key employees which is generally based on the Company’s achievement of a certain level of profit.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2003, 2002 and 2001 (continued)
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 $4.3 million in 2003, $7.3 million in 2002 and $8.8 million in 2001 and $4.9 million in 2000.2001. 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 STATEMENTSFor the Years Ended December 31, 2002, 2001 and 2000 (continued)
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 diversified general contracting, construction management and design-build services to private clients and public agencies throughout the United States and selected overseas locations.world. The Company’s construction business involvesis now conducted through three basic segments: building, civil and management services. The building segment is comprised of Perini Building Company and James A. Cummings, Inc., and focuses on large, complex projects in the hospitality and gaming, sports and entertainment, educational, transportation and healthcare markets. The civil segment is involved in public works construction primarily in the northeastern United States, including the repair, replacement and reconstruction of the United States public infrastructure such as highways, bridges and mass transit systems. The management services segment provides diversified construction, design-build and maintenance services to the U.S. military and government agencies as well as power producers, surety companies and multi-national corporations.
Historically, management had evaluated the Company’s operating results based on two basicreportable segments: building and civil. During the fourth quarter of 2003, the responsibilities of certain of the Company’s executive officers were adjusted and, in accordance with SFAS No. 131, the criteria for determining the Company’s reportable segments were reevaluated. Management determined that a third business segment, management services, would be included as a reportable segment beginning with the year ended December 31, 2003 to align the Company’s reportable segments with current management responsibilities. Previously, the management services operations were included as part of the building segment. The building operationmanagement services both private clientssegment aggregates contracts that have a higher than normal geopolitical and public agencies from offices located in Boston, Phoenix, Las Vegas, Detroitoperational risk and Celebration, FLa corresponding potential for greater than normal gross margin volatility. Segment information for each of the years ended December 31, 2002 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 work2001 presented 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. tables set forth below have been reclassified to reflect this change.
During the years 20002001 through 2002,2003, 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, 20022003 (in thousands):
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2003, 2002 and 2001 and 2000 (continued)
2003 Reportable Segments
---------------------------------------------------------
Management Consolidated
Building Civil Services Totals Corporate Total
------------- ----------- -------------- ------------- ----------- ---------------
Revenues $ 898,254 $ 176,877 $ 298,972 $ 1,374,103 $ - $ 1,374,103
Income from Construction Operations $ 12,462 $ 3,157 $ 23,711 $ 39,330 $ (8,840) (a) $ 30,490
Assets $ 225,139 $ 204,135 $ 80,649 $ 509,923 $ 55,520 (b) $ 565,443
Capital Expenditures $ 1,520 $ 3,722 $ 157 $ 5,399 $ - $ 5,399
2002 Reportable Segments
-------------------------------------------------------------------------------------------------------
Management Consolidated
Building Civil Services Totals Corporate Total
--------------- ------------- ----------- -------------- ------------------------- ----------- ---------------
Revenues $ 772,513631,860 $ 312,528 $1,085,041$ 140,653 $ 1,085,041 $ - $ 1,085,041
Income from Construction Operations $ 26,22514,487 $ 6,390 $ 11,738 $ 32,615 $ (6,735) (a) $ 25,880
Assets $ 158,241130,270 $ 223,036 $ 27,971 $ 381,277 $ 21,112 (b) $ 402,389
Capital Expenditures $ 2,1751,828 $ 2,335 $ 347 $ 4,510 $ - $ 4,510
2001 Reportable Segments
-------------------------------------------------------------------------------------------------------
Management Consolidated
Building Civil Services Totals Corporate Total
--------------- ------------- ----------- -------------- ------------------------- ----------- ---------------
Revenues $ 1,199,4391,120,161 $ 353,957 $1,553,396$ 79,278 $ 1,553,396 $ - $ 1,553,396
Income from Construction Operations $ 31,61226,596 $ 3,918 $ 5,016 $ 35,530 $ (6,029) (a) $ 29,501
Assets $ 234,022213,463 $ 246,326 $ 20,559 $ 480,348 $ 20,893 (b) $ 501,241
Capital Expenditures $ 1,4081,005 $ 3,120 $ 403 $ 4,528 $ - $ 4,5282000 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 and cash equivalents, marketable securities,net deferred tax asset, land held for sale and other investments available for general corporate purposes.
Revenues from various agencies of the United States federal government in the management services segment totaled approximately $225 million (or 16% of consolidated revenues) in 2003. Revenues from the Mohegan Sun Project in the building segment totaled approximately $153 million (or 14% of consolidated revenues)) in 2002 and $457 million (or 29%) in 2001 and $319 million (or 29%) in 2000.2001. Revenues from various agencies of the City of New York in the civil segment totaled approximately $185 million (or 17%) in 2002 and $185 million (or 12%) in 2001, and $117 million (or 11%) in 2000.2001.
Information concerning principal geographic areas is as follows:follows (in thousands):
Revenues
--------------------------------------------
2003 2002 2001 2000
------------- -------------- -------------
United States $ 1,120,961 $ 1,029,097 $ 1,516,810 $ 1,065,304
Foreign and U.S. Territories 253,142 55,944 36,586 40,356
------------- -------------- -------------
Total $ 1,374,103 $ 1,085,041 $ 1,553,396
$ 1,105,660
============= ============== =============NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2003, 2002 and 2001 and 2000 (continued)
[12]11] Business Segments (continued)
Income (Loss) from Construction Operations
--------------------------------------------
2003 2002 2001 2000
------------- -------------- -------------
United States $ 23,009 $ 26,731 $ 32,654 $ 35,106
Foreign and U.S. Territories 16,321 5,884 2,876
(2,406)
Corporate (8,840) (6,735) (6,029) (5,345)
------------- -------------- -------------
Total $ 30,490 $ 25,880 $ 29,501
$ 27,355
============= ============== =============Income (loss) from construction operations has been allocated geographically based on the location of the job site. 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
[12] Related Party Transactions
As a condition to a decrease in retainage receivable on several large projects. This decrease is transitory and is not indicativenew investor group's acquisition of any long-term trend.
[13] Related Party Transactions
Effective withshares of the issuance ofCompany's Series B Preferred Stock for an aggregate of $30 million, which was approved by the stockholders in January 1997, the Company entered into an agreement with Tutor-Saliba Corporation (“TSC”("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’sCompany's $1.00 par value Common Stock. TSC participates in joint ventures with the Company, the Company’sCompany's share of which contributed $49.0 million (or 3.6%), $48.8 million (or 4.5%), and $17.9 million and $4.6 million(or 1.2%) to the Company’sCompany's consolidated revenues in 2003, 2002 and 2001, respectively. The management agreement has been renewed annually by the Company's Compensation Committee, which consists entirely of independent directors, under the same basic terms and conditions as the initial agreement except that the amount of the fee payable thereunder to Tutor-Saliba was increased effective January 1, 2000, respectively.from $150,000 to $250,000 per year and effective January 1, 2004, from $250,000 to $375,000 per year. Effective December 1, 2001, Mr. Tutor was appointedincluded as one ofa participant in the three new directors in accordance with the terms of the Series B Preferred Stock transaction,Company's incentive compensation plan. Since January 17, 1997, Mr. Tutor has been 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 theCompany's Board of Directors and an officer of Perini and effective July 1, 1999 was elected Chairman of the Board of Directors. EffectiveDirectors and effective March 29, 2000 Mr. Tutor was appointedelected Chairman and Chief Executive Officer of the Company.Officer. Compensation for the management services consists of payment of $250,000 per year to TSC, for each of the three years in the period ended December 31, 2003, stock options granted to Mr. Tutor, and incentive compensation of $231,000 awarded to Mr. Tutor of $250,000 in 2003, $231,000 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$8.3750 150,000 01/16/05
12/10/98 $5.29$5.2875 45,000 12/09/06
01/04/99 $5.13$5.1250 30,000 01/03/07
03/29/00 $4.50$4.5000 1,000,000 03/28/10In 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 was fulfilled.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2003, 2002 and 2001 and 2000 (continued)
[13]12] 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”&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”("AIG"), one of the Company’sCompany'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
Common Shares Common 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 $0.8 million and $0.6 million to the Company's consolidated revenues in 2001.2003 and 2001, respectively. In addition, O&G is a 30% partner in a joint venture with the Company which was awarded a $137 million contract for a civil construction project in late 2003. Payments to AIG for surety, insurance and insurance related services approximated $7.8 million in 2003, $9.5 million in 2002 and $8.2 million in 20012001.
[13] Land Held for Sale, Net
Effective June 30, 1999, management adopted a plan to withdraw completely from the real estate development business and $4.6 million in 2000.
[14] Subsequent Events
On January 23,to wind down the operations of Perini Land and Development Company, the Company's wholly owned real estate development subsidiary. Accordingly, approximately 98% of the property has been liquidated since June 30, 1999. 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 for a variety of reasons. As of December 31, 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 backlogonly land remaining to be sold consists of approximately $17064 fully developed acres 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 24 to 36 month "sell off" period.
During the year ended December 31, 2003, 61 acres were sold resulting in a net gain of approximately $2.2 million. (See Note 6.) During the year ended December 31, 2002, 19 acres were sold with no gain or loss recognized. Land costs are allocated to reduce the related sales proceeds based on both the specific cost identification method for certain parcels and average cost per acre sold method on the remaining parcels.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2003, 2002 and 2001 (continued)
[14] Unaudited Quarterly Financial Data
The acquisition will be effective as of January 1,following table sets forth unaudited quarterly financial data for the years ended December 31, 2003 and accordingly, James A. Cummings, Inc. will be included in the Company's consolidated results of operations and financial position beginning in the2002 (in thousands, except per share amounts):
2003 by Quarter
-----------------------------------------------------------------
1st 2nd 3rd 4th
------------ ------------ ----------- ------------
Revenues $291,260 $286,336 $295,855 $500,652
------------ ------------ ----------- ------------
Gross profit $ 13,703 $ 14,370 $ 15,788 $ 26,391
------------ ------------ ----------- ------------
Net income $ 11,419 (a) $ 3,618 $ 6,396 $ 22,585 (a)
------------ ------------ ----------- ------------
Basic earnings per common share $ 0.48 (a) $ 0.43 (b) $ 0.29 (b) $ 0.97 (a)
------------ ------------ ----------- ------------
Diluted earnings per common share $ 0.48 (a) $ 0.41 (b) $ 0.28 (b) $ 0.92 (a)
------------ ------------ ----------- ------------
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
------------ ------------ ----------- ------------
(a) The first quarter of 2003 includes the recognition of a $7.0 million tax benefit in accordance with SFAS No. 109 (or approximately $0.31 per share) related to a reduction in the tax valuation allowance and the fourth quarter of 2003 includes the recognition of $7.9 million similar tax benefit (or approximately $0.34 per share).
(b) The second quarter of 2003 includes $6.7 million (or approximately $0.29 per share) and the third quarter of 2003 includes $0.6 million (or approximately $0.03 per share) added back to net income in the calculation of income available for common stockholders that represented the reversal of dividends previously accrued, but no longer required as a result of the Company's tender offer. See Note 8(a).
[15] Subsequent Event
Pursuant to the exercise of registration rights by certain of our stockholders, we have filed a registration statement for an underwritten secondary offering with respect to 5,910,800 shares of our common stock held by such stockholders. The registration statement is pending with the Securities and Exchange Commission and it has not yet become effective. The shares of common stock are being sold by the selling stockholders and we will not receive any proceeds from the sale. We expect the offering to be completed in the second quarter of 2004. We have accrued estimated costs in the amount of $991,000 in connection with the secondary offering and that amount has been charged against paid-in surplus as of December 31, 2003.
To the Stockholders of Perini Corporation:
We have audited the accompanying consolidated balance sheets of PERINI CORPORATION (a Massachusetts corporation)Perini Corporation and subsidiariesSubsidiaries (collectively, the “Company”) as of December 31, 20022003 and 2001,2002, and the related consolidated statements of income, stockholders'stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2002.2003. These financial statements are the responsibility of the Company'sCompany’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, 20022003 and 2001,2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002,2003, 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, 200311, 2004
Independent Auditors' Report on ScheduleTo 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 LLPBoston, MassachusettsMarch 21, 2003
Schedule II
Perini Corporation and Subsidiaries
Valuation and Qualifying Accounts and Reserves
for the Years Ended December 31, 2003, 2002 2001 and 20002001
(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, 2003
Reserve for real estate investments $ 2,515 $ -- $ -- $ 2,515 (2) $ --
============ ============ ============= ============= =============
DescriptionYear 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.
(2) Primarily relates to a reduction in the carrying value of the remaining "Land Held for Sale" ($2,066) and the disposition of certain other real estate assets.
Independent Auditors' Report on Schedule
To the Stockholders of Perini Corporation:
We have audited the consolidated financial statements of Perini Corporation and Subsidiaries (collectively, the “Company”) as of December 31, 2003 and 2002, and for each of the three years in the period ended December 31, 2003, and have issued our report thereon dated March 11, 2004 (included elsewhere in this Form 10-K). Our audits also included the financial statement schedule listed in item 15(a)(2) of this Form 10-K. This financial statement schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 11, 2004
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 -(incorporated by reference to Exhibit 4 to Form
S-2 (File No. 33-28401) filed on April 28, 1989).
3.2 Articles of Amendment to the Restated Articles of Organization of the Perini
Corporation (incorporated by reference to Exhibit 3.2 to Form S-1 (File No. 33-
111338) filed on December 18, 2003).
3.3 Articles of Amendment to the Articles of Organization of Perini Corporation
(incorporated by reference to Exhibit 3.1 to Form 8-K filed on April 12, 2000.2000).
3.4 Amended and Restated Bylaws of Perini Corporation (incorporated by reference to
Exhibit 3.2 By-laws - As amendedof Form 8-K (File No. 001-06314) filed on February 14, 1997).
3.5 Amendment No. 1 to the Amended and restated asRestated Bylaws of March 29, 2000 -Perini Corporation
(incorporated by reference to Exhibit 3.2 to Form 8-K filed on April 12, 2000.2000).
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 -(incorporated by reference to Exhibit 4(a) to Amendmentthe
Registration Statement on Form S-2 (File No. 133-14434) filed on June 19, 1987).
4.2 Certificate of Vote of Directors Establishing a Series of a Class of Stock
determining
the relative rights and preferences of the Series A Junior Participating Cumulative
Preferred Stock (incorporated by reference to Exhibit 4.2 to Form S-2 Registration StatementS-1 (File No. 33-
111338) filed June 19, 1987; SEC Registration
Statementon December 18, 2003).
4.3 Certificate of Vote of Directors Establishing a Series of a Class of Stock
determining
the relative rights and preferences of the Series B Cumulative Convertible Preferred
Stock (incorporated by reference to Exhibit 4.8 of Form 8-K (File No. 33-14434.
4.2001-06314)
Filed on February 14, 1997).
4.4 Form of Deposit Agreement, including form of Depositary Receipt - Exhibit4(b)(incorporated by
reference to Amendment No. 1Exhibit 4(b) to the Registration Statement on Form S-2 Registration Statement(File no.
33-14434) filed June19, 1987;
SEC Registration Statement No. 33-14434.
4.3on June 19, 1987).Exhibit Index
(Continued)
4.5 Form of Indenture with respect to the 8 1/2% Convertible Subordinated Debentures
Due June 15, 2012, including form of Debenture -(incorporated by reference to
Exhibit 4(c) to Amendment
No. 1 tothe Registration Statement on Form S-2 Registration Statement(File No. 33-14434) filed on
June 19, 1987; SEC Registration
Statement No. 33-14434.
4.41987).
4.6 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 -(incorporated by reference to Exhibit 4.4 to Amendment No. 1 to the
Registration Statement on Form 8-A/A filed on January 29, 1997, and as
further amended as of1997).
4.7 Amendment dated March 29, 2000 -to the Shareholder Rights Agreement
(incorporated by reference to Exhibit 4.3 to Form 8-K filed on April 12, 2000.
4.132000).
4.8 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 -(incorporated by reference to Exhibit 10.1 to Form 8-K filed on April 12,
2000.
Exhibit Index(Continued)
4.142000). 4.9 Exchange Agreement by and between Perini Corporation and PB Capital Partners, L.P., dated as of February 14, 2000-(incorporated by reference to Exhibit 10.2 to Form 8-K filed on April 12,2000. 4.152000). 4.10 Exchange Agreement by and between Perini Corporation and The Common Fund for Non-Profit Organizations, dated as of February 14, 2000-(incorporated by reference to Exhibit 10.3 to Form 8-K filed on April 12,2000. 4.162000). 4.11 Registration Rights Agreement by and among Perini Corporation,Tutor- SalibaTutor-Saliba Corporation, Ronald N. Tutor, O&G Industries, Inc. and National Union Fire Insurance Company of Pittsburgh, Pa.,BLUMBlum 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 (incorporated by reference to Exhibit 4.1 to Form 8-K filed on April 12, 2000). 4.12 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 4.1(incorporated by reference toForm 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 12,2000.2000). 4.13 Form of Warrant to purchase an aggregate of 420,000 shares of common stock of Perini Corporation dated January 17, 1997 issued to former lenders of Perini Corporation (incorporated by reference to Exhibit 4.13 to Form S-1 (File No. 33- 111338) filed on December 18, 2003).
Exhibit Index
(Continued)
4.14 Letter Agreement by and among Perini Corporation, Blum Capital Partners, L.P.,
PB Capital Partners, L.P. and The Common Fund for Non-Profit Organizations,
dated as of December 1, 2003 (incorporated by reference to Exhibit 4.14 to
Form S-1 (File No. 33-111338) filed on December 18, 2003).
4.15 Warrantholders Rights Agreement by and among Perini Corporation and the former
Lenders of Perini Corporation, dated January 17, 1997 (incorporated by reference
to Exhibit 4.15 to Amendment No. 2 to Form S-1 (File No. 33-111338) filed on
March 8, 2004).
Exhibit 10. Material Contracts
Incorporated herein10.1 Perini Corporation Amended and Restated (2004) General Incentive Compensation
Plan (incorporated by reference:reference to Exhibit 10.1 to Amendment No. 2 to Form S-1
(File No.33-111338) filed on March 8, 2004).
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(2004) Construction Business Unit
Incentive Compensation Plan -(incorporated by reference to Exhibit 10.310.2 to
1997Amendment No. 2 to Form 10-KS-1 (File No.33-111338) filed on March 30, 1998.
10.168, 2004).
10.3 Management Agreement dated as of January 17, 1997 by and among the Company,
Ronald N. Tutor and Tutor-Saliba Corporation -(incorporated by reference to
Exhibit 10.16 to Perini Corporation's Annual Report on Form 10-K for the year
ended December 31, 2002 filed herewith.
10.31on March 31, 2003).
10.4 Amendment No. 1 dated as of December 23, 1998 to the Management Agreement
by and among the Company, Ronald N. Tutor and Tutor-Saliba Corporation
(incorporated by reference to Exhibit 10.4 to Form S-1 (File No. 33-111338)
filed on December 18, 2003).
10.5 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 -(incorporated by reference to Exhibit 10.31 to Perini Corporation's.
Quarterly Report on Form 10-Q for the first quarter ended March 31, 2000 filed
on May 9, 2000.
10.322000).
10.6 Amendment No. 3 dated as of December 31, 2000 to the Management Agreement
by and among the Company, Ronald N. Tutor and Tutor-Saliba Corporation.
(incorporated by reference to Exhibit 10.6 to Form S-1 (File No. 33-111338) filed
on December 18, 2003).
10.7 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 (incorporated by reference to Exhibit 10.36 to Perini Corporation's.
Annual Report on Form 10-K for the year ended December 31, 2002 filed on
March 31, 2003).
Exhibit Index
(Continued)
10.8 Amendment No. 5 dated as of December 31, 2002 to the Management Agreement
by and among the Company, Ronald N. Tutor and Tutor-Saliba Corporation
(incorporated by reference to Exhibit 10.8 to Form S-1 (File No. 33-111338) filed
on December 18, 2003).
10.9 1982 Stock Option and Long Term Performance Incentive Plan, as amended
(incorporated by reference to Exhibit 10.9 to Form S-1 (File No. 33-111338) filed
on December 18, 2003).
10.10 Special Equity Incentive Plan -(incorporated by reference to Exhibit A to Registrant'sPerini
Corporation's Proxy Statement for Annual Meeting of Stockholders dated
April 19, 2000.
Exhibit Index(Continued)
10.332000). 10.11 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-(incorporated by Reference to Exhibit 10.1 to Form 8-K filed on February 9,2000. 10.342000). 10.12 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.)-(incorporated by reference to Exhibit 10.34 to Perini Corporation's Quarterly Report on Form 10-Q for the period ended September 30, 2000 filed on November 6,2000. 10.352000). 10.13 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-(incorporated by reference to Exhibit 10.35 to Perini Corporation's Annual Report on Form 10-K for the year ended December 31, 2001 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. 10.372002). 10.14 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-(incorporated by reference to Exhibit 10.37 to Perini Corporation's Annual Report on Form 10-K for the year ended December 31, 2002 filedherewith. 10.38on March 31, 2003). 10.15 Employment Agreement dated January 23, 2003 by and among the Company, James A. Cummings, Inc. and James A. Cummings-(incorporated by reference to Exhibit 10.38 to Perini Corporation's Annual Report on Form 10-K for the year ended December 31, 2002 filedherewith. 10.39on March 31, 2003). 10.16 First Amendment and Waiver dated February 14, 2003 to Credit Agreement among Perini Corporation, Fleet National Bank, as Administrative Agent, and the Lenders-(incorporated by reference to Exhibit 10.39 to Perini Corporation's Annual Report on Form 10-K for the year ended December 31, 2002 filedherewith.on March 31, 2003.
Exhibit 18. Preferability Letter Re: Change in Accounting Principles -Index
(Continued)
10.17 Second Amendment dated November 5, 2003 to Credit Agreement among Perini
Corporation, Fleet National Bank, as Administrative Agent, and the Lenders
(incorporated by reference to Exhibit 10.17 to Form S-1 (File No. 33-111338)
filed
herewith.on December 18, 2003).
10.18 Amendment No. 6 dated as of January 1, 2004 to the Management Agreement by
and among the Company, Ronald N. Tutor and Tutor-Saliba Corporation
(incorporated by reference to Exhibit 10.18 to Amendment No. 1 to Form S-1
(File No. 333-111338) filed on February 9, 2004).
10.19 Form of Director and Officer Indemnification Agreement (incorporated by
reference to Exhibit 10.19 to Amendment No. 1 to Form S-1(File No. 333-111338)
filed on February 9, 2004).
10.20 Third Amendment dated January 21, 2004 to Credit Agreement among Perini
Corporation, Fleet National Bank, as Administrative Agent, and the Lenders
(incorporated by reference to Exhibit 10.20 to Amendment No. 2 to Form S-1
(File No. 33-111338) filed on March 8, 2004).
Exhibit 21. Subsidiaries of Perini Corporation - filed herewith.
Exhibit 23. Consent of Independent AuditorsAuditors' Consent - filed herewith.
Exhibit 24. Power of Attorney - filed herewith.
Exhibit 99. Additional Exhibits
99.131.1 Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 - filed herewith.
Exhibit 31.2 Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 - filed herewith
Exhibit 32.1 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.
99.2Exhibit 32.2 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.