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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarter Ended
SEPTEMBER 30, 1994
Commission File Number 1-8889
(LOGO) MORRISON KNUDSEN CORPORATION
A Delaware Corporation
IRS Employer Identification No. 82-0393735
MORRISON KNUDSEN PLAZA, BOISE, IDAHO 83729
208/386-5000
The registrant's common stock is registered on the New York and Pacific
Stock Exchanges.
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At September 30, 1994, 33,061,205 shares of the registrant's common stock
were outstanding (excluding 506,105 shares held in treasury and including
322,232 unallocated shares of common stock in the Employee Stock Ownership
Plan Trust, accounted for as treasury stock).
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The registrant 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 and has been subject to such filing requirements for the
past 90 days.
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MORRISON KNUDSEN CORPORATION
QUARTERLY REPORT FORM 10-Q FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1994
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
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Item 1. Consolidated Financial Statements PAGE
Statements of Operations for the Three and Nine Months
Ended September 30, 1994 and 1993 I-1
Balance Sheets at September 30, 1994 and
December 31, 1993 I-2-3
Condensed Statements of Cash Flows for the
Nine Months Ended September 30, 1994 and 1993 I-4
Notes to Financial Statements I-5-10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations I-11-14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings II-1
Item 6. Exhibits and Reports on Form 8-K II-1
Signatures II-1
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PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
MORRISON KNUDSEN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993 (UNAUDITED)
(THOUSANDS OF DOLLARS EXCEPT SHARE DATA)
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<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1994 1993 1994 1993
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<S> <C> <C> <C> <C>
Revenue
Engineering and construction $598,720 $635,971 $1,553,911 $1,661,884
Rail systems 136,762 97,869 314,316 287,543
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Total revenue $735,482 $733,840 $1,868,227 $1,949,427
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Operating income (loss)
Engineering and construction $10,147 $14,466 $11,907 $44,257
Rail systems (8,640) 7,030 (61,057) 12,958
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Total operating income (loss) 1,507 21,496 (49,150) 57,215
General and administrative expenses (6,520) (7,909) (23,494) (25,565)
Research and development expenses (2,085) -- (3,912) --
Interest expense (2,673) (1,035) (6,467) (1,646)
Other income (expense), net 606 5,414 35 20,722
Equity in net income (loss) of
unconsolidated affiliates 2,448 (1,943) 7,335 (6,233)
Gains on subsidiaries sales of stock -- -- 25,284 --
Gain (loss) on disposition of
investments in unconsolidated
affiliates, net -- -- (8,951) --
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Income (loss) before income taxes
and minority interests (6,717) 16,023 (59,320) 44,493
Income tax (expense) benefit 2,680 (6,663) 23,728 (18,714)
Minority interests in net (income)
loss of subsidiaries 836 (110) 1,577 (439)
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Net income (loss) $(3,201) $9,250 $(34,015) $25,340
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Weighted average number of
common shares outstanding 32,642,800 31,278,400 32,457,600 30,958,900
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Earnings (loss) per common share $(.10) $.30 $(1.05) $.82
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Dividends per share $.20 $.20 $.60 $.60
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</TABLE>
The accompanying notes are an integral part of the financial statements.
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MORRISON KNUDSEN CORPORATION
CONSOLIDATED BALANCE SHEETS
AT SEPTEMBER 30, 1994 (UNAUDITED) AND DECEMBER 31, 1993 (AUDITED)
(THOUSANDS OF DOLLARS EXCEPT SHARE DATA)
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<CAPTION>
ASSETS 1994 1993
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CURRENT ASSETS
Cash and cash equivalents $ 81,455 $ 91,879
Short-term investments, at cost that
approximates market 5,646 --
Accounts receivable including retentions
of $54,867 and $62,800 274,039 231,021
Refundable federal income taxes 28,852 21,096
Inventories 220,118 133,350
Costs and earnings in excess of billings
on uncompleted contracts 224,403 185,221
Investments in construction joint ventures 57,995 83,116
Deferred income taxes 15,048 25,019
Other 18,915 22,519
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Total current assets 926,471 793,221
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INVESTMENTS AND OTHER ASSETS
Marketable securities, at cost, market
$22,064 and $53,180 22,404 51,143
Investments in unconsolidated affiliates 66,312 62,649
Goodwill and other intangibles, net 50,944 36,284
Other investments and assets 79,253 68,984
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Total investments and other assets 218,913 219,060
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PROPERTY AND EQUIPMENT, AT COST
Land and mineral rights 21,247 21,131
Buildings and improvements 167,712 153,252
Machinery and equipment 75,194 67,187
Construction equipment 205,660 226,221
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Total property and equipment 469,813 467,791
LESS ACCUMULATED DEPRECIATION (262,038) (254,122)
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Property and equipment, net 207,775 213,669
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TOTAL ASSETS $1,353,159 $1,225,950
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</TABLE>
The accompanying notes are an integral part of the financial statements.
I-2
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<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1994 1993
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CURRENT LIABILITIES
Short-term and current portion of long-term
debt $212,729 $ 37,238
Accounts payable including retentions of
$33,362 and $45,951 300,993 293,746
Accrued salaries, wages and benefits 64,502 46,507
Other accrued expenses 48,820 53,372
Billings in excess of costs and earnings on
uncompleted contracts 103,052 104,460
Advances from customers 96,255 147,788
Dividends payable -- 6,423
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Total current liabilities 826,351 689,534
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NON-CURRENT LIABILITIES
Deferred income taxes 15,788 24,189
Deferred compensation and income 30,739 13,671
Accrued workers' compensation 7,231 46,597
Accrued postretirement benefit obligation 25,363 26,506
Debt due after one year 5,131 9,768
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Total non-current liabilities 84,252 120,731
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COMMITMENTS AND CONTINGENCIES (Note 6)
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MINORITY INTERESTS IN SUBSIDIARIES 63,360 8,718
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STOCKHOLDERS' EQUITY
Preferred stock, par value $.10, authorized
10,000,000 shares, none Common stock, par
value $1.67, authorized 100,000,000 shares,
issued 33,567,310 and 32,698,179 shares 55,924 54,494
Capital in excess of par value 274,133 252,250
Retained earnings 74,134 127,466
Treasury stock, 828,337 and 1,080,184 shares,
at cost (14,731) (19,435)
Deferred compensation for restricted stock
awards (7,264) (5,837)
Cumulative translation adjustments (3,000) (1,971)
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Total stockholders' equity 379,196 406,967
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,353,159 $1,225,950
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</TABLE>
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MORRISON KNUDSEN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1994, AND 1993 (UNAUDITED)
(THOUSANDS OF DOLLARS)
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<CAPTION>
1994 1993
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OPERATING ACTIVITIES
Net cash provided (used) by operating
activities $(173,724) $(51,394)
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INVESTING ACTIVITIES
Short-term investments 507 31,517
Property and equipment acquisitions (46,288) (31,506)
Property and equipment disposals 17,265 10,387
Investments in unconsolidated affiliates and
other non-curent investments (33,596) (9,071)
Purchase of business assets (3,900) --
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Net cash provided (used) by investing activities (66,012) 1,327
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FINANCING ACTIVITIES
Net borrowings of short-term debt 175,441 6,668
Borrowings of long-term debt 10,853 20,037
Payments of long-term debt (20,115) (3,853)
Proceeds from subsidiary sale of stock 88,365 --
Proceeds from stock issued 509 369
Dividends paid (25,741) (24,445)
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Net cash provided (used) by financing activities 229,312 (1,224)
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Increase (decrease) in cash and cash equivalents (10,424) (51,291)
Cash and cash equivalents at beginning of period 91,879 134,011
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Cash and cash equivalents at end of period $ 81,455 $ 82,720
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OTHER CASH FLOW INFORMATION
Interest paid $ 6,762 $ 2,154
Income taxes paid (refunded), net (17,541) (13,824)
Acquisition of business for stock:
Property and equipment and other assets 9,128 --
Goodwill and other intangibles 19,215 --
Long-term debt (4,675) --
Other liabilities assumed (4,005) --
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</TABLE>
The accompanying notes are an integral part of the financial statements.
I-4
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MORRISON KNUDSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLAR AMOUNTS IN THOUSANDS)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the
accounts of Morrison Knudsen Corporation and its majority-owned
subsidiaries. The Corporation's investments in 20 percent to 50
percent owned affiliates and joint ventures are accounted for on
the equity method.
The consolidated financial statements have been prepared without
audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain financial information and
footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules
and regulations. These consolidated financial statements should
be read in conjunction with the audited consolidated financial
statements and notes thereto included in the Corporation's Annual
Report on Form 10-K for the year ended December 31, 1993.
The unaudited consolidated financial statements included herein
reflect all adjustments consisting of normal recurring
adjustments which are, in the opinion of management, necessary to
a fair presentation of the results of operations and cash flows
for the interim periods. The results of operations for the three
and nine month periods ended September 30, 1994 are not
necessarily indicative of the results to be expected for the full
year.
2. INVENTORIES
Inventories at September 30, 1994 and December 31, 1993 are
summarized below. The December 31, 1993 amounts were derived
from the audited financial statements of the Corporation.
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<CAPTION>
(Unaudited)
SEPTEMBER 30, DECEMBER 31,
1994 1993
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Finished goods $ 23,177 $ 4,267
Work in progress 360,942 240,097
Raw materials 185,353 120,481
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Total inventories 569,472 364,845
Payments on account of work
in progress (349,354) (231,495)
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Net inventories $220,118 $133,350
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</TABLE>
Approximately $33,640 and $34,540 of total inventories at
September 30, 1994 and December 31, 1993, respectively, were
valued on the LIFO cost method, and the excess current
replacement cost of these inventories over the stated LIFO value
was $2,919 and $2,924, respectively.
I-5
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3. CONSTRUCTION JOINT VENTURES
The Corporation has entered into a number of partnership arrangements
commonly referred to as "joint ventures". Generally, each
construction joint venture is formed to accomplish a specific project
and is dissolved upon completion of the project. The number of joint
ventures in which the Corporation participates and the size, scope
and duration of the projects vary between periods. Specific joint
ventures change from period to period, and the comparability between
periods of the following summary financial statements may not be
meaningful. Summary combined joint venture financial information at
September 30, 1994 and December 31, 1993 and for the nine months
ended September 30, 1994 and 1993 follows. The December 31, 1993
amounts were derived from the audited financial statements of the
Corporation.
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<CAPTION>
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
FINANCIAL POSITION AT 1994 1993
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Cash and cash equivalents $133,419 $161,084
Other current assets 166,383 197,448
Noncurrent assets 18,451 5,989
Property and equipment, net 42,349 37,776
Advances from customers (87,674) (87,777)
Other current liabilities (207,264) (208,100)
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Net assets $ 65,664 $106,420
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CORPORATION'S INVESTMENT IN
CONSTRUCTION JOINT VENTURES $57,995 $83,116
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RESULTS OF OPERATIONS (UNAUDITED) (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1994 1993
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COMBINED JOINT VENTURES, NET
Revenue $917,722 $728,545
Cost of revenue (906,659) (697,967)
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Operating income $11,063 $ 30,578
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CORPORATION'S SHARE, NET
Revenue $260,071 $328,016
Cost of revenue (259,347) (310,277)
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Operating income $ 724 $ 17,739
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</TABLE>
4. INVESTMENTS IN UNCONSOLIDATED AFFILIATES
The following table presents summarized financial information of
the unconsolidated affiliates at September 30, 1994 and December
31, 1993 and for the nine months ended September 30, 1994 and 1993,
on a combined 100 percent basis. The December 31, 1993 amounts
were derived from the audited financial statements of the
Corporation. The Corporation accounts for investments in 50% or
less owned companies by the equity method. Amounts presented
include the accounts of the following individually significant
investees and the Corporation's interest therein is shown
parenthetically, MK Gold Company ("MK Gold") (46.5% at September
30, 1994 and 50% at December 31, 1993); Straight Crossing
Development, Inc. ("SCDI") (36% at September 30, 1994 and 45% at
December 31, 1993); AmerBank (29.5% at September 30, 1994 and 31.1%
at December 31, 1993); Westmoreland Resources, Inc. (24%); and
Mitteldeutsche Braunkohlengesellschaft mbH ("MIBRAG") (33%). The summary
financial position presented
I-6
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at September 30, 1994 and December 31, 1993 and the summary results of
operations for the nine months ended September 30, 1994 and 1993 include the
accounts of Texas TGV Corporation ("Texas TGV") until the write-off of the
Corporation's investment therein in June 1994. Texas TGV was awarded a
franchise in May 1991, to finance, construct and operate a high speed rail
system in Texas. Because Texas TGV failed to provide equity
financing by December 31, 1993 as required under the franchise
agreement, and since its efforts to extend the deadline or to
negotiate amendments to the franchise agreement were unsuccessful,
the Corporation abandoned the project and wrote-off its $13,828 investment
in June 1994. The $13,828 loss on disposition of the Corporation's investment
in Texas TGV is not reflected in the summary financial information shown below,
but is reflected in the consolidated statements of operations as a separate
item.
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<CAPTION>
(Unaudited)
FINANCIAL POSITION AT SEPTEMBER 30, DECEMBER 31,
1994 1993
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Current assets $415,732 $ 91,775
Non-current assets 385,987 125,762
Long-term debt (97,218) (22,401)
Current liabilities (100,076) (46,168)
Non-current liabilities (431,196) (17,058)
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Net assets $173,229 $131,910
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CORPORATION'S INVESTMENTS IN
UNCONSOLIDATED AFFILIATES $66,312 $62,649
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<CAPTION>
RESULTS OF OPERATIONS (Unaudited) (Unaudited)
NINE MONTHS ENDED SEPTEMBER 30, 1994 1993
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<S> <C> <C>
Revenue $436,651 $150,967
Operating income (loss) 29,068 (4,860)
Net income (loss) 27,255 (8,434)
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CORPORATION'S EQUITY IN NET INCOME
(LOSS) OF UNCONSOLIDATED AFFILIATES $7,335 $(6,233)
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</TABLE>
MK Gold holds interests in two producing gold mining projects in
California and provides contract mining services. SCDI has a
development agreement with the government of Canada to design,
construct and operate for 35 years, an 8.4 mile-long toll bridge
linking the Canadian provinces of New Brunswick
and Prince Edward Island. AmerBank, a joint stock company, is a
licensed bank operating in Poland. Westmoreland Resources, Inc. is
a mining company that operates a surface coal mine in Montana.
MIBRAG is a private company formed by the German government to own
and operate lignite coal mines, power and process plants in
Germany. Effective January 1, 1994, the Corporation and its
partners acquired majority ownership of MIBRAG from the German
government. The Corporation, in addition to holding a 33%
participating interest in MIBRAG, has an agreement to provide mine
planning, engineering and related services to MIBRAG.
The Corporation recognized a net loss from its investee's
operations in 1993 primarily because of the $4.6 million combined
net losses of Joy MK Projects Company, then a 50% owned
unconsolidated affiliate and McConnell Dowell Corporation Limited,
then a 48.9% owned unconsolidated affiliate. Joy MK Projects
Company became a wholly-owned subsidiary in April 1993 and
McConnell Dowell Corporation Limited became a majority-owned
consolidated subsidiary in June 1993.
The Corporation's investment in MK Gold at September 30, 1994 was
$31,800. The aggregate market value of the 9,000,000 shares of
common stock of MK Gold held by the Corporation at September 30,
1994 was $43,875.
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The Corporation's investment in AmerBank at September 30, 1994 was
$5,646 and is classified as a short-term investment in the
accompanying balance sheet reflecting the Corporation's intent to
sell its interest therein. The aggregate market value of the
796,400 shares of common stock of AmerBank held by the Corporation
at September 30, 1994 was $5,800.
The Corporation received dividends of $420 from its investees
during the nine months ended September 30, 1994. No dividends were
received during the nine months ended September 30, 1993.
5. OTHER INCOME (EXPENSE), NET
Other income and expense items for the three and nine month periods
ended September 30, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1994 1993 1994 1993
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Interest and dividends $1,012 $2,171 $3,342 $11,486
Net gains on sales of
marketable securities 257 4,177 1,656 11,428
Net losses on disposals and
write-downs of assets (1,347) (759) (6,932) (2,289)
Underwriting income (expense) of
insurance subsidiary, net 630 (140) 3,953 (1,480)
Miscellaneous income (expense),
net 54 (35) (1,984) 1,577
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Other income (expense), net $ 606 $5,414 $ 35 $20,722
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</TABLE>
6. COMMITMENTS AND CONTINGENCIES
VERTAC SITE CONTRACTORS, A JOINT VENTURE, ("VERTAC"): The
Corporation has a 50% participating interest in VERTAC. VERTAC is
a subcontractor under a prime contract awarded to URS Consultants,
Inc. by the U.S. Environmental Protection Agency ("EPA"), to
process hazardous waste at an Arkansas site. Based on information
available, the Corporation recognized a $5,000 pre-tax charge to
income in the second quarter of 1994 in connection with the write-
down of its investment in VERTAC to its estimated net recoverable
value. The Corporation's investment in VERTAC at September 30,
1994 and December 31, 1993 was $8,342 and $21,950, respectively.
The Corporation will not recover its investment under the existing
contracts but anticipates, based upon information presently
available, that the Corporation will fully recover its investment.
CF SYSTEMS: The Corporation acquired a processing facility and a
solvent extraction processing technology in 1990 and subsequently
deferred additional design and engineering costs in modifying the
processing facility for commercial application. The corporation recognized a
$6,000 pre-tax charge to income in the second quarter of 1994 related to the
write-down of the carrying value of the processing facility to its
estimated net recoverable value. The Corporation's investment in
CF Systems at September 30, 1994 and December 31, 1993 was $10,643
and $13,896, respectively. The Corporation is currently
negotiating a "sole source" contract for remediation of
contaminated soil. The contract is expected to begin early in
1995, and will be of approximately 36 months duration. The
contract will be awarded by the State of Texas and will be
principally funded by the U.S. Environmental Protection Agency.
I-8
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LEGAL PROCEEDINGS: Between July 28, and August 23, 1994, the
Corporation and several of its officers were named as defendants
in three separate complaints filed in the United States District
Court for the District of Idaho by certain stockholders who claim
to represent a class of stockholders that purchased shares of the
Corporation's common stock between October 15, 1993 and July 19,
1994. The complaints are based on provisions of federal
securities laws and seek equitable relief and unspecified damages
for losses allegedly resulting from improper disclosure. On
October 17, 1994, the United States District Court for the
District of Idaho entered an order which provided for the filing
of one consolidated complaint on behalf of named plaintiffs in all
three actions. Although the securities litigation is in a preliminary stage
and the outcome cannot be predicted with certainty, the corporation
believes that the securities litigation lacks merit and intends to
contest it vigorously.
LETTERS OF CREDIT: The Corporation was contingently liable, in the
normal course of business, for $424,359 in standby letters of credit
not reflected in the accompanying financial statements at September 30,
1994 for contract performance guarantees on a number of
construction, rail and transit contracts.
DISCONTINUED OPERATIONS: At September 30, 1994, the Corporation was
contingently liable for $43,952 in connection with the shipbuilding
operations of National Steel and Shipbuilding Company ("NASSCO"),
discontinued in 1988. In April 1989, the Corporation sold its
interest in NASSCO and in June 1994, the Corporation renegotiated
and amended the April 1989 sale agreement with NASSCO. Under the
terms of the amended agreement the Corporation will provide NASSCO a
$21,000 credit facility continuing for a period of 3 years after
completion of a U.S. Navy contract, expected in mid 1996, and NASSCO
will relinquish its right to require the Corporation to accept
repayment in NASSCO preferred stock for any balance outstanding
under the credit facility. At September 30, 1994, NASSCO had no
balance outstanding under the Corporation's credit facility.
The Corporation is contingently liable up to a maximum of $21,000 on a
bank credit facility obtained by NASSCO. The balance outstanding
under NASSCO's bank credit facility at September 30, 1994 was
$21,000. The Corporation's credit facility is reduced by the amount
of funds NASSCO borrows under its bank credit facility. The Corporation has
guaranteed $21,000 of NASSCO's port facility bonds until not later than
December 2002. NASSCO's floating drydock is pledged as collateral for the
bonds. In addition, the Corporation has guaranteed $1,952 of NASSCO's federal
workers' compensation bonds.
At September 30, 1994, the Corporation was contingently liable for $30,980 in
connection with commercial real estate operations discontinued in 1987.
Certain real estate assets collateralize the bank debt.
The Corporation is of the opinion, based upon information presently available,
that no payments will be required and no losses will be incurred under such
contingencies for either of the discontinued operations.
AFFILIATE GUARANTEES: At September 30, 1994, the Corporation was
contingently liable up to a maximum of $31,000 on its affiliates'
bank credit facilities. The balances outstanding under these credit
facilities at September 30, 1994 were; $20,000 for MK Gold, $3,000
for data-Cache and $7,543 for Beacon Light. Data-Cache is a
development stage computer software company and Beacon Light is a
manufacturer and marketer of lighting enhancement products. The
Corporation has participating interests in data-Cache and Beacon
Light.
OTHER GUARANTEES: At September 30, 1994, the Corporation has also
guaranteed $5,055 of obligations of third parties under borrowing
arrangements. Where possible, the Corporation has obtained security
interests and guarantees by the principals.
I-9
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7. SUBSEQUENT EVENTS
RELATED PARTY TRANSACTION: In October, 1993, the Corporation
entered into a contract with a domestic railroad to remanufacture 133
locomotives for delivery in late 1994. In February, 1994, in
connection with the initial public offering of 35% of the common
stock of MK Rail Corporation ("MK Rail"), then a wholly-owned
subsidiary of the Corporation, the Corporation assigned the
contract to MK Rail and guaranteed the performance of MK Rail's
obligations under the contract. To meet the delivery dates
imposed by the contract, MK Rail entered into an agreement with
the Corporation pursuant to which the Corporation was to
remanufacture 43 of the 133 locomotives. On October 20, 1994, the
Corporation and MK Rail executed an agreement whereby the
Corporation agreed to indemnify MK Rail for its estimated loss on
the remaining 90 locomotives provided such loss does not exceed
$3,800. In addition, the October 1994 agreement provides, among
other things, that MK Rail (i) supply all materials and component parts
required for remanufacture of the Corporation's 43 locomotives, and (ii) be
responsible for warranty obligations on all 133 remanufactured locomotives.
The effect of the Corporation's indemnification of MK Rail's $3,800 loss was to
increase the Corporation's consolidated net loss for the three and
nine month periods ended September 30, 1994 by approximately $800,
representing the net after-tax amount of MK Rail's 35% minority
interest share of the $3,800 loss.
LEGAL PROCEEDINGS: On October 20, 1994, the Corporation, its 65%
owned subsidiary MK Rail, several of MK Rail's officers and
directors, and the managing underwriters of MK Rail's initial
public offering were named as defendants in two complaints filed
in United States District Court for the District of Idaho by
stockholders who claim to represent a class of stockholders that
purchased shares of MK Rail's common stock between April 26, and
September 29, 1994. The complaints are based on provisions of
federal securities laws and seek equitable relief and unspecified
damages for losses allegedly resulting from, among other things,
improper disclosure. This litigation is currently in the very
early stages; MK Rail and the Corporation intend to vigorously defend the
matter.
I-10
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
ENGINEERING AND CONSTRUCTION SEGMENT: Revenue and operating income of
the engineering and construction segment decreased for the three and
nine month periods of 1994 compared to the same periods of 1993. This
decline was principally due to the execution and completion of
profitable contracts during the first nine months of 1993, contrasted
with delays in anticipated contract awards and postponements of the
start-up of major new infrastructure contracts during the first nine
months of 1994.
In addition, operating income for the nine months of 1994 was
adversely impacted by provisions for write-downs of assets and
anticipated losses on uncompleted contracts. The Corporation
recognized a $17.6 million pre-tax charge to operating income in the
second quarter of 1994 consisting of an $11.0 million write-down of
its investments in two waste disposal projects to their estimated net
recoverable values, a $4.3 million write-down of the carrying values
of certain surplus tunnel boring equipment to their estimated net
realizable values and a $2.3 million provision for an anticipated loss
on an uncompleted contract. Excluding the effects of the $17.6
million pre-tax charge, operating income of the engineering and
construction segment for the nine month period of 1994 decreased $14.7
million, from the same period of 1993.
RAIL SYSTEMS SEGMENT: Revenue of the rail systems segment increased
for the three and nine month periods of 1994, compared to the same
periods of 1993, however, operating income decreased for the three and
nine month periods of 1994, compared to the same periods of 1993. In
the third quarter of 1994, the estimated earnings at completion of a
contract with a domestic railroad to remanufacture 133 locomotives for
delivery in late 1994 were revised due to lower than expected labor
productivity, and higher than expected material costs. The contract
was originally entered into by the Corporation which assigned the
contract to MK Rail and guaranteed the performance of MK Rail's
obligations under the contract in connection with MK Rail's initial
public offering. To meet the delivery dates imposed by the contract,
MK Rail entered into an agreement with the Corporation pursuant to
which the Corporation was to remanufacture 43 of the 133 locomotives.
On October 20, 1994, the Corporation and MK Rail executed an agreement
whereby the Corporation agreed to indemnify MK Rail for its estimated
loss on the remaining 90 locomotives provided such loss does not
exceed $3.8 million. As a result of the foregoing, the Corporation
recognized a pre-tax charge to operating income of $9.2 million for
anticipated losses on the uncompleted contract.
In addition, operating income of the rail systems segment for the nine
months of 1994 was adversely affected by the pre-tax provision of
$59.4 million for anticipated losses on four transit division
contracts, after revision in the second quarter of 1994, of the
estimated costs and earnings at completion of the contracts. The
losses were due principally to (i) delays in testing and delivery of
new transit cars under contract with the Metro North Commuter
Railroad, which resulted in higher direct labor, manufacturing
overhead and estimated costs for liquidated damages and (ii) for the
three remaining contracts which were in early stages of
production,higher than expected labor and overhead costs during the
start-up of production activities at the Corporation's two new
manufacturing facilities as well as anticipated overruns for labor and
overhead due to delivery schedule delays.
General and administrative expenses for the three and nine month
periods of 1994 decreased $1.4 million and $2.1 million, respectively,
from the same periods of 1993. The decrease is due principally to the
allocation of certain costs and expenses (previously retained at the
corporate level) to the engineering and construction, and rail systems
segments.
The Corporation's majority-owned subsidiary MK Rail Corporation
incurred research and development costs of $1.4 million and $2.4
million in the three and nine month periods of 1994, respectively,
related to MK Rail's programs to develop two new railroad locomotives.
In addition, costs for research and development of new products and
processes relating to the rail systems industry of $.7 million and
$1.5 million were charged to income in the three and nine month
periods of 1994, respectively.
I-11
<PAGE>
Interest expense for the three and nine month periods ended September 30,
1994 increased $1.6 million and $4.8 million, respectively, from
the same periods of 1993. The increase reflects the rise in both
short and long-term debt outstanding from $47.0 million at December
31, 1993, to $217.9 million at September 30, 1994, at a weighted
average annual cost of borrowing of 5.7%.
Other income for the three and nine month periods ended September 30,
1994, decreased $4.8 million, and $20.7 million, respectively, from
the comparable periods of 1993. The declines are due to (i) the
absence of non-operating investment earnings (interest, dividends and
net gains on sales of marketable securities) and (ii) net losses on
disposals and write-downs of assets. See Note 5 of Notes to
Consolidated Financial Statements.
The Corporation's share of unconsolidated affiliates' income increased
from a $1.9 million loss in the three month period ended September 30,
1993 to $2.4 million income in the comparable period of 1994. The
increase is primarily due to the recognition by the Corporation of
its $3.1 million share of the net income of MIBRAG, acquired effective
January 1, 1994. The Corporation's share of investee income increased
from a $6.2 million loss in the nine month period ended September 30,
1993 to $7.3 million income in the comparable period of 1994. The
increase is due to (i) recognition of $8.7 million share of net income
of MIBRAG and (ii) the absence of the adverse impact of the
Corporation's share of the combined $4.6 million losses for Joy MK
Projects Company and McConnell Dowell Corporation in 1993 prior to
their consolidation in April and June 1993, respectively. See Note 4
of Notes to Consolidated Financial Statements.
In May 1994, MK Rail completed an IPO of 6,000,000 shares of its
common stock. The Corporation recognized a $24.0 million pre-tax gain
with respect to such shares, because MK Rail's public offering price
per share exceeded the Corporation's carrying value per share. In
January 1994, 1,350,000 shares of MK Gold's common stock were sold
under an option granted by MK Gold to its IPO underwriters to cover
over-allotments. The Corporation recognized a $1.3 million pre-tax
gain with respect to such shares, because MK Gold's public offering
price per share exceeded the Corporation's carrying value per share.
See Note 4 of Notes to Consolidated Financial Statements.
The net loss on disposition of investments in unconsolidated
affiliates consists of a $13.8 million charge to income in the second
quarter of 1994 related to the write-off of the Corporation's
investment in Texas TGV and a $4.9 gain in the first quarter of 1994
on the sale of a portion of its stock holdings in SCDI. See Note 4 of
Notes to Consolidated Financial Statements.
The income tax (expense) benefit provided in the first nine months of
1994 and 1993 were based upon estimated annual effective tax rates of
40.0% and 42.1%, respectively. The 42.1% effective rate in the first
nine months of 1993 was higher than the Corporation's blended
statutory tax rate of 40.85% due in large part to the recognition of
taxes on foreign-source income. The 40.0% effective rate in the first
nine months of 1994 was slightly lower than the blended statutory rate
because of anticipated utilization of foreign tax credits to offset
U.S. income taxes.
I-12
<PAGE>
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
(thousands of dollars)
<TABLE>
<CAPTION>
1994 1993
------ ------
<S> <C> <C>
Cash and cash equivalents:
Beginning of period $ 91,879 $134,011
End of period 81,455 82,720
Total debt, September 30, 217,860 44,063
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1994 1993
------ ------
<S> <C> <C>
Net cash provided (used) by:
Operating activities $(173,724) $(51,394)
Investing activities (66,012) 1,327
Financing activities 229,312 (1,224)
</TABLE>
Total capitalization at September 30, 1994 was $597.1 million,
composed of $217.9 million debt and $379.2 million equity compared to
total capitalization at December 31, 1993 of $454.0 million, composed
of $47.0 million debt and $407.0 million equity.
Net cash used for operating activities in the first nine months of
1994 of $173.7 million was primarily due to an $81.9 million increase
in rail systems segment inventories ($73.4 million for MK Rail and
$8.5 for the transit division), and $82.2 million of trade receivables
and unbilled receivables. Net cash used for operating activities in
the first nine months of 1993 of $51.4 million was the result of
increases in trade receivables, unbilled receivables and a significant
increase in rail system's transit division inventories.
The Corporation anticipates negative cash flow from operations to
continue into 1995. The Corporation has commitments to complete a
number of major transit division contracts which will require cash
estimated at about $150.0 million. The Corporation anticipates
funding these commitments, principally from additional borrowings.
The Corporation is currently negotiating additional credit facilities
to meet these commitments. The Corporation believes that its balance
of cash, cash equivalents, existing short-term credit facilities,
potential additional credit facilities currently under negotiation and
positive cash flow from non-transit division operations, will be
sufficient to meet its operating cash requirements in the foreseeable
future.
Net cash used for investing activities in the first nine months of
1994 of $66.0 million included $29.0 million for net acquisitions of
property and equipment, $37.5 million for investments in
unconsolidated affiliates including, (i) $19.6 million for MIBRAG,
(ii) $12.1 million for prepaid rent in connection with MK Rail's
formation of MK Rail de Mexico., a wholly-owned subsidiary of MK Rail
doing business in Mexico, (iii) $3.9 million for the acquisition of
certain intangible assets in connection with the acquisition of
Touchstone (a wholly-owned subsidiary of MK Rail, acquired January 31,
1994), and (iv)$1.9 million for other non-current assets. Net cash of
$1.3 million provided by investing activities in the first nine months
of 1993 included $21.1 million used for the net acquisitions of fixed
assets, $31.5 million provided by the sale of marketable securities
and $9.1 million used for the acquisition of other non-current assets.
I-13
<PAGE>
Net cash provided by financing activities in the first nine months of
1994 of $229.3 million included $166.2 million net borrowings of short
and long-term debt, $88.4 million net proceeds from MK Rail's IPO,
reduced by the payment of $25.7 million dividends. Financing
activities in the first nine months of 1993 included $22.9 million net
borrowings of short and long term debt, and the payment of $24.4
million dividends. During the last quarter of 1993 and the first nine
months of 1994, the Corporation borrowed, net of repayments, an
aggregate of $197.5 million ($22.1 million and $175.4 million,
respectively) on a short-term basis to finance working capital, fixed
asset acquisition, and new business investments.
The ratio of debt to total capital (debt plus equity) at September 30,
1994 was 36.5%, compared with 10.4% at the beginning of 1994 and 1.6%
at the begining of 1993.
At September 30, 1994, the Corporation and its subsidiaries had $311.0
million of credit facilities, consisting of $266.0 million committed
facilities and $45.0 million uncommitted facilities. Of the $311.0
million available facilities, $93.1 million was unused at September 30,
1994.
At September 30, 1994, MK Rail had available $50.0 million of
committed unsecured credit lines of which approximately $9.9 million
was unused. At present, MK Rail is negotiating with potential
investors to secure debt financing for its wholly-owned Mexican
subsidiary, MK Rail de Mexico. Under the most likely structure for
this financing, MK Rail de Mexico would issue up to approximately
$40.0 million in US dollar denominated notes, without recourse to MK
Rail. Placement of the first series of notes, approximately $29.0
million, is anticipated in early 1995.
I-14
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Between July 28, and August 23,1994, three complaints were filed in the
United States District Court for the District of Idaho. The
Corporation, its chairman and certain other of its officers were named
as defendants in the actions. The complaints seek unspecified damages
and other relief under the federal securities laws based on allegations
that the Corporation made misleading disclosures regarding its transit
business. The complaints seek relief on behalf of a purported class of
persons and entities who acquired the Corporation's common stock
between October 15, 1993 and July 19, 1994. On October 17, 1994, the
United States District Court for the District of Idaho provided for the
filing of one consolidated complaint on behalf of named plaintiffs in
all three actions. The Corporation believes that the securities
litigation lacks merit and intends to defend vigorously against the
charges.
On October 20, 1994, the Corporation, its 65% owned subsidiary MK Rail,
several of MK Rail's officers and directors, and the managing
underwriters of MK Rail's initial public offering were named as
defendants in two complaints filed in United States District Court for
the District of Idaho by stockholders who claim to represent a class of
stockholders that purchased shares of MK Rail's common stock between
April 26, and September 29, 1994. The complaints are based on provisions
of federal securities laws and seek equitable relief and unspecified
damages for losses allegedly resulting from, among other things, improper
disclosure. This litigation is currently in the very early stages; MK
Rail and the Corporation intend to vigorously defend the matter.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
FILED IN PART I
None
FILED IN PART II
10.1 Indemnification agreement dated October 20, 1994
between Morrison Knudsen Corporation, an Ohio
corporation, a wholly owned subsidiary of the
registrant, and MK Rail Corporation, a 65% owned
subsidiary of the registrant.
10.2 Form of registrant's Employment Agreement (filed
as Exhibit 10.2 to Form 10-Q Quarterly Report for
quarter ended June 30, 1993 and incorporated
herein by reference.) A schedule listing the
directors, executive officers and named executive
officers of the Company with whom the registrant
has entered into such agreements is filed
herewith.
27. Financial data schedule.
(b) Reports on Form 8-K
The Registrant filed a current report on Form 8-K dated July 19,
1994 to announce a net loss for the quarter ended June 30, 1994.
All other items required under Part II are omitted because they are not
applicable.
SIGNATURES
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.
MORRISON KNUDSEN CORPORATION
/S/M.E. Howland
-------------------------------------
Vice President and Controller and
Principal Accounting Officer, in his
respective capacities as such
Date: November 14, 1994
II-1
<PAGE>
MORRISON KNUDSEN CORPORATION
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBITS
- ------- --------
10.1 Indemnification agreement dated October 20, 1994 between
Morrison Knudsen Corporation, an Ohio corporation, a
wholly owned subsidiary of the registrant, and MK Rail
Corporation, a 65% owned subsidiary of the registrant.
10.2 Form of registrant's Employment Agreement (filed as
Exhibit 10.2 to Form 10-Q Quarterly Report for quarter
ended June 30, 1993 and incorporated herein by
reference.) A schedule listing the directors, executive
officers and named executive officers of the Company with
whom the registrant has entered into such agreements is
filed herewith.
27. Financial data schedule.
<PAGE>
Exhibit 10.1
AGREEMENT
THIS AGREEMENT, dated as of October 20, 1994 ("Agreement"),
is entered into by and between MORRISON KNUDSEN CORPORATION, an
Ohio corporation ("MK"), and MK RAIL CORPORATION, a Delaware
corporation ("MK Rail").
WITNESSETH:
WHEREAS, MK and Southern Pacific Transportation Company
("SP") entered into a Contract, dated as of October 27, 1993 ("SP
Contract"), to supply SP with 133 remanufactured SD4OM-2 diesel
electric locomotives ("Remanufactured Locomotives");
WHEREAS, MK assigned the SP Contract to MK Rail as of
February 22, 1994, and MK, as a condition to SP's consent to the
assignment, guaranteed the performance of MK Rail's obligations
under the SP Contract;
WHEREAS, MK has undertaken to perform the remanufacture of
43 of the Remanufactured Locomotives ("MK Remanufactured
Locomotives") at MK's facility in Hornell, New York, and MK Rail
has undertaken to perform the remanufacture of 90 of the
Remanufactured Locomotives ("MK Rail Remanufactured Locomotives")
at MK Rail's facilities in Mountain Top, Pennsylvania and Boise,
Idaho; and
WHEREAS, MK and MK Rail desire to enter into this Agreement
to document MK's and MK Rail's understanding with respect to the
matters set forth herein;
NOW, THEREFORE, in consideration of the foregoing and other
good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties agree as follows:
1. INDEMNITY.
(a) MK hereby agrees to indemnify MK Rail for the
amount of MK Rail's actual reasonable costs including, without
limitation, design, engineering, manufacturing, quality control,
materials (which includes the purchase price of MK Remanufactured
Locomotives set forth in Section 2(b) of this Agreement),
subcontracting, ODC and labor (collectively, "Costs") incurred in
connection with the remanufacturing of the Remanufactured
Locomotives, solely to the extent such Costs exceed $90,534,554;
provided, however, the maximum amount of all indemnity payments
by MK to MK Rail pursuant to this Section 1(a) shall not exceed
$3,792,799.
(b) MK Rail shall use all reasonable efforts to minimize
the Costs. In connection with any claim for indemnity
under Section 1(a), (i) MK Rail shall submit to MK reasonable
documentary evidence of all Costs and (ii) MK Rail shall permit
MK to have reasonable access to MK Rail's books, records and
personnel to confirm and audit all Costs.
<PAGE>
2. SUPPLY OF MATERIALS AND COMPONENTS; ETC..
(a) MK Rail hereby agrees to supply on a timely basis
all materials and components ("Materials and Components")
requested by MK to complete the remanufacture of the MK
Remanufactured Locomotives. MK Rail shall supply such Materials
and Components to MK on terms (including delivery and price) no
less favorable than MK Rail supplies materials and components to
any other person or entity during the six-month period prior to
and after the date any Materials and Components are supplied to
MK.
(b) MK Rail hereby agrees to pay to MK $667,000 for
each MK Remanufactured Locomotive upon notification by MK to MK
Rail that any such MK Remanufactured Locomotive is ready for
delivery.
3. WARRANTIES, ETC.. All obligations and liabilities for
warranty, defect or any other claims relating to, resulting from
or arising out of any or all of the Remanufactured Locomotives
(including MK Remanufactured Locomotives) shall be the sole
responsibility of MK Rail.
4. MISCELLANEOUS.
(a) This Agreement may be amended or modified only by
an instrument in writing executed by each of the parties to this
Agreement.
(b) This Agreement shall be governed by and construed
and interpreted in accordance with the laws of the State of
Delaware, regardless of the laws that might otherwise govern
under principles of conflict of laws applicable thereto.
(c) This Agreement constitutes the entire agreement of
the parties and supersedes any prior understanding or agreements
between the parties with respect to the subject matter hereof.
(d) This Agreement may be executed in counterparts,
each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
(e) Any tax benefits associated with the Costs which
MK has agreed to indemnify under Section 1(a) of the Agreement
shall accrue to MK.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first above written.
MORRISON KNUDSEN CORPORATION
/s/ Stephen G. Hanks
By__________________________
Title_______________________
MK RAIL CORPORATION
/s/ Michael J. Farrell
By_________________________
Title______________________
<PAGE>
Schedule to Exhibit 10.2
MORRISON KNUDSEN CORPORATION
SCHEDULE OF EMPLOYMENT AGREEMENTS
<TABLE>
<CAPTION>
NAME DATE OF AGREEMENT
---- -----------------
<S> <C>
Hanks, Stephen G. January 1, 1993
Kealey, Thomas F. July 11, 1994
Tinstman, Robert A. January 1, 1993
Zarges, Thomas H. January 1, 1994
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
accompanying unaudited consolidated financial statements and notes thereto of
Morrison Knudsen Corporation at September 30, 1994 and for the nine months then
ended, and is qualified in its entirety by reference to such unaudited financial
statements:
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1994
<CASH> $81,455
<SECURITIES> 5,646
<RECEIVABLES> 205,030
<ALLOWANCES> (3,176)
<INVENTORY> 220,118
<CURRENT-ASSETS> 926,471
<PP&E> 469,813
<DEPRECIATION> (262,038)
<TOTAL-ASSETS> 1,353,159
<CURRENT-LIABILITIES> 826,351
<BONDS> 0
<COMMON> 55,924
0
0
<OTHER-SE> 323,272
<TOTAL-LIABILITY-AND-EQUITY> 1,353,159
<SALES> 314,316
<TOTAL-REVENUES> 1,868,227
<CGS> 375,373
<TOTAL-COSTS> 1,917,377
<OTHER-EXPENSES> 27,406
<LOSS-PROVISION> 2,350
<INTEREST-EXPENSE> 6,467
<INCOME-PRETAX> (59,320)
<INCOME-TAX> 23,728
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (34,015)
<EPS-PRIMARY> (1.05)
<EPS-DILUTED> 0
</TABLE>
