UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-6314
(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 ___ No X
Number of shares of common stock of registrant outstanding at November 5, 2003: 22,872,535
Page 1 of 31
PERINI CORPORATION & SUBSIDIARIES
INDEX
Page Number
Part I. - Financial Information:
Item 1. Financial Statements (Unaudited)
Consolidated Condensed Balance Sheets- 3
September 30, 2003 and December 31, 2002
Consolidated Condensed Statements of Income - 4
Three Months and Nine Months ended September 30, 2003 and 2002
Consolidated Condensed Statement of Stockholders' Equity - 5
Nine Months ended September 30, 2003
Consolidated Condensed Statements of Cash Flows - 6
Nine Months ended September 30, 2003 and 2002
Notes to Consolidated Condensed Financial Statements 7- 18
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 19 - 24
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24
Item 4. Controls and Procedures 24
Part II. - Other Information:
Item 1. Legal Proceedings 25 - 26
Item 2. Changes in Securities and Use of Proceeds 27
Item 3. Defaults Upon Senior Securities 27
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 27 - 30
Signatures 31
PERINI CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
SEPTEMBER 30, 2003 (UNAUDITED) AND DECEMBER 31, 2002
(In Thousands)
ASSETS SEPT. 30, DEC. 31,
2003 2002
------------- --------------
Cash and Cash Equivalents (Note 4) $ 45,376 $ 47,031
Accounts and Notes Receivable 256,341 218,172
Unbilled Work 115,017 112,563
Land Held for Sale, Net 2,057 2,173
Other Current Assets 5,984 1,992
------------- --------------
Total Current Assets $ 424,775 $ 381,931
------------- --------------
Property and Equipment, less Accumulated Depreciation of $21,956 in 2003 and
$19,858 in 2002 $ 16,334 $ 14,042
------------- --------------
Other Assets $ 23,303 $ 6,416
------------- --------------
$ 464,412 $ 402,389
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Maturities of Long-term Debt (Note 7) $ 831 $ 416
Accounts Payable 213,093 162,456
Deferred Contract Revenue 61,631 65,868
Accrued Expenses 27,110 37,283
------------- --------------
Total Current Liabilities $ 302,665 $ 266,023
------------- --------------
Long-term Debt, less current maturities included above (Note 7) $ 25,566 $ 12,123
------------- --------------
Other Long-term Liabilities (Note 11) $ 32,671 $ 37,594
------------- --------------
Contingencies and Commitments (Note 6)
Stockholders' Equity (Note 8):
Preferred Stock $ 56 $ 100
Series A Junior Participating Preferred Stock - -
Stock Purchase Warrants 2,233 2,233
Common Stock 22,903 22,725
Paid-In Surplus 91,137 95,546
Retained Earnings (Deficit) 7,719 (13,417)
Less - Treasury Stock (965) (965)
------------- --------------
$ 123,083 $ 106,222
Accumulated Other Comprehensive Loss (19,573) (19,573)
------------- --------------
Total Stockholders' Equity $ 103,510 $ 86,649
------------- --------------
$ 464,412 $ 402,389
============= ==============
The accompanying notes are an integral part of these financial statements.
3
PERINI CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(In Thousands, Except Share and Per Share Data)
THREE MONTHS NINE MONTHS
ENDED SEPT. 30, ENDED SEPT. 30,
-------------------------------- --------------------------------
2003 2002 2003 2002
--------------- ------------- ------------- --------------
Revenues (Note 12) $ 295,855 $ 232,805 $ 873,451 $ 822,482
Cost of Operations 280,067 220,429 829,590 784,744
--------------- ------------- ------------- --------------
Gross Profit $ 15,788 $ 12,376 $ 43,861 $ 37,738
General and Administrative Expenses 9,037 8,187 27,709 22,132
--------------- ------------- ------------- --------------
INCOME FROM CONSTRUCTION OPERATIONS (Note 12) $ 6,751 $ 4,189 $ 16,152 $ 15,606
Other Income (Expense), Net (146) 42 (428) (360)
Interest Expense (244) (387) (701) (1,146)
--------------- ------------- ------------- --------------
Income before Income Taxes $ 6,361 $ 3,844 $ 15,023 $ 14,100
Credit (Provision) for Income Taxes (Note 9) 35 (200) 6,410 (551)
--------------- ------------- ------------- --------------
NET INCOME $ 6,396 $ 3,644 $ 21,433 $ 13,549
=============== ============= ============= ==============
Less: Accrued Dividends on $21.25 Preferred Stock (Note 11) (308) (532) (1,356) (1,594)
Plus: Reversal of Accrued Dividends on $21.25 Preferred Stock
based on results of 2003 tender offer (Notes 8 and 11) 596 - 7,254 -
--------------- ------------- ------------- --------------
NET INCOME AVAILABLE FOR COMMON STOCKHOLDERS $ 6,684 $ 3,112 $ 27,331 $ 11,955
=============== ============= ============= ==============
BASIC EARNINGS PER COMMON SHARE (Note 10) $ 0.29 $ 0.14 $ 1.20 $ 0.53
=============== ============= ============= ==============
DILUTED EARNINGS PER COMMON SHARE (Note 10) $ 0.28 $ 0.14 $ 1.17 $ 0.52
=============== ============= ============= ==============
DIVIDENDS PER COMMON SHARE (Note 11) $ - $ - $ - $ -
=============== ============= ============= ==============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (Note 10):
BASIC 22,805,224 22,664,135 22,726,132 22,664,135
Effect of Dilutive Stock Options Outstanding 1,180,881 13,370 672,564 363,945
--------------- ------------- ------------- --------------
DILUTED 23,986,105 22,677,505 23,398,696 23,028,080
--------------- ------------- ------------- --------------
The accompanying notes are an integral part of these financial statements.
4
PERINI CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
(In Thousands, Except Share Data )
Accumulated
Stock Retained Other
Preferred Purchase Common Paid-In Earnings Treasury Comprehensive
Stock Warrants Stock Surplus (Deficit) Stock Loss Total
------------ ------------ ------------ ----------- ------------ ------------ ------------------ -------------
Balance - December 31, 2002 $ 100 $ 2,233 $ 22,725 $ 95,546 $ (13,417) $ (965) $ (19,573) $ 86,649
Net income --- --- --- --- 21,433 --- --- 21,433
Preferred stock tendered (Note 8) (44) --- --- (11,217) --- --- --- (11,261)
Reversal of dividends previously accrued
on preferred stock tendered (Note 8) --- --- --- 7,243 11 --- --- 7,254
Preferred stock dividends accrued
( $15.938 per share *) --- --- --- (1,048) (308) --- --- (1,356)
Common stock options exercised --- --- 178 613 --- --- --- 791
----------------------------------------------------------------------------------------------------------------------
Balance - September 30, 2003 $ 56 $ 2,233 $ 22,903 $ 91,137 $ 7,719 $ (965) $ (19,573) $ 103,510
======================================================================================================================
*Equivalent to $1.5938 per Depositary Share
The accompanying notes are an integral part of these financial statements.
5
PERINI CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(In Thousands)
NINE MONTHS
ENDED SEPTEMBER 30,
----------------------------
2003 2002
------------ -------------
Cash Flows from Operating Activities:
Net income $ 21,433 $ 13,549
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization 2,524 2,309
Cash used by changes in components of working capital other than cash,
current maturities of long-term debt and deferred tax asset (12,592) (49,607)
Net deferred tax asset (7,270) -
Other long-term liabilities 975 (941)
Other non-cash items, net (444) (32)
------------ -------------
NET CASH PROVIDED FROM (USED BY) OPERATING ACTIVITIES $ 4,626 $ (34,722)
------------ -------------
Cash Flows from Investing Activities:
Proceeds from sale of property and equipment $ 767 $ 140
Acquisition of property and equipment (4,406) (3,710)
Acquisition of James A. Cummings, Inc., net of cash balance acquired (Note 5) (8,613) -
Proceeds from (investment in) land held for sale, net 2,125 (265)
Proceeds from sale of marketable securities 380 -
Investment in other activities 78 (498)
------------ -------------
NET CASH USED BY INVESTING ACTIVITIES $ (9,669) $ (4,333)
------------ -------------
Cash Flows from Financing Activities:
Proceeds from long-term debt $ 14,192 $ 26,816
Reduction of long-term debt (334) (10,135)
Purchase of Preferred Stock pursuant to Tender Offer (Note 8) (11,261) -
Proceeds from exercise of common stock options 791 -
------------ -------------
NET CASH PROVIDED FROM FINANCING ACTIVITIES $ 3,388 $ 16,681
------------ -------------
Net Decrease in Cash $ (1,655) $ (22,374)
Cash at Beginning of Year 47,031 56,542
------------ -------------
Cash at End of Period $ 45,376 $ 34,168
============ =============
Supplemental Disclosure of Cash Paid During the Period For:
Interest $ 745 $ 1,118
============ =============
Income taxes $ 1,078 $ 1,401
============ =============
The accompanying notes are an integral part of these financial statements.
6
(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, 2002. 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 September 30, 2003 and December 31, 2002, results of operations
for the three month and nine month periods ended September 30, 2003 and 2002,
and cash flows for the nine month periods ended September 30, 2003 and 2002. The
results of operations for the nine month period ended September 30, 2003 may not
be indicative of the results that may be expected for the year ending December
31, 2003 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 Form 10-K for the year ended December 31,
2002. The Company has made no significant change in these policies during 2003.
(3)
Stock-Based Compensation
The
Company accounts for stock options granted to employees and directors using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
“Accounting for Stock Issued to Employees”, and related
Interpretations. No stock-based employee compensation cost is reflected in net
income since all stock options granted by the Company had an exercise price
equal to or greater than the fair market value of the underlying common stock on
the measurement date . The following table illustrates the effect on net income
and earnings per share if the Company had applied the fair value recognition
provisions of SFAS No. 123, “Accounting for Stock-Based Compensation”,
to stock-based employee and director compensation (in thousands). The effect of
applying SFAS No. 123 in this pro forma disclosure may not be indicative of
future charges.
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- --------------------------
2003 2002 2003 2002
------------ ------------- ------------ ------------
Net income, as reported $ 6,396 $ 3,644 $ 21,433 $ 13,549
Less: Total stock-based employee compensation expense
determined under fair value based method for all awards - (708) - (2,124)
------------ ------------- ------------ ------------
Net income, pro forma $ 6,396 $ 2,936 $ 21,433 $ 11,425
============ ============= ============ ============
Basic earnings per common share:
As reported (see Note 10) $ 0.29 $ 0.14 $ 1.20 $ 0.53
Pro forma $ 0.29 $ 0.11 $ 1.20 $ 0.43
Diluted earnings per common share:
As reported (see Note 10) $ 0.28 $ 0.14 $ 1.17 $ 0.52
Pro forma $ 0.28 $ 0.11 $ 1.17 $ 0.42
7
(4) 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 September 30, 2003 and December 31, 2002, cash and cash equivalents consisted of the following (in thousands):
Sept. 30, Dec. 31,
2003 2002
--------------- ---------------
Corporate cash and cash equivalents (available
for general corporate purposes) $ 16,959 $ 11,220
Company's share of joint venture cash and
cash equivalents (available only for joint venture
purposes, including future distributions) 28,417 35,811
--------------- ---------------
$ 45,376 $ 47,031
=============== ===============
(5)
Acquisition of James A. Cummings, Inc.
On
January 23, 2003, the Company completed the acquisition of 100% of the
outstanding common stock of James A. Cummings, Inc. (“Cummings”), a
privately held construction company based in Fort Lauderdale, Florida, for $20
million in cash, financed in part through the Company’s credit facility.
Cummings is an established building construction and construction management
company in the South Florida region specializing in the construction of schools,
municipal buildings, and commercial facilities. At January 1, 2003, Cummings had
a firm backlog of approximately $170 million. The acquisition is effective as of
January 1, 2003 and, accordingly, Cummings’ financial results are included
in the Company’s consolidated results of operations and financial position
beginning in the first quarter of 2003.
The transaction was accounted for using the purchase method of accounting as required by FASB Statement No. 141, “Business Combinations”. Goodwill and identifiable intangible assets recorded in the acquisition will be tested periodically for impairment as required by FASB Statement No. 142 “Goodwill and Other Intangible Assets”. The allocation of acquisition costs, which consists of the $20 million cash consideration referred to above and $565,000 of other direct acquisition costs, is as follows (in thousands):
8
(5) Acquisition of James A. Cummings, Inc. (continued)
Current assets $ 34,419
Property and equipment, net 394
Other long-term assets 23
Goodwill 12,990
Other identifiable intangible assets 575
------------
Total assets acquired $ 48,401
Less - Liabilities assumed (27,836)
------------
Total Consideration and Acquisition Costs $ 20,565
============
Since the acquisition was effective as of January 1, 2003, the Company's actual 2003 year to date results include Cummings for the total period. Therefore, the following pro forma financial information is only presented for the comparative three month and nine month periods ended September 30, 2002 (in thousands, except per share data):
Three Months Ended Nine Months Ended
September 30, 2002 September 30, 2002
----------------------------- ----------------------------
Actual Pro forma Actual Pro forma
------------- ------------- ------------- -------------
Revenues $232,805 $ 257,148 $822,482 $ 895,511
Gross profit $ 12,376 $ 13,971 $ 37,738 $ 42,523
Net income $ 3,644 $ 4,281 $ 13,549 $ 15,461
Basic earnings per common share $ 0.14 $ 0.17 $ 0.53 $ 0.61
Diluted earnings per common share $ 0.14 $ 0.17 $ 0.52 $ 0.60
The pro forma results have been prepared for comparative purposes only and include certain adjustments such as increased interest expense on acquisition debt and additional amortization expenses related to intangible assets arising from the acquisition. The pro forma results are not necessarily indicative either of the results of operations that actually would have resulted had the acquisition been in effect on January 1, 2002 or of future results.
(6)
Contingencies and Commitments
(a) Mergentime - Perini Joint Ventures vs. WMATA Matter
On
May 11, 1990, contracts with two joint ventures in which Perini Corporation held
a minority interest (“Joint Ventures”) were terminated by the
Washington Metropolitan Area Transit Authority (“WMATA”) on two
adjacent subway construction contracts in the District of Columbia. The
contracts were awarded to the Joint Ventures in 1985 and 1986. However, Perini
and Mergentime Corporation (“Mergentime”), the 60% managing partner,
entered into an agreement in 1987 under which Perini withdrew from the Joint
Ventures and Mergentime assumed complete control over the performance of both
projects. This agreement did not relieve Perini of its responsibilities to WMATA
as a Joint Venture partner. After Perini withdrew from the Joint Ventures,
Mergentime and WMATA were embroiled in a dispute regarding progress on the
projects. Each party blamed the other for delays that were
9
(6)
Contingencies and Commitments (continued)
(a) Mergentime - Perini Joint Ventures vs. WMATA Matter (continued)
impacting
both cost and progress and the parties were unable to resolve their dispute.
Ultimately, both construction contracts were terminated by WMATA and WMATA
retained Perini, acting independently, to complete both projects.
Subsequently, the Joint Ventures brought an action in the United States District Court for the District of Columbia against WMATA, seeking damages for delays, unpaid extra work and wrongful termination and WMATA brought an action against the Joint Ventures seeking damages for additional costs to complete the projects. After a bench trial before two District Court Judges (the initial Judge died before the matter could be concluded), the District Court found the Joint Ventures liable to WMATA for damages in the amount of approximately $16.5 million and WMATA liable to the Joint Ventures for damages in the amount of approximately $4.3 million.
The Joint Ventures appealed the judgment to the United States Court of Appeals for the District of Columbia (“Court of Appeals”), arguing, among other things, that the second District Court Judge had issued his final decision without fully familiarizing himself with the record of the initial District Court Judge. On February 16, 1999, the Court of Appeals vacated the District Court’s final judgment and ordered the successor District Court Judge to review the findings of the initial Judge and hold further hearings in regard to the Joint Venture’s affirmative claims. In addition, the Court of Appeals held that statutory interest on any of the claims will not accrue until final judgment is entered sometime in the future. Later in 1999, the case was transferred to a new successor District Court Judge.
On February 28, 2001, the new successor District Court Judge informed the parties that in the absence of a new trial, he could not certify adequate familiarity with the record to complete the remaining proceedings; therefore, he ordered that the Joint Ventures’ motion for a new trial be granted.
A new trial before the new successor District Court Judge was completed in January 2002 and a decision is still pending. The ultimate financial impact of the Judge’s pending decision is not yet determinable; therefore, no provision for loss, if any, has been recorded in the financial statements.
(b) Tutor-Saliba-Perini Joint Venture vs. Los Angeles MTA Matter
During
1995, a joint venture, Tutor-Saliba-Perini (“TSP”), in which Perini
Corporation is a 40% minority partner and Tutor-Saliba Corporation of Sylmar, CA
is the 60% managing partner, filed a complaint in the Superior Court of the
State of California for the County of Los Angeles against the Los Angeles County
Metropolitan Transportation Authority (“MTA”) seeking to recover costs
for extra work required by the MTA in connection with the construction of
certain tunnel and station projects. In February 1999 the MTA countered with
civil claims under the California False Claims Act against TSP, Tutor-Saliba
Corporation and Perini Corporation. Ronald N. Tutor, the Chairman and CEO of
Perini Corporation since March of 2000, is also the CEO and the sole stockholder
of Tutor-Saliba Corporation.
10
(6)
Contingencies and Commitments (continued)
(b) Tutor-Saliba-Perini Joint Venture vs. Los Angeles MTA Matter (continued)
Claims
concerning the construction of the MTA projects were tried before a Jury in
2001. During trial, the Judge ruled that TSP had failed to comply with the
Court’s prior discovery orders and the Judge penalized TSP for its alleged
non-compliance by dismissing TSP’s claim and by ruling, without a Jury
finding, that TSP was liable to the MTA for damages on the MTA’s
counterclaim. The Judge then instructed the Jury that TSP was liable to the MTA
and charged the Jury with the responsibility of determining the amount of the
damages based on the Judge’s ruling. The Jury awarded the MTA approximately
$29.6 million in damages.
On March 26, 2002, the Judge amended the award, ordering TSP to pay the MTA an additional $33.4 million in costs and attorney fees, with the aggregate $63.0 million award subject to interest at an annual rate of 10% from the date of the award.
TSP and the other plaintiffs/defendants in counterclaim have appealed the Judge’s discovery sanction, the subsequent Jury award and the amended award. The ultimate financial impact of the Judge’s ruling and/or the awards is not yet determinable. Therefore, no provision for loss, if any, has been recorded in the financial statements.
(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 ("Plaintiffs"), filed a civil action with a demand for a
jury trial against Tutor-Saliba Corporation ("TSC"), the Tutor-Saliba, Perini & Buckley, Joint
Venture ("JV"), Perini Corporation ("Perini"), Buckley & Company, Inc. ("Buckley") and their
bonding companies in the United States District Court in San Francisco relating to seven 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 JV was
established by TSC, Perini and Buckley through two Joint Venture Agreements dated October 28, 1996
and February 11, 1997 ("Joint Venture Agreements"). The JV had agreements with the Owner to perform
work ("Contracts") on two of the above projects ("Projects") and, as part of those Contracts, the
JV provided performance and payment bonds to the Owner ("Bonds").
In the Second Amended Complaint, the Plaintiffs allege, among other things, various overcharges, bidding violations, violations of minority contracting regulations, civil fraud, and violation of the California and San Francisco False Claims and California Unfair Competition Acts. In addition, the Plaintiffs allege that the defendants have violated the United States Racketeer Influenced Corrupt Organizations Act. The Plaintiffs have asserted $30 million in damages and are seeking treble damages, punitive and exemplary damages, various civil penalties and a declaration that TSC and the JV are irresponsible bidders.
On October 3, 2003, the Court granted the defendants’ motion to specify damages allegedly sustained for each contract. The defendants’ motion to dismiss the Plaintiff’s Second Amended Complaint is on file and not yet ruled upon by the Court.
11
(6)
Contingencies and Commitments (continued)
(c) City of San Francisco vs. Tutor-Saliba, Perini & Buckley Joint Venture Matter (continued)
TSC is the managing partner of the JV and, in December 1997, Perini sold its entire 20% interest in
the JV to TSC. As part of that sale agreement, TSC agreed to indemnify Perini from any liability
that Perini is required to pay by reason of or arising out of any event or occurrence subsequent to
the date of the sale of Perini's interest in the JV in any way connected with the Joint Venture
Agreements, the Contracts, the Projects, and the Bonds. The ultimate financial impact of this
action is not yet determinable.
(d) Perini/Kiewit/Cashman Joint Venture - Central Artery/Tunnel Project Matter
Perini/Kiewit/Cashman
Joint Venture (“PKC”), a joint venture in which Perini Corporation
holds a 56% interest and is the managing partner, is currently pursuing a series
of claims for additional contract time and/or compensation against the
Massachusetts Highway Department (“MHD”) for work performed by PKC on
a portion of the Central Artery/Tunnel project in Boston, Massachusetts. The
claims relate to the construction of the Northbound Mainline Central Artery
Tunnel from Kneeland Street to Congress Street. During construction, MHD ordered
PKC to perform changes to the work and issued related direct cost changes with
an estimated value, excluding time delay and inefficiency costs, in excess of
$100 million. In addition, PKC encountered a number of unforeseen conditions
during construction that greatly increased PKC’s cost of performance.
Certain of PKC’s claims have been presented to a Disputes Review Board (“DRB”) which consists of three construction experts chosen by the parties. To date, the DRB has ruled on a binding basis that PKC is entitled to additional compensation for its contract time delay claim in the amount of $17.4 million. A Judge of the Massachusetts Superior Court has issued a decision upholding the DRB’s binding award to PKC. Although MHD challenged several of the DRB’s decisions relative to the contract time delay award discussed above, PKC received a favorable ruling on March 20, 2002 from the Superior Court of the Commonwealth of Massachusetts that approved PKC’s request to have MHD comply with the DRB’s decision to award the $17.4 million for the time delay. The MHD has appealed the Superior Court decision to the Appeals Court of the Commonwealth of Massachusetts.
The DRB has also ruled on a binding basis that PKC is entitled to additional compensation for impacts and inefficiencies caused by MHD to PKC’s underpinning work in the amount of $5.6 million and that PKC is entitled to additional compensation for impacts and inefficiencies caused by MHD to PKC’s utility work in the amount of $11.5 million. PKC has filed applications in these actions seeking to confirm the awards and MHD has filed civil actions in Massachusetts Superior Court seeking to vacate these awards.
Under the Dispute Resolution Rules of the contract, either party may periodically terminate the services of some or all of the DRB members provided that members who are removed under this provision will remain on the DRB through the completion of any then pending claims. The MHD has chosen to remove the current DRB members under this provision and those members are in the process of completing hearings on all pending claims. Although the replacement DRB members have been agreed upon, proceedings before the current DRB and the new DRB have been postponed pending resolution of the current negotiations discussed below.
12
(6)
Contingencies and Commitments (continued)
(d) Perini/Kiewit/Cashman Joint Venture - Central Artery/Tunnel Project Matter (continued)
The pending claims yet to be decided by the current/replacement DRB on a binding basis
have an anticipated value of $49.4 million. The remaining claims to be decided by the replacement
DRB on a non-binding basis have an anticipated value of $72.6 million.
On August 14, 2002 the Massachusetts Attorney General’s office, pursuant to its authority under the Massachusetts False Claims Act, served a Civil Investigative Demand (“CID”) on Perini and the other joint venture partners. The CID sought the production of certain construction claims documentation in connection with the Central Artery/Tunnel Contract No. C11A1. PKC vigorously denies that it submitted any false claims and is cooperating with the Attorney General’s Office in the ongoing investigation.
In December 2002, PKC and MHD entered into an agreement whereby the parties agreed to attempt to resolve by negotiation and mediation all of the outstanding claims on the project. As part of the agreement, the MHD recommended for approval by the Massachusetts Turnpike Authority a contract modification that provides for provisional payments to PKC totaling $25 million against PKC’s outstanding claims. To date, PKC has received $23.75 million of those provisional payments. The parties also agreed to stay the pending litigation and DRB proceedings during the negotiations. Perini began mediation on all claims in September 2003. The ultimate financial impact of resolving all of the claims on this project is not yet determinable.
(e) 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 (“RPJV”), a joint venture in which Perini
Corporation (“Perini”) and Redondo Construction Corp.
(“Redondo”) each have a 50% interest, and the Siemens Transportation
Partnership, S.E., Puerto Rico (“STP”). STP, in conjunction with the
Siemens Transportation Team, is constructing a public metropolitan passenger
rail transportation project for the Commonwealth of Puerto Rico known as the
Tren Urbano Phase I Project (the “Project”). Pursuant to its contract
with STP, RPJV is responsible for the design and construction of two stations,
2.5 kilometers of guideway, the yard and maintenance shop facilities and all
trackwork throughout the 17 kilometers 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 additional costs related to design changes and the late completion of the design for Alignment Section 3 in the amount of approximately $38 million. 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.
An arbitration panel has been chosen and arbitration evidentiary hearings are scheduled to begin on February 23, 2004. Discovery began on September 8, 2003. The ultimate financial impact of resolving all of the claims on this Project is not yet determinable.
13
(6)
Contingencies and Commitments (continued)
(f) Polo Towers Master Owner's Association, Inc. vs. Perini Building Company, Inc. et. al.
On July 25, 2003, a civil action was filed in Clark County Nevada District Court by the Polo Towers
Master Owner's Association, Inc. ("Owner's Association") against Perini Building Company, Inc.
("PBC"), Hansen Mechanical Contractors, Inc. ("Hansen") and twenty five unnamed "John Doe"
defendants. The Polo Towers is a time-share resort property located in Las Vegas, Nevada and PBC
has constructed several projects for the developer of that property, the Nevada Resorts Property
Polo Towers Limited Partnership ("Developer"). Hansen was a mechanical subcontractor to PBC on
those projects.
The Owner’s Association alleges that Hansen “failed to construct and chlorinate the [Polo Towers Phase III] domestic water system per plans, specifications, building codes and industry standards, and [that PBC] failed to monitor the workmanship of Hansen . . . to insure that the [Polo Towers Phase III] water system was properly prepared for use by employees and guests of the project”. The Owner’s Association claims that those alleged failures caused the Polo Towers Phase III domestic water system to become “infected with legionella” and that several guests who were allegedly exposed to legionella at Polo Towers Phase III have brought personal injury damage actions against the Owner’s Association. Nine personal injury damage actions have been brought by individuals who were allegedly exposed to legionella at Polo Towers Phase III against PBC, the Developer and/or Hansen. PBC previously notified its insurance carrier of these personal injury actions and the insurance carrier is presently defending the actions without any reservation of rights under the insurance policy.
The Owner’s Association alleges that it has suffered in excess of $8.0 million in property damages because of the legionella and that it is the assignee of all rights against PBC under the Developer/PBC contract. PBC has forwarded the Owner’s Association’s complaint to its insurance carrier and is awaiting the carrier’s response. PBC will demand defense and indemnification from Hansen, as the mechanical subcontractor, and from the Developer for deficient maintenance. The Owner’s Association has not categorized the elements of its claim and it is unclear whether any portion of the property damage claim will not be covered by insurance.
(g) $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 Company's $2.125 Depositary
Convertible Exchangeable Preferred Shares (the "Depositary Shares", each of which represents 1/10th
of a share of the Company's $21.25 Convertible Exchangeable Preferred Stock), against certain
current and former directors of Perini (the "Defendants"). This lawsuit is captioned Doppelt, et
al. v. Tutor, et al., United States District Court for the District of Massachusetts, No.
02CV12010MLW. Mr. Doppelt is a current Director of the Company and Mr. Caplan is a former Director
of the Company.
Specifically, the Complaint alleges 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.
14
(6)
Contingencies and Commitments (continued)
(g) $21.25 Preferred Shareholders Class Action Lawsuit (continued)
On
January 6, 2003, the Defendants moved to dismiss the lawsuit. Among other
things, the Defendants argued that: (1) they did not owe fiduciary duties to the
holders of the Depositary Shares and (2) the claims of breach of fiduciary duty
owed to Perini must be dismissed because the claim could only be brought as a
derivative action.
On March 21, 2003, the plaintiffs filed an opposition to the motion to dismiss and in May 2003 the Plaintiffs asked the Court for leave to file an Amended Complaint.
In June 2003 the Plaintiffs were given leave to file an Amended Complaint. The Amended Complaint adds an allegation that the Defendants have further breached their fiduciary duties by authorizing a tender offer for the purchase of up to 90% of the Depositary Shares and an allegation that the collective actions of the Defendants constitute unfair and deceptive business practices under the provisions of the Massachusetts Consumer Protection Act. The Plaintiffs seek damages in an amount not less than $15,937,500, trebled, plus interest, costs, fees, and other unspecified punitive and exemplary damages.
On August 29, 2003, the Defendants filed a Motion to Dismiss. Plaintiffs filed an opposition thereto and on October 14, 2003, the Defendants filed their reply.
In 2001, a somewhat similar lawsuit was filed by some of the same plaintiffs in the United States District Court for the Southern District of New York. In 2002, the case was dismissed and upon appeal by the plaintiffs to the United States Court of Appeals for the Second Circuit, the appeal was dismissed.
(h) Other
Contingent
liabilities also include liability of contractors for performance and completion
of both Company and joint venture construction contracts. In addition to the
legal matters described above, the Company is involved in various lawsuits,
arbitration and alternative dispute resolution proceedings. In the opinion of
management, the resolution of these proceedings will not have a material effect
on the Company’s results of operations or financial condition.
(7) Long-term Debt
On
January 23, 2002, the Company entered into an agreement with a bank group to
refinance its former credit facility with a new $45 million credit agreement
(the “Credit Agreement”). In February 2003, the terms of the Credit
Agreement were amended to increase the revolving credit facility from $45
million to $50 million; to extend the term of the Credit Agreement from January
2004 to June 2005; to increase the amount of unborrowed revolving commitment
available for letters of credit from $5.0 million to $7.5 million; and to adjust
certain financial covenants. Other terms of the Credit Agreement remained the
same, including the provision that amounts due in June 2005, if not extended or
repaid, convert to a three year term loan with equal quarterly principal
payments. Because of this provision, borrowings under the Credit Agreement are
classified as “Long-term Debt” in the accompanying Consolidated
Condensed Balance Sheets.
15
(8) Tender Offer for $21.25 Preferred Stock
On
June 9, 2003, the Company completed its tender offer to purchase up to 900,000
shares, or approximately 90% of its outstanding $2.125 Depositary Convertible
Exchangeable Preferred Shares (the “Depositary Shares”), each of which
represents 1/10th of a share of the Company’s $21.25 Preferred
Stock at a purchase price of $25.00 per share, net to the seller in cash without
interest. The tender offer which commenced on March 31, 2003, expired on June 9,
2003, at which time the Company purchased 440,627 Depositary Shares.
The completion of the self tender offer resulted in the Company purchasing and immediately retiring 440,627 Depositary Shares and a reduction of approximately $11.3 million, including related expenses, in Stockholders’ Equity. Also, approximately $7.3 million of previously accrued and unpaid dividends relating to the purchased shares was reversed and restored to Paid-In Surplus.
(9) Credit (Provision) For Income Taxes
The
credit for income taxes in 2003 is due primarily to the recognition in the first
quarter of 2003 of a $7.0 million federal tax benefit in accordance with SFAS
No. 109, “Accounting for Income Taxes” based on the expectation that
the Company will be able to utilize a portion of its net operating loss
carryforwards in future years. In addition, the credit (provision) for income
taxes reflects a lower-than-normal tax rate in both years due primarily to the
realization of a portion of the federal tax benefit not recognized in prior
years. Also, the provision for income taxes for the nine months ended September
30, 2002 reflects the reversal of the federal alternative minimum tax provided
in 2001 which was no longer required based on the provisions of the Job Creation
and Workers Assistance Act of 2002.
(10) Per Share Data
Basic
earnings per common share was computed by dividing net income less dividends
accrued on the $21.25 Preferred Stock during all periods presented plus the
reversal in both the second and third quarters of 2003 of dividends on the
$21.25 Preferred Stock previously accrued, but no longer required based on the
results of the tender offer completed in June, 2003 (see Notes 8 and 11) 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 outstanding on the weighted average number of common
shares outstanding.
Options to purchase 380,000 shares of Common Stock at prices ranging from $8.10 to $8.66 per share were outstanding at September 30, 2003 but were not included in the computation of diluted earnings per share because the options’ exercise price was greater than the average market price of the Common Stock. Options to purchase 3,356,834 shares of Common Stock at prices ranging from $4.50 to $16.44 per share were outstanding at September 30, 2002 but were not included in the computation of diluted earnings per share because the options’ exercise price was greater than the average market price of the Common Stock. In addition, the effect of the assumed conversion of the Company’s outstanding $21.25 Preferred Stock and Stock Purchase Warrants into Common Stock is antidilutive for all periods presented.
16
(11) 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
In
conjunction with the covenants of the Company’s prior Credit Agreements,
the Company was required to suspend the payment of quarterly dividends on its
$21.25 Preferred Stock until certain financial criteria were met. Quarterly
dividends on the $21.25 Preferred Stock have not been paid since 1995 (although
they have been fully accrued due to the “cumulative” feature of the
$21.25 Preferred Stock). On June 9, 2003, the Company completed a tender offer
on its $21.25 Preferred Stock whereby the Company purchased 440,627 Depositary
Shares (see Note 8 above). As a result of this transaction, approximately $7.3
million of previously accrued and unpaid dividends was reversed and restored to
“Paid-In Surplus” in the Consolidated Condensed Balance Sheets.
Accordingly, the aggregate amount of dividends in arrears at September 30, 2003
is approximately $9.5 million, which represents approximately $170.00 per share
of $21.25 Preferred Stock or approximately $17.00 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 six Annual Meetings of Stockholders.
(12) Business
Segments
The
following tables set forth certain business segment information relating to the
Company’s operations for the three month and nine month periods ended
September 30, 2003 and 2002 (in thousands):
Nine months ended September 30, 2003
Reportable Segments
----------------------------------------------
Consolidated
Building Civil Totals Corporate Totals
------------- ------------- -------------- ------------ ----------------
Revenues $738,944 $ 134,507 $ 873,451 $ - $ 873,451
Income from Operations $ 20,617 $ 1,684 $ 22,301 $ (6,149) * $ 16,152
Assets $186,673 $ 245,573 $ 432,246 $ 32,166 ** $ 464,412
Nine months ended September 30, 2002
Reportable Segments
----------------------------------------------
Consolidated
Building Civil Totals Corporate Totals
------------- ------------- -------------- ------------ ----------------
Revenues $586,073 $ 236,409 $ 822,482 $ - $ 822,482
Income from Operations $ 18,432 $ 1,849 $ 20,281 $ (4,675) * $ 15,606
Assets $152,044 $ 221,884 $ 373,928 $ 21,398 ** $ 395,326
17
(12) Business Segments (continued)
Three months ended September 30, 2003
Reportable Segments
----------------------------------------------
Consolidated
Building Civil Totals Corporate Totals
------------- ------------- -------------- ------------ ----------------
Revenues $252,606 $ 43,249 $ 295,855 $ - $ 295,855
Income from Operations $ 8,760 $ (174) $ 8,586 $ (1,835)* $ 6,751
Three months ended September 30, 2002
Reportable Segments
----------------------------------------------
Consolidated
Building Civil Totals Corporate Totals
------------- ------------- -------------- ------------ ----------------
Revenues $154,933 $ 77,872 $ 232,805 $ - $ 232,805
Income from Operations $ 5,515 $ 493 $ 6,008 $ (1,819)* $ 4,189
* In all periods, consists
of corporate general and administrative expenses.
** In all periods, corporate assets consist principally of cash, cash equivalents,
marketable securities, net deferred tax asset, land held for sale and other
investments available for general corporate purposes.
18
Significant Accounting Policies
The Company’s significant accounting policies are described in Note 1 of Notes to Consolidated Financial Statements included in Item 15 of the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2002. The Company’s critical accounting policies are also identified and discussed in Item 7 of said annual report on Form 10-K. The Company has made no significant change in these policies during 2003.
Recent Developments
On January 23, 2003, the Company completed the acquisition of James A. Cummings, Inc., (“Cummings”) a privately held construction company based in Fort Lauderdale, Florida. The acquisition was effective as of January 1, 2003 and, accordingly, the financial results of Cummings are included in the Company’s consolidated condensed financial statements since that date. See Note 5 of Notes to Consolidated Condensed Financial Statements for a further discussion and analysis of the acquisition of Cummings and related pro forma financial information.
On June 9, 2003, the Company completed a tender offer on its $21.25 Preferred Stock whereby the Company purchased 440,627 Depositary Shares (representing approximately 44.1% of the outstanding $21.25 Preferred Stock) at a purchase price of $25.00 per Depositary Share, net to the seller without interest. (See Note 8 of Notes to Consolidated Condensed Financial Statements.) Including related expenses, this transaction resulted in an $11.3 million decrease in Stockholders’ Equity. Also as a result of this transaction, approximately $7.3 million of previously accrued and unpaid dividends relating to the purchased shares was reversed and restored to “Paid-In Surplus” in the Consolidated Condensed Balance Sheets. Since these accrued dividends had previously been deducted from net income in the computation of earnings per share in fiscal quarters prior to June 30, 2003, the reversal of these accrued dividends resulted in the addition of $0.6 million (or approximately $0.03 per share) and $7.3 million (or approximately $0.31 per share) to income available for common stockholders in the computation of earnings per share for the three month and nine month periods ended September 30, 2003, respectively.
Results of Operations
Comparison of the Third Quarter of 2003 with the Third Quarter of 2002
Overall revenues from construction operations increased by $63.0 million (or 27.1%), from $232.8 million in 2002 to $295.8 million in 2003. This increase was due primarily to an increase in building construction revenues of $97.7 million (or 63.1%), from $154.9 million in 2002 to $252.6 million in 2003. This increase was partly offset by a decrease in civil construction revenues of $34.7 million (or 44.5%), from $77.9 million in 2002 to $43.2 million in 2003. The increase in building construction revenues was due primarily to the impact of the Cummings acquisition in January 2003 and improved new work acquisition results during the second and third quarters of 2003. The decrease in revenues from civil construction operations primarily reflects the decrease in the Company’s year-end backlog at December 31, 2002 compared to the year-end backlog at December 31, 2001, as the pace of new contract awards slowed during the past 18 months.
Income from construction operations increased by $2.6 million (or 43.3%), from $6.0 million in 2002 to $8.6 million in 2003. Building construction operating income increased by $3.3 million, from $5.5 million in 2002 to $8.8 million in 2003, due primarily to the impact of the Cummings acquisition and to favorable experience on an overseas project. As a result of the decrease in revenues discussed above, civil construction operating income decreased by $0.7 million, from a profit of $0.5 million in 2002 to a loss of
19
$0.2 million in 2003.
The credit (provision) for income taxes reflects a lower-than-normal tax rate in both years due primarily to the realization of a portion of the federal tax benefit not recognized in prior years due to certain accounting limitations.
As discussed above, as a result of the completion of the Company’s tender offer on its $21.25 Preferred Stock, $0.6 million in previously accrued preferred stock dividends was reversed and added back to income available for common stockholders in the computation of earnings per share for the third quarter of 2003. Accordingly, basic and diluted earnings per common share in the third quarter of 2003 benefited by $0.03 per share from the impact of the completion of the $21.25 Preferred Stock tender offer transaction. Basic earnings per common share were $0.29 in 2003 compared to $0.14 in 2002. Diluted earnings per common share were $0.28 in 2003 compared to $0.14 in 2002.
Comparison of the Nine Months Ended September 30, 2003 with the Nine Months Ended September 30, 2002
The overall increase in net income of $7.9 million, from $13.5 million to $21.4 million, was due primarily to the recognition of a $7.0 million federal tax benefit based on the expectation that the Company will be able to utilize a portion of its net operating loss carryforwards in future years.
Overall revenues from construction operations increased by $50.9 million (or 6.2%), from $822.5 million in 2002 to $873.4 million in 2003. This increase was due primarily to a increase in building construction revenues of $152.8 million (or 26.1%), from $586.1 million in 2002 to $738.9 million in 2003, due primarily to the impact of the Cummings acquisition in January 2003 and improved new work acquisition results during the second and third quarters of 2003. This increase was partly offset by a decrease in civil construction revenues of $101.9 million (or 43.1%), from $236.4 million in 2002 to $134.5 million in 2003. The decrease in revenues from civil construction operations primarily reflects the decrease in the Company’s year-end backlog at December 31, 2002 compared to the year-end backlog at December 31, 2001, as the pace of new contract awards slowed during the past 18 months.
Income from construction operations increased by $2.0 million (or 9.9%), from $20.3 million in 2002 to $22.3 million in 2003. Building construction operating income increased by $2.2 million, from $18.4 million in 2002 to $20.6 million in 2003, due primarily to the impact of the Cummings acquisition and to favorable experiences on two overseas projects. Building construction operating income was negatively impacted by a $2.1 million increase in building construction-related general and administrative expenses (exclusive of Cummings) primarily in connection with the pursuit of new work opportunities. Civil construction operating income decreased by $0.2 million, from $1.9 million in 2002 to $1.7 million in 2003, due primarily to the decrease in revenues discussed above, partly offset by a higher gross profit margin in 2003 primarily because 2002 included recognition of the Company’s share of a loss on a Central Artery “Big Dig” joint venture project in Boston, Massachusetts. Income from operations was negatively impacted by a $1.5 million increase in corporate general and administrative expenses, from $4.7 million in 2002 to $6.2 million in 2003, due primarily to an aggregate increase in several items including outside professional fees relating to the annual audit of the Company’s financial statements and to the $21.25 Preferred Shareholders Class Action Lawsuit (see Note 6(g) of Notes to Consolidated Condensed Financial Statements), and certain corporate insurance premium costs.
Interest expense decreased by $0.4 million, from $1.1 million in 2002 to $0.7 million in 2003, due to lower interest rates.
20
The credit for income taxes in 2003 is due primarily to the recognition of a $7.0 million federal tax benefit in accordance with SFAS No. 109, “Accounting for Income Taxes” based on the expectation that the Company will be able to utilize an additional amount of its net operating loss carryforwards in future years. In addition, the (provision) credit for income taxes reflects a lower-than-normal tax rate in both years due primarily to the realization of a portion of the federal tax benefit not recognized in prior years due to certain accounting limitations. Also, the provision for income taxes in 2002 reflects the reversal of the federal alternative minimum tax provided in 2001 which was no longer required based on the provisions of the Job Creation and Worker Assistance Act of 2002.
As discussed above, as a result of the completion of the Company’s tender offer on its $21.25 Preferred Stock, $7.3 million in previously accrued preferred stock dividends was reversed and added back to income available for common stockholders in the computation of earnings per share for the nine months ended September 30, 2003. Accordingly, in addition to the higher net income for the nine months ended September 30, 2003 compared to the nine months ended September 30, 2002, basic and diluted earnings per common share in 2003 benefited by $0.32 and $0.31 per share, respectively, from the impact of the completion of the $21.25 Preferred Stock tender offer transaction. Basic earnings per common share were $1.20 in 2003 compared to $0.53 in 2002. Diluted earnings per common share were $1.17 in 2003 compared to $0.52 in 2002.
Financial Condition
Recent Developments
In February 2003, the terms
of the Company’s existing $45 million revolving credit facility (the
“Credit Agreement”) were amended to increase the revolving credit
facility from $45 million to $50 million; to extend the term of the Credit
Agreement from January 2004 to June 2005; to increase the amount of unborrowed
revolving credit commitment available for letters of credit from $5.0 million to
$7.5 million; and to adjust certain financial covenants. Other terms of the
Credit Agreement remained the same, including the provision that amounts due in
June 2005, if not extended or repaid, convert to a three year term loan. The
Credit Agreement, as amended, will provide the Company with greater flexibility
in providing the working capital needed to support the anticipated growth of the
Company’s construction activities. At September 30, 2003, the Company had
$30.2 million available to borrow under the Credit Agreement.
On June 9, 2003, the Company completed a tender offer on its $21.25 Preferred Stock whereby the Company purchased 440,627 Depositary Shares (representing approximately 44.1% of the outstanding $21.25 Preferred Stock) for approximately $11.3 million. As a result of this transaction, preferred shareholder equity was reduced by approximately $11.3 million. Also, approximately $7.3 million of previously accrued and unpaid dividends relating to the purchased shares was reversed and restored to “Paid-In Surplus” in the Consolidated Condensed Balance Sheets.
Cash and Working Capital
Cash and cash equivalents
as reported in the accompanying Consolidated Condensed Statements of Cash Flows
consist of amounts held by the Company as well as the Company’s
proportionate share of amounts held by construction joint ventures. Cash held by
the Company is available for general corporate purposes while cash held by
construction joint ventures is available only for joint venture-related uses.
Cash held by construction joint ventures is distributed from time to time to the
Company and to the other joint venture participants in accordance with their
percentage interest after the joint venture partners determine that a cash
distribution is prudent. Cash distributions received by the Company from its
construction joint ventures are then available for general corporate purposes.
At September 30, 2003 and December 31, 2002, cash held by the Company and
available for general corporate purposes was $17.0 million and $11.2 million,
respectively, and the Company’s proportionate share of cash held by joint
21
ventures and available only for joint venture-related uses was $28.4 million and $35.8 million, respectively.
During the first nine months of 2003, the Company generated $4.7 million in cash flow from operating activities, $13.9 million from a net increase in debt, and $2.1 million in net proceeds from the sale of certain remaining parcels of developed land held for sale to fund the $11.3 million required to complete the Company’s tender offer on its $21.25 Preferred Stock, as well as to fund a net $11.8 million used by investing activities, primarily for the acquisition of Cummings in January and to acquire construction equipment and an office building and equipment storage facility to be used by the Company’s civil construction operations. As a result, the Company’s consolidated cash balance decreased by $1.6 million, from $47.0 million at December 31, 2002 to $45.4 million at September 30, 2003. As more fully discussed in Note 6(d) of Notes to Consolidated Condensed Financial Statements, in the first quarter of 2003 the Company received its proportionate share of provisional payments against outstanding claims on a Central Artery/Tunnel “Big Dig” joint venture project in Boston, Massachusetts, as a result of an agreement reached in December, 2002. This amount of approximately $13.3 million was a significant contributor to the $4.7 million in cash flow generated from operating activities in the first nine months of 2003.
Working capital increased from $115.9 million at the end of 2002 to $122.1 million at September 30, 2003. The current ratio decreased slightly, from 1.44:1.00 to 1.40:1.00 during the same period.
Long-term Debt Long-term debt at September 30, 2003 was $25.6 million, an increase of $13.5 million from December 31, 2002, due primarily to the Company’s completion of a tender offer on its $21.25 Preferred Stock which required a cash outlay of approximately $11.3 million (including related expenses). The long-term debt to equity ratio was .25:1.00 at September 30, 2003, compared to .14:1.00 at December 31, 2002.
Dividends There were no cash dividends declared or paid on the Company’s outstanding Common Stock during the periods presented herein.
In conjunction with the covenants of the Company’s prior Credit Agreements, the Company was required to suspend the payment of quarterly dividends on its $21.25 Preferred Stock until certain financial criteria were met. Quarterly dividends on the $21.25 Preferred Stock have not been paid since 1995 (although they have been fully accrued due to the “cumulative” feature of the $21.25 Preferred Stock). After the impact of the conclusion of the $21.25 Preferred Stock tender offer discussed above, the aggregate amount of dividends in arrears is approximately $9.5 million at September 30, 2003.
As of December 31, 2000, the financial criteria in the Company’s prior Credit Agreement which restricted the payment of dividends were satisfied, thereby making the resumption of dividends possible if the Company believed that its working capital was sufficient to warrant the resumption of payment of the regular dividend or any of the dividends in arrears on the $21.25 Preferred Stock. The Company does not currently have any plans or target date for when this action may occur. This decision is based on the following circumstances:
22
Outlook
Forward-looking Statements
The statements contained in this Management’s Discussion and Analysis of the Consolidated Condensed Financial Statements, including “Outlook”, 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 the Company’s or its management’s expectations, hopes, beliefs, intentions or strategies regarding the future. These forward-looking statements are based on the Company’s current expectations and beliefs concerning future developments and their potential effects on the Company. There can be no assurance
23
that future developments affecting the Company will be those anticipated by the Company. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond the control of the Company) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by such forward-looking statements. These risks and uncertainties include, but are not limited to, the continuing validity of the underlying assumptions and estimates of total forecasted project revenues, costs and profits and project schedules; the outcomes of pending or future litigation, arbitration or other dispute resolution proceedings; the availability of borrowed funds on terms acceptable to the Company; changes in federal and state appropriations for infrastructure projects; possible changes or developments in worldwide or domestic political, social, economic, business, industry, market and regulatory conditions or circumstances; and actions taken or not taken by third parties including the Company’s customers, suppliers, business partners, and competitors and legislative, regulatory, judicial and other governmental authorities and officials. Should one or more of these risks or uncertainties materialize, or should any of the Company’s assumptions prove incorrect, actual results may vary in material respects from those projected in the forward-looking statements. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in the Company’s exposure to market risk as described in the Company’s annual report on Form 10-K, Item 7A., since December 31, 2002.
CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures
As required by Rule 13a-15 under the Exchange Act, the Company’s management carried out an evaluation with the participation of the Company’s principal executive officer and principal financial officer, of the effectiveness of the Company’s disclosure controls and procedures, as of the end of the last fiscal quarter. Based upon that evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports it files or submits 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.
(b) Changes in internal controls over financial reporting
There were no changes to the Company’s internal controls over financial reporting identified in connection with the Company’s evaluation of its disclosure controls and procedures that occurred during its last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
24
Part II. - Other Information
Item 1. - Legal Proceedings
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 ("RPJV"), a joint venture in which Perini Corporation ("Perini") and Redondo
Construction Corp. ("Redondo") each have a 50% interest, and the Siemens Transportation
Partnership, S.E., Puerto Rico ("STP"). STP, in conjunction with the Siemens Transportation Team,
is constructing a public metropolitan passenger rail transportation project for the Commonwealth of
Puerto Rico known as the Tren Urbano Phase I Project (the "Project"). The Project consists of
approximately 17 kilometers of railway track work and the construction of sixteen railway stations in
Puerto Rico which, for contracting purposes, have been divided into nine alignment sections.
Pursuant to its contract with STP, RPJV has agreed to design and construct the majority of the
railway station fixed facilities in Alignment Section 3 along with the railway track throughout 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
additional costs related to design changes and the late completion of the design for Alignment
Section 3 in the amount of approximately $38 million. 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.
An arbitration panel has been chosen and arbitration evidentiary hearings are scheduled to begin on
February 23, 2004. Discovery began on September 8, 2003. The ultimate financial impact of
resolving all of the claims on this Project is not yet determinable.
Polo Towers Master Owner's Association, Inc. vs. Perini Building Company, Inc. et. al.
On July 25, 2003, a civil action was filed in Clark County Nevada District Court by the Polo Towers
Master Owner's Association, Inc. ("Owner's Association") against Perini Building Company, Inc.
("PBC"), Hansen Mechanical Contractors, Inc. ("Hansen") and twenty five unnamed "John Doe"
defendants. The Polo Towers is a time-share resort property located in Las Vegas, Nevada and
PBC has constructed several projects for the developer of that property, the Nevada Resorts
Property Polo Towers Limited Partnership ("Developer"). Hansen was a mechanical subcontractor to
PBC on those projects.
The Owner's Association alleges that Hansen "failed to construct and chlorinate the [Polo Towers
Phase III] domestic water system per plans, specifications, building codes and industry standards,
and [that PBC] failed to monitor the workmanship of Hansen . . . to insure that the [Polo Towers
Phase III] water system was properly prepared for use by employees and guests of the project". The
Owner's Association claims that those alleged failures caused the Polo Towers Phase III domestic
water system to become "infected with legionella" and that several guests who were allegedly
exposed to legionella at Polo Towers Phase III have brought personal injury damage actions against
the Owner's Association. Nine personal injury damage actions have been brought by individuals
who were allegedly exposed to legionella at Polo Towers Phase III against PBC, the Developer
and/or Hansen. PBC previously notified its insurance carrier of these personal injury actions and the
25
Part II. - Other Information (continued)
insurance carrier is presently defending the actions without any reservation of rights under the
insurance policy.
The Owner's Association alleges that it has suffered in excess of $8.0 million in property damages
because of the legionella and that it is the assignee of all rights against PBC under the Developer/
PBC contract. PBC has forwarded the Owner's Association's complaint to its insurance carrier and is
awaiting the carrier's response. PBC will demand defense and indemnification from Hansen, as the
mechanical subcontractor, and from the Developer for deficient maintenance. The Owner's
Association has not categorized the elements of its claim and it is unclear whether any portion of the
property damage claim will not be covered by insurance.
$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 Company's $2.125 Depositary
Convertible Exchangeable Preferred Shares (the "Depositary Shares", each of which represents
1/10th of a share of the Company's $21.25 Convertible Exchangeable Preferred Stock), against
certain current and former directors of Perini (the "Defendants"). This lawsuit is captioned Doppelt,
et al. v. Tutor, et al., United States District Court for the District of Massachusetts, No.
02CV12010MLW. Mr. Doppelt is a current Director of the Company and Mr. Caplan is a former
Director of the Company.
Specifically, the Complaint alleges that the Defendants breached their fiduciary duties owed to the
holders of the Depositary Shares and to Perini. The Plaintiffs principally allege that the Defendants
improperly authorized the exchange of Series B Preferred Stock for common stock while
simultaneously refusing to pay accrued dividends due on the Depositary Shares.
On January 6, 2003, the Defendants moved to dismiss the lawsuit. Among other things, the
Defendants argued that: (1) they did not owe fiduciary duties to the holders of the Depositary Shares
and (2) the claims of breach of fiduciary duty owed to Perini must be dismissed because the claim
could only be brought as a derivative action.
On March 21, 2003, the plaintiffs filed an opposition to the motion to dismiss and in May 2003 the
Plaintiffs asked the Court for leave to file an Amended Complaint.
In June 2003 the Plaintiffs were given leave to file an Amended Complaint. The Amended Complaint
adds an allegation that the Defendants have further breached their fiduciary duties by authorizing a
tender offer for the purchase of up to 90% of the Depositary Shares and an allegation that the
collective actions of the Defendants constitute unfair and deceptive business practices under the
provisions of the Massachusetts Consumer Protection Act. The Plaintiffs seek damages in an
amount not less than $15,937,500, trebled, plus interest, costs, fees, and other unspecified punitive
and exemplary damages.
On August 29, 2003, the Defendants filed a Motion to Dismiss. Plaintiffs filed an opposition thereto
and on October 14, 2003, the Defendants filed their reply.
In 2001, a somewhat similar lawsuit was filed by some of the same plaintiffs in the United States
District Court for the Southern District of New York. In 2002, the case was dismissed and upon
appeal by the plaintiffs to the United States Court of Appeals for the Second Circuit, the appeal was
dismissed.
26
Part II. - Other Information (continued)
Item 2. - Changes in Securities and Use of Proceeds
(a) None
(b) None
(c) None
(d) Not applicable
Item 3. - Defaults Upon Senior Securities
(a) None
(b) In accordance with the covenants of the 1995 Amended Revolving Credit Agreement, the First
Amended and Restated Credit Agreement effective January 17, 1997 and the Second Amended
and Restated Credit Agreement effective March 29, 2000, 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, commencing with the dividend that
normally would have been declared during December 1995. Although the financial criteria were
satisfied as of December 31, 2000 and the Company's most recent Credit Agreement, entered into in
January 2002 and amended in February 2003, does not contain similar restrictions, 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 "Financial Condition" on pages 21 to 23 herein.
Therefore, as of September 30, 2003, the aggregate amount of dividends in arrears is approximately
$9.5 million, which represents approximately $170.00 per share of $21.25 Preferred Stock or
approximately $17.00 per Depositary Share. While these dividends have not been declared or paid,
they have been fully accrued in accordance with then "cumulative" feature of the $21.25 Preferred
Stock.
Item 4. - Submission of Matters to a Vote of Security Holders
(a) None
(b) Not applicable
(c) Not applicable
(d) Not applicable
Item 5. - Other Information - None
Item 6. - Exhibits and Reports on Form 8-K
(a) The following designated exhibits are, as indicated below, either filed herewith or have heretofore
been filed with Securities and Exchange Commission under the Securities Act of 1933 or the
the Securities Act of 1934 and are referred to and incorporated herein by reference to such filings:
27
Part II. - Other Information (continued)
Exhibit 3. Articles of Incorporation and By-laws
Incorporated herein by reference:
3.1 Restated Articles of Organization - As amended through March 29, 2000 -
Exhibit 3.1 to Form 8-K filed on April 12, 2000.
3.2 By-laws - As amended and restated as of March 29, 2000 - Exhibit 3.2 to
Form 8-K filed on April 12, 2000.
Exhibit 4. Instruments Defining the Rights of Security Holders, Including Indentures
Incorporated herein by reference:
4.1 Certificate of Vote of Directors Establishing a Series of a Class of Stock
determining the relative rights and preferences of the $21.25 Convertible
Exchangeable Preferred Stock - Exhibit 4(a) to Amendment No. 1 to Form S-
2 Registration Statement filed June 19, 1987; SEC Registration No. 33-
14434.
4.2 Form of Deposit Agreement, including form of Depositary Receipt - Exhibit
4(b) to Amendment No. 1 to Form S-2 Registration Statement filed June 19,
1987; SEC Registration No. 33-14434.
4.3 Form of Indenture with respect to the 8 1/2% Convertible Subordinated
Debentures Due June 15, 2012, including form of Debenture - Exhibit 4(c) to
Amendment No. 1 to Form S-2 Registration Statement filed June 19, 1987;
SEC Registration No. 33-14434.
4.4 Shareholder Rights Agreement dated as of September 23, 1988, as
amended and restated as of May 17, 1990, as amended and restated as of
January 17, 1997, between Perini Corporation and State Street Bank and
Trust Company, as Rights Agent - Exhibit 4.4 to Amendment No. 1 to
Registration Statement on Form 8-A/A filed on January 29, 1997, and as
further amended as of March 29, 2000 - Exhibit 4.3 to Form 8-K filed on April
12, 2000.
4.13 Exchange Agreement by and between Perini Corporation and The Union
Labor Life Insurance Company, acting on behalf of its Separate Account P,
dated as of February 7, 2000 - Exhibit 10.1 to Form 8-K filed on April 12, 2000.
4.14 Exchange Agreement by and between Perini Corporation and PB Capital
Partners, L.P., dated as of February 14, 2000 - Exhibit 10.2 to Form 8-K filed
on April 12, 2000.
4.15 Exchange Agreement by and between Perini Corporation and The Common
Fund for Non-Profit Organizations, dated as of February 14, 2000 - Exhibit
10.3 to Form 8-K filed on April 12, 2000.
4.16 Registration Rights Agreement by and among Perini Corporation, Tutor-
Saliba Corporation, Ronald N. Tutor, O&G Industries, Inc. and National Union
Fire Insurance Company of Pittsburgh, Pa., BLUM Capital Partners, L.P., PB
28
Part II. - Other Information (continued)
Capital Partners, L.P. The Common Fund for Non-Profit Organizations, and
The Union Labor Life Insurance Company, acting on behalf of its Separate
Account P, dated as of March 29, 2000 - Exhibit 4.1 to Form 8-K filed on
April 12, 2000.
4.17 Shareholders' Agreement by and among Perini Corporation, Tutor-Saliba
Corporation, Ronald N. Tutor, O&G Industries, Inc. and National Union Fire
Insurance Company of Pittsburgh, Pa., BLUM Capital Partners, L.P., PB
Capital Partners, L.P., The Common Fund for Non-Profit Organizations, and
The Union Labor Life Insurance Company, acting on behalf of its Separate
Account P, dated as of March 29, 2000 - Exhibit 4.2 to Form 8-K filed on
April 12, 2000.
Exhibit 10. Material Contracts
Incorporated herein by reference:
10.2 Perini Corporation Amended and Restated General Incentive Compensation
Plan - Exhibit 10.2 to 1997 Form 10-K filed on March 30, 1998.
10.3 Perini Corporation Amended and Restated Construction Business Unit
Incentive Compensation Plan - Exhibit 10.3 to 1997 Form 10-K filed on March
30, 1998.
10.16 Management Agreement dated as of January 17, 1997 by and among the
Company, Ronald N. Tutor and Tutor-Saliba Corporation - Exhibit 10.16 to
Form 10-K filed on March 31, 2003.
10.31 Amendment No. 2 dated as of December 31, 1999 to the Management
Agreement by and among the Company, Ronald N. Tutor and Tutor-Saliba
Corporation - Exhibit 10.31 to Form 10-Q filed on May 9, 2000.
10.32 Special Equity Incentive Plan - Exhibit A to Registrant's Proxy Statement for
Annual Meeting of Stockholders dated April 19, 2000.
10.33 Securities Purchase Agreement by and among Perini Corporation and Tutor-
Saliba Corporation, O&G Industries, Inc. and National Union Fire Insurance
Company of Pittsburgh, PA, dated as of February 5, 2000 - Exhibit 10.1 to Form
8-K filed on February 9, 2000.
10.34 Promissory Note dated as of September 6, 2000 by and among Mt. Wayte
Realty, LLC (a wholly-owned subsidiary of Perini Corporation) and The
Manufacturers Life Insurance Company (U.S.A.) - Exhibit 10.34 to Form 10-Q
filed on November 6, 2000.
10.35 Credit Agreement dated January 23, 2002 among Perini Corporation, Fleet
National Bank, as Administrative Agent, Fleet National Bank, as Arranger, and the
Lenders Party Hereto - Exhibit 10.35 to Form 10-K filed on March 21, 2002.
10.36 Amendment No. 4 dated as of December 31, 2001 to the Management Agreement
by and among the Company, Ronald N. Tutor and Tutor-Saliba Corporation -
Exhibit 10.36 to Form 10-K filed on March 31, 2003.
29
Part II. - Other Information (continued)
10.37 Stock Purchase and Sale Agreement dated December 16, 2002 by and among the
Company, James A. Cummings, Inc., James A. Cummings, William R. Derrer and
Michael F. Lanciault - Exhibit 10.37 to Form 10-K filed on March 31, 2003.
10.38 Employment Agreement dated January 23, 2003 by and among the Company,
James A. Cummings, Inc. and James A. Cummings - Exhibit 10.38 to Form 10-K
filed on March 31, 2003.
10.39 First Amendment and Waiver dated February 14, 2003 to Credit Agreement
among Perini Corporation, Fleet National Bank, as Administrative Agent, and the
Lenders - Exhibit 10.39 to Form 10-K filed on March 31, 2003.
Exhibit 31. Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.1 Certification of Principal Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 - filed herewith.
31.2 Certification of Principal Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 - filed herewith
Exhibit 32. Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
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.
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.
(b) Reports on Form 8-K
A Form 8-K was filed on August 8, 2003 that reported on the Company's press release announcing
its financial results for the second quarter ended June 30, 2003 in "Item 12. Results of Operations
and Financial Condition" in said Form 8-K.
30
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: November 7, 2003 /s/Michael E. Ciskey
Michael E. Ciskey, Vice President and Controller
Duly Authorized Officer and Principal Accounting Officer