- ---------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-K/A
AMENDMENT NO. 2
[Mark One]
[x] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1943
For the fiscal year ended December 31, 1998
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
THE TURNER CORPORATION
(Exact name of registrant as specified in its charter)
COMMISSION FILE NO.: 001-008719
DELAWARE 13-3209884
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
375 HUDSON STREET 10014
NEW YORK, NEW YORK (Zip Code)
(Address of principal executive offices)
(212) 229-6000
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Name of Exchange
Title of Class on which registered
---------------------- -----------------
Common Stock, $1 par value New York Stock Exchange
(with preferred stock purchase rights)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
--------------------------
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days: Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K [ ].
As of February 26, 1999, the aggregate market value on that date of
the common stock held by non-affiliates (based upon the last sale price for
the common stock on the New York Stock Exchange) was $107,947,744.
As of February 26, 1999, 7,899,448 shares of Turner's common stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Portions of definitive proxy statement to be filed pursuant to Section
14(a) of the Securities Exchange Act of 1934 - Part III, Items 10-13.
- ---------------------------------------------------------------------------
This amendment to Form 10-K is being filed to amend Items 5 and 7.
<PAGE>
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
-----------------------------------------------------
Turner's common stock has been listed and traded on the New York Stock
Exchange under the symbol TUR since December 16, 1998. Before that date, it
was listed on the American Stock Exchange. The following table sets forth
high and low closing prices per share of our common stock. The prices for
our common stock have been restated to reflect a three-for-two stock split
payable in the form of a 50% stock dividend distributed on August 14, 1998.
QUARTERLY STOCK INFORMATION
----------------------------------------------------
1998 HIGH LOW
First $19.422 $16.672
Second 20.172 17.078
Third 18.078 13.750
Fourth 18.625 14.000
----------------------------------------------------
1997 HIGH LOW
First $9.422 $7.000
Second 11.422 8.078
Third 15.250 10.578
Fourth 17.578 13.172
No dividends were declared or paid on Turner's common stock in 1998 or
1997. As of February 26, 1999, there were approximately 2,065 record
holders of Turner's common stock.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
-----------------------------------------------------------
OVERVIEW
Turner determines construction earnings under the percentage of
completion method. Under this method, Turner recognizes as earnings that
portion of the total earnings anticipated from a contract which the cost of
the work completed bears to the estimated total cost of the work covered by
the contract. Turner's construction contracts generally extend over more
than one year. During the course of the work, we make revisions in costs
and earnings estimates in the year in which the facts that require the
revision become known. Due to uncertainties inherent in the estimation
process, it is reasonably possible that we may revise our estimates from
time to time.
Value of construction completed includes, in addition to revenue from
construction contracts, construction costs incurred directly by owners on
certain construction management and similar projects. Because of the
varying proportion of general building construction, construction
management and construction consulting contracts, which generally have
different anticipated profit margins, the relationship between the value of
work completed and earnings from construction contracts is not necessarily
meaningful in the short run.
Revenue from construction contracts represents the value of
construction completed during the period, exclusive of costs incurred by
owners in connection with work under construction management and similar
contract types. It is a measure of the gross construction revenue that
flows directly through Turner from construction contracts.
Cost of construction contracts includes all direct material, labor and
subcontracting costs, and those indirect costs related to contract
performance that are identifiable with or allocable to contracts.
Construction operating expenses are costs incurred by Turner's
construction operating units and subsidiaries that are not directly
attributable to construction contracts, such as business development,
estimating, purchasing, accounting, cost control, general office support
and similar costs attributed to our construction activities. These
construction operating expenses are expensed as incurred.
General and administrative expenses represent corporate overhead
expenses.
Value of new contracts secured represents the value of construction to
be completed under contracts awarded through formal signed contractual
commitments during the period.
Backlog represents the value of construction to be completed in future
periods from contracts secured but not yet started or fully completed. The
average duration of a project in backlog, excluding projects to be
performed by our special projects divisions, is approximately 18 months.
Estimated earnings from construction contracts, which represents the
anticipated earnings associated with the estimated value of construction to
be completed, cannot and should not be used as the basis for predicting
future net income.
Our cash and cash equivalents and marketable securities balances at
any particular time include substantial monies received from owners on
construction contracts which have not yet been remitted for the purchase of
materials, payment of subcontractors and other construction costs.
<PAGE>
RESULTS OF OPERATIONS
The following table summarizes the consolidated results of operations
and the related percentages of revenues for the years ended December 31,
1996, 1997 and 1998.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------
1996 1997 1998
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenue from construction contracts $2,838,052 100.00% $3,170,744 100.00% $3,698,994 100.00%
Cost of construction contracts 2,765,901 97.46% 3,084,236 97.27% 3,600,311 97.33%
----------- --------- ----------- --------- ----------- --------
Earnings from construction contracts 72,151 2.54% 86,508 2.73% 98,683 2.67%
Construction operating expenses 52,962 1.87% 52,500 1.66% 53,220 1.44%
General and administrative expenses 13,885 0.49% 15,823 0.50% 14,289 0.39%
----------- --------- ----------- --------- ----------- --------
Income from construction operations 5,304 0.18% 18,185 0.57% 31,174 0.84%
Losses from real estate operations (383) (0.01%) (839) (0.03%) (764) (0.02%)
Interest expense (7,735) (0.27%) (6,406) (0.20%) (933) (0.03%)
Interest and other income, net 1,782 0.06% 5,046 0.16% 7,379 0.20%
----------- --------- ----------- --------- ----------- --------
Income (loss) before income taxes (1,032) (0.04%) 15,986 0.50% 36,856 0.99%
Income tax provision 663 0.02% 7,194 0.23% 17,223 0.46%
----------- --------- ----------- --------- ----------- --------
Income (loss) before
extraordinary loss (1,695) (0.06%) 8,792 0.27% 19,633 0.53%
Extraordinary loss on early
extinguishment of debt, net of tax -- -- (2,899) (0.09%) -- --
----------- --------- ----------- --------- ----------- --------
Net income (loss) $ (1,695) (0.06%)$ 5,893 0.18% $ 19,633 0.53%
=========== ========= =========== ========= =========== ========
</TABLE>
Results of Operations 1998 versus 1997
Revenue from construction contracts was a record $3.7 billion in 1998
versus $3.2 billion in 1997, an increase of 17% due to increased market
penetration in the key market sectors in which we compete, particularly the
commercial office building sector, as well as an enhanced sales and
marketing effort. The value of construction completed was a record $4.1
billion in 1998 versus $3.6 billion in 1997, an increase of 13%.
Earnings from construction contracts were a record $98.7 million in
1998 versus $86.5 million in 1997, an increase of 14%. The increase in
earnings is directly related to the increased revenue from construction
contracts in 1998. As a percentage of revenue, earnings from construction
contracts decreased slightly to 2.67% in 1998 from 2.73% in 1997. However,
as a percentage of the value of construction completed, earnings from
construction contracts were 2.39% in 1998 versus 2.38% in 1997.
Construction operating expenses were $53.2 million in 1998 versus
$52.5 million in 1997, an increase of 1%. Due to Turner's increased
construction activity in 1998, we were able to allocate a greater
percentage of construction operating costs to cost of construction
contracts than in 1997. In addition, 1998 includes a net periodic pension
credit of $4.2 million versus a $0.6 million charge in 1997 relating to
Turner's qualified defined benefit pension plan, due to a higher return
achieved on plan assets. The 1998 pension credit was offset by an increase
in expenses related to Turner's incentive compensation plan as a result of
improved earnings. As a percentage of construction revenue, construction
operating expenses were 1.44% in 1998 versus 1.66% in 1997.
General and administrative expenses were $14.3 million in 1998 versus
$15.8 million in 1997, a decrease of 10%. Expenses for 1997 include a
non-recurring charge of approximately $2.0 million related to stock awards
granted to directors in connection with the termination of the directors'
retirement plan.
Income from construction operations, reflecting the factors discussed
above, was $31.2 million in 1998 versus $18.2 million in 1997, an increase
of 71%. As a percentage of earnings from construction contracts, income
from constructions operations was 32% in 1998 versus 21% in 1997.
Losses from real estate operations were $0.8 million in 1998 and 1997.
We sold one undeveloped land parcel in 1998 for $1.5 million at
approximately its carrying value, and entered into a 90 year ground lease
arrangement on another land parcel. The ground lease tenant is currently
constructing a commercial office building on the site. Our proceeds from
real estate sales were approximately $1.4 million in 1998 and $22.9 million
in 1997. Rental and other income from real estate operations declined by
55% to $1.9 million in 1998 and the related cost of operations declined by
58% to $1.1 million in 1998, due to the sales of properties in 1998 and
1997. Losses from real estate operations included depreciation and
amortization expense of $1.5 million for 1998 and $2.3 million for 1997.
Because these expenses are non-cash, Turner's real estate operations
generated positive cash flow after payments of interest on real estate debt
for each of these years.
Interest expense was $0.9 million in 1998 versus $6.4 million in 1997,
a decrease of 85% primarily due to lower debt levels as a result of real
estate sales, debt repayments and the conversion of a debenture. In 1997,
we paid down $10.3 million of building mortgages, and in December 1997 we
repaid the $39.5 million principal balance of our 11.74% senior notes.
Interest expense also decreased as a result of Steiner Holding's election
to convert its $6.0 million 8.5% convertible debenture into 6,000 shares of
Series D preferred stock as of June 30, 1997.
Interest and other income, net was $7.4 million in 1998 versus $5.0
million in 1997, an increase of 46%. Interest income was $9.3 million in
1998 versus $5.1 million in 1997, an increase of 82% due to increased
income from higher investment balances of cash and cash equivalents and
marketable securities. We have been able to maintain these higher
investment balances due to increased construction activity, higher levels
of profitability and improved cash management practices. As noted above,
these investment balances consist principally of monies received from
owners on construction projects which have not yet been remitted for the
purchase of materials, payment of subcontractors and other construction
costs. Also included in other income in 1998 is a $2.0 million impairment
loss on an investment in a construction material supply company.
Income taxes. The provision for income taxes resulted in an effective
rate of 46.7% in 1998 and 45.0% in 1997. The difference between this rate
and the 35% statutory federal rate is primarily due to state and local
taxes. The effective rate for 1998 also includes the impact of the
non-deductibility of certain operating costs, primarily executive
compensation in excess of $1.0 million.
Net income was $19.6 million in 1998 versus net income of $5.9 million
in 1997. The 1997 results included the impact of a $2.9 million
extraordinary loss, net of tax, due to the early extinguishment of debt.
Basic earnings per share were $2.21 in 1998 versus $0.85 before the
extraordinary loss of $0.36, and $0.49 after the extraordinary loss, in
1997, all after taking into account the dividends paid to preferred
stockholders. Diluted earnings per share were $1.50 in 1998 versus $0.64
before the extraordinary loss of $0.23, and $0.41 after the extraordinary
loss, in 1997.
Value of new contracts secured was $4.30 billion in 1998 versus $3.37
billion in 1997, an increase of 28%. We attribute the improvement to our
increased market penetration in various general building market sectors in
which we compete.
The backlog of value of construction to be completed was $4.50 billion
as of December 31, 1998 versus $4.01 billion as of December 31, 1997, an
increase of 12%. Anticipated earnings associated with backlog from
construction contracts were $113.2 million as of December 31, 1998 versus
$104.7 million as of December 31, 1997, an increase of 8%. We attribute the
improvement to increased market penetration in various general building
market sectors in which we compete and our enhanced sales and marketing
effort.
Approximately 30% of the earnings backlog and 31% of the value of
construction backlog relates to work to be performed in 2000 and beyond.
Estimated earnings from construction backlog should not be used as a basis
for predicting future operating results.
Results of Operations 1997 versus 1996
Revenue from construction contracts was $3.2 billion in 1997 versus
$2.8 billion in 1996, an increase of 12% due to the continuation of a
strong general building construction market across the United States. The
value of construction completed was $3.6 billion in 1997 versus $3.3
billion in 1996, an increase of 10%.
Earnings from construction contracts were $86.5 million in 1997 versus
$72.2 million in 1996, an increase of 20%. As a percentage of revenue,
earnings from construction contracts increased to 2.73% in 1997 from 2.54%
in 1996, its highest level since 1993. These results reflected not only the
growth in construction revenues but also an improvement in margins of new
contracts secured over the past several years. As of January 1997, Turner
stopped pursuing new construction contracts in the Caribbean and ceased its
Caribbean operations in March 1998. During 1997, our Caribbean operations
incurred losses on construction contracts of $2.0 million due to continued
labor inefficiencies and corrective work. In 1996, the Caribbean operations
had losses from construction contracts of $4.9 million. Also included in
1996 was the recognition of $5.0 million of losses on a contract in
Minneapolis. The losses on the Minneapolis project were principally related
to significant changes in the design and scope of the project, which
resulted in increased costs and time extensions, as well as certain changes
to original estimates of costs. Late in 1998, Turner settled these issues
with the owner at an amount within the losses previously recorded.
Construction operating expenses and general and administrative
expenses were $68.3 million in 1997 versus $66.8 million in 1996, an
increase of 2%. As a percentage of construction revenue, construction
operating expenses and general and administrative expenses were 2.16% in
1997 versus 2.36% in 1996. Expenses for 1997 include a non-recurring charge
of approximately $2.0 million related to stock awards granted to directors
in connection with the termination of the directors' retirement plan.
Included in 1996 were expenses of $2.5 million related to management
changes, and the write-off of $1.3 million of goodwill associated with two
subsidiaries acquired in the mid 1980's that management determined was
impaired.
Income from construction operations, reflecting the factors discussed
above, was $18.2 million in 1997 versus $5.3 million in 1996, an increase
of 243%. As a percentage of earnings from construction contracts, income
from construction operations was 21% in 1997 versus 7% in 1996.
Losses from real estate operations were $0.8 million in 1997 versus
$0.4 million in 1996, an increase of 119%. We sold three developed
properties, a real estate joint venture interest, two land parcels and a
number of condominium units in 1997 as we continued to dispose of
properties at approximately their carrying values. In 1996, we sold two
developed properties and two land parcels, all at approximately their
carrying values. Our proceeds from real estate sales were approximately
$22.9 million in 1997 and $18.5 million in 1996. Rental and other income
from real estate operations declined by 47% to $4.1 million in 1997 and the
related cost of operations declined by 40% to $2.7 million in 1997, due to
the sales of properties in 1997 and 1996. Losses from real estate
operations included depreciation and amortization expense of $2.3 million
for 1997 and $3.7 million for 1996. Because these expenses are non-cash,
Turner's real estate operations generated positive cash flow after payments
of interest on real estate debt for each of these years.
Interest expense was $6.4 million in 1997 versus $7.7 million in 1996,
a decrease of 17% primarily due to lower debt levels as a result of real
estate sales, debt repayments and the conversion of a debenture. In 1997,
Turner paid down $10.3 million in building mortgages. Interest expense also
decreased as a result of Steiner Holding's election to convert its $6.0
million 8 1/2% convertible debenture into 6,000 shares of Series D
preferred stock as of June 30, 1997.
Interest and other income, net was $5.0 million in 1997 versus $1.8
million in 1996, an increase of 183% due to increased interest income
attributable to higher investment balances maintained by Turner.
Income taxes. The provision for income taxes resulted in an effective
tax rate of 45.0% in 1997. The difference between this rate and the 34%
statutory federal rate is primarily attributable to state and local taxes.
In 1996, Turner had a substantial provision for income taxes even though it
had a loss before income taxes. This was primarily attributable to state
income and other taxes and the non-deductibility of certain operating
costs.
Net income was $5.9 million in 1997 versus a net loss of $1.7 million
in 1996. The 1997 results included the impact of a $2.9 million
extraordinary loss, net of tax, due to the early extinguishment of debt.
Basic earnings per share before the extraordinary loss were $0.85 in 1997
versus a loss of $0.45 per share in 1996, both after taking into account
dividends paid to the preferred stockholders. Basic earnings per share were
$0.49 after the extraordinary loss of $0.36 in 1997. Diluted earnings per
share before the extraordinary loss were $0.64 in 1997. Diluted earnings
per share were $0.41 after the extraordinary loss of $0.23 in 1997.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, Turner had cash, cash equivalents and
marketable securities of $281.6 million, compared with $172.1 million as of
December 31, 1997 and $122.0 million at the end of 1996. Management
believes Turner's current cash position, in addition to cash flows from
construction activities, its $45.0 million revolving credit facility and
amounts available from overnight credit facilities, will be sufficient to
support Turner's short-term and foreseeable long-term requirements. Debt
maturing in 1999 and capital expenditures in 1999 will be paid from funds
generated from operations.
Cash flows for 1998 resulted in a net increase of funds of $15.6
million. Cash flows provided by operating activities amounted to $124.0
million due primarily to an increase in construction activity and the
timing of associated receipts and disbursements. Cash flows used in
investing activities amounted to $96.5 million, principally due to
purchases and sales of marketable securities. Cash used in financing
activities amounted to $11.9 million in 1998 and was primarily attributable
to stock repurchases and debt payments.
In November 1997, we announced the adoption of a stock repurchase
program for 5% of our common stock. In August 1998, we announced that we
had completed that program and may repurchase up to an additional 5% of our
common stock. Repurchases may be made from time to time in the open market
or in negotiated transactions as market and economic conditions warrant and
may be discontinued at any time. Turner will fund repurchases through
internally generated funds.
Capital expenditures in 1998, excluding real estate related capital
expenditures, were $4.9 million versus $6.1 million in 1997, a decrease of
$1.2 million. Significant capital expenditures in 1998 included computer
hardware and software and leasehold improvements. We do not expect our
capital expenditures for 1999 to vary significantly from the level incurred
over the last two years. There were $0.1 million in real estate related
capital expenditures in 1998 versus $0.4 million in 1997. We do not
anticipate any significant real estate related capital expenditures for
1999.
Turner has a $45.0 million unsecured revolving credit facility that
can be used for borrowings for general corporate purposes. The facility
matures in 2001 and contains two one-year extension options. Turner also
maintains $8.5 million of overnight credit facilities with various banks.
Turner had no borrowings under these facilities during 1997 or 1998.
INFLATION
Inflation and price changes during 1998 did not significantly affect
the major markets in which Turner conducts its business. In view of the
moderate rate of inflation, its impact on our business has not been
significant.
YEAR 2000
The Year 2000 issue results from computer programs and circuitry that
do not differentiate between the year 1900 and the year 2000 because they
are written using two- rather than four-digit dates to define the
applicable year. If not corrected, many computer applications and
date-sensitive devices could fail or create erroneous results before, on or
after January 1, 2000. The Year 2000 issue affects virtually all companies
and organizations, including Turner.
Turner has developed and is implementing a plan, the goal of which is
to assure that Turner will achieve Year 2000 readiness in time to avoid
significant Year 2000 failures. We are proceeding with our assessment of
the Year 2000 readiness issues for our computer systems, business
processes, facilities and equipment to assure their continued
functionality. We are also continuing our assessment of the readiness of
external entities, including subcontractors, suppliers, vendors, and
customers that interface with us. To that end, Turner has taken the
following actions:
o Computer Systems. Turner periodically upgrades its computer
systems as its needs require. Since 1997, we have been upgrading
the software for our financial, project management and human
resources computer systems, and we expect this process to be
completed by the second quarter of 1999. Vendors of our new
computer systems certified them to be Year 2000 compliant.
Turner's computer hardware is limited to stand-alone and
networked desk-top systems. Turner has assessed the Year 2000
readiness of its computer hardware and potential risks to
Turner's operations, and intends to replace those systems that
may pose a risk to Turner's operations in 1999. With regard to
computer equipment that is not Year 2000 compliant, but does not
pose a risk to Turner, as, for example, a desk-top computer used
for word processing, Turner intends in 1999 to replace that
equipment as part of routine upgrading.
o Business Processes. Turner has and continues to assess the
potential impact of Year 2000 on its business processes.
Internally, Turner has prepared and distributed a memorandum
outlining a plan of preparedness to all of Turner's financial
managers in our headquarters and business units. The plan
requires each manager to assess the risks of Year 2000 issues at
his or her business unit or department, and it describes Turner's
policies on testing, upgrading, and dealing with third parties as
they relate to Year 2000. Each manager is required to report back
to headquarters on his or her assessment of the unit's readiness.
We have modified our contract terms for any subcontractor hired
to install or construct structures or equipment that may be
affected by Year 2000 issues. We also require any vendor selling
equipment that may be affected by Year 2000 issues to sign a
contract. In both cases, the contract terms require the
subcontractor or vendor to represent and warrant that the work
performed by the subcontractor or the equipment sold by the
vendor is Year 2000 compliant. The subcontractor or the vendor
also must agree to indemnify Turner and the owner of the building
from any claims arising out of the breach of such representation
and warranty. Turner is in the process of contacting its key
suppliers and subcontractors regarding their Year 2000 readiness.
o Facilities and Equipment. Turner does not actually own or operate
significant construction machinery, but we have implemented a
policy of inquiring as to the Year 2000 compliance of
subcontractors' equipment and suppliers' products. We have
upgraded our phone switch with Year 2000 compliant components in
our New York headquarters and are assessing the equipment of
other offices. The cost of our phone switch upgrade was under
$50,000. Although Turner intends to upgrade its e-mail and
networking software and hardware by mid-1999, we will still be
vulnerable to any Year 2000 problems incurred by third-party
telecommunications companies.
The costs incurred for upgrading our computer systems are being funded
with cash flows from operations. The costs incurred principally relate to
new systems being implemented to improve business functionality rather than
solely to address Year 2000 issues. These costs have not been and are not
expected to be material in relation to Turner's overall results of
operations or financial position.
Turner believes that its internal computer systems, facilities, and
equipment will be Year 2000 compliant. However, there is no assurance that
all of the planned upgrades will be completed in time or function as
intended. As we have no contingency plan other than to deal as
expeditiously as possible with situations if and when they arise, we may
experience significant disruptions, the cost of which we are unable to
estimate at this time. We also believe that disruptions in some of our
subcontractors' operations will not significantly affect our projects
because we have relationships with other subcontractors with similar
expertise. We cannot assume, however, that an adequate supply of
subcontractors will be available.
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this amendment to be
signed on its behalf by the undersigned, thereunto duly authorized.
THE TURNER CORPORATION
Registrant
Date: March 25, 1999 By: /s/ D. G. Sleeman
-------------------------------
Name: D. G. Sleeman
Title: Senior Vice President, Chief
Financial Officer and
Chief Accounting Officer
