(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31,June 30, 2005
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-6314
Perini Corporation
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-1717070
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
73 MT. WAYTE AVENUE, FRAMINGHAM, MASSACHUSETTS 01701-9160
(Address of principal executive offices)
(Zip code)
(508) 628-2000
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes X No ___
The number of shares of Common Stock, $1.00 par value per share, of registrant outstanding at May 2,July 29, 2005 was 25,317,928.25,488,128.
Page 1 of 2832
PERINI CORPORATION & SUBSIDIARIES
INDEXPage NumberPart I. - Financial Information:
Item 1. Financial Statements (Unaudited)
Consolidated Condensed Balance Sheets-Sheets - 3
March 31,June 30, 2005 and December 31, 2004
Consolidated Condensed Statements of Income - 4
Three Months and Six Months ended March 31,June 30, 2005 and 2004
Consolidated Condensed Statement of Stockholders' Equity - 5
Six Months Ended June 30, 2005
Consolidated Condensed Statements of Cash Flows - 5
Three6
Six Months ended March 31,June 30, 2005 and 2004
Notes to Consolidated Condensed Financial Statements 67 - 1617
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 1718 - 2327
Item 3. Quantitative and Qualitative Disclosures About Market Risk 2427
Item 4. Controls and Procedures 2427 - 28
Part II. - Other Information:
Item 1. Legal Proceedings 2529
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 2630
Item 3. Defaults Upon Senior Securities 2630
Item 4. Submission of Matters to a Vote of Security Holders 2630 - 31
Item 5. Other Information 2731
Item 6. Exhibits 2731
Signatures 2832
2
Item 1. Financial Statements (Unaudited)
PERINI CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
MARCH 31,JUNE 30, 2005 (UNAUDITED) AND DECEMBER 31, 2004
(In Thousands)
ASSETS MARCH 31,JUNE 30, DEC. 31,
2005 2004
------------- --------------------------
Cash and Cash Equivalents (Note 3) $ 86,47694,573 $ 136,305
Accounts Receivable, including retainage 374,998344,005 372,909
Unbilled Work 103,10495,765 90,280
Deferred Tax Asset 2,481- 4,110
Other Current Assets 7,7987,465 4,112
------------- --------------------------
Total Current Assets $ 574,857541,808 $ 607,716
------------- --------------------------
Property and Equipment, less Accumulated Depreciation of $23,337$23,487 in 2005 and
$21,286 in 2004 $ 49,09952,726 $ 17,486
------------- --------------------------
Goodwill $ 12,678 $ 12,678
------------- --------------------------
Other Assets $ 11,94112,214 $ 16,385
------------- --------------------------
$ 648,575619,426 $ 654,265
============= ===============
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Maturities of Long-term Debt $ 8,94111,565 $ 759
Accounts Payable, including retainage 316,591285,378 344,684
Deferred Contract Revenue 51,22854,436 57,111
Accrued Expenses 30,28218,202 27,133
------------- --------------------------
Total Current Liabilities $ 407,042369,581 $ 429,687
------------- --------------------------
Long-term Debt, less current maturities included above $ 18,45718,497 $ 8,608
------------- --------------------------
Other Long-term Liabilities (Note 8) $ 42,25942,583 $ 41,936
------------- --------------------------
Contingencies and Commitments (Note 5)
Stockholders' Equity:
Preferred Stock $ 56 $ 56
Series A Junior Participating Preferred Stock - -
Stock Purchase Warrants 461 965
Common Stock 25,31825,448 25,233
Additional Paid-in Capital 112,007113,662 110,058
Retained Earnings 70,07976,242 64,826
------------- --------------------------
$ 207,921215,869 $ 201,138
Accumulated Other Comprehensive Loss (27,104) (27,104)
------------- --------------------------
Total Stockholders' Equity $ 180,817188,765 $ 174,034
------------- --------------------------
$ 648,575619,426 $ 654,265
============= ==========================
The accompanying notes are an integral part of these consolidated condensed financial statements.
3
PERINI CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(In Thousands, Except Share and Per Share Data)
THREE MONTHS SIX MONTHS
ENDED MARCH 31,JUNE 30, ENDED JUNE 30,
------------------------------ -----------------------------
2005 2004 2005 2004
------------- ------------- ------------- -------------
Revenues (Note 9) $ 371,553378,384 $ 480,304495,808 $ 749,937 $ 976,112
Cost of Operations 348,823 456,776353,775 472,077 702,598 928,853
------------- ------------- ------------- -------------
Gross Profit $ 22,73024,609 $ 23,52823,731 $ 47,339 $ 47,259
General and Administrative Expenses 13,333 9,74312,939 9,065 26,272 18,808
------------- ------------- ------------- -------------
INCOME FROM CONSTRUCTION OPERATIONS (Note 9) $ 9,39711,670 $ 13,78514,666 $ 21,067 $ 28,451
Other Expense, Net (143) (1,844)(524) (1,407) (667) (3,251)
Interest Expense (374) (191)(299) (117) (673) (308)
------------- ------------- ------------- -------------
Income before Income Taxes $ 8,88010,847 $ 11,75013,142 $ 19,727 $ 24,892
Provision for Income Taxes (Note 6) (3,330) (529)(4,387) (966) (7,717) (1,495)
------------- ------------- ------------- -------------
NET INCOME $ 5,5506,460 $ 11,22112,176 $ 12,010 $ 23,397
============= ============= ============= =============
Less: Accrued Dividends on $21.25 Preferred Stock (Note 8) (297) (297) (594) (594)
------------- ------------- ------------- -------------
NET INCOME AVAILABLE FOR COMMON STOCKHOLDERS $ 5,2536,163 $ 10,92411,879 $ 11,416 $ 22,803
============= ============= ============= =============
BASIC EARNINGS PER COMMON SHARE (Note 7) $ 0.210.24 $ 0.470.51 $ 0.45 $ 0.99
============= ============= ============= =============
DILUTED EARNINGS PER COMMON SHARE (Note 7) $ 0.200.24 $ 0.48 $ 0.44 $ 0.91
============= ============= ============= =============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (Note 7):
BASIC 25,286,711 23,013,93325,345,396 23,202,323 25,316,216 23,108,128
Effect of Dilutive Stock Options, Warrants and Restricted Stock Units Outstanding 750,199 1,879,391624,893 1,766,154 687,545 1,822,774
------------- ------------- ------------- -------------
DILUTED 26,036,910 24,893,32425,970,289 24,968,477 26,003,761 24,930,902
------------- ------------- ------------- -------------
The accompanying notes are an integral part of these consolidated condensed financial statements.
4
PERINI CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2005
(In Thousands)
Accumulated
Stock Additional Other
Preferred Purchase Common Paid-in Retained Comprehensive
Stock Warrants Stock Capital Earnings Loss Total
------------ ----------- ----------- ----------- ----------- ------------------ ------------
Balance - December 31, 2004 $ 56 $ 965 $25,233 $ 110,058 $ 64,826 $ (27,104) $ 174,034
Net income - - - - 12,010 - 12,010
Preferred stock dividends accrued - - - - (594) - (594)
($10.625 per share*)
Common stock options and stock purchase
warrants exercised - (504) 125 720 - - 341
Income tax benefit attributable to nonqualified
stock options exercised - - - 321 - - 321
Restricted stock compensation expense - - - 2,434 - - 2,434
Common Stock issued - - 90 129 - - 219
------------ ----------- ----------- ----------- ----------- ------------------ ------------
Balance - June 30, 2005 $ 56 $ 461 $25,448 $ 113,662 $ 76,242 $ (27,104) $ 188,765
============ =========== =========== =========== =========== ================== ============
*Equivalent to $1.0625 per Depositary Share
The accompanying notes are an integral part of these consolidated condensed financial statements.
5
PERINI CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREESIX MONTHS ENDED MARCH 31,JUNE 30, 2005 AND 2004
(In Thousands)
THREESIX MONTHS
ENDED MARCH 31,JUNE 30,
----------------------------
2005 2004
------------ -------------
Cash Flows from Operating Activities:
Net income $ 5,55012,010 $ 11,22123,397
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization 2,660 1,7202,798 2,838
Restricted stock compensation expense 1,2172,434 -
Income tax benefit from stock options exercised 160321 -
Deferred income taxes 1,137 (230)4,768 238
Gain on sale of equipment (271) (5)(70) (615)
Gain on sale of marketable securities (427) -
Unrealized loss on marketable securities 478 -
Other non-cash items, net 99 38407 79
Cash used by changes in components of working capital other
than cash, current maturities of long-term debt and deferred tax asset (37,191) (44,093)(41,020) (5,652)
------------ -------------
NET CASH USED BY(USED BY) PROVIDED FROM OPERATING ACTIVITIES $ (26,588)(18,301) $ (31,349)20,285
------------ -------------
Cash Flows from Investing Activities:
Acquisition of Cherry Hill Construction, Inc., net of cash balance acquired (Note 4)$ (19,970) $ -
Acquisition of property and equipment (1,854) (1,651)(6,380) (2,792)
Proceeds from sale of property and equipment 405 31926 858
Proceeds from sale of marketable securities 3,8194,452 -
Proceeds from (investment in) other investing activities (8) 185227 531
------------ -------------
NET CASH USED BY INVESTING ACTIVITIES $ (17,608)(20,745) $ (1,435)(1,403)
------------ -------------
Cash Flows from Financing Activities:
Proceeds from long-term debt $ -4,870 $ 12,9022,247
Reduction of long-term debt (5,751) (122)(7,957) (241)
Proceeds from exercise of common stock options and stock purchase warrants 153 1,398341 1,463
Issuance of common stock 219 -
Expenditure for stock registration (35) (485)(159) (847)
------------ -------------
NET CASH (USED BY) PROVIDED FROM FINANCING ACTIVITIES $ (5,633)(2,686) $ 13,6932,622
------------ -------------
Net Decrease(Decrease) Increase in Cash $ (49,829)(41,732) $ (19,091)21,504
Cash at Beginning of Year 136,305 67,823
------------ -------------
Cash at End of Period $ 86,47694,573 $ 48,73289,327
============ =============
Supplemental Disclosure of Cash Paid During the Period For:
Interest $ 374674 $ 190307
============ =============
Income taxes $ 55823 $ 3991,280
============ =============
The accompanying notes are an integral part of these consolidated condensed financial statements.
56
PERINI CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(1) Basis of Presentation
The unaudited consolidated condensed financial statements presented herein have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and note disclosures required by accounting principles generally accepted in the United States of America. These statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Form 10-K for the year ended December 31, 2004. In the opinion of management, the accompanying unaudited consolidated condensed financial statements include all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the Company’s financial position as of March 31,June 30, 2005 and December 31, 2004, results of operations for the three monthsmonth and six month periods ended March 31,June 30, 2005 and 2004, and cash flows for the three monthssix month periods ended March 31,June 30, 2005 and 2004. The results of operations for the threesix months ended March 31,June 30, 2005 may not be indicative of the results that may be expected for the year ending December 31, 2005 because the Company’s results are primarily generated from a limited number of significant active construction contracts. Therefore, such results can vary depending on the timing of progress achieved and changes in estimated profitability of projects being reported.
(2) Significant Accounting Policies
The significant accounting policies followed by the Company and its subsidiaries in preparing its consolidated financial statements are set forth in Note (1) to such financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. The Company has made no significant change in these policies during 2005.
In conjunction with the finalization of the purchase price allocation for the acquisition of Cherry Hill, the Company adjusted the estimated useful lives and estimated salvage values of the Cherry Hill fixed assets. Additionally, effective May 1, 2005, the Company prospectively changed its method of calculating depreciation for construction and computer-related equipment from accelerated methods to the straight-line method. As a result of these changes, the Cherry Hill fixed assets and fixed assets acquired by the Company on or after May 1, 2005 will have depreciation provided based on estimated useful lives ranging from five to twenty years and estimated salvage values ranging from ten to forty percent of the acquisition cost. Cherry Hill’s previous policy, which continued to be applied by the Company up until the finalization of the purchase price allocation, was to provide depreciation on a straight-line basis over lives ranging from five to thirty-nine years with no provision for estimated salvage values. The Company’s previous policy, which will continue to apply to fixed assets acquired prior to May 1, 2005 (except for the Cherry Hill fixed assets), was to provide depreciation on construction and computer-related equipment primarily using accelerated methods over lives ranging from three to seven years and the straight-line method for remaining depreciable property over lives ranging from three to thirty years with no provision for estimated salvage values. These changes were adopted to recognize a more realistic periodic charge to income based on the Company’s historical experience as well as to enhance financial statement comparability with most other public construction companies.
The effect of the change in depreciation policy in 2005 was to increase net income for the six months ended June 30, 2005 by approximately $0.3 million (all of which relates to the Cherry Hill fixed assets acquired effective January 1, 2005) and to increase basic and diluted earnings per common share by $0.01. Since the new depreciation policy was applied on a prospective basis and fixed assets acquired prior to May 1, 2005 have continued to be depreciated under the policy previously in effect, the cumulative effect of a change in accounting principle or pro forma effects of retroactive application disclosure is not required in accordance with the provisions of Accounting Principles Board Opinion No. 20, “Accounting Changes”.
7
PERINI CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
(3) 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 Condensed 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 March 31,June 30, 2005 and December 31, 2004, cash and cash equivalents consisted of the following (in thousands):
March 31,June 30, Dec. 31,
2005 2004
--------------------------- ---------------
Corporate cash and cash equivalents (available
for general corporate purposes) $ 38,50643,574 $ 81,024
Company's share of joint venture cash and
cash equivalents (available only for joint venture
purposes, including future distributions) 47,97050,999 55,281
--------------------------- ---------------
$ 86,476 $ 136,305
=============94,573 $136,305
============== ===============6
PERINI CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(Continued)
(4) Acquisition of Cherry Hill Construction, Inc.
On January 21, 2005, the Company completed the acquisition of 100% of the outstanding capital stock of Cherry Hill Construction, Inc. (“("Cherry Hill”Hill"), a privately held construction company based in Jessup, Maryland, for approximately $22 million in cash. Cherry Hill is an established civil contractor operating in the Mid-Atlantic and Southeast regions specializing in excavation, foundations, paving and construction of civil infrastructure. The acquisition is effective as of January 1, 2005 and, accordingly, Cherry Hill’sHill's financial results are included in the Company’sCompany's consolidated results of operations and financial position beginning in the first quarter of 2005.
The transaction was accounted for using the purchase method of accounting as required by FASB Statement No. 141, “Business Combinations”"Business Combinations". The cost to acquire Cherry Hill, which consists of $22 million cash consideration referred to above and $400,000 of estimated other direct acquisition costs, was less than the estimated fair value of the assets acquired less the liabilities assumed. The resulting excess of the fair value of acquired net assets over cost was generally allocated as a pro rata reduction of the estimated fair value of the non-current assets acquired in accordance with SFAS No. 141. The purchase price allocation is preliminary and a determination of required purchase accounting adjustments will be made based on finalization of the analysis of the fair value of assets acquired and liabilities assumed. The following table summarizes the initial estimated fair value of the assets acquired and liabilities assumed as of January 1, 2005 after the allocation described above (in thousands):
8
PERINI CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
(4) Acquisition of Cherry Hill Construction, Inc. (continued)
Current assets $ 46,920
Property and equipment, net 32,40032,155
Other long-term assets 376
Intangible assets 545790
------------
Total assets acquired $ 80,241
Current liabilities (39,604)
Long-term debt (12,167)
Long-term deferred tax liabilities (6,023)
------------
Total Acquisition Costs $ 22,447
============The amount assigned to intangible assets primarily represents the Company's estimate of the fair value of contract backlog acquired as of January 1, 2005 and was based on an independent appraisal. The intangible assets will be amortized using the straight-line method over an approximate 2.5-year period based on the estimated durations of the contracts acquired.
Since the acquisition was effective as of January 1, 2005, the Company's actual 2005 year to date results include Cherry Hill for the total period. Therefore, the following pro forma financial information is only presented for the comparative three month periodand six month periods ended March 31,June 30, 2004 (in thousands, except per share data):
7
PERINI CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(Continued)
(4) Acquisition of Cherry Hill Construction, Inc. (continued)
Three Months Ended March 31,Six Months Ended
June 30, 2004 June 30, 2004
----------------------------- ------------------------------
Actual Pro forma Actual Pro forma
------------- --------------------------- ------------- ---------------
Revenues $ 480,304495,808 $ 518,463533,967 $ 976,112 $1,052,430
Gross profit $ 23,52823,731 $ 27,98029,191 $ 47,259 $ 58,178
Net income $ 11,22112,176 $ 11,92913,476 $ 23,397 $ 25,997
Basic earnings per common share $ 0.470.51 $ 0.510.57 $ 0.99 $ 1.10
Diluted earnings per common share $ 0.440.48 $ 0.470.53 $ 0.91 $ 1.02The pro forma results have been prepared for comparative purposes only and include certain adjustments such as increased interest expense on acquisition debt, reduced depreciation expense related to the reduction of the fixed asset carrying values due the application of purchase accounting (as described above), 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, 2004 or of future results.
(5) Contingencies and Commitments
(a) Mergentime - Perini Joint Ventures vs. WMATA Matter
On May 11, 1990, contracts with two joint ventures in which Perini Corporation, or Perini, held a 40% interest were terminated by the Washington Metropolitan Area Transit Authority, or WMATA, on two subway construction projects in the District of Columbia. The contracts were
9
PERINI CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
(5) Contingencies and Commitments (continued)
(a) Mergentime - Perini Joint Ventures vs. WMATA Matter (continued)
awarded to the joint ventures in 1985 and 1986. However, Perini and Mergentime Corporation, or Mergentime, the 60% managing partner, entered into an agreement in 1987 under which Perini withdrew from the joint ventures and Mergentime assumed complete control over the performance of both projects. This agreement did not relieve Perini of its responsibilities to WMATA as a joint venture partner. After Perini withdrew from the joint ventures, Mergentime and WMATA had a dispute regarding progress on the projects. After both construction contracts were terminated, WMATA retained Perini, acting independently, to complete both projects.
Subsequently, the joint ventures brought an action in the United States District Court for the District of Columbia against WMATA, seeking damages for delays, unpaid extra work and wrongful termination and WMATA brought an action against the joint ventures seeking damages for additional costs to complete the projects. After a bench trial, the District Court found the joint ventures liable to WMATA for damages in the amount of approximately $16.5 million and WMATA liable to the joint ventures for damages in the amount of approximately $4.3 million.
The joint ventures appealed the judgment to the United States Court of Appeals for the District of Columbia, and on February 16, 1999, the Court of Appeals vacated the District Court's final judgment and ordered the District Court to review its prior findings and hold further hearings in regard to the joint venture's affirmative claims. In addition, the Court of Appeals held that statutory interest on any of the claims will not accrue until final judgment is entered sometime in the future.
8
PERINI CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(Continued)
(5) Contingencies and Commitments (continued)
(a) Mergentime - Perini Joint Ventures vs. WMATA Matter (continued)
On February 28, 2001, a successor District Court Judge informed the parties that he could not certify adequate familiarity with the record to complete the remaining proceedings; therefore, he granted the joint ventures' motion for a new 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 was completed in January 2002 and a decision is still pending. The ultimate financial impact of the Judge's pending decision is not yet determinable; therefore, no provision for loss, if any, has been recorded in the financial statements.
(b) Tutor-Saliba-Perini Joint Venture vs. Los Angeles MTA Matter
During 1995, a joint venture, Tutor-Saliba-Perini, or the Joint Venture, in which Perini Corporation, or Perini, is the 40% minority partner and Tutor-Saliba Corporation, or Tutor-Saliba, of Sylmar, California 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, or the LAMTA, seeking to recover costs for extra work required by the LAMTA in connection with the construction of certain tunnel and station projects. In February 1999, the LAMTA countered with civil claims under the California False Claims Act against the Joint Venture, Tutor-Saliba and Perini jointly and severally (together, TSP). Ronald N. Tutor, the Chairman and Chief Executive Officer of Perini since March 2000, is also the chief executive officer and the sole stockholder of Tutor-Saliba.
Claims concerning the construction of the LAMTA projects were tried before a jury in 2001. During trial, the Judge ruled that the Joint Venture had failed to comply with the Court's prior discovery orders and the Judge penalized TSP for the alleged non-compliance by dismissing
10
PERINI CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
(5) Contingencies and Commitments (continued)
(b) Tutor-Saliba-Perini Joint Venture vs. Los Angeles MTA Matter (continued)
the Joint Venture's claims and by ruling, without a jury finding, that TSP was liable to the LAMTA for damages on the LAMTA's counterclaims. The Judge then instructed the jury that TSP was liable to the LAMTA and charged the jury with the responsibility of determining the amount of the damages based on the Judge's ruling. The jury awarded the LAMTA approximately $29.6 million in damages.
On March 26, 2002, the Judge amended the award, ordering TSP to pay the LAMTA 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 appealed the Judge's discovery sanction, the subsequent judgment and the amended judgment.
On January 25, 2005, the State of California Court of Appeal issued an opinion in which it reversed the entire $63.0 million trial court's judgment and found that the trial court judge had abused his discretion and violated TSP's due process rights and imposed an impermissibly overbroad sanction in issuing terminating sanctions that prevented the Joint Venture from presenting its claims and severely limited TSP in defending itself against the LAMTA's lawsuit. The Court of Appeal also directed the trial court to dismiss LAMTA's claims that TSP had violated the Unfair Competition Law and remanded the Joint Venture's claims against LAMTA for extra work required by LAMTA and LAMTA's counterclaim under the California False
9
PERINI CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(Continued)
(5) Contingencies and Commitments (continued)
(b) Tutor-Saliba-Perini Joint Venture vs. Los Angeles MTA Matter (continued)
Claim Act against TSP to the trial court for further proceedings, including a new trial. The LAMTA thereafter petitioned the Court of Appeal for rehearing; said petition was denied. The LAMTA then filed a petition for review byrehearing and the California Supreme Court. That petition is pending.Court for review. Both petitions were denied and the case was remanded and has been reassigned for a new trial.
The ultimate financial impact of the lawsuit 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
In November 2002, the San Francisco City Attorney, on behalf of the City and County of San Francisco and the citizens of California, filed a civil action with a demand for a jury trial against the Tutor-Saliba, Perini & Buckley Joint Venture, or the Joint Venture, Perini Corporation, or Perini, Tutor-Saliba Corporation, or Tutor-Saliba, Buckley & Company, Inc., or Buckley, and their bonding companies in the United States District Court in San Francisco relating to seven projects 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 Joint Venture was established by Tutor-Saliba, 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").
On or about May 24, 2004, the Court granted substantial portions of the defendants' motion to dismiss the plaintiffs' second amended complaint with leave to amend certain causes of action. On June 21, 2004, the plaintiffs filed their third amended complaint. In the third amended complaint, the plaintiffs allege, among other things, various overcharges, bidding
11
PERINI CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
(5) Contingencies and Commitments (continued)
(c) City of San Francisco vs. Tutor-Saliba, Perini & Buckley Joint Venture Matter (continued)
violations, violations of minority contracting regulations, civil fraud, violation of the California False Claims and Unfair Competition Acts and breach of contract. In addition, the plaintiffs allege that the defendants have violated the United States Racketeer Influenced Corrupt Organizations Act ("RICO"). The plaintiffs have asserted approximately $45 million in actual damages against the Joint Venture and each of its partners as well as substantial liquidated damages, treble damages, punitive and exemplary damages, various civil penalties and a declaration that Tutor-Saliba and the Joint Venture are irresponsible bidders.
The defendants filed a Motion to Dismiss the Third Amended Complaint in August, 2004. Recently, the Court ruled on the Motion To Dismiss, granting it in part, and denying it in part. Specifically, the Court dismissed one of the two bases Plaintiffs' alleged to establish a RICO action; the breach of contract claim against Tutor-Saliba and the Joint Venture for their alleged violations of minority contracting regulations; and the request that the Court declare Tutor-Saliba and the Joint Venture to be irresponsible bidders.
Tutor-Saliba is the managing partner of the Joint Venture and, in December 1997, Perini sold its entire 20% interest in the Joint Venture to Tutor-Saliba. As part of that sale agreement, Tutor-Saliba 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
10
PERINI CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(Continued)
(5) Contingencies and Commitments (continued)
(c) City of San Francisco vs. Tutor-Saliba, Perini & Buckley Joint Venture Matter (continued)
Perini's interest in the Joint Venture in any way connected with the joint venture agreements, the Contracts, the Projects and 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) Redondo/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 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 design 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 approximately $17.9 million along with the repayment of approximately $22.6 million for alleged advances previously paid to RPJV.
The parties have each revised their statement of damages. RPJV's total claim is approximately $74 million. STP's revised claim is now approximately $54.5 million, including its claim for alleged advances already paid.
Arbitration evidentiary hearings have commenced and are continuing.
On October 7, 2004, STP filed suit against Perini in New York stateState court seeking enforcement against Perini of a Guaranty Agreement that allegedly guarantees the performance and payment obligations of the subject RPJV/Siemens Contract in an amount to be determined at trial, but not less than $27 million. This action has been stayed pending the arbitration.
12
PERINI CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
(5) Contingencies and Commitments (continued)
(d) Redondo/Perini Joint Venture vs. Siemens Transportation Matter (continued)
On December 3, 2004, the Arbitrators dismissed RPJV's claims for general delay damages, and general conditions, its claim for damages under cardinal change theory and the claim amount of a subcontractor. RPJV's remaining claims are for $46.7 million. STP's revised claim is now approximately $26 million, including its claim for alleged advances already paid.
Management has made an estimate of the anticipated total 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.
11
PERINI CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(Continued)
(5) Contingencies and Commitments (continued)
(e) Perini/Kiewit/Cashman Joint Venture-Central Artery/Tunnel Project Matter
Perini/Kiewit/Cashman Joint Venture, or PKC, a joint venture in which Perini 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, or MHD, for work performed by PKC on a portion of the Central Artery/Tunnel project in Boston, Massachusetts. During construction, MHD ordered PKC to perform changes to the work and issued related direct cost changes with an estimated value, excluding time delay and inefficiency costs, in excess of $100 million. In addition, PKC encountered a number of unforeseen conditions during construction that greatly increased PKC's cost of performance.
Certain of PKC's claims have been presented to a Disputes Review Board, 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. On March 20, 2002, the Superior Court of the Commonwealth of Massachusetts approved PKC's request to confirm the DRB's $17.4 million award. The MHD has appealed the Superior Court decision to the Appeals Court of the Commonwealth of Massachusetts.Massachusetts and the appeal is pending.
The DRB has also ruled on a binding basis that PKC is entitled to twothree additional compensation awards totaling $17.1$27.8 million for impacts and inefficiencies caused by MHD to certain of PKC's work. PKCMHD has filed applications in these actions in the Massachusetts Superior Court seeking to confirm thevacate these awards, and MHDPKC has filed applicationsanswered, seeking to vacate these awards.confirm them. PKC is awaiting a decision from the Court on cross-motions in two of these cross-motions,actions, which were argued in February 2005. The third action has not yet been heard.
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 removed the "Second DRB" members under this provision, although those members have continued to hear claims that were pending when it was terminated. Replacement ("Third") DRB members have been agreed upon. ProceedingsThe issue of which claims are "pending" before which DRB has been the Second and Third DRBs were postponed pending completionsubject of the negotiation and mediation discussed below.
The pending claims yet to be decidedrulings by the Second DRB on a binding basis have an anticipated valueand extensive litigation, some of $120.9 million. The remaining claims to be decided bywhich is still ongoing.
Over the Third DRB on a binding basis have an anticipated value of $18.4 million.
In December 2002, PKC and MHD entered into an agreement to attempt to resolve by negotiation and mediation all of the outstanding claims on the project. As part of the agreement,past several months, the MHD made certain provisional paymentshas refused to PKC. The parties also agreed to staypay the pending litigationSecond DRB for its services, and it contends that PKC may not pay MHD's share of those expenses. PKC has nevertheless paid the Second DRB proceedings duringfor both parties' share. This issue is currently the negotiations. The parties began mediation on all claims in September 2003. The mediation continued until October 2004. No claims were settled.subject
1213
PERINI CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
(5) Contingencies and Commitments (continued)
(e) Perini/Kiewit/Cashman Joint Venture-Central Artery/Tunnel Project Matter (continued)The mediation agreement has been terminated, andof litigation by the hearings beforeMHD to halt the Second DRB Third DRB, and the courts have resumed. proceedings or overturn its decisions.
The MHD asserted that the mediation/negotiation agreement terminated all authority ofpending claims yet to be decided by the Second DRB to hear pending claims and transferred thoseon a binding basis total $103.6 million (exclusive of interest). The remaining claims to be decided by the Third DRB but the court ruled that the agreement did not have that effect, and ordered that proceedings before the Second DRB are to proceed. The MHD also refuses to pay the Second DRB for its services, and it contends that PKC may not pay MHD's shareon a binding basis total $22.8 million (exclusive of those expenses. This issue may be the subject of further litigation.interest).
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.
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. In September 2004, the Attorney General's office presented a list of items that it believed constitute possible false claims. PKC made a responsive presentation to the Attorney General's office in January 2005. PKC vigorously denies that it submitted any false claims and is cooperating with the Attorney General's office in the ongoing investigation.
(f) $21.25 Preferred Shareholders Class Action Lawsuit
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 the $2.125 Depositary Convertible Exchangeable Preferred Shares, representing 1/10 Share of $21.25 Convertible Exchangeable Preferred Stock ("Depositary Shares") against certain current and former directors of Perini. This lawsuit is captioned Doppelt, et al. v. Tutor, et al., and is pending before the United States District Court for the District of Massachusetts. 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 allegealleged 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.
In July 2003, the plaintiffs filed an amended complaint. The amended complaint added an allegation that the defendants havehad 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.
On April 12, 2004, pursuant to Defendants' Motions to Dismiss, the Court dismissed the claim under the Massachusetts Consumer Protection Act. The Court did not dismiss the claim for breach of fiduciary duty, except as such claim relates to the tender offer for the purchase of
13
PERINI CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(Continued)
(5) Contingencies and Commitments (continued)
(f) $21.25 Preferred Shareholders Class Action Lawsuit (continued)
the Company's Depositary Shares. Pursuant to the Court's April 12, 2004 Order, in May 2004 the plaintiffs filed a third amended complaint and a motion for class certification. Defendants filed an answer denying any and all claims of wrongdoing and asserting affirmative defenses.
14
PERINI CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
(5) Contingencies and Commitments (continued)
(f) $21.25 Preferred Shareholders Class Action Lawsuit (continued)
On November 30, 2004, Perini announced that the parties had reached an agreement for settlement of the Action. Under the terms of the settlement, Perini would purchase all of the Depositary Shares submitted in the settlement for consideration per share of $19.00 in cash and one share of Perini common stock. The named plaintiffs have agreed to support the settlement.
On April 19, 2005, the District Court of Massachusetts conditionally certified a class of holders of Depositary Shares for purposes of settlement only. A hearing is scheduledOn May 5, 2005, the Court preliminarily approved the settlement as being fair, just, reasonable and adequate, pending a final hearing.
As of July 25, 2005, of the 559,273 Depositary Shares outstanding, 357,285 shares were participating in the settlement and 201,988 shares were the subject of requests for August 8, 2005exclusion from the settlement. No one has objected to seek Court approval of the settlement. The Court instructed that, starting on May 16, 2005, noticeproposed settlement and a claim form should be sent to identifiable holdersthe final determination of Depositary Shares.
As of March 31, 2005, there were 559,273 Depositary Shares outstanding. In the event that fewer than 200,000 Depositary Shares are submittedwhich shares will participate in the settlement Perini may terminate the settlement agreement and the parties will revert to their previous positions in the litigation. The proposed settlement remainsremain subject to approval of the Court.Court and a hearing before the Court for that purpose will be scheduled. Frederick Doppelt will resign from his position as a director of Perini upon Court approval of the settlement.
In 2001, a similar lawsuit was filed by some of the same plaintiffs in the United States District Court for the Southern District of New York, which claimed that the Company breached its contract with the holders of Depositary Shares. In 2002, the case was dismissed and upon appeal by the plaintiffs to the United States Court of Appeals for the Second Circuit, the Court of Appeals affirmed the dismissal.
(6) Provision For Income Taxes
The provision for income taxes reflects a lower-than-normal tax rate in 2004 due to the realization of a portion of the federal tax benefit not recognized in prior years due to certain accounting limitations.
(7) Earnings per Common Share
Basic earnings per common share was computed by dividing net income less dividends accrued on the $21.25 Preferred Stock during the period (see Note 8) by the weighted average number of common shares outstanding. Diluted earnings per common share was similarly computed after giving consideration to the dilutive effect of stock options, warrants and restricted stock units outstanding on the weighted average number of common shares outstanding.
There were no options or stock purchase warrants whose exercise price exceeded the average market price of the Common Stock at March 31,June 30, 2005 and 2004. The effect of the assumed conversion of the Company's outstanding $21.25 Preferred Stock into Common Stock was antidilutive for bothall periods presented.
14
PERINI CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(Continued)
(8) Dividends
(a) Common Stock
There were no cash dividends declared or paid on the Company's outstanding Common Stock during the periods presented in the consolidated condensed financial statements included herein.
(b) $21.25 Preferred Stock
The covenants of the Company's prior credit agreements required the Company to suspend the payment of quarterly dividends on its $21.25 Preferred Stock until certain financial criteria were met. While quarterly dividends on the $21.25 Preferred Stock have not been paid since 1995, they have been fully accrued due to the "cumulative" feature of the $21.25 Preferred Stock. Accordingly, the aggregate amount of dividends in arrears at March 31,June 30, 2005 is approximately $11.3$11.6 million, which represents approximately $201.88$207.19 per share of $21.25
15
PERINI CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
(8) Dividends (continued)
(b) $21.25 Preferred Stock (continued)
Preferred Stock or approximately $20.19$20.72 per Depositary Share and is included in "Other Long-term Liabilities" in the Consolidated Condensed Balance Sheets. Under the terms of the $21.25 Preferred Stock, the holders of Depositary Shares are entitled to elect two additional Directors when dividends have been deferred for more than six quarters, and they did so at each of the last seveneight annual meetings of stockholders.
(9) Business Segments
The following tables set forth certain business segment information relating to the Company's operations for the six month and three monthsmonth periods ended March 31,June 30, 2005 and 2004 (in thousands):
ThreeSix months endedMarch 31,June 30, 2005 Reportable Segments--------------------------------------------------------------------------------------------------------------------- Management Consolidated Building Civil Services Totals Corporate Total------------ -------------------------- ------------- ---------------------------- ---------------------------- ---------------- ---------------- Revenues$240,972$50,717472,439 $79,864114,096 $371,553163,402 $ 749,937 $ - $371,553749,937 Income from Construction Operations $4,72410,934 $1,5394,564 $6,59112,143 $12,85427,641 $(3,457)(6,574) * $9,39721,067 Assets$278,307 $266,230$48,978240,785 $593,515272,453 $55,06049,318 $ 562,556 $ 56,870 ** $648,575619,426ThreeSix months endedMarch 31,June 30, 2004 Reportable Segments--------------------------------------------------------------------------------------------------------------------- Management Consolidated Building Civil Services Totals Corporate Total------------ -------------------------- ------------- ---------------------------- ---------------------------- ---------------- ---------------- Revenues$291,438$27,457661,510 $161,40963,805 $480,304250,797 $ 976,112 $ - $480,304976,112 Income from Construction Operations $5,47314,682 $1971,229 $10,48217,067 $16,15232,978 $(2,367)(4,527) * $13,78528,451 Assets$271,731 $203,827$101,884314,719 $577,442212,139 $42,66323,242 $ 550,100 $ 82,737 ** $620,105632,837 Three months ended June 30, 2005 Reportable Segments ------------------------------------------------------------ Management Consolidated Building Civil Services Totals Corporate Total -------------- ------------- ------------- ------------- ---------------- ---------------- Revenues $ 231,467 $ 63,379 $ 83,538 $ 378,384 $ - $ 378,384 Income from Construction Operations $ 6,210 $ 3,025 $ 5,552 $ 14,787 $ (3,117) * $ 11,670 Three months ended June 30, 2004 Reportable Segments ------------------------------------------------------------ Management Consolidated Building Civil Services Totals Corporate Total -------------- ------------- ------------- ------------- ---------------- ---------------- Revenues $ 370,072 $ 36,348 $ 89,388 $ 495,808 $ - $ 495,808 Income from Construction Operations $ 9,209 $ 1,032 $ 6,585 $ 16,826 $ (2,160) * $ 14,666
* In all periods, consists of corporate general and administrative expenses.
** In all periods, corporate assets consist principally of cash and cash equivalents, net deferred tax asset, land held for sale and other investments available for general corporate purposes.
1516
PERINI CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
(10) Employee Pension Plans
The Company has a defined benefit pension plan that covers its executive, professional, administrative and clerical employees, subject to certain specified service requirements. The Company also has an unfunded supplemental retirement plan for certain employees whose benefits under the defined benefit plan are reduced because of compensation limitations under federal tax laws. In accordance with SFAS No. 132R, “Employers’ Disclosures About Pensions and Other Post-Retirement Benefits”, the pension disclosure presented below includes aggregated amounts for both of the Company’s plans. The following table sets forth the net pension cost by component for the three monthsmonth and six month periods ended March 31,June 30, 2005 and 2004 (in thousands):
For the Three Months Six Months
Ended March 31,
----------------------------June 30, Ended June 30,
------------------------- --------------------------
2005 2004 -------------2005 2004
---------- ------------ ---------- ------------
Service cost - benefits earned during the periodperiod* $ - $ 536 $ - $ 1,071
Interest cost on projected benefit obligation 1,071 1,196 2,142 2,392
Expected return on plan assets (962) (968) (1,924) (1,935)
Amortization of prior service costs - 9 - 18
Recognized actuarial loss 445 462 -------------890 925
---------- ------------ ---------- ------------
Net Pension Cost $ 554 $ 1,235 =============$ 1,108 $ 2,471
========== ============ ========== ============
On April 1, 2005, the Company made a $9.0 million contribution to theits defined benefit pension plan and does not expect to make further contributions to the pension plan in 2005.
*Effective June 1, 2004, all benefit accruals under the Company’s pension plan were frozen; however, the current vested benefit will be preserved. In accordance with SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits”, a one-time charge of $0.2 million was recorded in 2004.
1617
Perini Corporation is a leading construction services company, 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 for 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.
Our business is conducted through three primary segments: building, civil, and management services. Our building segment 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 northeast and mid-Atlantic regions of the 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.
Our significant accounting policies are described in Note 1 of Notes to Consolidated Financial Statements included in Item 15 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2004. Our critical accounting policies are also identified and discussed in Item 7 of said Annual Report on Form 10-K. We have made no significant change in these policies during 2005.
In conjunction with the finalization of the purchase price allocation for the acquisition of Cherry Hill, the Company adjusted the estimated useful lives and estimated salvage values of the Cherry Hill fixed assets. Additionally, effective May 1, 2005, the Company prospectively changed its method of calculating depreciation for construction and computer-related equipment from accelerated methods to the straight-line method. As a result of these changes, the Cherry Hill fixed assets and fixed assets acquired by the Company on or after May 1, 2005 will have depreciation provided based on estimated useful lives ranging from five to twenty years and estimated salvage values ranging from ten to forty percent of the acquisition cost. Cherry Hill’s previous policy, which continued to be applied by the Company up until the finalization of the purchase price allocation, was to provide depreciation on a straight-line basis over lives ranging from five to thirty-nine years with no provision for estimated salvage values. The Company’s previous policy, which will continue to apply to fixed assets acquired prior to May 1, 2005 (except for the Cherry Hill fixed assets), was to provide depreciation on construction and computer-related equipment primarily using accelerated methods over lives ranging from three to seven years and the straight-line method for remaining depreciable property over lives ranging from three to thirty years with no provision for estimated salvage values. These changes were adopted to recognize a more realistic periodic charge to income based on the Company’s historical experience as well as to enhance financial statement comparability with most other public construction companies.
The effect of the change in depreciation policy in 2005 was to increase net income for the six months ended June 30, 2005 by approximately $0.3 million (all of which relates to the Cherry Hill fixed assets acquired effective January 1, 2005) and to increase basic and diluted earnings per common share by $0.01. Since the new depreciation policy was applied on a prospective basis and fixed assets acquired prior to May 1, 2005 have continued to be depreciated under the policy previously in effect, the cumulative effect of a change in accounting principle or pro forma effects of retroactive application disclosure is not required in accordance with the provisions of Accounting Principles Board Opinion No. 20, “Accounting Changes”.
18
Acquisition of Cherry Hill Construction, Inc.
On January 21, 2005, we completed the acquisition of 100% of the outstanding capital stock of Cherry Hill Construction, Inc. (“Cherry Hill”), a privately held construction company based in Jessup, Maryland, for approximately $20 million in cash, net of cash balance acquired. Cherry Hill is an established civil contractor operating in the Mid-Atlantic and Southeast regions specializing in excavation, foundations, paving and construction of civil infrastructure. The acquisition is effective as of January 1, 2005. At January 1, 2005, Cherry Hill had a firm backlog of approximately $128 million.
Receipt of a Partial Stop Work Order for Work in Iraq
In January 2005, we received a partial stop work order relating to ten partially funded task orders for work in Iraq under our five-year cost-plus-award-fee contract with the U.S. Department of State’s Project Constructionand Contracting Office (“PCO”). Since then, we have negotiated and received approval to proceed with the design and construction of five task orders for certain electrical distribution facilities in Iraq. The remaining five task orders have beenwere cancelled and we have submitted a proposal tobeen reimbursed by the PCO regardingfor costs incurred and fees for work performed prior to the cancellation of those task orders. It is estimated that the backlog of remaining uncompleted work under the PCO contract at March 31,June 30, 2005 is $106.9$54.8 million.
17Las Vegas Project CityCenter
In May 2005, we announced that we have been selected for a multi-billion construction contract from MGM MIRAGE to build a major portion of Project CityCenter in Las Vegas, Nevada. The estimated value of our construction contract is in excess of $3 billion, and has not been included in our $1.82 billion backlog at June 30, 2005 pending finalization of contract scope, terms and conditions. MGM MIRAGE has stated it plans to complete the entire project by the end of 2009.
Preferred Stock Class Action Lawsuit
On July 21, 2005, we announced that we expect approximately 357,285 shares of outstanding $2.125 Depositary Convertible Exchangeable Preferred Shares (the “Depositary Shares”) to participate in the previously announced settlement of the class action lawsuit filed by holders of our Depositary Shares. The settlement and the final number of Depositary Shares participating in the settlement remain subject to Court approval. A hearing before the Court to consider approval of the settlement will be scheduled. Under the terms of the settlement, we would purchase all of the participating Depositary Shares that are submitted for $19.00 in cash and one share of our common stock for each Depositary Share. As of June 30, 2005, there were a total of 559,273 Depositary Shares outstanding.
Backlog Analysis for 2005 First Quarter
The following table provides an analysis of our backlog by business segment for the threesix month period ended March 31, 2005.June 30, 2005:
Backlog at New Business Revenue Backlog at
December 31, 2004 Awarded Recognized March 31,June 30, 2005
----------------- ------------------ ------------------- ----------------- --------------- -------------------------------------
(In millions)thousands)
Building $ 570.1 $ 689.31,080.5 $ (241.0)472.4 $ 1,018.41,178.2
Civil 230.7 262.0 (50.7) 442.0335.0 114.1 451.6
Management Services 350.7 14.6 (79.9) 285.4
--------------2.5 163.4 189.8
----------------- --------------------------------- ------------------- ------------------
Total $ 1,151.5 $ 965.91,418.0 $ (371.6)749.9 $ 1,745.8
==============1,819.6
================= ================================= =================== ==================
19
Comparison of the FirstSecond Quarter of 2005 with the FirstSecond Quarter of 2004
IncomeAlthough 2005 revenues decreased by $117.4 million as the timing of new work awards was slower than anticipated, gross profit in 2005 increased by $0.8 million, from $23.8 million in 2004 to $24.6 million in 2005, due primarily to the impact of the Cherry Hill acquisition completed in January 2005. Both the building segment and the civil segment experienced improved gross margins in 2005 while the gross margin in the management services segment in 2005 was unchanged from that experienced in 2004. However, income before income taxes decreased by $2.8$2.3 million (or 24%18%), from $11.7$13.1 million in 2004 to $8.9$10.8 million in 2005, due primarily to an overallincrease in general and administrative expenses of $3.8 million (or 42%) due to the inclusion of expenses of Cherry Hill in 2005 and an increase in compensation expense relating to the amortization of certain restricted stock awards granted in the second half of 2004. The increase in general and administrative expenses was partly offset by a $0.9 million decrease in revenues as the timing of new work awards received over the six month period ended March 31, 2005 was less than anticipated.other expense. In addition, the provision for income taxes increased by $2.8$3.4 million, from $0.5$1.0 million in 2004 to $3.3$4.4 million in 2005, due to the realization in 2004 of a portion of the federal tax benefit not recognized in prior years due to certain accounting limitations. As a result, net income decreased by $5.6$5.7 million (or 50%47%), from $11.2$12.2 million in 2004 to $5.6$6.5 million in 2005. Basic earnings per common share were $0.21$0.24 for the three months ended March 31,June 30, 2005, compared to $0.47$0.51 for the three months ended March 31,June 30, 2004. Diluted earnings per common share were $0.20$0.24 for the three months ended March 31,June 30, 2005, compared to $0.44$0.48 for the three months ended March 31,June 30, 2004.
Assuming an effective income tax rate of 37.5%, pro forma net income for the three months ended March 31, 2004 would have been $7.3 million, compared to actual net income of $5.6 million for the three months ended March 31, 2005. Similarly, pro forma basic earnings per share for the three months ended March 31, 2004 would have been $0.31, compared to actual basic earnings per share of $0.21 for the three months ended March 31, 2005. Pro forma diluted earnings per share for the three months ended March 31, 2004 would have been $0.28, compared to actual diluted earnings per share of $0.20 for the three months ended March 31, 2005. See the table included below under the heading “Reconciliation of Reported Net Income to Pro Forma Net Income.”
Revenues for the
Three Months Ended March 31,June 30,
-------------------------------------- Increase %
2005 2004 (Decrease) Change
-------------- ---------------- ---------------- ----------------------------- -----------
(In millions)
Building $ 241.0231.5 $ 291.4 $ (50.4) (17.3)370.1 $(138.6) (37.4)%
Civil 50.7 27.5 23.2 84.463.4 36.3 27.1 74.7 %
Management Services 79.9 161.4 (81.5) (50.5)83.5 89.4 (5.9) (6.6)%
-------------- ---------------- ---------------- ----------------------------
Total $ 371.6378.4 $ 480.3 $ (108.7) (22.6)495.8 $(117.4) (23.7)%
============== ================ ================ ===============
=============Overall revenues decreased by $108.7$117.4 million (or 22.6%23.7%), from $480.3$495.8 million in 2004 to $371.6$378.4 million in 2005. This decrease was due primarily to a decrease in management servicesbuilding construction revenues of $81.5$138.6 million (or 50.5%37.4%), from $161.4$370.1 million in 2004 to $79.9$231.5 million in 2005, due primarily to the timing of the start-up of new work in the hospitality and gaming market as the timing of new work awards was slower than anticipated. Management services revenues decreased by $5.9 million (or 6.6%), from $89.4 million in 2004 to $83.5 million in 2005 due primarily to a decreased volume of work related to the rebuilding of Iraq. Building construction revenues decreased by $50.4 million (or 17.3%), from $291.4 million in 2004 to $241.0 million in 2005 due primarily to the completion in 2004 of
18
several large hospitality and gaming market projects in Las Vegas and California. These increasesdecreases were partly offset by an increase in civil construction revenues of $23.2$27.1 million (or 84.4%74.7%), from $27.5$36.3 million in 2004 to $50.7$63.4 million in 2005, due primarily to the impact of the acquisition of Cherry Hill effective January 1, 2005.acquisition.
20
Income from Construction
Operations for the
Three Months Ended March 31,June 30, Increase
-------------------------------------- (Decrease) %
2005 2004 inIn Income Change
----------------------------- ----------------- --------------- ------------- --------------- ------------
(In millions)
Building $ 4.76.2 $ 5.59.2 $ (0.8) (14.5)(3.0) (32.6)%
Civil 1.5 0.2 1.3 650.03.0 1.0 2.0 200.0 %
Management Services 5.6 6.6 10.5 (3.9) (37.1)(1.0) (15.2)%
------------ ------------------------------ ----------------- ---------------
Subtotal $ 12.814.8 $ 16.216.8 $ (3.4) (21.0)(2.0) (11.9)%
Less: Corporate (3.4) (2.4)(3.1) (2.1) (1.0) (41.7)(47.6)%
------------ ------------------------------ ----------------- ---------------
Total $ 9.411.7 $ 13.814.7 $ (4.4) (31.9)(3.0) (20.4)%
============ ============================== ================= ===============Income from operations (excluding corporate) decreased by $3.4$2.0 million (or 21.0%11.9%), from $16.2$16.8 million in 2004 to $12.8$14.8 million in 2005. Management services income from operations decreased by $3.9 million (or 37.1%), from $10.5 million in 2004 to $6.6 million in 2005, due primarily to the decrease in revenues discussed above. Building construction income from operations decreased by $0.8$3.0 million (or 14.5%32.6%), from $5.5$9.2 million in 2004 to $4.7$6.2 million in 2005, also due primarily to the decrease in revenues discussed above. Partly offsetting the negative impact of the decrease in building construction revenues was a higher gross profit margin, largely due to profit increases recognized upon the completion and close-out of several hospitality and gaming market projects. Management services income from operations decreased by $1.0 million (or 15.2%), from $6.6 million in 2004 to $5.6 million in 2005, also due primarily to the decrease in revenues discussed above. Civil construction income from operations increased by $1.3$2.0 million (or 650.0%200.0%), from $0.2$1.0 million in 2004 to $1.5$3.0 million in 2005, due primarily to a higher gross profit margin in 2005 because 2004 included recognitionthe impact of losses and profit writedowns on several projects, including two joint venture projects sponsored by others.the Cherry Hill acquisition. Partly offsetting the higher civil construction gross profit margin in 2005 was a $2.3$1.5 million increase in civil construction-related G&A,general and administrative expenses, due primarily to the addition of Cherry Hill in 2005.Hill. In addition, income from operations was negatively impacted by a $1.0 million increase in corporate general and administrative expenses, from $2.4$2.1 million in 2004 to $3.4$3.1 million in 2005, due primarily to a $0.8 million increase in compensation expense recognized in conjunction withrelating to the grantingamortization of certain restricted stock awards duringgranted in the lattersecond half of 2004.
Other (income) expense decreased by $1.8$0.9 million, from an expense of $1.9$1.4 million in 2004 to an expense of $0.1$0.5 million in 2005, due primarily to a $0.9$0.6 million decrease in the amortization of the intangible asset established in conjunction with the acquisition of Cummings in January 2003 (which is now fully amortized), as well as a $0.7 million decrease in expenses related to the secondary stock offering which was completedrecorded in the second quarter of 2004. In addition, interest income increased by2004 related to a public stock offering, as well as a $0.2 million one-time charge recorded in 2005the second quarter of 2004 due to a higher available cash balancethe decision to invest.freeze all benefit accruals under our defined benefit pension plan effective June 1, 2004.
Interest expense increased by $0.2 million, from $0.2$0.1 million in 2004 to $0.4$0.3 million in 2005, due to interest expense on mortgage debt and equipment financing debt assumed in conjunction with the Cherry Hill acquisition in January 2005.acquisition.
The provision for income taxes increased by $2.8$3.4 million in 2005, from $0.5$1.0 million in 2004 to $3.3$4.4 million in 2005. The firstsecond quarter of 2004 results reflect a lower than normal tax rate due to the realization of a portion of the federal tax benefit not recognized in prior years due to certain accounting limitations.
Reconciliation of Reported Net Income to Pro Forma Net Income for the Second Quarter of 2004
As mentioned above, our reported net income was $5.6$6.5 million and $11.2$12.2 million for the three months
19
ended March 31,June 30, 2005 and 2004, respectively. Our reported basic earnings per common share were $0.21$0.24 and $0.47$0.51 for the three months ended March 31,June 30, and 2005 and March 31, 2004, respectively. Our reported diluted earnings per common share were $0.20$0.24 and $0.44$0.48 for the three months ended March 31,June 30, 2005 and March 31, 2004, respectively. Assuming an effective income tax rate of 37.5%39%, pro forma net income for the first quarter ofthree months
21
ended June 30, 2004 would have been $7.3$8.0 million, as compared to actualreported net income of $5.6$12.2 million for the first quarter of 2005.three months ended June 30, 2004. Similarly, pro forma basic earnings per common share for the first quarter ofthree months ended June 30, 2004 would have been $0.31,$0.33, as compared to actualreported basic earnings per common share of $0.21$0.51 for the first quarter of 2005.three months ended June 30, 2004. Pro forma diluted earnings per common share for the first quarter ofthree months ended June 30, 2004 would have been $0.28,$0.31, as compared to actualreported diluted earnings per common share of $0.20$0.48 for the first quarter of 2005.three months ended June 30, 2004. The reconciliation of reported net income to pro forma net income for the three months ended March 31,June 30, 2004 is set forth below under "Reconciliation of Reported Net Income to Pro Forma Net Income for the Three Month and Six Month Periods Ended June 30, 2004."
Comparison of the Six Months Ended June 30, 2005 with the Six Months Ended June 30, 2004
Although 2005 revenues decreased by $226.2 million as the timing of new work awards was slower than anticipated, gross profit in 2005 was equal to the $47.3 million recorded in 2004 due primarily to the impact of the Cherry Hill acquisition completed in January 2005. Moreover, all of the Company's business segments experienced improved gross margins in 2005. However, income before income taxes decreased by $5.2 million (or 21%), from $24.9 million in 2004 to $19.7 million in 2005, due primarily to an increase in general and administrative expenses of $7.5 million (or 40%) due to the inclusion of expenses of Cherry Hill in 2005 and an increase in compensation expense related to the amortization of certain restricted stock awards granted in the second half of 2004. The increase in general and administrative expenses was partly offset by a $2.6 million decrease in other expense. In addition, the provision for income taxes increased by $6.2 million, from $1.5 million in 2004 to $7.7 million in 2005, due to the realization in 2004 of a portion of the federal tax benefit not recognized in prior years due to certain accounting limitations. As a result, net income decreased by $11.4 million (or 49%), from $23.4 million in 2004 to $12.0 million in 2005. Basic earnings per common share were $0.45 for the six months ended June 30, 2005, compared to $0.99 for the six months ended June 30, 2004. Diluted earnings per common share were $0.44 for the six months ended June 30, 2005, compared to $0.91 for the six months ended June 30, 2004.
Revenues for the
Six Months Ended June 30,
-------------------------------------- Increase %
2005 2004 (Decrease) Change
----------------- ------------------ -------------- -------------
(In millions)
Building $ 472.4 $ 661.5 $ (189.1) (28.6)%
Civil 114.1 63.8 $ 50.3 78.8%
Management Services 163.4 250.8 $ (87.4) (34.8)%
----------------- ------------------ --------------
Total $ 749.9 $ 976.1 $ (226.2) (23.2)%
================= ================== ==============Overall revenues decreased by $226.2 million (or 23.2%), from $976.1 million in 2004 to $749.9 million in 2005. This decrease was due primarily to a decrease in building construction revenues of $189.1 million (or 28.6%), from $661.5 million in 2004 to $472.4 million in 2005, due primarily to the timing of the start-up of new work in the hospitality and gaming market as the timing of new work awards was slower than anticipated. Management services revenues decreased by $87.4 million (or 34.8%), from $250.8 million in 2004 to $163.4 million in 2005 due primarily to a decreased volume of work related to the rebuilding of Iraq. These decreases were partly offset by an increase in civil construction revenues of $50.3 million (or 78.8%), from $63.8 million in 2004 to $114.1 million in 2005, due primarily to the impact of the Cherry Hill acquisition.
22
Income from Construction
Operations for the
Six Months Ended June 30, Increase
----------------------------------- (Decrease) %
2005 2004 In Income Change
-------------- --------------- -------------- -------------
(In millions)
Building $ 10.9 $ 14.7 $ (3.8) (25.9)%
Civil 4.6 1.2 3.4 283.3 %
Management Services 12.1 17.1 (5.0) (29.2)%
-------------- --------------- --------------
Subtotal $ 27.6 $ 33.0 $ (5.4) (16.4)%
Less: Corporate (6.5) (4.5) (2.0) (44.4)%
-------------- --------------- --------------
Total $ 21.1 $ 28.5 $ (7.4) (26.0)%
============== =============== ==============Income from operations (excluding corporate) decreased by $5.4 million (or 16.4%), from $33.0 million in 2004 to $27.6 million in 2005. Building construction income from operations decreased by $3.8 million (or 25.9%), from $14.7 million in 2004 to $10.9 million in 2005, due primarily to the decrease in revenues discussed above. Partly offsetting the negative impact of the decrease in building construction revenues was a higher gross profit margin, largely due to profit increases recognized upon the completion and close-out of several hospitality and gaming market projects. Management services income from operations decreased by $5.0 million (or 29.2%), from $17.1 million in 2004 to $12.1 million in 2005, also due primarily to the decrease in revenues discussed above. Partly offsetting the negative impact of the decrease in management services revenues was a higher gross profit margin, largely due to profit increases recognized upon the completion and close-out of two overseas projects. Civil construction income from operations increased by $3.4 million (or 283.3%), from $1.2 million in 2004 to $4.6 million in 2005, due primarily to the impact of the Cherry Hill acquisition. Partly offsetting the higher civil construction gross profit in 2005 was a $3.7 million increase in civil construction-related general and administrative expenses, due primarily to the addition of Cherry Hill. In addition, income from operations was negatively impacted by a $2.0 million increase in corporate general and administrative expenses, from $4.5 million in 2004 to $6.5 million in 2005, due primarily to a $1.6 million increase in compensation expense related to the amortization of certain restricted stock awards granted in the second half of 2004.
Other (income) expense decreased by $2.6 million, from an expense of $3.3 million in 2004 to an expense of $0.7 million in 2005, due primarily to $1.3 million of expenses recorded in 2004 related to a public stock offering, as well as a $1.1 million decrease in the amortization of the intangible asset established in conjunction with the acquisition of Cummings in January 2003 (which is now fully amortized), and a $0.2 million one-time charge recorded in the second quarter of 2004 due to the decision to freeze all benefit accruals under our defined benefit pension plan effective June 1, 2004.
Interest expense increased by $0.4 million, from $0.3 million in 2004 to $0.7 million in 2005, due to interest expense on mortgage debt and equipment financing debt assumed in conjunction with the Cherry Hill acquisition.
The provision for income taxes increased by $6.2 million, from $1.5 million in 2004 to $7.7 million in 2005. The results for the six months ended June 30, 2004 reflect a lower than normal tax rate due to the realization of a portion of the federal tax benefit not recognized in prior years due to certain accounting limitations.
23
Reconciliation of Reported Net Income to Pro Forma Net Income for the Three Month and Six Month Periods Ended June 30, 2004
As mentioned above, our reported net income was $12.0 million and $23.4 million for the six months ended June 30, 2005 and 2004, respectively. Our reported basic earnings per common share were $0.45 and $0.99 for the six months ended June 30, 2005 and 2004, respectively. Our reported diluted earnings per share were $0.44 and $0.91 for the six months ended June 30, 2005 and 2004, respectively. Assuming an effective income tax rate of 39%, pro forma net income for the six months ended June 30, 2004 would have been $15.2 million, as compared to reported net income of $23.4 million for the six months ended June 30, 2004. Similarly, pro forma basic earnings per common share for the six months ended June 30, 2004 would have been $0.63, as compared to reported basic earnings per common share of $0.99 for the six months ended June 30, 2004. Pro forma diluted earnings per common share for the six months ended June 30, 2004 would have been $0.59, as compared to reported diluted earnings per common share of $0.91 for the six months ended June 30, 2004. The reconciliation of reported net income to pro forma net income for the three month and six month periods ended June 30, 2004 is set forth below:
Three Months Six Months
Ended Ended
June 30, 2004 June 30, 2004
---------------- --------------------
(in thousands, except per share data):Three Months
Ended
March 31, 2004
-------------------
Reported net income $ 11,22112,176 $ 23,397
Plus: Provision for income taxes 529
-------------------966 1,495
---------------- --------------------
Income before income taxes 11,75013,142 24,892
Provision for income taxes assuming a 37.5%39% effective rate 4,406
-------------------5,125 9,708
---------------- --------------------
Pro forma net income $ 7,3448,017 $ 15,184
Less: Dividends accrued on Preferred Stock (297) -------------------(594)
---------------- --------------------
Pro forma total available for common stockholders $ 7,047
===================7,720 $ 14,590
================ ====================
Pro forma basic earnings per common share $ 0.31
===================0.33 $ 0.63
================ ====================
Pro forma diluted earnings per common share $ 0.28
===================0.31 $ 0.59
================ ====================
Weighted average common shares outstanding:
Basic 23,01423,202 23,108
Effect of dilutive stock options, warrants and warrantsrestricted stock units outstanding 1,879
-------------------1,766 1,823
---------------- --------------------
Diluted 24,893
-------------------24,968 24,931
---------------- --------------------
No reconciliation of reported net income to pro forma net income for the three monthsmonth and six month periods ended March 31,June 30, 2005 is provided since the actual effective tax rate of 37.5% is equal toapproximates the pro forma tax rate;rate of 39%; therefore, there would be no difference between actual results and pro forma results for the three monthsmonth and six month periods ended March 31,June 30, 2005.
To supplement our unaudited 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, losses 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.
2024
Liquidity and Capital Resources
Cash and Working Capital
We have a $50 million revolving credit facility (the “Credit Facility”) which is scheduled to expire in June 2007. The terms of the Credit Facility provide that we can choose from interest rate alternatives including a prime-based rate, as well as options based on LIBOR (London inter-bank offered rate). Management believes that the Credit Facility provides us with the flexibility to provide the working capital needed to support the anticipated growth of our construction activities. At March 31,June 30, 2005, we had $47.2 million available to borrow under the Credit Facility.
The Credit Facility requires, among other things, maintaining a minimum tangible net worth, fixed charge coverage and operating profit levels as well as a minimum working capital ratio. 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 the level of capital expenditures that we may make, as well as the purchase and sale of assets outside of the 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.
Cash and cash equivalents as reported in the accompanying consolidated condensed financial statements consist of amounts held by us as well as our proportionate share of amounts held by construction joint ventures. Cash held by us 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 us and to the other joint venture participants in accordance with theirour respective percentage interest after the joint venture partners determine that a cash distribution is prudent. Cash distributions received by us from our construction joint ventures are then available for general corporate purposes. At March 31,June 30, 2005 and December 31, 2004, cash held by us and available for general corporate purposes was $38.5$43.6 million and $81.0 million, respectively, and our proportionate share of cash held by joint ventures and available only for joint venture-related uses was $48.0$51.0 million and $55.3 million, respectively.
A summary of cash flows for each of the threesix month periods ended March 31,June 30, 2005 and 2004 is set forth below:
ThreeSix Months
Ended March 31,
-----------------------------June 30,
----------------------------
2005 2004
------------ ------------
(In millions)
Cash flows from:
Operating activities $ (26.6)(18.3) $ (31.4)20.3
Investing activities (17.6)(20.7) (1.4)
Financing activities (5.6) 13.7(2.7) 2.6
------------ ------------
Net decreaseincrease (decrease) in cash $ (49.8)(41.7) $ (19.1)21.5
Cash at beginning of year 136.3 67.8
------------ ------------
Cash at end of period $ 86.594.6 $ 48.789.3
============ ============During the first threesix months of 2005, we used $49.8$41.7 million of cash on hand to fund $26.6$18.3 million in cash flow used by operating activities, principally to fund working capital requirements; $17.6$20.7 million to fund cash flow used by investing activities, principally to fund the January 2005 acquisition of Cherry Hill; and $5.6$2.7 million to fund cash flow used by financing activities, which was primarily used to pay down a portion of the debt assumed in conjunction with the acquisition of Cherry Hill. As a result, our consolidated cash
21
balance decreased by $49.8$41.7 million, from $136.3 million at December 31, 2004 to $86.5$94.6 million at March 31,June 30, 2005.
25
Working capital decreased from $178.0 million at the end of 2004 to $167.8$172.2 million at March 31,June 30, 2005. The current ratio ofincreased from 1.41x remained consistent during the same period.
As previously disclosed in our financial statements for the year endedat December 31, 2004 we expected to contribute $6.0 million to the pension plan in1.47x at June 30, 2005.
On April 1, 2005, we actually made a $9.0 million contribution to our defined benefit pension plan and do not expect to make further contributions to the pension plan in 2005.
The amount of unbilled work increased by $12.8$5.5 million, from $90.3 million at December 31, 2004 to $103.1$95.8 million at March 31,June 30, 2005, due primarily to the addition of Cherry Hill in 2005 and to the timing of certain contract billings.
Long-term Debt
Long-term debt at March 31,June 30, 2005 was $18.5 million, an increase of $9.9 million from December 31, 2004, due to mortgage debt and equipment financing debt assumed in conjunction with the Cherry Hill acquisition. Accordingly, the long-term debt to equity ratio increased from .05x at December 31, 2004 to .10x at March 31,June 30, 2005.
Dividends
There were no cash dividends declared or paid on our outstanding Common Stock during the periods presented herein.
The covenants in our prior credit agreements required us to suspend the payment of quarterly dividends on our $21.25 Preferred Stock until certain financial criteria were met. While quarterly dividends on the $21.25 Preferred Stock have not been paid since 1995, 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 $11.3$11.6 million as of March 31,June 30, 2005.
In November 2004, an agreement was reached to settle the class action lawsuit filed by the holders of the $21.25 Preferred Stock. (See Note 5(f) of Notes to Consolidated Condensed Financial Statements). On July 21, 2005, we announced that we expect holders of approximately 357,285 shares of outstanding Depositary Shares to participate in the settlement. The settlement and the final number of Depositary Shares participating in the settlement remain subject to Court approval. A hearing before the Court to consider approval of the settlement will be scheduled. Under the terms of the settlement, we would purchase all of the participating Depositary Shares that are submitted in the settlement for consideration per share of $19.00 in cash and one share of our common stock.stock for each Depositary Share. As of March 31,June 30, 2005, there were a total of 559,273 Depositary Shares outstanding. In the event that fewer than 200,000 Depositary Shares are submitted in the settlement, we may terminate the settlement agreement and the parties will revert to their previous positions in the litigation. The proposed settlement is subject to approval of the Court.
Our Board of Directors has not decided that our working capital and other conditions warrant the resumption of payment of the regular dividend or any of the dividends in arrears on the $21.25 Preferred Stock. We do not have any plans or target date for resuming the dividend, given the following circumstances:
22
26
Forward-looking Statements
The statements contained in this Management's Discussion and Analysis of the Consolidated Condensed Financial Statements and other sections of this Form 10-Q 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 our expectations, hopes, beliefs, intentions or strategies regarding the future. These forward-looking statements are based on our current expectations and beliefs concerning future developments and their potential effects on us. There can be no assurance that future developments affecting us will be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond 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 potential delay, suspension, termination or reduction in scope of a construction project; 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 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 our customers, suppliers, business partners, and competitors and legislative, regulatory, judicial and other governmental authorities and officials; and other risks and uncertainties discussed under the heading "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2004 filed with the Securities and Exchange Commission on March 4, 2005. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.
23
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There has been no material change in the Company's exposure to market risk from that described in the Company's annual report on Form 10-K, Item 7A., since December 31, 2004.
Item 4. Controls and Procedures
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.
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
27
control over financial reporting. In making its assessment of changes in internal control over financial reporting as of March 31,June 30, 2005, management has excluded Cherry Hill Construction, Inc. ("Cherry Hill") because this company was acquired in January of 2005. The assets and revenues of Cherry Hill as of and for the threesix months ended March 31,June 30, 2005 represent approximately 10% and 7%7.5%, respectively, of our consolidated assets and revenues as of and for the threesix months ended March 31,June 30, 2005. As part of our integration of Cherry Hill, we are in the process of incorporating our controls and procedures into the operations of Cherry Hill.
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.
2428
Part II. - Other Information
Item 1. Legal Proceedings
$21.25 Preferred Shareholders Class Action Lawsuit
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 the $2.125 Depositary Convertible Exchangeable Preferred
Shares, representing 1/10 Share of $21.25 Convertible Exchangeable Preferred Stock ("Depositary Shares")
against certain current and former directors of Perini. This lawsuit is captioned Doppelt, et al. v. Tutor,
et al., and is pending before the United States District Court for the District of Massachusetts. 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.
In July 2003, the plaintiffs filed an amended complaint. The amended complaint added an allegation that the
defendants havehad 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.
On April 12, 2004, pursuant to Defendants' Motions to Dismiss, the Court dismissed the claim under the
Massachusetts Consumer Protection Act. The Court did not dismiss the claim for breach of fiduciary duty,
except as such claim relates to the tender offer for the purchase of the Company's Depositary Shares. Pursuant
to the Court's April 12, 2004 Order, in May 2004 the plaintiffs filed a third amended complaint and a motion
for class certification. Defendants filed an answer denying any and all claims of wrongdoing and asserting
affirmative defenses.
On November 30, 2004, Perini announced that the parties had reached an agreement for settlement of the
Action. Under the terms of the settlement, Perini would purchase all of the Depositary Shares submitted in
the settlement for consideration per share of $19.00 in cash and one share of Perini common stock.
The named
plaintiffs have agreed to support the settlement. On April 19, 2005, the District Court of Massachusetts conditionally certified a class of holders of
Depositary Shares for purposes of settlement only. A hearing is
scheduledOn May 5, 2005, the Court preliminarily approved the
settlement as being fair, just, reasonable and adequate, pending a final hearing.
As of July 25, 2005, of the 559,273 Depositary Shares outstanding, 357,285 shares were participating in the
settlement and 201,988 shares were the subject of requests for August 8, 2005exclusion from the settlement. No one has
objected to seek Court approval of the settlement. The Court instructed that, starting on May 16, 2005, noticeproposed settlement and a
claim form should be sent to identifiable holdersthe final determination of Depositary Shares.
As of March 31, 2005, there were 559,273 Depositary Shares outstanding. In the event that fewer than
200,000 Depositary Shares are submittedwhich shares will
participate in the settlement Perini may terminate the settlement agreement and
the parties will revert to their previous positions in the litigation. The proposed settlement remainsremain subject to approval of the Court.Court and a hearing before the Court for
that purpose will be scheduled. Frederick Doppelt will resign from his position as a director of Perini
upon Court approval of the settlement.
In 2001, a similar lawsuit was filed by some of the same plaintiffs in the United States District Court for
the Southern District of New York, which claimed that the Company breached its contract with the holders of
Depositary Shares. In 2002, the case was dismissed and upon appeal by the plaintiffs to the United States
Court of Appeals for the Second Circuit, the Court of Appeals affirmed the dismissal.
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Part II. - Other Information (continued)
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds (a)On January 20, 2005, a member of our former bank group purchased 33,600 shares of our common stock, par value $1.00 per share, pursuant to a stock purchase warrant, by cashless exercise at an exercise price of $8.30 per share. As a result of this cashless exercise, we issued 17,507 shares of our common stock to the warrant holder and we retained 16,093 shares of common stock, valued at approximately $17.33 per share (based on the closing price of our common stock on January 19, 2005), in payment of the exercise price. On February 2, 2005, a member of our former bank group purchased 61,152 shares of our common stock, par value $1.00 per share, pursuant to a stock purchase warrant, by cashless exercise at an exercise price of $8.30 per share. As a result of this cashless exercise, we issued 32,621 shares of our common stock to the warrant holder and we retained 28,531 shares of common stock, valued at approximately $17.79 per share (based on the closing price of our common stock on February 1, 2005), in payment of the exercise price. The securities issued in the foregoing transaction were offered and sold in reliance on exemptions from registration set forth in Section 4(2) of the Securities Act or regulations promulgated there under, relating to sales by an issuer not involving any public offering.None (b) Not applicable (c) Not applicable Item 3. Defaults Upon Senior Securities (a) None (b) In accordance with the covenants of certain prior credit agreements, the Company was required to suspend the payment of quarterly dividends on its $21.25 Convertible Exchangeable Preferred Stock ("$21.25 Preferred Stock") until certain financial criteria were met. Although the financial criteria were satisfied as of December 31, 2000, the Company has not paid dividends on the $21.25 Preferred Stock since 1995. While the Company's most recent Credit Facility does not currently restrict such dividends, the Board of Directors does not believe that it is proper or prudent to pay or commit to pay dividends on the $21.25 Preferred Stock for the foreseeable future based on the Company's other working capital requirements. See additional comments under "Liquidity and Capital Resources" on pages21 to 2325 and 26 of this Quarterly Report. As ofMarch 31,June 30, 2005, the aggregate amount of dividends in arrears is approximately$11.3$11.6 million, which represents approximately$201.88$207.19 per share of $21.25 Preferred Stock or approximately$20.19$20.72 per Depositary Share. While these dividends have not been declared or paid, they have been fully accrued in accordance with the "cumulative" feature of the $21.25 Preferred Stock. Item 4. Submission of Matters to a Vote of Security Holders (a)NoneThe Company's Annual Meeting of Stockholders was held on May 19, 2005. (b) Not applicable (c)Not applicable (d) Not applicableResults of voting at the 2005 Annual Meeting of Stockholders were as follows: (1) Each of the following persons was elected by the holders of Common Stock as a Class III Director to hold office for a three-year term expiring in 2008 and until their successors are chosen and qualified: Number of Votes ------------------------------------- Authority Class III Director For Withheld ------------------ --------------- ----------------- Peter Arkley 18,002,315 5,978,058 James A. Cummings 23,917,344 63,029 Raymond R. Oneglia 23,581,769 398,604 (2) Two nominees for Preferred Directors (the "Preferred Directors") to hold office until the earlier of (i) the 2006 Annual Meeting of Stockholders and until their successors are chosen and qualified, or (ii) all dividends in arrears on the Preferred Stock have been paid or declared and funds therefor set apart for payment, were elected by the Depositary, based on the two nominees who received the greatest number of votes as indicated by the holders of the Depositary Shares. A summary of the voting results follows:
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Part II. - Other Information (continued)
Number of Votes
---------------------------------
Nominees for Authority
Preferred Directors For Withheld
------------------- ------------- ----------------
Frederick Doppelt 300,716 1,750
Martin Shubik 234,389 3,100
Leland D. Zulch 63,883 1,000
(d) Not applicable
Item 5. Other Information
(a) None
(b) None
Item 6. Exhibits
(a) ExhibitsExhibit 10.1 Fifth Amendment dated March 31, 2005 to Credit Agreement among Perini Corporation,
Fleet National Bank, as Administrative Agent, and the Lenders - filed herewith.
Exhibit 31.1 Certification of Principal Executive Officer Pursuant to Section 302 of 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.
Exhibit 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.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Perini Corporation
Registrant
Date:May 6,August 5, 2005 /s/Michael E. Ciskey
Michael E. Ciskey, Vice President and Chief Financial Officer
Duly Authorized Officer and Principal Accounting Officer
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