<PAGE>
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, 1995
Commission File Number 1-8889
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.
At September 30, 1995, 33,046,215 shares of the registrant's common stock were
outstanding (excluding 439,543 shares held in treasury).
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.
/X/ Yes / / No
<PAGE>
MORRISON KNUDSEN CORPORATION
Quarterly Report Form 10-Q for the
Nine Month Period Ended September 30, 1995
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
PAGE
Item 1. Consolidated Financial Statements and Notes Thereto
Statements of Operations for the Three and Nine Month Periods
Ended September 30, 1995 and 1994 I-1
Balance Sheets at September 30, 1995 and December 31, 1994 I-2
Statements of Cash Flows for the
Nine Month Periods Ended September 30, 1995 and 1994 I-4
Notes to Financial Statements I-5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations I-17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings II-1
Item 6. Exhibits and Reports on Form 8-K II-3
Signatures II-3
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
MORRISON KNUDSEN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1994 (UNAUDITED)
(THOUSANDS OF DOLLARS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ----------------------------
1995 1994 (a) 1995 1994 (a)
<S> <C> <C> <C> <C>
Revenue $ 547,553 $ 590,679 $ 1,482,034 $ 1,535,874
Cost of revenue (553,719) (581,465) (1,467,750) (1,527,945)
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Operating income (loss) from continuing operations (6,166) 9,214 14,284 7,929
General and administrative expenses (18,601) (6,520) (44,385) (23,494)
Interest expense (7,725) (767) (22,164) (2,561)
Other income (expense), net (3,995) 309 (2,212) 260
Equity in net income of unconsolidated affiliates 2,018 2,448 6,928 7,335
Gain (loss) on disposition of investments in affiliates, net 716 -- (7,382) (8,951)
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Income (loss) from continuing operations before income
taxes and minority interests (33,753) 4,684 (54,931) (19,482)
Income tax (expense) benefit (1,296) (1,855) (3,635) 7,835
Minority interests in net (income) loss of subsidiaries (1,621) 339 (6,676) 1,688
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Income (loss) from continuing operations (36,670) 3,168 (65,242) (9,959)
Discontinued operations:
Losses from discontinued MK Rail and Transit operations
(net of tax benefit of $4,535 and $25,493 in 1994 and
tax expense of $88 and tax benefit of $1,775 in 1995) (3,028) (6,369) (12,663) (38,485)
Losses on disposals of discontinued operations (64,926) -- (90,426) --
Gain on MK Rail's sale of stock (less applicable
income taxes of $9,600) -- -- -- 14,429
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Net loss $(104,624) $ (3,201) $ (168,331) $ (34,015)
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Income (loss )per common share:
Continuing operations $(1.11) $ .10 $(1.97) $ (.31)
Discontinued operations (2.06) (.20) (3.13) (.74)
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Net loss $(3.17) $(.10) $(5.10) $(1.05)
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Common shares used to compute loss per common share 33,047,300 32,642,800 32,985,400 32,457,600
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Dividends declared per common share $-- $.20 $-- $.60
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</TABLE>
(a) Certain amounts reclassified to conform to 1995 financial statement
presentation.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
I-1
<PAGE>
MORRISON KNUDSEN CORPORATION
CONSOLIDATED BALANCE SHEETS
AT SEPTEMBER 30, 1995 (UNAUDITED) AND DECEMBER 31, 1994
(THOUSANDS OF DOLLARS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ASSETS 1995 1994 (a)
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<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 63,253 $ 65,011
Accounts receivable including retentions of $17,360 and $32,256 174,976 177,616
Unbilled receivables 109,618 122,922
Refundable federal income taxes, net 8,992 20,002
Investments in and advances to construction joint ventures 479 12,854
Deferred income taxes 48,061 63,885
Assets of subsidiaries and investment held for sale 116,624 --
Net assets of discontinued MK Rail operations 116,791 142,424
Other 16,401 28,822
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Total current assets 655,195 633,536
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INVESTMENTS AND OTHER ASSETS
Securities available for sale, at fair value 22,955 25,101
Investments in and advances to unconsolidated affiliates 46,607 71,382
Goodwill and other intangibles, net 4,148 15,947
Other investments and assets 12,200 39,936
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Total investments and other assets 85,910 152,366
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PROPERTY AND EQUIPMENT, AT COST
Land and mineral rights 10,507 18,402
Buildings and improvements 64,948 84,754
Machinery and equipment 14,668 21,809
Construction equipment 135,051 187,052
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Total property and equipment 225,174 312,017
LESS ACCUMULATED DEPRECIATION (157,944) (198,788)
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Property and equipment, net 67,230 113,788
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TOTAL ASSETS $ 808,335 $ 899,131
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</TABLE>
(a) Certain amounts reclassified to conform to 1995 financial statement
presentation.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
I-2
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) 1995 1994 (a)
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<S> <C> <C>
CURRENT LIABILITIES
Short-term and current portion of long-term debt $ 267,538 $ 192,152
Accounts payable including retentions of $20,895 and $29,348 142,886 193,015
Accrued salaries, wages and benefits 47,004 40,286
Accruals for estimated losses on uncompleted contracts 21,265 38,110
Other accrued liabilities 67,183 52,183
Billings in excess of costs and earnings on uncompleted contracts 75,229 98,415
Advances from customers 14,043 23,709
Liabilities of subsidiaries held for sale 79,340 --
- --------------------------------------------------------------------------------------------------------------
Total current liabilities 714,488 637,870
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NON-CURRENT LIABILITIES
Deferred income taxes 16,818 22,046
Deferred compensation 13,257 18,001
Deferred income 11,249 11,082
Accrued workers' compensation insurance 17,917 11,026
Accrued postretirement benefit obligation 28,037 26,710
Debt due after one year -- 7,873
Net liabilities of discontinued Transit operations -- 78,080
Estimated reimbursement obligations of discontinued Transit operations 81,343 --
Accrued litigation settlement 25,000 25,000
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Total non-current liabilities 193,621 199,818
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COMMITMENTS AND CONTINGENCIES (Notes 1 and 8)
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MINORITY INTERESTS IN SUBSIDIARIES -- 3,647
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STOCKHOLDERS' EQUITY (DEFICIENCY)
Preferred stock, par value $.10, authorized 10,000,000 shares, none
Common stock, par value $1.67, authorized 100,000,000 shares, issued
33,485,758 and 33,490,664 shares 55,921 55,818
Capital in excess of par value 270,334 272,594
Accumulated deficit (416,540) (248,209)
Treasury stock, 439,543 and 626,434 shares, at cost (7,467) (11,116)
Unearned compensation - restricted stock awards (1,730) (2,473)
Cumulative translation adjustments (649) (8,239)
Net unrealized holding gain (loss) on securities available for sale 357 (579)
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Total stockholders' equity (deficiency) (99,774) 57,796
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) $ 808,335 $ 899,131
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</TABLE>
I-3
<PAGE>
MORRISON KNUDSEN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995, AND 1994 (UNAUDITED)
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
1995 1994 (a)
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<S> <C> <C>
OPERATING ACTIVITIES
Net (loss) $(168,331) $ (34,015)
Adjustments to reconcile net (loss) to net cash
provided (used) by operating activities:
Provisions for estimated losses on disposition of discontinued operations 90,426 --
Losses on dispositions of businesses and assets, net 10,453 --
Depreciation and amortization 17,279 35,870
Gain on subsidiary sale of stock -- (1,255)
Equity in net income of unconsolidated subsidiaries, net of dividends received (6,928) (6,615)
Increase in working capital from cancellation
of accounts receivable sales (60,000) --
Cash paid to prefund workers' compensation liability -- (44,100)
Other changes in working capital, net 59,756 (36,109)
Increase (decrease) in other assets and liabilities, net (56,031) (58,892)
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities (113,376) (145,116)
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INVESTING ACTIVITIES
Property and equipment acquisitions (9,144) (25,522)
Property and equipment disposals 5,993 16,016
Purchase of securities available for sale (12,603) (17,845)
Net proceeds from securities available for sale 15,786 49,975
Net proceeds from sales of Corporation's investments in affiliates 42,007 --
Net proceeds from sale of MDC's investment in affiliate 9,994 --
Investments in and advances to unconsolidated affiliates (2,083) (10,314)
Other investing activities 15,164 187
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities 65,114 12,497
- -------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net borrowing (repayments) under credit agreements and short-term debt
including $60,000 from cancellation of accounts receivable sales in 1995 75,532 152,858
Borrowings of long-term debt -- 10,853
Payments of long-term debt -- (16,170)
Net proceeds from stock issued -- 509
Dividends paid (6,164) (25,741)
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Net cash provided (used) by financing activities 69,368 122,309
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Effect of exchange rate changes on cash (2,056) --
- -------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents of businesses held for sale (20,808) --
- -------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (1,758) (10,310)
Cash and cash equivalents at beginning of period 65,011 80,108
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Cash and cash equivalents at end of period $ 63,253 $ 69,798
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
OTHER CASH FLOW INFORMATION FOR CONTINUING AND DISCONTINUED OPERATIONS
Interest paid $ 22,417 $ 6,762
Income taxes paid (refunded), net (19,129) (17,541)
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>
(a) Certain amounts reclassified to conform to 1995 financial statement
presentation.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
I-4
<PAGE>
MORRISON KNUDSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
THE TERM "CORPORATION" AS USED IN THIS QUARTERLY REPORT INCLUDES MORRISON
KNUDSEN CORPORATION AND ITS CONSOLIDATED SUBSIDIARIES UNLESS OTHERWISE
INDICATED.
1. BASIS OF PRESENTATION AND MANAGEMENT'S PLANS
In July 1995, the Corporation committed to dispose of its Transit segment
("Transit") and on October 17, 1995, the Corporation reached an agreement to
transfer substantially all of the assets, certain liabilities, operations and
management of Transit to American Passenger Rail Car Company, L.L.C. ("Amerail")
a newly-formed company wholly-owned by persons not affiliated with the
Corporation. In connection with the disposition of Transit, the Corporation
agreed to reimburse its bonding company for the bonding company's future losses
capped at $31,249 on (i) its payment and performance bonds supporting the
existing manufacturing and refurbishing contracts with various transit agencies
transferred by the Corporation to Amerail (the "Transit Contracts") and (ii) its
guaranty of Amerail's secured financing for performance of certain of such
Transit Contracts or its direct financing of Amerail for the performance of the
Transit Contracts. The Corporation's estimated liability for such reimbursement
obligations to its bonding company at September 30, 1995 was $31,249 and is
reflected as a long-term liability in the consolidated balance sheet at
September 30, 1995. Also in connection with the disposition of Transit, with
respect to the Transit Contract with the Illinois Commuter Rail Division of the
Regional Transit Authority d/b/a Metra/Metropolitan Rail transferred by the
Corporation to Amerail (the "Metra Contract"), the Corporation agreed to
guarantee Amerail's reimbursement and repayment obligations to certain banks
which are providing a standby letter of credit and a new revolving credit
facility up to an aggregate amount of $141,000 to support Amerail's performance
of the Metra Contract (the "Metra Guaranty"). The Corporation's estimated
liability for its reimbursement obligations under the Metra Guaranty at
September 30, 1995 was $50,094 and is reflected as a long-term liability in the
consolidated balance sheet at September 30, 1995.
In March 1995, the Corporation announced its decision to sell its 65% ownership
interest in MK Rail Corporation ("MK Rail"). The accompanying consolidated
financial statements and financial statement footnotes as of and for the three
and nine month periods ended September 30, 1995 and 1994 give effect to the
anticipated sale of the Corporation's 65% ownership interest in MK Rail. The
assets and liabilities of MK Rail have been segregated on the consolidated
balance sheet at September 30, 1995, from their historical classifications
consistent with the presentation of the related results of operations of MK Rail
as a separate item in the statements of operations.
MK Rail and Transit have been accounted for as discontinued operations at
September 30, 1995 and accordingly, their results of operations are segregated
and reported as discontinued operations in the accompanying consolidated
statements of operations for the three and nine month periods ended September
30, 1995. The net assets of MK Rail and the net liabilities of Transit have been
reflected separately in the accompanying consolidated balance sheets. Prior
period consolidated financial statements have been restated to present MK Rail
and Transit as discontinued operations. The comparative consolidated balance
sheet and financial statement footnotes included herein as December 31, 1994
amounts have been derived from the audited balance sheet and financial statement
footnotes at December 31, 1994. See Note 2. "Changes in Business - Discontinued
Transit Operations and Discontinued MK Rail Operations".
The consolidated financial statements include the accounts of the Corporation
and its majority-owned subsidiaries. Investments in 20 percent to 50 percent
owned companies and joint ventures are accounted for by the equity method. The
Corporation's proportionate share of joint venture revenue, cost of revenue and
operating income (loss) is included in the consolidated statements of
operations. Intercompany accounts and transactions have been eliminated.
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 annual
financial statements 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 to Stockholders or the Corporation's
Annual Report on Form 10-K for the year ended December 31, 1994.
I-5
<PAGE>
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 period. The results of operations for the nine month
period ended September 30, 1995 are not necessarily indicative of the results to
be expected for the full year.
The Corporation's unaudited consolidated financial statements have been prepared
on the basis that it will continue as a going concern, which contemplates the
realization of asset values and the satisfaction of liabilities in the normal
course of business. There are certain conditions that raise substantial doubt
about the Corporation's ability to continue as a going concern:
- The Corporation reported net losses of $168,331 and $349,635 for the
nine month period ended September 30, 1995 and year ended December 31,
1994, respectively.
- Net cash used by the Corporation's operating activities was $113,376
and $227,677 for the nine month period ended September 30, 1995 and
year ended December 31, 1994, respectively.
- At September 30, 1995 the Corporation had a stockholders' deficiency
of $99,774 which included an accumulated deficit of $416,540. At
December 31, 1994 the Corporation had stockholders' equity of $57,796
which included an accumulated deficit of $248,209.
- At September 30, 1995 and December 31, 1994 there were working capital
deficits of $59,293 and $4,334, respectively.
- The Corporation expects negative cash flows from operations for the
remainder of 1995.
On August 11, 1995, the Corporation, its bank lenders and sureties agreed as
of July 31, 1995 to a restructuring of the Corporation's existing
indebtedness and the establishment of two new interim credit facilities, to
advance funds to Transit prior to its planned divestiture. The restructuring
provided for an increase in the amount available under the Corporation's
existing bridge loan facility ("bridge loan") from $122,100 to $129,000. On
October 17, 1995, the Corporation reached an agreement to dispose of Transit.
In connection with the disposition of Transit (i) outstanding borrowings
under the two interim credit facilities to fund Transit's operations were
paid off on October 17, 1995 and (ii) the Corporation agreed to reduce the
borrowing amount under the bridge loan from $129,000 to $100,000. Outstanding
borrowings under the bridge loan are due and payable on March 31, 1996. The
restructuring agreements require the repayment of $100,000 of the antecedent
bank debt (amount outstanding at September 30, 1995 was $213,345.) on
September 30, 1996 and the balance payable on December 31, 1996. In addition
to these required payments, the restructuring agreements also provide for the
Corporation to repay any outstanding borrowings under the antecedent and
bridge loans in the amount of, and upon receipt of, any prepayments or
repayments received by the Corporation on the $52,200 note receivable from MK
Rail, net cash proceeds from the sales of certain businesses and assets
currently held for sale, and any tax refunds received. The restructuring
agreements provide that the Corporation's ongoing indebtedness to the lender
banks and its sureties be secured. In connection with the restructuring
agreements the Corporation granted stock purchase warrants to the lender
banks and sureties for unissued common stock up to 14,859,430 shares.
The Corporation's capped $31,249 reimbursement arrangement with its bonding
company in connection with the disposition of Transit, is governed by a
reimbursement agreement (the "Transit Reimbursement Agreement"). The
Corporation's obligation to its bonding company under the Transit Reimbursement
Agreement is secured by security interests in and mortgages on substantially all
of the assets of the Corporation on an equal priority basis with the
Corporation's antecedent bank debt. The Corporation's obligations to certain
banks under the Metra Guaranty are similarly secured by security interests in
and mortgages on substantially all of the assets of the Corporation on an equal
priority basis with the Corporation's antecedent bank debt and Transit
reimbursement obligations to its bonding company.
Prior to the disposition of Transit, the Corporation had been unable to cause
any surety to issue bonds to guarantee the future performance of the
Corporation's construction and other projects. In consideration for the
Corporation transferring substantially all the assets, certain liabilities,
operations and management of Transit to Amerail, the Corporation's surety agreed
to issue new bonds assuring the payment or the performance of the Corporation on
contracts of a maximum aggregate amount which may from time to time be reduced
in accordance with the terms of the New Bonds Agreement dated October 10, 1995.
The New Bonds Agreement contains certain financial covenants which, among other
things, require the Corporation to maintain, beginning September 30, 1995 and
for each calendar quarter end thereafter,
I-6
<PAGE>
(i) minimum earnings (loss) before taxes, (ii) minimum net income (loss), and
(iii) minimum net worth (deficit). As of September 30, 1995, the Corporation was
not in compliance with the minimum net income (loss) and minimum net worth
(deficit) provisions of the New Bonds Agreement. Accordingly, the Corporation,
as of the date of this Quarterly Report on Form 10-Q, had no bonding capacity.
The Corporation is negotiating with its surety to reset the financial covenants.
Regardless of the outcome of such discussions, the Corporation will continue to
pursue environmental, construction and other projects in partnership
arrangements with other contractors to support the Corporation's performance of
contracts.
The Corporation can give no assurance that the funds available under the
restructuring agreements, together with the anticipated net proceeds from sales
of businesses and assets currently held for sale will provide sufficient
liquidity until a substantial recapitalization through an equity infusion or new
debt is completed. Any such recapitalization would substantially dilute existing
stockholders' interests. Unless the Corporation is able to obtain sources of
cash to meet its liquidity needs and to fund the mandatory repayment of its
bridge loan, antecedent debt, and the estimated reimbursement obligations of the
discontinued Transit operations, the Corporation may, among other alternatives,
seek protection from its creditors under the United States Bankruptcy Code. The
Corporation believes that, in such circumstances, the ability, if any, of its
stockholders to recover their investments would be eliminated or significantly
impaired and that any such recovery, if available, would be substantially
delayed.
The Corporation's ability to continue as a going concern is dependent upon the
Corporation successfully completing a recapitalization by obtaining additional
debt or equity capital and returning the Corporation to profitable operations.
In this connection, the Corporation has adopted operating and management plans
to:
- Sell non-core businesses and receive cash proceeds sufficient to
substantially reduce the debt burden. See Note 2. "Changes in
Business" and Note 6. "Short-Term Debt - New and Amended Credit
Facilities".
- Successfully resolve the stockholders' litigation. See Note 8.
"Commitments and Contingencies - Legal Proceedings" and Item 1. "Legal
Proceedings" in Part II of this Quarterly Report on Form 10-Q.
- Negotiate with the bonding company to reset the financial
covenants and issue bonds to guarantee the future performance of the
Corporation's contracts.
- Continue to obtain new, profitable contracts and to generate positive
cash flows from continuing operations in 1996 and beyond.
The Corporation believes that if it is able to successfully complete its
operating and recapitalization plans, if it continues to receive the
cooperation of its bank and bonding company, and if it can obtain sufficient
additional debt or equity financing, it will be able to continue its
operations and ultimately to repay or refinance its existing indebtedness.
However, the results of these actions cannot be predicted and no assurance
can be given that the foregoing operating and restructuring plans will be
successful or that necessary sources of capital will be available when
required. Any such recapitalization, if successful, will substantially dilute
existing stockholders' interests.
2. CHANGES IN BUSINESS
DISCONTINUED TRANSIT OPERATIONS: In July 1995, the Corporation committed to
dispose of Transit and on October 17, 1995, the Corporation reached an agreement
to transfer substantially all of the assets, certain liabilities, operations and
management of Transit to Amerail. Amerail has managerial authority over its
operations including the completion of the Transit Contracts transferred to
Amerail. The Corporation remains liable for certain net cash losses resulting
from Amerail's performance of such contracts by virtue of the Transit
Reimbursement Agreement with its bonding company and the Metra Guaranty with
certain banks. The Corporation has estimated its total reimbursement obligations
for such net cash losses of the Transit Contracts transferred to Amerail to be
$81,343 and recognized an additional $49,693 estimated provision for its
reimbursement obligations at September 30, 1995. The reimbursement obligations
have been reflected as a long-term liability on the consolidated balance sheet
at September 30, 1995. The $49,693 additional provision includes anticipated
costs for interest on the outstanding borrowings under the credit facilities
extended to Amerail for completion of Transit Contracts, additional general and
administrative expenses and unabsorbed manufacturing overhead due to the
anticipated absence of new work during the period of Amerail's performance of
the Transit Contracts which is in addition to accumulated net contract losses
which have been previously recorded. The Corporation has accounted for the
disposition of Transit as a discontinued operation, and the prior periods
consolidated financial statements have been restated to present Transit as a
discontinued operation. The Corporation has recognized its reimbursement
obligations through the estimated final completion of the Transit Contracts
transferred to Amerail based upon the best information available in the
circumstances. However, there can be no assurance that the net cash losses
ultimately realized at completion of the Transit Contracts transferred to
Amerail will not exceed the Corporation's estimated reimbursement obligations at
September 30, 1995. The Corporation cannot exercise any control over the
management of Amerail and the execution of the Transit Contracts.
The Corporation's repayment obligations under the Transit Reimbursement
Agreements are governed by a Distribution
I-7
<PAGE>
Agreement among the Corporation, the bonding company and the agent for the
antecedent bank debt (the "Distribution Agreement"). Under the Distribution
Agreement, the amount owing to the bonding company under the Transit
Reimbursement Agreement is fixed, subject to the $31,249 cap, and becomes
payable approximately 90 days after the date the last rail car manufactured
under the Transit Contracts is accepted by a transit agency. Prior to this date,
however, the Distribution Agreement requires certain amounts to be placed in
escrow for the benefit of the bonding company to cover such future payment of
the ultimate amount owing under the Transit Reimbursement Agreement. These
escrow requirements are tied to when (i) dispositions of assets are made
requiring payments to be made on account of antecedent bank debt and (ii)
payments are made on account of antecedent bank debt. The amounts required to be
escrowed for the benefit of the bonding company at such times are determined by
formulas under the Distribution Agreement. These formulas generally require that
the amounts to be placed in escrow provide the bonding company with its pro rata
distribution of amounts paid on the antecedent bank debt obtained by multiplying
the existing capped exposure of the bonding company by the amount to be paid on
the antecedent bank debt divided by the outstanding antecedent bank debt. Under
the Distribution Agreement, the Corporation will be required to place in escrow
on September 30, 1996 an amount determined by the formulas if the Corporation
makes the scheduled $100,000 payment due on such date on account of its
antecedent bank debt.
The Corporation's repayment obligations under the Metra Guaranty are subject to
the terms and conditions of the Amended and Restated Override Agreement dated as
of October 10, 1995 ("Override Agreement") governing the repayment of the
remainder of the Corporation's antecedent bank debt. Optional and mandatory
payments under the Override Agreement, in addition to repaying funded antecedent
bank debt are escrowed on account of the contingent Metra Guaranty repayment
obligation and other contingent antecedent bank debt obligations until, among
other things, such amounts become fixed and liquidated. The amounts owing under
the Metra Guaranty are estimated to become fixed and liquidated sometime after
the delivery of the final transit car to the Metra agency which is estimated to
be December 1997.
DISCONTINUED MK RAIL OPERATIONS: In March 1995, the Corporation adopted a plan
to sell its 65% ownership interest in MK Rail Corporation and in the quarter
ended March 31, 1995 recognized a $25,500 estimated provision to write-down the
carrying value of its MK Rail investment. At September 30, 1995, the
Corporation recognized an additional $8,553 provision to write-down the carrying
value of its investment in MK Rail to its estimated recovery value (bringing the
total provision to $34,053), based upon the best information available in the
circumstances. However, there can be no assurance that the net proceeds realized
by the Corporation from the sale of its ownership interest in and accounts
receivable from MK Rail will not be less than the estimated fair value assumed
at September 30, 1995. Accordingly, the Corporation has accounted for the
planned divestiture of MK Rail as a discontinued operation, and the consolidated
financial statements have been reclassified to report the net assets and the
results of operations of MK Rail separately. Prior periods consolidated
financial statements have been restated to present MK Rail as a discontinued
operation.
Summary results of operations of MK Rail for the nine months ended September 30,
1995 and 1994 follows:
<TABLE>
<CAPTION>
Results of Operations
For the Nine Months in the Periods Ended September 30, 1995 1994
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Revenue $196,262 $259,706
Operating income (loss) (4,321) 9,360
Net income (loss) (12,260) 3,137
- -----------------------------------------------------------------------------------------------
Corporation's share of net income (loss) $ (7,969) $ 2,039
- -----------------------------------------------------------------------------------------------
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</TABLE>
(1) Included in the net loss for the nine months ended September 30, 1995 is an
aggregate after-tax loss of $7,285 in connection with MK Rail's wholly-owned
subsidiary Morrison Knudsen Corporation of Australia, Ltd. ("MKA"). MK Rail
recognized a $4,485 operating loss from MKA's operations and a $2,800 loss on
sale of its ownership interest in MKA to the Corporation. See Note 5.
"Investments in and Advances to Unconsolidated Affiliates."
I-8
<PAGE>
The assets and liabilities of MK Rail adjusted to give effect to the estimated
fair value of the Corporation's ownership interest therein, have been segregated
on the consolidated balance sheets at September 30, 1995 and December 31, 1994.
Such amounts are summarized as follows:
<TABLE>
<CAPTION>
September 30, 1995 December 31, 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents $ 1,122 $ 12,459
Accounts receivable 33,937 34,675
Unbilled receivables 2,601 11,393
Inventories 114,908 116,526
Other current assets 6,576 8,119
Property and equipment, net 78,876 71,426
Deferred income taxes 9,815 19,171
Goodwill and other intangibles, net 29,775 29,511
Prepaid lease cost 9,166 8,017
Short-term and current portion of long-term debt (365) (2,776)
Accounts payable (19,233) (31,133)
Accrued expenses and other accrued liabilities (24,126) (35,560)
Customer advances -- (6,196)
Debt due after one year (61,883) (38,091)
Other non-current liabilities (9,085) (13,450)
Minority interests (44,375) (41,667)
Cumulative translation losses 5,725 --
Excess of investment in MK Rail over proportionate share of net assets 17,410 --
Accrual for estimated loss on sale (34,053) --
- ----------------------------------------------------------------------------------------------------------------
Net assets of discontinued operations $116,791 $142,424
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
MK RAIL INTERCOMPANY AGREEMENTS: On June 15, 1995, the Corporation entered into
an agreement with MK Rail regarding the amount of intercompany indebtedness owed
by MK Rail to the Corporation and certain other matters. The agreement resulted
in the Corporation reducing its receivable from MK Rail through a capital
contribution of $29,500. The remaining balance of $52,200 was converted into a
note, with interest at the prime rate, due in 2000 with earlier repayments under
certain default and change-of-interest conditions. The outstanding balance of
the intercompany debt is due and payable in full upon the acquisition of all of
the common stock or substantially all of the assets of MK Rail by a third party.
The estimated loss on sale of MK Rail recognized in the consolidated statements
of operations includes the effect of this additional capital contribution to MK
Rail.
I-9
<PAGE>
ASSETS OF SUBSIDIARIES AND INVESTMENT HELD FOR SALE: The assets and liabilities
of the Corporation's subsidiaries - McConnell Dowell Corporation, Ltd. ("MDC"),
and Morrison Knudsen Corporation of Australia, Ltd. and the Corporation's
investment in AmerBank, have been segregated on the balance sheet at September
30, 1995 from their historical classifications to separately identify them as
held for sale. Such amounts are summarized as follows:
<TABLE>
<CAPTION>
Assets and liabilities of subsidiaries and investment held for sale September 30, 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C>
Cash and cash equivalents $ 20,808
Accounts receivable 36,798
Unbilled receivables 15,615
Investments in and advances to construction joint ventures 6,207
Investments in and advances to unconsolidated affiliates 6,714
Property and equipment, net 16,614
Other assets 13,868
- ------------------------------------------------------------------------------------------------------------
Total assets $116,624
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Short-term and current portion of long-term debt $ 7,727
Accounts payable and accrued expenses 46,069
Other accrued liabilities 3,505
Billings in excess of costs and earnings on uncompleted contracts 9,489
Deferred income taxes 821
Other long-term liabilities 643
Minority interests in subsidiaries 11,086
- ------------------------------------------------------------------------------------------------------------
Total liabilities $79,340
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
</TABLE>
MORRISON KNUDSEN CORPORATION OF AUSTRALIA, LTD.: Effective July 1, 1995, the
Corporation acquired MK Rail's ownership interest in Morrison Knudsen
Corporation of Australia, Ltd. ("MKA") for $3,000 in preferred stock of MKA. The
Corporation is committed to financially support the operations of MKA until the
Corporation can dispose of its ownership interest in MKA which is expected to be
about mid-1996. The Corporation has engaged the services of an investment
banking firm, the purpose of which is to seek potential buyers for the assets
and business of MKA. The Corporation does not anticipate a material gain or loss
on the disposition of MKA.
3. DISPOSITION OF INVESTMENTS IN AFFILIATES
Dispositions in 1995
SALE OF MK INVESTMENTS, INC. (NORTH PACIFIC CONSTRUCTION OPERATIONS)("MKI"): On
September 22, 1995, the Corporation completed the sale of certain MKI net assets
and operations for cash. In the first six months of 1995, the Corporation
recognized a provision of $8,836 to write-down the carrying value of its
investment in MKI to its estimated fair value based on preliminary negotiations
with the buyer. Pre-closing negotiations between the Corporation and the buyer
resulted in the retention by the Corporation of certain MKI net assets and
operations, resulting in a $716 reduction of the previously accrued $8,836
write-down or a net realized loss on disposal of $8,120.
SALE OF WESTERN AIRCRAFT, INC. ("WESTERN"): On July 21, 1995, the Corporation
sold its ownership interest in Western for $4,900 cash which approximated the
Corporation's carrying value of its investment in Western.
SALE OF INVESTMENT IN MK GOLD COMPANY ("MK GOLD"): On June 6, 1995 the
Corporation sold its 46.4% ownership interest in MK Gold to Leucadia National
Corporation ("Leucadia") for $22,500 cash. As a condition to the purchase of
the shares, Leucadia acquired MK Gold's $20,000 bank credit facility and
released the Corporation from its guarantee obligations under the facility.
The Corporation recognized a loss on disposal of $9,256.
SALE OF INVESTMENT IN BENJAMIN DEVELOPMENTS, LTD. In March 1995, the
Corporation's 63% owned subsidiary McConnell Dowell Corporation, Ltd. sold its
ownership interest in Benjamin Developments, Ltd. for cash and recognized a gain
of $9,994.
I-10
<PAGE>
Dispositions in 1994
WRITE OFF OF INVESTMENT IN TEXAS TGV CORPORATION ("TEXAS TGV"): 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 with the Texas High Speed Rail Authority in early 1994 were
unsuccessful, the Corporation abandoned the project and wrote-off its $13,828
investment in Texas TGV in June 1994.
SALE OF INTEREST IN STRAIT CROSSING DEVELOPMENT, INC. ("SCDI"): In October 1993,
Strait Crossing Development, Inc., a 45% owned unconsolidated subsidiary,
entered into 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
Atlantic Provinces of New Brunswick and Prince Edward Island. On March 31, 1994,
the Corporation entered into an agreement to sell a portion of its ownership
interest in SCDI to a third party for $1,301 cash and a $3,576 note receivable
with interest at 7% per annum, due and payable on the earlier of the date of
final completion of the toll bridge or May 31, 1998. The sale decreased the
Corporation's ownership interest in SCDI from 45% to 36%. The Corporation
recognized a pretax gain of $4,877 on the change of interest.
4. CONSTRUCTION JOINT VENTURES
The Corporation has from time to time entered into a number of partnership
arrangements with other contractors commonly referred to as "joint ventures".
Construction joint ventures frequently have a short life span, since they are
designed and created for the sole purpose of bidding on, negotiating for, and
completing one specific project and are liquidated when the projects are
completed. 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 of the
following summary financial information between periods may not be meaningful.
The following table presents summarized financial information of the
construction joint ventures on a combined 100 percent basis at September 30,
1995 and December 31, 1994 and for the nine months in the periods ended
September 30, 1995 and 1994.
<TABLE>
<CAPTION>
Financial Position at September 30, 1995 December 31, 1994
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents $ 142,665 $ 124,627
Other current assets 69,725 143,521
Non-current assets 6,334 19,365
Property and equipment, net 27,178 32,299
Advances from customers (98,302) (88,214)
Other current liabilities (132,798) (213,295)
- ------------------------------------------------------------------------------------------------------------------
Net assets $ 14,802 $ 18,303
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
Corporation's investment in and advances to construction joint ventures $479 $12,854
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
<CAPTION>
Results of Operations
For the Nine Month Periods Ended September 30, 1995 1994
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Combined Joint Ventures, Net:
Revenue $ 667,448 $ 917,722
Cost of revenue (684,121) (906,659)
- ------------------------------------------------------------------------------------------------------------------
Operating income (loss) $ (16,673) $ 11,063
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
Corporation's share, net:
Revenue $ 212,243 $ 260,071
Cost of revenue (217,514) (259,347)
- ------------------------------------------------------------------------------------------------------------------
Operating income (loss) $ (5,271) $ 724
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
I-11
<PAGE>
5. INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES
The following table presents summarized financial information of the
unconsolidated affiliates accounted for by the equity method on a combined 100
percent basis at September 30, 1995 and December 31, 1994 and for the nine
months in the periods ended September 30, 1995 and 1994. Amounts for all periods
presented include the accounts of the following individually significant
investees (the Corporation's ownership interests therein are shown
parenthetically): MK Gold Company (46.4%); Strait Crossing Development, Inc.
(36%); AmerBank (29.5%); Westmoreland Resources, Inc. (24%); and Mitteldeutsche
Braunkohlengesellschaft mbH ("MIBRAG mbH") (33%). Except as noted in (a) below.
<TABLE>
<CAPTION>
Financial Position at September 30, 1995 (a) December 31, 1994
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets $ 304,341 $ 446,260
Non-current assets 657,080 494,560
Current liabilities (182,578) (241,174)
Long-term debt (84,806) (75,455)
Other non-current liabilities (468,912) (440,987)
- ----------------------------------------------------------------------------------------------------------------------
Net assets $ 225,125 $ 183,204
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Corporation's investments in and advances to unconsolidated affiliates $ 46,607 $ 71,382
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
<CAPTION>
Results of Operations
For the Nine Month Periods Ended September 30, 1995 (a) 1994
- ----------------------------------------------------------------------------------------------------------------------
Revenue $387,528 $436,651
Operating income 36,798 29,068
Net income 27,766 27,255
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Corporation's equity in net income of unconsolidated affiliates $ 6,928 $ 7,335
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The assets and liabilities of MK Gold Company and AmerBank are not included
in the summarized financial position of the unconsolidated affiliates at
September 30, 1995. On June 6, 1995 the Corporation sold its ownership interest
in MK Gold and in connection with its decision to dispose of its ownership
interest in AmerBank, the Corporation has included the carrying amount of its
investment in AmerBank in "Assets of subsidiaries and investment held for sale"
in the balance sheet at September 30, 1995. The results of operations of
AmerBank for the nine months in the periods ended September 30, 1995 and 1994
are included in the summarized results of operations.
The Corporation received cash dividends of $720 and nil in the nine month
periods ended September 30, 1994 and 1995, respectively.
I-12
<PAGE>
6. SHORT-TERM DEBT
Short-term debt at September 30, 1995 and December 31, 1994 consisted of the
following:
<TABLE>
<CAPTION>
September 30, 1995 December 31, 1994
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Antecedent bank debt, interest rates of
8.75% at September 30, 1995, 6.5% at December 31, 1994 $213,345 $139,000
Bridge loan, interest rates of
11.75% at September 30, 1995, 6.7% at December 31, 1994 54,193 12,100
Unsecured borrowings, principally of foreign subsidiaries,
interest rates of 6.4% to 10.5% -- 21,287
Commercial paper, interest rate of 6.1% -- 19,765
- -----------------------------------------------------------------------------------------------------------------
Total short-term debt $267,538 $192,152
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
The weighted average interest rates on short-term borrowings outstanding of
$267,538 at September 30, 1995 and $192,152 at December 31, 1994 were 9.4% and
6.6%, respectively.
CREDIT FACILITY: On April 11, 1995, the Corporation and certain lender banks
entered into a Credit Facility under which the lender banks provided a bridge
loan of $110,000. The Credit Facility included establishment of $50,000 in new
borrowing capacity and absorption of a then existing $60,000 accounts receivable
purchase agreement. The Credit Facility also waived until May 31, 1995,
non-compliance with various financial covenants under the antecedent bank debt
agreement.
On April 25, 1995 the Credit Facility was amended to include an additional
accounts receivable facility of $12,100. The $122,100 outstanding under the
Credit Facility was due and payable on May 31, 1995.
Effective June 1, 1995, the Credit Facility was amended to (i) extend the bridge
loan termination date and the waivers from May 31, 1995 to July 31, 1995 and
(ii) require the Corporation to repay $31,200 of the bridge loan by July 31,
1995. The Corporation repaid $31,200 prior to June 30, 1995. The Credit Facility
specified certain events of default. These events of default arise upon the
occurrence of, among other things, (i) the Corporation's failure to pay amounts
owing under the bridge loan (ii) breaches of covenants, representations and
warranties and (iii) other events that customarily constitute events of default
under loan agreements similar to the bridge loan.
NEW AND AMENDED CREDIT FACILITIES: On August 11, 1995, the Corporation, its bank
lenders and sureties agreed as of July 31, 1995 to a restructuring of the
Corporation's existing indebtedness and provided for an increase in the amount
of the bridge loan from $122,100 to $129,000. In addition, the restructuring in
contemplation of the planned divestiture of Transit, provided for the
establishment of interim credit facilities, expiring September 1, 1995, to
advance funds to Transit of up to approximately $50,000 with interest at the
prime rate to finance its operations in connection with the Transit Contracts.
On October 17, 1995, the Corporation reached an agreement to dispose of Transit.
In connection with the disposition of Transit (i) outstanding borrowings under
the two interim credit facilities to fund Transit's operations were paid off on
October 17, 1995 and (ii) the Corporation agreed to reduce the maximum borrowing
amount under the bridge loan from $129,000 to $100,000. Outstanding borrowings
under the bridge loan are due and payable on March 31, 1996 and bear interest at
a rate equal to the prime rate plus three percent (11.75% at September 30,
1995). Interest is payable on the last day of each calendar month and on March
31, 1996. As of November 14, 1995 the Corporation had outstanding borrowings
under the antecedent bank and bridge loans of $279,645 and unused borrowing
capacity for working capital requirements under the bridge loan of $33,700.
Under the restructuring agreements, the antecedent bank debt was secured by
security interests and mortgages on substantially all of the assets of the
Corporation and certain of its subsidiaries. The restructuring agreements permit
the deferral of principal payments on the antecedent bank debt from July 1, 1995
until December 31, 1996, except, the Corporation is required to repay $100,000
on September 30, 1996 plus interest and periodic bank fees accrued to that date.
Outstanding borrowings under the antecedent bank debt bear interest at the prime
rate (8.75% at September 30, 1995). Interest accrued on outstanding borrowings
after July 1, 1995, may be deferred and paid in six equal monthly installments,
together with accrued interest thereon at the prime rate on the unpaid interest,
commencing April 30, 1996 unless repaid with optional principal prepayments. The
Corporation had deferred $4,759 of accrued interest payable in the balance sheet
at September 30, 1995.
I-13
<PAGE>
In addition to the required repayment of the outstanding borrowings under the
bridge loan at March 31, 1996 and $100,000 repayment under the antecedent bank
debt at September 30, 1996, the restructuring agreements also provide for (i)
optional prepayments and (ii) mandatory prepayments. The Corporation may, at its
option, prepay at any time all or part of the amount outstanding under the
antecedent bank debt and bridge loan. The Corporation must prepay any
prepayments or repayments received by the Corporation on the $52,200 note
receivable from MK Rail, net cash proceeds from the sales of certain businesses
and assets currently held for sale, and any tax refunds received.
As of July 31, 1995, the Corporation, in connection with the restructuring,
granted to the bank lenders two stock purchase warrants to acquire a total of
14,029,391 shares of unissued common stock at an exercise price of $6.75 per
share. The warrants may be exercised for all or any part thereof at December 31,
1996, or earlier upon a payment default on the antecedent bank debt, but not
later than July 31, 2000. The Corporation's obligation for the warrant covering
9,415,696 shares can be (i) eliminated if the Corporation repays the outstanding
balance of the antecedent bank debt by June 30, 1996 or (ii) reduced by 50% if
repaid during the period from July 1, 1996 through September 30, 1996. The
Corporation's obligation for the warrant covering 4,613,695 shares can be (i)
eliminated if the Corporation repays the outstanding balance of its
reimbursement obligation in connection with the Metra contract by June 30, 1996
or (ii) reduced by 50% if repaid during the period from July 1, 1996 through
December 31, 1996 or (iii) reduced by 25% if repaid during the period from
January 1, 1997 through June 30, 1997.
The Corporation's sureties were also granted a stock purchase warrant to acquire
a total of 830,039 shares of unissued common stock at an exercise price of $6.75
per share. The sureties warrant may be exercised for all or any part thereof at
December 31, 1996, or earlier upon a payment default with respect to the
Corporation's $31,249 maximum reimbursement obligation to its sureties, but not
later than July 31, 2000. The Corporation's obligation for the sureties warrant
can be (i) eliminated if the Corporation satisfies its $31,249 maximum
reimbursement obligation by June 30, 1996 or (ii) reduced by 50% if satisfied
during the period from July 1, 1996 through September 30, 1996.
7. OTHER INCOME (EXPENSE), NET
Other income (expense) items for the three and nine months in the periods ended
September 30, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest, dividends and net gains and losses on sales of
marketable securities $ 1,845 $ 1,012 $ 7,901 $ 4,256
Net losses on disposals and write-downs
of assets held for sale, net -- (1,077) (3,209) (5,179)
Write-off investment and notes receivable (4,440) -- (4,440) --
Gain on MK Gold's sale of stock -- -- -- 1,255
Miscellaneous income (expense), net (1,440) 374 (2,504) (72)
- ------------------------------------------------------------------------------------------------------------------------------
Other income (expense), net $(3,995) $ 309 $(2,212) $ 260
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
8. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS: The Corporation and several of its current and former
officers and the Corporation's auditors were named as defendants in lawsuits
asserted 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 March 20, 1995 (the "MK Securities Class Actions"). These class action
complaints, which were first filed on July 28, 1994, purport to present claims
under federal and state securities and other laws and seek equitable relief and
unspecified damages for losses resulting from alleged improper disclosures
during the class periods. The Corporation, 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 lawsuits asserted by stockholders
who claim to represent a class of stockholders that purchased shares of MK
Rail's common stock between April 26, 1994 and September 29, 1994 (the "MK Rail
Securities Class Actions"). The complaints, which were first filed on October
20, 1994, purport to present claims under the federal securities laws and seek
equitable relief and unspecified damages for losses resulting from, among other
things, alleged improper disclosures during the class period. Certain of the
Corporation's current and former directors and officers have been named as
defendants in thirteen derivative actions which have been filed in state courts
in Idaho and Delaware between February 13 and June 2, 1995. The Corporation is a
nom-
I-14
<PAGE>
inal defendant in each of these actions. Plaintiffs assert that the defendants
authorized or acquiesced in wrongful conduct on the part of the Corporation's
former chairman and failed to properly supervise his activities, and also allege
waste of corporate assets through payment of excessive compensation.
Agreements have been reached to settle the securities class actions and
derivative actions subject, among other things, to approval by the appropriate
courts. The $69,000 settlement will include payment of cash and the issuance of
stock. The $40,000 cash settlement will be paid by the Corporation's and
MK Rail's insurers. The settlement terms require the Corporation to issue
2,976,923 shares of its Common Stock in settlement of the MK Securities Class
Actions and require the Corporation to issue 869,231 shares of its Common Stock
and require MK Rail to issue 413,793 shares of its Common Stock and 10,000
shares of a new class of Preferred Stock in settlement of the MK Rail Securities
Class Actions. The shares to be issued by the Corporation and MK Rail have been
valued at $25,000 and $4,000, respectively, based upon predetermined stock
prices. Effective December 1994, the Corporation recognized an aggregate pretax
charge of $25,000 for the estimated costs of the settlement. The estimated
liability for the $25,000 settlements is included in the balance sheets at
December 31, 1994 and September 30, 1995 as a non-current liability. Assuming
court approval and issuance of the stock, the $25,000 will be reflected in
stockholders' equity. However, there can be no assurance that such final
settlement will be approved by the appropriate courts.
On February 7, 1995 the Corporation was named a defendant in lawsuits by former
stockholders of Touchstone. The plaintiffs allege that certain financial
statements of the Corporation, upon which they based their decision to exchange
their shares for shares of common stock of the Corporation, were misleading. The
plaintiffs purport to state claims for violation of federal and state securities
laws and also assert certain common law and contractual claims. The Touchstone
actions are at a preliminary state of proceedings and accordingly, the outcome
cannot be predicted with any certainty.
The Corporation is a defendant in a number of other legal actions of the type
normally associated with the Corporation's business and involving claims for
damages. The Corporation is of the opinion that such actions will not result in
any material adverse effect on the Corporation's financial position.
LETTERS OF CREDIT: The Corporation was contingently liable, in the normal course
of business, for $272,400 in standby and financial letters of credit not
reflected in the consolidated financial statements at September 30, 1995 for
contract performance guarantees comprised of $91,300 in connection with the
continuing Engineering and Construction operations, $144,000 in connection with
the discontinued operations of MK Rail and Transit, and $37,100 in connection
with the Corporation's 63% owned subsidiary McConnell Dowell.
DISCONTINUED SHIPBUILDING OPERATIONS: In April 1989, the Corporation sold its
interest in National Steel and Shipbuilding Company ("NASSCO") and in June 1994,
the Corporation renegotiated and amended the April 1989 sale agreement with
NASSCO. Under the terms of the amended sale agreement the Corporation committed
to provide NASSCO a $21,000 credit facility. In the third quarter of 1995,
NASSCO successfully negotiated a stand-alone bank credit facility without the
Corporation's guarantee. The Corporation's commitment to provide NASSCO a
$21,000 credit facility will continue for a period of three years after delivery
to and acceptance by the U.S. Navy of the last ship in a multiple-ship contract
expected to occur about February 1996, at which time the balance of the $21,000
credit facility will be reduced by $1,750 each successive quarter during the
three year period.
The Corporation has also guaranteed $21,000 of NASSCO's port facility bonds
until not later than December 1, 2002, and guaranteed $1,793 of NASSCO's federal
workers' compensation bonds. NASSCO's floating dry dock is pledged as collateral
for the $21,000 port facility bonds.
I-15
<PAGE>
DISCONTINUED REAL ESTATE OPERATIONS: At September 30, 1995, the Corporation was
liable for $29,280 of secured bank loans in connection with commercial real
estate operations of its Emkay Development Company, Inc., subsidiary ("Emkay"),
discontinued in 1987.
<TABLE>
<CAPTION>
Financial Position at September 30, 1995 December 31, 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Notes receivable $ 16,360 $ 23,551
Real estate held for sale, including $4,106 real estate repossessed in 1995 7,532 5,920
Other assets and liabilities, net 2,115 4,806
Secured bank loans, 8.75% at September 30, 1995 and
6.4% and 6.9% at December 31, 1994 (29,280) (31,078)
- ----------------------------------------------------------------------------------------------------------------------------------
Net assets (deficit) $ (3,273) $ 3,199
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
On March 31, 1995, Emkay failed to make a scheduled payment under one of two
existing then unsecured bank loan agreements. The Corporation and the banks
subsequently reached a Forbearance Agreement which, among other things, provided
for the waiving of existing defaults resulting from the nonpayment and granted
the banks security interests and mortgages in all of Emkay's real estate and
other assets, and the repayment of the outstanding secured loan balances by June
30, 1996. Interest on the outstanding secured bank loans, equal to the prime
rate, is payable on the last day of each month.
Subsequent to September 30, 1995, the maker of a $16,360 secured promissory note
payable to the Corporation defaulted on the note. The note is secured by deeds
of trust on certain real estate assets. The Corporation and the maker are
currently negotiating settlement terms which contemplate the maker purchasing
for cash a number of the real estate assets collateralizing the note and
transferring title to the remaining real estate assets to the Corporation. The
Corporation estimates that the net cash proceeds from the eventual sale of the
real estate assets securing the bank loans will be sufficient to liquidate such
bank loans by June 30, 1996. However, no assurance can be given as to the amount
or timing of the net cash proceeds from such sales.
I-16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTH PERIOD ENDED SEPTEMBER 30, 1995 COMPARED TO THE THREE MONTH PERIOD
ENDED SEPTEMBER 30, 1994
The Corporation, after giving effect to the disposition of its MK Rail segment
in March 1995 and the disposition of its Transit segment in July 1995, operates
in one industry segment, Engineering and Construction. See Note 2. "Changes in
Business."
REVENUE: Revenue for the third quarter of 1995 was $547.6 million, a decrease of
$43.1 million compared to $590.7 million for the same period of 1994. The
decline was principally due to the execution and completion of a number of major
contracts for petrochemical and industrial manufacturing customers, as well as
execution and completion of a number of contracts for public work and light
trackwork projects in the corresponding period of 1994, contrasted with
decreases in similar new contract awards in 1995.
OPERATING INCOME (LOSS): The Corporation reported an operating loss for the
third quarter of 1995 of $6.2 million compared to $9.2 million operating income
for the same period of 1994. Results of operations for the third quarter of 1995
were affected by the recognition of certain unusual items which adversely impact
operating income by $19.2 million, consisting of (i) aggregate provisions of
$25.3 million for anticipated losses on a number of long-term construction
projects including $16.8 million in connection with the contract to construct a
toll bridge principally due to unanticipated labor cost overruns during the
first season of construction, $4.5 million for the Taipei fixed-price subway
project for unanticipated repair costs on the tunnel boring machines and $4.0
million on other fixed-price contracts, partially offset by (ii) the receipt of
$6.1 million from the settlement of a claim on a light trackwork contract
completed in a prior period.
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses for the
third quarter of 1995 increased $12.1 million from $6.5 million in the same
period of 1994. The increase is due to approximately $7.7 million of
non-recurring expenses for legal and other professional fees associated with
litigation and financial restructuring. In addition, the Corporation accrued a
pro-rata share of $3.0 million in the third quarter of 1995 for additional
compensation in connection with the adoption in July 1995 of a key employee
retention and severance program. The aggregate amount of the program awards is
estimated to be approximately $12.0 million.
INTEREST EXPENSE: Interest expense for the third quarter of 1995 increased $7.0
million from $.8 million in the same period of 1994. The significant increase in
interest expense in 1995 is attributed to a substantially higher level of
short-term debt outstanding during the third quarter of 1995 compared to the
comparable period of 1994 and a weighted average cost of borrowing during the
third quarter of 1995 of 9.4% compared to 4.9% during the comparable period of
1994.
OTHER INCOME (EXPENSE), NET: Other net expense of $4.0 million, for the third
quarter of 1995 is comprised principally of $4.4 million to write-off an
investment and notes receivable and $1.0 million to recognize losses for future
rent costs on long-term non-cancellable real estate leases to the extent they
will not be offset by sub-lease rental income. The net expenses were partially
offset by investment gains of $1.8 million. See Note 7. "Other Income (Expense),
Net".
INCOME TAX EXPENSES: The Corporation recognized tax expense for the third
quarter of 1995 of $1.3 million consisting only of estimated foreign and state
income taxes relating to certain jurisdictions in which the Corporation had net
taxable income. The Corporation did not provide any tax benefit in 1995 because
management could not predict with reasonable certainty the amount of such
benefit which would be realized from future taxable income. Income tax expense
provided in the third quarter of 1994 was based on an annual effective tax rate
of 40.0%.
DISCONTINUED OPERATIONS: In connection with the disposition of its
discontinued Transit operations, the Corporation recorded a loss on disposal
of $56.3 million, without providing any future tax benefit. The loss includes
(i) a $49.7 million estimated provision for its reimbursement obligations for
the net cash losses resulting from Amerail's performance of certain Transit
car contracts transferred to Amerail, and (ii) a $6.6 million accrual for
transaction costs and employee severance and benefit costs. See Note 2.
"Changes in Business -Discontinued Transit Operations".
I-17
<PAGE>
In addition, the Corporation, in connection with its decision in March 1995 to
sell MK Rail, recorded an additional loss of $11.6 million, without any future
tax benefit. The loss includes (i) an $8.6 million write-down of the carrying
value of the Corporation's investment in MK Rail to estimated net realizable
value based on new information available in the circumstances and (ii) an
estimated additional $3.0 million loss for the Corporation's share of MK Rail's
estimated net operating loss until the expected time of disposal. See Note 2.
"Changes in Business - Discontinued MK Rail Operations".
RESULTS OF OPERATIONS
NINE MONTH PERIOD ENDED SEPTEMBER 30, 1995 COMPARED TO THE NINE MONTH PERIOD
ENDED SEPTEMBER 30, 1994
REVENUE: Revenue for the first nine months of 1995 was $1,482.0 million a
decrease of $53.9 million compared to $1,535.9 million for the same period of
1994, the decline was principally due to the execution and completion of a
number of major contracts for petrochemical and industrial manufacturing
customers, as well as execution and completion of a number of contracts for
public work and light trackwork projects in the corresponding period of 1994,
contrasted with decreases in similar new contract awards in 1995.
OPERATING INCOME (LOSS): The Corporation reported operating income for the first
nine months of 1995 of $14.3 million compared to $7.9 million operating income
for the same period of 1994. The results of operations for the first nine months
of 1995 were affected by the recognition of a net charge to operations of $8.6
million consisting of (i) $25.3 million charge for anticipated losses on a
number of fixed-price construction contracts and a $2.2 million provision for
anticipated costs of settling a long-term non-cancellable lease obligation
partially offset by (ii) $18.9 million proceeds from the settlements of claims
on contracts completed in prior periods.
The results of operations for the first nine months of 1994 were affected by the
recognition of a net charge to operations of $16.2 million consisting of an
aggregate $17.6 million write-down of investments in two environmental
businesses and fixed assets and to provide for an anticipated loss on a
long-term project which was partially offset by the recognition of $1.4 million
proceeds from settlement of a claim on a contract completed in a prior period.
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expense for the
first nine months of 1995 increased $20.9 million from $23.5 million in the same
period of 1994. The increase is due to substantial non-recurring expenses for
legal and other professional fees associated with pending litigation and
financial restructuring. In addition, the Corporation accrued a pro-rata share
of $3.0 million in the third quarter of 1995 for additional compensation in
connection with the adoption in July 1995 of a key employee retention and
severance program. The aggregate amount of the program awards is estimated to be
approximately $12.0 million.
INTEREST EXPENSE: Interest expense for the first nine months of 1995 increased
$19.6 million from $2.6 million in the same period of 1994. The significant
increase in interest expense in 1995 is attributed to a substantially higher
level of short-term debt outstanding during the first nine months of 1995
compared to the comparable period of 1994 and a weighted average cost of
borrowing during the first nine months of 1995 of 9.5% compared to 4.6% during
the comparable period of 1994.
OTHER INCOME (EXPENSE), NET: Other net expense of $2.2 million, for the first
nine months of 1995 is comprised principally of a $3.2 million write-down of the
carrying value of the Morrison Knudsen Depot held for sale, $4.4 million to
write-off an investment and notes receivable, $1.0 million to recognize losses
on future rent costs on long-term non-cancellable real estate leases to the
extent they will not be offset by sub-lease rental income and $1.0 million for
the periodic amortization of residual goodwill stemming from the Corporation's
acquisition of MDC. The net expenses were partially offset by investment gains
of $7.9 million. See Note 7. "Other Income (Expense), Net".
Other net expense of $.3 million, for the first nine months of 1994 is comprised
principally of losses on disposals of assets, write-downs of certain assets held
overseas, and a loan-guarantee loss, offset by investment gains and gain on
MK Gold's sale of stock. See Note 7. "Other Income (Expense), Net".
DISPOSITION OF INVESTMENTS IN AFFILIATES: The $7.4 million net loss on
disposition of investments in affiliates for the first nine months of 1995
consisted of a gain of $10.0 million in connection with the sale of a McConnell
Dowell subsidiary, offset by a loss of $9.3 million in connection with the
Corporation's sale in June 1995 of its remaining ownership interest in MK Gold
Company and a realized loss of $8.1 million in connection with the disposition
of its investment in MK Investments, Inc. (North Pacific construction
operations). See Note 3. "Disposition of Investments in Affiliates".
I-18
<PAGE>
The $8.9 million net loss on disposition of investments in affiliates for the
first nine months of 1994 resulted from a $4.9 million gain on the Corporation's
sale of a portion of its ownership interest in Strait Crossing Development, Inc.
offset by a $13.8 million loss from writing off the Corporation's investment in
Texas TGV after Texas TGV's failure to provide equity financing for a high speed
rail system project as required under the franchise agreement. See Note 3.
"Disposition of Investments in Affiliates".
INCOME TAX EXPENSES: The Corporation recognized tax expense for the first nine
months of 1995 of $3.6 million consisting only of estimated foreign and state
income taxes relating to certain jurisdictions in which the Corporation had net
taxable income. The Corporation did not provide any tax benefit in 1995 because
management could not predict with reasonable certainty the amount of such
benefit which would be realized from future taxable income. Income tax benefits
provided in the first nine months of 1994 was based upon an annual effective tax
rate of 40.0%.
DISCONTINUED OPERATIONS: In connection with the disposition of Transit, the
Corporation recorded a loss from discontinued operations of $60.0 million,
without providing any future tax benefit. The loss includes (i) a $49.7 million
provision for its reimbursement obligations for the net cash losses resulting
from Amerail's performance of certain transit car contracts transferred to
Amerail, (ii) a $6.6 million accrual for transaction costs and employee
severance and benefit costs and (iii) $3.7 million of Transit's operating loss.
See Note 2. "Changes in Business - Discontinued Transit Operations".
In connection with its decision to sell MK Rail, the Corporation recorded a loss
from discontinued operations of $43.0 million, without providing any future tax
benefit. The loss includes (i) a $34.1 million write-down of the Corporation's
carrying value of its investment in MK Rail to estimated net realizable value
based upon the best information available in the circumstances and (ii) $8.9
million for the Corporation's share of MK Rail's estimated net operating loss
until the expected time of disposal. See Note 2. "Changes in Business -
Discontinued MK Rail Operations".
Consistent with the presentation of Transit and MK Rail as discontinued
operations, the Corporation's share of Transit and MK Rail's results of
operations for the three and nine month periods ended September 30, 1994 and the
Corporation's gain recognized from MK Rail's sale of stock in May 1994 have been
segregated and reported as discontinued operations in the statements of
operations.
FINANCIAL CONDITION
<TABLE>
<CAPTION>
Liquidity and capital resources (THOUSANDS OF DOLLARS) September 30,
------------------------------
1995 1994
<S> <C> <C>
CASH AND CASH EQUIVALENTS:
Beginning of period $65,011 $80,108
End of period 63,253 69,798
Nine Months Ended
September 30,
-----------------------------
1995 1994
NET CASH PROVIDED (USED) BY:
Operating activities $(113,376) $(145,116)
Investing activities 65,114 12,497
Financing activities 69,368 122,309
</TABLE>
Total capitalization at September 30, 1995 was $167.8 million, and consisted of
$267.6 million debt net of a $99.8 million stockholders deficiency compared to
total capitalization at December 31, 1994 of $257.8 million, which consisted of
$200.0 million debt and $57.8 million stockholders' equity.
OPERATING ACTIVITIES: Net cash used for operating activities of $113.4 million
in the first nine months of 1995 included an increase in accounts receivable at
June 30, 1995 of $60.0 million. These accounts receivable were sold at December
31, 1994, cancelled effective March 31, 1995, and subsequently absorbed into the
new bank credit facility on April 11, 1995. In addition, the balance of $53.4
million was principally used to fund cost overruns on fixed-price contracts,
which cost overruns had been fully reserved in prior periods.
I-19
<PAGE>
Net cash used for operating activities of $145.1 million in the first nine
months of 1994 consisted primarily of $66.8 million to fund contract operations
and losses of the discontinued Transit operations, $44.1 million to prefund the
Corporation's self-insurance liability for workers' compensation claims and a
$39.3 million increase in trade receivables.
INVESTING ACTIVITIES: Net cash provided by investing activities in the first
nine months of 1995 of $65.1 million arose principally from (i) $3.1 million net
proceeds from sales and purchases of securities available for sale (ii) $52.0
million net proceeds from the sales of investments in affiliates which included
McConnell Dowell's $10.0 million proceeds from sale of its ownership interest in
Benjamin Developments, Ltd. and the Corporation's ownership interests in MK
Gold, Western and North Pacific construction operations, (iii) $15.2 million
proceeds from other investing activities including $4.6 million from liquidation
of investments in Brazil and receipt of a $9.7 million cash performance fee for
completion of financing for a major infrastructure project.
Net cash provided by investing activities in the first nine months of 1994 of
$12.5 million resulted from $32.1 million net proceeds from sales and
purchases of securities available for sale offset by $10.3 million for
investments in unconsolidated affiliates and $9.5 million for net purchases
of fixed assets. See Note 3. "Disposition of Investments in Affiliates".
FINANCING ACTIVITIES: Net cash provided by financing activities in the first
nine months of 1995 of $69.4 million included $75.5 million net borrowings under
the bridge loan less the $6.2 million cash payment in January 1995 of the fourth
quarter 1994 dividend.
Net cash provided by financing activities in the first nine months of 1994 of
$122.3 million included $147.5 million additional net borrowings under bank
credit agreements less the cash payment of $25.7 million dividends for the four
quarters ended September 1994.
LIQUIDITY
The Corporation further restructured its debt and other obligations during the
quarter ended September 30, 1995. On August 11, 1995, the Corporation and its
bank lenders and surety agreed as of July 31, 1995 to a restructuring of the
Corporation's existing indebtedness and the establishment of two new interim
credit facilities, expiring September 1, 1995, to advance up to approximately
$50.0 million to Transit prior to its planned divestiture. The restructuring
provided, among other things, for (i) an increase in the amount of the bridge
loan from $122.1 million to $129.0 million, (ii) extension of the maturity date
for the bridge loan to March 31, 1996 and extension of the maturity date for the
antecedent bank debt to December 31, 1996, (iii) mandatory repayment of $100.0
million of antecedent bank debt on September 30, 1996, (iv) required repayments
with the net cash proceeds from sales of certain businesses and assets, and cash
collected on certain receivables and (v) the granting of stock purchase warrants
to the lender banks and sureties. The restructuring provides that ongoing
indebtedness of the Corporation to the banks and its surety syndicate be
secured. On October 17, 1995, the Corporation reached an agreement to dispose of
Transit by transferring substantially all of the assets, certain liabilities,
operations (including the Transit Contracts) and management of Transit to
Amerail. In this connection, outstanding borrowings under the two interim credit
facilities extended to Transit were paid off on October 17, 1995 and the
Corporation agreed to reduce the maximum borrowing amount under the bridge loan
from $129.0 million to $100.0 million. Following the disposition of Transit the
Corporation remains liable for certain net cash losses resulting from Amerail's
performance of the transferred Transit Contracts by virtue of the Transit
Reimbursement Agreement with its bonding company and the Metra Guaranty with
certain banks. The amount owing to the bonding company under the Transit
Reimbursement Agreement is capped at $31.2 million. The amount owing under the
Metra Guaranty is estimated to become fixed and payable in December 1997. The
Corporation currently estimates its total reimbursement obligation for such net
cash losses on the Transit Contracts transferred to Amerail to be $81.3 million.
However, there can be no assurance that the net cash losses ultimately realized
at completion of the Transit Contracts transferred to Amerail will not exceed
the Corporation's estimated reimbursement obligations at September 30, 1995. The
Corporation cannot exercise any control over the management of Amerail and the
execution of the Transit Contracts. Certain amounts (determined on a formula
basis) are required to be escrowed in respect of these obligations upon any
repayments on the Corporation's antecedent bank debt.
As of November 14, 1995, the Corporation had outstanding borrowings under the
antecedent bank and bridge loans of $279.6 million and unused borrowing capacity
for working capital requirements under the bridge loan of $33.7 million. The
Corporation expects negative cash flows from operations for the remainder of
1995, due primarily to the funding of the operating losses recognized in 1994
and 1995. The Corporation's repayment obligations on existing indebtedness
include (i) repayment of the outstanding borrowings under the $100.0 million
bridge loan on March 31,
I-20
<PAGE>
1995, (ii) mandatory repayment of $100.0 million of antecedent bank debt on
September 30, 1996, (iii) repayment of the balance of the antecedent bank debt
on December 31, 1996, and the additional amounts required to be escrowed for the
benefit of the bonding company on such dates and to ultimately fund the
remaining capped reimbursement obligation to the bonding company and the
estimated amount owing on the Metra Guaranty, currently estimated to total $81.3
million and estimated to come due December 1997. The Corporation proposes to use
the proceeds from the sale of noncore assets currently held for sale (its
ownership interests in MK Rail Corporation, McConnell Dowell and AmerBank) to
repay amounts due with respect to its bridge loan. The Corporation has no
agreements for the sale of any of its remaining noncore assets, and even if such
agreements are reached, no assurance can be given that such agreements would
generate cash sufficient to repay its bridge loan obligation or that any such
agreements, if reached, could be consummated prior to March 31, 1996. Even if
the Corporation has sufficient liquidity to meet its obligations prior to the
maturity of its antecedent bank debt, the Corporation believes that a
substantial recapitalization through an equity infusion or new debt will be
required to meet such obligations. Such recapitalization would substantially
dilute existing stockholders' interests. The Corporation currently has no
arrangements for such a debt or equity infusion, and no assurance can be given
that such sources of capital will be available when required.
The Corporation currently believes it may be required under its partnership
agreement, relating to the contract to construct a toll bridge in Canada, to
contribute an amount currently estimated to be at least $22.0 million
additional cash to fund construction costs on the toll bridge contract during
the period from December 1995 through March 1996. The Corporation believes it
may be unable to make such contributions. Under the terms of the partnership
agreement, if the Corporation is unable to make the required contributions,
its partnership interest of 36% may be diluted or the Corporation may be
liable for interest on its unfunded contributions at prime interest rate plus
6%.
No assurance can be given that funds available under the Corporation's
restructured credit agreements, cash flow from operations, and proceeds from
the proposed sale of noncore assets will provide sufficient liquidity to
enable the Corporation to meet its bridge loan debt repayment obligations and
other cash needs or to successfully seek a substantial equity infusion or new
debt to fund a recapitalization and repayment of the Corporation's antecedent
debt and the estimated reimbursement obligations of the discontinued Transit
operations. The Corporation currently has no arrangements for such a debt or
equity infusion, and no assurance can be given that such sources of capital
will be available when required. Unless the Corporation is able to obtain
sources of cash to meet its liquidity needs and to fund the mandatory
repayment of its bridge loan, antecedent debt, and the estimated
reimbursement obligations of the discontinued Transit operations, the
Corporation may, among other alternatives, seek protection from its creditors
under the United States Bankruptcy Code. The Corporation believes that, in
such circumstances, the ability, if any, of its stockholders to recover their
investments would be eliminated or significantly impaired and that any such
recovery, if available, would be substantially delayed.
I-21
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Corporation previously has reported that lawsuits in the following four
general categories currently are pending against the Corporation and its
directors and/or officers: (1) class actions relating to transactions in the
common stock of the Corporation ("MK Securities Class Actions"); (2) class
actions relating to the issuance of, and transactions in, the common stock of MK
Rail ("MK Rail Securities Class Actions"); (3) derivative actions brought by
persons who claim to be stockholders of the Corporation ("Derivative Actions");
and (4) claims brought by the former stockholders of Touchstone, Inc.
("Touchstone Litigation").
The MK Securities Class Actions consist of seven separate cases which have been
consolidated as IN RE: MORRISON KNUDSEN SECURITIES LITIGATION, No. 94-0334-S-EJL
(U.S. District Court, Dist. of Idaho) (first filed July 28, 1994). The
defendants include the Corporation, certain of the Corporation's current and
former officers, and the Corporation's auditors. The MK Rail Securities Class
Actions consist of two cases relating to the issuance of, and transactions in,
the common stock of MK Rail which have been consolidated in the U.S. District
Court for the District of Idaho. The defendants include the Corporation, MK
Rail, certain current and former officers and directors of the Corporation and
MK Rail, and the managing underwriters of MK Rail's initial public offering.
Those two cases are: SUSSER, ET AL. V. AGEE, ET AL., No. CIV 94-0477-S-LMB (U.S.
District Court for the District of Idaho); and NEWMAN, ET AL. V. AGEE, ET AL.,
No. CIV 94-0478-S-EJL (U.S. District Court for the District of Idaho) (both
filed October 20, 1994).
The Derivative Actions consist of 13 derivative actions which have been filed in
state courts in Idaho and Delaware , naming as defendants certain of the
Corporation's President and former Directors and Officers. The Corporation is a
nominal defendant in each of these actions. The five Idaho derivative cases are
as follows: (i) DEKLOTZ, ET AL. V. MORRISON KNUDSEN CO., ET AL., No.
CV-00-9500605D (Idaho District Court, Ada County) (filed February 13, 1995);
(ii) WOHLGELERNTER V. AGEE, ET AL., No. CV-OC-9500656D (Idaho District Court,
Ada County) (filed March 24, 1995); (iii) FLINN V. AGEE, ET AL., No.
CV-OC-9500765D (Idaho District Court, Ada County) (filed February 21, 1995);
(iv) STEINER V. AGEE, ET AL., No. CV-OC-9500745D (Idaho District Court, Ada
County) (filed February 17, 1995); and (v) STATE BOARD OF ADMINISTRATION OF
FLORIDA V. MORRISON KNUDSEN CORPORATION, ET AL., No. CV-OC-9502463D (Idaho
District Court, Ada County) (filed June 2, 1995), and the eight Delaware
derivative cases are as follows: (i) STERN V. AGEE, ET AL., Civil Action No.
14032 (Delaware Chancery Court) (filed February 13, 1995); (ii) HAGER V. AGEE,
ET AL., Civil Action No. 14034 (Delaware Chancery Court)(filed February 14,
1995); (iii) TROY V. AGEE, ET AL., Civil Action No. 14167 (Delaware Chancery
Court) (filed March 31, 1995); (iv) CAFFREY V. AGEE, ET AL., Civil Action No.
14033 (Delaware Chancery Court) (filed February 13, 1995); (v) HAMMERSLOUGH V.
AGEE, ET AL., Civil Action No. 14042 (Delaware Chancery Court) (filed February
17, 1995); (vi) ROSENN V. AGEE, ET AL., Civil Action No. 14106 (Delaware
Chancery Court) (filed March 9, 1995); (vii) CITRON V. AGEE, ET AL., Civil
Action No. 14136 (Delaware Chancery Court) (filed March 22, 1995); and (viii)
ANTONICELLO V. AGEE, ET AL., Civil Action No. 14182 (Delaware Chancery Court)
(filed April 4, 1995).
The Touchstone Litigation consists of two cases brought by the former
stockholders of Touchstone which currently are pending in U.S. District Court in
Tennessee: THEODORE E. NELSON V. MORRISON KNUDSEN CORP., No. 95-1029 (U.S.D.C.
W.D. Tenn.) (filed February 7, 1995); and RICHARD JACOBS, ET AL. V. MORRISON
KNUDSEN CORP., No. 95-1024 (U.S.D.C. W.D. Tenn.) (filed February 7, 1995). The
plaintiffs, who among other things purport to state claims for violation of
federal and Tennessee securities laws, purport to be all of the stockholders of
Touchstone prior to the Corporation's acquisition of Touchstone through an
exchange offer. The Corporation is the sole defendant in these two cases. The
Corporation has been advised that the plaintiffs have filed a separate lawsuit
against William J. Agee, the Corporation's former chairman: RICHARD L. JACOBS,
ET AL. V. WILLIAM J. AGEE, No. 95-1168 (U.S.D.C. W.D. Tenn.) (filed July 18,
1995), which contains allegations similar to those against the Corporation.
These cases remain in the early stages of discovery; trial has been set for
September 1996.
II-1
<PAGE>
Agreements have been reached to settle the MK Securities Class Actions, the MK
Rail Securities Class Actions and the Derivative Actions (including the FLORIDA
case pending in Idaho) as to all defendants in those cases. The settlement terms
require the Corporation, as its share of the settlement: to (i) issue 2,976,923
shares of Common Stock in connection with the settlement of the MK Securities
Class Actions, (ii) issue 869,231 shares of Common Stock in connection with the
settlement of the MK Rail Securities Class Actions, (iii) pay the net (after
plaintiffs attorneys fees and related expenses) insurance proceeds received by
the Corporation in connection with the settlement of the Derivative Actions into
a settlement fund to be created in connection with the settlement of the
MKSecurities Class Actions, and (iv) implement certain corporate governance
procedures. Those procedures include, among other things, making reasonable
efforts to appoint up to seven additional non-employee directors, a presumption
that Board and Stockholders meetings will be held in Boise or certain other
specified locations, disclosure of certain common memberships of directors or
their immediate families on governing bodies of not-for-profit organizations,
and a requirement that future executive compensation not be based on
non-recurring items without stockholder approval, and (in connection with the
separate settlement of the FLORIDA case) requirements that the directors be
stockholders and that at least one director be an engineer and the establishment
of the position of stockholder liaison. In addition, the defendant non-employee
directors (other than Mrs. Peden) will relinquish five years of credited service
for purposes of the Corporation's Retirement Plan for Non-Employee Directors.
The settlement terms also require MK Rail, as its share of the settlement of the
MK Rail Securities Class Actions, to issue 413,793 shares of Common Stock and
shares of a new class of Preferred Stock with a redemption value of $1 million.
The Corporation's insurance carriers will pay $35 million (including the amounts
referred to in clause (iii) above) on behalf of the individual defendants in the
MK Securities Class Actions and the Derivative Actions, and MK Rail's insurance
carrier will pay $6 million into a settlement fund to be created in connection
with the settlement of the MK Rail Securities Class Actions, such payments to be
made with respect to the individual defendants in those cases. The funds paid by
MK Rail's insurance carrier will include the purchase from the settlement fund
of the MK Rail Preferred Stock referred to above for $1 million. As part of the
settlement of the Derivative Actions, Mr. Agee relinquished his claim to
contractual severance pay and all other contractual benefits other than his
Supplemental Savings Plan account (approximately $350,000 as of April 20, 1995,
the date the Plan was terminated), a reduced lifetime (with right of
survivorship) annual supplemental retirement benefit of $99,750 commencing in
1995, and prepaid medical and dental benefits for Mr. Agee and his family. The
Corporation's auditors separately have agreed to settle the MK Securities Class
Actions conditioned, among other things, on the execution of mutual releases by
the Corporation and its auditors. All of the foregoing settlements are subject
to approval by the appropriate courts.
The Corporation previously reported that it may become subject to an ongoing
investigation by the Central Regional Office of the Securities and Exchange
Commission of the issuance by the City and County of Denver of revenue bonds to
finance the construction of the new Denver International Airport. The
Corporation has since been notified that the Commission's staff plans to
recommend that one of the Corporation's subsidiaries be named as a respondent in
an administrative action relating to disclosure of information about the airport
project in connection with certain of the bond offerings. The subsidiary was a
joint venture partner of The Greiner/MKE Team, which was the program management
support consultant in connection with the construction of the new airport. The
Corporation also previously reported that MK Rail and the Corporation were
subject to an "informal investigation" by the Pacific Regional Office of the
Commission. The Corporation since has been advised that this is now a formal
investigation; the Corporation continues to provide documents in response to
discovery requests and otherwise to cooperate with the Commission's staff in
connection with this investigation.
II-2
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
FILED IN PART I
None
FILED IN PART II
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
The Registrant filed a current report on Form 8-K dated September 20,
1995, to report that it had settled all outstanding securities class
actions and all but one associated derivative action, the terms of
which are subject to court approval.
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/G.A. Crockett
-------------------------------------------
Vice President and Controller and Principal
Accounting Officer, in his respective
capacities as such
Date: November 20, 1995
II-3
<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, 1995 AND FOR THE NINE MONTHS THEN
ENDED, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH UNAUDITED FINANCIAL
STATEMENTS AND NOTES:
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 63,253
<SECURITIES> 0
<RECEIVABLES> 174,976
<ALLOWANCES> (631)
<INVENTORY> 0
<CURRENT-ASSETS> 655,195
<PP&E> 225,174
<DEPRECIATION> (157,944)
<TOTAL-ASSETS> 808,335
<CURRENT-LIABILITIES> 714,488
<BONDS> 0
<COMMON> 55,921
0
0
<OTHER-SE> (155,695)
<TOTAL-LIABILITY-AND-EQUITY> 808,335
<SALES> 0
<TOTAL-REVENUES> 1,482,034
<CGS> 0
<TOTAL-COSTS> (1,467,750)
<OTHER-EXPENSES> (44,385)
<LOSS-PROVISION> (631)
<INTEREST-EXPENSE> (22,164)
<INCOME-PRETAX> (54,931)
<INCOME-TAX> (3,635)
<INCOME-CONTINUING> (65,242)
<DISCONTINUED> (103,089)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (168,331)
<EPS-PRIMARY> (5.10)
<EPS-DILUTED> 0
</TABLE>
