<PAGE>
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [x]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[x] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2)
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
Washington Construction Group, Inc.
________________________________________________________________________________
(Name of Registrant as Specified in Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[_] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(l), or 14a-
6(i)(2) or Item 22(a)(2) of Schedule 14A.
[_] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-16(i)(3).
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock, par value $0.01
________________________________________________________________________________
(2) Aggregate number of securities to which transactionapplies:
________________________________________________________________________________
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
________________________________________________________________________________
(4) Proposed maximum aggregate value of transaction:
<PAGE>
_______________________________________________________________________________
(5) Total fee paid:
________________________________________________________________________________
[x] Fee paid previously with preliminary materials.
________________________________________________________________________________
[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously.
Identify the previous filing by registration statement number, or the Form or
Schedule and the
date of its filing.
(1) Amount Previously Paid:
________________________________________________________________________________
(2) Form, Schedule or Registration Statement No.:
________________________________________________________________________________
(3) Filing Party:
________________________________________________________________________________
(4) Date Filed:
<PAGE>
PRELIMINARY COPY
WASHINGTON CONSTRUCTION GROUP, INC.
27400 East Fifth Street
Highland, California 92346
September __, 1996
Dear Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders
of Washington Construction Group, Inc., a Delaware corporation ("WCGI"), to be
held at ________________ on September __, 1996, at __________ a.m. (the
"Special Meeting").
At the Special Meeting, you will be asked to consider and vote upon
two related proposals (the "Merger Proposals") which provide for (i) the merger
(the "Merger") of Morrison Knudsen Corporation, a Delaware corporation ("MK"),
with and into WCGI, with WCGI continuing as the surviving corporation, and
(ii) certain amendments to WCGI's Restated and Amended Certificate of
Incorporation. In the Merger, among other things, WCGI will (i) provide
$13,300,000 in cash and issue a number of newly-issued shares of common stock,
par value $0.01 per share, of WCGI ("WCGI Common Stock") (approximately
24,121,000 shares) equal to 45% of the issued and outstanding shares of WCGI
Common Stock after giving effect to the shares issued in connection with the
Merger, which cash and shares of WCGI Common Stock will be distributed to
certain creditors of MK; (ii) issue WCGI's Series A Preferred Stock for the
benefit of certain creditors of MK; (iii) repay and/or refinance borrowings
under MK's debtor-in-possession credit facility; and (iv) distribute to holders
of record of MK's common stock, par value $1.67 per share, immediately prior to
the effective time of the Merger warrants to purchase 2,765,000 shares of WCGI
Common Stock at $12.00 per share for a term of six and one-half years.
The Merger will be effected pursuant to a prepackaged plan of
reorganization of MK under Chapter 11 of the United States Code (the "Bankruptcy
Code").
THE APPROVAL OF EACH OF THE MERGER PROPOSALS IS CONDITIONED UPON
APPROVAL OF BOTH OF THE MERGER PROPOSALS. ACCORDINGLY, A VOTE AGAINST EITHER OF
THE MERGER PROPOSALS WILL HAVE THE SAME EFFECT AS A VOTE AGAINST BOTH OF THE
MERGER PROPOSALS.
Pursuant to a letter dated as of May 16, 1996, Dennis R. Washington,
who beneficially owns 68.5% of the outstanding WCGI Common Stock, agreed to
cause all shares of WCGI Common Stock beneficially owned by him to be voted in
favor of the approval of the Merger Proposals at the Special Meeting. As a
result, there are a sufficient number of shares of WCGI Common Stock to be voted
in favor of the Merger Proposals for approval and adoption at the Special
Meeting without the affirmative vote of any other holder of WCGI Common Stock.
The Merger Proposals are more fully described in the accompanying
Proxy Statement, including discussions therein concerning WCGI's reasons for the
Merger and the factors which should be considered in connection with your vote
on the Merger. Please review this information carefully.
After careful consideration, WCGI's Board of Directors believes that
the Merger is in the best interests of WCGI and its stockholders. Therefore,
the Board of Directors has unanimously approved the Merger Proposals, and
recommends that the stockholders VOTE IN FAVOR of the Merger Proposals.
Sincerely,
John H. Wimberly
President and Chief Executive Officer
<PAGE>
PRELIMINARY COPY
WASHINGTON CONSTRUCTION GROUP, INC.
27400 East Fifth Street
Highland, California 92346
----------------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To Be Held on September __, 1996
----------------------------------
To the Stockholders of
Washington Construction Group, Inc.:
Notice is Hereby Given that the Special Meeting of Stockholders (the
"Special Meeting") of Washington Construction Group, Inc., a Delaware
corporation ("WCGI"), will be held at __________________, on September __, 1996,
to consider and act upon:
1. Two related proposals (the "Merger Proposals"), more fully
described in the accompanying Proxy Statement and Appendix and Exhibits
thereto, which provide for the following:
Proposal One: Approval and adoption of the Restructuring and
Merger Agreement dated as of May 28, 1996, between WCGI and Morrison
Knudsen Corporation, a Delaware corporation ("MK"), providing for the
merger (the "Merger") of MK with and into WCGI, with WCGI continuing
as the surviving corporation. In the Merger, among other things, WCGI
will (i) provide $13,300,000 in cash and issue a number of newly-
issued shares of common stock, par value $0.01 per share, of WCGI
("WCGI Common Stock") (approximately 24,121,000 shares) equal to 45%
of the issued and outstanding shares of WCGI Common Stock after giving
effect to the shares issued in connection with the Merger, which cash
and shares of WCGI Common Stock will be distributed to certain
creditors of MK; (ii) issue WCGI's Series A Preferred Stock for the
benefit of certain creditors of MK; (iii) repay and/or refinance
borrowings under MK's debtor-in-possession credit facility; and
(iv) distribute to holders of record of MK's common stock, par value
$1.67 per share, immediately prior to the effective time of the Merger
warrants to purchase 2,765,000 shares of WCGI Common Stock at $12.00
per share for a term of six and one-half years. Approval and adoption
of the Merger Agreement will also constitute approval of the foregoing
transactions contemplated thereby.
Proposal Two: Approval of amendments to WCGI's Restated and
Amended Certificate of Incorporation (the "Certificate of
Incorporation") to become effective upon the effective time of the
Merger, among other things, (i) changing of the corporate name of WCGI
to "Morrison Knudsen Corporation"; (ii) increasing the number of total
authorized shares of WCGI Common Stock from 39,000,000 to 100,000,000
and the number of total authorized shares of WCGI's preferred stock,
par value $0.01 per share from 1,000,000 to 10,000,000;
(iii) eliminating stockholders' ability to remove a director of WCGI
without cause, (iv) eliminating stockholders' ability to call a
special meeting of the stockholders, (v) eliminating the ability of
stockholders of WCGI to act by written consent, (vi) changing the
required vote of the stockholders to amend or repeal WCGI's Bylaws,
(vii) changing the required vote of the stockholders to amend certain
provisions of WCGI's Certificate of Incorporation; and
(viii) prohibiting WCGI from issuing any nonvoting equity securities
as required by Chapter 11 of the United States Code.
THE APPROVAL OF EACH OF THE MERGER PROPOSALS IS CONDITIONED UPON THE
APPROVAL OF BOTH OF THE MERGER PROPOSALS. ACCORDINGLY, A VOTE AGAINST
EITHER OF THE MERGER PROPOSALS WILL HAVE THE SAME EFFECT AS A VOTE AGAINST
BOTH OF THE MERGER PROPOSALS.
<PAGE>
2. Such other business as may properly come before the Special
Meeting or any adjournment or postponement thereof.
Pursuant to a letter dated as of May 16, 1996, Dennis R. Washington,
who beneficially owns 68.5% of the outstanding WCGI Common Stock, agreed to
cause all shares of WCGI Common Stock beneficially owned by a him to be voted in
favor of the approval of the Merger Proposals at the Special Meeting. As a
result, there are a sufficient number of shares of WCGI Common Stock to be voted
in favor of the Merger Proposals for approval and adoption at the Special
Meeting without the affirmative vote of any other holder of WCGI Common Stock.
The Board of Directors of WCGI has fixed the close of business on
July 19, 1996 as the record date (the "Record Date") for the determination of
stockholders entitled to notice of and to vote at the Special Meeting or any
adjournment or postponement thereof. Only stockholders of record at the close
of business on the Record Date are entitled to notice of and to vote at the
Special Meeting and any adjournments or postponements thereof. A list of such
stockholders will be available for inspection at the offices of WCGI located at
27400 East Fifth Street, Highland, California 92346, at least ten days prior to
the Special Meeting.
Whether or not you plan to attend the Special Meeting, please execute, date
and return promptly the enclosed form of proxy. A return envelope is enclosed
for your convenience and requires no postage for mailing in the United States.
By Order of the Board of Directors
WASHINGTON CONSTRUCTION GROUP, INC.
Walter J. Orze
Secretary
August __, 1996
TO VOTE YOUR SHARES, PLEASE SIGN, DATE AND COMPLETE THE ENCLOSED PROXY AND MAIL
IT PROMPTLY IN THE ENCLOSED RETURN ENVELOPE.
<PAGE>
WASHINGTON CONSTRUCTION GROUP, INC.
Special Meeting of Stockholders
To Be Held on September __, 1996
PROXY STATEMENT
----------------------------------
This Proxy Statement is being furnished to the stockholders of Washington
Construction Group, Inc., a Delaware corporation ("WCGI or Washington"), in
connection with the solicitation of proxies by the Board of Directors to be used
at the Special Meeting of the stockholders of WCGI (the "Special Meeting") to be
held on September __, 1996, at __________________________.
At the Special Meeting, the stockholders of WCGI will be asked to consider
and vote upon the following two related proposals (the "Merger Proposals"):
(a) approval and adoption of the Restructuring and Merger Agreement dated as of
May 28, 1996 (the "Merger Agreement"), between WCGI and Morrison Knudsen
Corporation, a Delaware corporation ("MK"), providing for the merger (the
"Merger") of MK with and into WCGI, with WCGI continuing as the surviving
corporation, and (b) approval of certain amendments to WCGI's Restated and
Amended Certificate of Incorporation (the "Certificate of Incorporation") to
become effective upon the effective time of the Merger (the "Effective Time").
Under the Merger Agreement, WCGI will (i) provide $13,300,000 in cash and
issue a number of newly-issued shares of WCGI Common Stock (approximately
24,121,000 shares) (the "Merger Shares") equal to 45% of the issued and
outstanding shares of WCGI Common Stock after giving effect to the shares issued
in connection with the Merger, which cash and shares of WCGI Common Stock will
be distributed to certain creditors of MK; (ii) issue WCGI's Series A Preferred
Stock for the benefit of certain creditors of MK; (iii) repay and/or refinance
borrowings under MK's debtor-in-possession credit facility; and (iv) distribute
to holders of record of MK's common stock, par value $1.67 per share ("MK Common
Stock"), immediately prior to the Effective Time warrants to purchase 2,765,000
shares of WCGI Common Stock at $12.00 per share for a term of six and one-half
years (the "Warrants"). The Merger will be effected pursuant to a prepackaged
plan of reorganization (the "Plan") of MK under Chapter 11 of the U.S.
Bankruptcy Code. Approval and adoption of the Merger Agreement will also
constitute approval of the foregoing transactions contemplated thereby.
The Board of Directors of WCGI has approved certain amendments to WCGI's
Certificate of Incorporation to become effective upon the Effective Time,
including: (i) changing of the corporate name of WCGI to "Morrison Knudsen
Corporation"; (ii) increasing the number of total authorized shares of WCGI
Common Stock from 39,000,000 to 100,000,000 and the number of total authorized
shares of WCGI's preferred stock, par value $0.01 per share ("WCGI Preferred
Stock") from 1,000,000 to 10,000,000; (iii) eliminating stockholders' ability to
remove a director of WCGI without cause; (iv) eliminating stockholders' ability
to call a special meeting of the stockholders; (v) eliminating the ability of
stockholders of WCGI to act by written consent; (vi) changing the required vote
of the stockholders to amend or repeal WCGI's Bylaws; (vii) changing the
required vote of the stockholders to amend certain provisions of WCGI's
Certificate of Incorporation; and (viii) prohibiting WCGI from issuing any
nonvoting equity securities as required by the Bankruptcy Code.
Copies of the Merger Agreement and the Certificate of Incorporation are
attached as Exhibits 1 and 4, respectively, to this Proxy Statement.
Upon consummation of the Merger, the existing stockholders of WCGI may
experience dilution in net tangible book value per share of WCGI Common Stock.
Furthermore, upon consummation of the Merger, existing WCGI stockholders will
own an aggregate of approximately 55% of the outstanding WCGI Common Stock and,
assuming the issuance of shares of WCGI Common Stock upon exercise of all
Warrants, existing WCGI stockholders would own an aggregate of approximately
52.3% of WCGI Common Stock after the Merger. See "Risk Factors" on pages 12
through 18 for a discussion of certain additional considerations which should be
carefully considered in evaluating and voting on the Merger Proposals.
<PAGE>
PRELIMINARY COPY
This Proxy Statement and the accompanying form of proxy are first being
mailed or delivered to the stockholders of WCGI on or about August __, 1996.
WCGI Common Stock is quoted on the New York Stock Exchange, Inc. ("NYSE") under
the symbol "WAS." On August __, 1996, the last reported sale price for a share
of WCGI Common Stock on NYSE was $_________.
ii
<PAGE>
AVAILABLE INFORMATION
Statements contained in this Proxy Statement relating to the contents of
any contract or other document referred to herein are not necessarily complete,
and reference is made to the copy of such contract or such other document, each
such statement being qualified in all respects by such reference.
WCGI and MK are subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith file reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Reports, proxy
statements and other information filed by WCGI and MK can be inspected and
copied at the Commission's Public Reference Room, Judiciary Plaza, 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549, and at the public reference
facilities maintained by the Commission at its regional offices located at 500
West Madison Street, Suite 1400, Chicago, Illinois 60661, and 7 World Trade
Center, Suite 1300, New York, New York 10048. Copies of such materials can be
obtained from the Commission at prescribed rates from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549.
Additionally, WCGI Common Stock and MK Common Stock are listed on the NYSE.
Reports, proxy statements and other information with respect to WCGI and MK
should be available at the library of the NYSE, 20 Broad Street, New York, New
York 10005. Such materials can also be inspected on the Internet at
http://www.sec.gov.
All information concerning MK contained in this Proxy Statement has been
furnished by MK. No person is authorized to make any representation with
respect to the matters described in this Proxy Statement other than those
contained herein and, if given or made, such information or representation must
not be relied upon as having been authorized by WCGI, MK or any other person.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission by WCGI are incorporated
by reference in this Proxy Statement:
<TABLE>
<C> <S>
1. WCGI's Current Report on Form 8-K filed on March 4, 1996;
2. WCGI's Current Report on Form 8-K filed on May 20, 1996;
3. WCGI's Current Report on Form 8-K filed on May 31, 1996;
4. WCGI's Proxy Statement for the 1996 Annual Meeting of Stockholders;
5. WCGI's Quarterly Report on Form 10-Q for the three months ended
February 29, 1996;
6. WCGI's Quarterly Report on Form 10-Q for the three months ended May
31, 1996; and
7. WCGI's Annual Report on Form 10-K for the fiscal year ended November
30, 1995.
</TABLE>
All documents filed by WCGI with the Commission pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act after the date hereof and prior to the
date of the Special Meeting shall be deemed to be incorporated by reference
herein and shall be part hereof from the date of filing of such documents. Any
statement contained in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Proxy Statement to the extent that a statement in this Proxy Statement or
in any other subsequently filed document which is deemed to be incorporated by
reference modifies or supersedes such statement. Any such statement so modified
or superseded will not be deemed, except as so modified or superseded, to
constitute a part of this Proxy Statement.
iii
<PAGE>
This Proxy Statement incorporates by reference documents relating to WCGI
which are not presented herein or delivered herewith. Documents relating to
WCGI (other than exhibits to such documents unless such exhibits are
specifically incorporated by reference) are available without charge to any
person, including any beneficial owner, to whom this Proxy Statement is
delivered, upon request from WCGI, Attention: Investor Relations, 27400 East
Fifth Street, Highland, California 92346 (telephone: (909) 425-4200). To ensure
timely delivery of the documents in advance of the Special Meeting, requests
should be received at least seven days before the date of Special Meeting.
THIS PROXY STATEMENT, INCLUDING THE COMBINED COMPANY PROJECTIONS AND THE
EXHIBITS HERETO, AND THE DOCUMENTS INCORPORATED BY REFERENCE HEREIN, CONTAIN
PROJECTED FINANCIAL INFORMATION AND CERTAIN OTHER FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, ALL
OF WHICH ARE BASED ON VARIOUS ESTIMATES AND ASSUMPTIONS. SUCH INFORMATION AND
STATEMENTS ARE SUBJECT TO INHERENT UNCERTAINTIES AND TO A WIDE VARIETY OF
SIGNIFICANT BUSINESS, ECONOMIC AND COMPETITIVE RISKS, INCLUDING, AMONG OTHERS,
THOSE DESCRIBED HEREIN. SEE "RISK FACTORS." CONSEQUENTLY, ACTUAL EVENTS,
CIRCUMSTANCES, EFFECTS AND RESULTS MAY VARY SIGNIFICANTLY FROM THOSE INCLUDED IN
OR CONTEMPLATED BY SUCH PROJECTED FINANCIAL INFORMATION AND SUCH OTHER FORWARD-
LOOKING STATEMENTS. THE PROJECTED FINANCIAL INFORMATION CONTAINED HEREIN IS
THEREFORE NOT NECESSARILY INDICATIVE OF THE FUTURE FINANCIAL CONDITION OR
RESULTS OF OPERATIONS OF WCGI, MK AND THE COMBINED ENTITY OF WCGI AND MK, WHICH
MAY VARY SIGNIFICANTLY FROM THOSE SET FORTH IN SUCH PROJECTED FINANCIAL
INFORMATION. CONSEQUENTLY, THE PROJECTED FINANCIAL INFORMATION AND OTHER
FORWARD LOOKING STATEMENTS CONTAINED HEREIN SHOULD NOT BE REGARDED AS
REPRESENTATIONS BY WCGI, MK OR ANY OTHER PERSON THAT THE PROJECTED CONDITION OR
RESULTS CAN OR WILL BE ACHIEVED. ALL SUBSEQUENT WRITTEN OR ORAL FORWARD-LOOKING
STATEMENTS ATTRIBUTABLE TO WCGI OR PERSONS ACTING ON ITS BEHALF ARE EXPRESSLY
QUALIFIED BY THE FACTORS DESCRIBED IN THIS PROXY STATEMENT THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM WCGI'S EXPECTATIONS.
iv
<PAGE>
TABLE OF CONTENTS
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<TABLE>
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Page
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<S> <C>
AVAILABLE INFORMATION.................................................... iii
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.......................... iii
SUMMARY.................................................................. 1
The Companies............................................................ 1
The Special Meeting...................................................... 2
Vote Required; Agreement of Principal Stockholder........................ 2
The Merger............................................................... 2
Principal Terms of the Merger............................................ 2
Board of Directors....................................................... 3
MK Plan of Reorganization................................................ 3
Certain Conditions to the Merger; Termination Provisions................. 3
Amendments to WCGI's Certificate of Incorporation........................ 4
Recommendation of the Board of Directors of WCGI......................... 4
Risk Factors............................................................. 4
Dividends on WCGI Common Stock........................................... 4
Accounting Treatment..................................................... 4
Listing on the New York Stock Exchange................................... 5
Interests of WCGI Management in the Merger............................... 5
Certain Federal Income Tax Considerations; Possible Loss of Corporation
Tax Benefits............................................................. 5
Appraisal Rights......................................................... 5
Selected Financial Information........................................... 6
Selected Unaudited Pro Forma Financial Information....................... 7
Per Share Data........................................................... 8
Market Prices And Dividends.............................................. 9
VOTING AND PROXIES....................................................... 10
Record Date.............................................................. 10
Proxies.................................................................. 10
Quorum................................................................... 10
Vote Required............................................................ 11
RISK FACTORS............................................................. 12
Risks Related to the Business of MK, Washington and the Combined Company. 12
Potential Inability to Integrate MK...................................... 16
Risks Relating to the Projections........................................ 16
Assumptions Regarding Value of MK Assets................................. 16
Noncomparability of Historical Financial Information..................... 17
Certain Risks Associated with the Chapter 11 Case and the Merger......... 17
Dividend Restrictions.................................................... 17
Certain Effects of the Merger on the Rights of the Stockholders of WCGI.. 17
THE MERGER............................................................... 19
Background of the Merger................................................. 19
Subsequent Negotiations Involving Representatives of MK Equity Holders... 22
Recommendation of the Board of Directors of WCGI......................... 23
Chapter 11 Proceeding.................................................... 25
MK Plan of Reorganization................................................ 26
Operations of the Combined Company........................................ 28
</TABLE>
v
<PAGE>
TABLE OF CONTENTS (Cont'd)
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<TABLE>
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<S> <C>
Certain Federal Income Tax Consequences................................... 29
Other Indebtedness of the Combined Company................................ 30
Interests of WCGI Management in the Merger................................ 31
Dividends on WCGI Common Stock............................................ 31
Accounting Treatment...................................................... 31
Appraisal Rights.......................................................... 31
Regulatory Approvals...................................................... 31
Certain MK Legal Proceedings.............................................. 31
Boise Landlord Negotiations............................................... 34
THE MERGER AGREEMENT...................................................... 34
Conversion of Securities; Plan Consideration.............................. 34
Effective Time............................................................ 35
Board of Directors........................................................ 35
Representations and Warranties............................................ 35
Certain Covenants......................................................... 35
Conditions to the Merger.................................................. 38
Indemnification and Insurance............................................. 40
Termination............................................................... 40
Expenses.................................................................. 42
Employment Agreements..................................................... 42
Washington Agreement...................................................... 42
SECURITIES TO BE ISSUED AND TRANSFERRED UNDER THE PLAN.................... 43
Merger Shares............................................................. 43
The Warrants.............................................................. 43
Series A Preferred Stock.................................................. 44
MK Equity Rights.......................................................... 46
Registration Rights Agreement............................................. 46
Applicability of Section 1145 of the Bankruptcy Code...................... 47
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF THE COMBINED COMPANY............................. 59
BUSINESS OF MK............................................................ 59
PROPOSAL TO AMEND WCGI'S CERTIFICATE OF INCORPORATION..................... 60
Change the Corporate Name of WCGI......................................... 60
Increase in WCGI's Authorized Capital Stock............................... 60
Removal of Directors...................................................... 60
Special Meeting of Stockholders........................................... 60
Stockholder Action by Written Consent..................................... 61
Amendments to the Bylaws.................................................. 61
Amendments to the Certificate of Incorporation............................ 61
Prohibition of Issuance of Nonvoting Stock................................ 61
Potential Anti-Takeover Effects........................................... 61
Changes in Ownership of WCGI Resulting from the Merger.................... 62
SECURITY OWNERSHIP OF THE COMBINED COMPANY................................ 63
Certain Stockholders...................................................... 63
Beneficial Ownership of Stock by Management............................... 64
</TABLE>
vi
<PAGE>
TABLE OF CONTENTS (Cont'd)
--------------------------
<TABLE>
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<S> <C>
MANAGEMENT OF THE COMBINED COMPANY............................. 65
Board of Directors............................................. 65
Board Committees............................................... 66
Director Nomination Procedures................................. 67
Director Stock Options and Compensation........................ 67
Executive Officers............................................. 67
Executive Compensation......................................... 68
Limitation of Liability; Indemnification of Directors and
Officers....................................................... 69
Directors' and Officers' Insurance............................. 72
CERTAIN TRANSACTIONS........................................... 73
DESCRIPTION OF WCGI CAPITAL STOCK.............................. 76
Common Stock................................................... 76
Preferred Stock................................................ 76
Possible Increase in Number of Shares of Series A.............. 77
Preferred Stock................................................ 77
Potential Anti-Takeover Effects................................ 77
Delaware General Corporation Law Section 203................... 78
INDEPENDENT AUDITORS........................................... 78
DEADLINE FOR SUBMISSION OF STOCKHOLDER PROPOSALS FOR THE 1997
ANNUAL MEETING................................................. 78
OTHER MATTERS.................................................. 79
</TABLE>
APPENDIX A - The Combined Company Projections............................ A-1
APPENDIX B - Form of Proxy................................................B-1
EXHIBIT 1 - Restructuring and Merger Agreement...........................1-1
EXHIBIT 2 - Warrant Agreement............................................2-1
EXHIBIT 3 - Registration Rights Agreement................................3-1
EXHIBIT 4 - Restated and Amended Certificate of Incorporation............4-1
EXHIBIT 5 - Restated and Amended Bylaws..................................5-1
EXHIBIT 6 - MK's Quarterly Report on Form 10-Q for the three months
ended March 31, 1996.........................................6-1
EXHIBIT 7 - MK's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995......................................7-1
vii
<PAGE>
SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement. Reference is made to, and this summary is qualified in
its entirety by, the more detailed information contained elsewhere in this
Proxy Statement and Appendix and Exhibits hereto. Stockholders are urged to
read this Proxy Statement and its Appendix and Exhibits before voting on the
matters discussed herein.
As used herein, the term "WCGI or Washington" refers to Washington
Construction Group, Inc., including, unless the context otherwise requires,
its subsidiaries, and the term "MK" refers to Morrison Knudsen Corporation
including, unless the context otherwise requires, its subsidiaries.
The Companies
WCGI. WCGI is a diversified heavy construction company with more than 30
years experience in the infrastructure, contract mining, environmental
remediation, commercial construction and construction materials markets.
WCGI, through its subsidiaries, owns one of the largest heavy construction and
earthmoving equipment fleets in the United States and serves both public and
private customers throughout the Western United States.
WCGI (formerly named Kasler Holding Company) was formed in April 1993 to
become the parent corporation of Kasler Corporation, a California corporation
("Kasler"), and WCG Holdings, Inc., a Montana corporation ("WCG Holdings"),
the parent of Washington Contractors Group, Inc., a Montana corporation
("Washington Contractors"). The combination of these companies (the
"Combination") was effected July 12, 1993. Pursuant to the Combination, each
outstanding share of Kasler common stock was converted into one share of WCGI
Common Stock, and all of the outstanding shares of WCG Holdings' common stock,
all of which were held by Dennis R. Washington and his wife, were exchanged
for an aggregate of 19,459,473 shares of WCGI Common Stock. See "Security
Ownership of the Combined Company." WCGI conducts all of its operations
through Kasler, Pomeroy Corporation, and the subsidiaries of Washington
Contractors: Conda Mining, Inc., Washington Construction Co., Industrial
Constructors Corp., Blue Diamond Materials, Inc., WCG Leasing, Inc. and Pro
Builders Corp.
WCGI's principal executive offices are located at 27400 East Fifth
Street, Highland, California 92346, and its telephone number is (909) 425-
4200.
MK. MK is a diversified world-wide construction company with more than
84 years of experience. MK engages in all types of general construction work
including industrial, heavy civil and marine, mechanical, pipeline, building
and underground, for a wide range of public and private customers throughout
the world. In addition, MK renders design services in practically all
engineering disciplines. Other markets for its services include nuclear and
fossil-fueled power plants, environmental and hazardous waste abatement and
operations and maintenance for military and commercial facilities. As a
general contractor, MK provides construction services in accordance with the
terms and specifications of each contract, including planning and scheduling,
marshalling of manpower, procurement of equipment and materials, awarding of
subcontracts and direction and overall management of the project. MK also
operates through a number of domestic and foreign subsidiaries, coal and
lignite mines in the United States and Germany under long-term mining services
contracts. Morrison-Knudsen Company, Inc., predecessor to MK, was
incorporated in 1932 as a Delaware corporation.
MK's principal executive offices are located at Morrison Knudsen Plaza,
Boise, Idaho 83729, and its telephone number is (208) 386-5000.
The Combined Company. Upon the consummation of the Merger, the combined
entity of WCGI and MK (the "Combined Company") will continue to operate the
businesses presently operated by WCGI and MK. It is contemplated that,
following the consummation of the Merger, the Combined Company
1
<PAGE>
will implement a strategic plan intended to create opportunities for cost
reduction and synergism in the business operations of WCGI and MK on a
combined basis.
The Special Meeting
Date, Time and Place. The Special Meeting of the stockholders of WCGI
will be held on September __, 1996 at ____________________.
Record Date, Shares Entitled to Vote. Holders of record of WCGI Common
Stock at the close of business on July 19, 1996 (the "Record Date") will be
entitled to notice of and to vote at the WCGI Special Meeting. Holders of
WCGI Common Stock are entitled to one vote for each share of WCGI Common Stock
held by them. The presence, either in person or by properly executed proxies,
of the holders of a majority of the outstanding shares of WCGI Common Stock is
necessary to constitute a quorum at the Special Meeting.
Purpose of the Special Meeting. At the Special Meeting, the stockholders
of WCGI will be asked to act upon two related proposals to the Merger: (i)
approval and adoption of the Merger Agreement, and (ii) approval of certain
amendments to WCGI's Certificate of Incorporation to become effective upon the
Effective Time. Unless the context indicates otherwise, this Proxy Statement
assumes that the effectiveness of the Merger and the Plan will occur
simultaneously.
Vote Required; Agreement of Principal Stockholder
The affirmative vote of the holders of a majority of the outstanding
shares of WCGI Common Stock is required to adopt and approve each of the
Merger Proposals. As of the Record Date, 29,481,184 shares of WCGI Common
Stock were issued and outstanding, of which 1.6% were beneficially owned by
directors, executive officers and affiliates of WCGI. See "Voting and
Proxies--Vote Required."
Pursuant to a letter dated as of May 16, 1996, Dennis R. Washington, who
beneficially owns 68.5% of the outstanding WCGI Common Stock, agreed to cause
all shares of WCGI Common Stock beneficially owned by a him to be voted in
favor of the approval of the Merger Proposals at the Special Meeting. As a
result, there are a sufficient number of shares of WCGI Common Stock to be
voted in favor of the Merger Proposals for approval and adoption at the
Special Meeting without the affirmative vote of any other holder of WCGI
Common Stock.
WCGI STOCKHOLDERS SHOULD NOT SEND STOCK CERTIFICATES WITH THEIR PROXIES
AND WILL NOT NEED TO EXCHANGE THEIR CERTIFICATES AFTER THE MERGER.
The Merger
On the terms and subject to the conditions of the Merger Agreement, at
the Effective Time, MK will be merged with and into WCGI, with WCGI continuing
as the surviving corporation, which will thereupon change its name to
"Morrison Knudsen Corporation." As a result of the Merger, among other
effects, (i) the separate corporate existence of MK will cease, (ii) all
property and rights of MK and WCGI as of the Effective Time will be property
and rights of the Combined Company, and (iii) all liabilities and obligations
of MK and WCGI (including, without limitation, all of the obligations of MK
under the Plan) will be liabilities and obligations of the Combined Company.
Principal Terms of the Merger
Under the Merger Agreement, WCGI will (i) provide $13,300,000 in cash
(the "Cash Distribution") and issue a number of newly-issued shares of WCGI
Common Stock (approximately
2
<PAGE>
24,121,000 shares) equal to 45% of the issued and outstanding shares of WCGI
Common Stock after giving effect to the shares issued in connection with the
Merger, which cash and shares of WCGI Common Stock will be distributed to
certain creditors of MK; (ii) issue WCGI's Series A Preferred Stock (as
defined in "Securities to be Issued and Transferred Under the Plan--Series A
Preferred Stock" below) for the benefit of the holders of the Impaired Claims
(as defined below); (iii) repay and/or refinance borrowings under MK's debtor-
in-possession credit facility (the "DIP Facility"); and (iv) distribute to
holders of record of MK Common Stock immediately prior to the Effective Time
warrants to purchase 2,765,000 shares of WCGI Common Stock at $12.00 per share
for a term of six and one-half years. The Merger will be effected pursuant to
the Plan. See "The Merger Agreement."
As of July 29, 1996, $18.4 million was outstanding under the DIP
Facility. It is estimated that approximately $35 million will be outstanding
under the DIP Facility as of the Effective Time. See "The Merger--Conditions
to the Merger" and "--Certain Covenants."
Board of Directors
The Merger Agreement provides that, immediately after the Effective Time,
the directors of the Combined Company will consist of (i) five directors
designated by the current Board of Directors of Washington, who have been
selected from among members of such Board of Directors or officers, directors
and affiliates of the companies controlled by Dennis R. Washington,
(ii) Robert S. Miller, who is currently the Chairman of the Board of MK,
(iii) Robert A. Tinstman, who is currently the President and Chief Executive
Officer of MK, and (iv) two directors who have been designated by MK's
creditors and approved by Washington. See "Management of the Combined
Company -- Board of Directors."
MK Plan of Reorganization
The Merger will be effected pursuant to the Plan which provides for the
restructuring of MK's liabilities and will result in the elimination of
substantially all of MK's existing senior debt obligations, comprised of
obligations under MK's former credit facilities, obligations to a bonding
company and certain other obligations incurred in connection with MK's former
transit business, claims of the Boise Landlord (as defined in "The Merger -
Boise Landlord Negotiations" below) and claims of the plaintiffs in the
Touchstone Actions (as defined in "The Merger - Certain MK Legal Proceedings"
below) (collectively, the "Impaired Claims"). See "The Merger - Background of
the Merger." In general, the Plan provides for, among other things,
(i) distributions by MK of certain non-core assets (principally common stock
of MK Rail Corporation, a Delaware corporation ("MK Rail"), a note payable by
MK Rail (the "MK Rail Note") and up to $18 million of tax refunds) to holders
of the Impaired Claims, (ii) issuance by WCGI of the Merger Shares and the
distribution by WCGI of the Cash Distributions to holders of the Impaired
Claims, (iii) the repayment and/or refinancing by WCGI of the DIP Facility,
and (iv) the issuance by WCGI of the Warrants to the holders of MK Common
Stock. Under certain circumstances described in the Plan, a portion of the
distributions which would otherwise be made to holders of Impaired Claims, may
be made to holders of MK Common Stock. The Plan is subject to certain
conditions, including the entry of the order of the United States Bankruptcy
Court (the "Bankruptcy Court") having jurisdiction over the case (the "Chapter
11 Case") commenced under the Bankruptcy Code by MK confirming the Plan
pursuant to Section 1129 of the Bankruptcy Code (the "Confirmation Order").
See "The Merger--MK Plan of Reorganization."
Certain Conditions to the Merger; Termination Provisions
The obligations of Washington and MK to consummate the Merger are subject
to the satisfaction or waiver at or prior to the Effective Time of the Merger
of certain conditions. See "The Merger Agreement--Conditions to the Merger."
The Merger Agreement may be terminated at any time prior to the Effective Time
by the mutual agreement of Washington and MK and under certain specified
circumstances by Washington or MK. See "The Merger Agreement--Termination."
3
<PAGE>
Amendments to WCGI's Certificate of Incorporation
The Board of Directors of WCGI has approved certain amendments to WCGI's
Certificate of Incorporation to become effective upon the Effective Time,
including: (i) changing of the corporate name of WCGI to "Morrison Knudsen
Corporation"; (ii) increasing the number of total authorized shares of WCGI
Common Stock from 39,000,000 to 100,000,000 and the number of total authorized
shares of WCGI Preferred Stock from 1,000,000 to 10,000,000; (iii) eliminating
stockholders' ability to remove a director of WCGI without cause;
(iv) eliminating stockholders' ability to call a special meeting of the
stockholders; (v) eliminating the ability of stockholders of WCGI to act by
written consent; (vi) changing the required vote of the stockholders to amend
or repeal WCGI's Bylaws; (vii) changing the required vote of the stockholders
to amend certain provisions of WCGI's Certificate of Incorporation; and
(viii) prohibiting WCGI from issuing any nonvoting equity securities as
required by the Bankruptcy Code. See "Proposal to Amend WCGI's Certificate of
Incorporation" and "Description of WCGI Capital Stock."
Recommendation of the Board of Directors of WCGI
The Board of Directors of WCGI believes that the terms of the Merger are
fair and in the best interests of WCGI and its stockholders. Accordingly, the
Board of Directors of WCGI has unanimously approved the Merger Proposals and
unanimously recommends a vote FOR approval and adoption of the Merger
Proposals by the stockholders of WCGI. See "The Merger--Recommendation of the
Board of Directors of WCGI." See also "Risk Factors" for a discussion of
factors which should be carefully considered by the stockholders of WCGI in
connection with evaluating and voting on the Merger Proposals.
Risk Factors
The businesses of WCGI and MK after the Merger will be subject to many
risks, including, among others: the potential inability to integrate their
operations efficiently; certain effects of the Merger on the rights of WCGI
stockholders; intense competition in WCGI's and MK's businesses, particularly
those portions relating to engineering and construction contracts obtained
through the competitive bidding processes; continued deterioration of MK's
business; the potential loss of significant numbers of key professionals of
MK; potential inability to obtain government contracts; risks present in the
construction business, including unforeseen conditions encountered during
construction, the impact of inflation upon costs and financing requirements of
clients and changes in political and legal circumstances; unique risks in
connection with foreign operations; potential inability to obtain and maintain
sufficient bonding capacity; and potential liability relating to certain
environmental matters.
For a more detailed discussion of these and other risk factors in
connection with the Merger, see "Risk Factors" on pages 12 through 18.
Dividends on WCGI Common Stock
WCGI has not declared stockholder dividends since 1994. WCGI's credit
agreement restricts WCGI's ability to pay dividends. It is not anticipated
that dividends will be paid at any time in the foreseeable future with respect
to WCGI Common Stock. See "The Merger--Dividends on WCGI Common Stock."
Accounting Treatment
The Merger will be accounted for as a purchase, with WCGI as acquiror, in
accordance with generally accepted accounting principles. See "The Merger--
Accounting Treatment."
4
<PAGE>
Listing on the New York Stock Exchange
WCGI Common Stock is currently listed on the NYSE under the symbol "WAS"
and is expected to continue to be listed on the NYSE but under a new symbol
"MKC." MK Common Stock was delisted from the NYSE on June 26, 1996 following
the filing of the Chapter 11 Case. See "The Merger Agreement--Certain
Covenants--NYSE Listing."
Interests of WCGI Management in the Merger
In considering the recommendations of WCGI's Board of Directors,
stockholders should be aware that certain members of WCGI's management and
Board of Directors have certain interests in the Merger that are in addition
to the interests of WCGI stockholders generally. See "Management of the
Combined Company--Director Stock Options and Compensation," "--Executive
Compensation," "--Limitation of Liability; Indemnification of Directors and
Officers," "Directors' and Officers' Insurance" and "Certain Transactions."
Certain Federal Income Tax Considerations; Possible Loss of Corporation Tax
Benefits
It is not expected that MK will be required to recognize any cancellation
of indebtedness income by reason of the Plan because, under Section 108 of the
Internal Revenue Code of 1986, as amended (the "Code"), cancellation of
indebtedness income will not be recognized if the cancellation of indebtedness
occurs in a case under the Bankruptcy Code. To the extent that MK avoids
recognition of cancellation of indebtedness income because of the Chapter 11
Case, MK will be required to reduce certain of its tax attributes (such as its
net operating loss carryforward and/or the tax basis in its assets) by the
amount of the cancellation of indebtedness income avoided. Reduction of these
tax attributes could result in a material future tax cost to the Combined
Company.
MK reported net operating loss carryforwards of approximately $100
million at December 31, 1995. It is presently estimated that, after giving
effect to the discharge and cancellation of substantially all of MK's long-
term indebtedness pursuant to the Plan, MK will have net operating loss
carryforwards of approximately $275 million at the Effective Date. The actual
amount of MK's net operating loss carryforwards at the Effective Date will
depend upon, among other factors, the value of WCGI Common Stock on such date.
Section 382 of the Code will substantially limit the Combined Company's annual
use of such net operating loss carryforwards after consummation of the Plan.
In addition, the Merger will cause MK's net operating losses through the
Effective Time to be subject to the SRLY rules of the Code, which in general
will mean that such losses may be used by the Combined Company only to offset
MK income after the Merger. See "The Merger--Certain Federal Income Tax
Consequences."
Appraisal Rights
Holders of WCGI Common Stock are not entitled under Delaware General
Corporation Law (the "DGCL") law to dissenters' rights of appraisal in
connection with the Merger.
5
<PAGE>
Selected Financial Information
The following selected financial information is derived from the
historical consolidated financial statements of WCGI. The financial
information set forth below should be read in conjunction with WCGI's
consolidated financial statements, the related notes thereto and the other
financial information incorporated by reference in this Proxy Statement.
<TABLE>
<CAPTION>
Washington Construction Group, Inc.
(In thousands, except per share amounts)
Fiscal Year Ended Six Months Ended
November 30, May 31 May 31
-------------------------------------------------------- -------- --------
1991/(1)/ 1992/(1)/ 1993/(1)/ 1994 1995 1995 1996
---------- ---------- ---------- -------- -------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Operations Summary:
Revenue....................... $ 144,905 $ 133,555 $ 210,184 $258,739 $228,537 $ 88,389 $144,699
Net income (loss)............. 19,502 13,271 6,937 657 8,165 2,234 826
Net income (loss) per share... 1.88 1.28 0.39 0.02 0.28 0.08 0.03
Dividends declared per share.. $ 0.87 $ 0.99 $ 0.05 $ 0.05 -- -- --
<CAPTION>
As of As of
November 30, May 31 May 31
------------------------------------------------------ -------- --------
1991/(1)/ 1992/(1)/ 1993 1994 1995 1995 1996
---------- ---------- ---------- -------- -------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Financial Position Summary:
Total assets.................. $ 75,467 $ 76,011 $ 185,761 $182,618 $185,301 $179,283 191,109
Long-term debt................ -- -- -- 5,490 5,042 5,286 4,823
Stockholders' equity.......... $ 50,430 $ 53,425 $ 120,390 $119,956 $128,951 122,873 129,792
- ----------------------
</TABLE>
(1) On July 12, 1993, WCG Holdings and Kasler became wholly owned subsidiaries
of WCGI (formerly Kasler Holding Company). The transaction was accounted
for under the purchase method of accounting, with WCG Holdings treated as
the acquiring entity. The Operations Summary and Financial Position
Summary include the results and financial positions of WCG Holdings prior
to July 12, 1993, and of WCGI after July 12, 1993. WGC Holdings' per
share amounts have been restated to retroactively reflect the issuance of
19,478 shares of WCGI Common Stock on July 12, 1993, for all outstanding
shares of WCG Holdings' common stock.
Morrison Knudsen Corporation
Financial information for MK is set forth in MK's Quarterly Report on Form
10-Q for the three months ended March 31, 1996 and MK's Annual Report on Form
10-K for the fiscal year ended December 31, 1995, which are attached hereto as
Exhibit 6 and 7, respectively, and are incorporated herein by reference.
6
<PAGE>
Selected Unaudited Pro Forma Financial Information
The following unaudited selected financial information is derived from the
Combined Company Pro Forma Information included elsewhere in this Proxy
Statement.
<TABLE>
<CAPTION>
(In thousands, except per share amounts)
Fiscal Year Six Months
Ended Ended
November 30, May 31,
1995/(1)/ 1996/(1)/
------------------ ------------------
<S> <C> <C>
Operations Summary:
Revenue..................... $1,780,685 822,383
Net income.................. 5,764 10,844
Net income per share/(2)/... 0.11 .20
May 31,
1996/(1)/
------------------
Financial Position Summary:
Total assets................ 821,183
Long-term debt.............. 4,823
Stockholders' equity........ 315,692
- ----------------------
</TABLE>
Note: No dividends were declared by WCGI or MK in fiscal 1995 or the first
six months of fiscal 1996.
(1) The reference to the fiscal year ended November 30 means the fiscal years
ended November 30 for WCGI and December 31 for MK, and the reference to
the six months ended May 31 means the six month periods ended May 31 for
WCGI and June 30 for MK.
(2) Combined Company pro forma per share data is based on 53,599 shares of
WCGI Common Stock assumed to be outstanding for fiscal 1995 and 53,603
shares assumed to be outstanding for the first six months of fiscal 1996.
7
<PAGE>
Comparative Per Share Data
The following table presents historical per share data for WCGI and pro
forma per share data for the Combined Company, after giving effect to the
Merger using the purchase method of accounting, assuming the Merger had been
effective during all periods presented. The pro forma does not purport to be
indicative of future operations or the results that would have occurred had
the Merger been consummated at the beginning of the periods presented. The
information set forth below should be read in conjunction with the financial
statements and notes thereto of WCGI incorporated herein by reference and the
Combined Company Pro Forma Information included elsewhere in this Proxy
Statement. Historical per share data for MK would not be meaningful and is
therefore not presented because all shares of MK Common Stock will be canceled
pursuant to the Plan, with only the Warrants provided as consideration
therefor.
<TABLE>
<CAPTION>
Fiscal Year Six Months
Ended Ended
November 30, May 31,
WCGI 1995/(1)/ 1996/(1)/
------------ ----------
<S> <C> <C>
Historical earnings per share $ 0.28 $ 0.03
Historical stockholders' equity per share 4.37 4.40
Combined Company
Pro forma net income per share 0.11 0.20
Pro forma net stockholders' equity per share n/a 5.89
- ----------------------
</TABLE>
Note: No dividends were declared by WCGI or MK in fiscal 1995 or the first
half of fiscal 1996.
(1) The reference to the fiscal year ended November 30 for the Combined
Company pro forma information means the fiscal year ended November 30 for
WCGI and December 31 for MK, and the reference to the six months ended
May 31 means the six month period ended May 31 for WCGI and June 30 for
MK.
8
<PAGE>
Market Prices And Dividends
WCGI Common Stock is quoted on the NYSE under the symbol "WAS." MK Common
Stock was quoted until June 26, 1996 on the NYSE under the symbol "MRN." The
tables below set forth, for the fiscal quarters indicated, the high and low
sale prices per share for WCGI Common Stock and MK Common Stock as reported on
the NYSE Composite Tape.
<TABLE>
<CAPTION>
WCGI
High Low Dividends
------ ------ ---------
<S> <C> <C> <C>
Fiscal Year ended November 30, 1994:
First Quarter........................... $10.63 $ 7.00 $0.05
Second Quarter.......................... 10.63 6.13 --
Third Quarter........................... 7.00 5.00 --
Fourth Quarter.......................... 6.50 4.38 --
Fiscal Year ended November 30, 1995:
First Quarter........................... $ 6.13 $ 3.88 --
Second Quarter.......................... 6.75 5.00 --
Third Quarter........................... 6.38 5.13 --
Fourth Quarter.......................... $ 6.25 $ 5.38 --
Fiscal Year ending November 30, 1996:
First Quarter........................... $ 8.13 $ 5.38 --
Second Quarter.......................... 11.00 7.88 --
Third Quarter (through August , 1996). --
<CAPTION>
MK
High Low Dividends
------ ------ ---------
<S> <C> <C> <C>
Fiscal Year ended December 31, 1994:
First Quarter........................... $29.12 $24.37 $0.20
Second Quarter.......................... 29.87 20.12 0.20
Third Quarter........................... 21.50 15.12 0.20
Fourth Quarter.......................... 17.87 12.25 0.20
Fiscal Year ended December 31, 1995:
First Quarter........................... $13.00 $ 5.62 --
Second Quarter.......................... 9.50 4.75 --
Third Quarter........................... 9.62 6.00 --
Fourth Quarter.......................... 8.00 4.00 --
Fiscal Year ending December 31, 1996:
First Quarter........................... $ 4.37 $ 1.25 --
Second Quarter (through June 26, 1996).. 2.88 .75 --
</TABLE>
The last reported sale price per share of WCGI Common Stock and MK Common
Stock on May 16, 1996, the last trading day preceding public announcement that
WCGI and MK had reached an agreement in principle to merge, was $8.38 and
$1.50, respectively, and on May 28, 1996, the last trading day preceding
public announcement that WCGI and MK had signed a definitive merger agreement,
was $10.25 and $1.37, respectively. On August __, 1996, the last reported
sale prices per share for WCGI Common Stock on the NYSE Composite Tape was
$_______. MK Common Stock was delisted from the NYSE on June 26, 1996
following the filing of the Chapter 11 Case.
Stockholders are urged to obtain current market quotations.
9
<PAGE>
VOTING AND PROXIES
Record Date
The Board of Directors of WCGI has fixed the close of business on July 19,
1996 as the record date (the "Record Date") for the determination of
stockholders entitled to notice of, and to vote at, the Special Meeting.
Accordingly, only holders of record of shares of WCGI Common Stock at the
close of business on the Record Date are entitled to notice of, and to vote
at, the Special Meeting. As of the Record Date, 29,481,184 shares of WCGI
Common Stock were outstanding and held of record by approximately 1,007
stockholders.
Proxies
When a proxy card is returned, properly signed and dated, the shares
represented thereby will be voted in accordance with the instructions on the
proxy card. If a stockholder does not attend the Special Meeting and does not
return the signed proxy card, such stockholder's shares will not be voted. If
a stockholder returns a signed proxy card but does not indicate how his or her
shares are to be voted, such shares will be voted FOR approval of the Merger
Proposals. As of the date of this Proxy Statement, the Board of Directors
does not know of any other matters which are to come before the Special
Meeting. If any other matters are properly presented at the Special Meeting
for consideration, including, among other things, consideration of a motion to
adjourn the Special Meeting to another time and/or place, the persons named in
the enclosed form of proxy and acting thereunder will have discretion to vote
on such matters in accordance with their best judgment.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (i)
filing with the Secretary of WCGI, at or before the taking of the vote at the
Special Meeting, a written notice of revocation bearing a later date than the
proxy, (ii) duly executing a later dated proxy relating to the same shares of
WCGI Common Stock and delivering it to the Secretary of WCGI before the taking
of the vote at the Special Meeting, or (iii) attending the Special Meeting and
voting in person (i.e., attendance at the Special Meeting will not in and of
itself constitute a revocation of a proxy). In addition, brokers who hold
shares of WCGI Common Stock as nominees will not have discretionary
authorization to vote such shares on any of the matters to be voted thereon in
the absence of instructions from the beneficial owners. Any written notice of
revocation or subsequent proxy should be sent so as to be delivered to
Washington Construction Group, Inc., 27400 East Fifth Street, Highland,
California, 92346 Attention: Corporate Secretary, or hand delivered to the
Secretary of WCGI at or before the taking of the vote at the Special Meeting.
WCGI will bear the cost of the solicitation of proxies from its
stockholders. Proxies may be solicited by means of the mails, facsimile
transmissions, telephone, telegraph or in person by WCGI's directors,
executive officers and other regular employees, none of whom will receive any
special or additional compensation for their services, but may be reimbursed
for out-of-pocket expenses incurred in connection with such solicitation.
Arrangements also will be made with custodians, nominees and fiduciaries for
the forwarding of proxy solicitation materials to beneficial owners of shares
held of record by such custodians, nominees and fiduciaries, and WCGI will
reimburse such custodians, nominees and fiduciaries for reasonable expenses
incurred in connection therewith.
Quorum
The presence, either in person or by properly executed proxies, of the
holders of a majority of the outstanding shares of WCGI Common Stock is
necessary to constitute a quorum at the Special Meeting. Under WCGI's Bylaws
and the DGCL, shares represented by proxies that reflect abstentions or
"broker non-votes" (i.e., shares held by a broker or nominee which are
represented at the meeting, but with respect to which such broker or nominee
is not empowered to vote on a particular proposal) will be counted as shares
that are present and entitled to vote for purposes of determining the presence
of a quorum.
10
<PAGE>
Vote Required
WCGI stockholders are entitled to one vote at the Special Meeting for each
share of WCGI Common Stock held of record by them on the Record Date. The
affirmative vote of the holders of a majority of the outstanding shares of
WCGI Common Stock is required to approve each of the Merger Proposals.
Accordingly, abstentions and broker non-votes will have the same effect as
votes against the Merger Proposals. Any other proposal to come before the
Special Meeting would require the approval of a majority of the shares of WCGI
Common Stock present and entitled to vote at the Special Meeting. Therefore,
as to a particular proposal, abstentions will have the same effect as a vote
against that proposal, and broker non-votes will be treated as unvoted for
purposes of determining approval of such proposal and will not be counted as
votes for or against such proposal. Each of the Merger Proposals will be
voted upon separately. HOWEVER, THE APPROVAL OF EACH OF THE MERGER PROPOSALS
IS CONDITIONED UPON THE APPROVAL OF BOTH THE MERGER PROPOSALS. ACCORDINGLY, A
VOTE AGAINST EITHER OF THE MERGER PROPOSALS WILL HAVE THE SAME EFFECT AS A
VOTE AGAINST BOTH OF THE MERGER PROPOSALS.
Pursuant to a letter dated as of May 16, 1996, Dennis R. Washington, who
beneficially owns 68.5% of the outstanding WCGI Common Stock, agreed to cause
all shares of WCGI Common Stock beneficially owned by a him to be voted in
favor of the approval of the Merger Proposals at the Special Meeting. As a
result, there are a sufficient number of shares of WCGI Common Stock to be
voted in favor of the Merger Proposals for approval and adoption at the
Special Meeting without the affirmative vote of any other holder of WCGI
Common Stock.
As of the Record Date, WCGI's directors and executive officers may
be deemed to be beneficially owners of an aggregate of 486,393 shares of WCGI
Common Stock, or approximately 1.6% of the then outstanding shares of WCGI
Common Stock. See "Security Ownership of the Combined Company." WCGI has
been advised that its directors and executive officers intend to vote in favor
of the Merger Proposals.
11
<PAGE>
RISK FACTORS
In connection with the Merger, the WCGI stockholders are being asked to
approve, among other things, the Merger Agreement and the issuance of the WCGI
Common Stock pursuant thereto and certain amendments to WCGI's Certificate of
Incorporation. If the Merger is consummated, the WCGI stockholders will be
subject to certain risks, including the risks inherent in MK's business,
several of which are also applicable to WCGI's business. WCGI stockholders
should carefully consider the following risk factors in evaluating whether to
approve the Merger in addition to the other information contained or
incorporated by reference in this Proxy Statement. Information contained or
incorporated by reference in this Proxy Statement contains "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995, which can be identified by the use of forward-looking terminology
such as "may," "will," "expect," "anticipate," "estimate" or "continue" or the
negative thereof or other variations thereon or comparable terminology or
which constitute projected financial information. The following matters
constitute cautionary statements identifying important factors with respect to
such forward-looking statements, including certain risks and uncertainties,
that could cause actual results to differ materially from those contemplated
in such forward-looking statements.
Risks Related to the Business of MK, Washington and the Combined Company
Industry Cyclicality. Demand for the services to be offered by the Combined
Company has been, and is expected to continue to be, subject to significant
fluctuations due to a variety of factors beyond the control of the Combined
Company, including economic conditions. During economic downturns, the
ability of both private and governmental entities in targeted markets to make
capital expenditures on infrastructure improvement may decline significantly.
There can be no assurance that economic conditions generally will be favorable
or that there will not be significant fluctuations adversely affecting the
industry as a whole or key markets targeted by the Combined Company and, as a
result, the Combined Company and its financial results. In addition, the
Combined Company's operations will be in part dependent upon governmental
funding of infrastructure and environmental projects. Significant changes in
the level of government funding of these projects could have a favorable or
unfavorable impact on the operating results of the Combined Company.
Business and Competition. MK's competitive position in the markets that it
serves has been adversely impacted by limited bonding capacity and its lack of
financial flexibility that, among other things, inhibit its ability to secure
project financing. Washington and MK are engaged in highly competitive
businesses, particularly those portions relating to engineering and
construction contracts that are gained through competitive bidding processes.
Washington and MK compete with other general and specialty contractors, both
foreign and domestic, including small local contractors. Certain competitors
have a substantially stronger financial position than do Washington and MK.
While WCGI's management believes that the Combined Company will be able to
compete effectively, there can be no assurance that the Combined Company will
be able to compete successfully for new projects following the consummation of
the Merger.
Certain Timing Considerations. MK's business operations have been adversely
affected by its poor financial condition, and by the reluctance of many
customers and potential customers to engage MK on new or additional projects.
During the first six months of 1996, MK has booked new business of
approximately $340 million. Although this is approximately the same amount of
business booked during the first six months of 1995, backlog fell by more than
$100 million. In addition, MK's primary assets are its highly skilled
professionals, who have the ability to leave MK and so deprive it of the skill
and knowledge essential for performance of new and existing contracts. Because
MK is engaged in a service business, it is highly dependent on its customers'
and potential customers' belief that MK will perform professional tasks of the
highest standards over extended periods of time. Continued deterioration of
MK's business, or the loss of significant numbers of key professionals, could
have a material adverse effect on the Combined Company.
Disruption of Operations Relating to Bankruptcy Filing. MK's commencement of
the Chapter 11 Case, even in connection with the Plan, could adversely affect
MK's subsidiaries' relationships with their customers, suppliers and
employees. Employees of MK and its subsidiaries generally are not parties to
employment contracts. MK believes that, due to uncertainty about its financial
condition, it may be
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difficult to retain or attract high quality employees. If MK's relationships
with its customers, suppliers and employees are adversely affected, MK's
subsidiaries' operations could be materially affected.
Government Contracts. U.S. Government contracts historically have been a
significant part of MK's businesses, accounting for over 20% of MK's revenue
during each of the past three fiscal years. MK's poor financial condition
may have a disproportionately adverse impact on MK's ability to obtain new
U.S. Government contracts during the period in which MK is soliciting
approvals of the Plan or is in a bankruptcy court proceeding pursuant to the
Plan. MK's management believes that it is unlikely that any U.S. Government
procurement officer will award new contracts to MK during the period MK is
pursuing relief under the Bankruptcy Code.
Although WCGI's management believes that following the consummation of the
Plan the Combined Company should be in good position to obtain U.S. Government
contracts, there can be no assurance that such will be the result. In the
event that the Combined Company is unable to obtain new U.S. Government
contracts, there would be a material adverse effect on the Combined Company.
MK has a number of cost reimbursement contracts with various agencies of the
U.S. Government, the allowable costs of which are subject to audit by the U.S.
Government. As a result of such audits, U.S. Government auditors assert from
time to time that certain costs claimed as reimbursable under government
contracts either were not allowable costs or were not allocable in accordance
with federal government regulations. The resolution of these audits may
result in various sanctions including repayments of amounts previously paid by
the U.S. Government to MK. Some audits have resulted in cost disallowances
and claims for reimbursement by the government.
A significant percentage of Washington's revenues have been derived from
contracts with public agencies, particularly the California Department of
Transportation. For 1995, 1994 and 1993, public agency contracts comprised
58%, 67% and 65% of total revenue, respectively. Of Washington's contract
backlog at November 30, 1995, 76% was with public agencies, with 64%
contracted with the California Department of Transportation. U.S. Government
contracts have not been a significant part of Washington's revenues and do not
constitute a significant part of its backlog.
Fixed Price Contracts and Other Project Risks. In connection with their
respective engineering and construction businesses, Washington and MK, in
order to balance risk with reward, enter into three basic types of contracts:
fixed-price or lump-sum contracts providing for a single price for the total
amount of work to be performed, unit-price contracts providing for a specified
price for each unit of work performed, under which both risk and anticipated
income are the highest, and cost-type contracts (including cost-plus)
providing for reimbursement of allowable or otherwise defined costs incurred
plus a fee, under which risk is minimal and anticipated income is earned
solely from the fee received for services provided. In connection with its
engineering contracts, including design and program management, compensation
is typically on a cost-plus-fee basis.
Regardless of the type of contract, the construction business has always
been subject to unusual risks, including unforeseen conditions encountered
during construction, the impact of inflation upon costs and financing
requirements of clients and changes in political and legal circumstances,
particularly since contracts for major projects are performed over extended
periods of time. Other risks include the failure of third party project
participants, including joint venture partners and subcontractors, to obtain
required permits or to perform essential functions on a timely basis, the
failure of local governing authorities to take certain necessary actions,
opposition by community groups in the locality of a project or by other
interested third parties to the project's development, and the failure to
obtain adequate financing for the project. Foreign operations and joint
ventures are particularly vulnerable to changing political and economic
environments, foreign currency controls and fluctuations, civil disturbances,
labor strikes and other uncertainties associated with operations in foreign
countries. See "--Foreign Operations." Washington and MK may be exposed to
significant risks and uncertainties in the performance of contracts,
particularly fixed-price contracts. Although Washington and MK constantly
seek to minimize and spread the risks over a large number of contracts, losses
on a particular contract or contracts could occur, and the Combined Company
may experience significant changes in operating results on a quarterly or
annual basis.
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Because of the size and complexity of major infrastructure projects, a
relatively small number of projects has provided a significant percentage of
Washington's and MK's respective revenues in a given year. It is expected
that the Combined Company will also have a dependence on such major projects.
The loss of one or more major contracts or a financial loss incurred by the
Combined Company with respect to its performance under one or more major
contracts could have a material adverse effect on the Combined Company or its
financial results.
Foreign Operations. The Combined Company will continue to pursue project
opportunities throughout the world through foreign and domestic subsidiaries
as well as agreements with foreign joint venture partners. Such foreign
operations are subject to uncertain political and economic environments,
potential incompatibility with foreign joint venture partners, foreign
currency controls and fluctuations, civil disturbances, labor strikes, as well
as other uncertainties associated with operations in foreign countries.
Events outside of the Combined Company's control may limit or disrupt
operations, restrict the movement of funds, result in deprivation of contract
rights, increase foreign taxation or limit repatriation of earnings. In
addition, in certain cases applicable law and joint venture or other
agreements may provide that each joint venture partner is jointly and
severally liable for all liabilities of the venture.
MK's Employees. One of MK's primary assets is its group of highly skilled
professionals, who have the ability to leave MK and so deprive it of the skill
and knowledge essential for performance of new and existing contracts. MK is
engaged in a service business and is highly dependent on its customers' and
potential customers' belief that MK will perform professional tasks of the
highest standards over an extended period of time. Continued deterioration of
MK's business, or loss of a significant number of key professionals, would
have a material adverse effect on the Combined Company.
Other Operating Factors. Unforeseen circumstances encountered during the
development of projects often require changes in the scope of work or
additional work that are authorized by the project owner but not priced. This
process often results in claims against the owner which are negotiated or
litigated after a project is completed. The outcome of the claims resolution
process is often determinative of the financial success of a project. Cost
overruns resulting from unapproved and disputed change orders may adversely
affect financial results in the period incurred. The receipt of proceeds from
claims resolution may beneficially affect the Combined Company's financial
results in the period received. Contract mining services operations may also
be adversely affected by weather conditions, the potential for changes in
technology, demand, product substitution and political factors.
Capital Requirements. The Combined Company's businesses are expected to
require large amounts of working capital. While the projected financial
information contained in this Proxy Statement relating to the Combined Company
(the "Combined Company Projections") assumes that the Combined Company will
generate sufficient funds to meet its working capital needs for the
foreseeable future, the ability of the Combined Company to gain access to
additional capital, if needed, cannot be assured, particularly in view of
competitive factors and industry conditions. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations of the Combined
Company."
Certain Federal Income Tax Considerations; Possible Loss of Corporation Tax
Benefits. It is not expected that MK will be required to recognize any
cancellation of indebtedness income by reason of the Plan because, under
Section 108 of the Code, cancellation of indebtedness income will not be
recognized if the cancellation of indebtedness occurs in a case under the
Bankruptcy Code. To the extent that MK avoids recognition of cancellation of
indebtedness income because of the Chapter 11 Case, MK will be required to
reduce certain of its tax attributes (such as its net operating loss
carryforward and/or the tax basis in its assets) by the amount of the
cancellation of indebtedness income avoided. Reduction of these tax
attributes could result in a material future tax cost to the Combined Company.
MK reported net operating loss carryforwards of approximately $100 million
at December 31, 1995. It is anticipated that as of the Effective Time, MK's
NOL carryforwards will have increased significantly. Such increase is
reflected in "The Combined Company Pro Forms Information" and "The Combined
Company Projections." Section 382 of the Code will substantially limit the
Combined Company's annual use of such net operating loss carryforwards after
consummation of the Plan. In addition, the Merger will cause MK's net
operating losses through the Effective Time to be subject to the SRLY rules of
the Code, which in general will mean that such losses may be used by the
Combined
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Company only to offset MK income after the Merger. See "The Merger--Certain
Federal Income Tax Consequences."
Backlog. Backlog consists of uncompleted portions of engineering and
construction contract revenue including the proportionate share of
construction joint venture contract revenue, the next five-year portion of
long-term mining services contract revenue and the funded and unfunded
portions of long-term contract and subcontract revenue with various agencies
of the U.S. Government. Washington and MK have a number of contracts and
subcontracts with various agencies of the U.S. Government principally for
environmental remediation and restoration work, which contracts extend beyond
one year and for which government funding has not yet been approved. All
contracts with agencies of the U.S. Government and some commercial and foreign
contracts are subject to unilateral termination at the option of the customer.
In the event of a termination, Washington and MK would not receive projected
revenues or profits associated with the terminated portion of such contracts.
Bonding. Washington's and MK's businesses are highly dependent on its
ability to obtain construction bond coverages sufficient to meet bid
requirements imposed by potential customers. Although it is expected that the
Combined Company will initially have sufficient bonding capacity for its
expected businesses, no assurance can be given in this regard, and the failure
to obtain and maintain sufficient bonding capacity would have a material
adverse effect on the Combined Company.
Environmental Matters. The Combined Company will be subject to a variety of
environmental laws and regulations governing, among other things, discharges
to air and water, the handling, storage, and disposal of hazardous or solid
waste materials and the remediation of contamination associated with releases
of hazardous substances. Such laws and regulations and the risk of attendant
litigation can cause significant delays to a project and add significantly to
its cost. Violations of these environmental laws and regulations could
subject the Combined Company and its management to civil and criminal
penalties and other liabilities.
Various federal, state and local environmental laws and regulations, as well
as common law, may impose liability for property damage and costs of
investigation and cleanup of hazardous or toxic substances on property
currently or previously owned by Washington or MK or arising out of
Washington's and MK's waste management activities. Such laws may impose
responsibility and liability without regard to knowledge of or causation of
the presence of the contaminants, and the liability under such laws is joint
and several. Washington and MK have potential liabilities associated with
their past waste disposal activities and with their current and prior
ownership of certain property. In general, the management of Washington
believes that the likely amount of such liabilities will not be material,
because either Washington and MK may have a valid defense to liability with
respect to a given site or Washington or MK should only be responsible for a
small percentage of the total cleanup costs with respect to a given site.
However, because liability under such laws is joint and several, no assurances
can be given that the Combined Company will not eventually be responsible for
all or a substantial portion of the liabilities associated with one or more of
these sites, which liabilities could be material either individually or in the
aggregate. For further information regarding environmental claims against MK
and Washington, see MK's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995 at pages I-9 through I-11 included in Exhibit 7 attached
hereto and the Washington's Quarterly Report on Form 10-Q for the three months
ended May 31, 1996, at pages 9 through 10 incorporated herein by reference.
The U.S. Environmental Protection Agency (the "EPA") has suggested that a
subsidiary of Washington could be named as a potentially responsible party
with respect to mining waste contamination at a mine near Summitville,
Colorado. The Summitville mine, which covers approximately 550 acres, has
been intermittently mined since the late 1800s. From July 1985 to June 1989,
the subsidiary conducted site preparation, construction, surface mining and
crushing activities under the supervision and direction of the most recent
operator of the mine. In December 1992, after the operator abandoned the
mine, the EPA took over site maintenance activities. In 1994, the EPA added
the mine to the Superfund National Priorities List. The subsidiary has been
informed that the estimated remediation cost of the site is approximately
$200.0 million, of which approximately $105.0 million had been incurred as of
the date hereof. To Washington's knowledge, EPA has designated the former
owner-operator as a potentially responsible party (the "PRP"). Although
Washington believes that there are approximately 20 parties who could be
designated as PRPs by EPA with respect to the site, and that the Combined
Company and
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its subsidiaries should not be held liable and would have valid defenses to
any assertion of liability with respect to the site, there can be no assurance
that the Combined Company will not eventually be held responsible for material
liabilities associated with the mine.
Other Considerations. The business of WCGI is subject to certain of the
considerations relating to the business of MK described above. WCGI, like MK,
is a general contractor in the construction industry, and as such its
operating results are subject to fluctuations due to various factors described
above.
Potential Inability to Integrate MK
There can be no assurance that the expectations regarding the future
operations of the Combined Company described in "The Merger--Recommendation of
the Board of Directors of WCGI" will be fulfilled. The success of the Merger
will depend in part on the ability of the Combined Company to effectively
integrate the businesses of Washington and MK. The process of integrating the
businesses of Washington and MK may involve unforeseen difficulties and may
require a disproportionate amount of time and attention of the Combined
Company's management and financial and other resources of the Combined
Company. Although it is anticipated that the Merger will provide the
opportunity for synergism and efficiencies, there can be no assurance as to
the timing or amount of synergism or efficiencies that may ultimately be
attained. Certain of the anticipated benefits of the Merger may not be
achieved if the Combined Company's operations are not successfully integrated
in a timely manner. The difficulties of such integration may initially be
increased by the necessity of coordinating geographically separated
organizations and integrating personnel with disparate business backgrounds
and corporate cultures. There can be no assurance that the Combined Company
will be able to integrate effectively the Combined Company's operations or,
even if integrated, that the Combined Company's operating performance will be
successful. If WCGI and MK are not successful in integrating their corporate
strategies and operations or if their integrated operations fail to achieve
market acceptance, the business of the Combined Company could be adversely
affected. In addition, following the Merger, implementation of the Combined
Company's business strategy will be subject to numerous other contingencies
beyond the control of the Combined Company, including general and regional
economic conditions, interest rates, competition, changes in regulation and
the ability to attract and maintain skilled employees. As a result, no
assurance can be given that the Merger will be successful or that the Combined
Company's business strategies will prove effective or that the Combined
Company will achieve its goals.
Risks Relating to the Projections
The management of Washington and MK have prepared the Combined Company
Projections in connection with the development of the Plan to present the
projected effects of the Plan and the transactions contemplated thereby if the
Merger is consummated. The Combined Company Projections assume the Plan and
the transactions contemplated thereby will be implemented in accordance with
their terms. The assumptions and estimates underlying such Combined Company
Projections are inherently uncertain and are subject to significant business,
economic and competitive risks and uncertainties that could cause actual
results to differ materially from those projected, including, among others,
those enumerated in "The Combined Company Projections" attached hereto as
Appendix A. Accordingly, the Combined Company Projections are not necessarily
indicative of the future financial condition or results of operations of the
Combined Company, which may vary significantly from those set forth in the
Combined Company Projections. Consequently, the projected financial
information contained herein should not be regarded as a representation by MK,
MK's advisors, Washington, Washington's advisors or any other person that the
Combined Company Projections can or will be achieved. See "The Combined
Company Projections" attached hereto as Appendix A.
Assumptions Regarding Value of MK Assets
It has been determined in the preparation of the Combined Company Pro Forma
Information and the Combined Company Projections included elsewhere in this
Proxy statement that the historical book value of MK's assets generally
approximates the fair value thereof, except for specific adjustments discussed
in the notes to unaudited pro forma financial information. See "The Combined
Company Pro Forma." For financial reporting purposes, the fair value of the
assets of MK (including deferred tax assets) must be determined as of the
Effective Time. Although such valuation is not presently expected to result
in
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values that are materially greater or less than the values assumed in the
preparation of such Combined Company Pro Forma Information and the Combined
Company Projections, there can be no assurance with respect thereto.
Noncomparability of Historical Financial Information
As a result of the consummation of the Plan and the transactions
contemplated thereby, the financial condition and results of operations of the
Combined Company from and after the Effective Time will not be comparable to
the financial condition or results of operations reflected in the historical
financial statements of MK and Washington.
Certain Risks Associated with the Chapter 11 Case and the Merger
MK is party to various contractual arrangements, including, without
limitation, various contracts with governmental authorities, job-related
contracts and joint venture and similar agreements, under which the
commencement of the Chapter 11 Case and/or the consummation of the Merger and
the other transactions contemplated by the Merger Agreement and the Plan could
(i) result in a breach, violation, default or conflict, (ii) give other
parties thereto rights of termination or cancellation, or (iii) have other
adverse consequences for the Combined Company. The magnitude of any such
adverse consequences may depend upon, among other factors, the diligence and
vigor with which other parties to such contracts may seek to assert any such
rights and pursue any such remedies in respect of such matters, and the
ability of the Combined Company to resolve such matters on acceptable terms
through negotiations with such other parties or otherwise. One such
agreement, a non-competition agreement between MK and MK Gold Company, a
former subsidiary of MK ("MK Gold"), may be applicable to certain mining
activities conducted by Washington. MK Gold has informed MK that MK Gold
expects the Combined Company to comply with such agreement following the
Effective Date. MK's co-investors in MIBRAG mbH, which indirectly owns and
operates lignite coal mines, power and process plants in Germany, have
informed MK that they are conducting a factual investigation regarding MK's
financial circumstances and otherwise considering whether a breach of or
default under any agreement between MK and such co-investors has occurred. MK
has informed WCGI that it does not believe that any breach of or default under
any such agreement has occurred. Although it is expected that the foregoing
matters will not have a material adverse effect on the businesses, financial
condition or results of operations of the Combined Company, there can be no
assurance with respect thereto.
Dividend Restrictions
WCGI has not declared stockholder dividends since 1994. Under certain
conditions, WCGI's credit agreement restricts WCGI's ability to pay dividends.
It is not anticipated that dividends will be paid at any time in the
foreseeable future with respect to WCGI Common Stock.
Certain Effects of the Merger on the Rights of the Stockholders of WCGI
Changes in the Certificate of Incorporation. The Board of Directors of WCGI
has approved certain amendments to WCGI's Certificate of Incorporation to
become effective upon the Effective Time including: (i) changing of the
corporate name of WCGI to "Morrison Knudsen Corporation"; (ii) increasing the
number of total authorized shares of WCGI Common Stock from 39,000,000 to
100,000,000 and the number of total authorized shares of WCGI Preferred Stock
from 1,000,000 to 10,000,000 of which 18,000 shares (or, under certain
circumstances, 1,800,000 shares) will be designated as Series A Preferred
Stock; (iii) eliminating stockholders' ability to remove a director of WCGI
without cause; (iv) eliminating stockholders' ability to call a special
meeting of the stockholders; (v) eliminating the ability of stockholders of
WCGI to act by written consent; (vi) changing the required vote of the
stockholders to amend or repeal WCGI's Bylaws; (vii) changing the required
vote of the stockholders to amend certain provisions of WCGI's Certificate of
Incorporation; and (viii) prohibiting WCGI from issuing any nonvoting equity
securities as required by the Bankruptcy Code. See "Description of WCGI
Capital Stock" and "Proposal to Amend WCGI's Certificate of Incorporation."
The foregoing amendments to WCGI's Certificate of Incorporation may have the
effect of delaying, deferring or preventing a change in control of WCGI. WCGI
will be subject to the provisions of DGCL,
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which also may delay, deter or prevent a change in control. See "Description
of WCGI Capital Stock" and "Proposal to Amend WCGI's Certificate of
Incorporation."
Dilution. In connection with the Merger, WCGI will issue Merger Shares
equal to 45% of the issued and outstanding shares of WCGI Common Stock after
giving effect to the Merger Shares, and holders of record of MK Common Stock
immediately prior to the Effective Time will receive Warrants to purchase
2,765,000 shares of WCGI Common Stock. Therefore, upon the consummation of
the Merger, the stockholders of WCGI may experience dilution in net tangible
book value per share of WCGI Common Stock.
Changes in the Ownership of WCGI Resulting from the Merger. After
consummation of the Merger, existing WCGI stockholders will own approximately
55% of the outstanding WCGI Common Stock (excluding shares of WCGI Common
Stock issuable upon exercise of the Warrants). Mr. Dennis Washington, who
currently owns approximately 68.8% of the WCGI Common Stock, will own
beneficially approximately 37.8% of WCGI Common Stock (excluding shares of
WCGI Common Stock issuable upon exercise of the Warrants) after the Merger.
Assuming the issuance of shares of WCGI Common Stock upon exercise of all of
the Warrants, existing WCGI stockholders (including Mr. Washington) and Mr.
Washington would own approximately 52.3% and 36%, respectively, of WCGI Common
Stock after the Merger.
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THE MERGER
Background of the Merger
General. On the terms and subject to the conditions of the Merger
Agreement, at the Effective Time, MK will be merged with and into WCGI, with
WCGI continuing as the surviving corporation, which will thereupon change its
name to "Morrison Knudsen Corporation." As a result of the Merger, among
other effects, (i) the separate corporate existence of MK will cease, (ii) all
property and rights of WCGI and MK as of the Effective Time will be property
and rights of the Combined Company, and (iii) all liabilities and obligations
of WCGI and MK (including, without limitation, all of the obligations of MK
under the Plan) will be liabilities and obligations of the Combined Company.
Purpose of the Merger. WCGI is a diversified heavy construction company
with more than 30 years experience in the infrastructure, contract mining,
environmental remediation, commercial construction and construction materials
markets. Most of its contracts are on a fixed-price or unit-price basis.
WCGI, through its subsidiaries, owns one of the largest heavy construction and
earthmoving equipment fleets in the United States and has developed and
implemented a proven system for managing the efficient use of those assets.
WCGI serves both the public and private customers throughout the Western
United States. WCGI has a strong balance sheet and established relationships
with bonding companies which allow it to pursue attractive projects.
MK engages in all types of general construction work including industrial,
heavy civil and marine, mechanical, pipeline, building and underground, for a
wide range of public and private customers throughout the world. In addition,
MK renders design services in practically all engineering disciplines. Other
markets for its services include nuclear and fossil-fueled power plants,
environmental and hazardous waste abatement and operations and maintenance for
military and commercial facilities. As a general contractor, MK provides
construction services in accordance with the terms and specifications of each
contract, including planning and scheduling, marshalling of manpower,
procurement of equipment and materials, awarding of subcontracts and direction
and overall management of the project. MK's fixed-price heavy construction
operations have suffered recently from limited bonding capacity due to MK's
financial difficulties.
The Combined Company intends to continue to focus on these core businesses
and the markets in which WCGI and MK, as the case may be, have historically
performed best so as to maximize the Combined Company's efficiency and
effectiveness in those markets. WCGI and MK believe that the Combined Company
will be able to compete more effectively in the competitive industries in
which WCGI and MK conduct their respective businesses than could either WCGI
or MK alone. The combination is expected to bring opportunities to WCGI in
international markets and greater diversity of operations within the
construction industry. The combination also presents WCGI with the
opportunity to capitalize on MK's existing talent and global reputation in the
engineering and construction business. As a result of the combination, MK's
business is expected to benefit from WCGI's strong balance sheet
(approximately $130 million of shareholders' equity at May 31, 1996), existing
bonding capacity and established relationships with bonding companies and
lending institutions.
MK Financial Condition. In 1994, MK began experiencing significant losses
and negative cash flow problems, primarily related to MK's now-divested
transit manufacturing and refurbishing business ("Transit"). MK financed this
negative operating cash flow by significantly increasing borrowings under its
bank facilities. These losses caused MK's credit facilities to go into
financial covenant default in early 1995. In February 1995, MK announced that
it expected to incur a net loss for fiscal 1994 of approximately $175 million.
In June 1995, MK announced that the loss for fiscal 1994 had increased to
approximately $350 million. The losses incurred by MK resulted in defaults
under MK's credit facilities due to noncompliance with certain financial
covenants. Immediately after MK went into financial covenant default on its
bank facilities, an unofficial committee of lenders (the "Lender Steering
Committee") formed to represent MK's lenders in negotiations with MK as to a
restructuring of its debt obligations.
In February 1995, MK requested and was granted an interim waiver of
financial covenant defaults from its lenders through March 31, 1995 so as to
have continued liquidity under its receivable purchase facilities, while
conducting debt restructuring negotiations with the Lender Steering Committee.
During
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February and March 1995, MK conducted negotiations with the Lender Steering
Committee as to an interim financing package and an overall solution to MK's
1995 liquidity needs. These negotiations culminated in the implementation of a
bridge loan facility of $110 million, effective as of April 11, 1995 (the
"Initial Bridge Loan Facility"). In connection with the implementation of the
Initial Bridge Loan Facility, all waivers of existing defaults under MK's
other credit facilities were extended through May 31, 1995, the termination
date of the Initial Bridge Loan Facility.
Throughout April and May, MK conducted negotiations with the Lender Steering
Committee and its bonding company (the "Bonding Company") regarding possible
solutions to MK's liquidity needs. These negotiations resulted in an
extension of the May 31, 1995 termination date of the Initial Bridge Loan
Facility and the existing credit facility waivers to July 31, 1995.
During July 1995, MK concluded that it would be unable to secure sufficient
financing from its lenders or the Bonding Company to continue to completion
Transit contracts. Therefore, MK determined to exit the Transit car
manufacturing and refurbishing business. MK retained Bear, Stearns & Co. Inc.
to find an interested buyer for the Transit business. Despite soliciting bids
from all identified parties around the world with a potential interest in the
business, MK found no buyers for the business.
Also, during July 1995, MK made a proposal to its lenders and the Bonding
Company in which the Transit business would be divested to an entity
unaffiliated with MK, the ownership structure of which could be determined by
the Bonding Company. This proposal for the divestiture of the Transit
business formed the basis for (a) the successful conclusion of an agreement in
principle among MK, its lenders and the Bonding Company for the interim
financing of the Transit business pending its disposition, (b) the
restructuring of MK's credit facilities other than the Initial Bridge Loan
Facility, (c) the provision of new bonding capacity by the Bonding Company for
non-Transit projects, and (d) the increase in the Initial Bridge Loan Facility
to be used for non-Transit working capital needs. On August 10, 1995, MK
finalized this agreement in principle with its lenders and the Bonding
Company.
Under the agreement finalized on August 10, 1995, MK amended and restated
the Initial Bridge Loan Facility by increasing its borrowing capacity to $129
million and extending the maturity of the facility to March 31, 1996 (the
"Bridge Loan Facility"). MK's other credit facilities, letter of credit
facilities and guaranties were modified by an Override Agreement, providing
that (a) the maturity of all such other facilities would be extended to
December 31, 1996, (b) all defaults under such facilities would be waived,
(c) interest and fees payable under such facilities would be accrued until
March 31, 1996 and then paid in six equal monthly installments beginning in
April 1996, (d) a $100 million payment on such facilities would be made on
September 30, 1996, (e) all obligations under the Override Agreement would be
secured by liens on all of MK's assets, and (f) certain intercreditor
arrangements among MK's lenders would be established (the "Override
Facility"). MK's lenders also provided additional financing (the "Interim
Transit Financing") to fund operations of the Transit business pending the
divestiture thereof. A portion of such financing was backed in full by a
letter of credit procured by the Bonding Company. MK issued its lenders and
the Bonding Company warrants with an exercise price of $6.75 per share to
purchase 14,859,430 shares of MK Common Stock.
The initial maturity date of the Interim Transit Financing was September 1,
1995. The Bridge Loan Facility and the Override Facility provided that the
facilities would go into default on September 1, 1995 if the Transit business
had not been divested in accordance with the August 10, 1995 agreement in
principle. In September and October, while MK was working to consummate the
Transit disposition, MK obtained multiple extensions of the maturity date of
the Interim Transit Financing and waivers of the applicable events of default
under the Bridge Loan Facility and the Override Facility.
On October 17, 1995, MK consummated the disposition of the Transit business.
In connection with the closing of the transaction, the Interim Transit
Financing was retired. MK and one of its wholly owned subsidiaries guaranteed
borrowings of the acquiror in a total aggregate amount of $141.7 million as of
such closing. The Bonding Company entered into an agreement with MK, capping
its claims against MK for Transit bonding claims at approximately $31 million.
MK, the agent for its lenders and the Bonding Company, entered into an
agreement governing the Transit bonding claims and making certain
intercreditor arrangements among MK's lenders and the Bonding Company. The
Bridge Loan Facility was reduced from $129 million to $100 million. The
Override Facility was amended and restated primarily to reflect new
intercreditor arrangements among MK's lenders. MK entered into an
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agreement with the Bonding Company pursuant to which the Bonding Company
committed to provide MK with new bonds under certain specified conditions.
Beginning in late 1995, certain holders of funded bank debt under the Override
Agreement sold their claims against MK at a discount to their face value. A
market quickly developed in such bank debt, and most of the original holders
of bank debt sold their positions.
Despite the above-described developments in the financial and operational
restructuring of MK, it became apparent to MK's management by the first
quarter of 1996 that the proceeds from the divestitures effected in 1995,
which had generated cash proceeds aggregating approximately $44.5 million,
would at most provide sufficient funds to meet MK's repayment obligation on
March 31, 1996 with respect to the Bridge Loan Facility. Moreover, MK had
hoped that the divestiture of the Transit business and the restructuring of
its credit facilities and the Transit bonding exposure accomplished during
1995 would allow MK to attract new business and achieve positive operating
results that would allow MK to access the public debt or equity markets or to
arrange an equity infusion from a strategic investor in 1996. Instead, MK's
continued overleveraged capital structure prevented MK from attracting
sufficient new business. By the end of the third quarter of 1995, MK was not
in compliance with certain financial covenants in its agreement with the
Bonding Company for new bonds, and, accordingly, MK no longer had bonding
capacity, precluding MK from participating in certain construction projects.
In December 1995, MK engaged the investment banking firm of Donaldson,
Lufkin & Jenrette Securities Corporation ("DLJ") as its exclusive financial
advisor to, among other things, advise MK regarding further restructuring
alternatives. On March 29, 1996, MK paid off its indebtedness owing under the
Bridge Loan Facility. Certain of MK's lenders assigned their interest in the
Bridge Loan Facility to certain new lenders. The new lenders extended the
maturity date of the Bridge Loan Facility to September 30, 1996, amended
certain terms restricting asset dispositions and provided MK with borrowing
capacity of $47.5 million. In connection with the extension of the Bridge
Loan Facility, MK paid $14.4 million in accrued and unpaid interest which had
been deferred under the Override Agreement.
In early 1996, MK concluded that it could not meet its debt obligations
coming due in 1996 through access to the public debt or equity markets or
through an equity investment by a strategic investor. MK explored out-of-
court restructuring alternatives and bankruptcy alternatives as the best means
to recapitalize its enterprise. MK concluded that the restructuring
alternative best designed to maximize the recovery for all stakeholders was
through a form of a prepackaged Chapter 11 filing. As a result, MK conducted
intensive negotiations with various creditors in an effort to enable it to
restructure its indebtedness through a partial pre-packaged plan of
reorganization. In addition, MK engaged in extensive efforts to identify
other possible transactions designed to maximize recoveries for its
stakeholders, including the combination of MK's businesses with those of a
third party or a sale of such businesses. The result of such negotiations and
efforts is reflected in the Plan.
MK presented an initial restructuring proposal to certain of its creditors
on February 14, 1996. This proposal formed the basis for an initial plan of
reorganization of MK (the "Initial Plan"), which did not provide for the
Merger and provided for the distribution to MK's creditors and stockholders
of, among other things, securities to be issued by MK following its
reorganization. Because MK believed that potentially greater values could be
realized through alternative transactions, MK, with the assistance of DLJ,
intensified its efforts to identify other possible transactions designed to
maximize recoveries for its stakeholders, including the combination of the
MK's businesses with those of a third party or a sale of such businesses.
During the course of these efforts, more than 50 parties that had been
identified by MK and DLJ as potentially being interested in such a transaction
were contacted, of which more than 20 (including WCGI on February 22, 1996)
executed confidentiality agreements and were provided certain nonpublic
information regarding MK's businesses. Of the parties that executed
confidentiality agreements, 10 (including WCGI) conducted additional
investigations of MK's businesses and were invited to submit formal proposals
to acquire MK's businesses. Negotiations Between WCGI and MK. In late February
1996, Dennis R. Washington and other representatives of WCGI, including
representatives of Batchelder & Partners, Inc. and Schroder Wertheim & Co.
Incorporated, financial advisors of WCGI, met with Robert Miller, Robert
Tinstman and other representatives of MK to have exploratory discussions about
a possible combination of WCGI and MK. On March 11 and 12, 1996,
representatives of Washington, including its financial advisors,
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met with representatives of MK and DLJ to further discuss the possibility of a
business combination involving MK and Washington. On March 19, 1996,
Washington (along with nine other parties) received from MK a solicitation for
a formal proposal to acquire MK's businesses. In late March 1996, Washington
commenced a limited due diligence review in order to determine the viability
of consummating a business combination with MK.
On April 1, 1996, Washington submitted a proposal to MK to combine the
business and operations of Washington and MK. The Washington proposal
provided for the acquisition of MK through a prepackaged plan of
reorganization in which senior creditors would receive 18,750,000 shares of
Merger Shares, $29.5 million in cash and distributions of the MK Rail Stock,
the MK Rail Note (or proceeds thereof) and certain foreign tax credit refunds.
The Washington proposal also provided for the issuance of the Warrants. After
evaluating the respective terms of four proposals submitted pursuant to the
foregoing process, MK's Board of Directors recommended that the proposal
submitted by WCGI (which MK perceived as providing greater value to its
stockholders than the other three proposals) be submitted to the lenders for
their evaluation. Following further discussions, MK and Washington entered
into an agreement dated April 15, 1996 which provided, among other things,
that (i) subject to certain conditions, MK would cease and desist from
soliciting inquiries or proposals from other parties with respect to possible
business combinations or similar transactions involving MK, and (ii) MK would
reimburse WCGI for its expenses incurred in connection with a possible
transaction involving it and MK.
Following extensive negotiations among MK, MK's creditors and Washington, a
non-binding term sheet dated May 10, 1996 was entered into setting forth the
principal terms of the Merger Agreement. Pursuant to the term sheet, MK would
consummate the Plan pursuant to which the Cash Distribution, WCGI Common Stock
and certain other assets of MK would be distributed to holders of the Impaired
Claims. At the Effective Time, reorganized MK would merge into WCGI with WCGI
being the surviving entity operating under the name "Morrison Knudsen
Corporation." The term sheet provided for the payment of consideration by
WCGI as follows: (i) the payment of $13,300,000 in cash by WCGI on the
Effective Time, (ii) the issuance of newly-issued shares of WCGI Common Stock
equal to 45% (approximately 24,121,000 shares) of the issued and outstanding
shares on the Effective Time, (iii) the issuance of Warrants to purchase an
aggregate of 2,765,000 shares of WCGI Common Stock at an exercise price of
$12.00 per share for a term of five years, and (iv) that WCGI would cause MK's
DIP Facility to be repaid at the Effective Time.
Following the completion of Washington's review of MK's businesses and
extensive negotiations regarding the definitive terms of the Merger and of
modifications to the Initial Plan to provide for, among other things, the
Merger and the distribution of securities of the Combined Company to holders
of claims against and interests in MK, WCGI's Board of Directors approved the
Merger Agreement on May 24, 1996 and MK's Board of Directors approved the
Merger Agreement on May 28, 1996. MK and WCGI entered into the Merger
Agreement on May 28, 1996. See "The Merger Agreement." Because MK believed
that the Plan, which provides for the Merger, provides greater value to its
creditors and stockholders than would have been achieved under the Initial
Plan, MK abandoned the Initial Plan in favor of the Plan.
Subsequent Negotiations Involving Representatives of MK Equity Holders.
Since late May 1996, certain holders of MK Common Stock (the "Unofficial
Equity Committee") and their representatives have negotiated with MK and its
representatives in an effort to reach consensus on the terms of the Plan. The
Unofficial Equity Committee has contended, among other things, that the Plan
undervalued the MK assets that are to be distributed thereunder and that the
Plan effectively provided for overpayment to certain of MK's creditors. MK
disputed this contention. In order to avoid the cost and uncertainty of
protracted litigation with the Unofficial Equity Committee, MK and the
Unofficial Equity Committee entered into a settlement which is embodied in the
Plan.
Among the principal components of the settlement are (i) an increase in
the duration of term of the Warrants from five years to six and one-half years
after the Effective Time and (ii) the issuance to the holders of MK Common
Stock of rights which will be exercisable to purchase a portion of the
distributions that would otherwise be made to certain of MK's creditors (the
"MK Equity Rights"). See "Securities to be Issued and Transferred Under the
Plan--MK Equity Rights." Neither the issuance nor the exercise of the MK
Equity Rights will affect the amount of consideration to be paid by WCGI
pursuant to the Merger.
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On July 22 and July 23, 1996, the Boards of Directors of MK and WCGI,
respectively, approved the extension of the term of the Warrants from five
years to six and one-half years, the issuance of the MK Equity Rights and the
other terms of the agreement with the Unofficial Equity Committee.
Recommendation of the Board of Directors of WCGI
The Board of Directors of WCGI unanimously approved the Merger Agreement and
the transactions contemplated thereby at the May 24, 1996 Board meeting. The
Board of Directors of WCGI believes that the terms of the Merger are fair to
and in the best interests of WCGI and its stockholders and recommends that the
stockholders of WCGI vote FOR approval of the Merger Proposals.
In reaching its conclusion to approve the Merger, the Board of Directors of
WCGI considered a number of factors, including, without limitation, the
factors discussed or enumerated below. The Board of Directors of WCGI
generally attached greatest significance to its belief that the Merger will
achieve a number of WCGI's strategic objectives. With respect to the other
factors discussed or enumerated below, the Board of Directors did not find it
practicable and did not attempt to quantify or attach a specific weight to
such factors in its deliberations.
In unanimously approving the Merger, and in recommending that WCGI's
stockholders approve the Merger Proposals, WCGI's Board of Directors consulted
with WCGI's management, as well as its financial and legal advisors, and
considered a number of factors, including, but not limited to, the following:
Strategic Combination. WCGI's management believes that the Merger
represents a strategic combination which will create a fully integrated
engineering and construction company capable of competing for work on a global
basis in a variety of disciplines. The combination should provide an
opportunity for WCGI and MK to capitalize on each other's operating strengths.
The WCGI Board of Directors believes that the Merger is an opportunity for
WCGI's stockholders to participate in a combined enterprise that has
significantly greater business and financial resources than WCGI would have
absent the Merger.
Cost Savings and Synergism. WCGI believes that the combination of WCGI's
--------------------------
and MK's businesses and operations will create opportunities for cost
reduction and synergism that will result in an overall lower cost structure
and enhance the ability of the Combined Company to attract new business. It
is anticipated that the combination of the existing business operations of
WCGI and MK will provide cost reduction opportunities, including those
associated with the elimination of certain duplicative corporate functions
following the Merger. In addition, the Combined Company will possess the
combined capital and human resources of WCGI and MK and, accordingly, is
expected to possess an enhanced ability to attract and profitably exploit new
business opportunities compared to that of WCGI and MK standing alone,
primarily as a result of the Combined Company's enhanced bonding capacity and
ability to attract new business, including new business that the Combined
Company is capable of exploiting directly, rather than through less
profitable joint ventures and similar arrangements. There can be no
assurance, however, that any particular level of incremental cost savings or
revenues will be realized as a result of the synergism expected to result
from the Merger. See "Risk Factors."
Heavy Construction. WCGI's heavy construction activities include, among
------------------
other things, the construction of large earth moving projects and complex
public works projects. The geographic scope of such work is primarily in the
western United States, especially in California where WCGI is one of the
largest contractors for the California Department of Transportation. WCGI
performs a majority of its work on a fixed-price contract basis and utilizes
one of the largest owned equipment fleets in the United States. MK has had
recent difficulty in its heavy construction operation due to its inability to
obtain sufficient new work resulting from its financial difficulties.
However, MK has an impressive history of heavy construction on a global
basis, and currently has projects in the United States, Asia and the Middle
East.
The Combined Company will combine WCGI's and MK's heavy construction
operations into a single unit. Heavy construction projects can be large in
scale and complex in their engineering and construction requirements. Larger
projects are often bid on a joint venture basis with other
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construction companies to combine technical expertise, spread financial risk
or share bonding capacity. The Combined Company's heavy construction
operation will have strong bonding capacity, greater geographic diversity and
expanded expertise and capabilities in estimating, project management and
equipment utilization. It is anticipated that the Combined Company will bid
on larger, more geographically diverse jobs with capability to self-perform a
larger proportion of the work. When joint ventures are desired, the Combined
Company should be an attractive joint venture partner with its combined
financial and operating strengths.
Contract Mining. The Combined Company also will combine WCGI's and MK's
---------------
contract mining operations into a single operation. The current WCGI and MK
contract mining operations differ in their geographic presence and financial
strength. Once combined, the Combined Company will continue to develop
existing long-term relationships and client base, with a focus on expanding
such relationships and developing new business on a global basis.
Environmental Remediation. The Combined Company will benefit from the
-------------------------
complementary environmental remediation operations of WCGI and MK. MK
historically has performed highly technical remediation for the United States
Department of Energy, Department of Defense and private clients. Such
projects often involve MK providing technical design and project management
services on a cost plus profit basis. WCGI's environmental remediation
activities have grown out of its heavy construction operations and
historically include removing, transporting and depositing low-level
contaminated materials using standard earth moving equipment. WCGI's
projects usually are fixed-price or unit-price contracts. Management
believes that combination will expand opportunities in the remediation market
and will position the Combined Company to provide a wide range of services on
environmental remediation projects, ranging from technical design to the
physical remediation activities.
Engineering and Construction. MK has been a global leader in the
----------------------------
engineering and construction business. The long-term profitability of this
operation is heavily reliant on industry reputation, client relationships and
overall confidence in the firm's financial stability to ensure the completion
of long-term cost plus contracts typical to this industry. It is anticipated
that the financial stability of the Combined Company, as compared with the
financial difficulties experienced by MK, would enable the Combined Company
to reverse the trend of declining revenues and backlog.
Other Factors. In reaching its conclusion to approve the Merger, the WCGI
Board of Directors considered, among other things, the following additional
factors: (i) MK's business, management expertise, current business strategy,
prospects and competitive position in the general construction industry;
(ii) the growth opportunities in MK's markets not available to WCGI;
(iii) the potential consolidation benefits of the Merger, arising out of
WCGI's financial strength, bonding capacity and operating expertise in heavy
construction and contract mining and MK's design, engineering and construction
capabilities in the industrial process, power and environmental markets;
(iv) the historical, current and projected results of operations and financial
condition of WCGI and MK before and after giving effect to the Merger;
(v) information concerning the financial performance and condition, business
operations and prospects of each of MK and WCGI, and WCGI's projected future
performance and prospects as a separate entity and on a combined basis with
MK; (vi) an earnings per share dilution analysis which concluded that the
Merger would likely be anti-dilutive in 1997 through 1999 (although there
can be no assurance with respect thereto); (vii) current industry, economic
and market conditions in the general and heavy construction industry;
(viii) the structure of the transaction and terms of the Merger Agreement,
which were the result of arm's-length negotiations among WCGI, MK and MK's
creditors; and (ix) consolidation benefits that could be available to the
Combined Company after the Merger. The earnings per share dilution analysis
was based on certain projected financial information which combined projected
results of operation for WCGI and MK, respectively, on a stand-alone basis.
Such projected financial information, which was prepared by management of
Washington and MK, sets forth projected earnings per share for the Combined
Company in 1997 through 1999 of $0.50, $0.49 and $0.61, respectively, compared
with projected earnings per share of WCGI in 1997 through 1999 of $0.43, $0.46
and $0.51. A subsequent version of the projections for 1997 and 1998 are
included as Appendix A to the Proxy Statement. The primary difference between
the prior projections considered by the Board and the projections set forth in
Appendix A is that the prior projections do not include incremental revenues
and income due to projected synergism resulting from the Merger. See "Risk
Factors -- Risks Related to the Projections an" and Appendix A hereto.
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The Board of Directors also considered the following negative factors in its
deliberations concerning the Merger: (i) the risk that the issuance of WCGI
Common Stock in connection with the Merger may be dilutive to the WCGI
stockholders; (ii) the risk that the benefits sought to be achieved in the
Merger will not be achieved; and (iii) the other risks described above under
"Risk Factors."
In connection with the Merger, Washington has retained Schroder Wertheim &
Co. Incorporated ("Schroder") and Batchelder & Partners, Inc. ("BPI") to
provide financial advisory and related services. Washington also has retained
Washington Corporation, an affiliate of Dennis R. Washington, ("WC") to
provide financial advisory and related services in connection with the Merger.
See "Certain Transactions" for a description of the compensation arrangements
that Washington has entered into with these firms.
Each of these financial advisers worked closely with management in
structuring, negotiating and analyzing the Merger. In particular, the Company
retained Schroder because it is an internationally known investment banking
firm which has extensive experience in the construction industry in general,
and Washington in particular. Schroder assisted Washington primarily in
structuring the transaction, negotiating the terms of the transaction with MK
and making presentations to MK's creditors. The Company retained BPI because
of its extensive experience in the construction industry and its knowledge of
Washington's business, in part due to its previous advisory services provided
to Washington. BPI assisted Washington primarily in structuring the
transaction, negotiating the terms of the transaction with MK and the MK
creditors, conducting a due diligence review of MK, assisting Washington with
its financial analysis and advising the Washington Board of Directors on the
status and terms of the transaction. WC regularly provides assistance to
Washington on a number of financial and strategic matters. WC assisted
Washington primarily in conducting its due diligence review of MK and its
financial analysis of the transaction.
In connection with its retention of BPI and WC, the Audit Committee, in the
first instance, and the entire Board (with Messrs. Batchelder and Parkinson
abstaining) approved the arrangements between Washington, on the one hand, and
BPI and WC on the other. In reaching its decision to retain BPI and WC and in
connection with its deliberations concerning the Merger, the Board considered
the fact that BPI is an affiliate of David Batchelder and in connection with
deliberations concerning the Merger and that WC is an affiliate of Mr.
Washington and potential conflicts of interest arising from those
relationships.
The Board did not request any of the financial advisers to provide a
fairness opinion with respect to the Merger, as such an opinion was not deemed
necessary or desirable given the Board's experience in the construction
industry, the fact that the Merger with MK was an arm's length transaction
that did not involve any conflicts of interest between Washington and its
directors, officers and affiliates, on the one hand, and MK and its directors,
officers and affiliates, on the other, and the potential expense of such an
opinion.
After considering all of the factors set forth above, the Board of Directors
of WCGI determined that the Merger was in the best interests of WCGI and its
stockholders and that WCGI should proceed with the Merger at this time and
recommended that the stockholders approve the Merger.
THE BOARD OF DIRECTORS OF WCGI UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS OF
WCGI VOTE TO APPROVE AND ADOPT THE MERGER PROPOSALS. WCGI'S STOCKHOLDERS ARE
URGED TO CAREFULLY REVIEW THE FACTORS DISCUSSED IN "RISK FACTORS" IN
CONNECTION WITH EVALUATING AND VOTING ON THE MERGER PROPOSALS. Chapter 11 is
the principal business reorganization chapter of the Bankruptcy Code. Under
Chapter 11 of the Bankruptcy Code, a debtor is authorized to reorganize its
business for the benefit of itself and its creditors and stockholders. In
addition to rehabilitation of the debtor, another goal of Chapter 11 is to
promote equality of treatment with respect to the distribution of the debtor's
assets to classes of creditors and equity security holders who hold
substantially similar claims or interests. In furtherance of these two goals,
the filing of a petition for reorganization under Chapter 11 of the Bankruptcy
Code generally provides for an automatic stay of substantially all acts and
proceedings
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Chapter 11 Proceeding
against the debtor and its property, including all attempts to collect claims
or enforce liens that arose prior to the commencement of the debtor's Chapter
11 case.
The consummation of a plan of reorganization is the principal objective of a
Chapter 11 reorganization case. A plan of reorganization sets forth the means
for satisfying claims against and interests in a debtor. Confirmation of a
plan of reorganization by the Bankruptcy Court makes the plan binding upon the
debtor, any issuer of securities under the plan, any person or entity
acquiring property under the plan and any creditor of or equity security
holder in the debtor, whether or not such creditor or equity security holder
(i) is impaired under or has accepted the plan or (ii) receives or retains any
property under the plan. Subject to certain limited exceptions and other than
as provided in the plan itself or the confirmation order, the confirmation
order discharges the debtor from any debt that arose prior to the date of
confirmation of the plan and terminates all rights and interests of equity
security holders and substitutes therefor the obligations specified under the
confirmed plan.
MK Plan of Reorganization
Background. After exploring out-of-court restructuring alternatives and
bankruptcy alternatives, MK concluded that the restructuring alternative best
designed to maximize recovery for its stakeholders was through a form of a
pre-packaged plan of reorganization. In a pre-packaged plan of
reorganization, the debtor first solicits acceptances of its plan or
reorganization from certain or all of its creditors prior to commencing a case
for bankruptcy under Chapter 11. The solicitation materials include the plan
of reorganization, ballots, a disclosure statement and certain other related
documents. If sufficient votes for acceptance of the plan are received, the
debtor files for bankruptcy under Chapter 11 and typically seeks prompt
confirmation of the plan.
Under the Merger Agreement, MK agreed, subject to the fiduciary duties of
MK's Board of Directors, to seek the support of the terms of the Plan from its
creditors as promptly as possible. In this regard, MK agreed to prepare, as
promptly as possible, the Plan and a modification to the disclosure statement
relating to the Initial Plan (the "Disclosure Statement") and all related
documents, including ballots, necessary to solicit acceptances of the Plan
from MK's creditors (other than the plaintiffs in certain lawsuits).
On June 10 and 14, 1996, MK mailed the Disclosure Statement and related
solicitation materials to MK's creditors whose claims are impaired by the Plan
and entitled to vote (other than the plaintiffs in the Touchstone Actions as
described under "--Certain MK Legal Proceedings). By June 21, 1996, MK had
obtained a sufficient number of acceptances of the Plan from MK's creditors in
a sufficient number of classes of creditors to seek confirmation of the Plan
and on June 25, 1996, MK filed its voluntary petition for relief under Chapter
11. Since that time, MK has continued in possession of its property and is
operating and managing its business as a debtor in possession pursuant to the
Bankruptcy Code. On July 25, 1996 the Bankruptcy Court approved the
Disclosure Statement used to solicit votes of impaired classes of creditors
and interest holders. MK currently anticipates that the Confirmation Order
confirming the Plan will be entered on or about August 26, 1996 and that the
Plan will become effective 11 days thereafter, subject to the satisfaction or
waiver of the conditions to Plan. See "--Conditions Precedent to Confirmation
and Consummation of the Plan and the Effective Date."
Distributions. In general, the Plan provides for, among other things, (i)
distributions by MK of certain non-core assets (principally common stock of MK
Rail, a note payable by MK Rail and up to $18 million of MK tax refunds) to
the holders of Impaired Claims; (ii) the issuance by WCGI of the Merger Shares
and the distribution by WCGI of the Cash Distribution to the holders of
Impaired Claims; (iii) the repayment and/or refinancing by WCGI of the DIP
Facility; and (iv) the issuance by WCGI of the Warrants to stockholders of
record of MK immediately prior to the Effective Time. Under certain
circumstances described in the Plan, a portion of the distributions which
would otherwise be made to holders of Impaired Claims, may be made to holders
of MK Common Stock. The "Impaired Claims" under the Plan consist of
obligations under MK's former credit facilities, obligations to a bonding
company and certain other obligations incurred in connection with MK's former
Transit business, claims of the Boise Landlord (as defined in "The Merger -
Boise Landlord Negotiations" below) and claims of the plaintiffs in the
Touchstone Actions (as defined in "The Merger - Certain MK Legal Proceedings"
below).
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MK Equity Rights. The Plan also provides for the issuance of the MK Equity
Rights to holders of MK Common Stock. The MK Equity Rights will represent in
the aggregate the right to purchase for cash a pro rata share (which will be
determined under the Plan and will not exceed 50%) of all distributions and
related rights that, in the absence of the exercise of any MK Equity Rights,
would be made to or otherwise inure to the benefit of holders of Impaired
Claims. See "Securities to be Issued and Transferred Under the Plan -- MK
Equity Rights."
Liquidating Trust. A portion of the assets to be distributed pursuant to
the Plan may be distributed to the Liquidating Trust. In general, the
Liquidating Trust would be established if the amount of certain claims
incurred in connection with MK's former Transit business are not finally
determined at the Effective Time, if the MK Rail Note is not liquidated or if
the holders of MK Common Stock potentially would be entitled to receive a
portion of such assets after the Effective Time. If none of such events
occurs, MK may elect not to cause the Liquidating Trust to be established.
Assuming that the Liquidating Trust is established, the shares of Series A
Preferred Stock would be issued to the Liquidating Trust and the holders of
Impaired Claims (and, in some cases, holders of MK Common Stock, would receive
beneficial interests in the Liquidating Trust. Assets held in the Liquidating
Trust, and any distributions on account of the Series A Preferred Stock, would
be distributed to the parties who hold such beneficial interests.
Conditions Precedent to Confirmation and Consummation of the Plan and the
Effective Date. The Plan provides that the Confirmation Order must be
acceptable in form and substance to MK and Washington, and must expressly
authorize and direct MK and Washington to perform certain actions specified in
the Plan including, among other things: (i) the classification and treatment
of certain claims against MK; (ii) consummation of the Merger and the
transactions contemplated thereby; (iii) the establishment of the certificate
of incorporation and bylaws of the Combined Company; (iv) the designation of
the Board of Directors of the Combined Company; (v) the release by MK and the
holders of claims or interests of claims, demands, debts, rights, causes of
action and liabilities in connection with or related to MK; and (vi) the
release of certain liens against the property of MK. In addition, there are a
number of procedural and substantive confirmation requirements under the
Bankruptcy Code that must be satisfied for the Plan to be confirmed pursuant
to section 1129 of the Bankruptcy Code.
Under the Plan, the "Effective Date" is defined as a business day, as
determined by MK, that is as soon as reasonably practicable but that is at
least 11 days after the date the Bankruptcy Court enters the Confirmation
Order on its docket (the "Confirmation Date") and on which all conditions to
the Effective Date have been satisfied or, if permitted, waived by MK or
Washington, as described below, and on which no stay of the Confirmation Order
is in effect. See "The Merger Agreement--Conditions to the Merger" and "--
Termination" for a description of certain conditions to the consummation of
the Merger and the circumstances under which the Merger Agreement may be
terminated.
The Plan provides that the Effective Date will not occur and the Plan will
not be consummated unless and until, among other things, the following
conditions have been satisfied or, if permissible, duly waived:
(i) The Confirmation Order shall authorize and direct that MK and the
Combined Company take all actions necessary or appropriate to enter
into, implement and consummate the contracts, instruments, releases,
leases, indentures and other agreements or documents created in
connection with the Plan, including those actions contemplated by
the provisions of the Plan and described above. The Confirmation
Order shall not be subject to a presently effective stay pending
appeal.
(ii) All borrowings under the DIP Facility have been paid in full in cash
and all commitments terminated thereunder.
(iii) Final orders have been entered approving the settlement of certain
of MK's outstanding securities litigations. See "The Merger--Certain
MK Legal Proceedings."
(iv) The conditions to effectiveness of the New Lease (as defined below)
have been satisfied. See "The Merger--Boise Landlord Negotiations."
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(v) MK Rail shall have redeemed the MK Rail rights or MK shall be
satisfied, by reason of an amendment to the MK Rail Rights Plan, a
judicial determination or otherwise, that the MK Rail rights are
inapplicable to the transactions contemplated by the Plan.
(vi) Either MK Rail shall have completed the repurchase of the entire MK
Rail Note or an agreement pursuant to which MK Rail will agree to
repurchase the MK Rail Note from MK (the "MK Rail Note Cancellation
Agreement") shall have been terminated in accordance with its terms.
Each of the conditions to the entry of the Confirmation Order and the
Effective Date, other than subparagraphs (i), (ii) and (vi) above, may be
waived in whole or in part by MK and Washington at any time, without notice,
an order of the Bankruptcy Court or any further action other than proceeding
to confirmation and consummation of the Plan. The failure to satisfy or to
waive any condition may be asserted by MK and Washington regardless of the
circumstances giving rise to failure of such condition to be satisfied
(including any action or inaction by MK or Washington). The failure of MK and
Washington to exercise any of the foregoing rights will not be deemed a waiver
of any other rights and each such right will be deemed an ongoing right that
may be asserted at any time.
If each condition to the Effective Time has not been satisfied or duly
waived within 30 days after the Confirmation Date, then (unless the period for
satisfaction or waiver of conditions has been extended for a period not
exceeding 90 days pursuant to the Plan) upon motion by any party in interest,
made before the time that each of the conditions has been satisfied or duly
waived and upon notice to such parties in interest as the Bankruptcy Court may
direct, the Confirmation Order will be vacated by the Bankruptcy Court;
provided, however, that notwithstanding the filing of such motion, the
Confirmation Order may not be vacated if each of the conditions to the
Effective Date is either satisfied or duly waived before the Bankruptcy Court
enters an order granting such motion. If the Confirmation Order is vacated,
the Plan shall be deemed null and void in all respects, and nothing contained
in the Plan shall (1) constitute a waiver or release of any claims by or
against, or any interests in, MK or (2) prejudice in any manner the rights of
MK or Washington. MK and Washington are not presently aware of any
circumstances that would cause a material delay in the occurrence of the
Effective Date and the satisfaction of the conditions described above.
By letter dated June 21, 1996, MK agreed with WCGI that it would use its
reasonable best efforts to cause the conditions set forth in subparagraph (v)
above to be satisfied prior to the time at which all of the conditions to the
Effective Date shall have been satisfied or waived. MK also agreed, under
certain circumstance, that it will exercise its right to terminate the MK Rail
Note Cancellation Agreement in satisfaction of the conditions set forth in
subparagraph (vi) above. Such agreements have the same force and effect as if
they were set forth in the Merger Agreement.
Operations of the Combined Company
Following the Effective Time, the Combined Company will continue to operate
the core businesses presently operated by Washington and MK. It is
contemplated that, following the consummation of the Merger, the Combined
Company will implement a strategic plan intended to create opportunities for
cost reduction and synergism in the business operations of Washington and MK
on a combined basis.
Strategic Plan. Washington and MK believe that the Combined Company will
be able to compete more effectively in the competitive industries in which
Washington and MK conduct their respective businesses than could either
Washington or MK alone. In particular, MK believes that its businesses can be
returned to profitability and long-term stability and growth under the
Combined Company's proposed capital structure. In addition, MK believes that
the combination of its businesses and operations with those of Washington will
create opportunities for cost reduction and synergism that will result in an
overall lower cost structure and enhance the ability of the Combined Company
to attract new business.
Washington and MK are in the process of developing a strategic plan for the
Combined Company, and the principal components of such plan are briefly
summarized below:
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Focus on Core Businesses. The core businesses of each of Washington
------------------------
and MK include infrastructure construction, contract mining and environmental
remediation. MK's core businesses also include engineering and construction
in selected market segments and environmental management. The Combined
Company intends to continue to focus on these core businesses and the markets
in which Washington and MK, as the case may be, have historically performed
best so as to maximize the Combined Company's efficiency and effectiveness in
those markets.
Consolidation of Certain Operations; Cost Savings. It is anticipated
-------------------------------------------------
that the combination of the existing business operations of Washington and MK
will provide substantial cost reduction opportunities, including those
associated with the elimination of certain duplicative corporate functions
following the Merger. There can be no assurance, however, that any particular
level of savings will be realized. See "Risk Factors."
Realization of Synergism. The Combined Company will possess the
------------------------
combined capital and human resources of Washington and MK and, accordingly, is
expected to possess an enhanced ability to attract and profitably exploit new
business opportunities compared to that of Washington and MK standing alone.
In particular, the Combined Company is expected to benefit from an enhanced
bonding capacity (compared to that of MK) and ability to attract new business,
including new business that the Combined Company is capable of exploiting
directly, rather than through less profitable joint ventures and similar
arrangements. There can be no assurance, however, that any particular level
of incremental revenues will be realized as a result of the synergism expected
to result from the Merger. See "Risk Factors."
Certain Federal Income Tax Consequences
The following discussion sets forth the material federal income tax
consequences of the Merger to MK and the Combined Company, and is based on
current provisions of the Code, currently applicable Treasury regulations and
judicial and administrative rulings and decisions. There can be no assurance
that the Internal Revenue Service (the "IRS") will not take a contrary view,
and no ruling from the IRS has been or will be sought. Legislative, judicial
or administrative changes may be forthcoming that could alter or modify the
statements and conclusions set forth herein. Any legislative, judicial or
administrative changes or interpretations may or may not be retroactive.
The Merger. The Merger should qualify as a "reorganization" under Section
368(a) of the Code provided that, among other things, the prior owners of MK
receive and retain a substantial continuing proprietary interest in the
Combined Company. Although not free from doubt, the debt holders of MK who
receive shares of Combined Company common stock in the Merger may qualify as
the "owners" of MK for this purpose, in which case their ownership of shares
of Combined Company common stock should constitute a substantial continuing
proprietary interest by the prior owners of MK. Assuming that their interests
do so qualify, the Merger would likely qualify as a reorganization under the
Code, resulting generally in no recognition of gain or loss by MK on the
transfer of its assets and liabilities to the Combined Company in the Merger.
If the Merger does not qualify as a reorganization under the Code, MK will
recognize taxable gain or loss on the transfer of its assets to the Combined
Company, and its net operating loss ("NOL") carryforwards will generally be
eliminated, rather than subjected to limitation on future use, as discussed
below. See "--Limitation on Net Operating Loss Carryforwards."
The Combined Company will not recognize gain or loss as a result of the
issuance of the Merger Shares and the Warrants. The Combined Company may
recognize gain or loss upon the distribution of property other than the Merger
Shares issued to creditors of MK in satisfaction of MK debts. Such gain (or,
if realized and recognizable, such loss) will be equal to the difference
between the Combined Company's basis in the property and its fair market
value.
A taxpayer generally realizes cancellation of debt ("COD") income for
federal income tax purposes equal to the amount of any indebtedness that is
discharged or cancelled during the taxable year. If the discharge is granted
by a bankruptcy court in a Chapter 11 case or is pursuant to a plan of
reorganization approved by such court, however, such income is excluded from
the taxpayer's taxable income under Code Section 108(a).
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Code Section 108(b) provides that certain tax losses, credits, and/or other
tax attributes of a debtor, including any NOL carryforwards and/or basis in
the debtor's property, must be reduced by the amount of the debtor's COD
income that is excluded under Code Section 108(a). Any such reduction in
basis is limited to the excess of the aggregate tax basis of the property held
by the debtor over the aggregate liabilities of the debtor after the
transaction. With respect to the issuance of the Merger Shares and other
property distributed to creditors in satisfaction of their debts, MK will be
treated as having satisfied such debts with an amount of money equal to the
fair market value of the Merger Shares and other property distributed in
exchange therefor. The difference between the amount of debt satisfied and
the fair market value of the Merger Shares and other property distributed
therefor will constitute COD income, and reduce MK's tax attributes by that
amount.
Limitation on Net Operating Loss Carryforwards. MK reported net operating
loss carryforwards of approximately $100 million at December 31, 1995. It is
presently estimated that, after giving effect to the discharge and
cancellation of substantially all of MK's long-term indebtedness pursuant to
the Plan, MK will have NOL carryforwards of approximately $275 million at the
Effective Date. The actual amount of MK's NOL carryforwards at the Effective
Date will depend upon, among other factors, the value of WCGI Common Stock on
such date. The NOL carryforwards are subject to audit and possible challenge
by the IRS. Moreover, the implementation of the Plan will likely cause an
"ownership change" within the meaning of Code Section 382. Consequently, the
ability of the Combined Company to use the NOL carryforwards, as well as NOLs
arising in the 1996 taxable period ending on the Effective Time, and certain
losses or other deductions which may accrue thereafter, against ordinary
operating income in the taxable periods after the Effective Time may be
subject to annual limitations under Code Section 382 (the "Section 382
Limitation").
MK presently expects that Code Section 382(l)(5) will not be applicable
and, assuming it will not be applicable, that the Section 382 Limitation will
be determined under the rules provided in Code Section 382(l)(6). Under this
section, the amount of income that may be offset by the NOLs in any taxable
year ending after the Effective Time will generally be limited to an amount
equal to the sum of (i) the fair market value of the Common Stock of MK,
determined immediately prior to the Effective Time (but taking into account
the increase in value resulting from the cancellation of creditors' claims in
the Plan), multiplied by the federal long-term tax-exempt rate (currently
approximately 5.8%), and (ii) the amount of any "recognized built-in gains"
that do not exceed the "net unrealized built-in gain" (if such gain exists and
exceeds a statutorily-defined threshold amount) and that are recognized during
a taxable year any portion of which is in the five-year period following the
Effective Time. In addition, any "recognized built-in losses" that do not
exceed the "net unrealized built-in loss" (if such loss exists and exceeds a
statutorily-defined threshold amount), and that are recognized during a
taxable year any portion of which is within the five-year period following the
Effective Time, will be subject to limitation in the same manner as if such
loss was an existing NOL carryforward.
In addition, the Merger will cause MK's net operating losses through the
Effective Time to be subject to the SRLY rules of the Code, which in general
will mean that such losses may be used by the Combined Company only to offset
MK income after the Merger.
Other Indebtedness of the Combined Company
Outstanding Long-Term Debt Not Retired Pursuant to Plan. The significant
contingent debt obligations of MK that will remain outstanding after the
Effective Time, excluding performance guaranties and standby letters of credit
entered into in the ordinary course of their business, include (based on
amounts which are estimated to be outstanding at the Effective Time) (a)
guaranties of approximately $22.6 million of certain port facility bonds of
National Steel and Shipbuilding Company, (b) guaranties of approximately $32.6
million of debt of McConnell Dowell Corporation, (c) guaranties of
approximately $4.4 million of debt of Emkay Development Company, Inc. and (d)
obligations of approximately $51.2 million under certain letter of credit
reimbursement agreements.
Washington Credit Facility. In September 1995, Washington entered into a
four-year revolving credit facility which provides for borrowings bearing a
rate of interest equal to either LIBOR plus 1% or a specified prime rate of
interest. Under such credit facility, Washington may borrow the lesser of $60
million or Washington's "borrowing base," which is calculated based on
Washington's cash and cash equivalents, accounts receivable, investments,
inventory and equipment. At May 31, 1996, Washington's
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borrowing base exceeded $60 million. Such credit facility is secured by the
stock and all of the assets of Washington's participating subsidiaries. At May
31, 1996, there were no borrowings outstanding thereunder.
Washington is currently exploring alternative financing opportunities that
may be finalized prior to the Effective Time, including amending its existing
credit facility or obtaining a different credit facility with the same or a
different lender. Alternatively, Washington may elect to retain the existing
credit facility following the Effective Time.
Interests of WCGI Management in the Merger
In considering the recommendations of WCGI's Board of Directors,
stockholders should be aware that certain members of WCGI's management and
Board of Directors have certain interests in the Merger that are in addition
to the interests of WCGI stockholders generally. See "Management of the
Combined Company--Director Stock Options and Compensation," "--Executive
Compensation," "--Limitation of Liability; Indemnification of Directors and
Officers," "Directors' and Officers' Insurance" and "Certain Transactions."
Dividends on WCGI Common Stock
WCGI has not declared stockholder dividends since 1994. WCGI's credit
agreement restricts WCGI's ability to pay dividends. It is not anticipated
that dividends will be paid at any time in the foreseeable future with respect
to WCGI Common Stock.
Accounting Treatment
The Merger will be accounted for as a purchase, with WCGI as acquiror, in
accordance with generally accepted accounting principles.
Appraisal Rights
Holders of WCGI Common Stock are not entitled under DGCL to dissenters'
rights of appraisal in connection with the Merger.
Regulatory Approvals
Under the HSR Act, and the rules promulgated thereunder by the FTC, the
Merger may not be consummated until notifications have been given and certain
information has been furnished to the FTC and the Antitrust Division, and
specified waiting period requirements have been satisfied. WCGI and MK filed
premerger notification and report forms with the FTC and the Antitrust
Division on June 7, 1996. On June 19, 1996, the FTC granted WCGI's and MK's
request for early termination of the waiting period under the HSR Act.
WCGI and MK are not aware of any license or regulatory permit which is
material to the businesses of WCGI or MK and which is likely to be adversely
affected by consummation of the Merger or of any approval or other action by
any state, federal or foreign government or governmental agency (other than
routine re-licensing procedures) that would be required prior to the Merger.
Certain MK Legal Proceedings
During 1994 and 1995, certain lawsuits in the following four general
categories were filed against MK and/or MK Rail and their respective directors
and/or officers: (1) class actions relating to transactions in the MK Common
Stock; (2) class actions relating to the issuance of, and transactions in, the
common stock of MK Rail; (3) derivative actions brought by persons who claim
to be stockholders of MK; and (4) claims brought by the former stockholders of
three corporations, Touchstone, Inc., TMS, Inc. and Clark Industries, Inc.,
each of which were acquired by MK in exchange for shares of MK Common Stock
and the businesses of which are now part of MK Rail. In each of these actions,
the plaintiffs have alleged, inter alia, violation of various federal and
state securities laws. The plaintiffs in these actions have sought various
remedies, including compensatory and punitive damages and injunctive
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relief. Following is a brief summary of such legal proceedings, including a
summary of settlements achieved, where applicable. For a more detailed
discussion of such legal proceedings and of specific settlement terms, see
MK's Annual Report on Form 10-K for the fiscal year ended December 31, 1996
attached hereto as Exhibit 7 and MK's Quarterly Report on Form 10-Q for the
three months ended March 31, 1996 attached hereto as Exhibit 6. See also "Risk
Factors--Securities Litigation."
MK Securities Class Actions. Seven separate cases filed on July 28, 1994
have been consolidated. The settlement of these cases (collectively, the "MK
Securities Class Actions") has been approved by the United States District
Court for the District of Idaho in a final judgment entered on December 1,
1995. No appeal has been filed. A court-approved settlement fund was
established and settlement proceeds (cash of $35 million, which was provided
entirely by MK's insurance carriers, and a share certificate for 2,976,923
shares of MK Common Stock) were deposited therein during 1995. The issuance
of MK Common Stock represented by such certificate and the transfer of the
settlement proceeds from the settlement fund to the control of the plaintiffs
(and, thus, the effectiveness of the settlement) is subject to certain
conditions, including the entry of final nonappealable judgments approving the
settlements in the MK Rail Securities Class Actions (as defined below) and the
MK Derivative Actions (as defined below) and, in the event that a bankruptcy
case has been commenced in respect of MK, an order has been entered by the
court having jurisdiction over the bankruptcy case, and has become final and
nonappealable that (i) approves the settlement, (ii) authorizes MK's
performance of all of its obligations in respect of the settlement and (iii)
authorizes the use of the insurance policies to make the payments required by
the settlement.
MK Rail Securities Class Actions. Two cases filed on October 20, 1994
relating to the issuance of, and transactions in, the common stock of MK Rail
(the "MK Rail Securities Class Actions") have been consolidated. The
settlement of the MK Rail Securities Class Actions was approved on March 29,
1996 by the United States District Court for the District of Idaho. No appeal
has been filed. A court-approved settlement fund was established, into which
MK deposited a share certificate for 869,231 shares of MK Common Stock after
the settlement was approved. In addition to a condition that the settlement
be approved by an order of court that becomes final and nonappealable, the
issuance of the common stock represented by such certificate and the transfer
of the settlement proceeds to the control of the plaintiffs and, thus, the
effectiveness of the settlement is subject to certain other conditions,
including the entry of a final and nonappealable judgment approving the
settlement of the "Double Derivative" Claims in Wohlgelernter v. Agee, et al.,
No. CVOC 9500656D (Idaho Dist. Ct., Ada County) (filed March 24, 1995
("Wohlgelernter Action").
MK Derivative Actions. Thirteen derivative actions (the "MK Derivative
Actions") have been filed in state courts in Idaho and Delaware, naming as
defendants certain of MK's present and former directors and officers. MK is a
nominal defendant in each of these actions. Five of the cases were filed in
the Idaho Fourth District Court in Ada County (the "Idaho District Court"),
and eight of the cases were filed in the Delaware Chancery Court in New Castle
County (the "Delaware Chancery Court"). The settlements of the MK Derivative
Actions were submitted for approval to the Delaware Chancery Court and the
Idaho District Court. The settlements do not include the "Double Derivative"
Claim asserted on behalf of MK Rail in the Wohlgelernter Action, or the claims
asserted in State Board of Administration of Florida v. MK, et al., No. CVOC
9502463D (Idaho Dist. Ct., Ada County) (filed June 2, 1995) ("Florida
Action"), which were separately submitted for approval to the Idaho District
Court. The settlements of the MK Derivative Actions require MK to adopt
certain "therapeutic measures" with respect to its corporate governance. See
page I-15 of the MK Form 10-K. In connection with the settlements of the MK
Derivative Actions, MK reached an agreement with Mr. W.J. Agee, the former
Chairman, President and Chief Executive Officer of MK, with respect to his
severance benefits, including pension rights, to which the plaintiffs do not
object. Pursuant to Preliminary Orders of the Courts, notice has been sent to
the stockholders, and hearings were held on April 15, 1996 before the Delaware
Chancery Court and on May 21, 1996 before the Idaho District Court. Both
courts have entered orders approving the settlements, including the claims in
Wohlgelernter. No appeal has been filed in Delaware or in Idaho. The
settlement proceeds from the MK Derivative Actions (less attorneys' fees and
expenses) will be transferred to the control of the settlement fund in the MK
Securities Class Actions upon entry of a final and nonappealable order by the
court having jurisdiction over MK's bankruptcy case that (i) approves the
settlement, (ii) authorizes MK's performance of all of its obligations in
respect of the settlement and (iii) authorizes the use of certain derivative
cash account to make payments to certain settlement account in the MK
Securities Class Actions. The terms of the settlement
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in Florida were submitted to the Idaho District Court for approval. Pursuant
to the Court's Preliminary Approval Order, notice was sent to the
stockholders, and a hearing was held on May 21, 1996. Under the terms of the
settlement in Florida, MK is obligated to pay the plaintiffs' attorneys' fees
awarded by the Court in an amount of $140,000. The effectiveness of the
settlement is conditioned only on the entry by the Idaho District Court of a
judgment approving the settlement that becomes final and nonappealable. A
final judgment was entered on May 21, 1996, and, no appeal having been filed,
became final on July 2, 1996.
Settlement of the "Double Derivative" Claims on behalf of MK Rail in the
Wohlgelernter Action was reached on March 4, 1996. The stipulation of
settlement was submitted to the Idaho District Court for approval and a
hearing with respect to such approval was held on May 21, 1996. MK has no
monetary or other obligations under the settlement of the actions resulting
from the "Double Derivative" Claims. The effectiveness of the settlement is
conditioned upon the entry by the Idaho District Court of a judgment approving
the settlement that becomes final and nonappealable and upon the entry of a
final, nonappealable judgment approving the settlement in the MK Rail
Securities Class Actions. The Idaho District Court entered a final judgment
approving the Wohlgelernter settlement on May 21, 1996 and, no appeal having
been filed, that judgment became final on July 2, 1996. The condition that a
final nonappealable order be entered in the MK Rail Securities Class Actions
has been met. The settlements of the MK Derivative Actions and the
Wohlgelernter and Florida Actions are referred to herein as the "Derivative
Action Settlements." MK has informed WCGI that it intends to consummate
certain derivative action settlements in accordance with the order of the
Idaho District Court.
Touchstone Actions. These three cases Theodore E. Nelson v. Morrison
Knudsen Corp., No. 951029 (U.S.D.C. W.D. Tenn.) (filed February 7, 1995);
Richard Jacobs, et al. v. Morrison Knudsen Corp., No. 951024 (U.S.D.C. W.D.
Tenn.) (filed February 7, 1995); and Richard Jacobs, et al. v. Agee, No.
951168 (U.S.D.C. W.D. Tenn.) (filed July 18, 1995) (collectively, the
"Touchstone Actions") have been settled, and notices of voluntary dismissal
with prejudice were filed on January 16, 1996.
Other Shareholder Actions. Plaintiffs in Karol Pilarczyk, et al. v.
Morrison Knudsen Corp., MK Rail Corp., Agee, Hanks, Cleary, Smith, Herbots and
James P. O'Donnell, No. 95CV1835 (U.S.D.C. N.D.N.Y.) (filed December 22, 1995;
First Amended Complaint filed December 28, 1995) (the "Pilarczyk Action") are
the former shareholders of TMS, Inc. ("TMS"). On December 30, 1992, MK
acquired TMS under an exchange agreement, pursuant to which plaintiffs
exchanged their TMS shares for shares of MK Common Stock. Plaintiffs together
seek compensatory damages of not less than $7.5 million, treble damages,
punitive damages of not less than $5 million, pre and postjudgment interest
and attorneys' fees. The defendants in this action filed a motion to dismiss
the First Amended Complaint on April 8, 1996. No response has been filed and
no hearing date has been set.
An agreement to settle Richard J. Clark, et al. v. Morrison Knudsen Corp.
and Agee, No. 95-2305 (U.S.D.C. C.D. Ill.) (filed December 29, 1995) (the
"Clark Action") was executed by all parties as of May 29, 1996. The
settlement agreement does not involve any cash payment or other distribution
by MK to the plaintiffs. On May 8, 1996, the Court entered an order
dismissing the case with prejudice.
Effect of Chapter 11 Case on Securities Litigation Settlements. The Chapter
11 Case was commenced prior to the expiration of the appeal periods relating
to orders approving settlements of certain of the MK Derivative Actions,
including the Wohlgelernter and Florida Actions described above. Thus, in
order to consummate these favorable settlements and avoid the uncertainty and
expense of protracted litigation, MK requested that the Bankruptcy Court
modify the automatic stay of Section 362(a) of the Bankruptcy Code to allow
these appeal periods to expire. Because the orders approving the settlements
of such Derivative Actions did not become final and nonappealable orders prior
to the commencement of the Chapter 11 Case, the terms of the settlement
stipulations governing the MK Securities Class Actions and the MK Derivative
Actions require that the Bankruptcy Court (i) approve the settlements; (ii)
authorize MK's performance of all its obligations in respect of the
settlement; (iii) with respect to the MK Securities Class Actions, authorize
the use of the insurance policies to make the payment required to be made by
the insurance companies under the settlement; and (iv) with respect to the MK
Derivative Actions, authorize the use of a derivative cash account to make
payments to a settlement account and to pay attorneys' fees and costs. The
Bankruptcy Court has jurisdiction over these settlement agreements. The
Bankruptcy Court has modified the automatic stay of Section 362(a) of
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the Bankruptcy Code to allow the remaining appeal period from any order
approving the settlements to expire. The appeal period has expired, and no
appeals have been filed. MK has informed WCGI that it intends promptly to file
a motion with the Bankruptcy Court seeking entry of an order approving the
settlements of the MK Securities Class Actions and the MK Derivative Actions
within the meaning of applicable stipulations of settlements and orders. MK
believes this relief is appropriate as all other conditions to consummation of
such settlements have been met, and the Plan provides that the Confirmation of
the Plan shall constitute the required approval of the relevant settlement
stipulations. The MK Common Stock issued under the MK Securities Class Actions
and the MK Rail Securities Class Actions will be exchanged for a pro rata
share of the Warrants and the MK Equity Rights pursuant to the Plan. For a
discussion of the potential impact of MK's filing on the settlement
stipulations, see "Risk Factors--Securities Litigation."
Securities and Exchange Commission Investigations. MK has been notified
that the staff of the Central Regional Offices of the Commission planned to
recommend to the Commission that Morrison Knudsen Engineers, Inc., one of MK's
subsidiaries, be named as a respondent in an administrative action in
connection with an ongoing investigation of the issuance by the City and
County of Denver of revenue bonds to finance the construction of the Denver
International Airport. MK has since filed a brief with the Commission
disputing the staff recommendation. The Commission has not announced a
decision. MK Rail and MK also are subject to a formal investigation by the
Pacific Regional Office of the Commission. MK continues to provide documents
in response to discovery requests and otherwise to cooperate with the
Commission's staff in connection with this investigation.
Boise Landlord Negotiations
MK has conducted negotiations with the landlord for its corporate
headquarters, MK Plaza Trust, a Delaware business trust (the "Boise
Landlord"), regarding amendment of the terms of certain Amended and Restated
Leases dated as of January 9, 1990 (the "Boise Leases") to bring the economic
terms of such leases into alignment with current market conditions in Boise,
Idaho. As of the date of this Proxy Statement, MK and the Boise Landlord have
reached an agreement (the "Boise Agreement"), the material terms of which
involve MK's rejection of the current Boise Leases, with the stipulation that
the Boise Landlord will hold a certain class of Claim (for rejection and all
other damages relating to the Boise Leases) in the aggregate amount of
$12,970,191. Upon rejection of a Boise Leases and the occurrence of the
Effective Time, the Boise Agreement provides for the commencement of the new
lease between the Boise Landlord and the Combined Company (the "New Lease").
MK believes that the Boise Agreement represents the best opportunity to reduce
the expenses associated with maintenance of the current Boise headquarters.
The New Lease will commence on the Effective Time and will have a term of
84 months. Monthly base rent for the main premises, which aggregate
approximately 144,000 square feet, will be at the annual rate of $11.75 per
square foot for the first three years, increasing to $12.25 per square foot
for the fourth year, and will be adjusted from the fourth year rate in
accordance with the Consumer Price Index for each of the remaining three
years. The other terms of the New Lease are typical of other similar leases,
including provisions for landlord and tenant improvements, parking and
security. Subject to certain conditions contained in the New Lease, the name
of the premises will be "MK Plaza."
THE MERGER AGREEMENT
The detailed terms of and conditions to the Merger are contained in the
Merger Agreement, which is included in full as Exhibit 1 to this Proxy
Statement and incorporated herein by reference. The following summary
description of the terms of the Merger Agreement is qualified in its entirety
by, and made subject to, the more complete information set forth in the Merger
Agreement.
Conversion of Securities; Plan Consideration
On the terms and subject to the conditions set forth in the Merger
Agreement, at the Effective Time each share of MK Common Stock issued and
outstanding immediately before the Effective Time (including, without
limitation, all shares held in court-approved settlement funds) will be
converted on a
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pro rata basis into the right to receive the Warrants. In addition, at the
Effective Time each share of MK Common Stock held in the treasury of MK and
each share of MK Common Stock owned by any subsidiary of MK immediately prior
to the Effective Time will be cancelled without payment therefor.
Each share of WCGI Common Stock issued and outstanding or held in treasury
immediately prior to the Effective Time will be unaffected by the Merger and
will continue to be one validly issued, fully paid and nonassessable share of
WCGI Common Stock.
The Merger Agreement provides, among other things, that pursuant to the
Plan WCGI will (i) deliver $13,300,000 in cash, (ii) issue and deliver a
number of shares of WCGI Common Stock equal to 45% of the issued and
outstanding shares of WCGI Common Stock on the Effective Date after giving
effect to distribution of WCGI Common Stock under the Plan, and (iii) issue
and deliver the Series A Preferred Stock to the Liquidating Trust as provided
in the Plan. See "-- Conversion of Securities."
Effective Time
The Merger will be consummated and become effective upon the filing with
the Secretary of State of the State of Delaware of a Certificate of Merger as
provided in the Delaware General Corporation Law. The time at which the
Merger becomes effective is referred to herein as the "Effective Time."
Board of Directors
The Merger Agreement provides that, immediately after the Effective Time,
the directors of the Combined Company will consist of (i) five directors
designated by the current Board of Directors of Washington, who have been
selected from among members of such Board of Directors or officers, directors
and affiliates of the companies controlled by Dennis R. Washington, (ii)
Robert S. Miller, who is currently the Chairman of the Board of MK, (iii)
Robert A. Tinstman, who is currently the President and Chief Executive Officer
of MK, and (iv) two directors who have been designated by the creditors and
approved by Washington. See "Management of the Combined Company -- Board of
Directors."
Representations and Warranties
The Merger Agreement contains various representations and warranties of
Washington and MK. These include representations and warranties by MK to
Washington with respect to corporate organization, good standing, corporate
authority, capitalization, subsidiaries, conflicts, filings with the
Commission and the financial statements included therein, information
contained in this Proxy Statement and in the Disclosure Statement, consents
and approvals, finders' fees and brokerage commissions, insurance, labor
matters, employee benefit plans, taxes, title to properties, intellectual
property, permits, environmental matters, litigation, contracts and
commitments, compliance with laws and absence of certain developments. WCGI
has also made representations and warranties to MK with respect to corporate
organization, good standing, corporate authority, capitalization,
subsidiaries, conflicts, filings with the Commission and the financial
statements included therein, information contained in this Proxy Statement and
in the Disclosure Statement, consents and approvals, employee benefit matters,
taxes, environmental matters, compliance with laws and absence of certain
developments.
Certain Covenants
DIP Facility. The Merger Agreement provides that, on the Effective Time,
Washington will repay and/or refinance amounts outstanding under the DIP
Facility.
Conduct of Business. The Merger Agreement provides that Washington and MK
will, in general, conduct their respective businesses in the ordinary course
consistent with past practice prior to the Effective Time.
Employment Agreements. Pursuant to the Merger Agreement, Washington has
agreed, on the Effective Time, to enter into employment agreements with
certain of the officers and directors of MK designated by Washington. See
Management of the "Combined Company -- Executive Compensation."
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Certificate of Incorporation and Bylaws. The Combined Company Certificate
of Incorporation will be in the form of Exhibit 4 hereto. The Combined
Company Bylaws will be in the form of Exhibit 5 hereto. See "Proposal to
Amend WCGI's Certificate of Incorporation" and "Description of WCGI Capital
Stock."
Certain Prohibited Transactions. The Merger Agreement provides that,
without the prior written approval of Washington (which is not to be
unreasonably withheld or delayed) or except as contemplated by the Merger
Agreement or the Plan, prior to the Effective Time, MK will not, and will
cause its subsidiaries not to: (i) incur any indebtedness for borrowed money,
assume, guarantee, endorse or otherwise become responsible for the obligations
of any other individual, partnership, firm or corporation or make any loans or
advances to any individual, partnership, firm or corporation, except in the
ordinary course of business and consistent with past practices and, with
respect to indebtedness for borrowed money, pursuant to existing agreements or
pursuant to the DIP Facility; (ii) issue any shares of its capital stock or
any other securities or any securities convertible into, exchangeable for or
exercisable to purchase shares of its capital stock, other than shares issued
upon exercise of issued and unexercised options, warrants and other rights to
purchase capital stock of MK, or amend or modify the terms of any issued and
outstanding options, warrants and other rights to purchase capital stock of
MK; (iii) make or pay, or incur any obligation to make or pay, any dividend or
other distribution on its capital stock or make, or incur any obligation to
make, any redemption, repurchase or other acquisition of its capital stock;
(iv) make any change to its certificate of incorporation or bylaws; (v)
mortgage, pledge or otherwise encumber any of its properties or assets, sell,
transfer or dispose of any of its properties or assets with a value in excess
of $5 million (unless such assets are worn-out or obsolete) or cancel,
release, compromise or assign any indebtedness owed to it or claims held by
it, except in the ordinary course of business and consistent with past
practice or in connection with the DIP Facility; (vi) enter into any sale and
leaseback transaction except in the ordinary course of business and consistent
with past practices; (vii) make any investment of a capital nature either by
purchase of stock or securities, contributions to capital, property transfer
or otherwise, or by the purchase of any property or assets of any other
individual, partnership, firm or corporation, except in the ordinary course of
business and consistent with past practice; (viii) make any material tax
election or make any material change in MK's accounting principles or
practices or tax positions (other than elections or changes necessary to
facilitate the tax refunds described in "Securities to be Issued and
Transferred Under the Plan -- Series A Preferred Stock"); (ix) enter into any
engineering or mining services contract involving fixed payments of more than
$5 million in any year or construction, construction management or mining
operations contracts involving fixed payments of more than $10 million in any
year or into any other material contract (other than reimbursable
subcontracts) that would involve fixed payments or accruals of fixed payments
by MK of more than $1.5 million in any fiscal year; (x) enter into any
employment agreement providing for a salary in excess of $150,000 per year or
increase the compensation of employees who earn more than $150,000 per year
other than increases in the ordinary course of business consistent with past
practice; or (xi) do any other act that would cause any representation or
warranty of MK in the Merger Agreement to be or become untrue. Similarly, the
Merger Agreement provides that, without the prior written consent of MK (which
is not to be unreasonably withheld or delayed), or except as contemplated by
the Merger Agreement or the Plan, prior to the Effective Time, Washington will
not, and will cause its subsidiaries not to, take specified actions comparable
to those described in clauses (i), (ii), (iii), (v), (vi), (vii), (x) and (xi)
of the immediately preceding sentence.
Disclosure Statement; Solicitation of Acceptances. Under the Merger
Agreement, MK agreed, subject to the fiduciary duties of MK's Board of
Directors, to seek the support of the terms of the Plan from MK's creditors as
promptly as possible. In this regard, MK agreed to prepare, as promptly as
possible, the Plan and the Disclosure Statement and all related documents,
including ballots, necessary to solicit acceptances of the Plan from certain
creditors of MK. Pursuant to the Merger Agreement, Washington agreed to
provide to MK all information regarding Washington and its subsidiaries
necessary to permit MK to prepare the Disclosure Statement and related
solicitation materials.
Under the Merger Agreement, MK agreed to mail a disclosure statement and
related solicitation materials to certain creditors of MK and solicit
acceptances of the Plan from such creditors as soon as possible after such
documents had been finalized. In addition, MK agreed to use its reasonable
best efforts to obtain acceptances of the Plan from a sufficient number of
MK's creditors in a sufficient number of classes of creditors to allow the
Plan to be confirmed under the Bankruptcy Code.
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Pursuant to the Merger Agreement, MK further agreed: (i) as promptly as
possible after the date on which it mailed a disclosure statement to
creditors, to prepare a petition for relief under Chapter 11 of the Bankruptcy
Code and certain related motions and notices; (ii) as soon as possible after
the date on which MK obtained the acceptances of the Plan from a sufficient
number of MK's creditors in a sufficient number of classes of creditors to
allow the Plan to be confirmed under the Bankruptcy Code, to commence the
Chapter 11 Case and to file certain motions and schedule certain hearings in
connection therewith; (iii) if deemed necessary by MK, to solicit approval of
the Plan from MK's stockholders and certain plaintiffs in certain lawsuits
against MK, and (iv) upon the completion of the solicitation of MK's
stockholders and such plaintiffs, to use its reasonable best efforts to obtain
the Confirmation Order.
Stockholders Meeting; Purchaser Proxy Statement. The Merger Agreement
provides that Washington will call, convene and hold this Special Meeting as
promptly as practicable for the purpose of voting on the Merger Agreement and
the Merger. Pursuant to the Merger Agreement, (i) Washington agreed to use
its best efforts to prepare and file this Proxy Statement with the Commission
and to have the Proxy Statement cleared by the Commission as promptly as
practicable, and (ii) MK agreed to provide all information regarding MK and
its subsidiaries necessary to permit Washington to prepare and file this Proxy
Statement.
Access. Pursuant to the Merger Agreement, Washington and MK each agreed to
permit the other and the other's employees, agents and representatives
reasonable access to its premises and all its books, computer software
applications systems, files and records, and to furnish the other such
financial and operating data and other information with respect to its
business, assets and properties as the other shall request, for the purpose of
conducting a complete and thorough investigation and review of its business.
Washington and MK each further agreed to make its officers and other employees
available to the other and the other's employees, agents and representatives
to respond to questions and requests for information and to keep the other
informed of all material developments involving its operations and activities.
Notifications of Certain Matters. The Merger Agreement provides that each
of Washington and MK will give prompt notice to the other of: (i) the
occurrence or failure to occur of any event that would be likely to cause any
representation or warranty contained in the Merger Agreement to be untrue or
inaccurate prior to the Effective Time and (ii) any material failure to comply
with or satisfy any covenant or condition to be complied with or satisfied by
it under the Merger Agreement.
Reasonable Best Efforts; Cooperation. Pursuant to the Merger Agreement,
each of Washington and MK agreed, subject to the terms and conditions of the
Merger Agreement and the fiduciary duties of its Board of Directors, to use
its reasonable best efforts to take or cause to be taken all actions and to do
or cause to be done all things necessary, proper or advisable under applicable
laws and regulations to consummate and make effective the transactions
contemplated by the Merger Agreement. The Merger Agreement further provides
that each party will promptly consult with the other with respect to, provide
any necessary information with respect to and provide the other copies of, all
filings made by such party with the Bankruptcy Court or any governmental
entity in connection with the Merger Agreement or the transactions
contemplated thereby.
NYSE Listing. The Merger Agreement provides that Washington will use its
reasonable best efforts to cause the Merger Shares and the Warrants to be
issued under the Plan to be approved for listing on the NYSE, subject to
official notice of issuance, prior to the Effective Time.
Executory Contracts. The executory contracts and unexpired leases intended
to be rejected by MK pursuant to the Bankruptcy Code are identified in an
exhibit to the Plan, which exhibit may be modified in accordance with the Plan
at any time prior to the Effective Time. The Merger Agreement provides that,
during the pendency of the Chapter 11 Case, MK will not assume any contract or
lease listed on such exhibit without the prior approval of Washington (which
approval is not to be unreasonably withheld or delayed).
Exclusivity. Pursuant to the Merger Agreement, MK agreed that until the
Effective Time (or the earlier termination of the Merger Agreement), neither
MK nor any of its affiliates nor any of their respective directors, officers,
employees, representatives or agents (collectively, the "Restricted Parties"),
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will directly or indirectly, solicit, initiate or encourage any discussions,
submissions of proposals or offers or negotiations with or assist or
participate in, facilitate or encourage any effort or attempt by, or otherwise
cooperate in any other way with, or participate in any negotiations or
discussions with, or provide any information or data of any nature whatsoever
to, any corporation, partnership, person or other entity or group, other than
Washington and its partners, employees, representatives, agents and
affiliates, concerning any merger, consolidation, sale of assets, sale of
shares of capital stock or other equity securities, recapitalization, debt
restructuring or similar transaction involving MK, a substantial portion of
the assets of MK or any division of MK, whether as part of a plan of
reorganization or otherwise (any such transaction being referred to herein as
an "Alternative Transaction"); except that the Restricted Parties may furnish
information to, or enter into discussions or negotiations with, any person or
entity in response to a proposal for a Qualifying Alternative Transaction (as
defined below) if, and only to the extent that, MK's Board of Directors, after
consultation with independent legal counsel (which may include its regularly
engaged independent legal counsel), determines in good faith that such action
is required for the Board of Directors to comply with its fiduciary
obligations under applicable law. The Merger Agreement defines a "Qualifying
Alternative Transaction" as an Alternative Transaction that MK's Board of
Directors determines in good faith, after consultation with its financial
advisors, would provide aggregate consideration of at least $15 million
greater than the consideration provided by Washington under the Merger
Agreement (which is deemed to be $235 million for such purpose). Pursuant to
the Merger Agreement, MK further agreed that it will immediately (and within
no more than 24 hours) notify Washington if any proposal, offer, inquiry or
other contact is received by, any information is requested from, or any
discussions or negotiations are sought to be initiated or continued with, MK
in respect of an Alternative Transaction, and will, in any such notice to
Washington, indicate the identity of the offeror and the terms and conditions
of any proposals or offers or the nature of any inquiries or contacts, and
thereafter will keep Washington informed, on a current basis, of the status
and terms of any such proposals or offers and the status of any such
discussions or negotiations. In addition, the Merger Agreement provides that
MK will not release any third party from, or waive any provision of, any
confidentiality or standstill agreement to which MK is a party.
Conditions to the Merger
Conditions to Obligations of Washington. Under the Merger Agreement, the
obligations of Washington to effect the Merger and the other transactions
contemplated thereby are subject to the satisfaction or written waiver of the
following conditions, among other things: (i) the Disclosure Statement shall
have been approved by the Bankruptcy Court, (ii) this Proxy Statement shall
have been cleared by the Commission and no stop order or proceeding seeking a
stop order shall have been issued or commenced with respect to this Proxy
Statement, (iii) the Confirmation Order shall have been entered, no stay of
the Confirmation Order pending appeal shall have been entered and all other
conditions to the effectiveness of the Plan as set forth therein shall have
been satisfied or waived; (iv) the Merger Shares and, if required by the NYSE
for the continued listing of the Merger Shares, the Warrants shall have been
approved for listing on the NYSE, subject to official notice of issuance;
(v) all representations and warranties of MK contained in the Merger Agreement
shall be true and correct at and as of the Effective Time (except to the
extent that such representations and warranties speak as of an earlier date)
as if such representations and warranties were made at and as of the Effective
Time and MK shall have performed in all material respects all agreements and
covenants required hereby to be performed by it prior to or at the Effective
Time; (vi) all consents, approvals and waivers from governmental authorities
and other parties necessary to permit consummation of the transactions
contemplated by the Merger Agreement (other than (A) consents, approvals and
authorizations under any agreement with a governmental authority and (B)
consents, approvals and authorizations which, if not obtained, would not have
a material adverse effect on Washington or MK) shall have been obtained; (vii)
no suit, action, investigation, inquiry or other proceeding by any
governmental authority shall have been instituted or threatened which
questions the validity or legality of the transactions contemplated by the
Merger Agreement and no suit, action, investigation, inquiry or other
proceeding by any person shall have been instituted or threatened which
questions the validity or legality of the transaction contemplated by the
Merger Agreement and which could reasonably be expected to have a material
adverse effect on Washington or the Combined Company; (viii) aggregate
borrowings under the DIP Facility shall not exceed $50 million at the
Effective Time; (ix) certain MK stockholder litigations shall have been
settled or dismissed; (x) all conditions to effectiveness of certain Boise
leases shall have been satisfied or waived; (xi) MK shall have furnished
Washington with such certifications to evidence compliance with the foregoing
conditions as may be reasonably requested by Washington; and (xii) Washington
shall have
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received from MK resolutions adopted by the Board of Directors of MK approving
the Merger Agreement and the transactions contemplated thereby.
Included among the foregoing conditions is the condition that, except as
previously disclosed in MK's filings with the Commission, since December 31,
1995, no event shall have occurred with respect to MK that is reasonably
likely to have a material adverse effect on MK. Under the Merger Agreement, a
"material adverse effect" means, with respect to any person, a material
adverse effect on (i) the condition (financial or otherwise), revenues, gross
profits, assets, liabilities or business of such person and its subsidiaries,
taken as a whole, or (ii) the validity or enforceability of the Merger
Agreement. The Merger Agreement expressly provides that the assertion of a
claim arising out of a contract, agreement or commitment to which MK or any of
its subsidiaries is a party that, as a result of the consummation of the
transactions contemplated by the Merger Agreement, the surviving corporation
would be in breach of, or would be subject to a diminution in or termination
of rights under, a contract, agreement, or commitment, the result of which is
reasonably likely to result in a decrease in annual gross profit of at least
$3 million for any single contract, agreement or commitment, shall be deemed
to be an event which is reasonably likely to have a material adverse effect on
MK (unless such claim shall have been resolved prior to the Effective Time
without having resulted in such a decrease in annual gross profit). The MK is
party to various contracts and agreements, including, without limitation,
various contracts with governmental authorities, job-related contracts and
joint venture and similar agreements, under which the consummation of the
transactions contemplated by the Merger Agreement could result in a breach or
a diminution or termination of rights. MK has informed WCGI that, subject to
certain exceptions, it does not presently intend to seek consents under, or
modifications to, such agreements and contracts in connection with the
transactions contemplated by the Merger Agreement. One such agreement, a non-
competition agreement between MK and MK Gold, a former subsidiary of MK, may
be applicable to certain mining activities conducted by Washington. MK Gold
has informed MK that MK Gold expects the Combined Company to comply with such
agreement following the Effective Date. MK's co-investors in MIBRAG mbH,
which indirectly owns and operates lignite coal mines, power and process
plants in Germany, have informed MK that they are conducting a factual
investigation regarding MK's financial circumstances and otherwise considering
whether a breach of or default under any agreement between MK and such co-
investors has occurred. MK has informed WCGI that it does not believe that
any breach of or default under any such agreement has occurred. Although it
is expected that the foregoing matters will not have a material adverse effect
on the businesses, financial condition or results of operations of the
Combined Company, there can be no assurance with respect thereto.
Conditions to the Obligations of MK. Under the Merger Agreement, the
obligations of MK to consummate the Merger and the other transactions
contemplated thereby are subject to the satisfaction or written waiver of the
following conditions: (i) the Confirmation Order shall have been entered, no
stay of the Confirmation Order pending appeal shall have been entered and all
other conditions to the effectiveness of the Plan as set forth therein shall
have been satisfied or waived; (ii) all representations and warranties of
Washington contained in the Merger Agreement shall be true and correct at and
as of the Effective Time (except to the extent that such representations and
warranties speak as of an earlier date) as if such representations and
warranties were made at and as of the Effective Time and Washington shall have
performed in all material respects all agreements and covenants required by
the Merger Agreement to be performed by it prior to or at the Effective Time;
(iii) the Merger and the other transactions contemplated by the Merger
Agreement shall have been approved by Washington's stockholders in accordance
with the applicable requirements of the DGCL at the meeting of such
stockholders called for such purpose, and the agreement by Dennis R.
Washington to vote his shares of WCGI Common Stock in favor of the
transactions contemplated in the Merger Agreement shall not have been
withdrawn or revoked (see "-- Washington Agreement"); (iv) the Merger Shares
and Warrants to be distributed under the Plan will be issued under an
exemption from registration under the Securities Act of 1933, as amended (the
"Securities Act"), will be freely tradable by holders who are not affiliates
of the Combined Company or "underwriters" under the Securities Act with
respect to such securities and will have no restrictive legend, and the Merger
Shares and Warrants shall have been approved for listing on the NYSE, subject
to official notice of issuance; (v) all consents, approvals and authorizations
from governmental authorities and other parties necessary to permit
consummation of the transactions contemplated by the Merger Agreement (other
than (A) consents, approvals and authorizations required under any agreement
with a governmental authority and (B) consents, approvals and authorizations
which, if not obtained, would not have a material adverse effect on MK or
Washington) shall have been obtained; (vi) no suit, action, investigation,
inquiry or other proceeding by any governmental authority
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shall have been instituted or threatened which questions the validity or
legality of the transactions contemplated by the Merger Agreement and no suit,
action, investigation, inquiry or other proceeding by any person shall have
been instituted or threatened which questions the validity or legality of the
transaction contemplated by the Merger Agreement and which could reasonably be
expected to have a material adverse effect on MK or the Combined Company;
(vii) Washington shall have furnished MK with such certifications to evidence
compliance with the foregoing conditions as may be reasonably requested by MK;
and (viii) MK shall have received from Washington resolutions adopted by the
Board of Directors of Washington approving the Merger Agreement and the
transactions contemplated thereby and a tabulation reflecting the results of
any required vote of Washington's stockholders with respect to the Merger
Agreement.
Included among the foregoing conditions is the condition that, except as
previously disclosed in Washington's filings with the Commission, since
November 30, 1995, no event shall have occurred with respect to Washington
which is reasonably likely to have a material adverse effect on Washington.
Indemnification and Insurance
The Merger Agreement provides that MK (and, from and after the Effective
Time, the Combined Company) will, subject to certain limitations, (i)
indemnify Washington, Washington Corporations, Dennis Washington and their
respective affiliates, directors, officers, advisors, agents and employees
(the "Indemnified Washington Parties"), to the fullest extent lawful, from and
against any and all claims, actions and suits asserted against any of them,
and any and all damages, judgments, liabilities and expenses resulting from or
incurred in response thereto (including, without limitation, costs of
investigating, preparing or defending any such claim or action and reasonable
legal expenses) (collectively "Losses") arising out of, or in connection with,
the Merger or the Plan, and (ii) indemnify all officers and directors of MK or
any of its subsidiaries (together with the Indemnified Washington Parties, the
"Indemnified Parties"), to the fullest extent lawful, from and against any and
all claims, actions and suits asserted against any of them and any and all
Losses resulting from or incurred in response thereto, arising in whole or in
part out of the status at any time of any such person as an officer or
director of MK or any of its subsidiaries or any action taken or omitted to be
taken at any time in his or her capacity as such, including without limitation
any such action taken or omitted to be taken in connection with the Merger
Agreement or the Plan or the respective transactions contemplated thereby;
except that no Indemnified Party shall be entitled to indemnification by MK
with respect to any Losses arising solely from the bad faith or gross
negligence (as finally determined by a court of competent jurisdiction) of
such Indemnified Party or any affiliate, director, officer or employee of such
Indemnified Party. See "Management of the Combined Company--Limitation of
Liability; Indemnification of Directors and Officers."
The Merger Agreement provides that the Combined Company will either (i)
provide directors' and officers' liability insurance having substantially
similar terms and conditions and providing substantially similar coverages as
the directors' and officers' liability insurance maintained by MK at the
Effective Time for a period of three years following the Effective Time for
all current directors and officers of MK and its subsidiaries (provided
Washington may substitute therefor policies of at least the same coverage and
amounts containing terms and conditions which are no less advantageous to such
officers and directors) or (ii) purchase runoff extensions under MK's existing
directors' and officers' and fiduciary liability insurance policies extending
the period for making claims under such policies for at least three years
following the Effective Time; provided in each case that if the annual cost of
such coverage would exceed 150% of MK's annual premium paid the previous year,
WCGI will purchase as much coverage as possible for 150% of such amount for
each year in such three-year period. See "Management of the Combined Company--
Directors' and Officers' Insurance."
Termination
Termination by Mutual Consent. The Merger Agreement may be terminated at
any time prior to the Effective Time by mutual consent of Washington and MK.
Termination by Either Washington or MK. The Merger Agreement may be
terminated at any time prior to the Effective Time by either Washington or MK
if (i) a court of competent jurisdiction or governmental authority shall have
issued a nonappealable final order, decree or ruling or taking any other
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action having the effect of permanently restraining, enjoining or otherwise
prohibiting the consummation of the Plan or the Merger (provided that such
right to terminate will not be available to any party that has not complied
with its obligations under certain covenants and such non-compliance
materially contributed to the issuance of any such order, decree or ruling or
the taking of any such action) or (ii) the Effective Time shall not have
occurred on or before December 31, 1996.
Termination by Washington. The Merger Agreement may be terminated at any
time prior to the Effective Time by Washington if (i) there were inaccuracies
in the representations and warranties of MK that would have a material adverse
effect on MK or there has been a material breach on the part of MK in the
covenants of MK set forth in the Merger Agreement or any failure on the part
of MK to comply with its material obligations under the Merger Agreement, or
any other events or circumstances shall have occurred or exist (otherwise than
as a result, direct or indirect, of a breach by Washington of its obligations
under the Merger Agreement) such that the conditions to Washington's
obligations to consummate the transactions contemplated by the Merger
Agreement cannot be satisfied on or prior to the date on which all other
conditions to the effectiveness of the Plan shall have been satisfied or
waived or (ii) the Confirmation Order shall not have been entered on or before
August 31, 1996 (unless the failure of the Confirmation Order to be entered on
or before such date was the result, direct or indirect, of actions or
omissions by Washington).
Termination by MK. The Merger Agreement may be terminated at any time
prior to the Effective Time by MK if (i) there are inaccuracies in the
representations and warranties of Washington that would have a material
adverse effect on Washington or there has been a material breach on the part
of Washington in the covenants of Washington set forth in the Merger Agreement
or any failure on the part of Washington to comply with its material
obligations under the Merger Agreement or any other events or circumstances
shall have occurred or exist (otherwise than as a result, direct or indirect,
of a breach by MK of its obligations under the Merger Agreement) such that the
conditions to MK's obligations to consummate the transactions contemplated by
the Merger Agreement cannot be satisfied on or prior to the date on which all
other conditions to the effectiveness of the Plan shall have been satisfied or
waived, (ii) Washington's stockholders do not approve the Merger in accordance
with the applicable requirements of DGCL at this Special Meeting, or (iii) on
or prior to July 30, 1996, the 35th day following the date on which the
Chapter 11 Case was filed, MK receives a firm offer with respect to a
Qualifying Alternative Transaction that in the good faith determination of
MK's Board of Directors, after consultation with its financial advisors and
independent legal counsel (which may include its regularly engaged counsel),
is reasonably capable of being financed and would cause the Board of Directors
of MK to violate its fiduciary duties under applicable law were it to proceed
with the Plan and the Merger under the Merger Agreement.
Effect of Termination. In the event of termination of the Merger Agreement
by either Washington or MK, the Merger Agreement will become void and there
will be no liability or obligation on the part of Washington or MK or their
respective officers or directors except for certain covenants relating to
termination fees, indemnification and confidentiality that would survive any
termination of the Merger Agreement.
Termination Payments. The Merger Agreement provides that, in the event (i)
MK (A) fails to consummate the Merger in breach of its obligations under the
Merger Agreement, or (B) terminates the Merger Agreement pursuant to the
provisions described in clause (iii) under the caption "Termination by MK"
above, and thereafter enters into a definitive agreement with respect to a
Substantial Transaction (as defined below) within one year of such termination
and (ii) in all such cases Washington is not in material breach of its
obligations under the Merger Agreement and, at the time of such failure or
termination, as the case may be, is ready, willing and able to proceed to
consummate the transactions thereunder, MK will pay Washington a fee of
$9,000,000, plus reimbursement of expenses. The Merger Agreement further
provides that, in the case of a termination pursuant to the provisions
described in clause (iii) under the caption "Termination by MK" above, if MK
consummates such Substantial Transaction, MK will also pay to Washington the
lesser of (i) $3,000,000 and (ii) 40% of the amount by which the value of the
consideration provided in the Substantial Transaction exceeds $250,000,000,
plus reimbursement of expenses. For purposes of the Merger Agreement, the
term "Substantial Transaction" means an Alternative Transaction involving the
sale of MK, the sale of a majority of the stock of MK (by means of a merger,
stock sale or other transaction), the sale of any of MK's principal operating
businesses (other than MK Rail) and any other reorganization involving an
equity infusion.
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Expenses
The Merger Agreement provides that MK will be responsible for the payment
of all expenses incurred by MK in connection with the Plan and the Merger.
Pursuant to the Merger Agreement, MK also agreed to fulfill its obligation
pursuant to the letter agreement previously entered into between Washington
and MK to reimburse Washington for any reasonable out-of-pocket fees and
expenses incurred by Washington, subject to certain limitations. The Merger
Agreement further provides that, in the event that the termination fee
described above becomes due and payable to Washington, MK will reimburse
Washington for reasonable documented out-of-pocket expenses and fees incurred
after May 13, 1996 in an amount not to exceed $1,000,000.
Employment Agreements
Pursuant to the Merger Agreement, Washington has agreed, at the Effective
Time, to enter into employment agreements with certain of the officers and
directors of MK designated by Washington. Accordingly, all outstanding
employment agreements between MK and its officers at the Effective Time will
be assumed by WCGI and will continue in full force and effect. See
"Management of the Combined Company--Executive Compensation."
Washington Agreement
Pursuant to a letter dated as of May 16, 1996, Dennis R. Washington, who
beneficially owns 68.5% of the outstanding WCGI Common Stock, agreed to cause
all shares of WCGI Common Stock beneficially owned by a him to be voted in
favor of the approval of the Merger Proposals at the Special Meeting. As a
result, there are a sufficient number of shares of WCGI Common Stock to be
voted in favor of the Merger Proposals for approval and adoption at the
Special Meeting without the affirmative vote of any other holder of WCGI
Common Stock.
42
<PAGE>
SECURITIES TO BE ISSUED AND TRANSFERRED UNDER THE PLAN
A description of the following securities to be issued and transferred
under the Plan if the Merger is consummated, including the applicability of
federal and other securities laws, is set forth below.
As of the Effective Time, the Combined Company will issue the Merger
Shares, Series A Preferred Stock, Warrants and MK Equity Rights (collectively,
the "Combined Company Securities"). The Combined Company Securities will be
issued for distribution in accordance with the Plan. The following discussion
summarizes the material provisions of the Combined Company Securities,
including references, where applicable, to the Warrant Agreement, the
Certificate of Incorporation and Bylaws. This summary does not purport to be
complete and is qualified in its entirety by reference to the full text of the
Warrant Agreement, the Certificate of Incorporation and Bylaws, which are
attached hereto as Exhibits 2, 4 and 5, respectively.
Merger Shares
The Certificate of Incorporation authorizes 100,000,000 shares of WCGI
Common Stock. Giving effect to the Plan, including the distribution of the
Merger Shares and other transactions contemplated by the Plan, it is estimated
that approximately 53,605,000 shares of WCGI Common Stock will be outstanding
as of the Effective Time. Pursuant to the Merger Agreement, Washington has
agreed to use its reasonable best efforts to cause the Merger Shares to be
approved for listing on the NYSE, subject to official notice of issuance,
prior to the Effective Time. See "The Merger Agreement--Certain Covenants--
NYSE Listing." The rights of holders of the Merger Shares will be governed by
the laws of the State of Delaware as well as by the Certificate of
Incorporation and the Bylaws.
The Warrants
The Warrants will represent the right to purchase an aggregate of 2,765,000
shares of WCGI Common Stock. Pursuant to the Merger Agreement, Washington has
agreed to use its reasonable best efforts to cause the Warrants to be approved
for listing on the NYSE, subject to official notice of issuance, prior to the
Effective Time. See "The Merger Agreement--Certain Covenants--NYSE Listing."
In addition, the Warrant Agreement between the Combined Company and the
Warrant Agent (as defined below) (the "Warrant Agreement") requires the
Combined Company to use commercially reasonable efforts to list and to
maintain the listing of the Warrants on the NYSE and requires the Combined
Company to use such efforts to list the Warrants on alternative exchanges or
to include them in alternative quotation systems if NYSE listing is not (or is
no longer) available. Each Warrant will entitle the holder thereof to acquire
one share of WCGI Common Stock at an exercise price of $12.00 per share,
subject to adjustment in certain circumstances as provided in the Warrant
Agreement.
The number and kind of securities purchasable upon the exercise of the
Warrants and the exercise price thereof will be subject to adjustment upon the
occurrence of certain events as set forth in the Warrant Agreement, including
the issuance of WCGI Common Stock or other shares of capital stock as a
dividend or distribution on the WCGI Common Stock; subdivisions,
reclassifications and combinations of the WCGI Common Stock; the issuance to
all holders of WCGI Common Stock of certain rights, options or warrants
entitling them to subscribe for or purchase WCGI Common Stock at less than the
then-current market price of the WCGI Common Stock (as determined in
accordance with the Warrant Agreement); the distribution to holders of WCGI
Common Stock of evidences of indebtedness or assets of the Combined Company or
any entity controlled by the Combined Company (excluding cash dividends or
cash distributions from consolidated earnings or surplus legally available for
such dividends or distributions); the distribution to holders of WCGI Common
Stock of shares of capital stock of any entity controlled by the Combined
Company; the issuance of shares of WCGI Common Stock for less consideration
than the then-current market price of the WCGI Common Stock; the issuance of
securities convertible into or exchangeable or exercisable for shares of WCGI
Common Stock or rights to subscribe for such securities, for a consideration
per share of WCGI Common Stock deliverable on such conversion, exchange or
exercise that is less than the then-current market price thereof (although no
adjustment in such shares or exercise price will be required in connection
with the issuance of the WCGI Common Stock, options, rights, warrants or other
securities pursuant to the Plan, any plan adopted by the Combined Company or
any entity controlled by the Combined Company for the benefit of employees
43
<PAGE>
or directors, or any share purchase rights plan adopted by the Combined
Company; the issuance of shares of WCGI Common Stock or securities convertible
into or exchangeable for shares of WCGI Common Stock pursuant to an
underwritten public offering satisfying specified criteria; sales of WCGI
Common Stock pursuant to a plan adopted by the Combined Company for the
reinvestment of dividends or interest; the issuance of shares of WCGI Common
Stock to shareholders of any corporation which is acquired by, merged into or
made a part or subsidiary of the Combined Company in an arm's-length
transaction; or a change in the par value of WCGI Common Stock).
Additionally, no adjustment will be required if in connection with any of the
events otherwise giving rise to an adjustment the holders of the Warrants
receive such rights, securities or assets as such holders would have been
entitled had the Warrants been exercised immediately prior to such event, and
no adjustment will be required unless such adjustment would require a change
in the aggregate number of shares of WCGI Common Stock issuable upon the
hypothetical exercise of a Warrant of at least 1% (but any adjustment
requiring a change of less than 1% will be carried forward and taken into
account in any subsequent adjustment). In addition, the Board of Directors is
empowered by the Warrant Agreement to reduce the exercise price.
The Combined Company may at its option, at any time during the term of the
Warrants, reduce the then current exercise price to any amount deemed
appropriate by the Board of Directors of the Combined Company. The Combined
Company and Norwest Bank Minnesota, N.A., who is expected to serve as
registrar and warrant agent for the Warrants (the "Warrant Agent"), may from
time to time supplement or amend the Warrant Agreement without approval of any
holder to cure, among other things, any ambiguity or to correct or supplement
any provision, to comply with the requirements of any national securities
exchange or The Nasdaq National Market, to delete the aforementioned provision
allowing the directors to reduce the exercise price or to make any other
provisions in regard to matters or questions arising under the Warrant
Agreement which the Combined Company and the Warrant Agent may deem necessary
or desirable and which shall not be inconsistent with the provisions of the
Warrants and the Warrant Agreement. Any other supplement or amendment to the
Warrant Agreement may be made with the approval of the holders of a majority
of the then outstanding Warrants; provided, however, that any such amendment
or supplement which (i) increases the exercise price; (ii) decreases the
number of shares of WCGI Common Stock issuable upon exercise of a Warrant; or
(iii) shortens the period during which the Warrants may be exercised requires
the consent of each holder of a Warrant affected thereby.
The Warrants will be exercisable at any time from 9:00 a.m., New York City
time, on the Effective Date to 5:00 p.m. New York City time, on the date which
is six and one-half years after the Effective Time (the "Exercise Period").
Each Warrant not exercised prior to the expiration of the Exercise Period will
become void, and all rights thereunder and in respect thereof under the
Warrant Agreement will cease on the expiration of the Exercise Period.
Under the Warrant Agreement, the Combined Company is not obligated to
furnish holders of the Warrants with quarterly, annual or other reports
regarding the Combined Company, although it may do so in its sole discretion
and intends to do so to the extent required by applicable law or any
securities exchange on which the Warrants may be listed or any quotation
system in which they may be included.
To MK's knowledge, the Warrant Agent is not a holder of any indebtedness of
the MK and is not an affiliate of any such holder. If such firm is unwilling
or unavailable to serve or if otherwise determined by the Combined Company, an
alternative firm satisfactory to the Combined Company will be selected as
Warrant Agent.
Series A Preferred Stock
The Certificate of Incorporation permits the Board of Directors of WCGI to
authorize the issuance of WCGI Preferred Stock without further stockholder
approval. The shares of WCGI Preferred Stock may be issued in one or more
series, with the number of shares of each series and the designation, relative
powers, preferences, rights and qualifications, limitations or restrictions of
each series to be determined by the Board of Directors. Among the specific
matters that may be determined by the Board of Directors, as permitted by the
DGCL, are dividend rights, if any, redemption rights, if any, the terms of a
sinking or purchase fund, if any, the amount payable in the event of any
dissolution of the Combined Company, conversion rights, if any, and voting
powers, if any.
44
<PAGE>
The Certificate of Incorporation authorizes the issuance of 18,000 shares
of Series A Preferred Stock to be designated as Series A Preferred Stock
("Series A Preferred Stock"). The holders of Series A Preferred Stock will
have no right to receive dividends. The redemption price per share of Series
A Preferred Stock will be equal to the greater of $1.00 or a pro rata share of
any undistributed funds in a sinking fund maintained by the Combined Company
for the purpose of making distributions to the holders of, or redeeming, the
Series A Preferred Stock. The Series A Preferred Stock sinking fund (the
"Foreign Tax Credit Sinking Fund") will consist of all amounts received by the
Combined Company in respect of refunds of federal income tax and interest
thereon (without offset of any current or future tax obligations of MK and
consolidated subsidiaries and the Combined Company) associated with amended
federal income tax returns of MK and consolidated subsidiaries for the
calendar years 1982 through 1990 which were filed prior to January 1, 1996,
which change the corporation's election from deducting foreign taxes to
claiming a credit for those taxes (hereinafter referred to as "Foreign Tax
Credit Refunds"). The Board of Directors will have the exclusive power and
authority to determine (i) whether funds received by the Combined Company are
Foreign Tax Credit Refunds and (ii) the amount of any Foreign Tax Credit
Refunds. The holders of the Series A Preferred Stock will have no right to
challenge any such determination unless such challenge is specifically
authorized by the beneficial owners of a majority of the issued and
outstanding shares of the Series A Preferred Stock. The Combined Company may
also (upon the affirmative vote of two-thirds of the full Board of Directors)
deposit funds other than Foreign Tax Credit Refunds into the Foreign Tax
Credit Sinking Fund. The cumulative total amount which the Combined Company
will deposit to the Foreign Tax Credit Sinking Fund will not exceed
$18,000,000. The Certificate of Incorporation also provides that the Combined
Company must on the fifteenth day of the month following the end of each
quarter distribute to the holders of Series A Preferred Stock any funds on
deposit in the Foreign Tax Credit Sinking Fund, including any Foreign Tax
Credit Refunds and any interest thereon. The distribution for the calendar
quarter in which the cumulative total deposits to the Foreign Tax Credit
Sinking Fund reaches $18,000,000 will be the final distribution with respect
to the Series A Preferred Stock and the Series A Preferred Stock will be
cancelled upon that final distribution. The Certificate of Incorporation
provides that, if the Series A Preferred Stock has not been redeemed and
cancelled through the distribution of $18,000,000 from the Foreign Tax Credit
Sinking Fund within five years of the issuance of the Series A Preferred
Stock, the Combined Company must redeem all shares of Series A Preferred Stock
at a per share redemption price equal to the greater of $1.00 or a pro rata
portion of the balance of the Foreign Tax Credit Sinking Fund as of the fifth
anniversary of the issuance of the Series A Preferred Stock. Upon the
liquidation, dissolution or winding up of the affairs of the Combined Company,
the holders of shares of Series A Preferred Stock will be entitled to receive,
in full out of the assets of the Combined Company, before any amount is paid
or distributed to any holders of WCGI Common Stock, a per share amount equal
to the greater of $1.00 or a pro rata share of the remaining balance of the
Foreign Tax Credit Sinking Fund.
Holders of Series A Preferred Stock will be entitled to vote together with
holders of WCGI Common Stock as a single class on all matters with respect to
which the holders of WCGI Common Stock are entitled to vote. Each share of
Series A Preferred Stock will have 1/100 of a vote. Additionally, the
affirmative vote of the holders of two-thirds of the outstanding shares of
Series A Preferred Stock will be required for approval of each of the
following matters: (i) reclassification of any securities ranking junior to
the Series A Preferred Stock as securities ranking senior to or on parity with
the Series A Preferred Stock or (ii) any amendment of the Certificate of
Incorporation that changes any of the rights, powers, preferences and
privileges of the Series A Preferred Stock.
The Plan provides that under certain circumstances MK may elect to make all
distributions that would otherwise be made to the Liquidating Trust directly
to the persons for whose benefit they would otherwise have been held in the
Liquidating Trust. In that event, the number of shares of Series A Preferred
Stock authorized under the Certificate of Incorporation would be increased to
1,800,000, the redemption price per share of Series A Preferred Stock would be
equal to the greater of $0.01 or a pro rata share of any undistributed funds
in a sinking fund maintained by the Combined Company for the purpose of making
distributions to the holders of, or redeeming, the Series A Preferred Stock
and each share of Series A Preferred Stock would have 1/10,000 of a vote.
45
<PAGE>
MK Equity Rights
The Plan provides that the MK Equity Rights will be issued to holders of MK
Common Stock. The MK Equity Rights will be uncertificated and nontransferable
and will be exercisable from the Effective Date until the later of (i) the
23rd trading day following the Confirmation Date and (ii) the fifth business
day following the Effective Date. The MK Equity Rights will represent in the
aggregate the right to purchase for cash a pro rata share (which will be
determined under the Plan and will not exceed 50%) of all distributions and
related rights (i.e., the cash, shares of WCGI Common Stock, shares of MK Rail
Common Stock, proceeds from the MK Rail Note and certain tax refunds) which,
in the absence of the exercise of any MK Equity Rights, would be made to or
otherwise inure to the benefit of the holders of Impaired Claims under the
Plan. The aggregate purchase price payable upon exercise of MK Equity Rights
will be equal to the product of (i) the percentage representing the aggregate
pro rata share of such distributions and related rights so purchased and (ii)
the aggregate amount of claims of such senior creditors. Proceeds from the
exercise will be distributed to or for the benefit of such creditors in lieu
of the distributions and related rights so purchased. To the extent that MK
Equity Rights are not exercised, holders of the Rights who validly exercise
all of their rights will have an oversubscription right entitling them to
purchase the remaining assets purchasable upon exercise of all of the MK
Equity Rights.
Registration Rights Agreement
Demand Rights. The Combined Company and certain holders of shares of WCGI
Common Stock will enter into a Registration Rights Agreement (the "Combined
Company Registration Rights Agreement") which is attached hereto as Exhibit 3
on or prior to the Effective Time. Pursuant to the Registration Rights
Agreement, the Combined Company will agree to file with the Commission as soon
as practicable after receiving a request from the holders of not less than
5,000,000 shares of WCGI Common Stock (subject to adjustments for stock
splits), a registration statement (the "Combined Company Registration
Statement") on Form S-1 or Form S-3, if use of such a form is then available,
to cover resales of "Registrable Securities" (as defined in Registration
Rights Agreement) by the holders thereof who satisfy certain conditions
relating to the provision of information in connection with the Combined
Company Registration Statement. The Combined Company will use commercially
reasonable efforts to cause the Combined Company Registration Statement to be
declared effective by the Commission within 180 days of such demand.
Under the Registration Rights Agreement, "Registrable Securities" means the
WCGI Common Stock acquired by persons pursuant to the Plan or acquired by
their successors and permitted assigns in accordance with Registration Rights
Agreement (and any securities issued or issuable with respect thereto). If
the WCGI Common Stock (or any securities issued or issuable with respect
thereto) are listed on any national securities exchange or included in any
interdealer quotation system, then only such securities held by persons deemed
to be "underwriters" or "affiliates" for purposes of the Securities Act will
be deemed to be Registrable Securities.
Pursuant to the terms of the Registration Rights Agreement, the requisite
holders of the WCGI Common Stock who are a party to such agreement will have
the right to make up to two demands during the three-year term thereof for the
filing of a Combined Company Registration Statement, provided that such
holders may not make a second demand for registration until 12 months after
the date on which the Combined Company Registration Statement filed pursuant
to the first demand for registration shall have been declared effective, and
provided further that such holders may not make a second demand for
registration if the average daily trading volume of the WCGI Common Stock on
the securities exchange (or interdealer quotation system) on which the WCGI
Common Stock is then listed (or quoted) shall have been 100,000 shares per day
for any consecutive 20 business day period preceding such second demand. Only
those holders who are deemed to be "underwriters" or "affiliates" of the
Combined Company for purposes of the Securities Act will be permitted to
demand the registration of WCGI Common Stock pursuant to a shelf registration
statement. The Combined Company shall, upon receipt of the demand by the
requisite holders, provide notice within 15 days to all holders of WCGI Common
Stock who are parties to the Registration Rights Agreement. Such holders who
respond by requesting the right to include their shares of WCGI Common Stock
for resale pursuant to the Combined Company Registration Statement (the
"Participating Holders") shall be entitled to so participate, subject to
certain restrictions and limitations, including, the right of underwriters to
reduce the number of shares being offered for
46
<PAGE>
resale (in the case of an underwritten offering). In the case of any such
reduction, then the Combined Company shall include in such registration that
amount of WCGI Common Stock that the Combined Company is so advised can be
sold in (or during the time of) the offering, as follows: first, securities
of any Participating Holder that is an "underwriter" or an "affiliate" of the
Combined Company in an amount sufficient to include all the shares of WCGI
Common Stock (or other Registrable Securities, as the case may be) offered by
such Participating Holder or an amount sufficient to reduce the amount of such
Participating Holder's shares of WCGI Common Stock (or other Registrable
Securities, as the case may be) held after the offering to a level that would
cause such Participating Holder to no longer be an "underwriter" or an
"affiliate" of the Combined Company, whichever amount is less; second, such
securities requested to be included in such Combined Company Registration
Statement by any other Participating Holder, pro rata on the basis of the
amount of such securities held by such holder; and third, all other securities
of the Combined Company duly requested to be included in such Combined Company
Registration Statement.
Piggy-Back Rights. If, during the three-year term of the Registration
Rights Agreement, the Combined Company proposes to register any of its equity
securities under the Securities Act (other than by a registration statement on
Form S-4 or Form S-8) in a form and a manner that would permit registration of
WCGI Common Stock held by holders who are parties to the Registration Rights
Agreement, the Combined Company shall give notice to such holders of such
registration. Upon a written request from such a holder requesting that such
holder's shares be included in such registration (which request must be
received by the Combined Company within 20 days after such notice has been
given), the Combined Company shall use its commercially reasonable efforts to
effect the registration of such shares of WCGI Common Stock. In the case the
Combined Company's underwriters advise that the number of shares requested to
be included in the registration statement cannot be sold in the time or manner
requested by the Combined Company, then the Combined Company shall include in
such registration that amount of WCGI Common Stock that the Combined Company
is so advised can be sold in (or during the time of) the offering, as follows:
first, all securities proposed by the Combined Company to be sold for its own
account; second, securities of any holder of WCGI Common Stock that has
properly requested that its shares be included in such registration and that
is an "underwriter" or an "affiliate" of the Combined Company in an amount
sufficient to include all the shares of WCGI Common Stock (or other
Registrable Securities, as the case may be) offered by such holder or an
amount sufficient to reduce the amount of such holder's shares of WCGI Common
Stock (or other Registrable Securities, as the case may be) held after the
offering to a level that would cause such holder to no longer be an
"underwriter" or an "affiliate" of the Combined Company, whichever amount is
less; third, such securities requested to be included in such registration
statement by any other holder, pro rata on the basis of the amount of such
securities held by such holder; and fourth, all other securities of the
Combined Company duly requested to be included in such registration statement.
Other. The Registration Rights Agreement contains a variety of other
provisions applicable to either demand or piggy-back registrations. The
Combined Company is required to pay specified expenses in connection with such
registrations and is required to indemnify the selling stockholders against
certain liabilities, including liabilities under the Securities Act. The
registration rights provided for in the Registration Rights Agreement are
transferable to permitted transferees of WCGI Common Stock that comply with
specified procedures. The securities registrable under the Registration
Rights Agreement do not include securities listed on a national securities
exchange or included in any interdealer quotation system, except such
securities held by persons deemed to be "underwriters" or"affiliates" of the
Combined Company.
Applicability of Section 1145 of the Bankruptcy Code
Section 1145 of the Bankruptcy Code exempts the issuance of
securities under a plan of reorganization from registration under the
Securities Act and under state securities laws if three principal requirements
are satisfied: (i) the securities must be issued "under a plan" of
reorganization by the debtor or its successor under a plan or by an affiliate
participating in a joint plan of reorganization with the debtor; (ii) the
recipients of the securities must hold a prepetition or administrative expense
claim against the debtor or an interest in the debtor; and (iii) the
securities must be issued entirely in exchange for the recipient's claim
against or interest in the debtor, or "principally" in such exchange and
"partly" for cash or property. MK has informed WCGI that it believes that the
offer and sale of the Merger Shares, Series A Preferred Stock, Warrants, MK
Equity Rights, the common stock of MK Rail and
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<PAGE>
beneficial interests in the Liquidating Trust under the Plan satisfy
the requirements of section 1145(a)(1) of the Bankruptcy Code and are,
therefore, exempt from registration under the Securities Act and state
securities laws. MK also has informed WCGI that it believes that the offer and
sale of the WCGI Common Stock pursuant to the Warrants and the offer and sale
of the WCGI Common Stock, the Series A Preferred Stock, the common stock of MK
Rail and beneficial interests in the Liquidating Trust pursuant to the MK
Equity Rights satisfy the requirements of Section 1145(a)(2) of the Bankruptcy
Code and are, therefore, exempt from registration under the Securities Act and
state securities law. On July 25, 1996, the Bankruptcy Court entered an order
to the effect that the offer and sale of securities through or upon the
exercise of the MK Equity Rights would be exempt from registration under the
Securities Act and state securities laws pursuant to Section 1145 of the
Bankruptcy Code.
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<PAGE>
THE COMBINED COMPANY PRO FORMA INFORMATION
The following is the Combined Company Pro Forma Information which
gives effect to the Plan and the consummation of the Merger and the other
transactions contemplated by the Plan, in each case, as if (i) the disposition
by MK of certain assets and non-core businesses and (ii) such transactions had
been consummated on: (a) May 31, 1996, in the case of the Unaudited Pro Forma
Combined Condensed Consolidated Balance Sheet at May 31, 1996; and (b)
December 1, 1994, in the case of the Unaudited Pro Forma Combined Condensed
Consolidated Statement of Operations for the six months ended May 31, 1996 and
Unaudited Pro Forma Combined Condensed Consolidated Statement of Operations
for the fiscal year ended November 30, 1995. In addition to the Merger, the
principal transactions contemplated by the Plan to which the Combined Company
Pro Forma Information gives effect include the discharge and cancellation of
substantially all of MK's existing long-term debt and common stock in exchange
for the distribution of cash, securities of the Combined Company and
securities of a majority owned subsidiary of MK provided for in the Plan. See
"The Merger -- MK Plan of Reorganization."
The Combined Company Pro Forma Information is presented for
illustrative purposes only and is not necessarily indicative of what the
Combined Company's actual financial position or results of operations would
have been had the foregoing transactions been consummated, on such dates nor
does it give effect to: (1) any transactions other than the foregoing
transactions and those discussed in the accompanying Notes to the Combined
Company Pro Forma Information; (2) Washington's or MK's results of operations
since May 31, 1996; or (3) costs of implementing the consolidation of certain
operations of the Combined Company (the potential amounts of which are unknown
as specific plans for implementing such consolidation had not been developed
as of the date hereof), or savings that could result from such consolidation.
In addition, the following Combined Company Pro Forma Information is based
upon various estimates relating to the Plan, including the amount of cash
payments to be made on account of certain claims (as defined in Section 101(5)
of the Bankruptcy Code) against MK (the "Claims"), and will not be updated to
reflect events occurring after the date of this Proxy Statement. Among other
things, the amount of deferred tax assets and the amount of cost in excess of
net assets acquired reflected on the Unaudited Pro Forma Combined Condensed
Balance Sheet at May 31, 1996 are subject to change based on the value of WCGI
Common Stock at the Effective Time. Accordingly, the Combined Company Pro
Forma Information does not purport to be indicative of the Combined Company's
financial position or results of operations as of the date hereof or for any
period ended on the date hereof, as of the Effective Time or for any period
ending on the Effective Time, or as of or for any other future date or period.
The following Combined Company Pro Forma Information should be read
in conjunction with the historical financial statements of Washington and MK,
the related notes thereto and the other information contained elsewhere, or
incorporated by reference, in this Proxy Statement, including the information
set forth in "Management's Discussion and Analysis of Financial Condition and
Results of Operations of the Combined Company." See Exhibits 6 and 7 for (i)
certain historical financial statements of MK; (ii) selected historical
financial data of MK; and (iii) MK's managements' discussions and analyses of
the historical financial condition and results of operations of MK. See
"Incorporation of Certain Documents by Reference." In the preparation of the
following Combined Company Pro Forma Information, it has been assumed that the
historical book value of MK's assets generally approximates the fair value
thereof, except for specific adjustments discussed in the Notes to the
Combined Company Pro Forma Information. The Combined Company will be required
to determine the fair value of the assets of MK as of the Effective Time.
Although such valuation is not presently expected to result in values that are
materially greater or less than the values assumed in the preparation of the
following Combined Company Pro Forma Information, there can be no assurance
with respect thereto.
MK's fiscal year historically has ended on December 31, while
Washington's fiscal year has ended on November 30. The Unaudited Pro Forma
Combined Condensed Consolidated Balance Sheet at May 31, 1996 is based upon
Washington's financial position at May 31, 1996 and upon MK's financial
position at June 30, 1996. The Unaudited Pro Forma Combined Condensed
Consolidated Balance Sheet at May 31, 1996 reflects separately MK's
liabilities subject to compromise pursuant to the Chapter 11 Case in
conformity with the AICPA's Statement of Position 90-7, "Financial Reporting
by Entities in Reorganization under the Bankruptcy Code" ("SOP 90-7").
Liabilities subject to compromise at May 31, 1996 include the following
principal claims:
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<TABLE>
<S> <C>
Current liabilities subject to compromise:
Antecedent bank debt
Estimated reimbursement obligations of $213,345
discontinued Transit operations 121,249
Touchstone, Inc. litigation settlement 5,250
Liability for estimated allowed claim arising from
rejection of the Boise leases 12,970
--------
$352,814
=======
Non-current liabilities subject to compromise:
Accrued litigation settlements $25,000
======
</TABLE>
The Unaudited Pro Forma Combined Condensed Consolidated Statement of
Operations for the six months ended May 31, 1996 is based upon Washington's
results of operations for its six months ended May 31, 1996 and upon MK's
results of operations for its six months ended June 30, 1996. The Unaudited
Pro Forma Combined Condensed Consolidated Statement of Operations for the six-
month period ended May 31, 1996 reflects separately, as reorganization items,
certain material nonrecurring costs and expenses incurred by MK in connection
with the Chapter 11 Case in conformity with SOP 90-7. The Unaudited Pro Forma
Combined Condensed Consolidated Statement of Operations for the fiscal year
ended November 30, 1995 is based upon Washington's results of operations for
its fiscal year ended November 30, 1995 and upon MK's results of operations
for its fiscal year ended December 31, 1995. Certain items derived from MK's
and Washington's historical financial statements have been reclassified to
conform to the pro forma combined presentations.
As a result of various characteristics of their respective
businesses, the results of operations of Washington and MK can fluctuate
significantly from period to period. Accordingly, results of operations for
an interim period are not necessarily indicative of results of operations for
an entire fiscal year, and results of operations for a fiscal year are not
necessarily indicative of future operating results.
50
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED BALANCE SHEET
MAY 31, 1996
(in thousands of dollars)
<TABLE>
<CAPTION>
Historical Pro Forma Adjustments
------------------------ ------------------------ Combined
Company
MK Washington Debit Credit Pro Forma
---------- ------------ ------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 68,102 $ 24,863 $ 13,300 (a) $ 73,665
6,000 (a)
Accounts and note receivable and unbilled receivables 241,949 65,131 307,080
Deferred income taxes and other tax assets 15,510 514 $ 18,603 (b) 34,627
Net assets of discontinued MK Rail operations 72,000 -- 72,000 (a) --
Other current assets 33,663 10,371 44,034
---------- -------- ---------
Total current assets 431,224 100,879 459,406
---------- -------- ---------
Investments and other assets 101,617 9,197 8,816 (a) 101,998
Deferred income taxes and other tax assets -- -- 78,656 (a) 36,377 (b) 42,279
Cost in excess of net assets acquired -- 15,567 98,012 (a) 113,579
Property and equipment, net 38,455 65,466 103,921
---------- -------- -------- -------- ---------
Total assets $ 571,296 $191,109 $195,271 $136,493 $821,183
========== ======== ======== ======== =========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIENCY)
Current Liabilities
Short-term debt $ 30,981 $ 448 $ 31,429
Liabilities subject to settlement under
reorganization proceedings 352,814 -- $352,814 (a) --
Accounts payable and accrued expenses 148,636 37,815 186,451
Billings in excess of costs and estimated
earnings on uncompleted contracts 48,278 8,182 56,460
Income taxes payable 7,123 929 $ 159 (b) 8,211
Other current liabilities 98,411 -- 10,180 (a) 108,591
---------- -------- ---------
Total current liabilities 686,243 47,374 391,142
---------- -------- ---------
Non-current liabilities
Long-term debt -- 4,823 4,823
Deferred income taxes 8,813 9,120 17,933 (b) --
Accrued litigation settlements subject to
settlement under reorganization proceedings 25,000 -- 25,000 (a) --
Other non-current liabilities 73,520 -- 4,727 (a) 22,733 (a) 91,526
---------- -------- ---------
Total non-current liabilities 107,333 13,943 96,349
---------- -------- ---------
Redeemable preferred stock -- -- 18,000 (a) 18,000
---------- -------- ---------
Stockholders' equity (deficiency)
Washington's common stock and paid-in
capital 62,359 185,900 (a) 248,259
Washington's retained earnings 67,433 67,433
MK's stockholders' (deficiency) (222,280) -- 222,280 (a) --
---------- -------- ---------
Stockholders' equity (deficiency) (222,280) 129,792 315,692
---------- -------- -------- -------- ---------
Total liabilities and stockholders' equity
(deficiency) $ 571,296 $191,109 $400,474 $459,252 $821,183
========== ========= ========= ========= =========
</TABLE>
See Accompanying Notes to the Combined Company Pro Forma Information.
51
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE SIX MONTH PERIOD
ENDED MAY 31, 1996
(in thousands, except for share and per share data)
<TABLE>
<CAPTION>
Plan and
Pro Forma Merger
Disposition Pro Forma
Adjustments Adjusted Adjustments Combined
Historical (Debit) Historical Historical (Debit) Company
MK Credit MK Washington Credit Pro Forma
---------- ------------ ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenue $ 677,684 $ 677,684 $ 144,699 $ 822,383
Cost of revenue (645,109) (645,109) (141,331) $ 900(b) (785,540)
---------- --------- --------- ----------- -----------
Gross profit from continuing
operations........................... 32,575 32,575 3,368 900 36,843
General and administrative expenses... (24,027) (24,027) (1,730) 450 (b) (16,419)
(182)(c)
9,070 (d)
Amortization of excess of
cost over net assets
acquired............................ ---- ---- (210) (1,225)(e) (1,435)
Interest expense...................... (10,148) (10,148) (382) 9,124 (f) (1,406)
Other income (expense), net........... ---- ---- 1,723 1,723
Equity in the net income of
unconsolidated affiliate............. 4,757 $ (348)(a) 4,409 4,409
Gain on disposition of investment
in affiliates........................ 2,130 (2,130)(a) ---- ----
Reorganization expense................ ---- ---- (1,500) (1,500)
---------- --------- --------- --------- ----------- -----------
Income from continuing
operations before
reorganization items and
income taxes........................ 5,287 (2,478) 2,809 1,269 18,137 22,215
Reorganization items.................. (20,904) (20,904) ---- 20,904(g) ----
---------- --------- --------- --------- ----------- -----------
Income (loss) from
continuing operations
before income taxes................. (15,617) (2,478) (18,095) 1,269 39,041 22,215
Income tax expense.................... (2,357) (2,357) (443) (8,571)(h) (11,371)
---------- --------- --------- --------- ----------- -----------
Income (loss) from
continuing operations............... $ (17,974) $(2,478) $ (20,452) $ 826 $30,470 $ 10,844
========== ========= ========= ========= =========== ===========
</TABLE>
<TABLE>
<S> <C> <C>
Income per common share (1)............................................ $.03
Pro forma income per common share (1).................................. $.20
</TABLE>
(1) MK's historical per share data is not presented because, as a result of the
assumed cancellation of all shares of its common stock pursuant to the Plan,
such data is not considered meaningful. Washington's per share data is
based on the weighted average of 29,482,000 shares outstanding during the
period presented. Combined Company pro forma per share data is based on
53,603,000 shares of WCGI Common Stock assumed to be outstanding during the
period presented.
See Accompanying Notes to the Combined Company Pro Forma Information.
52
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE FISCAL YEAR
ENDED NOVEMBER 30, 1995
(in thousands, except for share and per share data)
<TABLE>
<CAPTION>
Plan and
Pro Forma Merger
Disposition Pro Forma
Adjustments Adjusted Adjustments Combined
Historical (Debit) Historical Historical (Debit) Company
MK Credit MK Washington Credit Pro Forma
---------- ----------- ---------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenue $ 1,708,666 $(156,518)(a) $ 1,552,148 $ 228,537 $ 1,780,685
Cost of revenue.................. (1,689,844) 163,662 (a) (1,526,182) (216,859) $ 1,800 (b) (1,741,241)
----------- --------- ----------- --------- ------- -----------
Gross profit from continuing
operations..................... 18,822 7,144 25,966 11,678 1,800 39,444
General and administrative
expenses....................... (59,243) (59,243) (3,332) 900 (b) (35,112)
130 (c)
26,433 (d)
Amortization of excess of
cost over net assets acquired.. ____ ____ (420) (2,450)(e) (2,870)
Interest expense................. (28,217) (28,217) (189) 25,217 (f) (3,189)
Other income (expense), net...... (4,408) 10,472 (a) 6,064 4,450 10,514
Equity in the net income of
unconsolidated affiliates...... 23,042 (9,735)(a) 13,307 ____ 13,307
Loss on disposition of
investments in affiliates...... (19,738) 19,738 (a) ____ ____ ____
----------- --------- ----------- --------- ------- -----------
Income (loss) from
continuing operations before
income taxes................... (69,742) 27,619 (42,123) 12,187 52,030 22,094
Income tax expense............... (9,894) (9,894) (4,022) (2,414)(h) (16,330)
----------- --------- ----------- --------- ------- -----------
Income (loss) from
continuing operations.......... $ (79,636) $ 27,619 $ (52,017) $ 8,165 $49,616 $ 5,764
=========== ========= =========== ========= ======= ===========
Income per common share (1)...... $.28
Pro forma income per common
share (1)...................... $.11
</TABLE>
(1) MK's historical per share data is not presented because, as a result of the
assumed cancellation of all shares of its common stock pursuant to the Plan,
such data is not considered meaningful. Washington's per share data is based on
the weighted average of 29,478,000 shares outstanding during the period
presented. Combined Company pro forma per share data is based on 53,599,000
shares of WCGI Common Stock assumed to be outstanding during the period
presented.
See Accompanying Notes to the Combined Company Pro Forma Information.
53
<PAGE>
NOTES TO THE COMBINED COMPANY PRO FORMA INFORMATION
(dollars in thousands, except for per share data)
Note 1. Description of Plan Transactions
As set forth below, the Merger and the settlement pursuant to the Plan of MK's
liabilities subject to settlement under reorganization proceedings are assumed
to be effected through, among other things, the payment of $13,300 in cash and
the issuance of the Merger Shares and Warrants. Under the purchase method of
accounting, the total purchase price paid by Washington for the acquisition of
MK pursuant to the Merger has been estimated to be $205,200, consisting of the
following consideration:
<TABLE>
<CAPTION>
<S> <C>
Cash to be distributed $ 13,300
Equity to be issued 185,900
Estimated costs of acquisition 6,000
--------
Total purchase price $205,200
========
</TABLE>
The Plan is also assumed to result in, among other things, the issuance and/or
distribution of all of the shares of MK Rail Common Stock held by MK, the MK
Rail Note held by MK (or the proceeds thereof) and 18,000 shares of Series A
Preferred Stock. See Note 3(a) below.
The estimated value of the Merger Shares ($180,259 in the aggregate, or $7.47
per share) and the Warrants ($5,641 in the aggregate, or $2.04 per warrant),
reflected in the foregoing calculation, was estimated solely for the purpose of
the foregoing calculation and does not purport to constitute an estimate of the
market value of such securities as of the Effective Time or any other date.
Pursuant to Accounting Principles Board Opinion No. 16, the assumed value of the
Merger Shares was estimated taking into consideration the market price of WCGI
Common Stock during a period of time before and after the terms of the Merger
were agreed upon and publicly announced, discounted by 12.5% due to the
relatively large number of shares to be issued pursuant to the Merger and the
historical volatility of the market price of WCGI Common Stock. The value of the
Warrants reflected in the foregoing calculation was determined through the
application of the Black-Scholes valuation model. The Black-Scholes valuation
model is a complex mathematical formula used to value warrants that takes into
account a number of factors, including assumptions regarding and estimates of
the market price of the underlying stock and the volatility of such price, the
exercise price of the warrant, the term of the warrant and prevailing interest
rates. The principal assumptions used in applying the Black-Scholes valuation
model to value the Warrants included, in addition to the $12.00 per warrant
exercise price and six and one-half year term thereof, an assumed market price
of $8.50 per share for the underlying shares of WCGI Common Stock, assumed
volatility in such market price during the six and one-half year exercise period
of 25.0% and an assumed risk-free interest rate throughout such period of 6.70%
per annum.
The actual market value of the Merger Shares and Warrants at any particular time
will be influenced by a number of factors, including the Combined Company's
financial condition and results of operations, perceptions regarding the
Combined Company's prospects and general market and economic conditions and may
vary materially from the assumed value thereof used herein. See "Risk Factors"
for a discussion of certain factors that may affect the financial performance of
the Combined Company and of various risks associated with the Combined Company
Securities.
54
<PAGE>
Note 2. Washington's Historical and Combined Company Pro Forma Capital Stock
<TABLE>
<CAPTION>
Number of Shares
---------------------------
Washington Combined
Historical Company
Capital Stock May 31, 1996 Pro Forma
- --------------------------------- --------------- -----------
<S> <C> <C>
Preferred stock - par value $ .01
Authorized 1,000,000 10,000,000
Issued and outstanding ---- 18,000
Common stock - par value $ .01
Authorized 39,000,000 100,000,000
Issued and outstanding 29,482,000 53,603,000
</TABLE>
Note 3. Unaudited Pro Forma Combined Company Balance Sheet Adjustments
(a) To record: (i) the Merger of MK and Washington, which will be accounted for
under the purchase method of accounting; (ii) the settlement of MK's liabilities
subject to compromise pursuant to the Plan; (iii) adjustments to reflect the net
assets acquired at estimated fair value and the recognition of the excess of the
total purchase price over net assets acquired as set forth below; and (iv)
estimated deferred tax assets (benefits of operating loss and tax credit
carryforwards based on MK management's estimate of its ability to utilize such
tax benefits) subsequent to the Merger. The value of the deferred tax assets is
based, among other things, upon various assumptions including the fair value of
the common stock and asset distributions to the secured creditors and the
generation of future taxable income. These deferred tax benefits are subject to
change based on the occurrence of future events, possibly by a material amount.
55
<PAGE>
<TABLE>
<CAPTION>
Account Debit Credit Description
- ---------------------------- ------- -------- --------------------------------------
<S> <C> <C> <C>
Cash and cash equivalents $ 13,300 Cash distribution pursuant to the Plan
6,000 Payment of transaction costs
Net assets of discontinued
MK Rail operations 72,000 Asset distributions pursuant
to the Plan
Investments and other 8,816 Adjustment to fair value of
assets MK's prepaid pension cost
for unrecognized net losses
Deferred income taxes and
other tax assets $ 78,656 Adjustment to MK's deferred
tax assets to reflect effect
of the Plan and the Merger
Cost in excess of net
assets acquired 98,012 To record the excess of cost
over net assets acquired
Liabilities subject to
settlement under
reorganization proceedings 352,814 Elimination of MK's
liabilities subject to
settlement under
reorganization proceedings
Other current liabilities 10,180 Other pre-acquisition
contingencies net, including
future severance costs from
existing MK employment
agreements and cost of
insurance for MK's previous
directors and officers
required by the Merger
Agreement
Accrued litigation
settlements subject to
settlement under
reorganization proceedings 25,000 Elimination of MK's
liabilities subject to
settlement under
reorganization proceedings
Other non-current
liabilities 4,727 Elimination of MK's
unamortized deferred gain
from prefunding workers'
compensation liabilities
22,733 Adjustment to fair value of
MK's postretirement benefit
obligation for unrecognized
net losses
Redeemable preferred stock 18,000 Issuance of redeemable
preferred stock pursuant to
the Plan
Washington's common stock
and paid-in capital 185,900 Issuance of equity pursuant
to the Plan and the Merger
MK's stockholders'
deficiency 222,280 Elimination of MK's
stockholders' deficiency
</TABLE>
(b) To reclassify deferred tax assets and liabilities and offset the non-
current deferred tax assets and liabilities and present as a single
amount.
56
<PAGE>
NOTES TO THE COMBINED COMPANY PRO FORMA INFORMATION
(Continued)
Note 4. Unaudited Pro Forma Combined Condensed Consolidated Statement of
Operations Adjustments for the Six Month Period Ended May 31, 1996
and Fiscal Year Ended November 30, 1995
(a) To eliminate the effects of dispositions of certain assets and non-core
businesses which will not have a continuing impact on the Combined Company's
results of operations.
<TABLE>
<CAPTION>
For the Six For the Fiscal
Month Period Year Ended
Ended November 30,
Account May 31, 1996 1995 Description
<S> <C> <C> <C>
Revenue $(156,518) Revenue of wholly-owned
subsidiary disposed of
during 1995
Cost of revenue 163,662 Cost of revenue of wholly-owned
subsidiary disposed of during
1995
Other income (expense),
net...................... 10,472 Realized losses and provisions
for losses in connection with
planned divestitures of
certain assets and non-core
businesses, excluding
discontinued operations
Equity in the net income
of unconsolidated
affiliates............... $ (348) (9,735) Equity in the net income of
unconsolidated affiliates
Gain (losses) on disposed of during the period
dispositions of
investments in affiliates (2,130) 19,738 Realized gain (losses) and
provisions for losses in
connection with planned divestitures
of certain assets and non-core
businesses, excluding discontinued
operations
</TABLE>
(b) To recognize the estimated reduction in periodic rent expense pursuant to
the terms of the new lease for MK's Boise offices to become effective on the
Effective Date pursuant to the Plan.
(c) To adjust MK's historical general and administrative expenses to reflect
the effects of certain pro forma adjustments made to give effect to the Plan
and the consummation of the Merger and other transactions contemplated thereby
as referred to in Note 3(a) above as follows:
<TABLE>
<CAPTION>
For the For the Fiscal
Six Month Year
Period Ended
Ended November 30,
May 31, 1996 1995
------------ --------------
<S> <C> <C>
To reverse MK's historical amortization of
unrecognized net losses of the postretirement
health care plan............................. $ 762 $ 1,683
To reverse MK's historical amortization of
deferred gain from prefunding workers'
compensation liabilities..................... (944) (1,553)
------------ --------------
Total $(182) $ 130
============ ==============
</TABLE>
57
<PAGE>
NOTES TO THE COMBINED COMPANY PRO FORMA INFORMATION
(Continued)
(d) To eliminate MK's historical professional consultant's fees and out-of-
pocket expenses, compensation expenses for employee retention plan awards and
reorganization bonus in each case related to the Plan.
(e) To record the Combined Company's amortization of estimated excess of cost
over net assets acquired over an assumed useful life of 40 years. The
Combined Company will be required to determine the actual amount of excess of
cost over net assets acquired and the appropriate amortization period as of
the Effective Time. Such determinations will be based upon the fair values of
MK's net assets (including deferred tax assets) and other relevant information
as of the Effective Time. Although such determinations are not presently
expected to result in the actual amount of excess of cost over the fair value
of net assets acquired and related periodic amortization being materially
greater or less than the estimated pro forma amounts thereof, there can be no
assurance with respect thereto. Any increase in the amount of periodic
amortization of the excess of cost over the fair value of net assets acquired
would reduce periodic net income.
(f) To eliminate MK's historical interest expense on the antecedent debt
subject to settlement under the Plan.
(g) To eliminate MK's nonrecurring reorganization expenses in connection with
the Plan.
<TABLE>
<CAPTION>
<S> <C>
Professional consultants' fees and out-of-pocket expenses $ 6,219
Compensation expense for reorganization bonus 1,115
Debtor-in-possession financing fees 600
Provision for estimated allowed claim arising from the rejection
of the Boise leases 12,970
-------
Total $20,904
=======
</TABLE>
(h) To provide, in addition to foreign income taxes, federal and state income
taxes at an assumed rate of 40% after giving effect to: (i) the net pro forma
adjustments to income (loss) before income taxes; (ii) the non-deductible
goodwill expense resulting from the assumed Merger; and (iii) the reversal of
a portion of the valuation allowance to adjust the deferred tax asset to an
amount that is more likely than not to be realized. The effective income tax
rate in future periods may vary due to differences in income tax rates in the
various jurisdictions where the Combined Company will operate. Because the
income tax laws of certain jurisdictions will not allow the Combined Company
to file on a consolidated basis, state and foreign income tax expense may be
incurred in periods when its combined results of operations reflect a loss
before income taxes.
58
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF THE COMBINED COMPANY
As a result of the effectiveness of the Plan and the consummation of the
Merger, the Combined Company will operate the existing businesses of Washington
and the existing businesses of MK (other than the businesses of MK Rail and
certain other noncore businesses) on a combined basis under a new corporate and
capital structure. See "The Merger" and "The Combined Company Pro Forma
Information." See also "The Combined Company Projections" attached hereto as
Appendix A. Accordingly, the financial condition and results of operations of
the Combined Company after the Effective Time are not comparable to the
historical financial conditions or results of operations of Washington and MK,
either individually or on a combined basis.
The Combined Company will have three principal sources of liquidity during
the period immediately following the Effective Time: (i) cash and cash
equivalents (after giving effect to the distributions contemplated by the Plan);
(ii) certain financing facilities available to the Combined Company; and (iii)
cash generated by operations. See "The Combined Company Pro Forma Information"
and "The Merger--Other Indebtedness of the Combined Company." See also "The
Combined Company Projections" attached hereto as Appendix A. While WCGI and MK
believe that the Combined Company's liquidity and capital resources will be
sufficient to cover its reasonably foreseeable working capital, capital
expenditure and debt service requirements, no assurance can be given with
respect thereto. See "Risk Factors."
BUSINESS OF MK
Copies of MK's Quarterly Report on Form 10-Q for the three months ended
March 31, 1996 and MK's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995 are attached hereto as Exhibits 6 and 7, respectively.
On July 25, 1996, MK reported that due to $30.7 million in charges
associated with it's financial reorganization and discontinued transit
operations, MK reported a net loss of $28.1 ($0.85 per share) on revenue of $353
million for the second quarter ended June 30, 1996 compared to a net loss of
$12.4 million ($0.37 per share) on revenue of $459 million for the second
quarter of 1995.
MK reported operating income from continuing operations for the quarter of
$17.8 million, compared to $10.6 million operating income for the second quarter
of 1995. In addition, MK reported income from continuing operations of $3.9
million before reorganization items and income taxes for the quarter, compared
to a loss of $10.1 million for the second quarter of 1995. Backlog of all
uncompleted contracts at June 30, 1996 was $3.5 billion.
Operational highlights during the quarter included the award of a three-
year-extension contract from the Tennessee Valley Authority (the "TVA") for
construction modifications and supplemental maintenance at TVA's fossil and
hydro electric generating plants and additional TVA facilities. The extension
contract, awarded to G-UB-MK Constructors, a joint venture of MK, Parsons Power
Group, Inc. and Union Boiler Company, is valued at $256 million, bringing the
total contract value to $634 million.
In April 1996, a joint-operations team led by MK was awarded an
engineering, procurement and construction-management contract for installation
of coal processing, stockpiling and ship loading equipment for a 3.8 million ton
capacity surface mine in Indonesia. Under the new contract, the MK consortium
will direct the 24 month long project to install equipment and construct
facilities valued at $80 million, permitting coal loading into ocean-going
Panamax-class vessels for export throughout the Pacific Rim.
During the second quarter of 1996, MK was awarded a cost-plus-fixed-
fee contract to provide management and technical services during construction of
the $700 million Pinglin Tunnel, a major segment of a new four-lane expressway
connecting Taipei City with Ilan County on the Pacific coast. The project is
the largest underground construction project currently underway in the world.
59
<PAGE>
PROPOSAL TO AMEND WCGI'S CERTIFICATE OF INCORPORATION
Pursuant to the Merger Agreement, WCGI's Certificate of Incorporation
will be amended to, among other things, permit the consummation of the
transactions contemplated by the Merger Agreement. All of the amendments
described below will become effective concurrently with the Merger. A copy of
WCGI's Certificate of Incorporation which will become effective concurrently
with the Merger is attached hereto as Exhibit 4.
Change the Corporate Name of WCGI
WCGI's Certificate of Incorporation will be amended to change the name
of the corporation to "Morrison Knudsen Corporation."
Increase in WCGI's Authorized Capital Stock
WCGI's Certificate of Incorporation will be amended to increase the
number of authorized shares of WCGI Common Stock from 39,000,000 to 100,000,000
and the number of authorized shares of WCGI Preferred Stock from 1,000,000 to
10,000,000, of which 18,000 shares (or, under certain circumstances, 1,800,000
shares) will be designated as Series A Preferred Stock. See "Description of
WCGI Capital Stock--Common Stock" and "Description of WCGI Capital Stock--
Preferred Stock." See also "Securities to be Issued and Transferred Under the
Plan--Series A Preferred Stock."
As of the Record Date, WCGI has outstanding 29,481,184 shares of WCGI
Common Stock and has 876,000 shares of WCGI Common Stock reserved for issuance
under its stock option plan. If the Merger is consummated, WCGI will have
outstanding approximately 53,603,000 shares of WCGI Common Stock, 2,765,000
shares of WCGI Common Stock reserved for the Warrants, 187,848 shares of WCGI
Common Stock reserved for issuance upon exercise of certain warrants to be
issued to WCGI's financial advisors in connection with the Merger (see "Certain
Transactions") and 876,000 shares of WCGI Common Stock reserved for issuance
under WCGI's stock option plan.
In addition to the necessity of this amendment to consummate the
transactions contemplated by the Merger Agreement, the WCGI Board of Directors
believes that this amendment is advantageous to WCGI and its stockholders,
providing additional authorized shares of WCGI Common Stock and WCGI Preferred
Stock that could be used from time to time, without further action or
authorization by the stockholders (except as may be required by law or by any
stock exchange on which WCGI securities may then be listed), for corporate
purposes which the WCGI Board of Directors may deem desirable, including,
without limitation, stock splits, stock dividends or other distributions,
financings, acquisitions, stock grants, stock options and employee benefit
plans. While WCGI has no present plans, agreements or commitments for the
issuance of additional shares of WCGI Common Stock and WCGI Preferred Stock
(except as described herein), other than pursuant to its employee benefit plans,
upon the exercise of stock options and warrants, the Board of Directors believes
that the availability of these shares would allow WCGI to issue additional
shares of WCGI Common Stock and WCGI Preferred Stock if market or other
conditions indicate that such a course of action is advisable.
Removal of Directors
Currently, the majority vote of the holders of WCGI Common Stock may
remove a director from office at any time, with or without cause. WCGI's
Certificate of Incorporation will be amended so that a director may be removed
from office only for cause by the majority vote of WCGI stockholders entitled to
vote thereon.
Special Meeting of Stockholders
WCGI's Certificate of Incorporation will be amended so that special
meetings of the stockholders for any purpose may be called at any time only by a
majority of the Board of Directors or the Chief Executive Officer or the
President of WCGI. Currently, WCGI's Certificate of Incorporation provides that
a special
60
<PAGE>
meeting may be called at any time by a majority of the Board of Directors or the
Chief Executive Officer or the President of WCGI and that the President or the
Secretary shall call a special meeting at the request in writing of stockholders
owning a majority of WCGI's voting stock issued and outstanding. Therefore,
this amendment would eliminate a stockholder's ability to call a special
meeting.
Stockholder Action by Written Consent
Under DGCL, unless otherwise provided in a corporation's charter, any
action required or permitted to be taken by stockholders at a meeting may be
taken without a meeting, without prior notice and without a stockholder vote, if
a written consent setting forth the action is signed by stockholders having the
requisite votes to authorize such action at a meeting. WCGI's Certificate of
Incorporation does not presently contain any provisions restricting the ability
of stockholders to act by written consent. This amendment would eliminate the
ability of stockholders to take action by written consent, by providing that any
action which may be taken by stockholders of WCGI at an annual or special
meeting may not be effected except at such an annual or special meeting by the
vote required for the taking of such action.
The Board of Directors is submitting this amendment for adoption by
the stockholders in order to assure that stockholders have an adequate
opportunity to consider all of the matters which may be brought to them for
action. Additionally, management is provided with an opportunity to review and
respond to proposed actions, as appropriate, and to make its views known to the
stockholders before action has been taken.
Amendments to the Bylaws
WCGI's Certificate of Incorporation will be amended so that the
affirmative vote of two-thirds of, rather than the affirmative vote of a
majority of, the issued and outstanding voting stock of WCGI would be required
to amend or rescind WCGI's Bylaws.
Amendments to the Certificate of Incorporation
WCGI's Certificate of Incorporation will be amended so that any
proposal to amend or repeal or the adoption of any provision inconsistent with
the provisions of WCGI's Certificate of Incorporation relating to classification
of the Board of Directors, removal of directors, calling a special meeting,
cumulative voting or no action by written consent or this amendment would
require the affirmative vote of two-thirds of the issued and outstanding voting
stock of WCGI rather than a majority of the voting stock issued and outstanding.
Without such provision, the holders of a majority of the voting stock would be
able to effect the amendment or repeal of such provisions.
Prohibition of Issuance of Nonvoting Stock
As required by the United States Bankruptcy Code, WCGI's Certificate
of Incorporation will be amended to prohibit WCGI from issuing any nonvoting
equity securities.
Potential Anti-Takeover Effects
The foregoing amendments to WCGI's Certificate of Incorporation may
discourage or make more difficult the acquisition of control of WCGI by means of
a tender offer, open market purchase, proxy contest or otherwise. These
provisions are intended to discourage, or may have the effect of discouraging,
certain types of coercive takeover practices and inadequate takeover bids and to
encourage persons seeking to acquire control of WCGI first to negotiate with
WCGI. The Board of Directors of WCGI believes that the foregoing measures, many
of which are substantially similar to the takeover-related measures in effect
for many other publicly held companies, provide benefits by enhancing WCGI's
potential ability to negotiate with the proponent of any unfriendly or
unsolicited proposal to take over or restructure WCGI that outweigh the
disadvantages of discouraging such proposals because, among other things,
negotiation of such proposals could result in an improvement of their terms.
While there necessarily can be no assurance in this regard, WCGI's Board of
Directors also believes that the foregoing measures are not likely to have a
material impact on market prices for
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<PAGE>
WCGI Common Stock in circumstances other than those described above in light of,
among other factors, the existence of generally comparable measures in effect
for other publicly held companies and the Board's belief that market prices will
be influenced most significantly by WCGI's actual results of operations and
prospects, general market and economic conditions, and other traditional
determinants of stock market prices rather than takeover-related measures and
other corporate governance provisions. See "Risk Factors--Certain Effects of
the Merger on the Rights of the Stockholders of WCGI," "Description of WCGI
Capital Stock--Potential Anti-Takeover Effects" and "--Delaware General
Corporation Law Section 203."
Changes in Ownership of WCGI Resulting from the Merger
In considering the proposed amendments to WCGI's Certificate of
Incorporation, WCGI stockholders should note that after consummation of the
Merger, existing WCGI stockholders will own approximately 55% of the outstanding
WCGI Common Stock (excluding shares of WCGI Common Stock issuable upon exercise
of the Warrants). Mr. Dennis Washington, who currently owns approximately 68.8%
of the WCGI Common Stock, will own beneficially approximately 37.8% of WCGI
Common Stock (excluding shares of WCGI Common Stock issuable upon exercise of
the Warrants) after the Merger. Assuming the issuance of shares of WCGI Common
Stock upon exercise of all of the Warrants, existing WCGI stockholders
(including Mr. Washington) and Mr. Washington would own approximately 52.3% and
36%, respectively, of WCGI Common Stock after the Merger.
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<PAGE>
SECURITY OWNERSHIP OF THE COMBINED COMPANY
Certain Stockholders
The following table indicates the number of shares of WCGI Common
Stock owned beneficially as of July 19, 1996 by each person known to WCGI to
beneficially own more than 5% of the outstanding shares of WCGI Common Stock.
<TABLE>
<CAPTION>
Amount of Shares
Beneficially Owned
-------------------------------------------------
Name and Address of Shares of
Beneficial Owner WCGI Stock Percent of Class
- ------------------- ------------------- ----------------------------
Before After
Merger Merger
Transactions Transactions
------------- -------------
<S> <C> <C> <C>
Dennis R. Washington 20,287,473(1) 68.5% 37.7%
c/o Washington Corporations
101 International Way
Missoula, MT 59807
Pioneer Management 1,713,400 5.8% 3.2%
Corporation (2)
60 State Street
Boston, MA 02109
<CAPTION>
Shares of Series A
Preferred Stock Percent of Class
------------------ ---------------------------
Before After
Merger Merger
Transactions Transactions
------------ ------------
<S> <C> <C> <C>
Liquidating Trust (3) 18,000 -- 100%
c/o Morrison Knudsen
Corporation
Morrison Knudsen Plaza
Boise, Idaho 83729
</TABLE>
____________________
(1) Includes 19,381,635 shares held of record by Mr. Washington individually,
and 828,000 shares held by D.W. Holdings, Inc., which is wholly owned by
Mr. Washington, and as to which Mr. Washington may be deemed the beneficial
owner. Also includes 77,838 shares of WCGI Common Stock held beneficially
by Mr. Washington's wife as to which Mr. Washington disclaims beneficial
ownership.
(2) Information based on a Schedule 13G dated January 26, 1996 filed with the
Commission, which reports sole voting power and shared dispositive power
with respect to such shares.
(3) At the Effective Time, all of the shares of Series A Preferred Stock will
be distributed to a Liquidating Trust to be established pursuant to the
Plan for the benefit of certain MK creditors. Holders of Series A Preferred
Stock will be entitled to vote together with holders of WCGI Common Stock
as a single class on all matters with respect to which the holders of WCGI
Common Stock are entitled to vote. Each share will have 1/100 of a vote.
See "The Merger -- MK Plan of Reorganization" for further information
concerning the Liquidating Trust. Under certain circumstances the number of
shares of Series A Preferred Stock may be distributed to the holders of
Impaired Claims, in which case the total number of such shares of Series A
Preferred Stock will be 1,800,000. See "Securities to be Issued and
Transferred Under the Plan--Series A Preferred Stock."
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<PAGE>
Beneficial Ownership of Stock by Management
Giving effect to the Merger and the Plan and assuming no change in the
number of shares of WCGI Common Stock beneficially owned by the Combined
Company's directors, officers (other than Dennis R. Washington) and directors
and officers as a group (excluding Mr. Washington) between the date as of which
such information is presented in the MK 10-K or the 1996 Proxy Statement and the
Effective Time, immediately following the Effective Time the percentage of
shares of WCGI Common Stock beneficially owned by each of such persons
individually and by such group would be less than 1%.
For information regarding the beneficial ownership of WCGI Common Stock by
Washington's current directors, executive officers and directors and executive
officers as a group, see the 1996 Proxy Statement at page 15. Washington's
current directors, executive officers and directors and executive officers as a
group do not include Dennis R. Washington, and neither the table of beneficial
ownership of management in the 1996 Proxy Statement nor the information in the
following paragraph includes beneficial ownership information regarding Mr.
Washington.
Giving effect to the Merger and assuming no change in the number of shares
of WCGI Common Stock beneficially owned by Washington's current directors,
officers and directors and officers as a group between the date as of which such
information is presented in this Proxy Statement and the Effective Time,
immediately following the Effective Time, (i) the number of shares of WCGI
Common Stock beneficially owned by each of such persons individually and by such
group would be the same as the number of shares of WCGI Common Stock owned by
each of such persons and such group and (ii) the percentage of shares of WCGI
Common Stock beneficially owned by each of such persons individually and by such
group would be less than 1%.
For information regarding the beneficial ownership of MK Common Stock by
MK's current directors, executive officers and directors and executive officers
as a group see the MK 10-K at pages III-13 through III-14, included in Exhibit 7
attached hereto. At the date as of which such information was given, none of
such persons beneficially owned any shares of WCGI Common Stock. Such group
includes Messrs. Miller and Tinstman, who will be directors of the Combined
Company pursuant to the Merger Agreement, and Messrs. Tinstman, Hanks, Slavich,
Zarges, Allred and Chi, who will be executive officers of the Combined Company.
Giving effect to the Merger and the Plan and assuming no change in the number of
shares of MK Common Stock or WCGI Common Stock beneficially owned by MK's
current directors, officers and directors and officers as a group between the
date as of which such information is presented in the MK 10-K and the Effective
Time, immediately following the Effective Time the percentage of shares of WCGI
Common Stock beneficially owned by each of such persons individually and by such
group would be less than 1%.
Accordingly, no person currently expected to be a director or an executive
officer of the Combined Company (other than Dennis R. Washington) is, and the
persons currently expected to be the directors and executive officers of the
Combined Company as a group (excluding Mr. Washington) are not, expected to
beneficially own more than 1% of the outstanding WCGI Common Stock immediately
following the Effective Time.
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<PAGE>
MANAGEMENT OF THE COMBINED COMPANY
Board of Directors
Immediately after the Effective Time, the Board of Directors of WCGI will
consist of nine members: (i) five who have been designated by the Board of
Directors of WCGI, (ii) Robert S. Miller and Robert A. Tinstman who have been
designated by MK, and (iii) William C. Langley and John D.C. Roach, who have
been designated by the creditors of MK.
The following individuals will serve as the directors of the Combined
Company from and after the Effective Time:
<TABLE>
<CAPTION>
Term
Name Age Expires
- ---- --- -------
<S> <C> <C>
Dennis R. Washington 61 1999
Terry W. Payne 54 1999
Dorn Parkinson 49 1999
Leonard R. Judd 56 1998
William C. Langley 57 1998
John D.C. Roach 52 1998
David H. Batchelder 46 1997
Robert A. Tinstman 49 1997
Robert S. Miller 54 1997
</TABLE>
Dennis R. Washington is the founder and principal shareholder of Washington
Corporations, the principal business of which is interstate trucking and the
repair and sale of machinery and equipment. Mr. Washington also is the
principal shareholder or partner of entities the principal businesses of which
include rail transportation, mining, heavy construction, environmental
remediation and real estate development. Mr. Washington is not currently a
director of WCGI. Mr. Washington's principal business is to make and hold
investments.
Terry W. Payne has been Chairman of Terry Payne & Co., Inc., an insurance
and construction bonding agency since 1994 as well as owner of Terry Payne &
Co., Inc. since 1972. Mr. Payne also serves as a director of First Interstate
Bank of Commerce - Montana. Mr. Payne has served as a director of Washington
Corporations and several other affiliates of WCG Holdings since 1984. Mr. Payne
has served as a director of the Company since July 1993.
Dorn Parkinson served as President and Chief Operating Officer of WCGI from
July 1993 until October 1, 1994. He has been a director of Washington
Contractors since its incorporation in February 1988 and Chairman of the Board
of Washington Contractors since May 1991. Mr. Parkinson has been the President
of Washington Corporations since April 1986 and has been employed by Washington
Corporations and its affiliates since 1975. Mr. Parkinson has served as a
director of the Company since July 1993 and as Chairman of the Board of WCGI
since January 1, 1995. Mr. Parkinson is also a director of Mesa, Inc.
Leonard R. Judd has been a consultant for Phelps Dodge Corporation ("Phelps
Dodge"), a major copper mining and manufacturing corporation since November
1991. Prior to such time, Mr. Judd was director, President and Chief Operating
Officer of Phelps Dodge since May 1989 and President of Phelps Dodge Mining
Company, a division of Phelps Dodge, since 1988. He was Executive Vice
President of Phelps Dodge from 1987 until 1989. Mr. Judd is a director of
Southwest Gas Corporation and PriMerit Bank. Mr. Judd served as a director of
Washington Contractors from 1992 to 1993 and of WCGI since July 1993.
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<PAGE>
David H. Batchelder has been the President, Secretary and Director of
Batchelder & Partners, Inc., an investment advisory and consulting firm, since
1988, and President, Secretary and Director of Batchelder Co., the general
partner of DHB Partners, L.P., an investor in acquisition partnerships, since
1988. Mr. Batchelder is also a director of MacFrugal's Bargains*Close-outs,
Inc. where he serves on the Compensation Committee and a director of Santa Fe
Pacific Gold Corporation. Mr. Batchelder has served as a director of WCGI since
July 1993.
Robert A. Tinstman has been the President and Chief Executive Officer of MK
since 1995 as well as a former President of the MK's Mining Group. Mr. Tinstman
has served as a director of MK since 1995.
Robert S. Miller, Jr. has been the Chairman of the Board of MK since 1995
as well as a former Senior Partner of James D. Wolfensohn, Inc. (Investment
Banking Firm) and a former Vice Chairman of Chrysler Corporation. Mr. Miller
also serves as a director of MK Rail, and as a director for Coleman Corp.,
Federal-Mogul Corp., Fluke Corporation, Pope & Talbot, Inc. and Symantec Corp.,
none of which is a parent, subsidiary or affiliate of the Corporation. Mr.
Miller has served as a director of MK since 1995.
Mr. Langley served as the Executive Vice President, Chief Credit and Risk
Policy Officer of Chemical Banking Corporation from 1990 until 1996.
Mr. Roach has been the Chairman of the Board, President and Chief Executive
Officer of Fibreboard Corporation since 1991. Mr. Roach also serves on the
Board of Directors of Thompson, PBE.
It is anticipated that Mr. Washington will serve as Chairman of the Board
of Directors and that each of Mr. Parkinson and Robert S. Miller will serve as a
Vice Chairman of the Board of Directors. It is anticipated that the other
current directors of WCGI, Messrs. Robert G. Hunt, Robert G. Reid, Robert C.
Wallace and John H. Wimberly, will resign from WCGI's Board of Directors on or
prior to the Effective Time.
Adoption and approval of the Merger Proposals by the holders of WCGI Common
Stock will be deemed to constitute their ratification of the election to the
Board of Directors of WCGI of the nine designees named above.
The Certificate of Incorporation and the Bylaws will provide that the
members of the Board of Directors will be divided into three classes serving
staggered terms of three years each, except that the initial terms of the
initial directors of the Combined Company will expire at the 1997, 1998 or 1999
annual meeting of stockholders of the Combined Company depending upon the
particular class in which each such director is placed with respect to the
initial Board of Directors. Pursuant to the Certificate of Incorporation and
the Bylaws, the terms of office of one class of directors, expires each year and
at each annual meeting the successors of the class whose term is expiring in
that year are elected to hold office for a term of three years and until their
successors are elected and have qualified. Directors of the Combined Company
will only be removable for cause.
Board Committees
The Bylaws will provide that the Board of Directors may establish
directorate committees. It is presently contemplated that the Board of
Directors will establish three committees: an Audit Committee, a Compensation
and Nominating Committee and an Executive Committee. The currently expected
functions of Washington's board committees are described below. However, the
Board of Directors will have the authority to modify the functions to be
performed by any such committee, to terminate any such committee and to
designate additional committees, as it deems appropriate after consideration of
applicable legal, stock exchange and other requirements.
Audit Committee. The functions performed by the Audit Committee will
include recommending to the Board of Directors independent auditors to serve the
Combined Company, reviewing with the independent auditors and management the
scope and results of the audit, assuring that the independent auditors act
independently, reviewing and approving any substantial change in the Combined
Company's accounting policies and practices, reviewing with management and the
independent auditors the adequacy of the Combined Company's system of internal
controls, reviewing the Combined Company's annual report, and reviewing the non-
audit professional services provided by the independent auditors and the range
of audit and non-audit fees.
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<PAGE>
Compensation and Nominating Committee. The functions performed by the
Compensation and Nominating Committee will include reviewing and approving
management's recommendations as to executive compensation, reviewing, approving
and administering the Combined Company's executive compensation and stock option
plans, and recommending to the Board of Directors nominees for election as
directors of the Combined Company, including any nominees recommended by
stockholders. Certain procedures relating to the nomination of directors are
described below.
Executive Committee. The functions performed by the Executive Committee
will be to exercise such powers as the full Board of Directors may delegate to
the Executive Committee from time to time. Under DGCL, the Board of Directors
may delegate to the Executive Committee all powers and authority of the Board of
Directors in the management of the business and affairs of the Combined Company,
subject to specified exceptions. It is anticipated that Mr. Miller will serve
as chairman of the Executive Committee.
Director Nomination Procedures
The nominations of persons for election to the Board of Directors, other
than those made by or at the direction of the Board of Directors, may be made at
an annual meeting of stockholders only if pursuant to a timely notice delivered
to the Secretary of the Combined Company. The Bylaws will require that, to be
timely, a stockholder's notice must be delivered to and received at the Combined
Company's principal executive offices not less than 50, nor more than 75, days
prior to the annual meeting of stockholders, unless less than 65 days' notice or
prior public disclosure of the date of the annual meeting is given or made to
stockholders, in which case notice of a nomination must be received not later
than the close of business on the 15th day following the day on which notice of
the date of the annual meeting was mailed to stockholders or public disclosure
of the annual meeting date was made, whichever first occurs. In addition, the
Bylaws will require that the notice of nomination set forth certain specified
information.
Director Stock Options and Compensation
It is currently anticipated that the existing director compensation and
benefit arrangements of WCGI initially will be maintained by the Combined
Company. However, the Combined Company may reexamine such compensation and
benefit arrangements at any time after the Effective Time, and may choose to
modify, amend or replace any such arrangements as it deems appropriate. Under
WCGI's existing director compensation and benefit arrangements, directors who
are not also officers or employees of WCGI ("Independent Directors") are paid an
annual retainer of $12,000. Committee chairmen are paid an additional $1,000
annually. Under the 1994 Stock Option Plan for Officers, Directors and Key
Employees, as amended (the "1994 Plan"), Independent Directors may elect to
forego cash payment of all or a portion of their director fees and receive stock
option grants instead. Under the 1994 Plan, such options would be granted six
months after the date of election and would vest one year after the date of
grant. During WCGI's fiscal 1996, each of Messrs. Hunt, Payne and Reid have
elected to receive options to purchase 7,385 shares in lieu of the annual
retainer of $12,000, and each of Messrs. Batchelder, Judd and Wallace, who serve
as committee chairmen, have elected to receive options to purchase 8,000 shares
in lieu of $13,000. Such options would have an exercise price of $6.50 per
share (which is 80% of the closing price of WCGI Common Stock on the date of the
election). WCGI's Board of Directors intends to amend the terms of the 1994
Plan to provide that (i) Messrs. Hunt, Reid and Wallace will receive such
options at the earlier of the Effective Time or six months after the date of
their election to receive such options and (ii) at the Effective Time such
options and all other outstanding options granted to such persons under the 1994
Plan will be fully vested and exercisable until July 1, 1997. In addition, at
the Effective Time, Mr. Smith will be paid $12,000 in respect of his services as
a director of WCGI during WCGI's 1996 fiscal year. Adoption and approval of the
Merger Proposals by the holders of WCGI Common Stock will be deemed to
constitute their ratification of the amendments to the 1994 Plan as described
herein.
Executive Officers
Following the consummation of the Merger, it is anticipated that the
following persons will serve as executive officers of the Combined Company from
and after the Effective Date. However, the Board of Directors will have the
authority to elect or appoint additional executive officers, and, subject to the
terms of any applicable
67
<PAGE>
employment agreement, to remove any executive officers, as it deems appropriate.
A final decision as to the executive officers of the Combined Company, will be
made by the Board of Directors of the Combined Company.
<TABLE>
<CAPTION>
Name Age Positions with the Combined Company
- ---- --- -----------------------------------
<S> <C> <C>
Robert A. Tinstman 49 President and Chief Executive Officer
Stephen G. Hanks 45 Executive Vice President, Chief Legal Officer
and Secretary
Denis M. Slavich 55 Executive Vice President and Chief Financial
Officer
Darrol N. Groven 52 Senior Vice President; President -- Heavy
Group Civil Construction
Thomas H. Zarges 48 Senior Vice President -- Operations and
& Construction Group President -- Engineering
C. Stephen Allred 54 President -- Environmental and Government
Group
S.Y. Chi 57 President -- Mining Group
</TABLE>
For certain biographical information regarding Mr. Tinstman, see "--Board
of Directors."
During the past five years, Mr. Hanks has served MK in various executive
and management capacities. He currently serves as Executive Vice President,
Chief Legal Officer and Secretary of MK.
Mr. Slavich was previously vice president, marketing of Fluor Daniel,
Inc. Prior to his association with Fluor Daniel, Inc., he served as corporate
director, senior vice president and manager of international power projects and
chief financial officer of Bechtel Group, Inc., where he was employed for 20
years. Mr. Slavich has been with MK in his present position since 1995.
Mr. Groven was appointed President of Kasler effective November 23, 1994.
From April 13, 1994 through November 23, 1994, Mr. Groven served as Executive
Vice President and Chief Operating Officer of WCGI. Prior to April 13, 1994, he
was President and sole director of WCG Holdings.
Mr. Zarges served MK as president of the engineering and construction
group since his employment with MK in August 1991. Prior to his employment with
MK, Mr. Zarges served as vice president of Business Development and Support
Services of United Engineers & Constructors, a subsidiary of Raytheon
Corporation.
During the past five years, Mr. Allred has served MK's Environmental and
Government Group in various executive or management capacities. He currently
serves as President, Environmental Group of MK.
During the past five years, Mr. Chi has served MK's Mining Group in
various executive and management capacities. He currently serves as President,
Mining Group of MK.
Executive Compensation
With respect to the executive officer employment, compensation and
benefit arrangements of the Combined Company, it is currently anticipated that
(i) Washington's and MK's existing employment contracts with their respective
executive officers who will be appointed as executive officers of the Combined
Company will be assumed by the Combined Company, with the Combined Company to be
the successor in interest to Washington or MK, as the case may be, and to be
obligated under, such contracts as of the Effective Time, and (ii) all other
existing Washington executive officer compensation and benefit arrangements will
initially be maintained by the Combined Company for the benefit of the executive
officers of the Combined Company; provided, however, that the Combined Company
may reexamine such compensation and benefit arrangements at any time after the
Effective Time, and may
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<PAGE>
choose to modify, amend, or replace any such arrangements as it deems
appropriate, in each case with the consent of the affected party, if required.
For information regarding the existing executive officer employment,
compensation and benefit arrangements of Washington, see the 1996 Proxy
Statement at pages 6 through 13. For information regarding the existing
executive officer employment, compensation and benefit arrangements of MK, see
MK's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 at
pages III-3 through III-13, included in Exhibit 7 hereto and the MK's Quarterly
Report on Form 10-Q for the three months ended March 31, 1996 at pages I-15
through I-16, included in Exhibit 6 attached hereto.
In June 1996, the MK Long-Term Incentive Plan for Mining Group Executives
was amended in order to prevent the Merger or the Plan from constituting a
change in control event which would otherwise have caused an acceleration of the
time of payment of a bonus to Mr. Tinstman under such plan. In connection with
such amendment, the Executive Compensation and Nominating Committee of MK's
board of directors has determined that Mr. Tinstman be vested in his accrued
benefit under such plan, that such benefit is $1,618,000 and is not subject to
offset, that no further benefit shall accrue under such plan and that such
amount shall be paid in accordance with such plan, as amended (meaning in
December 1997 or earlier upon the occurrence of certain specified events other
than the Effective Date). For a description of certain financial arrangements
between Mr. Tinstman and MK (which is expected to be assumed by the Combined
Company following the Effective Time), see "Certain Transactions."
The 1994 Plan provides that the Compensation Committee of WCGI's Board
of Directors may, in its sole discretion and subject to certain limitations,
determine that options granted thereunder will become exercisable,
notwithstanding that such options may not have become fully exercisable at such
time. Although the Compensation Committee has not made any determination at
this time, it is presently anticipated that the Compensation Committee may
provide that, upon the Effective Time, options held by WCGI executive officers
who will not retain their positions with the Combined Company will become fully
exercisable.
It is anticipated that in connection with the Merger, John Wimberly,
President and Chief Executive Officer of WCGI, will resign and thereby be
entitled to receive certain benefits under his employment agreement with WCGI,
including the payment of two years' salary ($300,000 per year) and two years'
bonus ($100,000 per year). In addition, pursuant to the agreement, Mr. Wimberly
is entitled to receive stock options to purchase 50,000 shares of WCGI Common
Stock on each of September 30, 1996 and September 30, 1997. Pursuant to the
agreement, upon Mr. Wimberly's resignation, WCGI will grant him such options, to
the extent they have not been so granted. Such options, as well as all of Mr.
Wimberly's other outstanding options (500,000 shares at $5.25 per share and
50,000 shares at $6.125 per share), will become fully vested and will be
exercisable for one year following the date of his resignation.
Limitation of Liability; Indemnification of Directors and Officers
Certificate of Incorporation and Bylaw Provisions. The Certificate of
Incorporation will limit personal liability of the Combined Company's directors
to the fullest extent permitted by DGCL. Section 102(b)(7) of DGCL enables a
Delaware corporation to include in its certificate of incorporation a provision
eliminating or limiting the personal liability of a director to the corporation
or its stockholders for monetary damages for breaches of fiduciary duties as a
director, but no such provision may eliminate or limit the liability of a
director (i) for any breach of the duty of loyalty, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) under Section 174 of DGCL (dealing with illegal redemptions and
stock repurchases), or (iv) for any transaction from which the director derived
an improper personal benefit.
The Certificate of Incorporation will also provide, as do the charters of
many other publicly held companies, for the mandatory indemnification of
directors and officers to the full extent authorized or permitted by law.
Section 145 of DGCL provides that a corporation (a) must indemnify its
directors, officers, employees and agents for all expenses of litigation when
they are successful on the merits or otherwise, (b) may indemnify such persons
for the expenses, judgments, fines and amounts paid in settlement of litigation
(other than a derivative suit) even if they are not successful on the merits, if
they acted in good faith and in a manner they reasonably believed to be in or
not opposed to the best interests of the corporation (and, in the case of
criminal proceedings, have no reason to believe
69
<PAGE>
that their conduct was unlawful), and (c) may indemnify such persons for the
expenses of a derivative suit even if they are not successful on the merits if
they acted in good faith and in a manner they reasonably believed to be in or
not opposed to the best interests of the corporation, provided that no such
indemnification may be made on behalf of a person adjudged to be liable in a
derivative suit, unless the Delaware Chancery Court determines that, despite
such adjudication but in view of all of the circumstances, such person is
entitled to indemnification. In any such case, indemnification may be made only
upon determination by (i) a majority of the disinterested directors, (ii)
independent legal counsel, or (iii) the stockholders that indemnification is
proper because the applicable standard of conduct was met. The advancement of
litigation expenses to a director or officer is also authorized upon receipt by
the board of directors of an undertaking to repay such amounts if it is
ultimately determined that such person is not entitled to be indemnified for
them. The Certificate of Incorporation will authorize the Combined Company to
enter into indemnification agreements with its officers and directors.
The Bylaws will also mandate indemnification of directors
and officers to the fullest extent permitted by DGCL.
Indemnification Agreements. The Certificate of Incorporation will
authorize the Combined Company to enter into indemnification agreements with the
directors and executive officers of the Combined Company. It is anticipated
that Washington's and MK's existing indemnification agreements with their
respective current directors and executive officers who will be directors and
executive officers of the Combined Company will remain in effect, with the
Combined Company to be the successor to Washington or MK, as the case may be,
under, and to be obligated under, such indemnification agreements as of the
Effective Time; provided, however, that the Combined Company may reexamine the
terms of such indemnification agreements at any time after the Effective Time,
and may choose to modify, amend, or replace any such indemnification agreements
as it deems appropriate, in each such case with the consent of the affected
party, if required. In addition, the Combined Company may enter into similar
agreements with any director elected or appointed in the future or the executive
officers designated by the Board of Directors at the time of their election,
appointment or designation. To the extent any indemnification obligation of MK
existing as of the date on which MK files its petition for relief commencing the
Chapter 11 Case to any current or former officer or director of MK constitutes
an executory contract, MK shall be deemed to have assumed such executory
contract as of the Effective Time pursuant to Section 365 of the Bankruptcy
Code.
Existing Washington Indemnification Agreements
----------------------------------------------
Indemnification in Third-Party Proceedings. Under the existing
------------------------------------------
Washington indemnification agreements (the "Washington Indemnification
Agreements"), Washington is obligated to indemnify directors and officers
against all damages, judgments, fines, penalties, settlements and charges,
costs, expenses of investigation and expenses of defense of legal actions,
suits, proceedings or claims and appeals therefrom, and expenses of appeal,
attachment or similar bonds (collectively, "Expenses") actually and reasonably
incurred in connection with the defense or settlement of judicial or
administrative actions, suits, proceedings or appeals, whether threatened,
pending or completed (collectively, "Proceedings"), incurred by reason of the
fact that such officer or director is or was an officer or director of
Washington or was serving at the request of Washington, provided only that the
director or officer acted in good faith and in a manner that he or she
reasonably believed to be in or not opposed to the best interests of Washington.
In addition, if the director or officer is involved in a criminal proceeding,
under the Washington Indemnification Agreements, Washington is obligated to
indemnify the director or officer if he or she had no reasonable cause to
believe that the conduct was unlawful. Under the Washington Indemnification
Agreements, a settlement or judgment or plea of nolo contendere will not, by
itself, create a presumption that the director or officer is not entitled to be
indemnified. No indemnification is permitted under the Washington
Indemnification Agreements for any acts or omissions or transactions from which
directors may not be relieved of liability under DGCL as referred to above.
Derivative Suits. Under the Washington Indemnification
----------------
Agreements, Washington is obligated to indemnify directors and officers against
Expenses actually and reasonably incurred in connection with the defense or
settlement of any Proceeding brought in the name or the right of Washington and
arising from the director's or officer's service to Washington. No
indemnification is provided under such agreements where the director or officer
is ultimately held liable to Washington unless a court should so determine, nor
will indemnification be made under such agreements for any action not taken in
good faith and in a manner reasonably believed to be in
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<PAGE>
or not opposed to the best interests of Washington and its stockholders.
Furthermore, no indemnification is permitted under such agreements for any acts
or omissions or transactions from which directors may not be relieved of
liability under DGCL.
Procedure for Indemnification. Under the Washington
-----------------------------
Indemnification Agreements, Washington is obligated to indemnify any director or
officer within 30 days after receipt of a written request therefor unless it is
determined by a majority vote of a quorum of disinterested directors or by
independent counsel in a written legal opinion that the actions of the director
or officer did not meet the relevant standard for indemnification. If such
disinterested directors or independent counsel determines that the requisite
standard of conduct has not been met in a particular instance, the director or
officer seeking indemnification may petition a court of competent jurisdiction
for an independent determination. In any such action, Washington will have the
burden of proving that indemnification is not appropriate. The failure of the
disinterested directors to make a determination that the director or officer
failed to meet the applicable standard of conduct would not be a defense to such
action nor create a presumption that the director or officer did not meet the
applicable standard of conduct. The indemnitee's Expenses incurred in connection
with successfully establishing his or her right to indemnification or advances
in any such Proceeding will also be indemnified by Washington. The indemnitee's
right to indemnification under the Washington Indemnification Agreements will
continue even though he or she may have ceased to be a director or officer and
will inure to the benefit of the indemnitee's heirs and personal
representatives.
Advance of Expenses. Under the Washington Indemnification
-------------------
Agreements, Washington is obligated to advance to any director or officer
expenses of the defense of any proceeding if the director or officer undertakes
to repay any amount advanced in the event it is determined that he or she is not
entitled to indemnification and certifies to Washington that the director or
officer has met the relevant standards for indemnification.
Partial Indemnity. If the director or officer is not entitled to
-----------------
indemnification of all expenses but is entitled to indemnification of some
expenses, under the Washington Indemnification Agreements, Washington is
obligated to indemnify the director or officer for that portion of the expenses
to which he or she is otherwise entitled to indemnification.
Existing MK Indemnification Agreements
--------------------------------------
Indemnification in Third-Party Proceedings and Derivative Suits.
---------------------------------------------------------------
Under the existing MK indemnification agreements (the "MK Indemnification
Agreements"), MK is obligated to indemnify a director or officer of MK (the
"Indemnitee") if the Indemnitee is a party or is threatened to be made a party
to any pending, threatened or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than a derivative suit),
by reason of the fact that the Indemnitee is or was a director or officer of MK,
or is or was serving at the request of MK in certain capacities with another
entity, against any and all costs, charges and expenses, including without
limitation attorneys' and others' fees and expenses, judgments, fines and
amounts paid in settlement actually and reasonably incurred by the Indemnitee in
connection with the defense or settlement of such proceeding if the Indemnitee
acted in good faith and in a manner which the Indemnitee reasonably believed to
be in or not opposed to the best interests of MK and with respect to any
criminal action or proceeding, had no reasonable cause to believe such
Indemnitee's conduct was unlawful. MK must also indemnify under the MK
Indemnification Agreements for such expenses in defense or settlement of a
derivative suit, but only to the extent that the Court of Chancery determines
the Indemnitee is fairly and reasonably entitled to in view of all the
circumstances. The MK Indemnification Agreements mandate indemnification for
expenses incurred to the extent that an Indemnitee has been successful on the
merits or otherwise; all other indemnification mentioned in this paragraph is
made based on a determination by the MK Board of Directors that the Indemnitee
is entitled to indemnification. An Indemnitee may submit, but is not required
to, an Indemnification Statement averring that the Indemnitee is entitled to
indemnification creating a presumption in favor of indemnification.
Additionally, the MK Indemnification Agreements provide for indemnification
for Indemnitees for amounts they are legally obligated to pay arising out of
claims made for any act, failure to act or neglect or breach of duty, including
any actual or alleged error, misstatement or misleading statement.
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Advancement of Expenses. The MK Indemnification Agreements also
-----------------------
authorize advancement of expenses incurred by the Indemnitee before the final
disposition of an action if the Indemnitee submits to the MK Board of Directors
an undertaking averring that (i) the Indemnitee has incurred or will incur
actual expenses in defending a civil or criminal action, suit, proceeding or
claim and (ii) the Indemnitee undertakes to repay such amount if it is
ultimately determined that he is not entitled to be indemnified by MK under an
MK Indemnification Agreement or otherwise.
Directors' and Officers' Insurance
Section 145 of DGCL permits a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against any liability asserted against
him and incurred by him in any such capacity, or arising out of his status as
such, whether or not the corporation would have the power to indemnify him
against such liability. The Certificate of Incorporation will authorize the
Combined Company to purchase and maintain insurance protecting its officers and
directors as permitted by DGCL. However, the Combined Company and the directors
or officers cannot be sure that such insurance coverage will continue to be
available in the future or, if available, that it will not be unreasonably
expensive to purchase and maintain.
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CERTAIN TRANSACTIONS
As part of its ongoing business and operations, Washington and its
subsidiaries regularly engage in transactions with Washington Corporations
("WC") and other entities owned by Dennis R. Washington (the "Washington
Entities"). Washington believes that these transactions are generally on terms
comparable to those available to or offered by unaffiliated third parties and
that Washington and its subsidiaries could obtain such services from third
parties or provide them internally without significantly affecting its
operations if WC were unable to provide such service. It is assumed that the
Combined Company will continue to engage in similar transactions with the
Washington Entities.
WC has historically provided Washington and its subsidiaries various
administrative and support services, including (i) cash management, equipment
and property management, legal, tax, accounting, and benefits administration
services, (ii) aircraft usage, (iii) computer, communications and other
management information systems and data processing, and (iv) office, shop and
storage space in its office complex in Missoula, Montana. For fiscal 1995, the
amounts allocated to Washington and its subsidiaries for administrative
services, aircraft services, data processing and facilities leases were
$164,000, $330,000, $223,000, and $241,000, respectively. It is anticipated
that WC will continue to provide such administrative and support services to the
Combined Company after the Effective Date and that, as a result of the increased
size and geographic dispersion of the Combined Company's operations, the volume
of such services used by the Combined Company, and accordingly the cost to the
Combined Company thereof, will increase relative to past years. WCG Holdings
regularly purchases equipment, parts and services from Modern Machinery Co.,
Inc. ("MMCI"), a wholly owned subsidiary of WC. In fiscal 1995, WCG Holdings
purchased $4,966,000 of goods and services from MMCI. MMCI purchases used or
surplus equipment from WCG Holdings for resale to third parties. In fiscal
1995, MMCI purchased $183,000 of used parts from WCG Holdings. WC has provided
financial and other advisory services to Washington with respect to the Merger,
including among other things, assisting with Washington's due diligence review,
negotiating with MK and its creditors, drafting and reviewing documents and
providing financial advice. Washington has agreed, upon consummation of the
Merger, to pay WC $485,000 in cash. Washington also has agreed to reimburse WC
for its expenses incurred in connection with its engagement and to indemnify WC
in connection therewith against certain liabilities and expenses. In the event
the Merger is not consummated but Washington receives a fee from MK pursuant to
the Merger Agreement as described under "The Merger Agreement--Termination--
Termination Payments" (a "Break-Up Fee"), Washington has agreed to pay WC the
greater of (i) $242,000 or (ii) 6/225ths of such Break-Up Fee.
WCG Holdings regularly employs Westran, Inc. ("Westran"), a wholly owned
subsidiary of WC, which provides heavy highway transportation services
throughout the United States, to mobilize or relocate its equipment. Westran
submits competitive bids to provide these services. In addition, Westran
provides subcontract hauling for WCG Holdings on a project in Grand Junction,
Colorado. Services purchased from Westran by WCG Holdings in fiscal 1995
totaled $660,000.
Equipco, Inc. ("Equipco"), a wholly owned subsidiary of WC, provides repair
services for equipment owned by WCG Holdings. Services are provided at cost,
and no warranty is made on work performed. WCG Holdings pays a proportionate
share of Equipco's fixed costs in return for Equipco's maintaining its repair
facility conveniently located and readily available for WCG Holdings's use.
Services and products provided by Equipco to WCG Holdings in fiscal 1995 totaled
$1,799,000.
The Dennis R. Washington Foundation is a charitable organization as defined
under Section 501(c)(3) of the Code. Through this entity, WCG Holdings has made
donations to a variety of tax-exempt charities and organizations. Since 1987,
WCG Holdings and other affiliates of WC have each contributed 1% of pre-tax
earnings to establish an endowment fund from whose earnings donations can be
made. The total amount contributed by WCG Holdings in fiscal 1995 was $144,000.
Pro Builders Corp., a subsidiary of Washington, has contracts in progress
with Gateway Limited Partnership a real estate entity in which Dennis R.
Washington has an indirect ownership interest. In fiscal 1995, revenues from
this project totaled $848,000.
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On July 8, 1993, WCG Holdings and WC entered into a Tax Indemnification
Agreement (the "Tax Indemnification Agreement") with respect to certain tax
liabilities. Following the combination of Kasler and WCG Holdings as
subsidiaries of Washington on July 12, 1993 (the "Combination"), WCG Holdings no
longer participates in WC' consolidated income tax returns. The Tax
Indemnification Agreement clarifies responsibilities for the payment of taxes
and the resolution of disputes regarding taxes following the Combination. WCG
Holdings is subject to possible liability for any unpaid federal income tax
liabilities of WC' consolidated group during any part of such taxable year in
which WCG Holdings was a member of WC's consolidated group. Pursuant to the Tax
Indemnification Agreement, Washington Corporation has agreed to indemnify WCG
Holdings for all income tax liabilities attributable to any member of WC'
consolidated group other than WCG Holdings for any taxable year.
On July 8, 1993, WCG Holdings and WC entered into an Environmental
Indemnification Agreement (the "Environmental Indemnification Agreement") with
respect to possible environmental liabilities which may arise following the
Combination. The Environmental Indemnification Agreement provides that WC and
WCG Holdings each will indemnify the other with respect to environmental
liability that may arise from the operation of the businesses of WC and its
affiliates, on the one hand, and WCG Holdings, on the other.
On February 17, 1995 Washington issued a non-interest bearing Demand
Promissory Note in the amount of $250,000 to Darrol N. Groven, President of
Kasler, a subsidiary of WCGI, and his wife which is secured by their residence.
This note matures on February 17, 1997. The loan was made in connection with
Mr. Groven's appointment as President of Kasler and his relocation to Kasler's
headquarters in Southern California at the request of Washington. During fiscal
1995, the largest aggregate amount of indebtedness outstanding from Mr. Groven
was $250,000, and Mr. Groven remained indebted to the company in the amount of
$113,260 as of June 30, 1996.
On August 14, 1995 Washington issued a non-interest bearing Promissory
Installment Note in the amount of $80,000 to Gregory J. Rutherford, Chief
Financial Officer of WCGI, and his wife which is secured by their residence.
The remaining balances due are payable in full on August 14, 2000, after
deduction for required yearly payments of $2,667 or 50% of Mr. Rutherford's
bonuses during its term. The loan was made in connection with Mr. Rutherford's
appointment as Vice President and Chief Financial Officer of Washington and his
relocation to Washington's headquarters in Southern California at the request of
Washington. During fiscal 1995, the largest aggregate amount of indebtedness
outstanding from Mr. Rutherford was $80,000, and Mr. Rutherford remained
indebted to Washington in the amount $72,825 as of June 30, 1996.
Terry W. Payne, a director of Washington, is the Chairman and owner of
Terry Payne & Co., which provides insurance and bonding brokerage services for
Washington and its subsidiaries. Premiums paid to insurance and bonding
companies by Washington for group life and disability, workers' compensation,
business insurance and surety bonds with respect to insurance arranged through
Terry Payne & Co., Inc. amounted to $3,900,667 in fiscal 1995. Since January 1,
1995, Mr. Payne's firm has been insurance broker of record for Washington and
its subsidiaries.
David H. Batchelder, a director of Washington, is President of Batchelder &
Partners, Inc. ("BPI") which entered into a fee agreement with Washington to act
as its advisor with respect to the possible acquisition of a partnership
interest in the San Diego Expressway Limited Partnership. The maximum amount
payable under such fee agreement is $100,000 plus reasonable out-of-pocket third
party expenses. During fiscal 1995, Washington paid a total of $25,000 to BPI
under the terms of this agreement. Washington has engaged BPI to act as a
financial advisor to Washington with respect to the Merger. Washington has
agreed, upon consummation of the Merger, to pay BPI $800,000 in cash and issue
BPI warrants to purchase 110,500 shares of WCGI Common Stock. The warrants
would be exercisable for a period of five years at an exercise price of $12.00
per share. Washington also has agreed to provide certain piggyback registration
rights with respect to the shares issuable upon exercise of the warrants, to
reimburse BPI for its expenses incurred in connection with its engagement and to
indemnify BPI in connection therewith against certain liabilities and expenses.
In the event the Merger is not consummated but Washington receives a Break-Up
Fee from MK pursuant to the Merger Agreement, Washington has agreed to pay BPI
$675,000 in cash.
Robert A. Tinstman, a director and executive officer of MK, previously
entered into promissory notes with MK in connection with the exercise of a
portion of his options to purchase MK Common Stock. Pursuant to such
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notes, payment of the exercise price for each purchase is deferred over 20
quarters with interest on the principal balance of 6% per annum. The notes are
collateralized by the shares of MK Common Stock which were purchased by Mr.
Tinstman upon each exercise. In 1993, the largest aggregate amount of
indebtedness owed by Mr. Tinstman to MK was $62,929 with a current balance owing
at April 5, 1996 of $8,841. See "The Merger--Operations of the Combined Company"
for information on a Merger-related modification of a benefit plan in which Mr.
Tinstman participates.
Washington has engaged Schroder to act as a financial advisor to Washington
with respect to the Merger. Washington has agreed, upon consummation of the
Merger, to pay Schroder $560,000 in cash and issue Schroder warrants to purchase
77,348 shares of WCGI Common Stock. The warrants would be exercisable for a
period of five years at an exercise price of $12.00 per share. Washington also
has agreed to provide certain piggyback registration rights with respect to the
shares issuable upon exercise of the warrants, to reimburse Schroder for its
expenses incurred in connection with its engagement and to indemnify Schroder in
connection therewith against certain liabilities and expenses. In the event the
Merger is not consummated but Washington receives a Break-Up Fee from MK
pursuant to the Merger Agreement, Washington has agreed to pay Schroder the
greater of (i) $280,000 or (ii) 7/225ths of such Break-Up Fee.
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DESCRIPTION OF WCGI CAPITAL STOCK
The following summary is a description of certain provisions of the WCGI's
Certificate of Incorporation and Bylaws that will become effective upon the
approval and adoption of the Merger Proposals by the stockholders of WCGI. Such
summary does not purport to be complete and is subject to, and is qualified in
its entirety by, all of the provisions of the Certificate of Incorporation and
Bylaws, including the definitions therein of certain terms. Copies of the
Certificate of Incorporation and Bylaws are attached hereto as Exhibits 4 and 5,
respectively.
Upon consummation of the Merger and the Plan, the authorized capital stock
of WCGI will consist of 100,000,000 shares of WCGI Common Stock and 10,000,000
shares of WCGI Preferred Stock. See "Proposal to Amend WCGI's Certificate of
Incorporation."
Common Stock
As of the Record Date, 29,481,184 shares of WCGI Common Stock were issued
and outstanding. All issued and outstanding shares of WCGI Common Stock are
validly issued, fully paid and nonassessable.
Holders of WCGI Common Stock are entitled to such dividends as may be
declared from time to time by the WCGI Board of Directors out of funds legally
available therefor. WCGI has not declared stockholder dividends since 1994.
Under certain conditions, WCGI's credit agreement restricts WCGI's ability to
pay dividends. It is not anticipated that dividends will be paid at any time in
the foreseeable future with respect to WCGI Common Stock.
Holders of WCGI Common Stock have no preemptive, redemption, conversion or
sinking fund rights. Holders of WCGI Common Stock are entitled to one vote per
share on all matters submitted to a vote of holders of WCGI Common Stock and do
not have any cumulative voting rights. In the event of a liquidation,
dissolution or winding up of WCGI, the holders of WCGI Common Stock are entitled
to share equally and ratably in the assets of WCGI, if any, remaining after the
payment of all debts and liabilities of WCGI and the liquidation preference of
any outstanding WCGI Preferred Stock. As of the Record Date, there were
approximately 1,007 holders of record of WCGI Common Stock.
Preferred Stock
The WCGI Board of Directors is authorized to issue the WCGI Preferred Stock
in one or more series with such designations, powers, preferences and rights,
and qualifications, limitations or restrictions thereof. Upon consummation of
the Merger and the Plan, WCGI will issue 18,000 shares of Series A Preferred
Stock. Subject to the terms of Series A Preferred Stock and applicable law, the
remaining shares of undesignated WCGI Preferred Stock may be issued by WCGI in
one or more series, at any time or from time to time, with such designations,
powers, preferences and rights, and qualifications, limitations or restrictions
thereof, as the WCGI Board of Directors shall determine, all without further
action of the stockholders, including holders of Series A Preferred Stock;
provided, however, that holders of Series A Preferred Stock must consent to
certain actions as described below.
Dividend Rights. Holders of Series A Preferred Stock are not entitled to
receive any dividends that may be declared by WCGI.
Sinking Funds; Redemption. Subject to certain limitations, the Combined
Company must maintain a sinking fund into which it must deposit all refunds of
federal income tax and interest thereon associated with amended federal income
tax returns of MK and its consolidated subsidiaries for the calendar years 1982
through 1990 which were filed prior to January 1, 1996, which change MK's
election from deducting foreign taxes to claiming a credit for those taxes (the
"Foreign Tax Credit Refunds"); provided, however, that the cumulative total
amount deposited into the sinking fund shall not exceed $18,000,000.
On the fifteenth day of the month following the end of each calendar
quarter, WCGI will distribute to each holder of record of Series A Preferred
Stock as of the last day of such calendar quarter an amount per share equal to a
pro rata portion of (i) the total amount of Foreign Tax Credit Refunds deposited
into the sinking fund during the quarter, and (ii) all interest earned on such
total amount during the quarter. The distribution for the calendar quarter
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in which the cumulative total deposits to the sinking fund reaches $18,000,000
will be the final distribution with respect to the Series A Preferred Stock.
Upon this final distribution, all shares of Series A Preferred Stock will be
cancelled and no longer outstanding and will not have the status of shares of
Series A Preferred Stock, and all rights of the holders thereof as stockholders
of WCGI will cease.
If the Series A Preferred Stock has not been cancelled by the fifth
anniversary of the issuance of the Series A Preferred Stock, WCGI is obligated,
on the fifteenth day of the month following the fifth anniversary of the
issuance of the Series A Preferred Stock, to redeem all of the outstanding
shares of Series A Preferred Stock at a per share redemption price equal to the
greater of (i) $1.00, or (ii) a pro rata portion of the balance of the sinking
fund (including all interest earned thereon) as of the fifth anniversary of the
issuance of the Series A Preferred Stock.
Liquidation Preferences. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of WCGI, each holder of
outstanding shares of Series A Preferred Stock will be entitled to be paid out
of the assets of WCGI available for distribution to its stockholders, before any
payment is made or any assets distributed to the holders of WCGI Common Stock or
any other classes or series of stock ranking junior to Series A Preferred Stock,
an amount in cash per share of Series A Preferred Stock held equal to the
greater of (i) $1.00, or (ii) a pro rata portion of the remaining balance of the
sinking fund described above (including all interest earned thereon). If the
assets of WCGI are not sufficient to pay in full the liquidation payments
payable to the holders of outstanding shares of Series A Preferred Stock and
other class or series of stock ranking on a parity with Series A Preferred Stock
(the "Parity Securities"), then the holders of all such shares shall share
ratably in such distribution of assets in accordance with the amount which would
be payable on such distribution if the amounts to which the holders of
outstanding shares of Series A Preferred Stock and the holders of outstanding
shares of such Parity Securities are entitled were paid in full.
Voting Rights. Except as set forth hereinafter or as otherwise from time
to time may be required by law, the holders of Series A Preferred Stock vote
together with the holders of WCGI Common Stock as a single class on all matters
as to which the holders of WCGI Common Stock are entitled to vote generally.
Each share of Series A Preferred Stock is entitled to 1/100 of a vote.
The approval of at least two-thirds of the outstanding shares of Series A
Preferred Stock, voting as a class, is required to (i) reclassify all classes
and series of stock that are junior to Series A Preferred Stock, or (ii) amend,
repeal or change any provision of WCGI's Certificate of Incorporation in any
manner that would alter or change the rights, powers, preferences or privileges
of shares of Series A Preferred Stock so as to affect them adversely, including,
without limitation, changing the voting percentage required for approval by the
holders of Series A Preferred Stock of the foregoing matters.
Possible Increase in Number of Shares of Series A Preferred Stock. The
Plan provides that under certain circumstances MK may elect to make all
distributions that would otherwise be made to the Liquidating Trust directly to
the persons for whose benefit they would otherwise have been held in the
Liquidating Trust. In that event, the number of shares of Series A Preferred
Stock authorized under the Certificate of Incorporation would be increased to
1,800,000, the redemption price per share of Series A Preferred Stock would be
equal to the greater of $0.01 or a pro rata share of any undistributed funds in
a sinking fund maintained by the Combined Company for the purpose of making
distributions to the holders of, or redeeming, the Series A Preferred Stock and
each share of Series A Preferred Stock would have 1/10,000 of a vote.
Potential Anti-Takeover Effects
The voting provisions of WCGI Common Stock and Series A Preferred Stock and
the broad discretion conferred upon the Board of Directors with respect to the
issuance of Preferred Stock could substantially impede the ability of one or
more stockholders (acting in concert) to acquire sufficient influence over the
election of directors and other matters to effect a change in control or
management of WCGI, and the Board of Directors' ability to issue Preferred Stock
could also be utilized to change the economic and control structure of the
Company. As a result, such provisions, together with certain other provisions
of WCGI's Bylaws, may be deemed to have an anti-takeover effect and may delay,
defer or prevent a tender offer or takeover attempt that a particular
stockholder might consider
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in such stockholder's best interest, including attempts that might result in a
premium over the market price for WCGI Common Stock held by such stockholder.
See "Proposal to Amend WCGI's Certificate of Incorporation."
Delaware General Corporation Law Section 203
Section 203 of the DGCL provides that, subject to certain exceptions
specified therein, a corporation will not engage in any business combination
with any "interested stockholder" for a three year period following the date
that such stockholder becomes an interested stockholder unless: (i) prior to
such date, the board of directors of the corporation approved either the
business combination or the transaction which resulted in the stockholder
becoming an interested stockholder; (ii) upon consummation of the transaction
which resulted in the stockholder becoming an interested stockholder, the
interested stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced (excluding stock held by
directors who are also officers and shares subject to employee stock purchase
plans in which employee participants do not have the right to determine
confidentially whether plan shares will be tendered in a tender or exchange
offer); or (iii) on or subsequent to such date, the business combination is
approved by the board of directors of the corporation and by the affirmative
vote at an annual meeting, and not by written consent, of at least 66-2/3% of
the outstanding voting stock which is not owned by the interested stockholder.
Except as specified in Section 203 of the DGCL, an interested stockholder is
defined to include (a) any person that is the owner of 15% or more of the
outstanding voting stock of the corporation or is an affiliate or associate of
the corporation and was the owner of 15% or more of the outstanding voting stock
of the corporation, at any time within three years immediately prior to the
relevant date and (b) the affiliates and associates of any such person.
Under certain circumstances, Section 203 of the DGCL may make it more
difficult for a person who would be an "interested stockholder" to effect
various business combinations with a corporation for a three*-year period,
although the corporation's certificate of incorporation or stockholders may
elect to exclude a corporation from the restrictions imposed thereunder. WCGI's
Certificate of Incorporation does not exclude WCGI from the restrictions imposed
under Section 203 of the DGCL.
Section 203 of the DGCL would not prohibit a business combination between
Dennis R. Washington, who is expected to own approximately 38% of the
outstanding WCGI Common Stock immediately following the Merger, and the Combined
Company because the transaction which resulted in his becoming an interested
stockholder of Washington was approved by Washington's Board of Directors.
Similarly, such Section 203 may not prohibit a business combination between the
Combined Company and any person who becomes the beneficial owner of 15% or more
of the outstanding WCGI Common Stock pursuant to the Plan.
INDEPENDENT AUDITORS
Representatives of KPMG Peat Marwick LLP are expected to be present at the
Special Meeting and will be given the opportunity to make statements if they so
desire. It is expected that they will be available to respond to appropriate
questions from the stockholders at the Special Meeting.
DEADLINE FOR SUBMISSION OF STOCKHOLDER PROPOSALS
FOR THE 1997 ANNUAL MEETING
The proxy rules adopted by the Commission provide that certain stockholder
proposals must be included in the proxy statement for WCGI's annual meetings of
stockholders. A proposal to be presented at the 1997 annual meeting must be
received at WCGI's principal executive offices no later than October 27, 1996 in
order to be considered for inclusion in the proxy materials to be disseminated
by the Board of Directors for such annual meeting. To be eligible for inclusion
in such proxy materials, such proposals must conform to the requirements set
forth in Regulation 14A under the Exchange Act, as well as in WCGI's Bylaws.
WCGI's Bylaws provide that for business to be brought before an annual
meeting by a stockholder, the stockholder must give notice thereof in writing to
the Secretary of WCGI not less than 50 days nor more than 75
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days prior to such annual meeting; provided, however, that in the event that
less than 65 days' notice or prior public disclosure of the date of such annual
meeting is given or made to stockholders, notice by a stockholder must be so
received not later than the close of business on the 15th day following the day
on which such notice of the date of the annual meeting was mailed or such public
disclosure was made, whichever first occurs. A stockholder's notice to the
Secretary shall set forth, among other things, (i) a brief description of the
business desired to be brought before the annual meeting and the reasons for
conducting such business at the annual meeting, (ii) the name and record address
of the stockholder proposing such business, (iii) the class, series and number
of shares of WCGI Common Stock which are beneficially owned by the stockholder,
and (iv) any material interest of the stockholder in such business.
If the Merger is consummated, all references to WCGI in this section shall
mean the Combined Company.
OTHER MATTERS
As of the date of this Proxy Statement, the Board of Directors of WCGI
knows of no other matters which may be presented for consideration at the
Special Meeting. However, if any other matter is presented properly for
consideration and action at the Special Meeting, or any adjournment or
postponement thereof, it is intended that the proxies will be voted with respect
thereto in accordance with the best judgment and in the discretion of the proxy
holders.
By Order of the Board of Directors
WASHINGTON CONSTRUCTION GROUP, INC.
WALTER J. ORZE
Secretary
Highland, California
August __, 1996
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APPENDIX A
THE COMBINED COMPANY PROJECTIONS
The following unaudited projected condensed consolidated financial
statements of the Combined Company (the "Combined Company Projections") were
prepared by Washington and MK, based upon, among other things, information
provided by Washington with respect to the projected future financial condition
and results of operations of the Washington on a stand-alone basis and
information provided by MK with respect to the projected future financial
condition and results of operations of MK on a stand-alone basis. The Combined
Company Projections were not prepared with a view toward compliance with
published guidelines of the AICPA, any regulatory or professional agency or
body, or generally accepted accounting principles. In addition, neither KPMG
Peat Marwick LLP, the independent accountants for Washington, nor Deloitte &
Touche LLP, the independent accountants for MK, have compiled or examined the
Combined Company Projections and, accordingly, do not express any opinion or any
other form of assurance with respect thereto. The Combined Company Projections
were prepared by Washington and MK for use in a Disclosure Statement prepared in
accordance with certain requirements under the Bankruptcy Code in connection
with the Plan and distributed to certain creditors of MK and holders of MK
Common Stock on July __, 1996. Accordingly, the Combined Company Projections
have been included in this Proxy Statement in the interests of full disclosure.
Neither Washington nor MK has independently verified the information provided by
the other and each of Washington and MK disclaims any responsibility for the
accuracy or reliability of the information provided by the other. References to
"Risk Factors" in this Combined Company Projections refers to the "Risk Factors"
set forth in the Washington's Proxy Statement in connection with the Special
Meeting to consider and vote upon the Merger Proposals. All capitalized terms
used herein not otherwise defined shall have the meaning ascribed to them in the
Proxy Statement.
The Combined Company Projections are based on estimates and
assumptions regarding future events that affect the projected future financial
condition, results of operations and cash flows of the Combined Company.
Sensitive estimates and assumptions include, among others, the ability of the
Combined Company to obtain new business, profit margins on existing and future
contracts, potential sales value of certain non-core assets and the realization
of cost savings and increased revenue from synergism from the Merger. Other
factors that could affect the Combined Company's future operations include
realizing certain contingent liabilities at amounts greater or less than related
reserves and the potential for the realizable value of certain assets to be more
or less than book value.
The Combined Company Projections assume the Plan and the Merger will
be implemented in accordance with their terms, and present the anticipated
effects of the consummation of the Plan and the Merger and various other factors
on the Combined Company's financial condition and results of operations
following the Effective Time. The assumptions and estimates underlying the
Combined Company Projections are inherently uncertain and are subject to a wide
variety of significant business, economic and competitive risks and
uncertainties that could cause actual results to differ materially from those
projected, including, among others, risks and uncertainties relating to: (i)
the ability of Washington and MK to achieve substantial improvements in their
respective results of operations; (ii) the potentially adverse effects that the
filing of the Chapter 11 Case could have on the MK's business relationships,
including relationships with governmental and private sector customers,
suppliers and employees; (iii) the ability of Washington and MK to effect the
transactions contemplated by the Plan and the Merger Agreement in a timely
manner, and the potentially adverse effects that such transactions could have
under certain contractual arrangements to which Washington or MK are parties;
(iv) the expected enhancements of the Combined Company's ability to attract and
profitably exploit new business opportunities; (v) the Combined Company's
ability to realize Merger-related synergism and cost reductions; (vi) the
ability of the Combined Company to generate sufficient funds or to gain access
to additional capital, if needed, to meet its working capital needs; and (vii)
industry cyclicality and the effect of economic downturns on private and
governmental expenditures on infrastructure improvements. See "Risk Factors."
Accordingly, the Combined Company Projections are not necessarily indicative of
the future financial condition or results of operations of the Combined Company,
which may vary significantly from those set forth in the Combined Company
Projections.
A-1
<PAGE>
Consequently, the unaudited projected condensed consolidated company
information contained herein should not be regarded as a representation by
Washington, MK, their respective advisors or any other person that the projected
condition or results can or will be achieved.
Neither Washington nor MK prepare multi-year projections as to future
revenues or earnings in the normal course of their respective businesses.
Accordingly, after the Effective Time, the Combined Company does not intend to
update or otherwise revise the Combined Company Projections to reflect
circumstances existing since their preparation in early 1996 or to reflect the
occurrence of unanticipated events, even in the event that any or all of the
underlying assumptions are shown to be in error. Furthermore, the Combined
Company does not intend to update or revise the Combined Company Projections to
reflect changes in general economic or industry conditions. However, the
Combined Company's regular quarterly and annual financial statements, and the
accompanying discussion and analysis, contained in the Combined Company's
Quarterly Reports on Form 10-Q and Annual Reports on Form 10-K, will contain
disclosure concerning the Combined Company's actual financial condition and
results of operations during the period covered by the Combined Company
Projections.
The Combined Company Projections, which present the Combined Company's
projected financial condition as of November 30, 1996, 1997 and 1998 and the
Combined Company's projected results of operations for each of the three fiscal
years ending on such dates (the "Projection Period"), are based upon specific
economic assumptions as described under "-- Assumptions Used in the Combined
Company Projections." In addition, (i) the projected information set forth in
the Combined Company Projections for the Combined Company's 1996 fiscal year is
based on projected information for Washington for the 12 months ending November
30, 1996, together with projected information for MK for the three months ending
December 31, 1996 (which is intended to approximate projected information for MK
for the three months beginning on the assumed Effective Time of August 31, 1996
and ending November 30, 1996), (ii) the projected information set forth in the
Combined Company Projections for the Combined Company's 1997 fiscal year is
based on projected information for Washington for the 12 months ending November
30, 1997 and for MK for the 12 months ending December 31, 1997 (which is
intended to approximate projected information for MK for the 12 months ending
November 30, 1997), and (iii) the projected information set forth in the
Combined Company Projections for the Combined Company's 1998 fiscal year is
based on projected information for Washington for the 12 months ending November
30, 1998 and for MK for the 12 months ending December 31, 1998 (which is
intended to approximate projected information for MK for the 12 months ending
November 30, 1998).
Unlike the unaudited pro forma combined condensed consolidated
financial statements contained in this Proxy Statement, which give effect to the
effectiveness of the Plan and the consummation of the Merger and the other
transactions contemplated thereby as if the Effective Time had occurred, and
such other transactions had been consummated, as of the historical dates
specified in "The Combined Company Pro Forma Information," the Combined Company
Projections assume that the Effective Time will occur, and such transactions
will be consummated, on August 31, 1996. Consequently, among other differences,
the Combined Company Projections give effect only to Washington's separate
historical and projected results of operations for the nine-month period from
December 1, 1995 through August 31, 1996, and give effect to the combined
results of operations of the businesses presently operated by Washington and MK
only for the three-month period ending on November 30, 1996 (which, in the case
of the businesses presently operated by MK, is based upon projected information
for MK for the three months ending December 31, 1996). Certain general and
administrative expenses of Washington have been classified as cost of revenue to
conform with classifications historically used by MK.
Neither the independent auditors for MK nor the independent auditors
for Washington have examined or compiled the Combined Company Projections
presented herein and, accordingly, assume no responsibility for them. Moreover,
the Combined Company Projections have not been prepared with a view to
compliance with the guidelines established by the American Institute of
Certified Public Accountants regarding projections.
THE COMBINED COMPANY PROJECTIONS CONTAINS PROJECTED FINANCIAL INFORMATION
AND CERTAIN OTHER FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995, ALL OF WHICH ARE BASED ON VARIOUS
ESTIMATES AND ASSUMPTIONS. SUCH INFORMATION AND STATEMENTS ARE SUBJECT TO
INHERENT UNCERTAINTIES AND TO A WIDE VARIETY OF SIGNIFICANT BUSINESS, ECONOMIC
AND
A-2
<PAGE>
COMPETITIVE RISKS, INCLUDING, AMONG OTHERS, THOSE DESCRIBED HEREIN. SEE "RISK
FACTORS." CONSEQUENTLY, ACTUAL EVENTS, CIRCUMSTANCES, EFFECTS AND RESULTS MAY
VARY SIGNIFICANTLY FROM THOSE INCLUDED IN OR CONTEMPLATED BY SUCH PROJECTED
FINANCIAL INFORMATION AND SUCH OTHER FORWARD-LOOKING STATEMENTS. THE PROJECTED
FINANCIAL INFORMATION CONTAINED HEREIN IS THEREFORE NOT NECESSARILY INDICATIVE
OF THE FUTURE FINANCIAL CONDITION OR RESULTS OF OPERATIONS OF WCGI, MK AND THE
COMBINED ENTITY OF WCGI AND MK, WHICH MAY VARY SIGNIFICANTLY FROM THOSE SET
FORTH IN SUCH PROJECTED FINANCIAL INFORMATION. CONSEQUENTLY, THE PROJECTED
FINANCIAL INFORMATION AND OTHER FORWARD-LOOKING STATEMENTS CONTAINED HEREIN
SHOULD NOT BE REGARDED AS REPRESENTATIONS BY WCGI, MK OR ANY OTHER PERSON THAT
THE PROJECTED CONDITION OR RESULTS CAN OR WILL BE ACHIEVED.
A-3
<PAGE>
UNAUDITED PROJECTED CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except for share and per share data)
<TABLE>
<CAPTION>
Year ending November 30,
--------------------------------------
1996 1997 1998
---------- ------------ ------------
<S> <C> <C> <C>
Revenue $ 604,016 $ 1,592,135 $ 1,834,645
Cost of revenue (574,866) (1,517,191) (1,752,553)
--------- ----------- -----------
Operating income 29,150 74,944 82,092
General and administrative expenses (11,763) (21,415) (21,415)
Interest expense (1,675) (2,678) (677)
Investment and other income 2,896 2,976 3,596
Amortization of excess of cost over
net assets acquired (1,265) (3,799) (3,799)
Equity in net income of unconsolidated
affiliates 2,740 8,600 8,600
--------- ----------- -----------
Income before income taxes 20,083 58,628 68,397
Income tax expense (8,667) (27,262) (31,652)
--------- ----------- -----------
Net income $ 11,416 $ 31,366 $ 36,745
========= =========== ===========
Income per common share (1) $ .32 $ .59 $ .69
========= =========== ===========
</TABLE>
1. Combined Company projected per share data for 1996 is based on the weighted
average of 35,492,000 shares outstanding during such period assuming the
Effective Time occurs on August 31, 1996. Combined Company projected per
share data for each of 1997 and 1998 is based on 53,601,000 shares assumed
to be outstanding during such period. Outstanding and future options and
warrants have been assumed to remain anti-dilutive during the periods
presented.
See "--Assumptions Used in the Combined Company Projections."
A-4
<PAGE>
UNAUDITED PROJECTED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
November 30,
--------------------------------
1996 1997 1998
-------- ------------ --------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 67,874 $ 47,185 $ 61,760
Accounts and note receivable and
unbilled receivables 254,634 236,340 293,749
Deferred income taxes and other tax assets 35,663 31,995 10,240
Other current assets 51,548 50,840 61,865
-------- -------- --------
Total current assets 409,719 366,360 427,614
-------- -------- --------
Investments and other assets 95,691 102,619 107,930
Deferred income taxes and other tax assets 40,168 32,608 25,403
Cost in excess of net assets acquired 149,690 145,891 142,092
Property and equipment, net 111,856 113,409 119,641
-------- -------- --------
Total assets $807,124 $760,887 $822,680
======== ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Short-term debt $ 39,948 $ 486 $ 527
Accounts payable and accrued expenses 175,183 171,891 217,158
Billings in excess of costs and earnings
on uncompleted contracts 39,641 24,599 19,292
Income taxes payable 11,654 2,286 2,677
Other current liabilities 82,191 74,825 79,953
-------- -------- --------
Total current liabilities 348,617 274,087 319,607
-------- -------- --------
Long-term debt 4,594 4,070 3,502
Other non-current liabilities 87,612 85,030 83,126
-------- -------- --------
Total liabilities 440,823 363,187 406,235
-------- -------- --------
Redeemable preferred stock 18,000 18,000 --
-------- -------- --------
Stockholders' equity 348,301 379,700 416,445
-------- -------- --------
Total liabilities and stockholders' equity $807,124 $760,887 $822,680
======== ======== ========
</TABLE>
See "--Assumptions Used in the Combined Company Projections."
A-5
<PAGE>
UNAUDITED PROJECTED CONDENSED CONSOLIDATED CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year ending November 30,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Operating Activities
Net income $ 11,416 $ 31,366 $ 36,745
Depreciation and amortization 15,198 28,264 30,084
Undistributed earnings of affiliates (2,060) (8,300) (8,212)
Changes in working capital (10,510) (21,244) (21,085)
Other items (21) 6,894 23,601
-------- -------- --------
Cash flow provided by operating activities 14,023 36,980 61,133
-------- -------- --------
Investing Activities
Property and equipment additions, net (14,045) (24,639) (30,931)
Proceeds from sales of investments -- 7,456 3,100
Purchase of MK, net of cash acquired 38,309 -- --
Other investing activities -- (500) (200)
-------- -------- --------
Cash flow provided (used) by
investing activities 24,264 (17,683) (28,031)
-------- -------- --------
Financing Activities
Borrowings under credit agreements 39,500 -- --
Repayment of DIP financing (39,500) -- --
Repayment of borrowings under credit agreements -- (39,500) --
Repayment of long-term borrowing (448) (486) (527)
Redemption of preferred stock and other items -- -- (18,000)
-------- -------- --------
Cash flow used by financing activities (448) (39,986) (18,527)
-------- -------- --------
Increase (decrease) in cash and
cash equivalents 37,839 (20,689) 14,575
Cash and cash equivalents at
beginning of period 30,035 67,874 47,185
-------- -------- --------
Cash and cash equivalents at
end of period $ 67,874 $ 47,185 $ 61,760
======== ======== ========
</TABLE>
See "--Assumptions Used in the Combined Company Projections."
A-6
<PAGE>
Assumptions Used in the Combined Company Projections
Additional information relating to the principal assumptions used in
preparing the Combined Company Projections is set forth below. See "Risk
Factors" for a discussion of various factors that could materially affect the
Combined Company's financial condition, results of operations, businesses,
prospects and securities.
(i) Effective Time; Plan Terms: The Combined Company Projections were
prepared assuming an Effective Time of August 31, 1996. See "The Merger
Agreement--Termination --Termination by Washington."
(ii) General Economic Conditions: Current economic conditions and
their impact on capital spending for engineering and construction services
within each of the Combined Company's operating segments were assumed to
continue throughout the Projection Period.
(iii) Synergism: The Combined Company Projections were prepared on
the assumption that the Combined Company would be able to recognize
incremental revenue of $15 million in 1996, $51 million in 1997 and $109
million in 1998 due to the continuation and expansion of the Combined
Company's ability (as compared to that of MK) to secure new work as a
result of its improved financial condition (including new work that MK
might have been able to participate in only indirectly, and less
profitably, through joint ventures and similar arrangements). Earnings on
the incremental revenue from synergism is assumed to approximate historical
margins. The Combined Company Projections also assume savings in general
and administrative expenses of $0.0 in 1996, $4.5 million in 1997 and $4.5
million in 1998 through the elimination of duplicative costs, net of one-
time costs associated with the implementation of a plan to combine
corporate functions.
(iv) Revenues: Revenues for the Combined Company in 1996 reflect an
assumed increase in revenues for Washington of over 40% from 1995, an
assumed decrease in revenues for MK of 28% from 1995 and incremental
revenues of $15 million from synergism. Revenues for the Combined Company
in 1997 reflect an assumed increase in revenues for Washington of 15% from
1996 to 1997, an assumed decrease in revenues for MK of 5% from 1996 to
1997 and incremental revenues of $51 million from synergism. Revenues for
the Combined Company in 1998 are assumed to increase by 15% from 1997,
inclusive of $109 million in incremental revenues from synergism. Revenues
were projected by each operating group and are based on the level of
backlog for each of the operating groups at the beginning of each year,
anticipated new work awards during that year and estimated levels of annual
revenue recognition. The assumed increases in the new work awards and
backlog are based upon the assumptions as to general economic conditions
referred to in paragraph (ii) above, certain growth rate assumptions and
the continuation and expansion of project bonding capacity.
(v) Operating Income: Projected operating income is based upon
projected revenues, current profit margins, expected market conditions and
historical performance of the Combined Company's principal operating
groups. Profit margins are assumed to remain relatively constant
throughout the Projection Period and include the impact of the synergism
discussed in paragraph (iii) above.
(vi) General and Administrative Expenses (G&A): G&A is based on MK's
1995 levels, with adjustments for assumed savings from the elimination of
duplicative corporate functions following the Merger as discussed in
paragraph (iii) above.
(vii) Interest Expense: Interest expense is calculated on the total
amount of debt assumed to be outstanding during the Projection Period and
includes the amortization of costs associated with Washington's existing
credit facility (assumed to continue through the Projection Period). New
borrowings used to retire amounts outstanding under the DIP Facility are
assumed to have a weighted average interest rate of 10% throughout the
Projection Period.
A-7
<PAGE>
(viii) Equity in Net Income of Unconsolidated Affiliates: Represents
the recognition of income from the Combined Company's unconsolidated
affiliates accounted for by the equity method. For the Projection Period,
equity in income of unconsolidated affiliates is assumed to be principally
derived from the Combined Company's 33% ownership interest in MIBRAG mbH
and 24% interest in Westmoreland Resources, Inc. The Combined Company
Projections of equity in the net income of MIBRAG mbH and Westmoreland
Resources, Inc. are based on current earnings levels. The Combined Company
Projections assume no cash distributions from MIBRAG mbH during the
Projection Period.
(ix) Income Taxes: Projected income taxes are based on a blended
federal and state tax rate of 40% and an additional 3% to 7% consolidated
impact for such items as foreign taxes and the non-tax deductible
amortization of goodwill.
(x) Purchase Accounting: The Combined Company Projections have been
prepared in accordance with the applicable principles of purchase
accounting. Under purchase accounting principles, the Combined Company
will record an intangible asset equal to the excess, if any, of the
purchase price paid by Washington to acquire MK over the net fair market
value allocated to the identifiable assets and liabilities of MK (such
excess, if any, being referred to herein as "Goodwill"). The Combined
Company Projections assume that such amount will be amortized on a
straight-line basis (i.e., ratably) over a period of 40 years. The
Combined Company Projections assume that the purchase price paid by
Washington to acquire MK will be $228.1 million, and that the net fair
market value allocable to the identifiable assets and liabilities of MK
will be $92.9 million, in each case as of the Effective Time, resulting in
Goodwill of $135.2 million as of the Effective Time. Such assumptions are
based upon, among other assumptions and estimates, an assumed per share
value of WCGI Common Stock of $8.37, an assumed per warrant value of the
Warrants of $2.50, and an assumption that the historical book value of MK's
assets and liabilities generally approximates the fair value thereof,
except for specific adjustments discussed in the Notes to Unaudited Pro
Forma Combined Condensed Consolidated Financial Information. See "The
Combined Company Pro Forma Information."
The foregoing assumptions and resultant computations were made solely
for purposes of preparing the Combined Company Projections. The Combined
Company will be required to determine the actual amount of Goodwill, if
any, and the appropriate amortization period as of the Effective Time.
Such determinations will be based on the fair values of MK's net assets and
other relevant information as of the Effective Time. Although such
determinations are not presently expected to result in the actual amount of
Goodwill and related amortization being materially greater or less than the
amounts thereof assumed for purposes of the Combined Company Projections,
there can be no assurance with respect thereto. Any increase in the amount
of amortization of Goodwill would reduce periodic income before taxes and
net income.
(xi) Net Operating Loss (NOL) Carryforwards: MK anticipates having
substantial NOL carryforwards on the Effective Time. The Combined Company
Projections assume that NOL carryforwards will be used by the Combined
Company during the Projection Period as follows: $1.4 million in 1996,
$19.7 million in 1997 and $16.8 million in 1998. See "Risk Factors--Risk
Related to the Business of MK, Washington and the Combined Company."
(xii) Balance Sheet Considerations: Projections of changes in certain
balance sheet accounts such as accounts receivable and accounts payable are
based on historic ratios of such accounts to other accounts such as revenue
and are modified, where appropriate, to recognize specific project or
balance sheet item changes.
(xiii) Debt And Redeemable Preferred Stock: The Combined Company
Projections assume that the Combined Company will either utilize existing
lines of credit or will secure a post-restructuring line of credit prior to
the Effective Time that will be sufficient to retire the borrowings
outstanding under the DIP Facility and provide for working capital and
letter of credit availability throughout the
A-8
<PAGE>
Projection Period. The Projections also assume that the Combined Company
will have adequate cash balances and cash flows from operations in 1997 to
pay off the majority of its debt balances. The Combined Company
Projections also assume that the Combined Company receives all $18 million
of Foreign Tax Credit Refunds in 1998 and, accordingly, retires the Series
A Preferred Stock in 1998.
A-9
<PAGE>
PRELIMINARY COPY
APPENDIX B
PROXY WASHINGTON CONSTRUCTION GROUP, INC. PROXY
THIS PROXY IS SOLICITED BY AND ON BEHALF OF THE BOARD OF DIRECTORS OF WCGI
FOR THE SPECIAL MEETING OF STOCKHOLDERS __________, 1996
The undersigned hereby appoints Dorn Parkinson and John H. Wimberly, and
each of them, with full power of substitution in each, as Proxies, and hereby
authorizes them to represent and to vote, as designated below, all shares of
Common Stock of Washington Construction Group, Inc. ("WCGI") which the
undersigned may be entitled to vote at the Special Meeting of Stockholders to be
held on __________, 1996, and any and all adjournments thereof.
(CONTINUED AND TO BE SIGNED ON THE REVERSE SIDE)
B-1
<PAGE>
THIS PROXY WILL BE VOTED AS DIRECTED. IF NO CONTRARY INSTRUCTION IS INDICATED,
THIS PROXY WILL BE VOTED FOR THE MERGER PROPOSALS AS ENUMERATED IN PROPOSAL 1
AND PROPOSAL 2.
THE APPROVAL OF EACH OF THE MERGER PROPOSALS IS CONDITIONED UPON APPROVAL OF
BOTH OF THE MERGER PROPOSALS. ACCORDINGLY, A VOTE AGAINST EITHER OF THE MERGER
PROPOSALS WILL HAVE THE SAME EFFECT AS A VOTE AGAINST BOTH OF THE MERGER
PROPOSALS.
The Board of Directors recommends that you vote FOR the Merger Proposals as
enumerated in Proposal 1 and Proposal 2.
1. Proposal to adopt the Merger Agreement providing for the merger of MK and
WCGI, with WCGI continuing as the surviving corporation.
FOR AGAINST ABSTAIN
[_] [_] [_]
2. Proposal to adopt certain Amendments to the Certificate of Incorporation
which are being proposed by the Board of Directors.
FOR AGAINST ABSTAIN
[_] [_] [_]
In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the Special Meeting and adjournments
thereof.
ANY PREVIOUS PROXY EXECUTED BY THE UNDERSIGNED
IS HEREBY REVOKED.
Receipt of the notice of the Special Meeting
and the Proxy Statement is hereby acknowledged.
Dated____________________________, 1996
_______________________________________
_______________________________________
Signature of Stockholder
Note: Please sign exactly as addressed hereon.
Joint owners should each sign. Executors,
administrators, trustees, guardians and
attorneys should so indicate when signing.
Attorneys should submit powers of attorney.
Corporations and partnerships should sign in
full corporate or partnership name by an
authorized officer.
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE
B-2
<PAGE>
EXHIBIT 1
RESTRUCTURING AND MERGER AGREEMENT
BY AND AMONG
WASHINGTON CONSTRUCTION GROUP, INC.
AND
MORRISON KNUDSEN CORPORATION
DATED: MAY 28, 1996
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
ARTICLE 1
PLAN OF REORGANIZATION
<S> <C> <C>
1.1 Terms of the Plan................................................ 2
1.2 Support of the Plan from Creditors............................... 2
1.3 Preparation of the Disclosure Statement and Solicitation of
Acceptances of the Plan.......................................... 2
1.4 Preparation of Chapter 11 Petitions and First Day Orders......... 3
1.5 Commencement of Cases Under Chapter 11........................... 3
1.6 Post-Petition Solicitation of Acceptances of the Plan from
Stockholders..................................................... 3
1.7 Confirmation of the Plan......................................... 4
1.8 Effective Date................................................... 4
1.9 DIP Facility..................................................... 4
ARTICLE 2
ACTIONS ON THE EFFECTIVE DATE
2.1 Actions by the Purchaser and the Company on the Effective
Date............................................................. 5
2.2 Employment Agreements............................................ 6
2.3 Board of Directors............................................... 6
ARTICLE 3
THE MERGER; CONVERSION OF SECURITIES
3.1 The Merger....................................................... 6
3.2 Effects of the Merger............................................ 7
3.3 Certificate of Incorporation and Bylaws.......................... 7
3.4 Conversion of Securities......................................... 7
3.5 Fractional Surviving Corporation Warrants........................ 7
3.6 Exchange of Certificates......................................... 8
3.7 Cancellation..................................................... 8
3.8 Purchaser Common Stock........................................... 8
3.9 Corporate Name................................................... 8
</TABLE>
(i)
<PAGE>
<TABLE>
<CAPTION>
Page
----
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
<S> <C> <C>
4.1 Organization, Good Standing and Authority........................ 9
4.2 Binding Agreement................................................ 9
4.3 Capitalization................................................... 9
4.4 Subsidiaries..................................................... 10
4.5 No Violation..................................................... 10
4.6 Exchange Act Reports and Financial Statements.................... 10
4.7 Information in Disclosure Statement.............................. 11
4.8 Information Provided for Purchaser Proxy Statement............... 11
4.9 Consents and Approvals........................................... 12
4.10 No Brokers....................................................... 12
4.11 Insurance........................................................ 12
4.12 Labor Matters.................................................... 13
4.13 Employee Benefit Plans........................................... 13
(a) Identification of Plans..................................... 13
(b) Representations Applicable to Pension Benefit Plans......... 14
(c) Representations with Respect to Multiemployer Plans......... 15
(d) Representations with Respect to Welfare Benefit Plans....... 16
(e) General Representations With Respect to Benefit Plans....... 16
(f) Disclosure of Documents and Information..................... 18
4.14 Taxes............................................................ 18
4.15 Title to Properties.............................................. 20
4.16 Intellectual Property Permits.................................... 20
4.17 Environmental Matters............................................ 21
4.18 Litigation....................................................... 21
4.19 Contracts and Commitments........................................ 22
4.20 Compliance with Laws............................................. 22
4.21 Absence of Certain Developments.................................. 23
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
5.1 Organization, Good Standing and Authority........................ 23
5.2 Binding Agreement................................................ 23
5.3 Capitalization................................................... 24
</TABLE>
(ii)
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
5.4 Subsidiaries..................................................... 24
5.5 No Violation..................................................... 24
5.6 Exchange Act Reports and Financial Statements.................... 25
5.7 Information in Disclosure Statement and Purchaser Proxy
Statement........................................................ 25
5.8 Consents and Approvals........................................... 26
5.9 Compliance with Laws............................................. 26
5.10 Employee Benefit Plans........................................... 26
(a) Identification of Plans..................................... 26
(b) Representations Applicable to Pension Benefit Plans......... 27
(c) Representations with Respect to Multiemployer Plans......... 28
(d) Representations with Respect to Welfare Benefit Plans....... 29
(e) General Representations With Respect to Benefit Plans....... 29
(f) Disclosure of Documents and Information..................... 31
5.11 Taxes............................................................ 31
5.12 Environmental Matters............................................ 33
5.13 Absence of Certain Developments.................................. 34
ARTICLE 6
ACTIONS BY THE COMPANY AND THE PURCHASER
PENDING THE EFFECTIVE DATE
6.1 Maintenance of Business.......................................... 34
6.2 Certain Prohibited Company Transactions.......................... 34
6.3 Certain Prohibited Purchaser Transactions........................ 36
6.4 Purchaser Proxy Statement........................................ 37
6.5 Meeting of Purchaser's Stockholders.............................. 38
6.6 Investigation.................................................... 38
6.7 Notification of Certain Matters.................................. 38
6.8 Reasonable Best Efforts.......................................... 38
6.9 New York Stock Exchange Listing.................................. 39
6.10 Executory Contracts.............................................. 39
6.11 Exclusivity...................................................... 39
</TABLE>
(iii)
<PAGE>
<TABLE>
<CAPTION>
Page
----
ARTICLE 7
CONDITIONS TO THE COMPANY'S OBLIGATIONS
<S> <C> <C>
7.1 Confirmation of the Plan......................................... 40
7.2 Representations, Warranties and Covenants........................ 41
7.3 Purchaser Stockholders' Meeting.................................. 41
7.4 Stock and Warrants Freely Tradeable.............................. 41
7.5 Consents......................................................... 41
7.6 No Governmental Proceeding or Litigation......................... 41
7.7 Certificates..................................................... 42
7.8 Corporate Documents.............................................. 42
ARTICLE 8
CONDITIONS TO THE PURCHASER'S OBLIGATIONS
8.1 Completion of Other Transactions................................. 42
8.2 Representations, Warranties and Covenants........................ 43
8.3 Consents......................................................... 43
8.4 No Governmental Proceeding or Litigation......................... 43
8.5 Borrowings Under DIP Facility.................................... 43
8.6 Settlement of Certain Litigation................................. 43
8.7 Headquarters Lease............................................... 43
8.8 Certificates..................................................... 44
8.9 Corporate Documents.............................................. 44
ARTICLE 9
ACTIONS BY THE COMPANY
AND THE PURCHASER AFTER THE EFFECTIVE DATE
9.1 Further Assurances............................................... 44
9.2 Directors and Officers Insurance................................. 44
9.3 Indemnification.................................................. 45
9.4 Registration Rights.............................................. 46
</TABLE>
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ARTICLE 10
TERMINATION AND AMENDMENT
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10.1 Termination...................................................... 47
10.2 Effect of Termination............................................ 48
10.3 Break-up Fees.................................................... 48
10.4 Expenses......................................................... 48
ARTICLE 11
DEFINITIONS
11.1 Defined Terms.................................................... 49
ARTICLE 12
MISCELLANEOUS
12.1 Survival of Representations, Etc................................. 57
12.2 Assignment; Binding; Effect; Benefits............................ 57
12.3 Notices.......................................................... 57
12.4 Choice of Law.................................................... 58
12.5 Entire Agreement; Amendments and Waivers......................... 58
12.6 Counterparts..................................................... 58
12.7 Invalidity....................................................... 58
12.8 Headings......................................................... 58
12.9 Specific Performance............................................. 59
12.10 Attorneys Fees................................................... 59
12.11 Publicity........................................................ 59
12.12 Confidentiality Agreements....................................... 59
</TABLE>
(v)
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Attachments:
DISCLOSURE SCHEDULES
Company Disclosure Schedule
Purchaser Disclosure Schedule
EXHIBITS
Exhibit 1 New Certificate of Incorporation of the Surviving Corporation
Exhibit 2 New Bylaws of the Surviving Corporation
Exhibit 3 Warrant Agreement
Exhibit 4 Registration Rights Agreement
</TABLE>
(vi)
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RESTRUCTURING AND MERGER AGREEMENT
This Restructuring and Merger Agreement, dated as of May 28, 1996
(this "Agreement"), is by and between Washington Construction Group, Inc., a
Delaware corporation (the "Purchaser"), and Morrison Knudsen Corporation, a
Delaware corporation (the "Company"). Capitalized terms not otherwise defined
have the meanings set forth in Article 11.
RECITALS
A. The respective Boards of Directors of the Purchaser and the
Company have approved the Merger of the Company with and into the Purchaser on
the terms and subject to the conditions set forth herein.
B. As soon as possible after the date hereof, the Company will
amend its standalone Chapter 11 plan of reorganization (the "Standalone Plan")
and related disclosure statement (the "Standalone Disclosure Statement"), each
dated April 15, 1996, to incorporate the terms and provisions of this Agreement.
C. Under the Plan, unless the Agreement is terminated, the Company
will merge with and into the Purchaser (the "Merger") on the Effective Date,
with the Purchaser surviving the Merger. On the Effective Date, the Purchaser
will (i) provide $13,300,000 in cash and issue a number (presently estimated to
be approximately 24,123,000) of newly-issued shares of Surviving Corporation
Common Stock equal to 45% of the issued and outstanding shares of Surviving
Corporation Common Stock after giving effect to the shares issued pursuant to
the Plan, for distribution under the Plan and (ii) issue and deliver the
Surviving Corporation Series A Preferred Stock to a liquidating trust, which
shall hold the Surviving Corporation Series A Preferred Stock for the benefit of
creditors of the Company as set forth in the Plan. In addition, on the Effective
Date the Purchaser will repay or refinance borrowings under the Company's DIP
Facility if such borrowings do not exceed $50,000,000. Under the Plan, shares of
Company Common Stock will be converted into warrants to purchase 2,765,000
shares (subject to adjustment for rounding as provided herein) of Surviving
Corporation Common Stock.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants,
representations, warranties and promises contained herein and for other good and
valuable consideration the receipt and adequacy of which are hereby
acknowledged, the parties hereto agree as follows:
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ARTICLE 1
PLAN OF REORGANIZATION
1.1 TERMS OF THE PLAN. As used herein, the term "Plan" means a
joint plan of reorganization of the Company and the Debtor Subsidiaries that
will be based upon the Standalone Plan as modified to incorporate the terms and
provisions of this Agreement and as otherwise modified to contain such terms and
provisions as may be mutually agreed upon by the Company and Purchaser.
1.2 SUPPORT OF THE PLAN FROM CREDITORS. As promptly as possible
after the date hereof, subject to the fiduciary duties of the Company's Board of
Directors, the Company shall, with the cooperation and assistance of the
Purchaser and its advisors, seek the support of the terms of the Plan from the
creditors whose claims will be impaired under the Plan.
1.3 PREPARATION OF THE DISCLOSURE STATEMENT AND SOLICITATION OF
ACCEPTANCES OF THE PLAN. As promptly as possible after the date hereof, the
Company shall, with the cooperation and assistance of the Purchaser, prepare the
Plan and a modification of the Standalone Disclosure Statement to reflect the
Plan (as amended, the "Disclosure Statement") and all related documents,
including bankruptcy ballots (collectively with the Disclosure Statement, the
"Solicitation Materials"), necessary to solicit acceptances of the Plan from
impaired creditors of the Company (other than the plaintiffs in the litigation
against the Company commonly referred to as the Touchstone actions (the
"Touchstone Plaintiffs")) prior to the date (the "Filing Date") on which the
Company and any Subsidiaries of the Company that are debtors under the Plan (the
"Debtor Subsidiaries") file for relief under Chapter 11 of the United States
Bankruptcy Code (the "Bankruptcy Code"). The Purchaser will provide all
information regarding the Purchaser and its Subsidiaries, officers and directors
that is necessary to permit the Company to prepare the Disclosure Statement. The
information supplied by the Purchaser for inclusion in the Disclosure Statement
or any amendment or supplement thereto shall not, at the time that it is so
supplied, contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading. In addition, the Purchaser shall promptly inform the
Company of any subsequent event or circumstance that should be disclosed so that
the Disclosure Statement does not contain an untrue statement of a material fact
or omit to state a material fact required to be stated therein with respect to
the information supplied by the Purchaser. As soon as possible after the Plan
and Disclosure Statement and such other documents are finalized, the Company
shall mail such documents to the creditors of the Company whose claims are
impaired by the Plan (other than the Touchstone Plaintiffs) and shall commence
solicitation of acceptances of the Plan from such creditors pursuant to Section
1126(b) of the Bankruptcy Code and Bankruptcy Rule 3018(b). The solicitation
period shall expire on a date no later than
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the minimum period required by the Bankruptcy Code, the rules under the
Bankruptcy Code (the "Bankruptcy Rules") and the Bankruptcy Court for
solicitation of acceptances of a Chapter 11 plan of reorganization. The Company
shall use its reasonable best efforts to receive acceptances of the Plan (the
"Requisite Acceptances") from a sufficient number of creditors in a sufficient
number of classes of creditors to allow the Plan to be confirmed under Chapter
11 of the Bankruptcy Code, including confirmation through the cramdown
provisions of Section 1129(b) of the Bankruptcy Code.
1.4 PREPARATION OF CHAPTER 11 PETITIONS AND FIRST DAY ORDERS. As
promptly as possible after the date on which the Company mails the Solicitation
Materials to its creditors, the Company shall, with the cooperation and
assistance of the Purchaser, prepare (a) petitions for relief under Chapter 11
of the Bankruptcy Code (the "Chapter 11 Petitions") for the Company and the
Debtor Subsidiaries, (b) motions for customary first-day orders and such orders
as described in the Disclosure Statement (the "First Day Orders") and (c)
notices to creditors and other parties required by the Bankruptcy Code with
respect to the filing of the Chapter 11 Petitions, the hearing for approval of
the Disclosure Statement, the hearing for confirmation of the Plan and other
matters (the "Bankruptcy Notices"). Such documents shall be prepared in
sufficient time to provide the Purchaser and its legal and financial advisors
with adequate time to review all such documents prior to the Filing Date.
1.5 COMMENCEMENT OF CASES UNDER CHAPTER 11. As soon as possible
after the date on which the Company obtains the Requisite Acceptances from its
creditors, the Company shall, and, subject to the terms of the Plan, shall cause
each of the Debtor Subsidiaries to, (a) file the Chapter 11 Petitions in the
United States Bankruptcy Court in the District of Delaware (the "Bankruptcy
Court") and commence cases under Chapter 11 of the Bankruptcy Code (the
"Reorganization Cases") in the Bankruptcy Court, (b) file the motions relating
to the First Day Orders and seek to obtain entry of the First Day Orders by the
Bankruptcy Court, (c) file motions for approval of the Solicitation Materials
(including if the Company deems it necessary a modification of the Solicitation
Materials in order to solicit the Company's stockholders and the Touchstone
Plaintiffs after the Filing Date), and schedule a hearing (the "Disclosure
Statement Hearing") in the Bankruptcy Court on the earliest date approved by the
Bankruptcy Court for approval of the Solicitation Materials and (d) schedule a
hearing (the "Confirmation Hearing") in the Bankruptcy Court on the earliest
date possible to consider confirmation of the Plan. As soon as possible after
the Filing Date, the Company shall send the Bankruptcy Notices to all Persons to
whom such notices are required to be sent under the Bankruptcy Code and such to
other Persons to whom it is ordered by the Bankruptcy Court to send the
Bankruptcy Notices.
1.6 POST-PETITION SOLICITATION OF ACCEPTANCES OF THE PLAN FROM
STOCKHOLDERS. If the Company deems it necessary to solicit approval of the Plan
from
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the Company's stockholders and the Touchstone Plaintiffs, the Company shall, as
soon as possible following the Disclosure Statement Hearing, mail or otherwise
distribute the Solicitation Materials to the Company's stockholders and the
Touchstone Plaintiffs and commence solicitation of acceptances of the Plan from
such Persons pursuant to Section 1126(a) of the Bankruptcy Code and Bankruptcy
Rule 3018(a). The solicitation period shall be a period of time no longer than
the minimum period required by the Bankruptcy Code, the Bankruptcy Rules and the
Bankruptcy Court for solicitation of acceptances of a Chapter 11 plan of
reorganization.
1.7 CONFIRMATION OF THE PLAN. Upon receipt of the Requisite
Acceptances and completion of the solicitation of Company's stockholders and the
Touchstone Plaintiffs, the Company shall use its reasonable best efforts to
obtain confirmation of the Plan by the Bankruptcy Court at the Confirmation
Hearing. Upon entry of an order confirming the Plan (the "Confirmation Order"),
the Company shall use its reasonable best efforts to obtain the dismissal of any
and all appeals and motions for reconsideration filed with respect to the Plan
or with respect to the Confirmation Order. The date on which the Plan is
confirmed is referred to herein as the "Confirmation Date."
1.8 EFFECTIVE DATE. The Company shall cause the Plan to become
effective and the distributions provided for under the Plan (the
"Distributions") to be commenced as promptly as possible on or following the day
on which the Confirmation Order is entered if no stay of the Confirmation Order
pending appeal has been entered and all other conditions to effectiveness set
forth in the Plan shall have been satisfied or waived. The date on which the
Plan becomes effective is referred to herein as the "Effective Date."
1.9 DIP FACILITY. On the Effective Date, the Purchaser will repay
or refinance amounts outstanding under the Company's debtor-in-possession credit
facility (the "DIP Facility"). The Company shall enter into the DIP Facility
only on terms that are approved by the Purchaser, which approval shall not be
withheld or delayed unreasonably. The Company will notify the Purchaser of its
discussions or negotiations with potential lenders in connection with its
efforts to obtain the DIP Facility, and shall, in any such notice, indicate the
identity of the potential lenders and the terms and conditions of any proposals
or offers to provide the DIP Facility, and thereafter shall keep the Purchaser
informed, on a current basis, of the status and terms of any such proposals or
offers and the status of any such discussions or negotiations.
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<PAGE>
ARTICLE 2
ACTIONS ON THE EFFECTIVE DATE
2.1 ACTIONS BY THE PURCHASER AND THE COMPANY ON THE EFFECTIVE DATE.
Subject to the conditions set forth in this Agreement, on the Effective Date:
(a) The Purchaser and the Company shall deliver all instruments and
documents required to be delivered pursuant to Articles 7 and 8. All instruments
and documents delivered to Purchaser pursuant hereto shall be in form and
substance, and shall be executed in a manner, reasonably satisfactory to the
Purchaser. All instruments and documents delivered to the Company pursuant
hereto shall be in form and substance, and shall be executed in a manner,
reasonably satisfactory to the Company. Each of the Purchaser, the Company and
the Surviving Corporation, as the case may be, shall take all other actions
required to be taken by it pursuant to the Plan, including without limitation,
the actions set forth in the following paragraphs of this Section 2.1.
(b) The Company shall transfer the Excluded Assets to a liquidating
trust or other entity, which shall hold the Excluded Assets for the benefit of
creditors of the Company, or distribute the Excluded Assets or portions thereof
in accordance with the Plan.
(c) The Company and the Purchaser shall merge in accordance with
Article 3.
(d) The Surviving Corporation shall deliver an amount equal to
$13,300,000 to the disbursing agent (the "Disbursing Agent") under the Plan in
order to permit the Disbursing Agent to make the Distributions.
(e) The Surviving Corporation shall issue and deliver a number of
shares of Surviving Corporation Common Stock equal to 45% of the issued and
outstanding shares of Surviving Corporation Common Stock on the Effective Date
after giving effect to the Distributions to the Disbursing Agent in order to
permit the Disbursing Agent to make the Distributions.
(f) The Surviving Corporation shall issue and deliver the Surviving
Corporation Series A Preferred Stock to a liquidating trust or other entity,
which shall hold the Surviving Corporation Series A Preferred Stock for the
benefit of creditors of the Company, as set forth in the Plan.
(g) The Surviving Corporation shall issue and deliver 2,765,000
Surviving Corporation Warrants (subject to adjustment as provided for herein) to
the
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<PAGE>
Disbursing Agent in order to permit the Disbursing Agent to distribute the
Surviving Corporation Warrants pursuant to the Plan.
(h) The Purchaser will repay or refinance obligations in an amount
up to $50,000,000 incurred by the Company and its Debtor Subsidiaries after the
Filing Date under the DIP Facility.
2.2 EMPLOYMENT AGREEMENTS. On the Effective Date, the Purchaser
will enter into employment agreements with certain officers and directors of the
Company as are designated by the Purchaser on terms and conditions reasonably
satisfactory to the Purchaser.
2.3 BOARD OF DIRECTORS. Immediately after the Effective Time, the
Board of Directors of the Surviving Corporation will consist of five directors
designated by the current Board of Directors of Purchaser (three of whom shall
be directors whose terms expire at the 1999 meeting of stockholders, one of whom
shall be a director whose term expires at the 1998 meeting of stockholders and
one of whom shall be a director whose term expires at the 1997 meeting of
stockholders), Robert S. Miller and Robert A. Tinstman (whose terms expire at
the 1997 meeting of stockholders) and two directors (whose terms expire at the
1998 meeting of stockholders) designated by the creditors prior to the earlier
of July 17, 1996 or 20 days after the Purchaser first files the Purchaser Proxy
Statement with the SEC, which directors shall be approved by the Purchaser. The
five directors designated by the current Board of Directors of Purchaser shall
be selected from among members of the current Board of Directors of the
Purchaser or officers, directors or Affiliates of other companies controlled by
Dennis Washington. All members of the Board of Directors shall serve until their
successors are duly elected or appointed and qualified or until their earlier
death, resignation or removal in accordance with the Certificate of
Incorporation and Bylaws of the Surviving Corporation.
ARTICLE 3
THE MERGER; CONVERSION OF SECURITIES
3.1 THE MERGER. On the Effective Date, in accordance with this
Agreement, the Plan and the applicable provisions of the Delaware General
Corporation Law ("Delaware Law"), the Company shall in the Merger merge with and
into Purchaser, with Purchaser being the surviving corporation in the Merger (as
such, the "Surviving Corporation"). As a result of the Merger, the separate
existence of the Company shall cease and the Purchaser shall continue as the
surviving corporation as set forth in the Merger Certificate. The Merger will be
consummated and become effective on the Effective Date upon the filing with the
Secretary of State of the State
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of Delaware of a certificate of merger (the "Merger Certificate") as is required
by, and executed in accordance with, the relevant provisions of the Delaware
Law. The time at which the Merger becomes effective is referred to herein as the
"Effective Time."
3.2 EFFECTS OF THE MERGER.
(a) The Merger shall have the effects set forth in the Delaware Law
and this Agreement. Without limiting the generality of the foregoing, and
subject thereto, at the Effective Time, the separate corporate existence of the
Company shall cease and the Purchaser shall be the Surviving Corporation and
shall have all of the rights, privileges, immunities and powers and shall be
subject to all duties and liabilities of a corporation organized under the
Delaware Law.
(b) Insofar as any agreement or instrument to which the Company is a
party requires by its terms the express assumption thereof by the Surviving
Corporation in connection with the Merger, this Section 3.2(b) will be deemed
without further action to constitute such assumption, provided, however, that
nothing in this Section 3.2(b) will affect the relative rights or obligations of
the parties under any other provision hereof or thereof.
3.3 CERTIFICATE OF INCORPORATION AND BYLAWS. The Certificate of
Incorporation of the Purchaser, as amended and restated to be in the form
attached hereto as Exhibit 1, shall be the Certificate of Incorporation of the
Surviving Corporation. The Bylaws of the Purchaser in the form attached as
Exhibit 2 shall be the Bylaws of the Surviving Corporation until amended in
accordance with applicable law.
3.4 CONVERSION OF SECURITIES. At the Effective Time, by virtue of
the Plan and without any action on the part of the parties hereto, the shares of
Company Common Stock issued and outstanding immediately prior to such time
(including without limitation all shares held in court-approved settlement
funds), which will be cancelled pursuant to the Plan, will be converted on a pro
rata basis into the right to receive warrants (the "Surviving Corporation
Warrants") to purchase an aggregate of 2,765,000 shares of Surviving Corporation
Common Stock (subject to adjustments for rounding as provided for herein) at an
exercise price of $12.00 per share. Without limiting the generality or effect of
Section 1.1, the Plan will provide that the Surviving Corporation Warrants will
be issued pursuant to a warrant agreement substantially in the form of Exhibit 3
hereto.
3.5 FRACTIONAL SURVIVING CORPORATION WARRANTS. No fractional
Surviving Corporation Warrants shall be issued in under the Plan. All fractional
Surviving Corporation Warrants that a holder of the Company Common Stock would
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otherwise be entitled to receive shall be aggregated and rounded to the nearest
whole number of Surviving Corporation Warrants.
3.6 EXCHANGE OF CERTIFICATES. From and after the Effective Date,
each holder of an outstanding certificate which immediately prior to the
Effective Date represented outstanding shares of Company Common Stock shall be
entitled to receive in exchange therefor, upon surrender thereof to the
Disbursing Agent, a certificate or certificates representing the number of whole
Surviving Corporation Warrants into which such holder's shares were converted.
After the filing of the Merger Certificate, there shall be no further
registration of transfers of Company Common Stock and holders of certificates
representing Company Common Stock shall not enjoy the rights and privileges of
holders of the Company Common Stock other than to exchange the certificates for
Surviving Corporation Warrants. As soon as reasonably practicable after the
Effective Time, the Purchaser will instruct the Disbursing Agent to mail to each
holder of record of certificates representing shares of Company Common Stock (i)
a letter of transmittal (which shall specify that delivery shall be effected,
and risk of loss and title to such certificates shall pass, only upon proper
delivery of such certificates to the Disbursing Agent and shall be in such form
and have such other provisions as Parent may reasonably specify) and (ii)
instructions to effect the surrender of such certificates in exchange for the
Surviving Corporation Warrants.
3.7 CANCELLATION. Each share of Company Common Stock held in the
treasury of the Company and each share of Company Common Stock owned by any
direct or indirect wholly-owned Subsidiary of the Company immediately prior to
the Effective Time (other than shares held in court-approved settlement funds)
shall, by virtue of the Merger and without any action on the part of the holder
thereof, cease to be outstanding, be cancelled and be returned without payment
of any consideration therefor and cease to exist.
3.8 PURCHASER COMMON STOCK. Each share of Purchaser Common Stock
issued and outstanding or held in treasury immediately prior to the Effective
Time shall be unaffected by the Merger and shall continue to be one validly
issued, fully paid and nonassessable share of Surviving Corporation Common
Stock. Certificates which immediately prior to the Effective Time represented
issued shares of Purchaser Common Stock will, without the need for further
action by any Person, immediately after the Effective Time represent a like
number of shares of Surviving Corporation Common Stock.
3.9 CORPORATE NAME. The Merger Certificate will provide that the
corporate name of the Surviving Corporation will be changed to "Morrison Knudsen
Corporation."
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ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to the Purchaser as
follows:
4.1 ORGANIZATION, GOOD STANDING AND AUTHORITY. Each of the Company
and its Subsidiaries is a corporation duly organized, validly existing and in
good standing under the laws of the state of its incorporation. Each of the
Company and its Subsidiaries has full corporate power to carry on its business,
as it is now being conducted, and to own, lease or operate the properties and
assets it now owns, leases or operates. Each of the Company and its Subsidiaries
is qualified to do business, is in good standing and has all required business
licenses in each jurisdiction in which its failure to obtain or maintain such
qualification, good standing or license could have a Material Adverse Effect on
the Company.
4.2 BINDING AGREEMENT. The Company has all requisite corporate
power and corporate authority to enter into this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly
authorized by all requisite corporate action, subject to approval of the
Company's stockholders (or the deemed approval thereof pursuant to Section 303
of the Delaware Law). This Agreement is a legal, valid and binding obligation of
the Company, enforceable against it in accordance with its terms, except as
enforcement thereof may be limited by general principles of equity (regardless
of whether such enforceability is considered in a proceeding at law or in
equity) and the effect of applicable bankruptcy, insolvency, moratorium and
other similar laws of general application relating to or affecting creditors'
rights generally, including, without limitation, the effect of statutory or
other law regarding fraudulent conveyances and preferential transfers.
4.3 CAPITALIZATION. The authorized capitalization of the Company
consists solely of (a) 100,000,000 shares of the Company Common Stock, of which
37,077,345 shares were issued and outstanding as of March 31, 1996 (including
the shares held in court-approved settlement funds); and (b) 10,000,000 shares
of the Company Preferred Stock, of which no shares were issued as of the date
hereof. On the Effective Date, after giving effect to the effectiveness of the
Plan, there will not be outstanding: (i) any options, warrants or other rights
to purchase from the Company any capital stock of the Company, (ii) any
securities convertible into or exchangeable for shares of such stock; or (iii)
any other commitments of any kind for the issuance of additional shares of
capital stock or options, warrants or other securities of the Company.
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4.4 SUBSIDIARIES. There is set forth in the Company Disclosure
Schedule: (i) the name and percentage ownership by the Company of each of its
Subsidiaries and each other entity in which the Company has an ownership
interest; (ii) the jurisdiction of incorporation, capitalization and ownership
of each Subsidiary; and (iii) the names of the officers, directors, partners or
Persons holding a similar management position of each Subsidiary and each such
entity.
4.5 NO VIOLATION
(a) Except as disclosed in the Company SEC Reports or as set forth
in the Company Disclosure Schedule, none of the Company or any of its
Subsidiaries is (i) in violation of its respective Charter Documents, or (ii) to
the actual knowledge of the executive officers of the Company, in default in the
performance of any obligation, agreement or condition contained in any
Applicable Agreement, which violation or default could, singly or in the
aggregate, have a Material Adverse Effect on the Company.
(b) Subject to the entry and provisions of the Confirmation Order
and assuming that the consents, approvals, authorizations, declarations, filings
and registrations referred to in Section 4.9 have been made or obtained and
shall remain in full force and effect and the conditions set forth in Articles 7
and 8 shall have been satisfied or waived, neither the execution or delivery by
the Company of this Agreement nor the performance by the Company of its
obligations under this Agreement will (i) constitute a breach or violation under
the Charter Documents of the Company or any of its Subsidiaries; or (ii)
conflict with, violate, constitute a breach or violation of or a default (with
the passage of time or otherwise) under, require the consent of any Person
under, give to others any rights of termination, amendment, acceleration or
cancellation of or result in the imposition of a Lien on any of the properties
or assets of the Company or any of its Subsidiaries or an acceleration of
material indebtedness pursuant to, any Applicable Agreement (other than any
agreement with a Governmental Authority, any job-related agreement with any
Person that is not a Governmental Authority or any joint venture or similar
agreement), except where such breach, violation or default, or the failure to
obtain such consent, or such termination, amendment or cancellation, or such
imposition of a Lien, or such acceleration of indebtedness would not, singly or
in the aggregate, have a Material Adverse Effect on the Company or except where
the same would result solely from the filing of the Chapter 11 Petitions.
4.6 EXCHANGE ACT REPORTS AND FINANCIAL STATEMENTS. The Company has
furnished or will upon request furnish the Purchaser with copies of its Annual
Report on Form 10-K for the fiscal years ended December 31, 1993, 1994 and 1995
and its Quarterly Report on Form 10-Q for the quarter ended March 31, 1996, in
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each case with exhibits, and all other reports filed or required to be filed
with the Securities and Exchange Commission ("SEC") under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and
regulations of the SEC thereunder since January 1, 1995 (all such reports being
herein collectively called the "Company SEC Reports"), each as filed with the
SEC. Each of the Company SEC Reports, when it was filed with the SEC, complied
in all material respects with the requirements of the Exchange Act and the rules
and regulations of the SEC thereunder, and did not on the date of filing or
amendment, if any, contain any untrue statement of material fact or omit to
state a material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The financial
statements contained in the Company SEC Reports: (i) were prepared in accordance
with GAAP (except as otherwise noted therein and subject, in the case of
unaudited interim financial statements, to the omission of certain notes not
ordinarily accompanying such unaudited interim financial statements and to
normal year-end adjustments and any other adjustments described therein) and
with Regulation S-X promulgated under the Exchange Act; and (ii) present fairly
the Company's consolidated financial condition and the consolidated results of
its operations, cash flows and shareholders equity as at the relevant dates
thereof and for the periods covered thereby.
4.7 INFORMATION IN DISCLOSURE STATEMENT. None of the information
contained in the Disclosure Statement and the Solicitation Materials will
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading (except
that the Company makes no representation or warranty as to any information
supplied by the Purchaser for inclusion therein). The Disclosure Statement and
the Solicitation Materials will, when filed with the Bankruptcy Court in
connection with the Disclosure Statement Hearing and when mailed to holders of
Claims in and Equity Interests of the Company, provide adequate information as
required by the Bankruptcy Code to allow such holders to vote on the Plan. The
Disclosure Statement and the Solicitation Materials will comply in all material
respects with the provisions of the applicable provisions of the Bankruptcy Code
and the Bankruptcy Rules.
4.8 INFORMATION PROVIDED FOR PURCHASER PROXY STATEMENT. None of the
information supplied or to be supplied by the Company for inclusion in the proxy
statement relating to the meeting of the Purchaser's stockholders to be held in
connection with the Merger (the "Purchaser Proxy Statement") will, at the date
provided to the Purchaser, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they are made, not misleading.
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4.9 CONSENTS AND APPROVALS. No consent, approval or authorization
of, or declaration, filing or registration with, any United States federal or
state governmental or regulatory authority is required to be made or obtained by
the Company in connection with the execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated hereby, except
(i) for consents, approvals or authorizations of, or declarations or filings
with, the Bankruptcy Court, (ii) for the filing of a notification and report
form under the HSR Act and the expiration or earlier termination of the
applicable waiting period thereunder, (iii) for any filings with the SEC or any
other Governmental Authority pursuant to the applicable requirements of any
federal or state securities or "Blue Sky" laws, (iv) for the filing of the
Merger Certificate with the Secretary of State of the State of Delaware in
accordance with the applicable provisions of the Delaware Law and of appropriate
documents with the relevant authorities of other states in which the Company or
any of its Subsidiaries is authorized to do business, (v) for consents,
approvals, authorizations, declarations or filings required under any
Environmental Law, (vi) for consents, approvals, authorizations, declarations or
filings required under any agreement with a Governmental Authority, and (vii)
for consents, approvals or authorizations, or declarations, filings or
registrations, which, if not obtained, would not, singly or in the aggregate,
have a Material Adverse Effect on the Company.
4.10 NO BROKERS. Except for the letter agreement, dated December 15,
1995, between the Company and Donaldson, Lufkin & Jenrette Securities
Corporation, neither the Company nor any affiliate thereof has entered into or
will enter into any agreement, arrangement or understanding with any Person or
firm which will result in any obligation of the Company to pay any finder's fee,
brokerage commission or similar payment in connection with the transactions
contemplated hereby.
4.11 INSURANCE. The Company Disclosure Schedule sets forth a list of
all insurance policies (including policies providing property, casualty,
liability, and workers' compensation coverage and bond and surety arrangements)
to which any of the Company or its Subsidiaries is a party, a named insured, or
otherwise the beneficiary of coverage: the insurer, the policy number, the
amount of coverage, type of insurance, the amount of each premium payment, the
expiration date and any retroactive premium adjustments or other loss sharing
arrangements. To the actual knowledge of the executive officers of the Company,
with respect to each such insurance policy that is material to the Company: (a)
the policy is legal, valid, binding, enforceable, and in full force and effect;
(b) the policy (or a renewal or replacement policy) will continue to be legal,
valid, binding, enforceable, and in full force and effect on substantially
identical terms following the Effective Date; (c) neither any of the Company or
its Subsidiaries nor any other party to the policy is in breach or default
(including with respect to the payment of premiums or the giving of notices),
and no event has occurred which, with notice or the lapse of time, would
constitute such a
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breach or default, or permit termination, modification, or acceleration under
the policy; and (d) no party to the policy has repudiated any provision thereof.
The premiums for all property and liability and workers' compensation policies
have been fully paid. The Company Disclosure Schedule also describes any self
insurance arrangements (other than deductibles under insurance policies)
affecting any of the Company and its Subsidiaries.
4.12 LABOR MATTERS. Except as disclosed in the Company SEC Reports
or the Company Disclosure Schedule or as would not have a Material Adverse
Effect on the Company: (a) there is no labor strike, dispute, slowdown, work
stoppage or lockout pending or, to the actual knowledge of the executive
officers of the Company, threatened against or affecting the Company or any
Subsidiary and, since January 1, 1993, there has not been any such action; (b)
there are no unions claiming to represent the employees of the Company or any
Subsidiary; (c) neither the Company nor any Subsidiary is a party to or bound by
any collective bargaining or similar agreement with any labor organization, or
work rules or practices agreed to with any labor organization or employee
association applicable to employees of the Company or any Subsidiary; (d) none
of the employees of the Company or any Subsidiary are represented by any labor
organization and none of the executive officers of the Company has any knowledge
of any current union organizing activities among the employees of the Company or
any Subsidiary, nor to the actual knowledge of such executive officers does any
question concerning representation exist concerning such employees; (e) the
Company and its Subsidiaries are, and have at all times been, in material
compliance with all Applicable Employment Laws and are not engaged in any ULP;
(f) there is no ULP charge or complaint against the Company or any Subsidiary
pending or, to the actual knowledge of the executive officers of the Company,
threatened before the NLRB; and (g) there is no grievance or arbitration
proceeding arising out of any collective bargaining agreement or other grievance
procedure relating to the Company or any Subsidiary.
4.13 EMPLOYEE BENEFIT PLANS
(a) IDENTIFICATION OF PLANS. The Company Disclosure Schedule lists
and identifies each Pension Benefit Plan, Welfare Benefit Plan and Multiemployer
Plan which is (or, with respect to Multiemployer Plans or Pension Benefit Plan
only, was within 12 months prior to the Effective Date) maintained or
contributed to by the Company or any ERISA Affiliate or under which the Company
or any of its ERISA Affiliate was or is obligated to contribute, or has any
liability with respect to, including terminated Multiemployer Plans which have
been terminated within the past 12 months and any stock purchase, option or
bonus plan, deferred compensation, severance pay, incentive, vacation or sick
pay or leave, maintained or contributed by the Company or any of its ERISA
Affiliates (each individually a "Benefit Plan" and collectively the
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"Benefit Plans"). With respect to any Benefit Plan to which contributions are
made pursuant to a collective bargaining agreement, the identification of such
Benefit Plan may be made by referring to the collective bargaining agreement
disclosed in the Company Disclosure Schedule.
(b) REPRESENTATIONS APPLICABLE TO PENSION BENEFIT PLANS
Except as disclosed in the Company SEC Reports or the Company
Disclosure Schedule or as would not have a Material Adverse Effect on the
Company:
(i) Each Pension Benefit Plan which is intended to be
"qualified" under Section 401(a) of the Code, is and has been at all times so
qualified and each trust maintained thereunder is and has been at all times
exempt from taxation under Section 501(a) of the Code was so exempt throughout
its existence.
(ii) The funding method used in connection with each Pension
Benefit Plan which is subject to the minimum funding requirements of ERISA is
acceptable and the actuarial assumptions used in connection with funding each
such plan are reasonable; as of the last day of the last plan year of each
Pension Benefit Plan and, to the best knowledge of the Company's actuary, as of
the Effective Date, the "amount of unfunded benefit liabilities" as defined in
Section 4001(a)(18) of ERISA (but excluding from the definition of "current
value" of "assets" of such Pension Benefit Plan, accrued but unpaid
contributions) did not and will not exceed zero; no "accumulated funding
deficiency" (for which an excise tax is due or would be due in the absence of a
waiver) as defined in Section 412 of the Code or as defined in Section 302(a)(2)
of ERISA, whichever may apply, has been incurred with respect to any Pension
Benefit Plan with respect to any plan year, whether or not waived; neither the
Company nor any ERISA Affiliate has failed to pay when due any "required
installment," within the meaning of Section 412(m) of the Code and Section
302(e) of ERISA, whichever may apply, with respect to any Pension Benefit Plan;
neither the Company nor any ERISA Affiliate is subject to any lien imposed under
Section 412(n) of the Code or Section 302(f) of ERISA, whichever may apply, with
respect to any Pension Benefit Plan; and neither the Company nor any ERISA
Affiliate has any liability for unpaid contributions with respect to any Pension
Benefit Plan.
(iii) The Company and each ERISA Affiliate has paid all
premiums (and interest charges and penalties for late payment, if applicable)
due the PBGC with respect to each Pension Benefit Plan for each plan year
thereof for which such premiums are required; neither the Company nor any ERISA
Affiliate has engaged in, or is a successor or parent corporation to an entity
that has engaged in, a transaction described in Section 4069 of ERISA; there has
been no "reportable event" (as defined in Section 4043(b) or (c) of ERISA and
the PBGC regulations under such Section, other
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than a reportable event for which notice to the PBGC is waived or penalties have
been waived under PBGC Technical Update 95-3) with respect to any Pension
Benefit Plan; and neither the Company nor any ERISA Affiliate has, at any time,
(A) ceased opera tions at a facility so as to become subject to the provisions
of Section 4068(e) of ERISA, (B) withdrawn as a substantial employer so as to
become subject to the provisions of Section 4063 of ERISA, or (C) ceased making
contributions on or before the Effective Date to any Pension Benefit Plan
subject to Section 4064(a) of ERISA to which the Company any ERISA Affiliate
made contributions during the five years prior to the Effective Date.
(c) REPRESENTATIONS WITH RESPECT TO MULTIEMPLOYER PLANS
Except as disclosed in the Company SEC Reports or the Company
Disclosure Schedule or as would not have a Material Adverse Effect on the
Company:
(i) After taking into account the exceptions set forth in
ERISA Sections 4203(b) and 4208(d), neither the Company nor any ERISA Affiliate
has, at any time, withdrawn from a Multiemployer Plan in a "complete withdrawal"
or a "partial withdrawal" as defined in Sections 4203 and 4205 of ERISA,
respectively, so as to result in a liability, contingent or otherwise
(including, but not limited to, the obligations pursuant to an agreement entered
into in accordance with Section 4204 of ERISA), to the Company or any ERISA
Affiliate which has not been fully satisfied or otherwise fully discharged.
(ii) If, as of the Effective Date, the Company and all ERISA
Affiliates were to withdraw from all Multiemployer Plans to which it (or any of
them) has contributed or been obligated to contribute, it (and they) would incur
no liabilities to such plans under Title IV of ERISA.
(iii) To the actual knowledge of the executive officers of the
Company, with respect to each Multiemployer Plan: (A) no such Multiemployer Plan
has been terminated or has been in reorganization under ERISA so as to result,
directly or indirectly, in any liability, contingent or otherwise, of the
Company or any ERISA Affiliate under Title IV of ERISA; (B) no proceeding has
been initiated by any Person (including the PBGC) to terminate any Multiemployer
Plan; (C) the Company has no reason to believe that any Multiemployer Plan will
be terminated or will be reorganized under ERISA; and (D) the Company does not
intend to withdraw from any Multiemployer Plan.
(iv) Neither the Company nor any ERISA Affiliate has incurred
any liability with respect to any Multiemployer Plan which is a "welfare benefit
plan" as defined in Section 3(1) of ERISA, under the terms of such Multiemplo-
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yer Plan, any collective bargaining agreement or otherwise resulting from any
cessation of contributions, cessation of obligations to make contributions or
other form of withdrawal from such Multiemployer Plan and if, as of the
Effective Date, the Company and all ERISA Affiliates were to have a cessation of
contributions, cessation of obligations to make contribution or other form of
withdrawal from all such Multiemployer Plans it (and they) would incur no
liabilities with respect to any such Multiemployer Plans under the terms of such
Multiemployer Plans, any collective bargaining agreement or otherwise.
(d) REPRESENTATIONS WITH RESPECT TO WELFARE BENEFIT PLANS
Except as disclosed in the Company SEC Reports or the Company
Disclosure Schedule or as would not have a Material Adverse Effect on the
Company:
(i) None of the Company or any Welfare Benefit Plan has any
present or future obligation to make any payment to or with respect to any
present or former employee of the Company or any ERISA Affiliate for post-
retirement medical benefits or other post-retirement welfare benefits, and the
Company has accounted for such obligations in accordance with GAAP.
(ii) Each Welfare Benefit Plan which is a "group health plan,"
as defined in Section 607(1) of ERISA, has been operated in compliance with the
provisions of Part 6 of Title I of ERISA and Sections 162(k) and 4980B of the
Code at all times.
(e) GENERAL REPRESENTATIONS WITH RESPECT TO BENEFIT PLANS
Except as disclosed in the Company SEC Reports or the Company
Disclosure Schedule or as would not have a Material Adverse Effect on the
Company:
(i) Each Benefit Plan which is not a Multiemployer Plan
complies and has been administered in form and operation with all requirements
of ERISA, the Code and Applicable Law. The Company and the ERISA Affiliates have
performed all of their obligations under all Benefit Plans.
(ii) There have been no acts or omissions which have given rise
to, or which could give rise to, any Tax under Sections 409, 502(c), or 502(i)
of ERISA, or Sections 4975 or 4976 of the Code, for which the Company and any
ERISA Affiliate may be liable.
(iii) All contributions required with respect to any Benefit
Plan for all periods ending prior to the Effective Date (including periods from
the first
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day of the current plan year to the Effective Date) will be timely made prior to
the Effective Date by the Company and all ERISA Affiliates.
(iv) All required reports and descriptions of each Benefit
Plan which is not a Multiemployer Plan have been timely filed and distributed.
(v) None of the Company or any ERISA Affiliate has any plan
or commitment to establish any additional Benefit Plans or to amend any existing
Benefit Plan.
(vi) There are no actions, suits, or claims (other than
routine claims for benefits made in the ordinary course of plan administration
for which plan administrative review procedures have not been exhausted) pending
or threatened involving any Benefit Plans which are not Multiemployer Plans or
the assets of any such Benefit Plans, and no facts exist which could give rise
to any such action, suit, or claim.
(vii) Neither the execution and delivery of this Agreement nor
the consummation of the transactions contemplated hereby will entitle any
employee of the Company or its ERISA Affiliates to severance pay, unemployment
compensation or any similar payment unless such employee is terminated from
employment with the Company or its ERISA Affiliates in connection with the
consummation of this transaction (except obligations arising under the Worker
Adjustment and Retraining Notification Act, if the Purchaser effects a "plant
shutdown" or "mass layoff" after the Effective Date) or under any other
applicable law or regulation.
(viii) There is no contract, agreement, plan or arrangement
covering any employee or former employee of the Company or any ERISA Affiliates
that, individually or collectively, provides for the payment by the Company or
any ERISA Affiliate of any amount (i) that is not deductible under Section
162(a)(1) or 404 of the Code or (ii) that is an "excess parachute payment"
pursuant to Section 280G of the Code.
(ix) Neither the execution and delivery of this Agreement nor
the consummation of the transactions contemplated hereby will result in the
acceleration or creation of any rights of any Person to benefits under any
Benefit Plan (including, without limitation, the acceleration of the vesting or
exercisability of any stock options, the acceleration of the vesting of any
restricted stock, the acceleration of the accrual or vesting of any benefits
under any Pension Benefit Plan or the acceleration or creation of any rights
under any severance, parachute or change in control agreement).
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(x) Neither the Company nor any ERISA Affiliate maintains,
contributes to, or has any obligation to contribute to any Benefit Plan with
respect to any employee or former employee who is located outside of the United
States which Benefit Plan is subject to foreign law.
(f) DISCLOSURE OF DOCUMENTS AND INFORMATION. With respect to each
Benefit Plan which is not a Multiemployer Plan, the Company has disclosed in the
Company SEC Reports or in the Company Disclosure Schedule or made available to
Purchaser (i) a true and complete copy of such Benefit Plan, (ii) a copy of each
trust or other funding arrangement applicable to such Benefit Plan, (iii) the
most recent summary plan description and any applicable summary of material
modifications of such Benefit Plan, (iv) any annual reports or returns with
respect to such Benefit Plan (on Form 5500 Series or Form 990 Series, as
applicable), (v) all determination letters, rulings, exemptions, waivers and
opinions issued by the IRS, PBGC or the Department of Labor with respect to such
Benefit Plan and (vi) the most recently prepared actuarial report, auditor's
report and financial statement, if applicable.
4.14 TAXES
Except as disclosed in the Company SEC Reports, in the Company
Disclosure Schedule or as would not have a Material Adverse Effect on the
Company:
(a) All Tax Returns and reports required to be filed by the Company
or any of its Subsidiaries have been timely filed or will be timely filed, all
such Tax Returns are true, correct and complete, and all Taxes, due or claimed
to be due from the Company or any of its Subsidiaries have been paid, other than
those currently payable without penalty or interest and for which an adequate
reserve or accrual has been established. To the best knowledge of the Company,
there is no actual or proposed additional Tax assessments or any claim of
deficiency for any fiscal period ending on or prior to the Effective Date
against the Company or any of its Subsidiaries.
(b) To the best knowledge of the Company, no claim has ever been made
by an authority in a jurisdiction, whether in the United States or otherwise,
where any of the Company and its Subsidiaries do not file Tax Returns that any
of them is or may be subject to taxation by such jurisdiction. The Company
Disclosure Schedule indicates all federal Tax Returns that have been audited for
all years for which the statute of limitations has not expired, and indicates
those federal Tax Returns that are currently the subject of an audit.
(c) Neither the Company nor any of its Subsidiaries has any liability
for the Taxes of any Person other than the Company or its Subsidiaries under
Regulations Section 1.1502-6 (or any similar provision of state, local or
foreign law),
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as a transferee or successor, by contract or otherwise. None of the Company and
its Subsidiaries is a party to any Tax allocation or sharing agreement.
(d) None of the Company or its Subsidiaries has made any payments, is
obligated to make any payments, or is a party to any agreement that would
obligate it to make any payments that will not be deductible under Section 280G
of the Code.
(e) There are no security interests on any of the assets of any of
the Company and its Subsidiaries that arose in connection with any failure (or
alleged failure) to pay any Tax.
(f) The Company and each Subsidiary have withheld from their
employees (and timely paid to the appropriate governmental authority) all
amounts required by the Tax withholding provisions of applicable federal, state,
local and foreign laws (including, without limitation, income, social security,
and employment Tax withholding for all types of compensation, and withholding or
payments to non-United States Persons) for all periods through the date hereof.
(g) None of the Company and its Subsidiaries has waived any statute
of limitations in respect of Taxes or agreed to any extension of time with
respect to a Tax assessment or deficiency.
(h) None of the Company and its Subsidiaries has filed a consent
under Code Section 341(f) (or any similar provision of federal, state, local or
foreign law) concerning collapsible corporations.
(i) The unpaid Taxes of the Company and its Subsidiaries (A) did not,
as of the most recent fiscal month-end, exceed the reserve for Tax liability
(rather than any reserve for deferred Taxes established to reflect timing
differences between book and Tax income) set forth on the face of the Company's
most recent balance sheet (rather than in any notes thereto), and (B) do not
exceed that reserve as adjusted for the passage of time through the Effective
Date in accordance with the past custom and practice of the Company and its
Subsidiaries in filing their Tax Returns.
(j) No "ownership change" within the meaning of Section 382 of the
Code has occurred with respect to the Company or any Subsidiary during the past
10 years.
(k) Neither the Company nor any Subsidiary (A) has an unrecaptured
overall foreign loss within the meaning of Section 904(f) of the Code, or
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(B) has participated in or cooperated with an international boycott within the
meaning of Section 999 of the Code.
(l) No Tax is required to be withheld pursuant to any provision of
federal, state, local or foreign law, including without limitation Section 1445
of the Code, as a result of any of the transactions contemplated by this
Agreement.
(m) Neither the Company nor any Subsidiary is a lessor (or treated as
a lessor for federal income Tax purposes) of any property pursuant to the
provisions of Section 168(f)(8) of the Internal Revenue Code of 1954, as amended
and in effect before the enactment of the Tax Reform Act of 1986, or of any
property that is "tax-exempt use property" within the meaning of Section 168(h)
of the Code.
4.15 TITLE TO PROPERTIES. Except as disclosed in the Company SEC
Reports or the Company Disclosure Schedule or as would not have a Material
Adverse Effect on the Company:
(a) Each of the Company and each Subsidiary (i) has legal and valid
title to all the real properties and other assets (tangible, intangible or
mixed) it reflects in the financial statements included in the Company SEC
Reports as owned, free and clear of all Liens (other than Permitted Liens) and
free and clear of restrictions on the manner in which such property is presently
being used, and (ii) enjoys peaceful and undisturbed possession under all leases
to which it is a party as lessee.
(b) All of the leases to which the Company or any Subsidiary is a
party are legal, valid and binding and in full force and effect, and no payment
default by the Company, any Subsidiary or, to the actual knowledge of the
executive officers of the Company, any other party thereto has occurred or is
continuing thereunder.
(c) No property or asset, the value of which is reflected in the
balance sheets included in the financial statements included in the Company SEC
Reports, is held under any lease or under any conditional sale or other title
retention agreement.
(d) All tangible assets and facilities of each of the Company and its
Subsidiaries are in good condition and repair and are adequate for the uses to
which they are being put.
4.16 INTELLECTUAL PROPERTY PERMITS. Except as disclosed in the
Company SEC Reports or the Company Disclosure Schedule or as would not have a
Material Adverse Effect on the Company:
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(a) The Company and its Subsidiaries own, or are licensed to use, all
Intellectual Property required and sufficient to operate their businesses as
currently conducted.
(b) Each of the Company and its Subsidiaries has been granted all
Permits under any Applicable Laws necessary for the ownership of their
respective properties and assets and the conduct of their respective businesses.
(c) To the actual knowledge of the executive officers of the Company,
all Permits are in full force and effect and (a) no suspension or cancellation
is threatened with respect thereto, and (B) there is no reason to believe that
upon expiration of any Permit, such Permit will not be renewed.
4.17 ENVIRONMENTAL MATTERS. Except as disclosed in the Company SEC
Reports or the Company Disclosure Schedule:
(a) Each of the Company and its Subsidiaries is in compliance with
the provisions of all Environmental Laws, which compliance includes, but is not
limited to, the possession by the Company or its Subsidiaries, as appropriate,
of all licenses, permits and other governmental authorizations required under
applicable Environmental Laws, and compliance with the terms and conditions
thereof where the failure to comply could, singly or in the aggregate, have a
Material Adverse Effect on the Company.
(b) None of the Company or any of its Subsidiaries has received any
communication (written or oral), whether from a Governmental Authority, employee
or otherwise, that alleges that the Company or any of its Subsidiaries is not in
such compliance where the failure to comply could, singly or in the aggregate,
have a Material Adverse Effect on the Company, and there are no currently
existing circumstances actually known to the executive officers of the Company
that, if not corrected, could prevent such compliance in the future.
(c) There are no Environmental Claims pending or, to the actual
knowledge of the executive officers of the Company, threatened against the
Company or any of its Subsidiaries or against any Person whose liability for any
Environmental Claim the Company or any of its Subsidiaries has retained or
assumed either contractually or by operation of law that, singly or in the
aggregate, are reasonably likely to have a Material Adverse Effect on the
Company; and to the actual knowledge of the executive officers of the Company,
there is no basis for any such claim.
4.18 LITIGATION. Except as disclosed in the Company SEC Reports or
the Company Disclosure Schedule:
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(a) There are no Proceedings against or affecting the Company or any
of its Subsidiaries or any of their properties or assets, that are reasonably
likely, singly or in the aggregate, have a Material Adverse Effect on the
Company.
(b) Neither the Company nor any of its Subsidiaries is subject to any
judgment, injunction, decree, writ, interpretation or order of any Governmental
Authority that could, singly or in the aggregate, have a Material Adverse Effect
on the Company.
4.19 CONTRACTS AND COMMITMENTS. Except as disclosed in the Company
SEC Reports or the Company Disclosure Schedule:
(a) Neither the Company nor any of its Subsidiaries has any (i)
agreement for the employment of any individual or agreements that contain any
severance pay liabilities or obligations; (ii) engineering, mining or
construction contract or commitment not terminable without penalty or cost on
notice of thirty (30) days or less and which contains an obligation to pay
and/or accrue or provide services for fees of more than $5,000,000 in any year
in the case of engineering and mining services contracts and $10,000,000 in any
year in the case of construction, construction management and mining operations
contracts; (iii) agreement of guarantee or indemnification (other than rights
of indemnification to which officers, directors, employees and agents may be
entitled by reason of Applicable Laws); or (iv) agreement or commitment limiting
the freedom of the Company or any Subsidiary to engage in any line of business
or compete with any Person.
(b) To the actual knowledge of the executive officers of the Company,
neither the Company nor any of its Subsidiaries has breached, nor has received
notice in writing or otherwise of any claim that it has breached, any of the
terms of conditions of any agreement, contract or commitment referred to in
Section 4.19(a), which breach or breaches, singly or in the aggregate, are
reasonably likely to have a Material Adverse Effect on the Company, and, to the
actual knowledge of the executive officers of the Company, there are no facts or
conditions (other than the transactions contemplated by the Plan and this
Agreement) which have occurred or are anticipated to occur which, through the
passage of time or the giving of notice, or both, would constitute a breach
under any such agreement, contract, or commitment which breach is reasonably
likely to have a Material Adverse Effect on the Company.
4.20 COMPLIANCE WITH LAWS. Except as disclosed in the Company SEC
Reports or the Company Disclosure Schedule, to the actual knowledge of the
executive officers of the Company, the Company and its Subsidiaries have
complied with all applicable laws, regulations (including, without limitation,
applicable occupational health and safety laws and regulations, applicable
immigration laws and regula-
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tions and applicable laws governing the sale of franchises) and zoning
ordinances of foreign, federal, state and local governments and all agencies
thereof which affect the business, business practices or any owned or leased
properties of the Company and its Subsidiaries and to which the Company and its
Subsidiaries may be subject, except where the failure to comply would not,
singly or in the aggregate, have a Material Adverse Effect on the Company.
4.21 ABSENCE OF CERTAIN DEVELOPMENTS. Except as disclosed in the
Company SEC Reports or the Company Disclosure Schedule: (a) since December 31,
1995, no event has occurred with respect to the Company or any of its
Subsidiaries which is reasonably likely to have a Material Adverse Effect on the
Company; and (b) since December 31, 1995, neither the Company nor any of its
Subsidiaries has taken any action which would be prohibited under Section 6.2.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
The Purchaser hereby represents and warrants to the Company as
follows:
5.1 ORGANIZATION, GOOD STANDING AND AUTHORITY. Each of the Purchaser
and its Subsidiaries is a corporation duly organized, validly existing and in
good standing under the laws of the state of its incorporation. Each of the
Purchaser and its Subsidiaries has full corporate power to carry on its
business, as it is now being conducted, and to own, lease or operate the
properties and assets it now owns, leases or operates. Each of the Purchaser and
its Subsidiaries is qualified to do business, is in good standing and has all
required business licenses in each jurisdiction in which its failure to obtain
or maintain such qualification, good standing or license could have a Material
Adverse Effect on the Purchaser.
5.2 BINDING AGREEMENT. The Purchaser has all requisite corporate
power and corporate authority to enter into this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly
authorized by all requisite corporate action. This Agreement is a legal, valid
and binding obligation of the Purchaser, enforceable against it in accordance
with its terms, except as enforcement thereof may be limited by general
principles of equity (regardless of whether such enforceability is considered in
a proceeding at law or in equity) and the effect of applicable bankruptcy,
insolvency, moratorium and other similar laws of general application relating to
or affecting creditors' rights generally, including, without
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limitation, the effect of statutory or other law regarding fraudulent
conveyances and preferential transfers.
5.3 CAPITALIZATION. The authorized capitalization of the Purchaser
consists solely of (a) 39,000,000 shares of the Purchaser Common Stock, of which
29,481,184 shares were issued and outstanding as of May 21, 1996; and (b)
1,000,000 shares of Purchaser Preferred Stock, of which no shares were issued or
outstanding as of the date hereof. At the Effective Time, the authorized
capitalization of the Surviving Corporation will consist solely of (a)
100,000,000 shares of the Surviving Corporation Common Stock; and (b) 10,000,000
shares of Surviving Corporation Preferred Stock, including 18,000 shares of
Surviving Corporation Series A Preferred Stock.
5.4 SUBSIDIARIES. There is set forth in the Purchaser Disclosure
Schedule (i) the name and percentage ownership by the Purchaser of each of its
Subsidiaries and each other entity in which the Purchaser has an ownership
interest; (ii) the jurisdiction of incorporation, capitalization and ownership
of each Subsidiary; and (iii) the names of the officers, directors, partners or
Persons holding a similar management position of each Subsidiary and each such
entity.
5.5 NO VIOLATION
(a) None of the Purchaser or any of its Subsidiaries is (i) in
violation of its respective Charter Documents, or (ii) to the actual knowledge
of the executive officers of Purchaser, in default in the performance of any
obligation, agreement or condition contained in any Applicable Agreement, which
violation or default could, singly or in the aggregate, have a Material Adverse
Effect on the Purchaser.
(b) Subject to the entry and provisions of the Confirmation Order and
assuming that the consents, approvals, authorizations, declarations, filings and
registrations referred to in Section 5.8 have been made or obtained and shall
remain in full force and effect and the conditions set forth in Articles 7 and 8
shall have been satisfied or waived, neither the execution or delivery by the
Purchaser of this Agreement nor the performance by the Purchaser of its
obligations under this Agreement will (i) constitute a breach or violation under
the Charter Documents of the Purchaser or any of its Subsidiaries; or (ii)
conflict with, violate, constitute a breach or violation of or a default (with
the passage of time or otherwise) under, require the consent of any Person
under, give to others any rights of termination, amendment, acceleration or
cancellation of or result in the imposition of a Lien on any of the properties
or assets of the Purchaser or any of its Subsidiaries or an acceleration of
material indebtedness pursuant to, any Applicable Agreement, except where such
breach, violation or default, or the failure to obtain such consent, or such
termination, amendment or cancellation, or such
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imposition of a Lien, or such acceleration of indebtedness would not, singly or
in the aggregate, have a Material Adverse Effect on the Purchaser.
5.6 EXCHANGE ACT REPORTS AND FINANCIAL STATEMENTS. The Purchaser has
furnished or will upon request furnish the Purchaser with copies of its Annual
Report on Form 10-K for the fiscal years ended November 30, 1993, 1994 and 1995
and its Quarterly Report on Form 10-Q for the quarter ended February 29, 1996,
in each case with exhibits, and all other reports filed or required to be filed
with the Exchange Act and the rules and regulations of the SEC thereunder since
December 1, 1994 (all such reports being herein collectively called the
"Purchaser SEC Reports"), each as filed with the SEC. Each of the Purchaser SEC
Reports, when it was filed with the SEC, complied in all material respects with
the requirements of the Exchange Act and the rules and regulations of the SEC
thereunder, and did not on the date of filing or amendment, if any, contain any
untrue statement of material fact or omit to state a material fact necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading. The financial statements contained in the Purchaser SEC
Reports: (i) were prepared in accordance with GAAP (except as otherwise noted
therein and subject, in the case of unaudited interim financial statements, to
the omission of certain notes not ordinarily accompanying such unaudited interim
financial statements and to normal year-end adjustments and any other
adjustments described therein) and with Regulation S-X promulgated under the
Exchange Act; and (ii) present fairly the Purchaser's consolidated financial
condition and the consolidated results of its operations, cash flows and
shareholders equity as at the relevant dates thereof and for the periods covered
thereby. .
5.7 INFORMATION IN DISCLOSURE STATEMENT AND PURCHASER PROXY
STATEMENT. None of the information supplied or to be supplied in writing by the
Purchaser specifically for inclusion the Disclosure Statement, will, at the time
it is filed with the Bankruptcy Court, at the time of the Disclosure Statement
Hearing or at the time its is mailed to holders of Claims and Interests of the
Company, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. Except for the information provided by the Company for inclusion in
the Purchaser Proxy Statement (as to which the Purchaser expresses no view), the
Purchaser Proxy Statement relating to the special meeting of stockholders of the
Purchaser to be held in connection with the Merger will not, at the date mailed
to the Purchaser's stockholders, at the time of the meeting of stockholders to
be held in connection with the Merger and at the Effective Date, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they are made, not misleading. The
Purchaser Proxy Statement will, when filed with the SEC by the Purchaser, comply
as to form in all material respects
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with the provisions of the Exchange Act and the rules and regulations
thereunder, except that no representation is made by the Purchaser with respect
to statements made therein about the Company and based on information supplied
by the Company for inclusion in the Purchaser Proxy Statement.
5.8 CONSENTS AND APPROVALS. No consent, approval or authorization
of, or declaration, filing or registration with, any United States federal or
state governmental or regulatory authority is required to be made or obtained by
the Purchaser in connection with the execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated hereby, except
(i) for consents, approvals or authorizations of, or declarations or filings
with, the Bankruptcy Court, (ii) for the filing of a notification and report
form under the HSR Act and the expiration or earlier termination of the
applicable waiting period thereunder, (iii) for any filings with the SEC or any
other Governmental Authority pursuant to the applicable requirements of any
federal or state securities or Blue Sky laws, (iv) for the filing of the Merger
Certificate with the Secretary of State of the State of Delaware in accordance
with the applicable provisions of the Delaware Law and of appropriate documents
with the relevant authorities of other states in which the Company or any of its
Subsidiaries is authorized to do business, (v) for consents, approvals,
authorizations, declarations or filings required under any Environmental Law,
(vi) for consents, approvals, authorizations, declarations or filings required
under any agreement with a Governmental Authority, and (vii) for consents,
approvals or authorizations, or declarations, filings or registrations, which,
if not made or obtained would not, singly or in the aggregate, have a Material
Adverse Effect on the Purchaser.
5.9 COMPLIANCE WITH LAWS. Except as set forth in the Purchaser SEC
Reports or in the Purchaser Disclosure Schedule, to the actual knowledge of the
executive officers of the Purchaser, the Purchaser and its Subsidiaries have
complied with all applicable laws, regulations (including, without limitation,
applicable occupational health and safety laws and regulations and applicable
immigration laws and regulations) and zoning ordinances of foreign, federal,
state and local governments and all agencies thereof which affect the business,
business practices or any owned or leased properties of the Purchaser and its
Subsidiaries and to which the Purchaser and its Subsidiaries may be subject,
except where the failure to comply would not singly or in the aggregate have a
Material Adverse Effect on the Purchaser.
5.10 EMPLOYEE BENEFIT PLANS
(a) IDENTIFICATION OF PLANS. The Purchaser Disclosure Schedule lists
and identifies each Pension Benefit Plan, Welfare Benefit Plan and Multiemployer
Plan which is (or, with respect to Multiemployer Plans or Pension Benefit Plan
only, was within 12 months prior to the Effective Date) maintained or
contributed to by the
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Purchaser or any ERISA Affiliate or under which the Purchaser or any of its
ERISA Affiliate was or is obligated to contribute, or has any liability with
respect to, including terminated Multiemployer Plans which have been terminated
within the past 12 months and any stock purchase, option or bonus plan, deferred
compensation, severance pay, incentive, vacation or sick pay or leave,
maintained or contributed by the Purchaser or any of its ERISA Affiliates (each
individually a "Benefit Plan" and collectively the "Benefit Plans"). With
respect to any Benefit Plan to which contributions are made pursuant to a
collective bargaining agreement, the identification of such Benefit Plan may be
made by referring to the collective bargaining agreement disclosed in the
Purchaser Disclosure Schedule.
(b) REPRESENTATIONS APPLICABLE TO PENSION BENEFIT PLANS
Except as disclosed in the Purchaser SEC Reports or the Purchaser
Disclosure Schedule or as would not have a Material Adverse Effect on the
Purchaser:
(i) Each Pension Benefit Plan which is intended to be
"qualified" under Section 401(a) of the Code, is and has been at all times so
qualified and each trust maintained thereunder is and has been at all times
exempt from taxation under Section 501(a) of the Code was so exempt throughout
its existence.
(ii) The funding method used in connection with each Pension
Benefit Plan which is subject to the minimum funding requirements of ERISA is
acceptable and the actuarial assumptions used in connection with funding each
such plan are reasonable; as of the last day of the last plan year of each
Pension Benefit Plan and, to the best knowledge of the Purchaser's actuary, as
of the Effective Date, the "amount of unfunded benefit liabilities" as defined
in Section 4001(a)(18) of ERISA (but excluding from the definition of "current
value" of "assets" of such Pension Benefit Plan, accrued but unpaid
contributions) did not and will not exceed zero; no "accumulated funding
deficiency" (for which an excise tax is due or would be due in the absence of a
waiver) as defined in Section 412 of the Code or as defined in Section 302(a)(2)
of ERISA, whichever may apply, has been incurred with respect to any Pension
Benefit Plan with respect to any plan year, whether or not waived; neither the
Purchaser nor any ERISA Affiliate has failed to pay when due any "required
installment," within the meaning of Section 412(m) of the Code and Section
302(e) of ERISA, whichever may apply, with respect to any Pension Benefit Plan;
neither the Purchaser nor any ERISA Affiliate is subject to any lien imposed
under Section 412(n) of the Code or Section 302(f) of ERISA, whichever may
apply, with respect to any Pension Benefit Plan; and neither the Purchaser nor
any ERISA Affiliate has any liability for unpaid contributions with respect to
any Pension Benefit Plan.
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(iii) The Purchaser and each ERISA Affiliate has paid all
premiums (and interest charges and penalties for late payment, if applicable)
due the PBGC with respect to each Pension Benefit Plan for each plan year
thereof for which such premiums are required; neither the Purchaser nor any
ERISA Affiliate has engaged in, or is a successor or parent corporation to an
entity that has engaged in, a transaction described in Section 4069 of ERISA;
there has been no "reportable event" (as defined in Section 4043(b) or (c) of
ERISA and the PBGC regulations under such Section, other than a reportable event
for which notice to the PBGC is waived or penalties have been waived under PBGC
Technical Update 95-3) with respect to any Pension Benefit Plan; and neither the
Purchaser nor any ERISA Affiliate has, at any time, (A) ceased operations at a
facility so as to become subject to the provisions of Section 4068(e) of ERISA,
(B) withdrawn as a substantial employer so as to become subject to the
provisions of Section 4063 of ERISA, or (C) ceased making contributions on or
before the Effective Date to any Pension Benefit Plan subject to Section 4064(a)
of ERISA to which the Purchaser any ERISA Affiliate made contributions during
the five years prior to the Effective Date.
(c) REPRESENTATIONS WITH RESPECT TO MULTIEMPLOYER PLANS
Except as disclosed in the Purchaser SEC Reports or the Purchaser
Disclosure Schedule or as would not have a Material Adverse Effect on the
Purchaser:
(i) After taking into account the exceptions set forth in
ERISA Sections 4203(b) and 4208(d), neither the Purchaser nor any ERISA
Affiliate has, at any time, withdrawn from a Multiemployer Plan in a "complete
withdrawal" or a "partial withdrawal" as defined in Sections 4203 and 4205 of
ERISA, respectively, so as to result in a liability, contingent or otherwise
(including, but not limited to, the obligations pursuant to an agreement entered
into in accordance with Section 4204 of ERISA), to the Purchaser or any ERISA
Affiliate which has not been fully satisfied or otherwise fully discharged.
(ii) If, as of the Effective Date, the Purchaser and all ERISA
Affiliates were to withdraw from all Multiemployer Plans to which it (or any of
them) has contributed or been obligated to contribute, it (and they) would incur
no liabilities to such plans under Title IV of ERISA.
(iii) To the actual knowledge of the executive officers of the
Purchaser, with respect to each Multiemployer Plan: (A) no such Multiemployer
Plan has been terminated or has been in reorganization under ERISA so as to
result, directly or indirectly, in any liability, contingent or otherwise, of
the Purchaser or any ERISA Affiliate under Title IV of ERISA; (B) no proceeding
has been initiated by any Person (including the PBGC) to terminate any
Multiemployer Plan; (C) the Purchaser has no
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reason to believe that any Multiemployer Plan will be terminated or will be
reorganized under ERISA; and (D) the Purchaser does not intend to withdraw from
any Multiemployer Plan.
(iv) Neither the Purchaser nor any ERISA Affiliate has incurred
any liability with respect to any Multiemployer Plan which is a "welfare benefit
plan" as defined in Section 3(1) of ERISA, under the terms of such Multiemployer
Plan, any collective bargaining agreement or otherwise resulting from any
cessation of contributions, cessation of obligations to make contributions or
other form of withdrawal from such Multiemployer Plan and if, as of the
Effective Date, the Purchaser and all ERISA Affiliates were to have a cessation
of contributions, cessation of obligations to make contribution or other form of
withdrawal from all such Multiemployer Plans it (and they) would incur no
liabilities with respect to any such Multiemployer Plans under the terms of such
Multiemployer Plans, any collective bargaining agreement or otherwise.
(d) REPRESENTATIONS WITH RESPECT TO WELFARE BENEFIT PLANS
Except as disclosed in the Purchaser SEC Reports or the Purchaser
Disclosure Schedule or as would not have a Material Adverse Effect on the
Purchaser:
(i) None of the Purchaser or any Welfare Benefit Plan has any
present or future obligation to make any payment to or with respect to any
present or former employee of the Purchaser or any ERISA Affiliate for post-
retirement medical benefits or other post-retirement welfare benefits, and the
Purchaser has accounted for such obligations in accordance with GAAP.
(ii) Each Welfare Benefit Plan which is a "group health plan,"
as defined in Section 607(1) of ERISA, has been operated in compliance with the
provisions of Part 6 of Title I of ERISA and Sections 162(k) and 4980B of the
Code at all times.
(e) GENERAL REPRESENTATIONS WITH RESPECT TO BENEFIT PLANS
Except as disclosed in the Purchaser SEC Reports or the Purchaser
Disclosure Schedule or as would not have a Material Adverse Effect on the
Purchaser:
(i) Each Benefit Plan which is not a Multiemployer Plan complies
and has been administered in form and operation with all requirements of ERISA,
the Code and Applicable Law. The Purchaser and the ERISA Affiliates have
performed all of their obligations under all Benefit Plans.
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(ii) There have been no acts or omissions which have given
rise to, or which could give rise to, any Tax under Sections 409, 502(c), or
502(i) of ERISA, or Sections 4975 or 4976 of the Code, for which the Purchaser
and any ERISA Affiliate may be liable.
(iii) All contributions required with respect to any Benefit
Plan for all periods ending prior to the Effective Date (including periods from
the first day of the current plan year to the Effective Date) will be timely
made prior to the Effective Date by the Purchaser and all ERISA Affiliates.
(iv) All required reports and descriptions of each Benefit
Plan which is not a Multiemployer Plan have been timely filed and distributed.
(v) None of the Purchaser or any ERISA Affiliate has any plan
or commitment to establish any additional Benefit Plans or to amend any existing
Benefit Plan.
(vi) There are no actions, suits, or claims (other than
routine claims for benefits made in the ordinary course of plan administration
for which plan administrative review procedures have not been exhausted) pending
or threatened involving any Benefit Plans which are not Multiemployer Plans or
the assets of any such Benefit Plans, and no facts exist which could give rise
to any such action, suit, or claim.
(vii) Neither the execution and delivery of this Agreement nor
the consummation of the transactions contemplated hereby will entitle any
employee of the Purchaser or its ERISA Affiliates to severance pay, unemployment
compensation or any similar payment unless such employee is terminated from
employment with the Purchaser or its ERISA Affiliates in connection with the
consummation of this transaction (except obligations arising under the Worker
Adjustment and Retraining Notification Act, if the Purchaser effects a "plant
shutdown" or "mass layoff" after the Effective Date) or under any other
applicable law or regulation.
(viii) There is no contract, agreement, plan or arrangement
covering any employee or former employee of the Purchaser or any ERISA
Affiliates that, individually or collectively, provides for the payment by the
Purchaser or any ERISA Affiliate of any amount (i) that is not deductible under
Section 162(a)(1) or 404 of the Code or (ii) that is an "excess parachute
payment" pursuant to Section 280G of the Code.
(ix) Neither the execution and delivery of this Agreement nor
the consummation of the transactions contemplated hereby will result in the
acceleration
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or creation of any rights of any Person to benefits under any Benefit Plan
(including, without limitation, the acceleration of the vesting or
exercisability of any stock options, the acceleration of the vesting of any
restricted stock, the acceleration of the accrual or vesting of any benefits
under any Pension Benefit Plan or the acceleration or creation of any rights
under any severance, parachute or change in control agreement).
(x) Neither the Purchaser nor any ERISA Affiliate maintains,
contributes to, or has any obligation to contribute to any Benefit Plan with
respect to any employee or former employee who is located outside of the United
States which Benefit Plan is subject to foreign law.
(f) DISCLOSURE OF DOCUMENTS AND INFORMATION. With respect to each
Benefit Plan which is not a Multiemployer Plan, the Purchaser has disclosed in
the Purchaser SEC Reports or in the Purchaser Disclosure Schedule or made
available to Purchaser (i) a true and complete copy of such Benefit Plan, (ii) a
copy of each trust or other funding arrangement applicable to such Benefit Plan,
(iii) the most recent summary plan description and any applicable summary of
material modifications of such Benefit Plan, (iv) any annual reports or returns
with respect to such Benefit Plan (on Form 5500 Series or Form 990 Series, as
applicable), (v) all determination letters, rulings, exemptions, waivers and
opinions issued by the IRS, PBGC or the Department of Labor with respect to such
Benefit Plan and (vi) the most recently prepared actuarial report, auditor's
report and financial statement, if applicable.
5.11 TAXES
Except as disclosed in the Purchaser SEC Reports, in the Purchaser
Disclosure Schedule or as would not have a Material Adverse Effect on the
Purchaser:
(a) All Tax Returns and reports required to be filed by the Purchaser
or any of its Subsidiaries have been timely filed or will be timely filed, all
such Tax Returns are true, correct and complete, and all Taxes, due or claimed
to be due from the Purchaser or any of its Subsidiaries have been paid, other
than those currently payable without penalty or interest and for which an
adequate reserve or accrual has been established. To the best knowledge of the
Purchaser, there is no actual or proposed additional Tax assessments or any
claim of deficiency for any fiscal period ending on or prior to the Effective
Date against the Purchaser or any of its Subsidiaries.
(b) To the best knowledge of the Purchaser, no claim has ever been
made by an authority in a jurisdiction, whether in the United States or
otherwise, where any of the Purchaser and its Subsidiaries do not file Tax
Returns that any of them is or may be subject to taxation by such jurisdiction.
The Purchaser Disclosure Schedule indicates all federal Tax Returns that have
been audited for all tax years for which the
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statute of limitations has not expired, and indicates those federal Tax Returns
that are currently the subject of an audit.
(c) Neither the Purchaser nor any of its Subsidiaries has any
liability for the Taxes of any Person other than the Purchaser or its
Subsidiaries under Regulations Section 1.1502-6 (or any similar provision of
state, local or foreign law), as a transferee or successor, by contract or
otherwise. None of the Purchaser and its Subsidiaries is a party to any Tax
allocation or sharing agreement.
(d) None of the Purchaser or its Subsidiaries has made any payments,
is obligated to make any payments, or is a party to any agreement that would
obligate it to make any payments that will not be deductible under Section 280G
of the Code.
(e) There are no security interests on any of the assets of any of
the Purchaser and its Subsidiaries that arose in connection with any failure (or
alleged failure) to pay any Tax.
(f) The Purchaser and each Subsidiary have withheld from their
employees (and timely paid to the appropriate governmental authority) all
amounts required by the Tax withholding provisions of applicable federal, state,
local and foreign laws (including, without limitation, income, social security,
and employment Tax withholding for all types of compensation, and withholding or
payments to non-United States Persons) for all periods through the date hereof.
(g) None of the Purchaser and its Subsidiaries has waived any statute
of limitations in respect of Taxes or agreed to any extension of time with
respect to a Tax assessment or deficiency.
(h) None of the Purchaser and its Subsidiaries has filed a consent
under Code Section 341(f) (or any similar provision of federal, state, local or
foreign law) concerning collapsible corporations.
(i) The unpaid Taxes of the Purchaser and its Subsidiaries (A) did
not, as of the most recent fiscal month-end, exceed the reserve for Tax
liability (rather than any reserve for deferred Taxes established to reflect
timing differences between book and Tax income) set forth on the face of the
Purchaser's most recent balance sheet (rather than in any notes thereto), and
(B) do not exceed that reserve as adjusted for the passage of time through the
Effective Date in accordance with the past custom and practice of the Purchaser
and its Subsidiaries in filing their Tax Returns.
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(j) No "ownership change" within the meaning of Section 382 of the
Code has occurred with respect to the Purchaser or any Subsidiary during the
past 10 years.
(k) Neither the Purchaser nor any Subsidiary (A) has an unrecaptured
overall foreign loss within the meaning of Section 904(f) of the Code, or (B)
has participated in or cooperated with an international boycott within the
meaning of Section 999 of the Code.
(l) No Tax is required to be withheld pursuant to any provision of
federal, state, local or foreign law, including without limitation Section 1445
of the Code, as a result of any of the transactions contemplated by this
Agreement.
(m) Neither the Purchaser nor any Subsidiary is a lessor (or treated
as a lessor for federal income Tax purposes) of any property pursuant to the
provisions of Section 168(f)(8) of the Internal Revenue Code of 1954, as amended
and in effect before the enactment of the Tax Reform Act of 1986, or of any
property that is "tax-exempt use property" within the meaning of Section 168(h)
of the Code.
5.12 ENVIRONMENTAL MATTERS. Except as disclosed in the Purchaser SEC
Reports or the Purchaser Disclosure Schedule:
(a) Each of the Purchaser and its Subsidiaries is in compliance with
the provisions of all Environmental Laws, which compliance includes, but is not
limited to, the possession by the Purchaser or its Subsidiaries, as appropriate,
of all licenses, permits and other governmental authorizations required under
applicable Environmental Laws, and compliance with the terms and conditions
thereof where the failure to comply could, singly or in the aggregate, have a
Material Adverse Effect on the Purchaser.
(b) None of the Purchaser or any of its Subsidiaries has received any
communication (written or oral), whether from a Governmental Authority, employee
or otherwise, that alleges that the Purchaser or any of its Subsidiaries is not
in such compliance where the failure to comply could, singly or in the
aggregate, have a Material Adverse Effect on the Purchaser, and there are no
currently existing circum stances actually known to the executive officers of
the Purchaser that, if not corrected, could prevent such compliance in the
future.
(c) There are no Environmental Claims pending or, to the actual
knowledge of the executive officers of the Purchaser, threatened against the
Purchaser or any of its Subsidiaries or against any Person whose liability for
any Environmental Claim the Purchaser or any of its Subsidiaries has retained or
assumed either contractually or by operation of law that, singly or in the
aggregate, are reasonably
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likely to have a Material Adverse Effect on the Purchaser; and to the actual
knowledge of the executive officers of the Purchaser, there is no basis for any
such claim.
5.13 ABSENCE OF CERTAIN DEVELOPMENTS. Except as set forth in the
Purchaser SEC Reports or the Purchaser Disclosure Statement: (a) since November
30, 1995, no event has occurred with respect to the Purchaser or any of its
Subsidiaries which has had, or which is reasonably likely to have, a Material
Adverse Effect on the Purchaser; and (b) since the date hereof, neither the
Purchaser nor any of its Subsidiaries has taken any action which would be
prohibited under Section 6.3.
ARTICLE 6
ACTIONS BY THE COMPANY AND THE PURCHASER
PENDING THE EFFECTIVE DATE
The Company and the Purchaser covenant as follows for the period from
the date hereof through the Effective Date:
6.1 MAINTENANCE OF BUSINESS.
(a) Subject after the Filing Date to any obligations as a debtor and
debtor-in-possession under the Bankruptcy Code, the Company shall, and shall
cause each of its Subsidiaries to, diligently carry on its business in the
ordinary course consistent with past practice, including, without limitation,
meeting its obligations as they become due and fulfilling its commitments to
suppliers to the extent allowed under the First Day Orders. The Company shall
cause its existing insurance policies to be maintained in effect through the
Effective Date.
(b) The Purchaser shall, and shall cause each of its Subsidiaries to,
diligently carry on its business in the ordinary course consistent with past
practice. The Purchaser shall cause its existing insurance policies to be
maintained in effect through the Effective Date.
6.2 CERTAIN PROHIBITED COMPANY TRANSACTIONS. Without the prior
written approval of the Purchaser (which shall not be unreasonably withheld or
delayed) or except as otherwise contemplated under this Agreement or under the
Plan, prior to the Effective Date the Company shall not, and shall cause each of
its Subsidiaries not to:
(a) incur any indebtedness for borrowed money, assume, guarantee,
endorse or otherwise become responsible for obligations of any other individual,
partnership, firm or corporation, or make any loans or advances to any
individual,
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partnership, firm or corporation, except, in any such case, in the ordinary
course of business and consistent with past practice and, with respect to
indebtedness for borrowed money, pursuant to existing agreements or pursuant to
a DIP Facility as contemplated by the Plan;
(b) issue any shares of its capital stock or any other securities or
any securities convertible into, exchangeable for or exercisable to purchase
shares of its capital stock or any other securities, other than shares issued
upon exercise of issued and outstanding options, warrants and other rights to
purchase capital stock of the Company, or amend or modify the terms of any
issued and outstanding options, warrants and other rights to purchase capital
stock of the Company;
(c) make or pay or incur any obligation to make or pay any dividend
or other distribution on its capital stock or make or incur any obligation to
make any redemption, repurchase or other acquisition of its respect to capital
stock or split or reclassify any of its capital stock;
(d) make any change to its Certificate of Incorporation or bylaws
other than the filing of the Merger Certificate;
(e) mortgage, pledge or otherwise encumber any of its properties or
assets or sell, transfer or otherwise dispose of any of its properties or assets
with a value in excess of $5,000,000 (unless such assets are worn-out obsolete)
or cancel, release, compromise or assign any indebtedness owed to it or any
claims held by it, except, in any such case, in the ordinary course of business
and consistent with past practice or in connection with the DIP Facility;
(f) enter into any sale and leaseback agreement or transaction except
in the ordinary course of business and consistent with past practice;
(g) make any investment of a capital nature either by purchase of
stock or securities, contributions to capital, property transfer or otherwise,
or by the purchase of any property or assets of any other individual,
partnership, firm or corporation, except, in any such case, in the ordinary
course of business and consistent with past practice;
(h) make any material tax election or make any material change in
the Company's accounting principles or practices or tax positions (other than
elections or changes necessary to facilitate refunds described under clause (c)
of the definition of Excluded Assets);
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(i) enter into any engineering or mining services contracts involving
fixed payments of more than $5,000,000 in any year or construction, construction
management or mining operations contracts involving fixed payments of more than
$10,000,000 in any year or into any other material contract (other than
reimbursable subcontracts) that would involve fixed payments or accruals of
fixed payments by the Company of more than $1,500,000 in any year;
(j) enter into any employment agreement providing for a salary in
excess of $150,000 per year or increase the compensation of employees who earn
more than $150,000 per year other than increases in the ordinary course of
business consistent with past practice; or
(k) enter into any other transactions outside the ordinary course of
business or do any other act which would cause any representation or warranty of
the Company in this Agreement to be or become untrue.
6.3 CERTAIN PROHIBITED PURCHASER TRANSACTIONS. Without the prior
written approval of the Company (which shall not be unreasonably withheld or
delayed) or except as otherwise contemplated under this Agreement or under the
Plan or except as disclosed in the Purchaser Disclosure Schedule, prior to the
Effective Date the Purchaser shall not, and shall cause each of its Subsidiaries
not to:
(a) incur any indebtedness for borrowed money, assume, guarantee,
endorse or otherwise become responsible for obligations of any other individual,
partnership, firm or corporation, or make any loans or advances to any
individual, partnership, firm or corporation, except, in any such case, in the
ordinary course of business and consistent with past practice and, with respect
to indebtedness for borrowed money, pursuant to existing agreements or pursuant
to a DIP Facility as contemplated by the Plan;
(b) issue any shares of its capital stock or any other securities or
any securities convertible into, exchangeable for or exercisable to purchase
shares of its capital stock or any other securities, other than shares issued
upon exercise of issued and outstanding options, warrants and other rights to
purchase capital stock of the Purchaser, or amend or modify the terms of any
issued and outstanding options, warrants and other rights to purchase capital
stock of the Purchaser;
(c) make or pay or incur any obligation to make or pay any dividend
or other distribution on its capital stock or make or incur any obligation to
make any redemption, repurchase or other acquisition of its respect to capital
stock or split or reclassify any of its capital stock;
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(d) mortgage, pledge or otherwise encumber any of its properties or
assets or sell, transfer or otherwise dispose of any of its properties or assets
with a value in excess of $5,000,000 (unless such assets are worn-out obsolete)
or cancel, release, compromise or assign any indebtedness owed to it or any
claims held by it, except, in any such case, in the ordinary course of business
and consistent with past practice;
(e) enter into any sale and leaseback agreement or transaction except
in the ordinary course of business and consistent with past practice;
(f) make any investment of a capital nature either by purchase of
stock or securities, contributions to capital, property transfer or otherwise,
or by the purchase of any property or assets of any other individual,
partnership, firm or corporation, except, in any such case, in the ordinary
course of business and consistent with past practice;
(g) enter into any employment agreement providing for a salary in
excess of $150,000 per year or increase the compensation of employees who earn
more than $150,000 per year other than increases in the ordinary course of
business consistent with past practice; or
(h) enter into any other transactions outside the ordinary course of
business or do any other act which would cause any representation or warranty of
the Purchaser in this Agreement to be or become untrue.
6.4 PURCHASER PROXY STATEMENT. Subject to the terms and conditions
of this Agreement, the Purchaser agrees to use its best efforts to prepare and
file the Purchaser Proxy Statement with the SEC and to have the Purchaser Proxy
Statement cleared by the SEC as promptly as practicable, including by consulting
with the other parties hereto as to, and responding promptly to, any SEC
comments with respect thereto. The Company agrees to provide all information
regarding the Company and its subsidiaries, officers and directors that is
necessary to permit the Purchaser to prepare and file the Purchaser Proxy
Statement. In addition, if at any time prior to the stockholders' meeting any
event or circumstance relating to the Company or any of its Subsidiaries, or any
of its officers or directors should be discovered by the Company which is
required to be set forth in an amendment or supplement to the Purchaser Proxy
Statement, the Company shall promptly inform the Purchaser of such event or
circumstance and shall provide all information with respect thereto necessary to
permit the Purchaser to prepare such amendment or supplement. The information
supplied by the Company for inclusion in the Purchaser Proxy Statement or any
amendment or supplement thereto shall not contain any untrue statement of a
material fact or omit to
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state any material fact required to be stated therein or necessary in order to
make the statements therein not misleading.
6.5 MEETING OF PURCHASER'S STOCKHOLDERS. The Purchaser shall, in
accordance with applicable law and its certificate of incorporation and bylaws,
duly call, convene and hold a meeting of its stockholders to occur as promptly
as practicable (and in any event prior to December 31, 1996) for the purpose of
voting upon this Agreement, the Merger and related matters. The Purchaser will,
through its Board of Directors, recommend to its stockholders approval of such
matters and will take all lawful action to solicit such approval, including
without limitation timely mailing the Purchaser Proxy Statement, which shall
include such recommendation.
6.6 INVESTIGATION. Each of the Company and the Purchaser agrees to
permit the other and its employees, agents and representatives reasonable access
to (a) its premises and (b) all of its books, computer software application
systems, files and records, including, but not limited to, lease, loan, real
estate, financial, tax and personnel files and records, and to furnish the other
such financial and operating data and other information with respect to its
business, assets and properties as the other shall request, for the purpose of
conducting a complete and thorough investigation and review of the other's
business. Each of the Company and the Purchaser shall authorize its accountants
to provide the other with their working papers for its financial statements.
Each of the Company and the Purchaser shall make its officers and other
employees available to the other and its employees, agents and representatives
to respond to questions and requests for information in connection with the
other's due diligence investigation. Each of the Company and the Purchaser shall
keep the other informed of all material developments involving its operations
and activities.
6.7 NOTIFICATION OF CERTAIN MATTERS. The Company shall give prompt
notice to the Purchaser, and the Purchaser shall give prompt notice to the
Company, of (i) the occurrence, or failure to occur, of any event which
occurrence or failure would be likely to cause any representation or warranty
contained in this Agreement to be untrue or inaccurate any time from the date
hereof to the Effective Date and (ii) any material failure to comply with or
satisfy any covenant, condition or agreement to be complied with or satisfied by
it hereunder. The Company and the Purchaser acknowledge that they are presently
unaware of any facts that cause any representation or warranty contained in this
Agreement to be untrue or inaccurate.
6.8 REASONABLE BEST EFFORTS. Subject to the terms and conditions of
this Agreement, and the fiduciary duties of their respective Board of Directors,
each of the parties hereto agrees to use its reasonable best efforts to take, or
cause to be taken, all actions, and to do, or cause to be done, all things
necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the
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transactions contemplated by this Agreement. Each party shall promptly consult
with the other with respect to, provide any necessary information with respect
to and provide the other (or its counsel) copies of, all filings made by such
party with the Bankruptcy Court or with any Governmental Entity in connection
with this Agreement and the transactions contemplated hereby. In addition, if
at any time prior to the Effective Date any event or circumstance relating to
either the Company or the Purchaser or any of their respective Subsidiaries, or
any of their respective officers or directors, should be discovered by the
Company or the Purchaser, as the case may be, and which should be set forth in
an amendment or supplement to the Disclosure Statement or the Purchaser Proxy
Statement, the discovering party shall promptly inform the other party of such
event or circumstance.
6.9 NEW YORK STOCK EXCHANGE LISTING. The Purchaser shall use its
reasonable best efforts to cause the Surviving Corporation Common Stock and the
Surviving Corporation Warrants to be issued under the Plan to be approved for
listing on the New York Stock Exchange, subject to official notice of issuance,
prior to the Effective Date.
6.10 EXECUTORY CONTRACTS. Exhibit F to the Standalone Plan lists each
of the executory contracts and unexpired leases which the Company presently
intends to reject in the Plan pursuant to Section 365 of the Bankruptcy Code in
the Reorganization Cases. The Company shall notify the Purchaser of any
proposed changes to such exhibit. During the pendency of the Reorganization
Cases, the Company will not assume any contract or lease listed on Exhibit F to
the Standalone Plan without the prior approval of the Purchaser (which shall not
be unreasonably withheld or delayed).
6.11 EXCLUSIVITY. The Company agrees that during the period from the
date hereof until the Effective Date (or the earlier termination of this
Agreement under Section 10.1), neither the Company nor any of its affiliates nor
any of their respective directors, officers, employees, representatives or
agents (collectively the "Restricted Parties"), shall directly or indirectly,
solicit, initiate or encourage any discussions, submissions of proposals or
offers or negotiations with, or assist or participate in, facilitate or
encourage any effort or attempt by, or otherwise cooperate in any other way
with, or participate in any negotiations or discussions with, or provide any
information or data of any nature whatsoever to, any corporation, partnership,
Person or other entity or group, other than the Purchaser and its partners,
employees, representatives, agents and affiliates, concerning any merger,
consolidation, sale of assets, sale of shares of capital stock or other equity
securities or other recapitalization, debt restructuring or similar transaction
involving the Company, a substantial portion of the assets of the Company or any
division of the Company, whether as part of a plan of reorganization or
otherwise (any such transaction, other than a transaction solely
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involving MK Rail, being referred to herein as an "Alternative Transaction");
provided, however, that the Restricted Parties may furnish information to, or
enter into discussions or negotiations with, any Person or entity in response to
proposal for a Qualifying Alternative Transaction if, and only to the extent
that, the Company's Board of Directors, after consultation with independent
legal counsel (which may include its regularly engaged independent legal
counsel), determines in good faith that such action is required for the Board of
Directors to comply with its fiduciary obligations under applicable law. A
"Qualifying Alternative Transaction" is an Alternative Transaction that the
Company's Board of Directors determines in good faith, after consultation with
its financial advisors, would provide aggregate consideration of at least
$15,000,000 greater than the consideration provided by the Purchaser under this
Agreement. For purposes of the foregoing definition, the value of the
consideration provided by the Purchaser under this Agreement shall be deemed to
be $235,000,000. The Company shall immediately inform each party with which it
is currently holding discussions or negotiations concerning an Alternative
Transaction of the execution of this Agreement and of the termination of such
discussions or negotiations.
The Company shall immediately (and within no more than 24 hours)
notify the Purchaser if any proposal, offer, inquiry or other contact is
received by, any information is requested from, or any discussions or
negotiations are sought to be initiated or continued with, the Company in
respect of an Alternative Transaction, and shall, in any such notice to the
Purchaser, indicate the identity of the offeror and the terms and conditions of
any proposals or offers or the nature of any inquiries or contacts, and
thereafter shall keep the Purchaser informed, on a current basis, of the status
and terms of any such proposals or offers and the status of any such discussions
or negotiations. The Company shall not release any third party from, or waive
any provision of, any confidentiality or standstill agreement to which the
Company is a party.
ARTICLE 7
CONDITIONS TO THE COMPANY'S OBLIGATIONS
The obligations of the Company under this Agreement to consummate the
Merger and the other transactions contemplated hereby are subject to the
satisfaction or written waiver, on or prior to the Effective Date, of each of
the following conditions:
7.1 CONFIRMATION OF THE PLAN. The Confirmation Order shall have been
entered and no stay of the Confirmation Order pending appeal shall have been
entered and all other conditions to the effectiveness of the Plan as set forth
in the Plan shall have been satisfied or waived.
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7.2 REPRESENTATIONS, WARRANTIES AND COVENANTS. All representations
and warranties of the Purchaser contained in this Agreement shall be true and
correct at and as of the Effective Date (except to the extent that such
representations and warranties speak as of an earlier date) as if such
representations and warranties were made at and as of the Effective Date, and
the Purchaser shall have performed in all material respects all agreements and
covenants required hereby to be performed by it prior to or at the Effective
Date. There shall be delivered to the Company a certificate (signed by the
President or a Vice President of the Purchaser on behalf of the Purchaser) to
the foregoing effect.
7.3 PURCHASER STOCKHOLDERS' MEETING. The Merger and the other
transactions contemplated by this Agreement shall have been approved by the
Purchaser's stockholders in accordance with the applicable requirements of the
Delaware Law at a stockholders' meeting contemplated by Section 6.5. The
letter, dated May 16, 1996, of Dennis Washington with respect to his agreement
to vote his shares of Purchaser Common Stock in favor of the transactions
contemplated by this Agreement shall not have been withdrawn or revoked.
7.4 STOCK AND WARRANTS FREELY TRADEABLE. The Surviving Corporation
Common Stock and the Surviving Corporation Warrants to be issued in the
Distributions shall be issued under an exemption from registration under the
Securities Act, shall be freely tradeable by holders who are not Affiliates of
the Surviving Corporation or "underwriters" under the Securities Act with
respect to such securities and shall contain no restrictive legend. The
Surviving Corporation Common Stock and the Surviving Corporation Warrants shall
have been approved for listing on the New York Stock Exchange, subject to
official notice of issuance.
7.5 CONSENTS. All consents, approvals and authorizations from
Governmental Authorities and other parties provided for under Sections 4.9 and
5.8 to permit consummation of the transactions as contemplated hereby (other
than any consent, approval or authorization of the kind specified in clauses
(vi) or (vii) of either such Section) shall have been obtained.
7.6 NO GOVERNMENTAL PROCEEDING OR LITIGATION. No suit, action,
investigation, inquiry or other Proceeding by any Governmental Authority shall
have been instituted or threatened which questions the validity or legality of
the transactions contemplated hereby. No suit, action, investigation, inquiry
or other Proceeding by any Governmental Authority or other Person shall have
been instituted or threatened which questions the validity or legality of the
transactions contemplated hereby and which could reasonably be expected to have
a Material Adverse Effect on the Company or the Surviving Corporation.
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7.7 CERTIFICATES. The Purchaser shall have furnished the Company
with such certificates of its officers, directors and others to evidence
compliance with the conditions set forth in this Article 7 as may be reasonably
requested by the Company.
7.8 CORPORATE DOCUMENTS. The Company shall have received from the
Purchaser resolutions adopted by the board of directors of the Purchaser
approving this Agreement and the transactions contemplated hereby, certified by
the Purchaser's corporate secretary, and a tabulation reflecting the results of
the vote of the stockholders of the Purchaser adopting this Agreement, certified
by the inspector of election for the meeting of such stockholders.
Notwithstanding the foregoing, the Company's obligation under this
Agreement to consummate the Merger and the other transactions contemplated
hereby shall not be relieved by the failure of any of the foregoing conditions
if such failure is the result, direct or indirect, of a breach by the Company of
its obligations under this Agreement.
ARTICLE 8
CONDITIONS TO THE PURCHASER'S OBLIGATIONS
The obligations of the Purchaser under this Agreement to make the
payments under Section 2.1 and to consummate the Merger and the other
transactions contemplated hereby are subject to the satisfaction or written
waiver, on or prior to the Effective Date, of each of the following conditions:
8.1 COMPLETION OF OTHER TRANSACTIONS. Simultaneously with or prior
to the Purchaser's effectuation of the transactions to be effected by it at the
Closing:
(a) The Disclosure Statement and the Solicitation Materials
shall have been approved by the Bankruptcy Court at the Disclosure Statement
Hearing;
(b) The Purchaser Proxy Statement shall have been cleared by the
staff of the SEC and no stop order or proceeding seeking stop orders shall have
been issued with respect to the Purchaser Proxy Statement.
(c) The Confirmation Order shall have been entered and no stay
of the Confirmation Order pending appeal shall have been entered and all other
conditions to the effectiveness of the Plan as set forth in the Plan shall have
been satisfied or waived.
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(d) The Surviving Corporation Common Stock and, if required by
the New York Stock Exchange for the continued listing of the Surviving
Corporation Common Stock, the Surviving Corporation Warrants shall have been
approved for listing on the New York Stock Exchange, subject to official notice
of issuance.
8.2 REPRESENTATIONS, WARRANTIES AND COVENANTS. All representations
and warranties of the Company contained in this Agreement shall be true and
correct at and as of the Effective Date (except to the extent that such
representations and warranties speak as of an earlier date) as if such
representations and warranties were made at and as of the Effective Date, and
the Company shall have performed in all material respects all agreements and
covenants required hereby to be performed by it prior to or at the Effective
Date. There shall be delivered to the Purchaser a certificate (signed by the
President or a Vice President of the Company on behalf of the Company) to the
foregoing effect.
8.3 CONSENTS. All consents, approvals and authorizations from
Governmental Authorities, and other parties provided for under Sections 4.9 and
5.8 to permit consummation of the transactions as contemplated hereby (other
than any consent, approval or authorization of the kind specified in clauses
(vi) or (vii) of either such Section), shall have been obtained.
8.4 NO GOVERNMENTAL PROCEEDING OR LITIGATION. No suit, action,
investigation, inquiry or other Proceeding by any Governmental Authority shall
have been instituted or threatened which questions the validity or legality of
the transactions contemplated hereby. No suit, action, investigation, inquiry
or other Proceeding by any Governmental Authority or other Person shall have
been instituted or threatened which questions the validity or legality of the
transactions contemplated hereby and which could reasonably be expected to have
a Material Adverse Effect on the Purchaser or the Surviving Corporation.
8.5 BORROWINGS UNDER DIP FACILITY. Aggregate borrowings under the
DIP Facility shall not exceed $50,000,000 on the Effective Date.
8.6 SETTLEMENT OF CERTAIN LITIGATION. All Company stockholder
litigation (other than the litigation commenced in the name of Karol Pilarczyk)
shall have been settled or dismissed in accordance with the agreements providing
therefor entered into by the Company prior to the date hereof (copies of which
have been provided to the Purchaser) or otherwise on terms acceptable to the
Purchaser.
8.7 HEADQUARTERS LEASE. On or prior to the Effective Date, all
conditions to the effectiveness of a new lease (a copy of which has been
furnished to
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Purchaser) covering the Company's corporate headquarters in Boise, Idaho shall
have been satisfied or waived.
8.8 CERTIFICATES. The Company shall have furnished the Purchaser
with such certificates of the respective officers of the Company and others to
evidence compliance with the conditions set forth in this Article 8 as may be
reasonably requested by the Purchaser.
8.9 CORPORATE DOCUMENTS. The Purchaser shall have received from the
Company resolutions adopted by the board of directors of the Company approving
this Agreement and the transactions contemplated hereby, certified by the
corporate secretary of the Company.
Notwithstanding the foregoing, the Purchaser's obligations under this
Agreement to make the payments contemplated by Section 2.1 and to consummate the
Merger and the other transactions contemplated hereby shall not be relieved by
the failure of any of the foregoing conditions if such failure is the result,
direct or indirect, of a breach by the Purchaser of its obligations under this
Agreement.
ARTICLE 9
ACTIONS BY THE COMPANY
AND THE PURCHASER AFTER THE EFFECTIVE DATE
9.1 FURTHER ASSURANCES. On and after the Effective Date, the Company
and the Purchaser will take all appropriate action and execute all documents,
instruments or conveyances of any kind which may be reasonably necessary or
advisable to carry out any of the provisions hereof, including without
limitation, putting the Purchaser in possession and operating control of the
business of the Company from and after the Effective Time.
9.2 DIRECTORS AND OFFICERS INSURANCE. The Purchaser shall either:
(i) provide directors' and officers' liability insurance having substantially
similar terms and conditions and providing substantially similar coverage as the
directors' and officers' liability insurance maintained by the Company at the
Effective Date for a period of three years following the Effective Date for all
present directors and officers of the Company and its Subsidiaries, provided
that the Purchaser may substitute therefor policies of at least the same
coverage and amounts containing terms and conditions which are no less
advantageous to such officers and directors, or (ii) purchase runoff extensions
under the Company's existing directors' and officers' and fiduciary liability
insurance policies, extending the period for making claims under such policies
for at least three years following the Effective Date; provided, in each case
that if the annual cost of such coverage would exceed 150% of the Company's last
annual premium
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therefor, the Purchaser shall purchase as much coverage as possible for 150% of
such amount for each year in such three-year period.
9.3 INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless the Purchaser,
Washington Corporations, Dennis Washington and their respective affiliates,
directors, officers, advisors, agents and employees (the "Indemnified Purchaser
Parties"), to the fullest extent lawful, from and against any and all claims,
actions and suits asserted against any of them, and any and all damages,
judgments, liabilities and expenses resulting from or incurred in response
thereto (including, without limitation, costs of investigating, preparing or
defending any such claim or action and reasonable legal expenses) (collectively
"Losses"), arising out of, or in connection with, the Merger or the Plan, and
the Company shall indemnify and hold harmless all present officers and directors
of the Company or any of its Subsidiaries (the "Indemnified Company Parties"
and, together with the Indemnified Purchaser Parties the "Indemnified Parties"),
to the fullest extent lawful, from and against any and all claims, actions and
suits asserted against any of them and any and all Losses resulting from or
incurred in response thereto, arising in whole of in part out of the status at
any time of any such Person as on officer or director of the Company or any of
its Subsidiaries or any action taken or omitted to be taken at any time in his
or her capacity as such, including without limitation any such action taken or
omitted to be taken in connection with this Agreement or the Plan or the
respective transactions contemplated hereby and thereby; provided, that no
Indemnified Party shall be entitled to indemnification by the Company hereunder
with respect to any Losses arising solely from the bad faith or gross negligence
(as finally determined by a court of competent jurisdiction) of such Indemnified
Party or any affiliate, director, officer or employee of such Indemnified Party.
If any action or proceeding shall be brought or asserted against any Indemnified
Party in respect of which indemnity may be sought from the Company, such
Indemnified Party shall promptly notify the Company in writing and the Company
shall assume the defense thereof, including the employment of counsel
satisfactory to the Indemnified Party and the payment of expenses as provided in
the preceding sentence. The Indemnified Party shall have the right to employ
separate counsel in any such action, and to participate in the defense thereof,
but the fees and expenses of such counsel shall be borne by such Indemnified
Party, unless (i) the Company has agreed in writing to pay such fees and
expenses, (ii) the Company shall have failed promptly to assume the defense of
such action or proceeding or shall have failed to employ counsel reasonably
satisfactory to such Indemnified Party in any such action or proceeding, or
(iii) such Indemnified Party shall have reasonably concluded that there are
defenses available to it which are different from or additional to those
available to the Company which, if the Company and the Indemnified Party were to
be represented by the same counsel, would constitute a conflict of interest for
such counsel or
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materially prejudice the prosecution of the defenses available to such
Indemnified Party (in which case, if such Indemnified Party notifies the Company
in writing that it elects to employ separate counsel at the expense of the
Company, the Company shall not have the right to assume the defense of such
action or proceeding on behalf of such Indemnified Party, it being agreed to and
understood that the Company shall not, in connection with any one such action or
proceeding or separate but substantially similar or related actions or
proceedings in the same jurisdiction arising out of the same general allegations
or circumstances, be liable for the fees and expenses of more than one separate
firm of attorneys (together, if appropriate, with one firm of local counsel per
jurisdiction) at any time for such Indemnified Party, which counsel or firm
shall be designated in writing by such Indemnified Party or by the Purchaser if
there is more than on Indemnified Party, provided, that in the case of clause
(c) above, the Company shall only be liable for the fees and expenses of
separate counsel with respect to such different or additional defenses and such
Indemnified Party shall instruct such separate counsel to cooperate with Company
counsel in order to reduce the fees and expenses for which the Company is
liable). The Company shall not be liable for any settlement of such action or
proceeding effected without its prior written consent, which consent shall not
be unreasonably withheld, but if settled with its written consent, or if there
be a final judgment for the plaintiff in any such action or proceeding, the
Company agrees to indemnify and hold harmless any such Indemnified Party from
and against any Losses (to the extent stated above) by reason of such settlement
or judgment. All references in this Section 9.3(a) to the "Company" shall be
deemed to include the Surviving Corporation from and after the Effective Time.
(b) The provisions of Section 9.3(a) shall be in addition to, but not
duplicative of, any rights to indemnification that any of the Indemnified
Company Parties may have under the certificate of incorporation of by-laws of
the Company or any of its Subsidiaries or any agreement to which the Company or
any of its Subsidiaries is a party, which rights (except as may otherwise be
provided in the Plan) shall survive the Merger and be honored by the Surviving
Corporation and the applicable Subsidiaries thereof in accordance with their
terms.
9.4 REGISTRATION RIGHTS. Without limiting the generality or effect
of Section 1.1, the Plan will provide that the Surviving Corporation will on the
Effective Date enter into a registration rights agreement (the "Registration
Rights Agreement") substantially in the form of Exhibit 4 with Persons who
receive Surviving Corporation Common Stock in the Distributions and who desire
to be a party to such agreement.
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ARTICLE 10
TERMINATION AND AMENDMENT
10.1 TERMINATION. This Agreement may be terminated at any time prior
to the Effective Date:
(a) by mutual written consent of the Purchaser and the Company;
(b) by either the Purchaser or the Company if (i) a court of
competent jurisdiction or Governmental Authority shall have issued a
nonappealable final order, decree or ruling or taken any other action having the
effect of permanently restraining, enjoining or otherwise prohibiting the
consummation of the Plan or the Merger (provided that the right to terminate
this Agreement under this clause (i) shall not be available to any party who has
not complied with its obligations under Section 6.8 and whose noncompliance has
materially contributed to the issuance of any such order, decree or ruling or
the taking of any such action), or (ii) the Effective Date shall not have
occurred on or before December 31, 1996;
(c) by the Purchaser if (i)(A) there are inaccuracies in the
representations and warranties of the Company that would have a Material Adverse
Effect on the Company, or (B) there has been a material breach on the part of
the Company in the covenants of the Company set forth herein, or any failure on
the part of the Company to comply with its material obligations hereunder, or
any other events or circumstances shall have occurred or exist (otherwise than
as the result, direct or indirect, of a breach by the Purchaser of its
obligations under this Agreement), such that, in any such case, the conditions
set forth in Article 8 cannot be satisfied on or prior to date on which all
other conditions to the effectiveness of the Plan shall have been satisfied or
waived, (ii) the Company has not received the Requisite Acceptances to the Plan
on or prior to July 1, 1996, or (iii) the Confirmation Order shall not have been
entered on or before August 31, 1996 (unless the failure of the Confirmation
Order to be entered on or before such date was the result, direct or indirect,
of actions or omissions by the Purchaser);
(d) by the Company if (i) (A) there are inaccuracies in the
representations and warranties of the Purchaser that would have a Material
Adverse Effect on the Purchaser or the Surviving Corporation or (B) there has
been a material breach on the part of the Purchaser in the covenants of the
Purchaser set forth herein, or any failure on the part of the Purchaser to
comply with its material obligations hereunder, or any other events or
circumstances shall have occurred or exist (otherwise than as the result, direct
or indirect, of a breach by the Company of its obligations under this
Agreement), such that, in any such case, the conditions set forth in Article 7
cannot be satisfied on or prior to the date on which all other conditions to the
effectiveness of
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the Plan shall have been satisfied or waived, or (ii) the Purchaser's
stockholders do not approve the Merger in accordance with the applicable
requirements of the Delaware Law at the Purchaser's stockholders' meeting
contemplated by Section 6.5, or (iii) on or prior to the 35th day following
Filing Date the Company receives a firm offer with respect to a Qualifying
Alternative Transaction that, in the good faith determination of its Board of
Directors after consultation with its financial advisors and with independent
legal counsel (which may include its regularly engaged legal counsel), is
reasonably capable of being financed and would cause the Board of Directors of
the Company to violate its fiduciary duties under applicable law were it to
proceed with the Plan and the Merger under this Agreement (such an offer, an
"Offer"), and following such determinations such Offer and all documents
relating thereto, together with a written statement on behalf of the Board of
Directors of the Company that the Company intends to terminate this Agreement in
order to accept such Offer, is presented to the Purchaser and the Purchaser
declines to match or exceed such Offer within three business days following such
presentation.
10.2 EFFECT OF TERMINATION. In the event of a termination of this
Agreement by either the Company or the Purchaser as provided in Section 10.1,
this Agreement shall forthwith become void and there shall be no liability or
obligation on the part of the Purchaser or the Company or their respective
officers or directors (other than as provided in Section 10.3 below) except for
Sections 9.3 and 12.12.
10.3 BREAK-UP FEES. In the event (a) the Company (i) fails to
consummate the Merger in breach of its obligations under this Agreement, or (ii)
terminates this Agreement pursuant to Section 10.1(d)(iii) and thereafter enters
into a definitive agreement with respect to a Substantial Transaction within one
year of such termination, and (b) in either such case the Purchaser is not in
material breach of its obligations under this Agreement and, at the time of such
failure or termination, as the case may be, is ready, willing and able to
proceed to consummate the transactions hereunder, the Company shall forthwith
pay Purchaser a fee of $9,000,000 plus reimbursement of expenses as provided in
Section 10.4. In addition, in the case of a termination pursuant to Section
10.1(d)(iii), the Company shall pay the Purchaser, promptly upon consummation of
such Substantial Transaction, the lesser of (i) $3,000,000 and (ii) 40% of the
amount by which the value of the consideration provided in the Substantial
Transaction exceeds $250,000,000. A "Substantial Transaction" means an
Alternative Transaction involving the sale of the Company, the sale of a
majority of the stock of the Company (by means of a merger, stock sale or other
transaction), the sale of any of the Company's principal operating businesses
(other then MK Rail) and any other reorganization involving an equity infusion.
10.4 EXPENSES. The Company shall be responsible for the payment of
all expenses incurred by the Company in connection with the Plan and the Merger,
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including all fees of attorneys, brokers, finders, accountants, and financial
advisors, whether or not the Plan or the Merger shall be consummated. The
Company agrees to fulfill its obligation to reimburse the Purchaser for any
reasonable out-of-pocket fees and expenses incurred by Purchaser pursuant to the
April 15, 1996 letter agreement between the Company and Purchaser; provided that
such expenses and fees incurred on or after May 16, 1996 through May 23, 1996
shall not exceed an aggregate of $150,000. Paragraph 4 of the April 15, 1996
letter agreement is hereby terminated as of the date hereof. In the event that
the break-up fee set forth in Section 10.3 becomes due and payable to the
Purchaser, the Company shall reimburse the Purchaser for such reasonable
documented out-of-pocket expenses and fees incurred after May 13, 1996 in an
amount not to exceed $1,000,000.
ARTICLE 11
DEFINITIONS
11.1 DEFINED TERMS. As used herein, the terms below shall have the
following meanings:
"Affiliate" of any specified Person means any other Person, directly
or indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and controlled have meanings correlative to the foregoing.
Notwithstanding anything to the contrary herein contained, neither MK Rail nor
any Subsidiary thereof shall be deemed to be an "Affiliate" of the Company or
any of its Subsidiaries.
"Agreement" has the meaning set forth in the Preamble hereof.
"Applicable Agreement" means, with respect to any Person, any bond,
debenture, note or any other evidence of indebtedness, indenture, mortgage, deed
of trust, lease, contract, agreement, license or instrument to which such Person
or any of the Subsidiaries is a party or by which any of their respective
properties or assets is bound.
"Applicable Employment Law" means any Applicable Law governing or
respecting employment or the termination thereof, employment practices, terms
and conditions of employment, wages, hours of work, occupational safety and
health, or discriminatory, wrongful or tortious conduct in connection with the
employment relationship.
49
<PAGE>
"Applicable Law" means any law, statute, ordinance, judgment,
injunction, decree, writ, regulation, interpretation, rule or order of any court
or Governmental Authority, and any other governmental restrictions or
requirements, including (without limitation) pursuant to any permit or license
in effect on or prior to the Effective Date.
"Bankruptcy Code" has the meaning set forth in Section 1.3
"Bankruptcy Court" has the meaning set forth in Section 1.5.
"Bankruptcy Notices" has the meaning set forth in Section 1.4.
"Bankruptcy Rules" has the meaning set forth in Section 1.3.
"Benefit Plan" has the respective meanings set forth in Section
4.13(a) and 5.10(a).
"Chapter 11 Petitions" has the meaning set forth in Section 1.4.
"Charter Documents" means, with respect to any Person, the articles or
certificate of incorporation and by-laws, partnership agreement or other
organizational documents of such Person.
"Code" shall mean the Internal Revenue Code of 1986, as amended to the
date hereof.
"Company" has the meaning set forth in the Preamble.
"Company Common Stock" means the Common Stock, par value $1.67 per
share, of the Company.
"Company Disclosure Schedule" means a schedule delivered by the
Company to the Purchaser as of the date hereof which sets forth exceptions to
the representations and warranties contained in Article 4 hereof and certain
other information called for by Article 4 hereof and other provisions of this
Agreement.
"Company Preferred Stock" means the Preferred Stock, par value $.10
per share, of the Company.
"Company SEC Reports" has the meaning set forth in Section 4.6.
"Confirmation Hearing" has the meaning set forth in Section 1.5.
50
<PAGE>
"Confirmation Order" has the meaning set forth in Section 1.7.
"Debtor Subsidiaries" has the meaning set forth in Section 1.3.
"Delaware Law" has the meaning set forth in Section 3.1.
"DIP Facility" has the meaning set forth in Section 1.9.
"Disbursing Agent" has the meaning set forth in Section 2.1.
"Disclosure Statement" has the meaning set forth in Section 1.3.
"Disclosure Statement Hearing" has the meaning set forth in Section
1.5.
"Distributions" has the meaning set forth in Section 1.8.
"Effective Date" has the meaning set forth in Section 1.8.
"Effective Time" has the meaning set forth in Section 3.1.
"Environmental Claim" means any claim, action, cause of action,
investigation or notice (written or oral) by any Person alleging potential
liability (including, without limitation, potential liability for investigatory
costs, cleanup costs, governmental response costs, natural resources damages,
property damages, personal injuries, or penalties) arising out of or resulting
from (a) the presence, or release into the environment, of any Materials of
Environmental Concern at any location, whether or not owned or operated by the
Company or any of the Subsidiaries, or (b) any noncompliance with any
Environmental Law.
"Environmental Law" means any and all Applicable Laws relating to
pollution or the protection of human health or the environment or to emissions,
discharges, releases or threatened releases of any Materials of Environmental
Concern into the environment (including without limitation ambient air, surface
water, ground water, or land), or otherwise relating to the manufacture,
processing, distribution, generation, treatment, storage, disposal, transport or
handling of any Materials of Environmental Concern.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
51
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"ERISA Affiliate" means, with respect to any Person, any trade or
business, whether or not incorporated, that together with the Person would be
deemed a "single employer" (i) under ERISA Section 4001 for purposes of any plan
which is subject to Title IV of ERISA; (ii) under Code Sections 414(b), (c), (m)
or (o) for purposes of liability under ERISA Sections 302(c)(11) and Code
Section 412(c)(11) or for purposes of any lien created under ERISA Section
302(f) or Code Section 412(n); or (iii) under Code Sections 414(b) or (c) for
all other applicable purposes not described above.
"Exchange Act" has the meaning set forth in Section 4.6.
"Excluded Assets" means (a) the common stock in MK Rail owned by the
Company, (b) the Company's note receivable from MK Rail or the proceeds
therefrom, and (c) all amounts received by the Company in respect of refunds of
federal income tax and interest thereon associated with amended federal income
tax returns of the Company and its consolidated Subsidiaries for the calendar
years 1982 through 1990 which were filed prior to January 1, 1996, which change
the Company's election from deducting foreign taxes to claiming a credit for
those taxes; provided, that the cumulative total amount of such amounts received
which constitute "Excluded Assets" under this clause (c) shall not exceed
$18,000,000.
"Filing Date" has the meaning set forth in Section 1.3.
"First Day Orders" has the meaning set forth in Section 1.4.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the date of this Agreement.
"Governmental Authority" means any Federal, state, local or foreign
court or governmental, administrative or regulatory authority or agency.
"HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended.
"Intellectual Property" means all trademarks, patents, service marks,
trade names, copyrights, fictitious business names, and licenses or similar
agreements or arrangements.
52
<PAGE>
"Lien" means any mortgage, pledge, lien, encumbrance, charge or
adverse claim, or a security interest of any kind (including, without
limitation, any conditional sale or other title retention agreement, any lease
in the nature thereof and any option or other agreement to sell).
"Material Adverse Effect" means, with respect to any Person, a
material adverse effect on (i) the condition (financial or otherwise), revenues,
gross profits, assets, liabilities or business of such Person and its
Subsidiaries, taken as a whole, (ii) the ability of such Person or any of its
Affiliates to perform its obligations hereunder or (iii) the validity or
enforceability of this Agreement. The assertion of a claim arising out of a
contract, agreement or commitment to which the Company or any of its
Subsidiaries is a party that, as a result of the consummation of the
transactions contemplated hereby, the Surviving Corporation would be in breach
of, or would be subject to a diminution in or termination of its rights or
benefits under, an agreement, contract or commitment, the result of which is
reasonably likely to result in a decrease in annual gross profit of at least
$3,000,000 for any single agreement, contract or commitment shall be deemed to
be an event which is reasonably likely to have a Material Adverse Effect on the
Company; provided, however, that any such claim that shall have been been
resolved prior to the Effective Date without having resulted in such a decrease
in annual gross profit being reasonably likely shall not be deemed to be such an
event.
"Materials of Environmental Concern" means pesticides, chemicals,
pollutants, contaminants, wastes, toxic substances and hazardous substances.
"Merger" has the meaning set forth in Recital C.
"Merger Certificate" shall have the meaning set forth in Section 3.1.
"MK Rail" means MK Rail Corporation, a Delaware corporation.
"Multiemployer Plan" means, with respect to any Person, on any date, a
multiemployer plan defined as such in Section 3(37) of ERISA to which
contributions have been made at any time during the six-year period ending on or
prior to such date, by such Person and that is covered by Title IV of ERISA.
"NLRB" means the National Labor Relations Board.
"Offer" has the meaning set forth in Section 10.1(d).
"PBGC" means the Pension Benefit Guaranty Corporation.
53
<PAGE>
"Permit" means all certificates, licenses, approvals and permits
necessary under Applicable Laws in connection with the present use of the
properties and assets and operation of the businesses of the Company and its
Subsidiaries.
"Pension Benefit Plan" means, with respect to any Person, an employee
pension benefit plan (as defined in Section 3(2) of ERISA), other than a
Multiemployer Plan, which is maintained or contributed to by such Person or with
respect to which such Person has any obligation or liability.
"Permitted Liens" means (i) Liens securing the Company's existing
indebtedness and indebtedness under the DIP Facility; (ii) Liens in favor of the
Company or any Subsidiary; (iii) Liens to secure the performance of statutory
obligations, surety or appeal bonds, performance bonds or other obligations of a
like nature incurred in the ordinary course of business; (iv) Liens for taxes,
assessments or governmental charges or claims that are not yet delinquent or
that are being contested in good faith by appropriate proceedings promptly
instituted and diligently concluded, provided that any reserve or other
appropriate provision as shall be required in conformity with GAAP shall have
been made therefor; (v) carriers', warehousemen's, mechanics', materialmen's,
repairmen's, or other similar Liens arising in the ordinary course of business
which are not overdue for a period of more than 60 days or which are being
contested in good faith by appropriate proceedings diligently conducted, (vi)
Liens of landlords or of mortgagees of landlords arising by operation of law,
provided that the rental payments secured thereby are not yet due and payable,
(vii) Liens incurred or deposits made in the ordinary course of business in
connection with workers' compensation, unemployment insurance and other types of
social security; (viii) easements, rights-of-way, restrictions, minor defects or
irregularities in title and other similar charges or encumbrances not
interfering in any material respect with the business of the Company or any of
its Subsidiaries, (ix) Purchase Money Liens (including extensions and renewals
thereof); (x) any interest or title of a lessor in property subject to any
capital lease obligation or operating lease; and (xi) Liens arising from filing
Uniform Commercial Code financing statements regarding leases.
"Person" means any individual, partnership, corporation, joint
venture, association, joint-stock company, trust, unincorporated organization,
government or agency or political subdivision thereof, or other entity.
"Plan" has the meaning set forth in Section 1.1.
"Proceeding" means an action, claim, suit or proceeding (including,
without limitation, an investigation or partial proceeding, such as a
deposition), whether commenced, threatened or, to the actual knowledge of the
executive officers of the Company, contemplated.
54
<PAGE>
"Purchase Money Lien" means a Lien granted on an asset or property to
secure indebtedness incurred solely to finance the purchase, or the cost of
construction or improvement, of such asset or property.
"Purchaser" has the meaning set forth in the Preamble.
"Purchaser Common Stock" means the Common Stock, par value $.01 per
share, of the Purchaser.
"Purchaser Disclosure Schedule" means a schedule delivered by the
Purchaser to the Company as of the date hereof which sets forth exceptions to
the representations and warranties contained in Article 5 hereof and certain
other information called for by Article 5 hereof and other provisions of this
Agreement.
"Purchaser Proxy Statement" has the meaning set forth in Section 4.8.
"Purchaser SEC Reports" has the meaning set forth in Section 5.6.
"Qualifying Alternative Transaction" has the meaning set forth in
Section 6.11.
"Registration Rights Agreement" has the meaning set forth in Section
9.4.
"Reorganization Cases" has the meaning set forth in Section 1.5.
"Requisite Acceptances" has the meaning set forth in Section 1.3.
"SEC" has the meaning set forth in Section 4.6.
"Securities Act" means the Securities Act of 1933, as amended.
"Solicitation Materials" has the meaning set forth in Section 1.3.
"Standalone Plan" has the meaning set forth in Recital A.
"Standalone Disclosure Statement" has the meaning set forth in Recital
A.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of capital stock entitled (without regard to the occurrence of
any contingency)
55
<PAGE>
to vote in the election of directors, managers or trustees thereof is at the
time owned or controlled, directly or indirectly, by such Person or one or more
of the other Subsidiaries of that Person (or a combination thereof) and (ii) any
partnership (a) the sole general partner or the managing general partner of
which is such Person or a Subsidiary of such Person or (b) the only general
partners of which are such Person or of one or more Subsidiaries of such Person
(or any combination thereof); provided that, notwithstanding anything to the
contrary herein contained, neither MK Rail nor any Subsidiary thereof shall not
be deemed to be a "Subsidiary" of the Company.
"Substantial Transaction" has the meaning set forth in Section 10.3.
"Surviving Corporation" has the meaning set forth in Section 3.1.
"Surviving Corporation Common Stock" means the Common Stock, par value
$.01 per share, of the Surviving Corporation.
"Surviving Corporation Preferred Stock" means the Preferred Stock, par
value $.01 per share, of the Surviving Corporation.
"Surviving Corporation Series A Preferred Stock" means the Series A
Preferred Stock, par value $.01 per share, of the Surviving Corporation.
"Surviving Corporation Warrants" has the meaning set forth in Section
3.4.
"Tax or Taxes" means any federal, state, local, foreign or other
income, gross receipts, ad valorem, franchise, profits, sales or use, transfer,
registration, excise, utility, environmental, communications, real or personal
property, capital stock, license, payroll, wage or other withholding,
employment, social security, severance, transfer, stamp, occupation, alternative
or add-on minimum, estimated or other taxes of any kind whatsoever (including,
without limitation, fines, deficiencies, penalties, additions to tax, and
interest attributable thereto) whether disputed or not.
"Tax Returns" means any federal, state, local and foreign returns,
declarations, elections, statements, reports, schedules and information returns
pertaining to any Tax or the refiling or amendment of any such Tax Returns
previously filed.
"Touchstone Plaintiffs" has the meaning set forth in Section 1.3.
"ULP" means an unfair labor practice as defined in the National Labor
Relations Act.
56
<PAGE>
"Welfare Benefit Plan" means, with respect to any Person, an employee
welfare benefit plan (as defined in Section 3(1) of ERISA), other than a
Multiemployer Plan, which is maintained or contributed to by such Person or with
respect to which such Person has any obligation or liability.
ARTICLE 12
MISCELLANEOUS
12.1 SURVIVAL OF REPRESENTATIONS, ETC. All statements contained in
the Company Disclosure Schedule and the Purchaser Disclosure Schedule shall be
deemed to be representations and warranties of the Company and Purchaser,
respectively. The representations and warranties of the Company and the
Purchaser contained herein and in the Company Disclosure Schedule and Purchaser
Disclosure Schedule, respectively, shall not survive the Effective Time.
12.2 ASSIGNMENT; BINDING; EFFECT; BENEFITS. Neither this Agreement
nor any of the rights or obligations hereunder may be assigned (whether by
operation of law or otherwise) by the Company without the prior written consent
of the Purchaser, or by the Purchaser without the prior written consent of the
Company. Subject to the preceding sentence, this Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and assigns. Notwithstanding anything contained in this Agreement to
the contrary, except for the provisions of Section 9.2, 9.3 and 9.4, nothing in
this Agreement, expressed or implied, is intended to confer on any Person other
than the parties hereto or their respective successors and assigns any rights,
remedies, obligations or liabilities under or by reason of this Agreement.
12.3 NOTICES. Unless otherwise provided herein, any notice, request,
instruction or other document to be given hereunder by any party to the others
shall be in writing and delivered in person or by courier, telegraphed, telexed
or by facsimile transmission (with confirmation given) or mailed by certified
mail, postage prepaid, return receipt requested (such mailed notice to be
effective on the date of such receipt is acknowledged), as follows:
If to
the Company:
Morrison Knudsen Corporation
Morrison Knudsen Plaza
P.O. Box 73
Boise, Idaho 83729
Attention: Stephen G. Hanks
57
<PAGE>
If to the Purchaser:
Washington Construction Group, Inc.
27400 East 5th Street
Highland, California 92346
Attention: John Wimberly
or to such other place and with such other copies as either party may designate
as to itself by written notice to the others.
12.4 CHOICE OF LAW. This Agreement shall be construed, interpreted
and the rights of the parties determined in accordance with the laws of the
State of Delaware or, solely, with respect to matters of law concerning the
internal corporate affairs of any corporate entity which is the subject of this
Agreement, the law of the jurisdiction under which the respective entity derives
its powers.
12.5 ENTIRE AGREEMENT; AMENDMENTS AND WAIVERS. This Agreement,
together with all exhibits and schedules hereto and the confidentiality
agreements referred to in Section 12.12, constitutes the entire agreement among
the parties pertaining to the subject matter hereof and supersedes all prior
agreements, understandings, negotiations and discussions, whether oral or
written, of the parties. No supple ment, modification or waiver of this
Agreement shall be binding unless executed in writing by the party to be bound
thereby. No waiver of any of the provisions of this Agreement shall be deemed
or shall constitute a waiver of any other provision hereof (whether or not
similar), nor shall such waiver constitute a continuing waiver unless otherwise
expressly provided.
12.6 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
12.7 INVALIDITY. In the event that any one or more of the provisions
contained in this Agreement or in any other instrument referred to herein,
shall, for any reason, be held to be invalid, illegal or unenforceable in any
respect, such invalidity, illegality or unenforceability shall not affect any
other provision of this Agreement or any other such instrument.
12.8 HEADINGS. The headings of the Articles and Sections herein are
inserted for convenience of reference only and are not intended to be a part of
or to affect the meaning or interpretation of this Agreement.
58
<PAGE>
12.9 SPECIFIC PERFORMANCE. The parties hereto agree that if any of
the provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached, irreparable damage would occur, no
adequate remedy at law would exist, and that the parties shall be entitled to
specific performance of the terms hereof, in addition to actions for damages and
any other remedy at law or equity.
12.10 ATTORNEYS FEES. The parties hereby agree that if any party
hereto pursues a Proceeding to enforce the terms of this Agreement, the
prevailing party in any such Proceeding shall be entitled to recover its
attorneys fees and other costs and expenses incurred in such Proceeding from the
other party.
12.11 PUBLICITY. All public announcements or statements concerning
the Merger and the Plan shall be jointly approved by Purchaser and the Company.
However, in the event the parties are unable to agree on a public statement or
announcement following the announcement of this Agreement and the Company or the
Purchaser determines, after consultation with counsel, that such statement or
announcement is required by law, then the Company or the Purchaser, as the case
may be, may issue such statement or announcement.
12.12 CONFIDENTIALITY AGREEMENTS. The February 1996 confidentiality
agreement between Donaldson, Lufkin & Jenrette Securities Corporation and
Washington Corporations and the March 1996 confidentiality agreement between the
Company and the Purchaser shall survive, without modification, the execution of
this Agreement and any termination hereof.
59
<PAGE>
SIGNATURES
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the day and year first above written.
WASHINGTON CONSTRUCTION GROUP, INC.
By /s/ J. H. Wimberly
-----------------------
President and Chief
Executive Officer
By _______________________
MORRISON KNUDSEN CORPORATION
By /s/ Robert A. Tinstman
-----------------------
Robert A. Tinstman
President and
Chief Executive Officer
By /s/ Stephen G. Hanks
-----------------------
Stephen G. Hanks
Executive Vice President
and Chief Legal Counsel
<PAGE>
EXHIBIT 2
________________________________________________________________________________
WARRANT AGREEMENT
BETWEEN
MORRISON KNUDSEN CORPORATION
AND
[NORWEST BANK MINNESOTA, N.A.]
AS WARRANT AGENT
______________________________
DATED AS OF ___________, 1996
________________________________________________________________________________
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION Page
- ------- ----
<S> <C>
Section 1. Definitions ................................................... 1
Section 2. Form of Warrant; Execution; Registration ...................... 3
2.1 Form of Warrant; Execution of Warrants ........................ 3
2.2 Registration .................................................. 3
2.3 Countersignature of Warrants .................................. 3
Section 3. Transfer and Exchange of Warrants ............................. 3
Section 4. Term of Warrants; Exercise of Warrants; Compliance with
Government Regulations ........................................ 4
4.1 Term of Warrants .............................................. 4
4.2 Exercise of Warrants .......................................... 4
4.3 Compliance with Government Regulations; Qualification under
Securities Laws ............................................... 5
Section 5. Payment of Taxes .............................................. 5
Section 6. Mutilated or Missing Warrant Certificates ..................... 6
Section 7. Reservation of Warrant Shares ................................. 6
Section 8. Stock Exchange Listings ....................................... 6
Section 9. Adjustment of Exercise Price; Number of Warrant Shares and
Shares of Capital Stock Warrants Are Exercisable Into ......... 7
9.1 Mechanical Adjustments ........................................ 7
(a) Adjustment for Change in Capital Stock ................... 7
(b) Adjustment for Rights Issue .............................. 7
(c) Adjustment for Other Distributions ....................... 7
(d) Adjustment for Common Stock and Convertible Securities
Issue .................................................... 8
(e) Current Market Price; Price Per Share .................... 8
(f) When De Minimis Adjustment May Be Deferred .............. 10
(g) Adjustment in Exercise Price ............................ 10
(h) When No Adjustment Required ............................. 10
(i) Shares of Common Stock .................................. 10
(j) Expiration of Rights, etc ............................... 11
9.2 Voluntary Adjustment by the Company .......................... 11
9.3 Notice of Adjustment ......................................... 11
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
SECTION Page
- ------- ----
<S> <C>
9.4 Preservation of Purchase Rights upon Merger or
Consolidation ................................................ 11
9.5 Statement on Warrants ........................................ 12
Section 10. Fractional Interests ......................................... 12
Section 11. No Rights as Stockholders; Notices to Holders ................ 12
Section 12. Payments in U.S. Currency .................................... 13
Section 13. Merger or Consolidation or Change of Name of Warrant
Agent ........................................................ 13
Section 14. Appointment of Warrant Agent ................................. 14
14.1 Concerning the Warrant Agent ................................. 14
14.2 Correctness of Statements .................................... 14
14.3 Breach of Covenants .......................................... 14
14.4 Performance of Duties ........................................ 14
14.5 Reliance on Counsel .......................................... 14
14.6 Proof of Actions Taken ....................................... 14
14.7 Compensation ................................................. 14
14.8 Legal Proceedings ............................................ 15
14.9 Other Transactions in Securities of Company .................. 15
14.10 Liability of Warrant Agent ................................... 15
14.11 Reliance on Documents ........................................ 15
14.12 Validity of Agreement ........................................ 15
14.13 Instructions from Company .................................... 15
Section 15. Change of Warrant Agent ...................................... 15
Section 16. Notices ...................................................... 16
Section 17. Cancellation of Warrants ..................................... 16
Section 18. Supplements and Amendments ................................... 16
Section 19. Successors ................................................... 17
Section 20. Applicable Law ............................................... 17
Section 21. Benefits of this Agreement ................................... 17
Section 22. Counterparts ................................................. 17
Section 23. Captions ..................................................... 17
EXHIBIT A FORM OF WARRANT CERTIFICATE .................................. A-2
</TABLE>
ii
<PAGE>
WARRANT AGREEMENT, dated as of _________, 1996, between MORRISON KNUDSEN
CORPORATION, formerly known as Washington Construction Group, Inc., a Delaware
corporation (the "Company"), and [NORWEST BANK MINNESOTA, N.A., a national
-------
banking association,] as Warrant Agent (together with any successors and
assigns, the "Warrant Agent").
W I T N E S E T H :
WHEREAS, Morrison Knudsen Corporation, a Delaware corporation ("Old MK"),
was a Debtor and Debtor-in-Possession in the case (the "Chapter 11 Case") filed
---------------
in the United States Bankruptcy Court for the District of Delaware (the
"Bankruptcy Court"), entitled "In re Morrison Knudsen Corporation, Debtor,"
-----------------
Chapter 11 Case No. _______________, under the Bankruptcy Code;
WHEREAS, in connection with and as part of the transactions to be
consummated pursuant to the confirmation of a Plan of Reorganization (as
amended, modified or supplemented from time to time) of Old MK in the Chapter 11
Case (the "Plan"), Old MK has merged with and into the Company pursuant to a
----
Restructuring and Merger Agreement between the Company and Old MK dated as of
May ___, 1996 (the "Merger Agreement"), and the Company has agreed to issue
Warrants for the purchase of an aggregate (subject to adjustment as herein
provided and in Section 3.5 of the Merger Agreement) of 2,765,000 shares of
Common Stock of the Company (the "Warrants").
--------
WHEREAS, by Order dated ______________ ____, 1996, the Bankruptcy Court
confirmed the Plan;
WHEREAS, the Plan and the Merger Agreement contemplate that the Company
will enter into certain agreements, including, without limitation, this Warrant
Agreement;
WHEREAS, the Company desires to issue the Warrants, each of which entitles
the holder thereof to purchase one share of its Common Stock (each of said
shares of Common Stock deliverable upon exercise of the Warrants a "Warrant
-------
Share"); and
- -----
WHEREAS, the Company wishes the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing to so act in connection with the
issuance, division, transfer, exchange and exercise of Warrants.
NOW, THEREFORE, in consideration of the foregoing, to implement the terms
of the Plan, and for the purpose of defining the terms and provisions of the
Warrants and the respective rights and obligations thereunder of the Company and
the registered owners of the Warrants and any security into which they may be
exchanged (the "Holders"), the Company and the Warrant Agent hereby agree as
-------
follows:
SECTION 1. DEFINITIONS. The following terms, as used herein, have the
-----------
following meanings (all terms defined herein in the singular to have the
correlative meanings when used in the plural and vice versa):
1.1 "Agreement" means this Warrant Agreement, as the same may be
---------
amended, modified or supplemented from time to time.
1.2 "Assets" has the meaning ascribed to such term in Section 9.1(c)
------
hereof.
<PAGE>
1.3 "Business Day" means a day other than (a) a Saturday or Sunday, (b)
------------
any day on which banking institutions located in the City of New York, New York
are required or authorized by law or by local proclamation to close or (c) any
day on which the New York Stock Exchange is closed.
1.4 "Commercially Reasonable Efforts", when used with respect to any
-------------------------------
obligation to be performed or term or provision to be observed hereunder, means
such efforts as a prudent Person seeking the benefits of such performance or
action would make, use, apply or exercise to preserve, protect or advance its
rights or interests, provided, that such efforts do not require such Person to
--------
incur a material financial cost or a substantial risk of material liability
unless such cost or liability (i) would customarily be incurred in the course of
performance or observance of the relevant obligation, term or provision, (ii) is
caused by or results from the wrongful act or negligence of the Person whose
performance or observance is required hereunder or (iii) is not excessive or
unreasonable in view of the rights or interests to be preserved, protected or
advanced. Such efforts may include, without limitation, the expenditure of such
funds and retention by such Person of such accountants, attorneys or other
experts or advisors as may be necessary or appropriate to effect the relevant
action; the undertaking of any special audit or internal investigation that may
be necessary or appropriate to effect the relevant action; and the commencement,
termination or settlement of any action, suit or proceeding involving such
Person to the extent necessary or appropriate to effect the relevant action.
1.5 "Common Stock" means the common stock, par value $.01, of the
------------
Company.
1.6 "Convertible Securities" has the meaning ascribed to such term in
----------------------
Section 9.1(d) hereof.
1.7 "Exercise Period" has the meaning ascribed to such term in Section
---------------
4.1 hereof.
1.8 "Exercise Price" means $12.00 per share of Common Stock, as adjusted
--------------
pursuant to Section 9 hereof:
1.9 "Holder" has the meaning ascribed to such term in the preamble
------
hereto.
1.10 "NASD" has the meaning ascribed to such term in Section 4.2 hereof.
----
1.11 "Person" means a natural person, a corporation, a partnership, a
------
trust, a joint venture, any regulatory authority or any other entity or
organization.
1.12 "Plan" has the meaning ascribed to such term in the preamble hereto.
----
1.13 "Price Per Share" has the meaning ascribed to such term in Section
---------------
9.1(e)(ii) hereof.
1.14 "Rights" has the meaning ascribed to such term in Section 9.1(b)
------
hereof.
1.15 "Transfer Agent" has the meaning ascribed to such term in Section 7
--------------
hereof.
1.16 "SEC" means the United States Securities and Exchange Commission, or
---
any successor governmental agency or authority thereto.
1.17 "Subsidiary" has the meaning ascribed to such term in Section 9.1(c)
----------
hereof.
1.18 "Warrant" has the meaning ascribed to such term in the preamble
-------
hereto.
2
<PAGE>
1.19 "Warrant Certificate" has the meaning ascribed to such term in
-------------------
Section 2.1 hereof.
1.20 "Warrant Register" has the meaning ascribed to such term in Section
----------------
2.2 hereof.
1.21 "Warrant Share" has the meaning ascribed to such term in the
-------------
preamble hereto.
SECTION 2. FORM OF WARRANT; EXECUTION; REGISTRATION.
----------------------------------------
2.1 Form of Warrant; Execution of Warrants. The certificates evidencing
--------------------------------------
the Warrants (the "Warrant Certificates") shall be in registered form only and
--------------------
shall be in the form set forth as Exhibit A hereto. The Warrant Certificates
shall be signed on behalf of the Company by its Chairman of the Board, President
or one of its Vice Presidents. The signature of any such officer on the Warrant
Certificates may be manual or by facsimile. Any Warrant Certificate may be
signed on behalf of the Company by any person who, at the actual date of the
execution of such Warrant Certificate, shall be a proper officer of the Company
to sign such Warrant Certificate. Each Warrant Certificate shall be dated the
date it is countersigned by the Warrant Agent pursuant to Section 2.3 hereof.
2.2 Registration. The Warrant Certificates shall be numbered and shall
------------
be registered on the books of the Company maintained at the principal office of
the Warrant Agent initially in _____________, __________ (or such other place in
the continental United States as the Warrant Agent shall from time to time
notify the Company and the Holders in writing) (the "Warrant Register") as they
----------------
are issued. The Company and the Warrant Agent shall be entitled to treat the
registered owner of any Warrant as the owner in fact thereof for all purposes
and shall not be bound to recognize any equitable or other claim to or interest
in such Warrant on the part of any other person.
2.3 Countersignature of Warrants. The Warrant Certificates shall be
----------------------------
countersigned by the Warrant Agent and shall not be valid for any purpose unless
so countersigned. Warrant Certificates may be countersigned, however, by the
Warrant Agent and may be delivered by the Warrant Agent notwithstanding that the
persons whose manual or facsimile signatures appear thereon as proper officers
of the Company shall have ceased to be such officers at the time of such
countersignature, issuance or delivery. The Warrant Agent shall, upon written
instructions of the Chairman of the Board, the President, any Vice President,
the Treasurer or the Secretary of the Company, countersign, issue and deliver
Warrant Certificates entitling the Holders thereof to purchase not more than an
aggregate of _____________ Warrant Shares (subject to adjustment pursuant to
Section 9 hereof and Section 3.5 of the Merger Agreement) and shall countersign,
issue and deliver Warrant Certificates as otherwise provided in this Agreement.
SECTION 3. TRANSFER AND EXCHANGE OF WARRANTS. Subject to the terms hereof, the
---------------------------------
Warrant Agent shall initially countersign, register in the Warrant Register and
deliver Warrants hereunder in accordance with the written instructions of the
Company. Subject to the terms hereof and the receipt of such documentation as
the Warrant Agent may reasonably require, the Warrant Agent shall thereafter
from time to time register the transfer of any outstanding Warrants upon the
Warrant Register, upon surrender of the Warrant Certificate or Certificates
evidencing such Warrants duly endorsed or accompanied (if so required by it) by
a written instrument or instruments of transfer in form reasonably satisfactory
to the Warrant Agent, duly executed by the registered Holder or Holders thereof
or by the duly appointed legal representative thereof or by a duly authorized
attorney. Subject to the terms of this Agreement, each Warrant Certificate may
be exchanged for another Warrant Certificate or Certificates entitling the
Holder thereof to purchase a like aggregate number of Warrant Shares as the
Warrant Certificate or Certificates surrendered then entitles such Holder to
purchase. Any
3
<PAGE>
Holder desiring to exchange a Warrant Certificate or Certificates shall make
such request in writing delivered to the Warrant Agent, and shall surrender,
duly endorsed or accompanied (if so required by the Warrant Agent) by a written
instrument or instruments of transfer in form reasonably satisfactory to the
Warrant Agent, the Warrant Certificate or Certificates to be so exchanged. Upon
registration of transfer, the Company shall issue and the Warrant Agent shall
countersign and deliver by certified mail a new Warrant Certificate or
Certificates to the persons entitled thereto.
No service charge shall be made for any exchange or registration of
transfer of a Warrant Certificate or of Warrant Certificates, but the Company
may require payment of a sum sufficient to cover any stamp tax or other tax or
other governmental charge that is imposed in connection with any such exchange
or registration of transfer pursuant to Section 5 hereof.
By accepting the initial delivery, transfer or exchange of Warrants, each
Holder shall be deemed to agree to the terms of this Agreement as it may be in
effect from time to time, including any amendments or supplements duly adopted
in accordance with Section 18 hereof.
SECTION 4. TERM OF WARRANTS; EXERCISE OF WARRANTS; COMPLIANCE WITH GOVERNMENT
------------------------------------------------------------------
REGULATIONS.
-----------
4.1 Term of Warrants. Subject to the terms of this Agreement, each
----------------
Holder shall have the right, which may be exercised at any time from 9:00 a.m.,
New York City time, on the date of their issuance to 5:00 p.m., New York City
time, on, 2003 (six and one-half years after the Effective Date as defined in
the Plan) (the "Exercise Period") to receive from the Company the number of
---------------
Warrant Shares which the Holder may at the time be entitled to receive upon
exercise of such Warrants and payment of the Exercise Price then in effect for
such Warrant Shares, and the Warrant Shares issued to a Holder upon exercise of
its Warrants shall be duly authorized, validly issued, fully paid, nonassessable
and shall not have been issued in violation of or subject to any preemptive
rights. Each Warrant not exercised prior to the expiration of the Exercise
Period shall become void, and all rights thereunder and all rights in respect
thereof under this Agreement shall cease as of the expiration of the Exercise
Period.
4.2 Exercise of Warrants. During the Exercise Period, each Holder may,
--------------------
subject to this Agreement, exercise from time to time some or all of the
Warrants evidenced by its Warrant Certificate(s) by (i) surrendering to the
Company at the principal office of the Warrant Agent such Warrant Certificate(s)
with the form of election to purchase on the reverse thereof duly filled in and
signed, which signature shall be guaranteed by a bank or trust company having an
office or correspondent in the United States or a broker or dealer which is a
member of a registered securities exchange or the National Association of
Securities Dealers, Inc. (the "NASD"), and (ii) paying to the Warrant Agent for
----
the account of the Company the aggregate Exercise Price for the number of
Warrant Shares in respect of which such Warrants are exercised. Warrants shall
be deemed exercised on the date such Warrant Certificate(s) are surrendered to
the Warrant Agent and tender of payment of the aggregate Exercise Price is made.
Payment of the aggregate Exercise Price shall be made in cash by wire transfer
of immediately available funds to the Warrant Agent for the account of the
Company or by certified or official bank check or checks to the order of the
Company or by any combination thereof.
Upon the exercise of any Warrants in accordance with this Agreement, the
Company shall issue and cause to be delivered with all reasonable dispatch, to
or upon the written order of the Holder and in such name or names as the Holder
may designate, a certificate or certificates for the number of full Warrant
Shares issuable upon the exercise of such Warrants and shall take such other
actions at its sole expense as are necessary to complete the exercise of the
Warrants (including, without limitation, payment of any cash with respect to
fractional interests required under Section 10 hereof). The Warrant
4
<PAGE>
Agent shall have no responsibility or liability for such issuance or the
determination of the number of Warrant Shares issuable upon such exercise. The
certificate or certificates representing such Warrant Shares shall be deemed to
have been issued and any person so designated to be named therein shall be
deemed to have become a holder of record of such Warrant Shares as of the date
the Warrants are exercised hereunder. Each Warrant Share, when issued upon
exercise of the Warrants, shall be duly authorized, validly issued, fully paid
and non-assessable and will not have been issued in violation of or subject to
any preemptive rights.
In the event that less than all of the Warrants evidenced by a Warrant
Certificate are exercised, the Holder thereof shall be entitled to receive a new
Warrant Certificate or Certificates as specified by such Holder evidencing the
remaining Warrant or Warrants, and the Warrant Agent is hereby irrevocably
authorized by the Company to countersign, issue and deliver the required new
Warrant Certificate or Certificates evidencing such remaining Warrant or
Warrants pursuant to the provisions of this Section 4.2 hereof and of Section 3
hereof. The Company, whenever required by the Warrant Agent, will supply the
Warrant Agent with Warrant Certificates duly executed on behalf to the Company
for such purpose.
Upon delivery of the Warrant Shares issuable upon exercise in accordance
herewith and of any required new Warrant Certificates, the Company shall direct
the Warrant Agent by written order to cancel the Warrant Certificates
surrendered upon exercise. Such canceled Warrant Certificates shall then be
disposed of by the Warrant Agent in a manner permitted by applicable laws and
satisfactory to the Company in accordance with its written instructions to the
Warrant Agent. The Warrant Agent shall account promptly to the Company with
respect to Warrants exercised and concurrently pay to the Company all amounts
received by the Warrant Agent upon exercise of such Warrants.
The Warrant Agent shall keep copies of this Agreement and any notices given
or received hereunder available for inspection by the Holders during normal
business hours at its office. The Company shall at its sole expense supply the
Warrant Agent from time to time with such numbers of copies of this Agreement as
the Warrant Agent reasonably may request.
4.3 Compliance with Government Regulations; Qualification under
-----------------------------------------------------------
Securities Laws. The Company covenants that if following a due demand to
- ---------------
exercise Warrants any shares of Common Stock required to be reserved for
purposes of exercise of such Warrants require, under any federal or state law,
registration with or approval of any governmental authority before such shares
may be issued upon exercise, the Company will, unless the Company has received
an opinion of counsel to the effect that such registration is not then permitted
by such laws, use its Commercially Reasonable Efforts to cause such shares to be
duly so registered or approved, as the case may be; provided that in no event
--------
shall such shares of Common Stock be issued, and the exercise of all such
Warrants shall be suspended, for the period from the date of such due demand for
exercise until such registration or approval is in effect; provided, further,
-------- -------
that the Exercise Period for such Warrants (but only such Warrants) shall be
extended one day for each day (or portion thereof) that any such suspension is
in effect. The Company shall promptly notify the Warrant Agent of any such
suspension, and the Warrant Agent shall have no duty, responsibility or
liability in respect of any shares of Common Stock issued or delivered prior to
its receipt of such notice. The Company shall promptly notify the Warrant Agent
of the termination of any such suspension, and such notice shall set forth the
number of days that the Exercise Period with respect to such Warrants shall be
extended as a result of such suspension.
SECTION 5. PAYMENT OF TAXES. The Company will pay all documentary stamp and
----------------
other like taxes, if any, attributable to the initial issuance and delivery of
the Warrants and the initial issuance and delivery of the Warrant Shares upon
the exercise of Warrants, provided, that the Company shall not be
--------
5
<PAGE>
required to pay any tax or taxes which may be payable in respect of any transfer
of the Warrants or involved in the issuance or delivery of any Warrant Shares in
a name other than that of the Holder of the Warrants being exercised, and the
Warrant Agent shall not register any such transfer or issue or deliver any
Warrant Certificate(s) or Warrant Shares unless or until the persons requesting
the registration or issuance shall have paid to the Warrant Agent for the
account of the Company the amount of such tax, if any, or shall have established
to the reasonable satisfaction of the Company that such tax, if any, has been
paid.
SECTION 6. MUTILATED OR MISSING WARRANT CERTIFICATES. In the event that any
-----------------------------------------
Warrant Certificate shall be mutilated, lost, stolen or destroyed, the Company
shall issue, and at the direction of the Company by written order the Warrant
Agent shall countersign and deliver in exchange and substitution for and upon
cancellation of the mutilated Warrant Certificate or in lieu of and substitution
for the Warrant Certificate lost, stolen or destroyed, a new Warrant Certificate
of like tenor and representing an equivalent right or interest, but only upon
receipt of evidence reasonably satisfactory to the Company and the Warrant Agent
of such loss, theft or destruction of such Warrant Certificate and an indemnity
or bond, if requested by the Company or the Warrant Agent, also reasonably
satisfactory to them. An applicant for such a substitute Warrant Certificate
shall also comply with such other reasonable procedures as the Company or the
Warrant Agent may reasonably require.
SECTION 7. RESERVATION OF WARRANT SHARES. There have been reserved, and the
-----------------------------
Company shall at all times keep reserved, out of its authorized Common Stock,
free of all preemptive rights, a number of shares of Common Stock sufficient to
provide for the exercise of the rights of purchase represented by the
outstanding Warrants. The transfer agent for the Common Stock and every
subsequent or other transfer agent for any shares of the Company's capital stock
issuable upon the exercise of the Warrants (each, a "Transfer Agent") will be
--------------
and are hereby irrevocably authorized and directed at all times to reserve such
number of authorized shares as shall be required for such purpose. The Company
will keep a copy of this Agreement on file with each Transfer Agent. The Warrant
Agent is hereby irrevocably authorized to requisition from time to time from the
Company or a Transfer Agent, as the case may be, the certificate for Warrant
Shares required to honor outstanding Warrants upon exercise thereof in
accordance with the terms of this Agreement. The Company will supply its
Transfer Agents with duly executed stock certificates for such purposes and will
itself provide or otherwise make available any cash which may be payable as
provided in Section 10 hereof. The Company will furnish to its Transfer Agents a
copy of all notices of adjustments and certificates related thereto, transmitted
to each Holder pursuant to Section 9.3 hereof. The Company will give the Warrant
Agent prompt notice of any change in any Transfer Agent or any change of address
of any Transfer Agent.
Before taking any action which would cause an adjustment pursuant to
Section 9 reducing the Exercise Price, the Company will take any and all
corporate action which may be necessary in order that the Company may validly
and legally issue fully paid and nonassessable Warrant Shares at the Exercise
Price as so adjusted.
SECTION 8. STOCK EXCHANGE LISTINGS. The Company shall use its Commercially
-----------------------
Reasonable Efforts (including requests for waivers) to have the Warrants listed
on the New York Stock Exchange and failing that included for quotation in The
Nasdaq National Market or listed on the American Stock Exchange, and shall use
its Commercially Reasonable Efforts to maintain such listing or inclusion. In
the event the Warrants do not qualify for such listing or inclusion, the Company
will use its Commercially Reasonable Efforts (including, requests for waivers)
to effect such inclusion or listing
6
<PAGE>
whenever the Warrants qualify therefor. Any such listing and inclusion shall be
at the Company's sole expense.
SECTION 9. ADJUSTMENT OF EXERCISE PRICE; NUMBER OF WARRANT SHARES AND SHARES OF
--------------------------------------------------------------------
CAPITAL STOCK WARRANTS ARE EXERCISABLE INTO. The number and kind of securities
- -------------------------------------------
purchasable upon the exercise of each Warrant, and the Exercise Price, shall be
subject to adjustment from time to time upon the happening of certain events, as
hereinafter described.
9.1 Mechanical Adjustments. The number of Warrant Shares purchasable
----------------------
upon the exercise of each Warrant and the Exercise Price shall be subject to
adjustment as follows:
(a) Adjustment for Change in Capital Stock. Subject to paragraphs
--------------------------------------
(f) and (h) below, in case the Company shall (i) pay a dividend on its
outstanding shares of Common Stock in shares of Common Stock or make a
distribution of shares of Common Stock on its outstanding shares of Common
Stock, (ii) make a distribution on its outstanding shares of Common Stock in
shares of its capital stock other than Common Stock, (iii) subdivide its
outstanding shares of Common Stock into a greater number of shares of Common
Stock, (iv) combine its outstanding shares of Common Stock into a smaller number
of shares of Common Stock, or (v) issue, by reclassification of its shares of
Common Stock, other securities of the Company (including any such
reclassification in connection with a consolidation or merger in which the
Company is the surviving entity), then the number of Warrant Shares purchasable
upon exercise of each Warrant immediately prior thereto shall be adjusted so
that the Holder of each Warrant shall be entitled to receive the kind and number
of Warrant Shares or other securities of the Company which such Holder would
have owned or have been entitled to receive upon the happening of any of the
events described above had such Warrant been exercised in full immediately prior
to the happening of such event or any record date with respect thereto. If a
Holder is entitled to receive shares of two or more classes of capital stock of
the Company pursuant to the foregoing upon exercise of Warrants, the allocation
of the adjusted Exercise Price between such classes of capital stock shall be
determined reasonably and in good faith by the Board of Directors of the
Company. After such allocation, the exercise privilege and the Exercise Price
with respect to each class of capital stock shall thereafter be subject to
adjustment on terms substantially identical to those applicable to Common Stock
in this Section 9. An adjustment made pursuant to this paragraph (a) shall
become effective immediately after the record date for such event or, if none,
immediately after the effective date of such event. Such adjustment shall be
made successively whenever such an event occurs.
(b) Adjustment for Rights Issue. Subject to paragraphs (f) and (h)
---------------------------
below, in case the Company shall issue rights, options or warrants
(collectively, "Rights") to all holders of its outstanding Common Stock
------
entitling them to subscribe for or purchase shares of Common Stock at a Price
Per Share (as defined in paragraph (e) below) which is lower at the record date
mentioned below than the then Current Market Price (as defined in paragraph (e)
below) per share of Common Stock, the number of Warrant Shares thereafter
purchasable upon the exercise of each Warrant shall be determined by multiplying
the number of Warrant Shares theretofore purchasable upon exercise of each
Warrant by a fraction, the numerator of which shall be the number of shares of
Common Stock outstanding on the date of issuance of such Rights plus the
additional Number of Shares (as defined in paragraph (e) below) of Common Stock
offered for subscription or purchase in connection with such Rights and the
denominator of which shall be the number of shares of Common Stock outstanding
on the date of issuance of such Rights plus the number of shares which the
aggregate Proceeds (as defined in paragraph (e) below) received or receivable by
the Company upon exercise of such Rights would purchase at the Current Market
Price per share of Common Stock at such record date. Such adjustment
7
<PAGE>
shall be made whenever Rights are issued, and shall become effective immediately
after the record date for the determination of stockholders entitled to receive
Rights.
(c) Adjustment for Other Distributions. Subject to paragraphs (f)
----------------------------------
and (h) below, in case the Company shall distribute to all holders of its shares
of Common Stock (x) evidences of indebtedness or assets (excluding cash
dividends or distributions payable out of the consolidated earnings or surplus
legally available for such dividends or distributions and dividends or
distributions referred to in paragraphs (a) or (b) above) of the Company or any
corporation or other legal entity a majority of the voting equity or equity
interests of which are owned, directly or indirectly, by the Company (a
"Subsidiary"), or (y) shares of capital stock of a Subsidiary (such evidences of
----------
indebtedness, assets and securities as set forth in clauses (x) and (y) above,
collectively, "Assets"), then in each case the number of Warrant Shares
------
thereafter purchasable upon the exercise of each Warrant shall be determined by
multiplying the number of Warrant Shares theretofore purchasable upon the
exercise of each Warrant by a fraction, the numerator of which shall be the
Current Market Price per share of Common Stock on the date of such distribution
and the denominator of which shall be such Current Market Price per share of
Common Stock less the fair value as of such record date as determined reasonably
and in good faith by the Board of Directors of the Company of the portion of the
Assets applicable to one share of Common Stock. Such adjustment shall be made
whenever any such distribution is made, and shall become effective on the date
of distribution retroactive to the record date for the determination of
stockholders entitled to receive such distribution.
(d) Adjustment for Common Stock and Convertible Securities Issue.
------------------------------------------------------------
Subject to paragraphs (f) and (h) below, in case the Company shall issue shares
of its Common Stock, or securities convertible into, or exchangeable or
exercisable for Common Stock or Rights to subscribe for or purchase such
securities (collectively, "Convertible Securities") (excluding the issuance of
----------------------
(i) Common Stock or Convertible Securities issued in any of the transactions
described in paragraphs (a), (b) or (c) above or (ii) Warrant Shares issued upon
the exercise of the Warrants, at a Price Per Share of Common Stock, in the case
of the issuance of Common Stock, or at a Price Per Share of Common Stock
initially deliverable upon conversion or exercise of exchange of such
Convertible Securities, in each case, together with any other consideration
received by the Company in connection with such issuance, below the then Current
Market Price per share of Common Stock on the date the Company fixed the
offering, conversion or exercise or exchange price of such additional shares,
then the number of Warrant Shares thereafter purchasable upon the exercise of
each Warrant shall be determined by multiplying the number of Warrant Shares
theretofore purchasable upon exercise of each Warrant by a fraction, the
numerator of which shall be the total number of shares of Common Stock
outstanding on such date plus the additional Number of Shares of Common Stock
offered for subscription or purchase and the denominator of which shall be the
number of shares of Common Stock outstanding on such date plus the number of
shares of Common Stock which the aggregate Proceeds of the total amount of
Convertible Securities so offered would purchase at the Current Market Price Per
Share of Common Stock at such record date. In case the Company shall issue and
sell Convertible Securities for a consideration consisting, in whole or in part,
of property other than cash or its equivalent, then in determining the "Price
Per Share" of Common Stock and the "consideration received by the Company" for
purposes of the first sentence and the immediately preceding sentence of this
paragraph (d), the Board of Directors of the Company shall reasonably and in
good faith determine the fair value of such property. The determination of
whether any adjustment is required under this paragraph (d), by reason of the
sale and issuance of any Convertible Securities and the amount of such
adjustment, if any, shall be made at such time and not at the subsequent time of
issuance of shares of Common Stock upon the exercise, conversion or exchange of
Convertible Securities.
8
<PAGE>
(e) Current Market Price; Price Per Share. (i) For the purpose of
-------------------------------------
any computation under Section 4.2 hereof or this Section 9.1, the "Current
-------
Market Price" per share of Common Stock at any date shall be the average of the
- ------------
daily closing prices for the 20 consecutive trading days preceding the date of
such computation. The closing price for each day shall be (x) if the Common
Stock shall be then listed or admitted to trading on the New York Stock
Exchange, the closing price on the NYSE -Consolidated Tape (or any successor
composite tape reporting transactions on the New York Stock Exchange) or, if
such a composite tape shall not be in use or shall not report transactions in
the Common Stock, or if the Common Stock shall be listed on a stock exchange
other than the New York Stock Exchange, the last reported sales price regular
way or, in case no such reported sale takes place on such day, the average of
the closing bid and asked prices regular way for such day, in each case on the
principal national securities exchange on which the shares of Common Stock are
listed or admitted to trading (which shall be the national securities exchange
on which the greatest number of shares of the Common Stock have been traded
during such 20 consecutive trading days) or (y) if the Common Stock is not
listed or admitted to trading, the average of the closing bid and asked prices
of the Common Stock in the over-the-counter market as reported by The Nasdaq
National Market or any comparable system or, if the Common Stock is not included
for quotation in The Nasdaq National Market or a comparable system, the average
of the closing bid and asked prices as furnished by two members of the NASD
selected reasonably and in good faith from time to time by the Board of
Directors for that purpose. In the absence of one or more such quotations, the
Current Market Price per share of the Common Stock shall be determined
reasonably and in good faith by the Board of Directors of the Company.
(ii) For purposes of this Section 9.1, "Price Per Share" shall be
---------------
defined and determined according to the following formula:
P = R/N
where
P = Price Per Share;
R = the "Proceeds" received or receivable by the Company which
(x) in the case of shares of Common Stock is the total
amount received or receivable by the Company in
consideration for the issuance and sale of such shares;
(y) in the case of Rights or of Convertible Securities
with respect to shares of Common Stock, is the total
amount received or receivable by the Company in
consideration for the issuance and sale of Rights or such
Convertible Securities, plus the minimum aggregate amount
of additional consideration, other than the surrender of
such Convertible Securities, payable to the Company upon
exercise, conversion or exchange thereof; and (z) in the
case of Rights to subscribe for or purchase such
Convertible Securities, is the total amount received or
receivable by the Company in consideration for the
issuance and sale of such Rights plus the minimum
aggregate amount of additional consideration, other than
the surrender of such Convertible Securities, payable upon
the conversion or exchange or exercise of such Convertible
Securities, provided that in each case the proceeds
--------
received or receivable by the Company shall be the net
cash proceeds after deducting therefrom any compensation
paid or discount allowed in the
9
<PAGE>
sale, underwriting or purchase thereof by underwriters or
dealers or others performing similar services; and
N = the "Number of Shares," which (x) in the case of Common
Stock is the number of shares issued; and (y) in the case
of Rights or of Convertible Securities with respect to
shares of Common Stock, is the maximum number of shares of
Common Stock initially issuable upon exercise, conversion
or exchange thereof.
(f) When De Minimis Adjustment May Be Deferred. No adjustment in
------------------------------------------
the number of Warrant Shares purchasable hereunder shall be required unless such
adjustment would require an increase or decrease of at least one percent (1%) in
the number of Warrant Shares purchasable upon the exercise of each Warrant,
provided that any adjustments which by reason of this paragraph (f) are not
- --------
required to be made shall be carried forward and taken into account in any
subsequent adjustment. All calculations shall be made to the nearest one-
thousandth of a Warrant Share and the nearest cent.
(g) Adjustment in Exercise Price. Whenever the number of Warrant
----------------------------
Shares purchasable upon the exercise of each Warrant is adjusted as herein
provided, the Exercise Price payable upon exercise of each Warrant immediately
prior to such adjustment shall be adjusted by multiplying such Exercise Price by
a fraction, the numerator of which shall be the number of Warrant Shares
purchasable upon the exercise of each Warrant immediately prior to such
adjustment and the denominator of which shall be the number of Warrant Shares
purchasable immediately thereafter.
(h) When No Adjustment Required. No adjustment in the number of
---------------------------
Warrant Shares purchasable upon the exercise of each Warrant need be made under
this Section 9.1 in connection with: (i) the issuance of Common Stock, options,
rights, warrants or other securities pursuant to the Plan; (ii) shares of Common
Stock, options, rights, warrants or other securities issued pursuant to any plan
adopted by the Company or its subsidiaries for the benefit of employees or
directors; (iii) shares of Common Stock, options, rights, warrants or other
securities issued pursuant to any share purchase rights plan adopted by the
Company; (iv) any issuance of shares of Common Stock or securities convertible
into or exchangeable for shares of Common Stock pursuant to an underwritten
public offering for a price per share of Common Stock in the case of an issuance
of shares of Common Stock, or for a price per share of Common Stock initially
deliverable upon conversion or exchange of such securities, that is equal to or
greater than 95% of the Current Market Price per share of Common Stock on the
date the Company fixed the offering, conversion or exchange price of such
additional shares of Common Stock; (v) sales of Common Stock pursuant to a plan
adopted by the Company for reinvestment of dividends or interest; or (vi) shares
of Common Stock issued to shareholders of any corporation that is acquired by,
merged into or made a part or subsidiary of the Company in an arm's-length
transaction. Additionally, no adjustment need be made if the Company issues or
distributes to each Holder of Warrants the shares, rights, options, warrants,
evidences of indebtedness, assets or other securities referred to in those
paragraphs which each Holder of Warrants would have been entitled to receive had
the Warrants been exercised for the number of Warrant Shares for which Warrants
are then exercisable prior to the happening of such event or the record date
with respect thereto. No adjustment in the number of Warrant Shares will be made
for a change in the par value of the shares of Common Stock.
(i) Shares of Common Stock. For all purposes of this Agreement,
----------------------
the term "shares of Common Stock" shall mean (i) the class of stock designated
as the Common Stock of the Company at the date of this Agreement or (ii) any
other class of stock resulting from successive changes or reclassification of
such shares consisting solely of changes in par value, or from par value to no
par
10
<PAGE>
value, or from no par value to par value. In the event that at any time, as a
result of an adjustment made pursuant to this Section 9.1, the Holders shall
become entitled to purchase any securities of the Company other than shares of
Common Stock, thereafter the number of such other shares so purchasable upon
exercise of each Warrant and the Exercise Price of such shares shall be subject
to adjustment from time to time in a manner and on terms substantially identical
to the provisions with respect to the Warrant Shares contained in paragraphs (a)
through (h) above, and the provisions of this Agreement with respect to the
Warrant Shares shall apply on like terms to any such other securities.
(j) Expiration of Rights, etc. Upon the expiration of any Rights
-------------------------
or conversion or exchange or exercise rights, if any thereof shall not have been
exercised, the Exercise Price and the number of Warrant Shares purchasable upon
the exercise of each Warrant shall, upon such expiration, be readjusted and
shall thereafter be such as it would have been had it been originally adjusted
(or had the original adjustment not been required, as the case may be) as if (A)
the only shares of Common Stock so issued were the shares of Common Stock, if
any, actually issued or sold upon the exercise of such Rights or conversion or
exchange or exercise rights and (B) such shares of Common Stock, if any, were
issued or sold for the consideration actually received by the Company upon such
exercise plus the aggregate consideration, if any, actually received by the
Company for the issuance, sale or grant of all of such Rights or conversion or
exchange or exercise rights whether or not exercised, provided that no such
--------
readjustment shall have the effect of increasing the Exercise Price or
decreasing the number of Warrant Shares purchasable upon the exercise of each
Warrant by an amount in excess of the amount of the adjustment initially made in
respect of the issuance, sale or grant of such Rights or conversion or exchange
or exercise rights.
9.2 Voluntary Adjustment by the Company. The Company may at its option,
-----------------------------------
at any time during the term of the Warrants, reduce the then current Exercise
Price to any amount deemed appropriate by the Board of Directors of the Company.
9.3 Notice of Adjustment. Whenever the number of Warrant Shares
--------------------
purchasable upon the exercise of each Warrant or the Exercise Price of Warrant
Shares is adjusted, as herein provided, the Company shall cause the Warrant
Agent promptly to mail to each Holder, at the sole expense of the Company by
first class mail, postage prepaid, notice of such adjustment or adjustments and
shall deliver to the Warrant Agent a certificate of a firm of independent public
accounts (who may be the regular accountants employed by the Company) setting
forth the number of Warrant Shares purchasable upon the exercise of each Warrant
and the Exercise Price of Warrant Shares after such adjustment, setting forth a
brief statement of the facts requiring such adjustment and setting forth in
reasonable detail the computations by which such adjustment was made. The
Warrant Agent shall be entitled to rely on such certificate and shall be under
no duty or responsibility with respect to any such certificate, except to
exhibit the same, from time to time, to any Holder requesting an inspection
thereof during reasonable business hours. The Warrant Agent shall not at any
time be under any duty or responsibility to any Holder to determine whether any
facts exist which may require any adjustment of the Exercise Price or the number
of Warrant Shares or other stock or property purchasable on exercise of
Warrants, or with respect to the nature or extent of any such adjustment when
made, or with respect to the method employed in making such adjustment.
9.4 Preservation of Purchase Rights upon Merger or Consolidation. In
------------------------------------------------------------
case of any consolidation of the Company with or merger of the Company into
another entity, the Company or such successor entity shall execute and deliver
to the Warrant Agent an agreement, which shall be binding on the Holders, that
each Holder shall have the right thereafter upon payment of the Exercise Price
in effect immediately prior to such action (after giving effect to any
applicable adjustments under Section 9.1 hereof) to purchase upon exercise of
each Warrant the kind and amount of shares and other
11
<PAGE>
securities and property (including cash) which such Holder would have owned or
have been entitled to receive after the happening of such consolidation or
merger had such Warrant been exercised immediately prior to such action. The
Company shall at its sole expense mail by first class mail, postage prepaid, to
each Holder notice of the execution of any such agreement. Such agreement shall
provide for adjustments, which shall be substantially identical to the
adjustments provided for in this Section 9. In addition, the Company shall not
merge or consolidate with or into, any other entity unless the successor entity
(if not the Company), shall expressly assume, by supplemental agreement
reasonably satisfactory in form and substance to the Warrant Agent in its sole
judgment and executed and delivered to the Warrant Agent, the due and punctual
performance and observance of each and every covenant and condition of this
Agreement to be performed and observed by the Company. The provisions of this
Section 9.4 shall similarly apply to successive consolidations or mergers. The
Warrant Agent shall be under a good faith duty and responsibility to determine
the correctness of any provisions contained in any such agreement relating to
the kind or amount of shares of stock or other securities or property receivable
upon exercise of Warrants or with respect to the method employed and provided
therein for any adjustments and shall be entitled to rely upon the provisions
contained in any such agreement.
9.5 Statement on Warrants. Irrespective of any adjustments in the
---------------------
Exercise Price or the number or kind of shares purchasable upon the exercise of
the Warrants, Warrants theretofore or thereafter issued may continue to express
the same Exercise Price and number and kind of Warrant Shares as are stated in
the Warrants initially issuable pursuant to this Agreement.
SECTION 10. FRACTIONAL INTERESTS. Neither the Company nor the Warrant Agent
--------------------
shall be required to issue fractional Warrant Shares on the exercise of
Warrants. If more than one Warrant shall be exercised at the same time by the
same Holder, the number of full Warrant Shares which shall be issuable upon such
exercise shall be computed on the basis of the aggregate number of Warrants so
exercised. If any fraction of a Warrant Share would, except for the provisions
of this Section 10, be issuable on the exercise of any Warrant, the Company
shall pay an amount in cash equal to the closing price for one share of Common
Stock on the date the Warrant Certificate is presented for exercise (determined
in accordance with the second sentence of Section 9.1(e)(i) hereof), multiplied
by such fraction.
SECTION 11. NO RIGHTS AS STOCKHOLDERS; NOTICES TO HOLDERS. Nothing contained
---------------------------------------------
in this Agreement or in any of the Warrants shall be construed as conferring
upon the Holders or their transferees the right to vote or to receive dividends
or to consent or to receive notice as stockholders in respect of any meeting of
stockholders for the election of directors of the Company or any other matter,
or any rights whatsoever as stockholders of the Company.
In case:
(a) the Company shall authorize the issuance to all holders of
shares of Common Stock of rights, options or warrants to subscribe for or
purchase shares of Common Stock or of any other subscription rights or
warrants; or
(b) the Company shall authorize the distribution to all holders of
shares of Common Stock of securities or assets (other than cash dividends);
or
12
<PAGE>
(c) of any consolidation or merger to which the Company is a party
and for which approval of any stockholders of the Company is required, or
of the conveyance or transfer of a substantial portion of the properties
and assets of the Company for which approval of any stockholders of the
Company is required, or of any reclassification or change of Common Stock
issuable upon exercise of the Warrants (other than a change in par value,
or from par value to no par value, or from no par value to par value, or as
a result of a subdivision or combination), or a tender offer or exchange
offer for shares of Common Stock; or
(d) of the voluntary or involuntary dissolution, liquidation or
winding up of the Company;
then the Company shall cause to be filed with the Warrant Agent and shall cause
to be given to each Holder at its address appearing on the Warrant Register, at
least twenty (20) days prior to the applicable record date hereinafter
specified, or promptly in the case of events for which there is no record date,
by first class mail, postage prepaid, a written notice stating (i) the date as
of which the holders of record of shares of Common Stock entitled to receive any
such rights, options, warrants or distribution are to be determined, or (ii) the
initial expiration date set forth in any tender offer or exchange offer for
shares of Common Stock, or (iii) the date on which any such reclassification,
consolidation, merger, conveyance, transfer, dissolution, liquidation or winding
up is expected to become effective or consummated, as well as the date as of
which it is expected that holders of record of shares of Common Stock shall be
entitled to exchange such shares for securities or other property, if any,
deliverable upon such reclassification, consolidation, merger, conveyance,
transfer, dissolution, liquidation, or winding up. The failure to give the
notice required by this Section 11 or any defect therein shall not affect the
legality or validity of any distribution, right, option, warrant,
reclassification, consolidation, merger, conveyance, transfer, dissolution,
liquidation, winding up or action, or the vote upon any of the foregoing.
SECTION 12. PAYMENTS IN U.S. CURRENCY. All payments required to be made
-------------------------
hereunder shall be made in lawful money of the United States of America.
SECTION 13. MERGER OR CONSOLIDATION OR CHANGE OF NAME OF WARRANT AGENT. Any
----------------------------------------------------------
corporation into which the Warrant Agent may be merged or with which it may be
consolidated, or any corporation resulting from any merger or consolidation to
which the Warrant Agent shall be a party, or any corporation succeeding to the
corporation trust business of the Warrant Agent, shall be the successor to the
Warrant Agent hereunder without the execution or filing of any paper or any
further act on the part of any of the parties hereto, provided that such
corporation would be eligible for appointment as a successor Warrant Agent under
the provisions of Section 15 hereof. In case at the time such successor to the
Warrant Agent shall succeed to the agency created by this Agreement, any of the
Warrant Certificates shall have been countersigned but not delivered, any such
successor to the Warrant Agent may adopt the countersignature of the original
Warrant Agent and deliver such Warrant Certificates so countersigned; and in
case at that time any of the Warrant Certificates shall not have been
countersigned, any successor to the Warrant Agent may countersign such Warrant
Certificates either in the name of the predecessor Warrant Agent or in the name
of the successor Warrant Agent; and in all such cases such Warrant Certificates
shall be fully valid and effective as provided therein and in this Agreement.
In case at any time the name of the Warrant Agent shall be changed and at
such time any of the Warrant Certificates shall have been countersigned but not
delivered, the Warrant Agent may adopt
13
<PAGE>
the countersignatures under its prior name and deliver such Warrant Certificates
so countersigned; and in case at that time any of the Warrant Certificates shall
not have been countersigned, the Warrant Agent may countersign such Warrant
Certificates either in its prior name or in its changed name; and in all such
cases such Warrant Certificates shall be fully valid and effective as provided
therein and in this Agreement.
SECTION 14. APPOINTMENT OF WARRANT AGENT. The Company hereby appoints the
----------------------------
Warrant Agent to act as agent for the Company hereunder and in accordance with
the terms and conditions hereof, and the Warrant Agent hereby accepts such
appointment.
14.1 Concerning the Warrant Agent. The Warrant Agent undertakes the
----------------------------
duties and obligations imposed by this Agreement upon the following terms and
conditions, by all of which the Company and the Holders, by their acceptance of
Warrant Certificates, shall be bound:
14.2 Correctness of Statements. The statements contained herein and in
-------------------------
the Warrant Certificates shall be taken as statements of the Company, and the
Warrant Agent assumes no responsibility for the correctness of any of the same
except such as described the Warrant Agent or action taken by it. The Warrant
Agent assumes no responsibility with respect to the distribution of the Warrant
Certificates or Warrants except as herein otherwise provided.
14.3 Breach of Covenants. The Warrant Agent shall not be responsible for
-------------------
any failure of the Company to comply with any of the covenants contained in this
Agreement or in the Warrant to be complied with by the Company.
14.4 Performance of Duties. The Warrant Agent may execute and exercise
---------------------
any of the rights or powers hereby vested in it or perform any duty hereunder
either itself or by or through its attorneys or agents and shall not be
responsible for the misconduct or negligence of any attorney or agent (which
shall not include an employee of the Warrant Agent) appointed with due care.
14.5 Reliance on Counsel. The Warrant Agent may consult at any time with
-------------------
legal counsel satisfactory to it (who may be counsel for the Company), and the
Warrant Agent shall incur no liability or responsibility to the Company or to
any Holder in respect to any action taken, suffered or omitted by it hereunder
in good faith and in accordance with the opinion or the advice of such counsel.
14.6 Proof of Actions Taken. Whenever in the performance of its duties
----------------------
under this Agreement the Warrant Agent shall deem it necessary or desirable that
any fact or matter be proved or established by the Company prior to taking or
suffering any action hereunder, such fact or matter (unless other evidence in
respect thereof be herein specifically prescribed) may be deemed conclusively to
be proved and established by a certificate signed by the Chairman of the Board,
the President, a Vice President, the Treasurer or the Secretary of the Company
and delivered to the Warrant Agent; and such certificate shall be full
authorization to the Warrant Agent for any action taken or suffered in good
faith by it under the provisions of this Agreement in reliance upon such
certificate.
14.7 Compensation. The Company agrees to pay the Warrant Agent
------------
reasonable compensation for all services rendered by the Warrant Agent in the
performance of its duties under this Agreement, to reimburse the Warrant Agent
for all reasonable expenses, taxes and governmental charges and other charges of
any kind and nature incurred by the Warrant Agent in the performance of its
duties under this Agreement (including but not limited to legal fees and
expenses), and to indemnify the Warrant Agent and save it harmless against any
and all liabilities, including judgments, costs and counsel fees,
14
<PAGE>
for anything done or omitted by the Warrant Agent or any of its agents in the
performance of its duties under this Agreement, except as a result of the
Warrant Agent's gross negligence or willful misconduct as determined in a final
judgment of a court of competent jurisdiction and authority. The Company's
obligations under this Section 14.6 and any claim arising hereunder shall
survive the resignation or removal of the Warrant Agent and the termination or
discharge of the Company's obligations under this Agreement.
14.8 Legal Proceedings. The Warrant Agent shall be under no obligation
-----------------
to institute any action, suit or legal proceeding or to take any other action
likely to involve expense unless the Company or any one or more Holders shall
furnish the Warrant Agent with reasonable security and indemnity for any costs
and expenses which may be incurred or any liabilities which may arise, but this
provision shall not affect the power of the Warrant Agent to take such action as
the Warrant Agent may consider proper, whether with or without any such security
or indemnity. All rights of action of any Holder under this Agreement or under
any of the Warrants may be enforced by the Warrant Agent without the possession
of any of the Warrant Certificates or the production thereof at any trial or
other proceeding relative thereto, and any such action, suit or proceeding
instituted by the Warrant Agent shall be brought in its name as Warrant Agent,
and any recovery of judgment shall be for the ratable benefit of the Holders, as
their respective rights or interests may appear.
14.9 Other Transactions in Securities of Company. The Warrant Agent and
-------------------------------------------
any stockholders, director, officer or employee of the Warrant Agent may buy,
sell or deal in any of the Warrants or any other securities of the Company or
become pecuniarily interested in any transaction in which the Company may be
interested or contract with or lend money to the Company or other wise act as
fully and freely as though it were not Warrant Agent under this Agreement.
Nothing herein shall preclude the Warrant Agent from acting in any other
capacity for the Company of for any other legal entity.
14.10 Liability of Warrant Agent. The Warrant Agent shall act hereunder
--------------------------
solely as agent, and its duties shall be determined solely by the provisions
hereof. The Warrant Agent shall not be liable for anything which it may do or
refrain from doing in connection with this Agreement except for its own
negligence or bad faith.
14.11 Reliance on Documents. The Warrant Agent will not incur any
---------------------
lability or responsibility to the Company or to any Holder for any action taken
in reliance on any notice, resolution, waiver, consent, order, certificate, or
other paper, document or instrument reasonably believed by it to be genuine and
to have been signed, sent or presented by the proper party or parties.
14.12 Validity of Agreement. The Warrant Agent shall not be under any
---------------------
responsibility in respect of the validity of this Agreement or the execution and
delivery hereof (except the due execution hereof by the Warrant Agent) or in
respect of the validity or execution of any Warrant Certificate (except its
countersignature thereof) or any Warrant; nor shall the Warrant Agent by any act
hereunder be deemed to make any representation or warranty as to the
authorization or reservation of any Warrant Shares (or other securities) to be
issued pursuant to this Agreement or any Warrant, or as to whether any Warrant
Shares (or other securities) will, when issued, be validly issued, fully paid
and nonassessable, or as to the Exercise Price or the number or amount of
Warrant Shares or other securities or any Assets or other property issuable upon
exercise of any Warrant.
14.13 Instructions from Company. The Warrant Agent is hereby authorized
-------------------------
and directed to accept instructions with respect to the performance of its
duties hereunder from the Chairman of the Board, the President, a Vice
President, the Treasurer or the Secretary of the Company, and to apply to
15
<PAGE>
such officers for advice or instructions in connection with its duties, and
shall not be liable for any action taken or suffered to be taken by it in
accordance with instructions of any such officer or officers.
SECTION 15. CHANGE OF WARRANT AGENT. The Warrant Agent may resign and be
-----------------------
discharged from its duties under this Agreement by giving to the Company thirty
(30) days' notice in writing. The Warrant Agent may be removed by like notice to
the Warrant Agent and the Holders from the Company, such notice to specify the
date when removal shall become effective. If the Warrant Agent shall resign or
be removed or shall otherwise become incapable of acting, the Company shall
appoint a successor to the Warrant Agent. If the Company shall fail to make such
appointment within a period of thirty (30) days after such removal or
notification in writing of such registration or incapacity by the resigning or
incapacitated Warrant Agent or by any Holder (who shall with such notice submit
his Warrant Certificate or Certificates for inspection by the Company), then any
Holder may apply to any court of competent jurisdiction for the appointment of a
successor to the Warrant Agent. Any successor Warrant Agent, whether appointed
by the Company or such a court, shall be a bank or trust Company, in good
standing, incorporated under the laws of the United States of America or any
state thereof and having at the time of its appointment as Warrant Agent a
combined capital and surplus of at least $100,000,000. After appointment and
acceptance of such appointment in writing, the successor Warrant Agent shall be
vested with the same powers, rights, duties and responsibilities as if it had
been originally named as Warrant Agent with out further act or deed; but the
former Warrant Agent shall deliver and transfer to the successor Warrant Agent
any property at the time held by it hereunder, and shall execute and deliver any
further assurance, conveyance, act or deed necessary for the purpose. Failure to
file any notice provided for in this Section 15, however, or any defect therein,
shall not affect the legality or validity of the resignation or removal of the
Warrant Agent or the appointment of the successor Warrant Agent, as the case may
be. In the event of such resignation or removal, the successor Warrant Agent
shall mail, by first class mail, postage prepaid, to each Holder, written notice
of such removal or resignation and the name and address of such successor
Warrant Agent.
SECTION 16. NOTICES. Any notice pursuant to this Agreement by the Company or
-------
by any Holder to the Warrant Agent, or by the Warrant Agent or by any Holder to
the Company, shall be in writing and shall be delivered in person or by
facsimile transmission, or mailed first class, postage pre-paid, (a) to the
Company, at its offices at Morrison Knudsen Plaza, Boise Idaho 83729, Attention:
_____________, Telecopier No.: _____________, or (b) to the Warrant Agent, at
its offices at ______________________, Attention: __________________, Telecopier
No.: ________________. Each party hereto may from time to time change the
address to which notices to its are to be delivered or mailed hereunder by
notice to the other party.
Any notice mailed pursuant to this Agreement by the Company or the Warrant
Agent to the Holders shall be in writing and shall be mailed first class,
postage prepaid, or otherwise delivered, to such Holders at their respective
addresses in the Warrant Register. The initial address of each Holder shall be
as provided by the Company to the Warrant Agent. Any Holder may change its
address by notice to the Company and the Warrant Agent given in accordance with
this Section 16.
SECTION 17. CANCELLATION OF WARRANTS. In the event the Company shall purchase
------------------------
or otherwise acquire Warrants, the same shall thereupon be delivered to the
Warrant Agent and be cancelled by it and retired. The Warrant Agent shall cancel
any Warrant certificate surrendered for exchange, substitution, transfer or
exercise in whole or in part.
16
<PAGE>
SECTION 18. SUPPLEMENTS AND AMENDMENTS. The Company and the Warrant Agent may
--------------------------
from time to time supplement or amend this Agreement, the Warrants and the
Warrant Certificates without approval of any Holder, in order to cure any
ambiguity or to correct or supplement any provision contained herein which may
be defective or inconsistent with any other provision herein, or to comply with
the requirements of any national securities exchange or The Nasdaq National
Market (including but not limited to the deletion of Section 9.2), or to make
any other provisions in regard to matters or questions arising hereunder which
the Company and the Warrant Agent may deem necessary or desirable and which
shall not be inconsistent with the provisions of the Warrants and this
Agreement. Any other supplement or amendment to this Agreement may be made with
the approval of the Holders of a majority of the then outstanding Warrants;
provided, however, that any such amendment or supplement that (i) increases the
Exercise Price; (ii) decreases the number of shares of Common Stock issuable
upon exercise of a Warrant; or (iii) shortens the period during which the
Warrants may be exercised shall require the consent of each Holder of a Warrant
affected thereby.
SECTION 19. SUCCESSORS. All the covenants and provisions of this Agreement by
----------
or for the benefit of the Company or the Warrant Agent shall bind and inure to
the benefit of the Company or the Warrant Agent shall bind and inure to the
benefit of their respective successors hereunder.
SECTION 20. APPLICABLE LAW. This Agreement and each Warrant issued hereunder
--------------
shall be governed by and construed in accordance with the laws of the state of
Delaware without giving effect to the principles of conflict of laws thereof.
SECTION 21. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement shall be
--------------------------
construed to give to any person or corporation other than the Company, the
Warrant Agent and the Holders any legal or equitable right, remedy or claim
under this Agreement; but this Agreement shall be for the sole and exclusive
benefit of the Company, the Warrant Agent, their respective successors and the
Holders of the Warrants.
SECTION 22. COUNTERPARTS. This Agreement may be executed in any number of
------------
counterparts; each of such counterparts shall for all purposes be deemed to be
an original, and all such counterparts shall together constitute but one and the
same instrument.
SECTION 23. CAPTIONS. The captions of the Sections and subsections of this
--------
Agreement have been inserted for convenience only and shall have no substantive
effect.
17
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, all as of the day and year first above written.
MORRISON KNUDSEN CORPORATION
By:___________________________________
Name:
Title:
[NORWEST BANK MINNESOTA, N.A.,]
as Warrant Agent
By:___________________________________
Name:
Title:
18
<PAGE>
EXHIBIT A
FORM OF WARRANT CERTIFICATE
No. ____________________ ____________________ Warrants
Warrant Certificate
MORRISON KNUDSEN CORPORATION
This Warrant Certificate certifies that _______________________________, or
registered assigns, is the registered holder of __________________________
Warrants (the "Warrants") expiring at 5:00 p.m., New York City time, on
__________ ___, 2003 (the "Expiration Date"), to purchase Common Stock, $.01 par
value per share (the "Common Stock"), of MORRISON KNUDSEN CORPORATION, a
Delaware corporation (the "Company"). The Warrants may be exercised at any time
from 9:00 a.m., New York City time, on _________ ___, 1996 to 5:00 p.m., New
York City time, on the Expiration Date. Each Warrant entitles the holder upon
exercise to receive from the Company, if exercised before 5:00 p.m., New York
City time, on the Expiration Date, one fully paid and nonassessable share of
Common Stock (a "Warrant Share") at the Exercise Price (as defined in the
Warrant Agreement referred to on the reverse side hereof), payable in lawful
money of the United States of America, upon surrender of this Warrant
Certificate and payment of the Exercise Price at the office or agency of the
Warrant Agent, but only subject to the conditions set forth herein and in the
Warrant Agreement. The Exercise Price and number of Warrant Shares issuable upon
exercise of the Warrants are subject to adjustment upon the occurrence of
certain events as set forth in the Warrant Agreement.
WARRANTS NOT EXERCISED ON OR BEFORE 5:00 P.M., NEW YORK CITY TIME, ON
__________ ___, 2003 SHALL BECOME VOID.
Reference is hereby made to the further provisions of this Warrant
Certificate set forth on the reverse hereof, and such further provisions shall
for all purposes have the same effect as though fully set forth at this place.
This Warrant Certificate shall not be valid unless countersigned by the
Warrant Agent, as such term is used in the Warrant Agreement.
IN WITNESS WHEREOF, MORRISON KNUDSEN CORPORATION has caused this Warrant
Certificate to be duly executed.
MORRISON KNUDSEN CORPORATION
By:______________________________________
Title:
Dated:_______________________________
Countersigned:
[NORWEST BANK MINNESOTA, N.A.,] as
Warrant Agent
By:__________________________________
Authorized Signatory
A-1
<PAGE>
[Form of Warrant Certificate]
[Reverse]
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants expiring on the Expiration Date entitling the
holder on exercise to receive shares of Common Stock of the Company and are
issued or to be issued pursuant to a Warrant Agreement dated as of
_________________, 1996 (the "Warrant Agreement"), duly executed and delivered
by the Company to [Norwest Bank Minnesota, N.A.,] a national banking
association, as Warrant Agent (the "Warrant Agent"), which Warrant Agreement is
hereby incorporated by reference in and made a part of this instrument and is
hereby referred to for a description of the rights, limitation of rights,
obligations, duties and immunities thereunder of the Warrant Agent, the Company
and the holders (the words "holders" or "holder" meaning the registered holders
or registered holder) of the Warrants. A copy of the Warrant Agreement may be
obtained by the holder hereof upon written request to the Company. By accepting
initial delivery, transfer or exchange of this Warrant, the duly registered
holder shall be deemed to have agreed to the terms of the Warrant Agreement as
it may be in effect from time to time, including any amendments or supplements
duly adopted in accordance therewith.
The holder of Warrants evidenced by this Warrant Certificate may exercise
them by surrendering this Warrant Certificate, with the form of election to
purchase set forth hereon properly completed and executed, together with payment
of the Exercise Price in the manner described below at the office of the Warrant
Agent. In the event that upon any exercise of Warrants evidenced hereby the
number of Warrants exercised shall be less than the total number of Warrants
evidenced hereby, there shall be issued to the holder hereof or its assignee a
new Warrant Certificate evidencing the number of Warrants not exercised.
Payment of the Exercise Price may be made in cash by wire transfer to the
Warrant Agent for the account of the Company or by certified or official bank
check or checks to the order of the Company or by any combination thereof.
The Warrant Agreement provides that upon the occurrence of certain events
the number of shares of Common Stock issuable upon the exercise of each Warrant,
and the Exercise Price of each Warrant, may, subject to certain conditions, be
adjusted. No fractions of a share of Common Stock will be issued upon the
exercise of any Warrant, but the Company shall pay the cash value thereof
determined as provided in the Warrant Agreement.
Warrant Certificates, when surrendered at the office of the Warrant Agent
by the registered holder thereof in person or by legal representative or
attorney duly authorized in writing, may be exchanged, in the manner and subject
to the limitations provided in the Warrant Agreement, but without payment of any
service charge, for another Warrant Certificate or Warrant Certificates of like
tenor evidencing in the aggregate a like number of Warrants.
Upon due presentation for registration of transfer of this Warrant
Certificate at the office of the Warrant Agent, a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like number
of Warrants shall be issued to the transferee(s) in exchange for this Warrant
Certificate, subject to the limitations provided in the Warrant Agreement,
without charge except for any tax or other governmental charge imposed in
connection therewith.
A-2
<PAGE>
The Company and the Warrant Agent may deem and treat the registered
holder(s) hereof as the absolute owner(s) of this Warrant Certificate
(notwithstanding any notation of ownership or other writing hereon made by
anyone), for the purpose of any exercise hereof, of any distribution to the
holder(s) hereof, and for all other purposes, and neither the Company nor the
Warrant Agent shall be affected by any notice to the contrary. Neither the
Warrants nor this Warrant Certificate entitles any holder hereof to any rights
of a stockholder of the Company.
A-3
<PAGE>
PURCHASE FORM
-------------
The undersigned hereby irrevocably elects to exercise this Warrant,
according to the terms and conditions hereof, to the extent of purchasing
_______________ shares of Common Stock and hereby makes payment of $_________ in
payment of the exercise price thereof. If the number of shares shall not be all
of the shares purchasable under this Warrant, a new Warrant Certificate for the
balance remaining shall be issued in the name of the undersigned or its assignee
as indicated on the Assignment Form.
Dated: ________________________
INSTRUCTIONS FOR REGISTRATION OF STOCK
--------------------------------------
Name: __________________________________________________________________________
(please typewrite or print in block letters)
Address: ___________________________________________________________________
Signature: __________________________________________________________
Note: The signature must conform in all respects to name
of holder as specified on the face of this Warrant
Certificate
Signature Guaranteed:
A-4
<PAGE>
ASSIGNMENT FORM
---------------
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and
transfers unto
Name: _________________________________________________________________________
(please typewrite or print in block letters)
Address: ___________________________________________________________________
its right to purchase ____________ shares of Common Stock represented by this
Warrant and does hereby irrevocably constitute and appoint __________ Attorney,
to transfer the same on the books of the Company, with full power of
substitution in the premises.
Dated:___________________
<TABLE>
<S> <C>
______________________________________________ Signature:______________________________________
Social Security or other identifying number of Note: The signature must
holder conform in all respects to name of
holder as specified on the face of
this Warrant Certificate
</TABLE>
Signature Guaranteed:
A-5
<PAGE>
EXHIBIT 3
REGISTRATION RIGHTS AGREEMENT
AMONG
MORRISON KNUDSEN CORPORATION
AND
THE HOLDERS OF STOCK TO BE ON SCHEDULE 1
DATED: , 1996
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Section 1. Definitions................................................... 1
Section 2. Registration under the Securities Act......................... 5
Section 3. Rule 144...................................................... 19
Section 4. Term.......................................................... 20
Section 5. Amendments and Waivers........................................ 20
Section 6. Entire Agreement.............................................. 20
Section 7. No Third-Party Beneficiary.................................... 20
Section 8. Invalid Provisions............................................ 20
Section 9. Nominees for Beneficial Owners................................ 21
Section 10. Notices....................................................... 21
Section 11. Deemed Acceptance by Investors; Assignment.................... 22
Section 12. Descriptive Headings; Section References...................... 22
Section 13. Specific Performance.......................................... 22
Section 14. Governing Law................................................. 22
Section 15. Attorneys' Fees............................................... 22
Section 16. Termination of Certain Rights................................. 22
Section 17. No Inconsistent Agreements.................................... 23
Section 18. Requisite Holders............................................. 23
Section 19. Completion of Schedule I...................................... 23
</TABLE>
(i)
<PAGE>
REGISTRATION RIGHTS AGREEMENT
Registration Rights Agreement (the "Agreement") made and entered
into as of ____________ ____, 1996, among Morrison Knudsen Corporation (formerly
Washington Construction Group, Inc.), a Delaware corporation (the "Company") and
the holders of stock of the Company listed on Schedule 1 as prepared and
completed by the Company in accordance with Section 19 hereof
(the "Investors").
This Agreement is made pursuant to the Restructuring and Merger
Agreement (the "Merger Agreement") dated as of ___________, 1996, between the
Company and Morrison Knudsen Corporation, a Delaware corporation ("Morrison
Knudsen").
NOW THEREFORE, in consideration of the foregoing and to implement
the terms of the Merger Agreement, the parties hereby agree as follows:
SECTION 1. DEFINITIONS
Except as otherwise defined herein, capitalized terms used herein
shall have the meanings ascribed to such terms in the Merger Agreement. The
following terms, as used herein, have the following meanings (all terms defined
herein in the singular to have the correlative meanings when used in the plural
and vice versa):
"Affiliate" means (i) when used with reference to any
partnership, any Person that, directly or indirectly through one or more
intermediaries, owns or controls 10% or more of either the capital or profit
interests of such partnership or is a general partner of such partnership or is
a Person in which such partnership has a 10% or greater direct or indirect
equity interest and (ii) when used with reference to any corporation, any Person
that, directly or indirectly owns or controls 10% or more of the outstanding
voting securities of such corporation or is a Person in which such corporation
has a 10% or greater direct or indirect equity interest. In addition, the term
"Affiliate," when used with reference to any Person, also means any other Person
that, directly or indirectly through one or more intermediaries, controls or is
controlled by or is under common control with such Person. As used in the
preceding sentence, (A) the term "control" means the possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of the entity referred to, whether through ownership of voting
securities, by contract or otherwise, and (B) the terms "controlling"" and
"controls" shall have meanings correlative to the foregoing.
"Affiliate of the Company" has the meaning ascribed to the term
"affiliate" in Rule 144(a)(1) promulgated by the SEC pursuant to the Securities
Act, and any successor rule thereto.
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"Agreement" means this Registration Rights Agreement, as the same
may be amended, modified or supplemented from time to time.
"Business Day" means any day other than (a) a Saturday or Sunday,
(b) any day on which banking institutions located in the City of New York, New
York are required or authorized by law or by local proclamation to close or (c)
any day on which the New York Stock Exchange is closed.
"Commercially Reasonable Efforts" when used with respect to any
obligation to be performed or term or provision to be observed hereunder, means
such efforts as a prudent Person seeking the benefits of such performance or
action would make, use, apply or exercise to preserve, protect or advance its
rights or interests, provided, that such efforts do not require such Person to
incur a material financial cost or a substantial risk of material liability
unless such cost or liability (i) would customarily be incurred in the course of
performance or observance of the relevant obligation, term or provision, (ii) is
caused by or results from the wrongful act or negligence of the Person whose
performance or observance is required hereunder or (iii) is not excessive or
unreasonable in view of the rights or interests to be preserved, protected or
advanced. Such efforts may include, without limitation, the expenditure of such
funds and retention by such Person of such accountants, attorneys or other
experts or advisors as may be necessary or appropriate to effect the relevant
action; the undertaking of any special audit or internal investigation that may
be necessary or appropriate to effect the relevant action; and the commencement,
termination or settlement of any action, suit or proceeding involving such
Person to the extent necessary or appropriate to effect the relevant action.
"Common Stock" means the Common Stock of the Company.
"Demand Registration" means any registration of Registrable
Securities under the Securities Act effected in accordance with Section 2.1
hereof.
"Effective Date" means the effective date of the Plan as provided
for therein.
"Holders" means, subject to Section 9 hereof, the holders of
record of Registrable Securities, or, in the case of explicit references to
holders of securities of the Company other than Registrable Securities, the
record holders of such securities.
"Indemnified Party" has the meaning ascribed to such term in
Section 2.6(a) hereof.
"Loss" has the meaning ascribed to such term in Section 2.6(a)
hereof.
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<PAGE>
"Material Adverse Change" means (i) any general suspension of
trading in, or limitation on prices for, securities on any national securities
exchange or in the over-the-counter market in the United States of America, (ii)
the declaration of a banking moratorium or any suspension of payments in respect
of banks in the United States of America, (iii) the commencement of a war, armed
hostilities or other international or national calamity involving the United
States of America, (iv) any limitation (whether or not mandatory) by any
governmental authority on, or any other event which materially affects the
extension of credit by banks or other financial institutions, (v) any material
adverse change in the Company's business, condition (financial or otherwise) or
prospects or (vi) a 15% or more decline in the Dow Jones Industrial Average or
the Standard and Poor's Index of 500 Industrial Companies, in each case from the
date a Notice of Demand is made.
"Notice of Demand" means a request by Holders pursuant to Section
2.1 hereof that the Company effect the registration under the Securities Act of
the Registrable Securities which specifies: (i) the intended method or methods
and plan of disposition of the Registrable Securities and (ii) whether or not
such requested registration is to be an underwritten offering.
"Participating Holders" means, with respect to the Registration
of Registrable Securities by the Company pursuant to this Agreement, the
Requesting Holders and any other Holders that are entitled to participate in,
and are participating in or seeking to participate in, such registration.
"Person" means a natural person, a corporation, a partnership, a
trust, a joint venture, any regulatory authority or any other entity or
organization.
"Piggyback Registration" means any registration of Registrable
Securities under the Securities Act effected in accordance with Section 2.2
hereof.
"Plan" means the joint Chapter 11 plan of reorganization of
Morrison Knudsen as described in the Merger Agreement.
"Registered Address" has the meaning set forth in Section 2.1(c)
hereof.
"Registrable Securities" means the Common Stock acquired by the
Investors pursuant to the Plan or held by any Investor or any of the respective
Successors or the permitted assigns of any Investor, including, without
limitation, (a) any share of Common Stock issued or issuable on or after the
Effective Date pursuant to the Plan, including the Common Stock to be issued
pursuant to the exercise of Combined Company Rights (as defined in the Plan),
and (b) any securities issued or issuable with respect to Registrable
Securities, whether by way of stock dividend or stock split or in connection
with a combination of shares, recapitalization, merger, consolidation or other
reorganization or otherwise provided that, (i) if the
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<PAGE>
Common Stock or any securities issued with respect thereto are listed on any
national securities exchange or included in any interdealer quotation system,
then only such securities held by Persons who are deemed to be "underwriters" or
"affiliates" of the Company for purposes of the Securities Act shall be deemed
to be Registrable Securities and (ii) that with respect to any permitted
transferee of such securities, only such securities held by permitted
transferees that have complied with the assignment requirements of Section 11
shall be deemed to be Registrable Securities. As to any particular Registrable
Securities, once issued such securities will cease to be Registrable Securities
when a registration statement with respect to the resale of such securities has
become effective under the Securities Act and such securities shall have been
disposed of in accordance with the plan of distribution set forth in such
registration statement.
"Registration Expenses" means all expenses incident to the
Company's performance of or compliance with this Agreement, including, without
limitation, (a) all registration, filing, securities exchange listing, rating
agency and National Association of Securities Dealers, Inc. fees, (b) all
registration, filing, qualification and other fees and expenses of complying
with securities or blue sky laws of all jurisdictions in which the securities
are to be registered and any legal fees and expenses incurred in connection with
the blue sky qualifications of the Registrable Securities and the determination
of their eligibility for investment under the laws of all such jurisdictions,
(c) all word processing, duplicating, printing, messenger and delivery expenses,
(d) the fees and disbursements of counsel for the Company and of its independent
public accountants, including, without limitation, the expenses of any special
audits or "cold comfort" letters required by or incident to such performance and
compliance, (e) the reasonable fees and disbursements incurred by the Holders of
the Registrable Securities being registered for one counsel or firm of counsel
selected by the Requisite Holders of such Registrable Securities, (f) premiums
and other costs of policies of insurance against liabilities arising out of the
public offering of the Registrable Securities being registered to the extent the
Company elects to obtain such insurance, (g) any fees and disbursements of
underwriters customarily paid by issuers or sellers of securities (but excluding
underwriting discounts and commissions and transfer taxes, if any, relating to
the Registrable Securities being registered) and (h) fees and expenses of other
Persons retained or employed by the Company.
"Registration Statement" means a registration statement filed
under the Securities Act pursuant to Section 2.1 hereof in accordance with
Section 2.3(a) hereof, including but not limited to a Shelf Registration
Statement.
"Requesting Holder" means each party providing a Notice of Demand
to the Company pursuant to Section 2.1(a).
4
<PAGE>
"Requisite Holders" means any Holder or Holders of a majority in
interest of the Registrable Securities included or to be included in a
registration or other relevant action, as the case may be.
"Rule 144" means Rule 144 promulgated by the SEC under the
Securities Act, and any successor provision thereto.
"SEC" means the United States Securities and Exchange Commission,
or any successor governmental agency or authority thereto.
"Shelf Period" has the meaning ascribed to such term in Section
2.1(d) hereof.
"Shelf Registration Statement" means a Registration Statement
filed under Rule 415 under the Securities Act.
"Successor" means, with respect to any Person, a successor to
such Person by merger, consolidation, liquidation or other similar transaction.
"Suspension Notice" has the meaning ascribed to such term in
Section 2.3(h) hereof.
"Suspension Period" has the meaning ascribed to it such term
Section 2.3(h) hereof.
"Underwriter" has the meaning ascribed to such term in Section 2
of the Securities Act.
SECTION 2. REGISTRATION UNDER THE SECURITIES ACT
2.1 DEMAND REGISTRATION
(a) DEMAND FOR REGISTRATION. As soon as practicable following
the Company's receipt of a Notice of Demand from Holders holding at least
5,000,000 shares of the Registrable Securities (subject to appropriate
adjustments in the case of stock splits), the Company shall prepare and file a
Registration Statement covering the Registrable Securities that the Company has
been requested to register (whether pursuant to the Notice of Demand or pursuant
to notice provided under Section 2.1(c) hereof) and shall use Commercially
Reasonable Efforts to cause the Registration Statement to become effective
within one hundred eighty (180) days of its receipt of such Notice of Demand.
The Holders are entitled to a maximum of two Demand Registrations under this
Section 2.1 during the term of this Agreement; provided,
5
<PAGE>
however, that the Holders may not make a second demand for registration until
twelve (12) months after the date on which the Registration Statement filed
pursuant to the first demand for registration shall have been declared
effective; and provided further, however, that the Holders may not make a second
demand for registration if the average daily trading volume of the Company's
Common Stock on the securities exchange on which the Common Stock is then listed
shall have been one hundred thousand (100,000) shares per day for any
consecutive twenty (20) business day period preceding such second demand.
(b) LIMITATIONS ON DEMAND REGISTRATION. In the event that the
Requesting Holders determine for any reason (other than at the request or
recommendation of the Company or the underwriter or due to the occurrence of a
Material Adverse Change) not to proceed with a registration of Common Stock
requested pursuant to this Section 2.1 at any time before the Registration
Statement has been declared effective by the SEC, and such Registration
Statement, if theretofore filed with the SEC, is withdrawn with respect to the
Common Stock covered thereby, and such Holders reimburse the Company for all
fees, costs and expenses in connection therewith, then the Holders shall not be
deemed to have exercised their right to a Demand Registration pursuant to this
Section 2.1 with respect to such withdrawn Registration Statement. If the
Holders determine not to proceed with such a registration upon the request or
recommendation of the Company or the underwriter or due to the occurrence of a
Material Adverse Change, the Holders will not be required to reimburse the
Company for its fees, costs and expenses and the Holders shall not be deemed to
have exercised their right to a Demand Registration pursuant to this Section 2.1
with respect to such registration.
(c) NOTICE TO HOLDERS. Upon receipt of any Notice of Demand,
the Company will give prompt notice (but in any event within fifteen (15) days
after such receipt) to all Holders of Registrable Securities at the address
provided to the Company in Schedule 1 or as otherwise furnished in writing to
the Company for purposes of this Agreement (the "Registered Address") of the
Notice of Demand and of the Holders' rights under this Section 2.1. Upon the
written request of any such Holder made within twenty (20) days after the
receipt by that Holder of the notice (which request shall specify the
Registrable Securities intended to be disposed of by such Holder and the
intended method or methods of disposition thereof) the Company shall use
Commercially Reasonable Efforts to effect the registration under the Securities
Act of all Registrable Securities which the Company has been so requested to
register by the Holders thereof, to the extent required to permit the
disposition (in accordance with the intended method or methods thereof as
aforesaid) of the Registrable Securities so to be registered.
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<PAGE>
(d) CONTINUOUS EFFECTIVENESS OF REGISTRATION STATEMENTS. Once a
Registration Statement is effective pursuant to Section 2.1(a) hereof, the
Company shall use Commercially Reasonable Efforts to cause such Registration
Statement to remain continuously effective (i) in the case of a Registration
Statement other than a Shelf Registration Statement, until the earlier of (x)
the two (2) month anniversary of the date such Registration Statement is
declared effective by the SEC and (y) the date on which all of the Registrable
Securities covered by such Registration Statement have been sold; and (ii) in
the case of a Shelf Registration Statement, until the earlier of (x) six (6)
months following the date such Shelf Registration Statement is declared
effective by the SEC and (y) the date on which all of the Registrable Securities
covered by such Shelf Registration Statement have been sold, but in no event (in
either case) prior to the expiration of the applicable period referred to in
Section 4(3) of the Securities Act and Rule 174 thereunder (such period being
defined as the "Effective Period" with respect to any such Registration
Statement other than a Shelf Registration Statement and as the "Shelf Period"
with respect to any such Shelf Registration Statement); provided, however, that
(x) with respect to any Registration Statement the Company may suspend use of
such Registration Statement at any time if the continued effectiveness thereof
would require the Company to disclose a material financing, acquisition or other
corporate transaction, which disclosure the Company shall have determined in
good faith is not in the best interests of the Company and its stockholders
(provided the Effective Period or Shelf Period, as the case may be, shall be
extended by the number of days of any such suspension) and (y) with respect to
any Registration Statement the Company may suspend use of any such Registration
Statement during any period if each of the Company and the Requisite Holders of
the Registrable Securities covered by such Registration Statement consents in
writing to such suspension for such period.
(e) PRIORITY IN DEMAND REGISTRATIONS. If a registration
pursuant to this Section 2.1 involves an underwritten offering and the managing
underwriter of such underwritten offering advises the Company in writing (with a
copy to each Participating Holder) of its belief that the amount of securities
requested to be included in such registration exceeds the amount which can be
sold in (or during the time of) such offering within an acceptable price range,
then the amount of securities to be sold in such offering shall be reduced in
accordance with the advice of such managing underwriter. In the case of any such
reduction, then the Company shall include in such Demand Registration that
amount of Registrable Securities that the Company is so advised can be sold in
(or during the time of) the offering, as follows: first, Registrable Securities
of any Participating Holder that is an "underwriter" or and "affiliate" of the
Company in an amount sufficient to include all the shares of Registrable
Securities offered by such Participating Holder or an amount sufficient to
reduce the amount of such Participating Holder's Registrable Securities held
after the offering to a level that would cause such Participating Holder to no
longer be an "underwriter" or an "affiliate" of the Company, whichever amount is
less; second, such Registrable Securities
7
<PAGE>
requested to be included in such Registration Statement by any other
Participating Holder, pro rata on the basis of the amount of such securities
held by such other holder; and third, all other securities of the Company duly
requested to be included in such Registration Statement.
2.2 PIGGYBACK REGISTRATION
(a) RIGHT TO INCLUDE REGISTRABLE SECURITIES. If the Company at
any time proposes to register any of its equity securities under the Securities
Act (other than by a registration on Form S-4 or Form S-8 or any successor or
similar form then in effect and other than pursuant to Section 2.1 hereof) in a
form and in a manner that would permit registration of the Registrable
Securities, whether or not for sale for its own account, it will give prompt
(but in no event less than 30 days prior to the proposed date of filing the
registration statement relating to such registration) notice to all Holders of
Registrable Securities of the Company's intention to do so and of such Holders'
rights under this Section 2.2. Upon the written request of any such Holder made
within twenty (20) days after the receipt by that Holder of the notice (which
request shall specify the Registrable Securities intended to be disposed of by
such Holder and the intended method or methods of disposition thereof), the
Company shall use Commercially Reasonable Efforts to effect the registration
under the Securities Act of all Registrable Securities which the Company has
been so requested to register by the Holders thereof, to the extent required to
permit the disposition (in accordance with the intended method or methods
thereof as aforesaid) of the Registrable Securities so to be registered,
provided that if, at any time after giving notice of its intention to register
any equity securities and prior to the effective date of the registration
statement filed in connection with such registration, the Company determines for
any reason not to register or to delay registration of the equity securities,
the Company may, at its election, give notice of that determination to each such
Holder and, thereupon, (i) in the case of a determination not to register, shall
be relieved of its obligation to register any Registrable Securities in
connection with such registration (but not from its obligation to pay all
Registration Expenses in connection therewith as provided in Section 2.3(b)
hereof), without prejudice, however, to the right of the Holders to request that
such registration be effected as a Demand Registration in accordance with
Section 2.1 hereof, and (ii) in the case of a determination to delay
registering, shall be permitted to delay registering any Registrable Securities
for the same period as the delay in registering such other equity securities. No
registration effected under this Section 2.2 will be deemed to have been
effected pursuant to Section 2.1 hereof (except for any right to a Demand
Registration which may be exercised pursuant to the last clause of subsection
(i) of the preceding sentence) or will relieve the Company of its obligation to
effect a Demand Registration in accordance with Section 2.1. hereof.
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<PAGE>
(b) PRIORITY IN PIGGYBACK REGISTRATIONS. If a registration
pursuant to this Section 2.2 involves an underwritten offering and the managing
underwriter of such underwritten offering advises the Company in writing (with a
copy to each Participating Holder) of its belief that the amount of securities
requested to be included in such registration exceeds the amount which can be
sold in (or during the time of) such offering within an acceptable price range,
then the Company will include in such registration that amount of securities
which the Company is so advised can be sold in (or during the time of) the
offering as follows: first, all securities proposed by the Company to be sold
for its own account; second, Registrable Securities of any Participating Holder
that has properly requested that its Registrable Securities be included in such
registration and that is an "underwriter" or an "affiliate" of the Company in an
amount sufficient to include all the Registrable Securities offered by such
Participating Holder or an amount sufficient to reduce the amount of such
Participating Holder's Registrable Securities held after the offering to a level
that would cause such Participating Holder to no longer be an "underwriter" or
an "affiliate" of the Company, whichever amount is less; third, such Registrable
Securities requested to be included in such registration statement by any other
Participating Holder, pro rata on the basis of the amount of such securities
held by such other Participating Holder; and "fourth", all other securities of
the Company duly requested to be included in such registration statement.
2.3 REGISTRATION TERMS AND PROCEDURES
(a) REGISTRATION STATEMENT FORM. Registrations under Section
2.1 hereof shall be on Form S-1 or Form S-3 (if use of such a form is then
available to cover resales of the Registrable Securities) or such other
appropriate form of the SEC as shall permit the sale, resale or other
disposition of such Registrable Securities in accordance with the intended
method or methods of disposition.
(b) REGISTRATION EXPENSES. Subject to Section 2.3(f) hereof,
the Company will pay all Registration Expenses incurred in connection with a
registration to be effected (whether or not effected or deemed effected pursuant
to subsection (c) below) pursuant to Sections 2.1 hereof or 2.2 hereof.
(c) EFFECTIVENESS OF CERTAIN DEMAND REGISTRATIONS. A Demand
Registration will not be deemed to have been effected under Section 2.1 hereof
unless the Registration Statement with respect thereto has been declared
effective by the SEC and, subject to Section 2.3(g)(ii) hereof, (i) in the case
of a Registration Statement other than a Shelf Registration Statement, such
Registration Statement remains effective until the earlier of (x) forty-five
(45) days of the date such Registration Statement is declared effective by the
SEC and (y) the date on which all of the Registrable Securities covered by such
Registration Statement have been sold; and (ii) in the case of a Shelf
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Registration Statement, such Shelf Registration Statement remains effective
until the earlier of six (6) months from its effective date (subject to
extension as contemplated by Section 2.1(d) and the last sentence of Section
2.3(h)(ii) hereof) or the date on which all of the Registrable Securities
covered by such Shelf Registration Statement have been sold; provided, however,
in either case, that if (x) after such registration statement has been declared
effective, the marketing of Registrable Securities offered pursuant to such
registration statement is materially disrupted or adversely affected as a result
of any stop order, injunction or other order or requirement of the SEC or any
other governmental agency or court (for reasons other than a misrepresentation
or omission by any Requesting Holder or any Participating Holder) or (y) the
conditions to closing specified in the purchase agreement or underwriting
agreement entered into in connection with such registration have not been
satisfied (for reasons other than a wrongful or bad faith act, omission or
misrepresentation by any Requesting Holder or any Participating Holder), such
registration statement will be deemed not to have become effective. If a
registration pursuant to Section 2.1 hereof is deemed not to have been effected
hereunder, then the Company shall continue to be obligated to effect the
remaining number of unused Demand Registrations in accordance with Section 2.1
hereof.
(d) SELECTION OF UNDERWRITER. If, in connection with a
registration effected pursuant to Section 2.1 hereof, the Requisite Holders so
elect, the offering of Registrable Securities pursuant to Section 2.1 hereof
shall be in the form of an underwritten offering. If the Requisite Holders so
elect, they shall select one or more nationally recognized firms of investment
bankers to act as the book-running managing underwriter or underwriters in
connection with such offering, provided that such selection shall be subject to
the consent of the Company, which consent shall not be unreasonably withheld.
(e) LIMITATION ON SHELF REGISTRATION STATEMENTS.
Notwithstanding the provisions of Section 2.1 hereof, only those Participating
Holders who are deemed to be "underwriters" or "affiliates" of the Company for
purposes of the Securities Act shall be permitted to demand the registration of
Registrable Securities pursuant to a Shelf Registration Statement.
(f) WITHDRAWAL. Any Holder participating in a registration
pursuant to this Agreement shall be permitted to withdraw all or part of its
Registrable Securities from such registration at any time prior to the effective
date of the registration statement covering such securities; provided that, in
the event of a withdrawal from a registration effected pursuant to Section 2.1
hereof, such registration shall be deemed to have been effected for purposes of
the first sentence of Section 2.1(b) hereof except as otherwise provided in
Section 2.1(b) hereof.
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(g) REGISTRATION PROCEDURES. In connection with the Company's
obligations to register Registrable Securities pursuant to this Agreement, the
Company will use Commercially Reasonable Efforts to effect such registration so
as to permit the sale, resale or other disposition of any Registrable Securities
included in such registration in accordance with the intended method or methods
of distribution thereof, and pursuant thereto the Company will as expeditiously
as possible:
(i) prepare and (as soon thereafter as practicable) file
with the SEC the requisite registration statement containing all information
required thereby to effect such registration and thereafter use Commercially
Reasonable Efforts to cause such registration statement to become and remain
effective in accordance with the terms of this Agreement, provided that as far
in advance as practicable before filing such registration statement or any
amendment, supplement or exhibit thereto (but, with respect to the filing of
such registration statement, in no event later than seven (7) days prior to such
filing), the Company will furnish to the Participating Holders or their counsel
copies of reasonably complete drafts of all such documents proposed to be filed
(excluding exhibits, which shall be made available upon request by any
Participating Holder), and any such Holder shall have the opportunity to object
to any information contained therein and the Company will make the corrections
reasonably requested by such Holder, in writing, with respect to information
relating to such Holder or the plan of distribution of the Registrable
Securities prior to filing any such registration statement, amendment,
supplement or exhibit;
(ii) prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
therewith (A) as reasonably requested by any Participating Holder, in writing,
to which such registration statement relates (but only to the extent such
request relates to information with respect to such Holder) and (B) as may be
necessary to keep such registration statement effective (x) during the Effective
Period in the case of a Registration Statement other than a Shelf Registration
Statement and (y) during the Shelf Period in the case of a Shelf Registration
Statement, and comply with the provisions of the Securities Act with respect to
the sale, resale or other disposition of all securities covered by such
registration statement during such period in accordance with the intended method
or methods of disposition by the seller or sellers thereof set forth in such
registration statement;
(iii) furnish to each Holder covered by, and each
underwriter or agent participating in the disposition of securities under, such
registration statement such number of conformed copies of such registration
statement and of each such amendment and supplement thereto (in each case
excluding all exhibits and documents incorporated by reference, which exhibits
and documents shall be furnished to any such Person upon request), such number
of copies of the prospectus contained in such
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registration statement (including each preliminary prospectus and any summary
prospectus) and any other prospectus filed under Rule 424 under the Securities
Act relating to such Holder's Registrable Securities, in conformity with the
requirements of the Securities Act, and such other documents as such Holder,
underwriter or agent may reasonably request to facilitate the disposition of
such Registrable Securities;
(iv) use Commercially Reasonable Efforts to register or
qualify all Registrable Securities and other securities covered by such
registration statement under all applicable blue sky and other securities laws,
and to keep such registration or qualification in effect for so long as such
registration statement remains in effect, and take any other action which may be
reasonably necessary or advisable to enable such Holder to consummate the
disposition of the securities owned by such Holder, except that the Company
shall not for any such purpose be required to (A) qualify generally to do
business as a foreign corporation in any jurisdiction wherein it would not but
for the requirements of this clause (iv) be obligated to be so qualified, (B)
subject itself to taxation in any such jurisdiction or (C) consent to general
service of process in any jurisdiction;
(v) use Commercially Reasonable Efforts to cause all
Registrable Securities covered by such registration statement to be registered
with or approved by such other governmental agencies or authorities applicable
to the Company as may be reasonably necessary to enable the seller or sellers
thereof (or underwriter or agent, if any) to consummate the disposition of such
Registrable Securities in accordance with the plan of distribution set forth in
such registration statement;
(vi) promptly notify each Participating Holder at its
Registered Address and any underwriter or agent participating in the disposition
of Registrable Securities covered by such registration statement, at any time
when a prospectus relating thereto is required to be delivered under the
Securities Act, upon discovery that, or upon the happening of any event known to
the Company as a result of which, the prospectus included in such registration
statement, as then in effect, includes an untrue statement of a material fact or
omits to state any material fact required to be stated therein or necessary to
make the statements therein not misleading in light of the circumstances under
which they were made, and promptly prepare and furnish to such Holder (or
underwriter or agent, if any) a reasonable number of copies of a supplement to
or an amendment of such prospectus as may be necessary so that, as thereafter
delivered to the purchasers of such securities, such prospectus shall not
include an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading in light of the circumstances under which they were made;
(vii) otherwise use Commercially Reasonable Efforts to
comply with all applicable rules and regulations of the SEC, and make available
to its security holders, as soon as reasonably practicable (but not more than
fifteen (15) months) after the effective date of the registration statement, an
earnings statement satisfying the provisions of Section 11(a) of the Securities
Act and Rule 158 promulgated thereunder, and furnish to each Holder covered by
such registration statement or any participating underwriter or agent a copy of
any amendment or supplement to such registration statement or prospectus five
(5) calendar days (or such
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shorter period as may be practicable under the circumstances) prior to the
filing thereof with the SEC;
(viii) provide and cause to be maintained a transfer agent
and registrar for all Registrable Securities covered by such registration
statement from and after a date not later than the effective date of such
registration statement;
(ix) use Commercially Reasonable Efforts to, on or prior
to the effective date of such registration statement, list the Registrable
Securities covered by such registration statement on any securities exchange on
which the Registrable Securities are then listed;
(x) cooperate with each Participating Holder and each
underwriter or agent participating in the disposition of such Registrable
Securities and their respective counsel in connection with any filings required
to be made with the National Association of Securities Dealers, Inc.;
(xi) use Commercially Reasonable Efforts to prevent the
issuance by the SEC or any other governmental agency or court of a stop order,
injunction or other order suspending the effectiveness of such registration
statement and, if such an order is issued, use Commercially Reasonable Efforts
to cause such order to be lifted as promptly as practicable;
(xii) take such other actions as the Requisite Holders of
such Registrable Securities shall reasonably request in order to expedite or
facilitate the disposition of such Registrable Securities;
(xiii) promptly notify each Participating Holder and each
underwriter or agent, if any:
(A) when such registration statement or any
prospectus used in connection therewith, or any amendment or supplement thereto,
has been filed and, with respect to such registration statement or any post-
effective amendment thereto, when the same has become effective;
(B) of any written comments from the SEC with
respect to any filing referred to in clause (A) and of any written request by
the SEC for amendments or supplements to such registration statement or
prospectus;
(C) of the notification to the Company by the SEC
of its initiation of any proceeding with respect to, or of the issuance by the
SEC of, any stop order suspending the effectiveness of such registration
statement; and
(D) of the receipt by the Company of any
notification with respect to the suspension of the qualification of any
Registrable Securities for sale, resale or other disposition under the
applicable securities or blue sky laws of any jurisdiction;
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(xiv) cooperate with each Participating Holder and each
underwriter or agent participating in the distribution of such Registrable
Securities to facilitate the timely preparation and delivery of certificates
(which shall not bear any restrictive legends, other than as required by
applicable law) representing securities sold under a registration statement
hereunder, and enable such securities to be in such denominations and registered
in such names as such seller, underwriter or agent may request and keep
available and make available to the Company's transfer agent, prior to the
effectiveness of such registration statement, an adequate supply of such
certificates;
(xv) not later than the effective date of such
registration statement, provide a CUSIP number for all Registrable Securities
covered by a registration statement hereunder;
(xvi) incorporate in the registration statement or any
amendment, supplement or post-effective amendment thereto such information as
each Participating Holder, each underwriter or agent (if any) or their
respective counsel may reasonably request, in writing, to be included therein
with respect to any Registrable Securities being sold by such Holder to such
underwriter or agent, the purchase price being paid therefor by such underwriter
or agent and any other terms of the offering of such Registrable Securities;
(xvii) during any period when a prospectus is required to
be delivered under the Securities Act, make timely periodic filings with the SEC
pursuant to and containing the information required by the Exchange Act (whether
or not the Company is required to make such filings pursuant to such Act); and
(xviii) in connection with an underwritten offering,
participate, to the extent reasonably requested by the Requisite Holders of the
securities included in the offering or the managing underwriter for the
offering, in customary efforts to sell the securities under the offering.
(h) AGREEMENTS OF CERTAIN HOLDERS
(i) Each Participating Holder shall furnish to the
Company, in writing, such information regarding such Holder, the Registrable
Securities held by such Holder and the intended plan of distribution of such
securities as the Company may from time to time reasonably request in writing in
connection with such registration.
(ii) Each Participating Holder agrees, by acquisition of
such Registrable Securities, that upon receipt of any notice (a "Suspension
Notice") from the Company of the suspension of the use of a Shelf Registration
Statement as contemplated by Section 2.1(d) (as limited pursuant to Section
2.3(e)) or of the happening of any event of the kind described in clause (vi) of
Section 2.3(g) hereof, such Holder will forthwith discontinue such Holder's
disposition of Registrable Securities pursuant to the registration statement
relating to such Registrable Securities until such Holder's receipt of the
copies of the supplemented or amended prospectus contemplated by clause (vi) of
Section 2.3(g) hereof or of a notice that such Holder may resume dispositions of
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Registrable Securities pursuant to the registration statement (the period from
the date on which such Holder receives a Suspension Notice to the date on which
such Holder receives copies of the supplemental or amended prospectus being
herein called the "Suspension Period"). The Company shall take such actions as
are necessary to end the Suspension Period as promptly as practicable. The
applicable time period for effectiveness in Section 2.3(c) shall be extended by
the number of days of a Suspension Period.
2.4 UNDERWRITTEN OFFERINGS
(a) UNDERWRITTEN OFFERINGS IN CONNECTION WITH A DEMAND
REGISTRATION. If requested by the underwriters for any underwritten offering in
connection with a registration pursuant to Section 2.1 hereof, the Company will
enter into an underwriting agreement with such underwriters for such offering,
such agreement (i) to be satisfactory in substance and form to the Company and
to the Requisite Holders, and (ii) to contain such representations and
warranties by the Company and the Participating Holders and such other terms as
are generally prevailing in agreements of such type, including, without
limitation, indemnities to the effect and to the extent provided in Section 2.6
hereof. Each Investor (so long as it or any of its Affiliates holds Registrable
Securities to be included in such registration) shall be a party to such
underwriting agreement and may, at its option, require that any or all of the
representations and warranties by, and the other agreements on the part of, the
Company to and for the benefit of such underwriters, also be made to and for its
benefit and that any or all of the conditions precedent to the obligations of
such underwriters under such underwriting agreement be conditions precedent to
its obligations thereunder.
(b) UNDERWRITTEN OFFERINGS IN CONNECTION WITH PIGGYBACK
REGISTRATIONS. If the Company at any time proposes to register any of its
equity securities under the Securities Act as contemplated by Section 2.2 hereof
and such securities are to be distributed by or through one or more
underwriters, the Company will, if requested by any Participating Holder and
subject to Section 2.2(b) hereof, arrange for such underwriters to include
Registrable Securities to be offered and sold by such Holder or Holders among
the securities to be distributed by such underwriters. The Participating Holders
shall be parties to the underwriting agreement between the Company and such
underwriters, such agreement (i) to be satisfactory in substance and form to the
Company and to the Requisite Holders, and (ii) to contain such representations
and warranties by the Company and the Participating Holders and such other terms
as are generally prevailing in agreements of such type, including, without
limitation, indemnities to the effect and to the extent provided in Section 2.6
hereof. The Requisite Holders of the Registrable Securities included in such
offering may, at their option, require that any or all of the representations
and warranties by, and the other agreements on the part of, the Company to and
for the benefit of such underwriters, also be made to and for the benefit of the
Participating Holders and that any or all of the conditions precedent to the
obligations of such underwriters under such underwriting agreement be conditions
precedent to the obligations of such Holders thereunder.
2.5 PREPARATION; REASONABLE INVESTIGATION. In connection with the
preparation and filing of each registration statement under the Securities Act
pursuant to this Agreement, the Company will give Participating Holders, their
underwriters or
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agents, if any, and their respective counsel and accountants, reasonable access
to its books and records and such opportunities to discuss the business of the
Company with its officers and the independent public accountants who have
certified its financial statements as shall be necessary, in the opinion of such
Holders' and such underwriters' or agents' respective counsel, to conduct a
reasonable investigation within the meaning of the Securities Act.
2.6 INDEMNIFICATION
(a) INDEMNIFICATION BY THE COMPANY. The Company agrees to
indemnify and hold harmless, to the full extent permitted by law, each
Participating Holder, its directors, officers, shareholders, employees,
investment advisers, agents and Affiliates, either direct or indirect (and each
such Affiliate's directors, officers, shareholders, employees, investment
advisers and agents), and each other Person, if any, who controls such Persons
within the meaning of the Securities Act (each such Person, an "Indemnified
Party"), from and against any losses, claims, damages, liabilities or expenses,
joint or several (each a "Loss" and collectively, "Losses"), to which such
Indemnified Party may become subject under the Securities Act or otherwise, to
the extent that such Losses (or actions or proceedings, whether commenced or
threatened, in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in any
registration statement under which such securities were registered under the
Securities Act (including all documents incorporated therein by reference), any
preliminary prospectus, final prospectus or summary prospectus contained
therein, or any amendment or supplement thereto, or any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and the Company will
reimburse such Indemnified Party for any legal or any other expenses reasonably
incurred by it in connection with investigating or defending against any such
Loss, action or proceeding; provided that in any such case the Company shall not
be liable to any particular Indemnified Party to the extent that such Loss (or
action or proceeding in respect thereof) arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission
made in such registration statement, any such preliminary prospectus, final
prospectus, summary prospectus, amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by such Indemnified
Party specifically for inclusion therein; and provided, further, that the
Company shall not be liable in any such case to the extent it is finally
determined by a court of competent jurisdiction that any such Loss (or action or
proceeding in respect thereof) arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made
(i) in any such preliminary prospectus, if (A) it was
the responsibility of such Indemnified Party to provide the Person asserting
such Loss with a current copy of the final prospectus or summary prospectus
contained therein and such Indemnified Party failed to deliver or cause to be
delivered a copy of the final prospectus or summary prospectus contained therein
to such Person after the Company had furnished such Indemnified Party with a
sufficient number of copies of the same prior to the sale of Registrable
Securities to the Person asserting such Loss and (B) the final prospectus or
summary prospectus contained therein corrected such untrue statement or
omission; or
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(ii) in such final prospectus or summary prospectus
contained therein, if such untrue statement or omission is corrected in an
amendment or supplement to such final prospectus or summary prospectus contained
therein and such amendment or supplement has been delivered to the Indemnified
Party prior to the sale of Registrable Securities to the Person asserting such
Loss and the Indemnified Party thereafter fails to deliver the final prospectus
or summary prospectus contained therein as so amended or supplemented prior to
or concurrently with such sale after the Company had furnished such Indemnified
Party (in accordance with the notice provisions contained in Section 10 for
Persons who are parties to this Agreement) with a sufficient number of copies of
the same for delivery to purchasers of securities.
Such indemnity will remain in full force and effect regardless of any
investigation made by or on behalf of such Indemnified Party and shall survive
the transfer of such securities by such Indemnified Party. The Company shall
also indemnify each other Person who participates (including as an underwriter)
in the offering or sale of Registrable Securities hereunder, their officers and
directors and each other Person, if any, who controls any such participating
Person within the meaning of the Securities Act to the same extent as provided
above with respect to Indemnified Parties.
(b) INDEMNIFICATION BY THE SELLERS. The Company may require, as
a condition to including any Registrable Securities in any registration
statement filed pursuant to Sections 2.1 or 2.2 hereof and as a condition to
indemnifying such sellers pursuant to this Section 2.6, that the Company shall
have received an undertaking reasonably satisfactory to it from each
Participating Holder included in any such offering regarding its agreement to
indemnify and hold harmless and reimburse (in the same manner and to the same
extent as set forth in paragraph (a) of this Section 2.6) the Company, each
director, officer, employee and agent of the Company, and each other Person, if
any, who controls the Company within the meaning of the Securities Act, from and
against any Losses (or actions or proceedings, whether commenced or threatened,
in respect thereof) arising out of or based upon any untrue statement or alleged
untrue statement of a material fact contained in any registration statement
pursuant to which securities of such Holder are registered under the Securities
Act (including all documents incorporated therein by reference), any preliminary
prospectus, final prospectus or summary prospectus contained therein, or any
amendment or supplement thereto, or any omission or alleged omission from such
registration statement, preliminary prospectus, final prospectus or summary
prospectus, or any amendment or supplement thereto required to be stated therein
or necessary to make the statements therein not misleading, if (but only if)
such untrue statement or alleged untrue statement or omission or alleged
omission was made in reliance upon and in conformity with written information
furnished to the Company by such Participating Holder specifically for inclusion
therein; provided, however, that such Participating Holder shall not be
obligated to provide such indemnity to the extent that such Losses result,
directly or indirectly, from the failure of the Company to promptly amend or
take action to correct or supplement or to deliver timely any such registration
statement, prospectus, amendment or supplement based on corrected or
supplemental information provided in writing by such Participating Holder to the
Company expressly for such purpose; and provided further, that the obligation to
provide indemnification pursuant to this Section 2.6(b) shall be several, and
not joint and several, among such indemnifying parties. Notwithstanding anything
in this Section 2.6(b) to the contrary,
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in no event shall the liability of any Participating Holder under such indemnity
be greater in amount than the amount of the proceeds received by such
Participating Holder upon the sale of its Registrable Securities in the offering
to which the Losses relate. Such indemnity shall remain in full force and
effect, regardless of any investigation made by or on behalf of the Company or
any such director, officer, employee, agent or participating or controlling
Person and shall survive the transfer of such securities by such Participating
Holder.
(c) NOTICES OF CLAIMS, ETC. Promptly after receipt by an
Indemnified Party of notice of the commencement of any action or proceeding
involving a claim referred to in paragraph (a) or (b) of this Section 2.6, such
Indemnified Party will, if a claim in respect thereof is to be made against an
indemnifying party, give prompt written notice to the latter of the commencement
of such action, provided that the failure of any Indemnified Party to give
notice as provided herein shall not relieve the indemnifying party of its
obligations under this Section 2.6, except to the extent that the indemnifying
party is actually and materially prejudiced by such failure to give notice. In
case any such action is brought against an Indemnified Party, the indemnifying
party shall be entitled to participate in and to assume the defense thereof
(such assumption to constitute its acknowledgement of its agreement to indemnify
the Indemnified Party with respect to such matters), jointly with any other
indemnifying party similarly notified to the extent that it may wish, with
counsel reasonably satisfactory to such Indemnified Party, and after notice from
the indemnifying party to such Indemnified Party of its election so to assume
the defense thereof, the indemnifying party shall not be liable to such
Indemnified Party for any legal fees or other expenses subsequently incurred by
the latter in connection with the defense thereof other than reasonable costs of
investigation; provided, however, that if, in such Indemnified Party's
reasonable judgment, a conflict of interest between such indemnified and
indemnifying parties may exist in respect of such claim, such Indemnified Party
shall be entitled to separate counsel reasonably satisfactory to the
indemnifying party at the expense of the indemnifying party; and provided,
further, that, unless there exists a conflict of interest among indemnified
parties, all indemnified parties in respect of such claim shall be entitled to
only one counsel or firm of counsel for all such indemnified parties. In the
event an indemnifying party shall not be entitled, or elects not, to assume the
defense of a claim, such indemnifying party shall not be obligated to pay the
fees and expenses of more than one counsel or firm of counsel for all parties
indemnified by such indemnifying party in respect of such claim, unless in the
reasonable judgment of any such Indemnified Party a conflict of interest exists
between such Indemnified Party and any other of such indemnified parties in
respect of such claim, in which event the indemnifying party shall be obligated
to pay the fees and expenses of one additional counsel or firm of counsel for
such indemnified parties. No indemnifying party shall, without the consent of
the Indemnified Party, consent to entry of any judgment or enter into any
settlement that (i) does not include as an unconditional term thereof the giving
by the claimant or plaintiff to such Indemnified Party of a release from all
Losses in respect of such claim or litigation or (ii) would impose injunctive
relief on such Indemnified Party. No indemnifying party shall be subject to any
Losses for any settlement made without its consent, which consent shall not be
unreasonably withheld.
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(d) OTHER INDEMNIFICATION. The provisions of this Section 2.6
shall be in addition to any other rights to indemnification or contribution
which an Indemnified Party may have pursuant to law, equity, contract or
otherwise.
(e) INDEMNIFICATION PAYMENTS. The indemnification required by
this Section 2.6 shall be made by periodic payments of the amount thereof during
the course of the investigation or defense, promptly as and when bills are
received or Losses are incurred.
(f) CONTRIBUTION. If for any reason the foregoing indemnity and
reimbursement is unavailable or is insufficient to hold harmless an Indemnified
Party under paragraph (a) or (b) of this Section 2.6, then each indemnifying
party shall contribute to the amount paid or payable by such Indemnified Party
as a result of any Loss (or actions or proceedings, whether commenced or
threatened, in respect thereof), including, without limitation, any legal or
other expenses reasonably incurred by them in connection with investigating or
defending any such Loss, action or proceeding, in such proportion as is
appropriate to reflect the relative fault of the indemnifying party on the one
hand and the Indemnified Party on the other. The relative fault shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the indemnifying party or the
Indemnified Party and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such untrue statement or
omission. Notwithstanding anything in this Section 2.6(f) to the contrary, no
indemnifying party (other than the Company) shall be required pursuant to this
Section 2.6(f) to contribute any amount in excess of the amount by which the net
proceeds received by such indemnifying party from the sale of Registrable
Securities in the offering to which the Losses of the indemnified parties relate
exceeds the amount of any damages which such indemnifying party has otherwise
been required to pay by reason of such untrue statement or omission. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any Person who was
not guilty of such fraudulent misrepresentation.
SECTION 3. RULE 144
(a) The Company will file the reports required to be filed by it
under the Securities Act and the Exchange Act and the rules and regulations
promulgated by the SEC thereunder and will take such further action as any
Holder may reasonably request, to the extent required from time to time to
enable the Holder to sell Registrable Securities without registration under the
Securities Act within the limitation of the exemptions provided by (i) Rule 144,
or (ii) any similar rule or regulation hereafter adopted by the SEC. Upon the
request of any Holder, the Company will deliver to that Holder a written
statement as to whether it has complied with such requirements, a copy of the
most recent annual or quarterly report of the Company, and such other reports or
documents so filed as a Holder may reasonably request in availing itself of any
rule or regulation of the SEC allowing a Holder to sell any such securities
without registration.
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(b) If at any time the Company is not required to file reports
in compliance with either Section 13 or Section 15(d) of the Exchange Act, the
Company at its expense will, forthwith upon the request of any Holder make
available adequate current public information with respect to the Company within
the meaning of paragraph (c)(2) of Rule 144.
SECTION 4. TERM
This Agreement shall enter into force on the date hereof and
shall continue in full force and effect, subject to Section 16 hereof, until the
third (3rd) anniversary of the date hereof.
SECTION 5. AMENDMENTS AND WAIVERS
This Agreement may be amended, supplemented or modified only by a
writing (which makes reference to this Agreement) executed by the Company and
Holders holding at least fifty percent (50%) of the Registrable Securities then
held by all the Holders. Any term or condition of this Agreement may be waived
at any time by the party that is entitled to the benefit thereof, but no such
waiver shall be effective unless set forth in a written instrument duly executed
by or on behalf of the party waiving such term or condition. No waiver by any
party of any term or condition of this Agreement, in any one or more instances,
shall be deemed to be or construed as a waiver of the same term or condition of
this Agreement on any future occasion.
SECTION 6. ENTIRE AGREEMENT
This Agreement supersedes all prior discussions and agreements
between the parties with respect to the subject matter hereof and contains the
sole and entire agreement between the parties hereto with respect to the subject
matter hereof.
SECTION 7. NO THIRD-PARTY BENEFICIARY
The terms and provisions of this Agreement are intended solely
for the benefit of each party, their respective Successors or permitted assigns
and it is not the intention of the parties to confer third-party beneficiary
rights upon any other Person other than (i) any Affiliate of any Investor, (ii)
any permitted transferee, direct or indirect, of any of the Registrable
Securities held by any Investor or any of their respective Affiliates, or (iii)
any other Person entitled to notice of the registration of Registrable
Securities under Sections 2.1(c) or 2.2(a) hereof or to indemnity under Section
2.6 hereof.
SECTION 8. INVALID PROVISIONS
If any provision of this Agreement is held to be illegal, invalid
or unenforceable under any present or future law, (i) such provision will be
fully severable, (ii) this Agreement will be construed and enforced as if such
illegal, invalid or unenforceable provision had never comprised a part hereof,
(iii) the remaining provisions of this Agreement will remain in full force and
effect and will not be affected by the illegal, invalid or unenforceable
provision or by its severance herefrom and (iv) in lieu of such illegal, invalid
or unenforceable provision, there will be added
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automatically as a part of this Agreement a legal, valid and enforceable
provision as similar in terms to such illegal, invalid or unenforceable
provision as may be possible.
SECTION 9. NOMINEES FOR BENEFICIAL OWNERS
In the event that any Registrable Securities are held by a
nominee for the beneficial owner thereof, the beneficial owner thereof may, at
its election, be treated as the holder of such Registrable Securities for
purposes of request or other action by any Holder or Holders pursuant to this
Agreement or any determination of any amount of shares of Registrable Securities
held by any Holder or Holders of Registrable Securities contemplated by this
Agreement. If the beneficial owner of any Registrable Securities so elects, the
Company may require assurances reasonably satisfactory to it of such owner's
beneficial ownership of such Registrable Securities. For purposes of this
Agreement, "beneficial ownership" and "beneficial owner" refer to beneficial
ownership as defined in Rule 13d-3 (without regard to the 60-day provision in
paragraph (d)(1)(i) thereof) under the Exchange Act.
SECTION 10. NOTICES
All notices, requests and other communications hereunder must be
in writing and will be deemed to have been duly given only if (a) delivered
personally, (b) by facsimile transmission, (c) by Federal Express or other
nationally recognized courier service or (d) mailed (first class postage
prepaid) to the parties at the following addresses or facsimile numbers:
(i) If to the Company, to:
_____________________
_____________________
(ii) If to an Investor, to the Registered
Address for that Investor.
With respect to any other Holder of Registrable Securities entitled to
receive notice, requests or other communications hereunder, such notices,
requests and other communications shall be sent to the Registered Addresses and
telecopy numbers provided to the Company and the other parties hereto by notice
as herein provided and referencing this Agreement. All such notices, requests
and other communications will (A) if delivered personally to the address as
provided in this Section 10, be deemed given upon delivery, (B) if delivered by
facsimile transmission to the facsimile number as provided in this Section 10,
be deemed given upon receipt, and (C) if delivered by courier service or by mail
in the manner described above to the address as provided in this Section 10, be
deemed given upon receipt (in each case regardless of whether such notice,
request or other communication is received by any other Person to whom a copy of
such notice is to be delivered pursuant to this Section 10). Any Person from
time to time may change its Registered Address, facsimile number or other
information for
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the purpose of notices to that Person by giving notice in accordance with this
Section 10 specifying such change to each of the other parties executing this
Agreement.
SECTION 11. DEEMED ACCEPTANCE BY INVESTORS; ASSIGNMENT
Each Investor shall be deemed, by accepting the shares of Common
Stock acquired by such Investor pursuant to the Plan, to agree to the terms of
this Agreement as it may be in effect from time to time, including any
amendments, supplements or waiver duly adopted in accordance with Section 5
hereof.
This Agreement shall be binding upon and inure to the benefit of
and be enforceable by the parties and their respective Successors and permitted
assigns of Registrable Securities. Each Investor may assign any of its rights
hereunder (in whole or in part) to one or more permitted transferees of
Registrable Securities; provided, however, that any such permitted transferees
of Registrable Securities agrees in writing, in form and substance satisfactory
to the Company, to be bound by all of the terms and provisions hereof and to
join this Agreement as a party hereto. Without limiting the foregoing, no such
assignment shall be binding upon or obligate the Company to any such assignee
unless and until (a) the Company has received notice of the assignment as herein
provided, which notice (i) references this Agreement and (ii) sets forth the
Registered Address of any assignee for the purpose of any notices hereunder.
SECTION 12. DESCRIPTIVE HEADINGS; SECTION REFERENCES
The descriptive headings of the several sections and paragraphs
of this Agreement are inserted for convenience of reference only and do not
define or limit the provisions hereof or otherwise affect the meaning hereof.
All references in this Agreement to sections are to sections of this agreement
unless otherwise stated.
SECTION 13. SPECIFIC PERFORMANCE
The parties agree that, to the extent permitted by law, (i) the
obligations imposed on them in this Agreement are special, unique and of an
extraordinary character, and that in the event of a breach by any such party
damages would not be an adequate remedy; and (ii) each of the other parties
shall be entitled to specific performance and injunctive and other equitable
relief in addition to any other remedy to which it may be entitled at law or in
equity.
SECTION 14. GOVERNING LAW
This agreement shall be governed by and construed in accordance
with the laws of the state of Delaware without reference to the conflicts of law
principles thereof.
SECTION 15. ATTORNEYS' FEES
In any action or proceeding brought to enforce any provision of
this Agreement or where any provision hereof is validly asserted as a defense,
the successful party shall, to the extent permitted by applicable law, be
entitled to recover reasonable attorneys' fees in addition to any other
available remedy.
SECTION 16. TERMINATION OF CERTAIN RIGHTS
22
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The rights and obligations hereunder of each Investor will
terminate with respect to such party at such time when neither it nor any of its
respective Affiliates holds Registrable Securities, provided that the provisions
of Section 2.3 hereof, the rights of any party hereto with respect to the breach
of any provision hereof, and any obligation accrued as of the date of
termination (including any obligation accrued under Section 2.6 hereof) shall
survive termination of this Agreement.
SECTION 17. NO INCONSISTENT AGREEMENTS
The Company will not hereafter enter into, modify, amend or waive
any agreement with respect to its securities if such agreement, modification,
amendment or waiver would conflict with the rights granted pursuant to this
Agreement to the Holders of Registrable Securities.
SECTION 18. REQUISITE HOLDERS
Each of the parties hereto agrees that the Company may, in
connection with the taking of any action permitted to be taken hereunder with
the consent or approval of the Requisite Holders of the Registrable Securities,
rely in good faith on a certificate from any such holder or holders stating that
it holds or is acting on behalf of a majority in interest of the Registrable
Securities.
SECTION 19. COMPLETION OF SCHEDULE 1
The Company covenants and agrees to duly prepare and complete
Schedule 1 as soon as practicable following the Combined Company Rights
Expiration Date (as defined in the Plan) such that Schedule 1 lists all Persons
that acquire Common Stock pursuant to the Plan, including Persons that acquire
Common Stock pursuant to the exercise of Combined Company Rights (as defined in
the Plan).
23
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered by their respective officers thereunto duly authorized as
of the date first above written.
MORRISON KNUDSEN CORPORATION
By: _______________________
Name: _____________________
Title: ____________________
<PAGE>
SCHEDULE 1
INVESTORS
---------
Name Address
---- -------
This Schedule 1 shall be deemed to include all Persons that acquire Common
Stock pursuant to the Plan, including Persons that acquire Common Stock pursuant
to the exercise of Combined Company Rights (as defined in the Plan). This
Schedule 1 is to be prepared and completed by the Company in accordance with
Section 19 of the Agreement.
<PAGE>
EXHIBIT 4
RESTATED AND AMENDED
CERTIFICATE OF INCORPORATION
OF
WASHINGTON CONSTRUCTION GROUP, INC.
Washington Construction Group, Inc., a corporation existing under the
laws of the State of Delaware, which was originally incorporated in April 28,
1993 under the name Kasler Holding Company (the "Corporation"), does hereby
certify:
FIRST: That the Restated and Amended Certificate of Incorporation of
the Corporation is hereby amended and restated to read as follows:
ARTICLE I.
The name of the Corporation is Morrison Knudsen Corporation.
ARTICLE II.
The address of the registered office of the Corporation in the State
of Delaware is 32 Loockerman Square, Suite L-100, in the City of Dover, County
of Kent. The name of its registered agent at such address is The Prentice-Hall
Corporation System, Inc.
ARTICLE III.
The nature of the business or purposes to be conducted or promoted is
to engage in any lawful act or activity for which a corporation may now or
hereafter be organized under the General Corporation Law of the State of
Delaware as set forth in Title 8 of the Delaware Code (the "GCL").
1
<PAGE>
ARTICLE IV.
Section 1. Authorized Capital Stock. The total number of shares of
all classes of stock which the Corporation shall have authority to issue is
Hundred Ten Million (110,000,000), consisting of Hundred Million (100,000,000)
shares of common stock, par value $0.01 per share (the "Common Stock"), and Ten
Million (10,000,000) shares of preferred stock, par value $0.01 per share (the
"Preferred Stock").
Section 2. Preferred Stock. The Preferred Stock may be issued in one
----------------
or more series. The Board of Directors of the Corporation is hereby authorized
to issue the shares of Preferred Stock in such series and to fix from time to
time before issuance the number of shares to be included in any series and the
designation, relative powers, preferences, and rights and qualifications,
limitations, or restrictions of all shares of a series.
a. Authority of the Board of Directors. The authority of the Board
-----------------------------------
of Directors with respect to each series will include, without limiting the
generality of the foregoing, the determination of any or all of the
following:
(i) the distinctive designation of and the number of shares
comprising the series, which number may be increased (except where
otherwise provided by the Board of Directors in creating the series)
or decreased (but not below the number of such shares then
outstanding) from time to time by like action of the Board of
Directors;
(ii) the voting powers, if any, and whether such voting powers
are full or limited in such series;
(iii) the redemption provisions, if any, applicable to the
series, including the redemption price or prices to be paid;
(iv) whether dividends, if any, will be cumulative or
noncumulative, the dividend rate of the series, and the dates and
preferences of dividends on the series;
2
<PAGE>
(v) the rights of the series upon the voluntary or
involuntary dissolution of, or upon any distribution of the assets of,
the Corporation;
(vi) the provisions, if any, pursuant to which the shares of
the series are convertible into, or exchangeable for, shares of any
other class or classes or of any other series of the same or any other
class or classes of stock, or any other security, of the Corporation
or any other corporation or other entity, and the price or prices or
the rates of exchange applicable thereto;
(vii) the right, if any, to subscribe for or to purchase any
securities of the Corporation or any other corporation or other
entity;
(viii) the provisions, if any, of a sinking fund applicable to
the series; and
(ix) any other relative, participating, optional, or other
special powers, preferences, rights, qualifications, limitations, or
restrictions thereof;
all as may be determined from time to time by the Board of Directors and
stated in the resolution or resolutions providing for the issuance of the
Preferred Stock (collectively, a "Preferred Stock Designation").
b. Series A Preferred Stock. The following is a statement of the
------------------------
powers, preferences, rights, qualifications, limitations and restrictions
of the series of Preferred Stock consisting of 18,000/1/ shares designated
as Series A Preferred Stock.
(i) Designation and Amount. The shares of such series of
----------------------
Preferred Stock shall be designated as "Series A Preferred Stock" and
the number of shares constituting such series shall be 18,000.
(ii) Rank. With respect to rights on liquidation, winding up
----
and dissolution, the Series A Preferred Stock ranks (i) senior to both
the Corporation's Common Stock and to all classes and series of stock
of the Corporation now or hereafter authorized,
------------------------
/1/ Under certain circumstances as described in the Proxy
Statement, 1,800,000 shares of Series A Preferred Stock may be
authorized.
3
<PAGE>
issued or outstanding which by their terms expressly provide that they
are junior to the Series A Preferred Stock as to distributions upon
the liquidation, winding up and dissolution of the Corporation or
which do not specify their rank (collectively with the Common Stock,
the "Junior Securities"); (ii) on a parity with each other class or
series of capital stock issued by the Corporation after the date
hereof the terms of which specifically provide that such class or
series will rank on a parity with the Series A Preferred Stock as to
distributions upon the liquidation, winding up and dissolution of the
Corporation (collectively referred to as "Parity Securities"),
provided that any such Parity Securities that were not approved by the
--------
holders of Series A Preferred Stock in accordance with paragraph
(b)(vii)(B) of this Section 2 shall be deemed to be Junior Securities
and not Parity Securities; and (iii) junior to each other class of
capital stock or other series of Preferred Stock issued by the
Corporation after the date hereof the terms of which have been
approved by the holders of the Series A Preferred Stock in accordance
with paragraph (b)(vii)(B) of this Section 2 and which specifically
provide that such class or series will rank senior to the Series A
Preferred Stock as to distributions upon the liquidation, winding up
and dissolution of the Corporation (collectively referred to as
"Senior Securities").
(iii) Dividends. The holders of shares of Series A Preferred
---------
Stock are not entitled to receive dividends.
(iv) Foreign Tax Credit Sinking Fund; Redemption.
-------------------------------------------
(A) The Corporation shall create and maintain a sinking
fund ("Foreign Tax Credit Sinking Fund") into which it shall
deposit promptly upon receipt and hold all amounts received by
the Corporation in respect of refunds of federal income tax and
interest thereon associated with amended federal
4
<PAGE>
income tax returns of the Corporation and consolidated
subsidiaries for the calendar years 1982 through 1990 which were
filed prior to January 1, 1996, which change the Corporation's
election from deducting foreign taxes to claiming a credit for
those taxes ("Foreign Tax Credit Refunds"); provided, however,
-------- -------
that the cumulative total amount of Foreign Tax Credit Refunds,
together with any amounts contributed pursuant to the sentence
prior to the penultimate sentence of this paragraph, which the
Corporation may deposit to the Sinking Fund shall not exceed
$18,000,000. A majority of the directors of the Corporation
present at a meeting at which a quorum is present has the
exclusive power and authority to determine, in good faith, on the
basis of information known to them after reasonable inquiry, (i)
whether funds received by the Corporation are Foreign Tax Credit
Refunds and (ii) the amount of any Foreign Tax Credit Refunds.
The holders of the Series A Preferred Stock shall have no right
to challenge any such determination unless such challenge is
specifically authorized by the beneficial owners of a majority of
the issued and outstanding shares of the Series A Preferred
Stock. The Corporation may, but shall not be obligated to,
deposit funds other than Foreign Tax Credit Refunds into the
Foreign Tax Credit Sinking Fund; provided, however, that such a
-------- -------
deposit of funds other than Foreign Tax Credit Refunds shall be
made only upon the affirmative vote of two-thirds of the total
number of directors that the Corporation would have if there were
no vacancies. Pending distribution of the amounts in the Foreign
Tax Credit Sinking Fund pursuant to paragraph (b)(iv)(B) of this
Section 2, all such amounts shall be deposited into and
maintained in an interest-bearing account at a bank or other
depository institution at which the Corporation maintains other
interest-
5
<PAGE>
bearing deposit accounts. Other than distributions made pursuant
to paragraph (b)(iv)(B) of this Section 2, the Corporation shall
not withdraw any funds from the Foreign Tax Credit Sinking Fund.
(B) On the fifteenth day of the month following the end
of each calendar quarter, the Corporation shall distribute to
each holder of record of Series A Preferred Stock as of the last
day of such calendar quarter an amount per share equal to a pro
rata portion of (i) the total amount of Foreign Tax Credit
Refunds deposited into the Foreign Credit Sinking Fund during the
quarter and (ii) all interest earned on such total amount during
the quarter. The distribution for the calendar quarter in which
the cumulative total deposits to the sinking fund reaches
$18,000,000 will be the final distribution with respect to the
Series A Preferred Stock. Upon this final distribution, all
shares of Series A Preferred Stock will be cancelled and no
longer outstanding and will not have the status of shares of
Series A Preferred Stock, and all rights of the holders thereof
as stockholders of the Corporation will cease.
(C) If the Series A Preferred Stock has not been
cancelled as provided in paragraph (b)(iv)(B) of this Section 2
by the fifth anniversary of the issuance of the Series A
Preferred Stock, the Corporation shall, on the fifteenth day
("Redemption Date") of the month following the fifth anniversary
of the issuance of the Series A Preferred Stock, redeem all the
outstanding shares of Series A Preferred Stock at a per share
redemption price ("Redemption Price") equal to the greater of (I)
$1.00/2/ or (II) a pro rata portion of the balance of the
--------------------
/2/ In the event 1,800,000 shares of Series A Preferred Stock
are authorized, the redemption price per share would be
equal to the greater of $0.01 or a pro rata share of any
undistributed funds in the sinking fund.
6
<PAGE>
Foreign Tax Credit Sinking Fund (including all interest earned
thereon) as of the fifth anniversary of the issuance of the
Series A Preferred Stock.
(D) In the event that the Corporation redeems shares of
Series A Preferred Stock pursuant to paragraph (b)(iv)(C) of this
Section 2, the Corporation shall send notice of the redemption by
first-class mail, postage prepaid, not less than 30 days prior to
the Redemption Date, to the holders of record of the shares to be
redeemed at their respective addresses as they shall appear in
the records of the Corporation; provided, however, that failure
-------- -------
to give such notice or any defect therein or in the mailing
thereof shall not affect the validity of the proceedings for the
redemption of any shares so to be redeemed except as to the
holder to whom the Corporation has failed to give such notice or
except as to the holder to whom notice was defective. Each such
notice shall state: (i) the Redemption Date; (ii) the number of
shares of Preferred Stock to be redeemed; (iii) the Redemption
Price, and (iv) the place or places where certificates for such
shares are to be surrendered for payment of the Redemption Price.
Upon surrender of the certificates for the shares (properly
endorsed or assigned for transfer, if the Board of Directors so
requires and a notice by the Corporation so states), the
Corporation shall redeem such shares at the Redemption Price as
aforesaid.
(E) If the Corporation has mailed the notice provided in
paragraph (b)(iv)(D) of this Section 2, then, from and after the
Redemption Date (unless the Corporation defaults in the payment
of the Redemption Price, in which case such rights shall continue
until the Redemption Price is paid), all shares of Series A
Preferred Stock will be deemed to be cancelled and no longer
outstanding, and
7
<PAGE>
will not have the status of shares of Series A Preferred Stock,
and all rights of the holders thereof as stockholders of the
Corporation (except the right to receive the Redemption Price)
will cease.
(v) Liquidation Preference.
----------------------
(A) In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the
Corporation, each holder of outstanding shares of Series A
Preferred Stock will be entitled to be paid out of the assets of
the Corporation available for distribution to its stockholders,
before any payment is made or any assets distributed to the
holders of any of the Junior Securities, an amount in cash per
share of Series A Preferred Stock held equal to the greater of
(I) $1.00, or (II) a pro rata portion of the remaining balance of
the Foreign Tax Credit Sinking Fund (including all interest
earned thereon). If the assets of the Corporation are not
sufficient to pay in full the liquidation payments payable to the
holders of outstanding shares of the Series A Preferred Stock and
any Parity Securities, then the holders of all such shares shall
share ratably in such distribution of assets in accordance with
the amount which would be payable on such distribution if the
amounts to which the holders of outstanding shares of Series A
Preferred Stock and the holders of outstanding shares of such
Parity Securities are entitled were paid in full.
(B) For the purposes of this paragraph (b)(v), neither
the voluntary sale, conveyance, exchange or transfer (for cash,
shares of stock, securities or other consideration) of all or
substantially all of the property or assets of the Corporation
nor the consolidation or merger of the Corporation with any one
or more other corporations shall be deemed to be a voluntary or
involuntary
8
<PAGE>
liquidation, dissolution or winding up of the Corporation, unless
such voluntary sale, conveyance, exchange or transfer shall be in
connection with a plan of liquidation, dissolution or winding up
of the Corporation.
(vi) Reacquired Shares. Shares of Series A Preferred Stock
-----------------
that have been issued and reacquired by the Corporation in any manner,
including shares reacquired by redemption pursuant to paragraph
(b)(iv) of this Section 2, shall (upon compliance with any applicable
provisions of the laws of the State of Delaware) have the status of
authorized and unissued shares of Preferred Stock undesignated as to
series, and may be redesignated and reissued as part of any series of
Preferred Stock.
(vii) Voting Rights. In addition to any voting rights provided
-------------
by law, the holders of Series A Preferred Stock have the following
voting rights:
(A) General. Except as required in this Article IV and
-------
as otherwise required by law, shares of Series A Preferred Stock
shall vote together with shares of Common Stock of the
Corporation as a single class on all matters as to which the
shares of Common Stock are entitled to vote generally. Each share
of Series A Preferred Stock is entitled to 1/100 of a
vote./3/
(B) Voting Rights On Extraordinary Matters. In addition
--------------------------------------
to any vote or consent of stockholders required by law, the
approval of holders of at least two-thirds of the outstanding
shares of Series A Preferred Stock, voting as a class, is
required (i) to reclassify any series of Junior Securities as
Senior Securities or Parity Securities, or (ii) to amend, repeal
or change any of the provisions of this Restated and Amended
Certificate of Incorporation or the provisions of this Article IV
in any manner that would alter or change the rights,
------------
/3/ In the event 1,800,000 shares of Series A Preferred Stock
are authorized, each share of Series A Preferred Stock would
have 1/10,000 of a vote.
9
<PAGE>
powers, preferences or privileges of the shares of Series A
Preferred Stock so as to affect them adversely, including,
without limitation, changing the voting percentage required for
approval by the holders of Series A Preferred Stock of the
foregoing matters.
ARTICLE V.
The business and affairs of the Corporation shall be managed by or
under the direction of the Board of Directors consisting of not less than six
(6) directors nor more than twelve (12) directors, the exact number of directors
to be determined from time to time by resolution adopted by the Board of
Directors. The directors shall be divided into three classes, designated Class
I, Class II and Class III. Each class shall consist, as nearly as may be
possible, of one-third of the total number of directors constituting the entire
Board of Directors. The term of the initial Class I directors shall terminate on
the date of the 1997 annual meeting of stockholders; the term of the initial
Class II directors shall terminate on the date of the 1998 annual meeting of
stockholders; and the term of the initial Class III directors shall terminate on
the date of the 1999 annual meeting of stockholders. At each annual meeting of
stockholders beginning in 1997, successors to the class of directors whose term
expires at that annual meeting shall be elected for a three-year term. If the
number of directors is changed, any increase or decrease shall be apportioned
among the classes so as to maintain the number of directors in each class as
nearly equal as possible, and any additional directors of any class elected to
fill a vacancy resulting from an increase in such class shall hold office for a
term that shall coincide with the remaining term of that class, but in no case
will a decrease in the number of directors shorten the term of any incumbent
director. A director shall hold office until the annual meeting for the year in
which his term expires and until his successor shall be elected and shall
qualify, subject, however, to prior death, resignation, retirement,
disqualification or removal from office. Any vacancy on the Board of Directors,
howsoever
10
<PAGE>
resulting, may be filled by a majority of the directors then in office, even if
less than a quorum, or by a sole remaining director. Any director elected to
fill a vacancy shall hold office for a term that shall coincide with the term of
the class to which such director shall have been elected. Notwithstanding
anything to the contrary in this Restated and Amended Certificate of
Incorporation or any provisions of Bylaws of the Corporation, there shall be no
cumulative voting.
ARTICLE VI.
Any or all of the directors of the Corporation may be removed from the
Board of Directors for cause only by the affirmative vote of stockholders owning
a majority in amount of the entire capital stock of the Corporation issued and
outstanding and entitled to vote thereon.
ARTICLE VII.
Elections of directors at an annual or special meeting of stockholders
need not be by written ballot unless the Bylaws of the Corporation shall
otherwise provide.
ARTICLE VIII.
Special meetings of the stockholders of the Corporation for any
purpose or purposes may be called at any time only by a majority of the Board of
Directors or the Chief Executive Officer or the President.
ARTICLE IX.
Any action which may be taken by stockholders of the Corporation at an
annual or special meeting may not be effected except at such an annual or
special meeting by the vote required for the taking of such action, and the
right of stockholders to act by written consent is expressly denied.
11
<PAGE>
ARTICLE X.
The officers of the Corporation shall be chosen in such a manner,
shall hold their offices for such terms and shall carry out such duties as are
determined by the Board of Directors, subject to the right of the Board of
Directors to remove any officer or officers at any time with or without cause.
ARTICLE XI.
A. The Corporation shall indemnify to the full extent authorized
or permitted by law (as now or hereafter in effect) any person made, or
threatened to be made, a defendant or witness to any action, suit or proceeding
(whether civil or criminal or otherwise) by reason of the fact that he, his
testator or intestate, is or was a director or officer of the Corporation or by
reason of the fact that such director or officer, at the request of the
Corporation, is or was serving any other corporation, partnership, joint
venture, employee benefit plan or other enterprise, in any capacity. Nothing
contained herein shall affect any rights to indemnification to which employees
other than directors or officers may be entitled by law. No amendment or repeal
of this Section A of Article XI shall apply to or have any effect on any right
to indemnification provided hereunder with respect to any acts or omissions
occurring prior to such amendment or repeal.
B. No director of the Corporation shall be personally liable to
the Corporation or its stockholders for monetary damages for any breach of
fiduciary duty by such a director as a director. Notwithstanding the foregoing
sentence, a director shall be liable to the extent provided by applicable law
(i) for any breach of the director's duty of loyalty to the Corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) pursuant to Section
174 of the GCL, or (iv) for any transaction from which such director derived an
improper personal benefit. No amendment to or repeal of this Section B of this
Article XI shall apply
12
<PAGE>
to or have any effect on the liability or alleged liability of any director of
the Corporation for or with respect to any acts or omissions of such director
occurring prior to such amendment or repeal.
C. In furtherance and not in limitation of the powers conferred by
statute:
(i) the Corporation may purchase and maintain insurance on behalf
of any person who is or was a director, officer, employee or agent of the
Corporation, or is serving at the request of the Corporation as a director,
officer, employee or agent of another corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise against any
liability asserted against him and incurred by him in any such capacity, or
arising out of his status as such, whether or not the Corporation would
have the power to indemnify him against such liability under the provisions
of law; and
(ii) the Corporation may create a trust fund, grant a security
interest and/or use other means (including, without limitation, letters of
credit, surety bonds and/or other similar arrangements), as well as enter
into contracts providing indemnification to the full extent authorized or
permitted by law and including as part thereof provisions with respect to
any or all of the foregoing to ensure the payment of such amounts as may
become necessary to effect indemnification as provided therein, or
elsewhere.
ARTICLE XII.
In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to adopt, repeal, alter,
amend or rescind the Bylaws of the Corporation. In addition, the Bylaws of the
Corporation may be adopted, repealed, altered, amended, or rescinded by the
affirmative vote of two-thirds of the issued and outstanding stock of the
Corporation entitled to vote thereon.
13
<PAGE>
ARTICLE XIII.
The Corporation reserves the right to repeal, alter amend, or rescind
any provision contained in this Restated and Amended Certificate of
Incorporation, in the manner now or hereafter prescribed by statute, and all
rights conferred on stockholders herein are granted subject to this reservation.
Notwithstanding any other provision of this Restated and Amended Certificate of
Incorporation and any provisions of the Bylaws of the Corporation, any proposal
to amend or repeal Articles V, VI, VIII, IX, or XII, or this Article XIII or any
other proposal to amend this Restated and Amended Certificate of Incorporation
that is inconsistent with any provisions of Articles V, VI, VIII, IX, or XII or
this Article XIII shall require not less than the affirmative vote of two-thirds
of the issued and outstanding stock of the Corporation entitled to vote thereon.
ARTICLE XIV.
The Corporation will not issue nonvoting equity securities to the
extent prohibited by Section 1123 of the United States Bankruptcy Code;
provided, however, that this Article XIV (a) will have no further force and
effect beyond that required under Section 1123 of the United States Bankruptcy
Code, (b) will have such force and effect, if any, only for so long as such
Section 1123 is in effect and applicable to the Corporation, and (c) in all
events may be amended or eliminated in accordance with applicable law as from
time to time in effect.
SECOND: That this Restated and Amended Certificate of Incorporation
was duly adopted in accordance with the provisions of Sections 242 and 245 of
the GCL.
14
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused its corporate seal to
be hereunto affixed and this Restated and Amended Certificate of Incorporation
to be signed by John H. Wimberly, its President and Chief Executive Officer, and
attested by Walter J. Orze, its Assistant Secretary, this ___ day of
___________, 1996.
_________________________________________
John H. Wimberly
President and Chief Executive Officer
Attest:
_________________________________
Walter J. Orze
Assistant Secretary
<PAGE>
EXHIBIT 5
RESTATED AND AMENDED BYLAWS
OF
MORRISON KNUDSEN CORPORATION
(formerly Washington Construction Group, Inc.)
<PAGE>
RESTATED AND AMENDED BYLAWS OF MORRISON KNUDSEN CORPORATION
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE I - OFFICES........................................................ 1
Section 1. REGISTERED OFFICES.......................................... 1
Section 2. OTHER OFFICES............................................... 1
ARTICLE II - MEETINGS OF STOCKHOLDERS...................................... 1
Section 1. PLACE OF MEETINGS........................................... 1
Section 2. ANNUAL MEETING OF STOCKHOLDERS.............................. 1
Section 3. QUORUM; ADJOURNED MEETINGS AND NOTICE
THEREOF.................................................... 2
Section 4. VOTING...................................................... 2
Section 5. PROXIES..................................................... 2
Section 6. SPECIAL MEETINGS............................................ 3
Section 7. NOTICE OF STOCKHOLDERS' MEETINGS............................ 3
Section 8. MAINTENANCE AND INSPECTION OF STOCKHOLDER
LIST....................................................... 3
Section 9. STOCKHOLDER ACTION BY WRITTEN CONSENT
WITHOUT A MEETING.......................................... 3
ARTICLE III - DIRECTORS.................................................... 4
Section 1. THE NUMBER OF DIRECTORS..................................... 4
Section 2. VACANCIES................................................... 5
Section 3. POWERS...................................................... 5
Section 4. PLACE OF DIRECTORS' MEETINGS................................ 5
Section 5. MEETINGS.................................................... 5
Section 6. QUORUM...................................................... 5
Section 7. ACTION WITHOUT MEETING...................................... 5
Section 8. TELEPHONIC MEETINGS......................................... 6
Section 9. COMMITTEES OF DIRECTORS..................................... 6
Section 10. MINUTES OF COMMITTEE MEETINGS............................... 6
Section 11. COMPENSATION OF DIRECTORS................................... 6
ARTICLE IV - OFFICERS...................................................... 6
Section 1. OFFICERS.................................................... 6
Section 2. ELECTION OF OFFICERS........................................ 7
Section 3. SUBORDINATE OFFICERS........................................ 7
</TABLE>
i
<PAGE>
<TABLE>
<S> <C> <C>
Section 4. COMPENSATION OF OFFICERS.................................... 7
Section 5. TERM OF OFFICE; REMOVAL AND VACANCIES....................... 7
Section 6. CHAIRMAN OF THE BOARD....................................... 7
Section 7. PRESIDENT AND CHIEF EXECUTIVE OFFICER....................... 7
Section 8. VICE PRESIDENTS............................................. 8
Section 9. SECRETARY................................................... 8
Section 10. ASSISTANT SECRETARY......................................... 8
Section 11. TREASURER................................................... 8
Section 12. ASSISTANT TREASURER......................................... 8
ARTICLE V - INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES
AND AGENTS.................................................... 9
ARTICLE VI - CERTIFICATES OF STOCK......................................... 11
Section 1. CERTIFICATES................................................ 11
Section 2. SIGNATURES ON CERTIFICATES.................................. 11
Section 3. STATEMENT OF STOCK RIGHTS, PREFERENCES,
PRIVILEGES................................................. 11
Section 4. LOST CERTIFICATES........................................... 11
Section 5. TRANSFERS OF STOCK.......................................... 12
Section 6. FIXED RECORD DATE........................................... 12
Section 7. REGISTERED STOCKHOLDERS..................................... 12
ARTICLE VII - GENERAL PROVISIONS........................................... 12
Section 1. DIVIDENDS................................................... 12
Section 2. PAYMENT OF DIVIDENDS; DIRECTORS' DUTIES..................... 12
Section 3. CHECKS...................................................... 12
Section 4. FISCAL YEAR................................................. 13
Section 5. CORPORATE SEAL.............................................. 13
Section 6. MANNER OF GIVING NOTICE..................................... 13
Section 7. WAIVER OF NOTICE............................................ 13
Section 8. ANNUAL STATEMENT............................................ 13
ARTICLE VIII - AMENDMENTS.................................................. 13
Section 1. AMENDMENT BY DIRECTORS...................................... 13
Section 2. AMENDMENT BY STOCKHOLDERS................................... 13
</TABLE>
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RESTATED AND AMENDED BYLAWS
OF
MORRISON KNUDSEN CORPORATION
(FORMERLY WASHINGTON CONSTRUCTION GROUP, INC.)
ARTICLE I
OFFICES
-------
Section 1. REGISTERED OFFICES. The registered office shall be in the
City of Dover, County of Kent, State of Delaware.
Section 2. OTHER OFFICES. The corporation may also have offices at
such other places both within and without the State of Delaware as the Board of
Directors may from time to time determine or the business of the corporation may
require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
------------------------
Section 1. PLACE OF MEETINGS. Meetings of stockholders shall be held
at any place within or outside the State of Delaware designated by the Board of
Directors. In the absence of any such designation, stockholders' meetings shall
be held at the principal executive office of the corporation.
Section 2. ANNUAL MEETING OF STOCKHOLDERS. The annual meeting of
stockholders shall be held on such date and at such time and place as may be
fixed by the Board of Directors and stated in the notice of the meeting, for the
purposes of electing directors and for the transaction of such other business as
is properly brought before the meeting in accordance with these Bylaws.
To be properly brought before the annual meeting, business must be
either (i) specified in the annual notice of meeting (or any supplement or
amendment thereto) given by or at the direction of the Board of Directors, (ii)
otherwise brought before the annual meeting by or at the direction of the Board
of Directors, or (iii) otherwise brought before the annual meeting by a
stockholder. In addition to any other applicable requirements, for business to
be brought before an annual meeting by a stockholder, the stockholder must have
given timely notice thereof in writing to the Secretary of the corporation. To
be timely, a stockholder's notice must be delivered to or mailed and received at
the principal executive offices of the corporation, not less than fifty (50)
days nor more than seventy-five (75) days prior to the meeting; provided,
however, that in the event that less than sixty-five (65) days' notice or prior
public disclosure of the date of the annual meeting is given or made to
stockholders, notice by a stockholder to be timely must be so received not later
than the close of business on the fifteenth (15th) day following the day on
which such notice of the date of the annual meeting was mailed or such public
disclosure was made, whichever first occurs. A stockholder's notice to the
Secretary shall set forth (a) as to each matter the stockholder proposes to
bring before the annual meeting (i) a brief description of the business desired
to be brought before
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the annual meeting and the reasons for conducting such business at the annual
meeting, (ii) the name and record address of the stockholder proposing such
business, (iii) the class, series and number of shares of the corporation which
are beneficially owned by the stockholder, and (iv) any material interest of the
stockholder in such business and (b) as to the stockholder giving the notice (i)
the name and record address of the stockholder and (ii) the class and number of
shares of capital stock of the corporation which are beneficially owned by the
stockholder. Notwithstanding anything in the Bylaws to the contrary, no
business shall be conducted at the annual meeting except in accordance with the
procedures set forth in this Article II, Section 2. The officer of the
corporation presiding at an annual meeting shall, if the facts warrant,
determine and declare to the annual meeting that business was not properly
brought before the annual meeting in accordance with the provisions of this
Article II, Section 2, and if he should so determine, he shall so declare to the
annual meeting and any such business not properly brought before the meeting
shall not be transacted. Written notice of the annual meeting stating the
place, date and hour of the annual meeting shall be given to each stockholder
entitled to vote at such meeting not less than ten (10) nor more than sixty (60)
days before the date of the meeting.
Section 3. QUORUM; ADJOURNED MEETINGS AND NOTICE THEREOF. A majority
of the stock issued and outstanding and entitled to vote at any meeting of
stockholders, the holders of which are present in person or represented by
proxy, shall constitute a quorum for the transaction of business except as
otherwise provided by law, by the Certificate of Incorporation, or by these
Bylaws. A quorum, once established, shall not be broken by the withdrawal of
enough votes to leave less than a quorum and the votes present may continue to
transact business until adjournment. If, however, such quorum shall not be
present or represented at any meeting of the stockholders, a majority of the
voting stock represented in person or by proxy may adjourn the meeting from time
to time, without notice other than announcement at the meeting, until a quorum
shall be present or represented. At such adjourned meeting at which a quorum
shall be present or represented, any business may be transacted which might have
been transacted at the meeting as originally notified. If the adjournment is
for more than thirty days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote thereat.
Section 4. VOTING. When a quorum is present at any meeting, the vote
of the holders of a majority of the stock having power present in person or
represented by proxy at the meeting and entitled to vote on the subject matter
shall decide any question brought before such meeting, unless the question is
one upon which by express provision of the statutes, or the Certificate of
Incorporation or these Bylaws, a different vote is required in which case such
express provisions shall govern and control the decision of such question.
Directors of the corporation shall be elected by a plurality of the votes of the
shares present in person or represented by proxy at the meeting and entitled to
vote on the election of directors. Shares represented by proxies that reflect,
with respect to a proposal, abstentions or limited voting authority, including
"broker non-votes" (i.e., shares held by a broker or nominee which are
represented at the meeting, but with respect to which such broker or nominee is
not empowered to vote on a particular proposal or proposals) shall be counted as
shares that are present and entitled to vote for purposes of determining the
presence of a quorum. For purposes of determining the outcome of any proposal,
shares represented by such proxies will be treated as not present and not
entitled to vote with respect to the proposal or proposals.
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Section 5. PROXIES. At each meeting of the stockholders, each
stockholder having the right to vote may vote in person or may authorize another
person or persons to act for him by proxy appointed by an instrument in writing
subscribed by such stockholder and bearing a date not more than three years
prior to said meeting, unless said instrument provides for a longer period. All
proxies must be filed with the Secretary of the corporation at the beginning of
each meeting in order to be counted in any vote at the meeting. Each stockholder
shall have one vote for each share of stock having voting power, registered in
his name on the books of the corporation on the record date set by the Board of
Directors as provided in Article VI, Section 6 hereof. All elections shall be
had and all questions decided by a plurality vote.
Section 6. SPECIAL MEETINGS. Special meetings of the stockholders,
for any purpose, or purposes, unless otherwise prescribed by statute or by the
Certificate of Incorporation, may be called only by a majority of the Board of
Directors or the Chief Executive Officer or the President. Business transacted
at any special meeting of stockholders shall be limited to the purposes stated
in the notice.
Section 7. NOTICE OF STOCKHOLDERS' MEETINGS. Whenever stockholders
are required or permitted to take any action at a meeting, a written notice of
the meeting shall be given which notice shall state the place, date and hour of
the meeting, and, in the case of a special meeting, the purpose or purposes for
which the meeting is called. The written notice of any meeting shall be given
to each stockholder entitled to vote at such meeting not less than 10 (ten) nor
more than 60 (sixty) days before the date of the meeting. If mailed, notice is
given when deposited in the United States mail, postage prepaid, directed to the
stockholder at his address as it appears on the records of the corporation.
Section 8. MAINTENANCE AND INSPECTION OF STOCKHOLDER LIST. The
officer who has charge of the stock ledger of the corporation shall prepare and
make, at least 10 (ten) days before every meeting of stockholders, a complete
list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least 10 (ten) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
Section 9. STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING.
Any action which may be taken by stockholders of the corporation at an annual or
special meeting may not be effected except at such an annual or special meeting
by the vote required for the taking of such action, and the right of
stockholders to act by written consent is expressly denied.
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ARTICLE III
DIRECTORS
---------
Section 1. THE NUMBER OF DIRECTORS. The number of directors which
shall constitute the whole Board shall be not less than six (6) directors nor
more than twelve (12) directors, the exact number of directors to be determined
from time to time by resolutions adopted by the Board of Directors. The exact
number of directors shall be nine (9) until changed as provided in this Section
1. The directors need not be stockholders. Only persons who are nominated in
accordance with the following procedures shall be eligible for election as
directors. Nominations of persons for election to the Board of Directors of the
corporation at the annual meeting may be made at such meeting by or at the
direction of the Board of Directors, by any committee or persons appointed by
the Board of Directors or by any stockholder of the corporation entitled to vote
for the election of directors at the meeting who complies with the notice
procedures set forth in this Article III, Section 1. Such nominations by any
stockholder shall be made pursuant to timely notice in writing to the Secretary
of the corporation. To be timely, a stockholder's notice shall be delivered to
or mailed and received at the principal executive offices of the corporation not
less than fifty (50) days nor more than seventy-five (75) days prior to the
meeting; provided, however, that in the event that less than sixty-five (65)
days notice or prior to public disclosure of the date of the meeting is given or
made to stockholders, notice by the stockholder to be timely must be so received
not later than the close of business of the fifteenth (15th) day following the
day on which such notice of the date of the meeting was mailed or such public
disclosure was made, whichever first occurs. Such stockholder's notice to the
Secretary shall set forth (i) as to each person whom the stockholder proposes to
nominate for election or reelection as a director, (a) the name, age, business
address and residence address of the person, (b) the principal occupation or
employment of the person, (c) the class and number of shares of capital stock of
the corporation which are beneficially owned by the person, and (d) any other
information relating to the person that is required to be disclosed in
solicitations for proxies for election of directors pursuant to the Rules and
Regulations of the Securities and Exchange Commission under Section 14 of the
Securities Exchange Act of 1934, as amended; and (ii) as to the stockholder
giving the notice (a) the name and record address of the stockholder and (b) the
class and number of shares of capital stock of the corporation which are
beneficially owned by the stockholder. The corporation may require any proposed
nominee to furnish such other information as may reasonably be required by the
corporation to determine the eligibility of such proposed nominee to serve as a
director of the corporation. No person shall be eligible for election as a
director of the corporation unless nominated in accordance with the procedures
set forth herein. The officer of the corporation presiding at an annual meeting
shall, if the facts warrant, determine and declare to the meeting that a
nomination was not made in accordance with the foregoing procedure, and if he
should so determine, he shall so declare to the meeting and the defective
nomination shall be disregarded. The directors shall be elected at the annual
meeting of the stockholders, except as provided in Section 2 of this Article
III, and each director elected shall hold office until his successor is elected
and qualified; provided, however, that unless otherwise restricted by the
Certificate of Incorporation or by law, any director or the entire Board of
Directors may be removed from the Board of Directors for cause only at any
meeting of stockholders by a majority of the stock represented and entitled to
vote thereat.
Section 2. VACANCIES. Vacancies on the Board of Directors by reason
of death, resignation, retirement, disqualification, removal from office, or
otherwise, and newly created
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directorships resulting from any increase in the authorized number of directors
may be filled by a majority of the directors then in office, although less than
a quorum, or by a sole remaining director. The directors so chosen shall hold
office for a term that shall coincide with the term of the class to which such
director shall have been elected. If there are no directors in office, then an
election of directors may be held in the manner provided by statute. If, at the
time of filling any vacancy or any newly created directorship, the directors
then in office shall constitute less than a majority of the whole Board (as
constituted immediately prior to any such increase), the Court of Chancery may,
upon application of any stockholder or stockholders holding at least ten percent
of the total number of the shares at the time outstanding having the right to
vote for such directors, summarily order an election to be held to fill any such
vacancies or newly created directorships, or to replace the directors chosen by
the directors then in office.
Section 3. POWERS. The property and business of the corporation
shall be managed by or under the direction of its Board of Directors. In
addition to the powers and authorities by these Bylaws expressly conferred upon
them, the Board may exercise all such powers of the corporation and do all such
lawful acts and things as are not by statute or by the Certificate of
Incorporation or by these Bylaws directed or required to be exercised or done by
the stockholders.
Section 4. PLACE OF DIRECTORS' MEETINGS. The directors may hold
their meetings and have one or more offices, and keep the books of the
corporation outside of the State of Delaware.
Section 5. MEETINGS. The Board of Directors of the corporation may
hold meetings, both regular and special, either within or without the State of
Delaware. Regular meetings of the Board of Directors may be held without notice
at such time and at such place as may from time to time be determined by the
Board of Directors. Special meetings of the Board of Directors may be called by
the Chairman of the Board of Directors, the President, or by a majority of the
Board of Directors. Notice thereof, stating the place, date and hour of the
meeting, shall be given to each director either by mail not less than four (4)
days before the date of the meeting, or personally or by telephone, telegram,
telex or similar means of communication on twelve (12) hours' notice, or on such
shorter notice as the person or persons calling such meeting may deem necessary
or appropriate in the circumstances.
Section 6. QUORUM. At all meetings of the Board of Directors a
majority of the authorized number of directors shall be necessary and sufficient
to constitute a quorum for the transaction of business, and the vote of a
majority of the directors present at any meeting at which there is a quorum,
shall be the act of the Board of Directors, except as may be otherwise
specifically provided by statute, by the Certificate of Incorporation or by
these Bylaws. If a quorum shall not be present at any meeting of the Board of
Directors, the directors present thereat may adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum
shall be present. If only one director is authorized, such sole director shall
constitute a quorum.
Section 7. ACTION WITHOUT MEETING. Unless otherwise restricted by
the Certificate of Incorporation or these Bylaws, any action required or
permitted to be taken at any meeting of the Board of Directors or of any
committee thereof may be taken without a meeting, if all
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<PAGE>
members of the Board or committee, as the case may be, consent thereto in
writing, and the writing or writings are filed with the minutes of proceedings
of the Board or committee.
Section 8. TELEPHONIC MEETINGS. Unless otherwise restricted by the
Certificate of Incorporation or these Bylaws, members of the Board of Directors,
or any committee designated by the Board of Directors, may participate in a
meeting of the Board of Directors, or any committee, by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and such participation in a
meeting shall constitute presence in person at such meeting.
Section 9. COMMITTEES OF DIRECTORS. The Board of Directors may, by
resolution passed by a majority of the whole Board, designate one or more
committees, each such committee to consist of one or more of the directors of
the corporation. The Board may designate one or more directors as alternate
members of any committee, who may replace any absent or disqualified member at
any meeting of the committee. In the absence or disqualification of a member of
a committee, the member or members thereof present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member. Any such
committee, to the extent provided in the resolution of the Board of Directors,
shall have and may exercise all the powers and authority of the Board of
Directors in the management of the business and affairs of the corporation, and
may authorize the seal of the corporation to be affixed to all papers which may
require it; but no such committee shall have the power or authority in reference
to amending the Certificate of Incorporation, adopting an agreement of merger or
consolidation, recommending to the stockholders the sale, lease or exchange of
all or substantially all of the corporation's property and assets, recommending
to the stockholders a dissolution of the corporation or a revocation of a
dissolution, or amending the Bylaws of the corporation; and, unless the
resolution or the Certificate of Incorporation expressly so provide, no such
committee shall have the power or authority to declare a dividend or to
authorize the issuance of stock.
Section 10. MINUTES OF COMMITTEE MEETINGS. Each committee shall keep
regular minutes of its meetings and report the same to the Board of Directors
when required.
Section 11. COMPENSATION OF DIRECTORS. Unless otherwise restricted
by the Certificate of Incorporation or these Bylaws, the Board of Directors
shall have the authority to fix the compensation of directors. The directors
may be paid their expenses, if any, of attendance at each meeting of the Board
of Directors and may be paid a fixed sum for attendance at each meeting of the
Board of Directors or a stated salary as director. No such payment shall
preclude any director from serving the corporation in any other capacity and
receiving compensation therefor. Members of special or standing committees may
be allowed like compensation for attending committee meetings.
ARTICLE IV
OFFICERS
--------
Section 1. OFFICERS. The officers of this corporation shall be
chosen by the Board of Directors and shall include a President and a Secretary.
The corporation may also have at the discretion of the Board of Directors such
other officers as are desired, including a Chief Executive
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Officer, a Treasurer, one or more Vice Presidents, one or more Assistant
Secretaries and Assistant Treasurers, and such other officers as may be
appointed in accordance with the provisions of Section 3 hereof. In the event
there are two or more Vice Presidents, then one or more may be designated as
Executive Vice President, Senior Vice President, or other similar or dissimilar
title. At the time of the election of officers, the directors may by resolution
determine the order of their rank. Any number of offices may be held by the
same person, unless the Certificate of Incorporation or these Bylaws otherwise
provide. The Board of Directors may also appoint a Chairman of the board who
need not be an officer of the corporation unless specifically designed as such
by the Board.
Section 2. ELECTION OF OFFICERS. The Board of Directors, at its
first meeting after each annual meeting of stockholders, shall choose the
officers of the corporation.
Section 3. SUBORDINATE OFFICERS. The Board of Directors may appoint
such other officers and agents as it shall deem necessary who shall hold their
offices for such terms and shall exercise such powers and perform such duties as
shall be determined from time to time by the Board.
Section 4. COMPENSATION OF OFFICERS. The salaries of all officers
and agents of the corporation shall be fixed by the Board of Directors.
Section 5. TERM OF OFFICE; REMOVAL AND VACANCIES. The officers of
the corporation shall hold office until their successors are chosen and qualify
in their stead. Any officer elected or appointed by the Board of Directors may
be removed at any time by the affirmative vote of a majority of the Board of
Directors. If the office of any officer or officers becomes vacant for any
reason, the vacancy shall be filled by the Board of Directors.
Section 6. CHAIRMAN OF THE BOARD. The Chairman of the Board, if the
Board has appointed one, shall, if present, preside at all meetings of the Board
of Directors and exercise and perform such other powers and duties as may be
from time to time assigned to him by the Board of Directors or prescribed by
these Bylaws. If there is no President or Chief Executive Officer, the Chairman
of the Board shall become the Chief Executive Officer of the corporation and
shall have the powers and duties prescribed in Section 7 of this Article IV.
Section 7. PRESIDENT AND CHIEF EXECUTIVE OFFICER. Subject to such
supervisory powers, if any, as may be given by the Board of Directors to the
Chairman of the Board, if there be a Chairman, the President shall, subject to
the control of the Board of Directors, have general supervision, direction and
control of the business and officers of the corporation. The President shall
preside at all meetings of the stockholders and, in the absence of the Chairman
of the Board, or if there be none, at all meetings of the Board of Directors.
The President shall be an ex-officio member of all committees and shall have the
general powers and duties of management usually vested in the office of
President of corporations, and shall have such other powers and duties as may be
prescribed by the Board of Directors or these Bylaws. The President shall be
the Chief Executive Officer of the corporation, unless the Board of Directors,
in its discretion, elects or appoints a President and a Chief Executive Officer.
If there is a Chief Executive Officer of the corporation, other than the
President, the Chief Executive Officer shall have such powers and duties as may
be prescribed by the Board of Directors or these Bylaws.
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Section 8. VICE PRESIDENTS. In the absence or disability of the
President, the Vice Presidents in order of their rank as fixed by the Board of
Directors, or if not ranked, the Vice President designated by the Board of
Directors, shall perform all the duties of the President, and when so acting
shall have all the powers of and be subject to all the restrictions upon the
President. The Vice Presidents shall have such other duties as from time to
time may be prescribed for them, respectively, by the Board of Directors.
Section 9. SECRETARY. The Secretary shall attend all sessions of the
Board of Directors and all meetings of the stockholders and record all votes and
the minutes of all proceedings in a book to be kept for that purpose; and shall
perform like duties for the standing committees when required by the Board of
Directors. The Secretary shall give, or cause to be given, notice of all
meetings of the stockholders and of the Board of Directors, and shall perform
such other duties as may be prescribed by the Board of Directors or these
Bylaws. The Secretary shall keep in safe custody the seal of the corporation,
and when authorized by the Board, affix the same to any instrument requiring it,
and when so affixed it shall be attested by his signature or by the signature of
an Assistant Secretary. The Board of Directors may give general authority to
any other officer to affix the seal of the corporation and to attest the
affixing by his signature.
Section 10. ASSISTANT SECRETARY. The Assistant Secretary, or if there
be more than one, the Assistant Secretaries in the order determined by the Board
of Directors, or if there be no such determination, the Assistant Secretary
designated by the Board of Directors, shall, in the absence or disability of the
Secretary, perform the duties and exercise the powers of the Secretary and shall
perform such other duties and have such other powers as the Board of Directors
may from time to time prescribe.
Section 11. TREASURER. The Treasurer shall have the custody of the
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the corporation and shall
deposit all moneys, and other valuable effects in the name and to the credit of
the corporation, in such depositories as may be designated by the Board of
Directors. The Treasurer shall disburse the funds of the corporation as may be
ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the Board of Directors, at its regular
meetings, or when the Board of Directors so requires, an account of all his
transactions as Treasurer and of the financial condition of the corporation. If
required by the Board of Directors, the Treasurer shall give the corporation a
bond, in such sum and with such surety or sureties as shall be satisfactory to
the Board of Directors, for the faithful performance of the duties of his office
and for the restoration to the corporation, in case of his death, resignation,
retirement or removal from office, of all books, papers, vouchers, money and
other property of whatever kind in his possession or under his control belonging
to the corporation.
Section 12. ASSISTANT TREASURER. The Assistant Treasurer, or if there
shall be more than one, the Assistant Treasurers in the order determined by the
Board of Directors, or if there be no such determination, the Assistant
Treasurer designated by the Board of Directors, shall, in the absence or
disability of the Treasurer, perform the duties and exercise the powers of the
Treasurer and shall perform such other duties and have such other powers as the
Board of Directors may from time to time prescribe.
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ARTICLE V
INDEMNIFICATION OF DIRECTORS,
-----------------------------
OFFICERS, EMPLOYEES AND AGENTS
------------------------------
(a) The corporation shall indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
(b) The corporation shall indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the corporation to procure a judgment in
its favor by reason of the fact that he is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation and except that no such indemnification shall
be made in respect of any claim, issue or matter as to which such person shall
have been adjudged to be liable to the corporation unless and only to the extent
that the Court of Chancery of Delaware or the court in which such action or suit
was brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which such Court
of Chancery or such other court shall deem proper.
(c) To the extent that a director, officer, employee or agent of the
corporation shall be successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in paragraphs (a) and (b), or in defense
of any claim, issue or matter therein, he shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection therewith.
(d) Any indemnification under paragraphs (a) and (b) (unless ordered
by a court) shall be made by the corporation only as authorized in the specific
case upon a determination that indemnification of the director, officer,
employee or agent is proper under the circumstances because he has met the
applicable standard of conduct set forth in paragraphs (a) and (b). Such
determination shall be made (1) by the Board of Directors by a majority vote of
a quorum consisting of directors
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who were not parties to such action, suit or proceeding, or (2) if such a quorum
is not obtainable, or, even if obtainable a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, or (3) by the
stockholders.
(e) Expenses (including attorneys' fees) incurred by an officer or
director in defending any civil, criminal, administrative or investigative
action, suit or proceeding may be paid by the corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that he is not entitled to be indemnified by
the corporation as authorized in this Article V. Such expenses (including
attorneys' fees) incurred by other employees and agents may be so paid upon such
terms and conditions, if any, as the Board of Directors deems appropriate.
(f) The indemnification and advancement of expenses provided by, or
granted pursuant to, the other paragraphs of this Article V shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office.
(g) The Board of Directors may authorize, by a vote of a majority of
a quorum of the Board of Directors, the corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against any liability asserted against
him and incurred by him in any such capacity, or arising out of his status as
such, whether or not the corporation would have the power to indemnify him
against such liability under the provisions of this Article V.
(h) For the purposes of this Article V, references to "the
corporation" shall include, in addition to the resulting corporation, any
constituent corporation (including any constituent of a constituent) absorbed in
a consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers, and employees
or agents, so that any person who is or was a director, officer, employee or
agent of such constituent corporation, or is or was serving at the request of
such constituent corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
shall stand in the same position under the provisions of this Article V with
respect to the resulting or surviving corporation as he would have with respect
to such constituent corporation if its separate existence had continued.
(i) For purposes of this section, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on a person with respect to an employee benefit plan; and
references to "serving at the request of the corporation" shall include service
as a director, officer, employee or agent of the corporation which imposes
duties on, or involves services by, such director, officer, employee or agent
with respect to an employee benefit plan, its participants or beneficiaries; and
a person who acted in good faith and in a manner he reasonably believed to be in
the interest of the participants and beneficiaries of an employee benefit plan
shall be deemed to have acted in a manner "not opposed to the best interests of
the corporation" as referred to in this section.
10
<PAGE>
(j) The indemnification and advancement of expenses provided by, or
granted pursuant to, this Article V shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
(k) The corporation shall be required to indemnify a person in
connection with a proceeding (or part thereof) initiated by such person only if
the proceeding (or part thereof) was authorized by the Board of Directors of the
corporation.
ARTICLE VI
CERTIFICATES OF STOCK
---------------------
Section 1. CERTIFICATES. Every holder of stock of the corporation
shall be entitled to have a certificate signed by, or in the name of the
corporation by, the Chairman of the Board of Directors, if the Board has
appointed one, or the President or a Vice President, and by the Secretary or an
Assistant Secretary, or the Treasurer or an Assistant Treasurer of the
corporation, certifying the number of shares represented by the certificate
owned by such stockholder in the corporation.
Section 2. SIGNATURES ON CERTIFICATES. Any or all of the signatures
on the certificate may be a facsimile. In case any officer, transfer agent, or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent, or registrar
before such certificate is issued, it may be issued by the corporation with the
same effect as if he were such officer, transfer agent, or registrar at the date
of issue.
Section 3. STATEMENT OF STOCK RIGHTS, PREFERENCES, PRIVILEGES. If
the corporation shall be authorized to issue more than one class of stock or
more than one series of any class, the powers, designations, preferences and
relative, participating, optional or other special rights of each class of stock
or series thereof and the qualification, limitations or restrictions of such
preferences and/or rights shall be set forth in full or summarized on the face
or back of the certificate which the corporation shall issue to represent such
class or series of stock, provided that, except as otherwise provided in Section
202 of the General Corporation Law of Delaware, in lieu of the foregoing
requirements, there may be set forth on the face or back of the certificate
which the corporation shall issue to represent such class or series of stock, a
statement that the corporation will furnish without charge to each stockholder
who so requests the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights.
Section 4. LOST CERTIFICATES. The Board of Directors may direct a
new certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the corporation alleged to have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate of stock to be lost, stolen or destroyed. When
authorizing such issue of a new certificate or certificates, the Board of
Directors may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed certificate or
certificates, or his legal representative, to advertise the same in such manner
as it shall require and/or to give the corporation a bond in such sum as it may
direct as indemnity against any
11
<PAGE>
claim that may be made against the corporation with respect to the certificate
alleged to have been lost, stolen or destroyed.
Section 5. TRANSFERS OF STOCK. Upon surrender to the corporation, or
the transfer agent of the corporation, of a certificate for shares duly endorsed
or accompanied by proper evidence of succession, assignation or authority to
transfer, it shall be the duty of the corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its books.
Section 6. FIXED RECORD DATE. In order that the corporation may
determine the stockholders entitled to notice of or to vote at any meeting of
the stockholders, or any adjournment thereof, or entitled to receive payment of
any dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock or
for the purpose of any other lawful action, the Board of Directors may fix a
record date which shall not be more than 60 (sixty) nor less than 10 (ten) days
before the date of such meeting, nor more than 60 (sixty) days prior to any
other action. A determination of stockholders of record entitled to notice of
or to vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the Board of Directors may fix a new record
date for the adjourned meeting.
Section 7. REGISTERED STOCKHOLDERS. The corporation shall be
entitled to treat the holder of record of any share or shares of stock as the
holder in fact thereof and accordingly shall not be bound to recognize any
equitable or other claim or interest in such share on the part of any other
person, whether or not it shall have express or other notice thereof, save as
expressly provided by the laws of the State of Delaware.
ARTICLE VII
GENERAL PROVISIONS
------------------
Section 1. DIVIDENDS. Dividends upon the capital stock of the
corporation, subject to the provisions of the Certificate of Incorporation, if
any, may be declared by the Board of Directors at any regular or special
meeting, pursuant to law. Dividends may be paid in cash, in property, or in
shares of the capital stock, subject to the provisions of the Certificate of
Incorporation.
Section 2. PAYMENT OF DIVIDENDS; DIRECTORS' DUTIES. Before payment
of any dividend there may be set aside out of any funds of the corporation
available for dividends such sum or sums as the directors from time to time, in
their absolute discretion, think proper as a reserve fund to meet contingencies,
or for equalizing dividends, or for repairing or maintaining any property of the
corporation, or for such other purpose as the directors shall think conducive to
the interests of the corporation, and the directors may abolish any such
reserve.
Section 3. CHECKS. All checks or demands for money and notes of the
corporation shall be signed by such officer or officers as the Board of
Directors may from time to time designate.
12
<PAGE>
Section 4. FISCAL YEAR. The fiscal year of the corporation shall be
fixed by resolution of the Board of Directors.
Section 5. CORPORATE SEAL. The corporate seal shall have inscribed
thereon the name of the corporation, the year of its organization and the words
"Corporate Seal, Delaware." Said seal may be used by causing it or a facsimile
thereof to be impressed or affixed or reproduced or otherwise.
Section 6. MANNER OF GIVING NOTICE. Whenever, under the provisions
of the statutes or of the Certificate of Incorporation or of these Bylaws,
notice is required to be given to any director or stockholder, it shall not be
construed to mean personal notice, but such notice may be given in writing, by
mail, addressed to such director or stockholder, at his address as it appears on
the records of the corporation, with postage thereon prepaid, and such notice
shall be deemed to be given at the time when the same shall be deposited in the
United States mail. Notice to directors may also be given by telegram.
Section 7. WAIVER OF NOTICE. Whenever any notice is required to be
given under the provisions of the statutes or of the Certificate of
Incorporation or of these Bylaws, a waiver thereof in writing, signed by the
person or persons entitled to said notice, whether before or after the time
stated therein, shall be deemed equivalent thereto.
Section 8. ANNUAL STATEMENT. The Board of Directors shall present at
each annual meeting, and at any special meeting of the stockholders, a full and
clear statement of the business and condition of the corporation.
ARTICLE VIII
AMENDMENTS
----------
Section 1. AMENDMENT BY DIRECTORS. These Bylaws may be altered,
amended or repealed or new Bylaws may be adopted by the Board of Directors, when
such power is conferred upon the Board of Directors by the Certificate of
Incorporation, at any regular meeting of the Board of Directors or at any
special meeting of the Board of Directors if notice of such alteration,
amendment, repeal or adoption of new Bylaws be contained in the notice of such
special meeting. If the power to adopt, amend or repeal Bylaws is conferred
upon the Board of Directors by the Certificate of Incorporation, it shall not
divest or limit the power of the stockholders to adopt, amend or repeal Bylaws.
Section 2. AMENDMENT BY STOCKHOLDERS. These Bylaws may be altered,
amended or repealed or new Bylaws may be adopted by the stockholders, at any
regular meeting of the stockholders or at any special meeting of the
stockholders if notice of such alteration, amendment, repeal or adoption of new
Bylaws be contained in the notice of such special meeting; provided, however,
any proposal to adopt, amend or repeal Bylaws shall require not less than the
affirmative vote of two-thirds of the issued and outstanding stock of the
Corporation entitled to vote thereon.
13
<PAGE>
CERTIFICATE OF ASSISTANT SECRETARY
I, the undersigned, do hereby certify:
(1) That I am the duly elected and acting Assistant Secretary of
Morrison Knudsen Corporation, a Delaware corporation; and
(2) That the foregoing bylaws constitute the bylaws of said
corporation as duly adopted by an affirmative vote of a majority of the issued
and outstanding stock of the said corporation as of ___________, 1996.
IN WITNESS WHEREOF, I have hereunto subscribed my name this ___ day
of ____________, 1996.
_______________________________
Walter J. Orze
Assistant Secretary
<PAGE>
EXHIBIT 6
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
March 31, 1996
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 April 30, 1996, 33,231,191 shares of the registrant's common stock were
outstanding (excluding 461,666 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
Three Months Ended March 31, 1996
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
<S> <C>
Item 1. Consolidated Condensed Financial Statements and Notes Thereto
Statements of Operations for the Three Months
Ended March 31, 1996 and 1995 I-1
Balance Sheets at March 31, 1996 and
December 31, 1995 I-2
Statements of Cash Flows for the
Three Months Ended March 31, 1996 and 1995 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 3. Legal Proceedings II-1
Item 6. Exhibits and Reports on Form 8-K II-3
Signatures II-3
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MORRISON KNUDSEN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995 (UNAUDITED)
(Thousands of dollars except share data)
<TABLE>
<CAPTION>
1996 1995 (a)
<S> <C> <C>
Revenue $ 324,203 $ 366,486
Cost of revenue (309,474) (361,463)
- ---------------------------------------------------------------------------------------------------------------
Operating income from continuing operations 14,729 5,023
General and administrative expenses (13,498) (10,619)
Interest expense (5,224) (5,431)
Equity in net income of unconsolidated affiliates 3,241 11,947
Gain (loss) on dispositions of investments in affiliates and other assets, net 2,130 (20,019)
- ---------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before income taxes 1,378 (19,099)
Income tax expense (1,082) (537)
- ---------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations 296 (19,636)
Discontinued operations:
Loss from discontinued MKRail and Transit,
net of tax expense of $107 -- (6,183)
Loss on disposition of discontinued operations -- (25,500)
- ---------------------------------------------------------------------------------------------------------------
Net income (loss) $ 296 $ (51,319)
===============================================================================================================
Income (loss) per common share:
Continuing operations $.01 $ (.60)
Discontinued operations -- (.96)
- ---------------------------------------------------------------------------------------------------------------
Net income (loss) $.01 $ (1.56)
===============================================================================================================
Common shares used to compute earnings (loss) per share 33,240,000 32,865,000
===============================================================================================================
</TABLE>
(a) Certain amounts reclassified to conform to 1996 financial presentation.
The accompanying notes are an integral part of the financial statements.
I-1
<PAGE>
MORRISON KNUDSEN CORPORATION
CONSOLIDATED BALANCE SHEETS
AT MARCH 31, 1996 (UNAUDITED) AND DECEMBER 31, 1995
(Thousands of dollars except share data)
<TABLE>
<CAPTION>
ASSETS 1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 78,638 $ 63,086
Accounts receivable including retentions of $13,739 and $16,952 141,100 166,104
Unbilled receivables 78,132 87,902
Refundable income taxes, net -- 22,803
Investments in and advances to construction joint ventures 16,998 15,186
Deferred income taxes 11,975 10,590
Investments in unconsolidated affiliates held for sale 5,389 32,189
Net assets of discontinued MK Rail operations 72,000 72,000
Other 18,615 14,944
- -----------------------------------------------------------------------------------------------------
Total current assets 422,847 484,804
- -----------------------------------------------------------------------------------------------------
INVESTMENTS AND OTHER ASSETS
Securities available for sale, at fair value 27,256 24,440
Investments in and advances to unconsolidated affiliates 54,093 51,031
Goodwill and other intangibles, net 3,776 4,006
Other investments and assets 5,664 7,787
- -----------------------------------------------------------------------------------------------------
Total investments and other assets 90,789 87,264
- -----------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, AT COST
Land and mineral rights 10,302 10,507
Leasehold improvements 67,878 60,079
Machinery and equipment 3,049 9,140
Construction equipment 101,163 132,776
- -----------------------------------------------------------------------------------------------------
Total property and equipment 182,392 212,502
LESS ACCUMULATED DEPRECIATION (137,714) (156,410)
- -----------------------------------------------------------------------------------------------------
Property and equipment, net 44,678 56,092
- -----------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 558,314 $ 628,160
=====================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
I-2
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Short-term and current portion of long-term debt $ 213,345 $ 251,226
Estimated reimbursement obligations of discontinued Transit operations 111,444 111,444
Accounts payable including retentions of $18,266 and $20,076 101,136 130,969
Accrued salaries, wages and benefits 43,802 45,362
Accruals for estimated losses on uncompleted contracts 26,058 21,973
Accrued and deferred interest on antecedent debt 14,427 9,320
Other accrued liabilities 53,960 64,284
Billings in excess of costs and earnings on uncompleted contracts 66,088 63,252
Advances from customers 9,968 19,181
Income taxes payable 1,996 --
- -------------------------------------------------------------------------------------------------------
Total current liabilities 642,224 717,011
- -------------------------------------------------------------------------------------------------------
NON-CURRENT LIABILITIES
Deferred income taxes 9,115 8,061
Deferred compensation 14,467 12,999
Deferred income 9,534 10,572
Accrued workers' compensation insurance and other non-current liabilities 20,887 19,006
Accrued postretirement benefit obligation 30,479 29,193
Accrued litigation settlements 25,000 25,000
- -------------------------------------------------------------------------------------------------------
Total non-current liabilities 109,482 104,831
- -------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Note 8)
- -------------------------------------------------------------------------------------------------------
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
33,692,857 shares 56,156 56,156
Capital in excess of par value 270,553 270,661
Accumulated deficit (509,851) (510,147)
Treasury stock, 450,089 and 454,914 shares, at cost (7,655) (7,757)
Unearned compensation - restricted stock (1,155) (1,582)
Cumulative translation adjustments (1,626) (1,578)
Net unrealized holding gain on securities available for sale 186 565
- -------------------------------------------------------------------------------------------------------
Total stockholders' equity (deficiency) (193,392) (193,682)
- -------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) $ 558,314 $ 628,160
=======================================================================================================
</TABLE>
I-3
<PAGE>
MORRISON KNUDSEN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1996, AND 1995 (UNAUDITED)
(Thousands of dollars)
<TABLE>
<CAPTION>
1996 1995 (a)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 296 $(51,319)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Results of discontinued operations and loss on disposal -- 31,683
(Gain) loss on disposition of businesses and assets, net (2,130) 20,019
Depreciation and amortization 4,491 4,370
Provision for (realization of) estimated losses on uncompleted contracts, net 4,085 (20,270)
Increase in working capital from cancellation
of accounts receivable sales -- (60,000)
Other changes in working capital, net 20,134 1,917
Increase (decrease) in other assets and liabilities, net 553 3,526
- ---------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 27,429 (70,074)
- ---------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Property and equipment acquisitions (3,077) (1,140)
Property and equipment disposals 3,566 2,698
Purchase of securities available for sale (9,845) (6,875)
Proceeds from securities available for sale 6,648 15,035
Proceeds from sales of investments in affiliates and other assets 29,264 --
Investments in and advances to unconsolidated affiliates (551) 671
Other investing activities -- (149)
- ---------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities 26,005 10,240
- ---------------------------------------------------------------------------------------------------------
Net cash used by discontinued operations -- (37,397)
- ---------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Borrowing (repayments) under credit agreements and short-term debt, net
including $60,000 from cancellation of accounts receivable sales in 1995 (37,882) 117,131
Dividends paid -- (6,164)
- ---------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (37,882) 110,967
- ---------------------------------------------------------------------------------------------------------
Cash and cash equivalents of businesses held for sale -- (3,518)
- ---------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 15,552 10,218
Cash and cash equivalents at beginning of period 63,086 66,864
- ---------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 78,638 $ 77,082
=========================================================================================================
Other cash flow information for continuing and discontinued operations
Interest paid $ 1,716 $ 6,417
Income taxes paid (refunded), net (21,300) 527
=========================================================================================================
</TABLE>
(a) Certain amounts reclassified to conform to 1996 financial presentation.
The accompanying notes are an integral part of the financial statements.
I-4
<PAGE>
MORRISON KNUDSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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
The accompanying 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 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 financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. These consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
included in the Corporation's Annual Report on Form 10-K for the year ended
December 31, 1995. The comparative consolidated balance sheet and financial
statement footnotes included herein as December 31, 1995 amounts have been
derived from the audited balance sheet and financial statement footnotes at
December 31, 1995.
The preparation of the Corporation's consolidated financial statements
in conformity with generally accepted accounting principles necessarily requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the balance sheet dates and the reported amounts of revenues and costs during
the reporting periods for long-term contracts. Actual results of contract
operations could differ from the estimates.
On October 17, 1995, the Corporation reached an agreement to transfer
substantially all of the assets, certain liabilities, all contract 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. The Corporation has accounted for the disposition of Transit as
a discontinued operation. The Corporation remains liable for certain net cash
losses resulting from Amerail's performance of contracts transferred to Amerail.
In this connection, the Corporation agreed to guarantee Amerail's reimbursement
obligations to certain banks ("Metra Banks") and its bonding company which are
providing a standby letter of credit and credit facilities to support the
performance of the contract with the Illinois Commuter Rail Division of the
Regional Transit Authority ("Metra") d/b/a Metra/Metropolitan Rail ("Metra
Contract") and the existing manufacturing and refurbishing contracts, other than
the Metra Contract, with various transit agencies (the "Non-Metra Contracts")
transferred to Amerail. The Corporation has agreed to reimburse the Metra Banks
and its bonding company for certain amounts borrowed by Amerail under these
facilities.
The Corporation, in estimating its Transit reimbursement obligations
makes significant assumptions concerning cost estimates, projected to the
estimated completion dates of contracts which are in their early stages of
production, for labor productivity rates, material price and usage, for interest
expense on the estimated borrowings under the credit facilities extended to
Amerail, 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 contracts transferred to Amerail. The
Corporation has no management control over Amerail and therefore must rely on
financial and operating information provided by Amerail to estimate its
reimbursement obligations. Due to uncertainties in the estimation process, it is
at least reasonably possible that estimated costs to complete the Metra Contract
will be further revised in the near-term. See Note 2. "Changes in Business -
Discontinued Transit Operations and Reimbursement Obligations."
The Corporation has a substantial history of making reasonably
dependable estimates of the extent of progress towards completion, contract
revenues, and contract costs on its long-term construction contracts. However,
due to uncertainties inherent in the estimation process, the Corporation can
give no assurance that it will not revise its estimates of completion costs in
the near-term for certain construction projects.
The Corporation recognizes revenue on construction contracts,
including substantially all of its construction joint-venture contracts, on the
percentage-of-completion method, based on the proportion of costs incurred on
the contract to total estimated contract costs. Construction-management and
engineering contract revenue is recognized on the accrual method.
Revisions in uncompleted contract revenue and cost estimates are
reflected in the accounting period when known. Any anticipated losses on
uncompleted contracts are charged to operations as soon as they are
determinable. Claims for addi-
I-5
<PAGE>
tional contract revenue in excess of original contract price are recognized when
an offer to settle has been received from the customer.
The unaudited consolidated financial statements included herein
reflect all adjustments consisting of normal recurring adjustments which are, in
the opinion of management, necessary to a fair presentation of the results of
operations and cash flows for the interim periods. The results of operations for
the three month period ended March 31, 1996 are not necessarily indicative of
the results to be expected for the full year.
The Corporation's consolidated financial statements have been prepared
on the basis that it will continue as a going concern, which contemplates
continuity of operations, realization of assets and liquidation of liabilities
in the ordinary 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 losses from continuing operations of $79,636
and $155,698 for the years ended December 31, 1995 and 1994,
respectively. The Corporation reported net losses of $261,938 and
$349,635 for the years ended December 31, 1995 and 1994, respectively,
including losses from discontinued MK Rail Corporation ("MKRail") and
Transit segment ("Transit") operations of $182,302 and $193,937 in
1995 and 1994, respectively.
. Net cash used by the discontinued MK Rail and Transit operating
activities was $76,998and $200,883 for the years ended December 31,
1995 and 1994, respectively.
. At March 31, 1996 the Corporation had a stockholders' deficiency of
$193,392 which included an accumulated deficit of $509,851.
. At March 31, 1996 and December 31, 1995 the Corporation had working
capital deficiencies of $219,377 and $232,207, respectively.
. The Corporation expects negative cash flows from operations in 1996.
. The Corporation does not expect to make its required debt repayments
in 1996.
The Corporation's ability to continue as a going concern is dependent
upon the Corporation successfully obtaining relief from the burden of its
existing indebtedness, including its antecedent debt and Transit reimbursement
obligations and returning the Corporation to profitable operations. In this
connection the Corporation is pursuing a recapitalization through a partial
prepackaged plan of reorganization under Chapter 11 of the United States
Bankruptcy Code.
Recapitalization Plan
The Corporation, which has been experiencing significant operating losses and is
facing severe liquidity problems, has been discussing with certain of its
secured and unsecured creditors, including holders of the Corporation's existing
secured indebtedness, its bonding company, lessors in connection with certain
long-term, noncancelable leases, and representatives of potential investors,
alternatives to reduce or liquidate the Corporation's current and future
financial obligations to permit the continuation of the Corporation as a going
concern. These alternatives included, among other things, a number of remedies
available to the Corporation, the goal of which is to alleviate the problems
caused by the Corporation's excessive debt levels, debt service and certain
long-term lease payment obligations, to enable the Corporation to continue to
implement its revised business strategy and to help assure the Corporation's
long-term viability. For that purpose, the Corporation initially presented a
proposed recapitalization plan (the "Recapitalization") to certain of its
secured creditors at a meeting held in February 1996, and has continued to
discuss the terms of the Recapitalization with those secured creditors. Pursuant
to the Recapitalization, the Corporation would exchange its existing secured
indebtedness, consisting of its antecedent debt and Transit reimbursement
obligations and certain long-term lease obligations for a new issue of the
Corporation's common stock, (which initially will represent all of the
outstanding common stock of the Corporation) and common stock of MKRail
representing the Corporation's 65% ownership interest in MK Rail, the
Corporation's $52,200 principal amount of its note receivable from MK Rail with
interest at the prime rate (8.25% at March 31, 1996) and certain other assets.
Existing stockholders and the securities class actions claimants would receive
new common stock purchase warrants in exchange for all of the outstanding shares
of common stock and all the shares of common stock to be issued by the
Corporation in settlement of the MK Securities Class Actions and MK Rail
Securities Class Actions.
On April 15, 1996, the Corporation solicited acceptances of its
Recapitalization from its impaired creditors (holders of the Corporation's
existing secured indebtedness) and requested its impaired creditors to return
their completed ballots no later than 5:00 p.m. Eastern Daylight time on May 24,
1996. The Recapitalization would be effected through a partial prepackaged plan
of reorganization pursuant to Chapter 11 of the United States Bankruptcy Code
("prepackaged plan"). The objective of a prepackaged plan under Chapter 11 would
be to allow the Corporation to achieve its objectives in the shortest time
possible, and continue operations in its recapitalized form without the full
burden of debt that existed prior to the bankruptcy proceedings.
I-6
<PAGE>
The prepackaged plan contemplates a settlement of the Corporation's
obligations to its impaired secured creditors, while the Corporation's unsecured
creditors, its vendors, subcontractors and material suppliers will not be
impaired. The Corporation intends to conduct its business as usual, and the
prepackaged plan will permit the Corporation to carry on its business, to bid,
propose and negotiate for new contract awards and to continue to perform its
existing contracts, including its contracts with various agencies of the U.S.
Government. The prepackaged plan would provide that valid claims of trade
creditors, including subcontractors and material suppliers, are to be paid in
full and on time and that the holders of such claims shall not be required to
file a proof of claim or take other formal action to obtain such payment.
To ensure the continuity of its work force and to further accommodate
the unimpaired treatment of employee benefits, the Corporation intends that
salaries, wages, expense reimbursements, vacations, health related benefits,
severance benefits and similar benefits of employees, as well as the health
benefits of its covered retirees, their spouses and dependents, will be
unaffected in the reorganization contemplated by the prepackaged plan.
The Recapitalization, through the prepackaged plan, is designed to
substantially reduce the Corporation's secured debt obligations, lessen the risk
of a protracted Chapter 11 proceeding, which would have a significant adverse
impact on the Corporation's business, and create a capital structure that allows
the Corporation to continue in operation and maintain and enhance its
competitive position. In addition, management anticipates that the prepackaged
plan would also allow management to concentrate more of their time on improving
the Corporation's business opportunities, rather than on managing its debt
obligations.
As of the date of this Quarterly Report on Form 10-Q, the Corporation
has not reached final agreement with its secured creditors. The final form or
results of a Recapitalization cannot be predicted, and there can be no assurance
that a restructuring can be accomplished through a prepackaged plan. Any such
restructuring, if successful, would substantially dilute or eliminate the value
of existing stockholders' interests. The Corporation continues to explore
opportunities with potential investors.
On May 16, 1996, the Corporation and Washington Construction Group,
Inc. ("Washington") reached a preliminary non-binding agreement in principle
(the "agreement") as to the economic terms of the merger of the Corporation with
and into Washington subject to the successful negotiation and execution of a
definitive agreement and the successful completion of the Corporation's proposed
Recapitalization, among other things.
Under the terms of the agreement, Washington would (i) issue shares of
common stock representing 45% of the combined companies (estimated to be 24.1
million shares) and pay $13,300 cash to the holders of certain claims set forth
in the Corporation's proposed Recapitalization plan and (ii) issue warrants to
purchase an aggregate of 2,765,000 shares of new common stock of the combined
companies at an exercise price of $12.00 per share for a term of five years in
exchange for all of the outstanding shares of the Corporation's common stock.
In the event the Corporation fails to proceed with the proposed
Recapitalization or agrees, following termination of the agreement, to sell a
majority of its stock or any of its principal operating businesses to a party
other than Washington and in either event, Washington was not in default of its
obligations under the agreement, the Corporation would be liable for a break-up
fee in the maximum amount of $12,000 plus certain out-of-pocket expenses of
Washington not to exceed $1,000. In connection with its Recapitalization plan,
Washington would pay in full the Corporation's debtor-in-possession loan, not to
exceed $50,000.
The Corporation's management believes that further refinancings of the
Corporation's existing secured indebtedness are unavailable, but that even if
available they would not be sufficient to enable the Corporation to continue as
a going concern, because of the overwhelming burden of existing debt and the
Corporation's inability to make its required debt repayments in 1996. If the
Corporation does not effect a financial restructuring and reorganization as
contemplated under the prepackaged plan or is unable to arrange a transaction
with a strategic investor, the Corporation will be forced to consider other
available options, which may include the commencement or continuation of a
Chapter 11 case without a preapproved plan. A nonprepackaged Chapter 11 case
would likely be lengthier, involve more contested issues with creditors and
other parties in interest, and result in significantly increased Chapter 11
expenses for professional consultants, a negative impact on cash flow due to
lack of customer confidence resulting in a reduction in new contract awards, and
a corresponding reduction in the consideration received by the Corporation's
creditors and existing stockholders than would be the case with a prepackaged
plan.
Any recapitalization, including the proposed Recapitalization, if
successful, will substantially dilute or eliminate the value of existing
stockholders' and the securities class action claimants' interests. Under the
terms of the Corporation's proposed Recapitalization the sole recovery for
existing stockholders and the securities class action claimants (other than the
cash settlement proceeds provided by the Corporation's insurers) would be
represented by the proposed stock purchase warrants.
I-7
<PAGE>
Debt Restructuring
During 1995 and through March 31, 1996, the Corporation completed a number of
divestiture transactions with respect to its numerous businesses and assets and
received federal and state tax refunds, which provided aggregate cash proceeds
of approximately $117,000 to fund operations and to repay obligations under the
bridge loan facility. Despite these developments in the financial and
operational restructuring of the Corporation, it became apparent to management
in the first quarter of 1996 that the proceeds from divestitures and tax refunds
would at most provide sufficient funds to meet the Corporation's bridge loan
repayment obligation on March 31, 1996. Moreover, the Corporation had hoped that
the divestiture of the Transit business and the restructuring of its bank
facilities and the Transit bonding exposure accomplished during 1995 would allow
the Corporation to attract new business and achieve positive operating results
that would allow the Corporation to access the public debt or equity markets or
to arrange an equity infusion from a strategic investor in 1996.
On March 31, 1996, the Corporation and certain of its secured
creditors agreed to amend certain terms and conditions of the bridge loan
facility, which expired on March 31, 1996. The amendments to the bridge loan
facility included, among other things, establishment of a new borrowing capacity
of $47,500, and extension of its termination date to September 30, 1996.
Outstanding borrowing under the amended bridge loan facility will be subject to
interest at the prime rate plus one and one-half percent per annum (9.75% at
March 31, 1996) due and payable on the last day of each month and on September
30, 1996. On April 2, 1996, as partial consideration for the extension of the
bridge loan facility, the Corporation paid $14,427 interest on the antecedent
debt that had been accrued and deferred from July 1, 1995 through March 31,
1996. Outstanding borrowings under the bridge loan facility as of the date of
this Quarterly Report on Form 10-Q were $14,500. See Note 6. "Short-Term
Debt"Note to Consolidated Financial Statements.
2. CHANGES IN BUSINESS
Discontinued Transit Operations and Reimbursement Obligations: On October 17,
1995, the Corporation reached an agreement to transfer substantially all of the
assets, certain liabilities, all contract operations and management of Transit
to Amerail. Amerail has managerial authority over its operations including the
completion of all of the Transit contracts transferred to Amerail. The
Corporation cannot exercise any control over the management of Amerail and the
execution of the contracts transferred to Amerail. The Corporation has accounted
for the disposition of Transit as a discontinued operation.
In connection with the disposition of Transit, two new credit
facilities were provided to Amerail, (i) an $80,000 facility guaranteed by the
Corporation's bonding company to fund the non-Metra Contracts and (ii) a $65,000
revolving credit facility provided by the Metra Banks to fund the Metra
Contract. The Corporation's reimbursement obligation to its bonding company for
the surety's future losses on the Metra and non-Metra Contracts including the
guarantee of the $80,000 facility is governed by the Transit Reimbursement
Agreement. The agreement provides, among other things, that the Corporation's
maximum reimbursement obligation to its bonding company for net cash losses of
the Metra and non-Metra Contracts is $31,249. Such actual net cash losses of the
bonding company were estimated to exceed the Corporation's maximum reimbursement
obligation at March 31, 1996.
The Corporation's reimbursement obligation to the Metra Banks, which
are providing a standby letter of credit and revolving credit facility up to an
aggregate commitment of $138,664 at April 30, 1996, includes the $65,000
revolving credit facility to fund the Metra Contract, is governed by the Metra
Guaranty. The amount available under the standby letter of credit is reduced by
a predetermined amount for each transit car delivered to and accepted by Metra.
For purposes of estimating the Corporation's reimbursement obligation
under the Metra Guaranty, the Corporation has assumed, among other things, (i)
that the standby letter of credit is not drawn, if ever, prior to the reduction
of the letter of credit to approximately $80,000, based on continued delivery by
Amerail of transit cars under the Metra Contract, and (ii) that the Metra Banks
do not increase their commitment to provide financing to Amerail for the Metra
Contract beyond approximately $80,000. Although the completion of the Metra
Contract by Amerail may require financing over and above such amount, the
Corporation has assumed that such additional financing would be provided by the
bonding company. Any such additional financing by the bonding company would be
subject to the $31,249 maximum reimbursement obligation of the Corporation to
the bonding company. However, if Amerail were to default under the Metra
Contract prior to the reduction of the standby letter of credit to such amount
and the letter of credit is drawn or the Metra Banks provide financing over and
above such amount, then the reimbursement obligation of the Corporation under
the Metra Guaranty could increase above the estimated amount.
The Corporation's reimbursement obligation under the Transit
Reimbursement Agreement is governed by a Distribution Agreement among the
Corporation, the bonding company and the agent for the antecedent debt (the
"Distribution Agreement"). Under the Distribution Agreement, the amount owing to
the bonding company under the Transit Reimbursement Agreement becomes subject to
a maximum of $31,249, and becomes payable 90 days after the date the last rail
car is accepted by a transit agency which is estimated to be 1998. Prior to this
date, however, the Distribution Agreement
I-8
<PAGE>
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 debt and (ii) payments are made on account of antecedent debt.
The Corporation's reimbursement obligation under the Metra Guaranty
(estimated at $80,195 at March 31, 1996) is 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 debt. Optional and mandatory payments under the
Override Agreement, in addition to repaying funded antecedent debt, are escrowed
on account of the contingent Metra Guaranty repayment obligation and other
contingent antecedent debt obligations until, among other things, such amount
becomes fixed and liquidated.
The Corporation's proposed Recapitalization contemplates a settlement of
the Corporation's debt obligations with its secured creditors, which includes
the discharge of estimated reimbursement obligations of its discontinued Transit
operations through an exchange of a new issue of the Corporation's common stock,
common stock representing its 65% ownership interest in MKRail and $52,200
principal amount of its note receivable from MKRail and other assets.
Discontinued MK Rail Operations: In March 1995, the Corporation adopted a plan
to dispose of its 65% ownership interest in MKRail Corporation. Accordingly, the
Corporation has accounted for the planned divestiture as a discontinued
operation. In connection with its decision to dispose of MKRail, the Corporation
has recorded an estimated loss on disposition of its ownership interest in and
note receivable from MKRail based upon the best information available in the
circumstances.
Summary results of operations for the discontinued segment for the three
months ended March 31, 1996 and 1995 follows:
<TABLE>
<CAPTION>
Results of Operations (Unaudited) (Unaudited)
Three Months Ended March 31, 1996 1995
<S> <C> <C>
- ------------------------------------------------------------------------------------------
Revenue $69,655 $78,404
Operating income (loss) 5,562 (1,351)
Net income (loss) 2,584 (8,162)
==========================================================================================
Corporation's share of net income (loss) $ 1,680 $(5,305)
==========================================================================================
</TABLE>
The Corporation recognized its share of MKRail's net income for the
first quarter of 1996. However, in determining the estimated recovery value of
its investment in and note receivable from MKRail, the Corporation accrued an
equivalent expected loss on disposition at March 31, 1996.
The assets and liabilities of MK Rail have been segregated on the
consolidated balance sheets at March 31, 1996 and December 31, 1995. Such
amounts are summarized as follows:
<TABLE>
<CAPTION>
(Unaudited)
March 31, 1996 December 31, 1995
<S> <C> <C>
- ------------------------------------------------------------------------------------------
Cash and cash equivalents $ 6,556 $ 5,696
Accounts receivable and unbilled receivables 52,390 43,934
Inventories 95,188 99,459
Other current assets 2,923 2,903
Property and equipment, net 61,463 61,587
Deferred income taxes 27,211 28,363
Goodwill and other intangibles, net 30,564 31,575
Prepaid lease cost 6,973 7,182
Short-term and current portion of long-term debt (51,930) (60,825)
Accounts payable and accrued liabilities (48,999) (51,780)
Advances from customers (7,360) --
Debt due after one year (10,031) (7,198)
Other non-current liabilities (11,019) (10,901)
Minority interests (36,016) (35,083)
Cumulative translation losses 5,206 5,223
Accrual for estimated loss on disposal (51,119) (48,135)
- ------------------------------------------------------------------------------------------
Net assets of discontinued MK Rail operations $ 72,000 $ 72,000
==========================================================================================
</TABLE>
I-9
<PAGE>
MK Rail Intercompany Agreements: On June 15, 1995, the Corporation entered into
an agreement with MKRail regarding the amount of intercompany indebtedness owed
by MKRail to the Corporation and certain other matters. The agreement resulted
in the Corporation reducing its receivable from MKRail through a capital
contribution of $29,500. The remaining balance of $52,200 was converted into a
promissory 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 promissory note 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 disposition of MK Rail recognized
in the consolidated statements of operations includes the effects of this
additional capital contribution to MK Rail and the adjustment to realized value
upon the sale of MK Rail's promissory note subsequent to December 31, 1995. The
Corporation, in connection with its proposed Recapitalization plan, has proposed
to exchange the $52,200 principal amount of its MKRail promissory note and
accrued interest thereon, together with other consideration for the discharge of
the Corporation's existing secured indebtedness.
3. DISPOSITIONS OF INVESTMENTS IN AFFILIATES AND OTHER ASSETS
Dispositions in 1996
McConnell Dowell Corporation, Limited: In the first quarter of 1996, the
Corporation sold its 62.8% ownership interest in MDCfor $28,000 net cash
proceeds and recognized a gain on disposal of $2,130. The Corporation, MDC and
MDC's lender banks, as of the date of this Quarterly Report on Form 10-Q, are
---
holding discussions concerning the banks release of the Corporation's financial
- -------------------------------------------------------------------------------
guarantees amounting to $25,838 in support of MDC's contract performance
- -------------------------------------------------------------------------------
obligations to its customers.
- --------------
Strait Crossing Development, Inc.: On March 29, 1996, the Corporation and the
SCDI members reached an agreement in connection with the Corporation's
withdrawal from the joint venture (the "withdrawal agreement") under which the
Corporation, in exchange for being indemnified by SCDI members against
liabilities relating to the project including contract performance guarantees
and those outstanding liabilities or potential liabilities to the bonding
companies and those under a bank-provided letter of credit, the Corporation
agreed among other things, to transfer its $24,841 investment in the joint
venture and its 36% ownership interest in SCDI, to the SCDI members, as well as
assign to an SCDI member, as maker, the promissory note received as partial
consideration for the sale of its 9% ownership interest in SCDI. The
Corporation, further agreed to sell its title to and interest in certain marine
equipment to the SCDImembers.
The Government of Canada has consented to the terms and conditions of
the withdrawal agreement and has released the Corporation from its contract
performance guarantee under the development agreement. The Corporation had fully
provided for the divestiture of its investment in the joint venture and
cancelation of its note receivable and accrued interest thereon at December 31,
1995. The Corporation recognized a gain of $4,831 in connection with the sale of
its marine equipment to the SCDI members and its withdrawal from the SCDI joint
venture in March 1996.
Dispositions in 1995
Sale of Investment in MK Gold Company ("MKGold"): On June 6, 1995, the
Corporation sold its 46.4% ownership interest in MKGold for $22,500 cash. As a
condition to the purchase of the shares, the buyer acquired MKGold'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.
MK Investments, Inc. (North Pacific construction operations)("MKI"): Based on
preliminary negotiations with a prospective buyer of the Corporation's North
Pacific construction operations the Corporation recognized a provision of $7,554
to write-down the carrying amount of its 100% ownership interest in MKI to its
estimated recovery value. In September 1995, the Corporation completed the sale
of certain MKInet assets and operations for $17,100 cash.
Sale of Morrison Knudsen Depot ("Depot"): Based on an indicative offer by the
City of Boise to buy the Depot the Corporation wrote-down its carrying amount by
$3,209. In December 1995, the Corporation completed the sale of the Depot for
$1,500 cash, payable in three equal installments ending June 1996.
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 project is
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 pre-
I-10
<PAGE>
sents summarized financial information of the construction joint ventures on a
combined 100 percent basis at March 31, 1996 and December 31, 1995 and for the
three months in the periods ended March 31, 1996 and 1995.
<TABLE>
<CAPTION>
(Unaudited)
Financial Position at March 31, 1996 December 31, 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents $ 27,996 $ 49,781
Other current assets 62,230 65,781
Non-current assets -- 22,112
Property and equipment, net 2,034 67,038
Advances from customers (16,051) (16,197)
Other current liabilities (50,753) (161,066)
- --------------------------------------------------------------------------------------------------------------------
Net assets $ 25,456 $ 27,449
====================================================================================================================
Corporation's investments in and advances to construction joint ventures $ 16,998 $ 15,186
====================================================================================================================
- --------------------------------------------------------------------------------------------------------------------
<CAPTION>
Results of Operations (Unaudited) (Unaudited)
Three Months Ended March 31, 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Combined joint ventures, net
Revenue $ 126,489 $ 218,089
Cost of revenue (104,686) (210,317)
- --------------------------------------------------------------------------------------------------------------------
Operating income $ 21,803 $ 7,772
Corporation's share, net
Revenue $ 24,821 $ 68,496
Cost of revenue (22,011) (65,283)
- --------------------------------------------------------------------------------------------------------------------
Operating income $ 2,810 $ 3,213
====================================================================================================================
</TABLE>
5. INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES
The following table presents summarized financial information of the
unconsolidated affiliated companies accounted for by the equity method on a
combined 100 percent basis at March 31, 1996 and December 31, 1995 and for the
three months in the periods ended March 31, 1996 and 1995. Amounts for all
periods presented include the accounts of the following individually significant
investees (the Corporation's ownership interests therein are shown
parenthetically): AmerBank (29.5%); Westmoreland Resources, Inc. (24%),
Mitteldeutsche Braunkohlengesellschaft mbH ("MIBRAG mbH") (33%) and McConnell
Dowell Corporation, Limited ("MDC") (62.8%) until its disposition in March 1996.
Because of the Corporation's decision to dispose of its ownership
interest in AmerBank the carrying amount of its investment therein is reflected
in the accompanying balance sheets at March 31, 1996 and December 31, 1995 under
the caption "Investments in Unconsolidated Affiliates Held for Sale". The
carrying amount of the Corporation's 29.5% ownership interest in AmerBank at
March 31, 1996 was $5,389 and was less than the fair market value of AmerBank's
publicly traded stock, based on published market prices at March 31, 1996.
<TABLE>
<CAPTION>
(Unaudited)
Financial Position at March 31, 1996 December 31, 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets $ 506,820 $ 618,701
Non-current assets 738,160 754,462
Current liabilities (183,740) (274,537)
Long-term debt (255,059) (211,331)
Other non-current liabilities (614,458) (665,662)
- --------------------------------------------------------------------------------------------------------------------
Net assets $ 191,723 $ 221,633
====================================================================================================================
Corporation's investments in and advances to unconsolidated affiliates $ 54,093 $ 51,031
====================================================================================================================
</TABLE>
I-11
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Results of Operations (Unaudited) (Unaudited)
Three Months Ended March 31, 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenue $ 217,579 $ 197,871
Operating income 11,682 20,563
Net income 9,010 28,823
===============================================================================================================
Corporation's equity in net income of unconsolidated affiliates $ 3,241 $ 11,947
===============================================================================================================
</TABLE>
The Corporation's equity in the net income of unconsolidated
affiliates of $11,947 for the three months ended March 31, 1995 includes its
$8,005 proportionate share of MDC's net income. Because of the Corporation's
decision to sell its ownership interest in MDC, the Corporation has accounted
for its investment in MDCduring 1995 by the equity method. In the first quarter
of 1996, the Corporation sold its 62.8% ownership interest in MDC. See Note 3.
"Dispositions of Investments in Affiliates and Other Assets."
6. SHORT-TERM DEBT
Short-term debt at March 31, 1996 and December 31, 1995 consisted of
the following:
<TABLE>
<CAPTION>
(Unaudited)
March 31, 1996 December 31, 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Antecedent debt, interest rates of 8.25% and 8.5% at
March 31, 1996 and 8.5% at December 31, 1995 $213,344 $213,344
Bridge loan, interest rate of 11.5%
at December 31, 1995 -- 37,882
- ----------------------------------------------------------------------------------------------------------------
Total short-term debt $213,344 $251,226
================================================================================================================
</TABLE>
The weighted average interest rates on short-term borrowings outstanding at
March 31, 1996 and December 31, 1995 were 8.25% and 9.0%, respectively.
New and Amended Credit Facilities: On August 10, 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
incontemplation 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 maximum borrowing amount under
the bridge loan was reduced from $129,000 to $100,000. Outstanding borrowings
under the bridge loan were subject to interest at the prime rate plus three
percent per annum (11.25% at March 31, 1996) and were due and payable on March
31, 1996. On March 29, 1996 the Corporation paid the outstanding balance owing
under the bridge loan.
On March 31, 1996, the Corporation and certain of its secured
creditors agreed to amend certain terms and conditions of the bridge loan
facility, which expired on March 31, 1996. The amendments to the bridge loan
facility included, among other things, establishment of a new borrowing capacity
of $47,500, and extension of its termination date to September 30, 1996.
Outstanding borrowing under the amended bridge loan facility will be subject to
interest at the prime rate plus one and one-half percent per annum (9.75% at
March 31, 1996) due and payable on the last day of each month and on September
30, 1996.
Under the restructuring agreements, the antecedent 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 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 debt bear interest at the prime rate
(8.25% at March 31, 1996). Interest accrued on outstanding borrowings after July
1, 1995, was allowed to 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 $14,427 of accrued interest payable on antecedent debt
from July 1, 1995 in the accompanying consolidated balance sheet at March 31,
1996. On April 2, 1996, as partial consideration for the extension of the bridge
loan facility the Corporation paid the $14,427 interest, which funds were drawn
from the bridge loan facility. Outstanding borrowings under the bridge loan
facility as of the date of this Quarterly Report on Form 10-Q were $14,500.
I-12
<PAGE>
In addition to the required $100,000 repayment under the antecedent
debt at September 30, 1996 and $113,344 on December 31, 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 debt. The Corporation must prepay
any prepayments or repayments received by the Corporation on the $52,200 note
receivable from MKRail, net cash proceeds from the sales of certain businesses
and assets currently held for sale, and any tax refunds received.
7. LEGAL PROCEEDINGS
The Corporation is subject to a number of lawsuits in the following four general
categories that were either settled or are currently pending against the
Corporation and/or MKRail and their respective directors and or officers (the
"defendants") (i) class actions relating to transactions in the common stock of
the Corporation (ii) class actions relating to the issuance of, and transactions
in, the common stock of MK Rail (iii) derivative actions brought by persons who
claim to be stockholders of the Corporation and (iv) claims brought by the
former stockholders of three corporations, Touchstone, Inc., TMS, Inc. and Clark
Industries, Inc., ("Clark") acquired by the Corporation in exchange for shares
of the Corporation's common stock. The plaintiffs in these actions have sought
various remedies, including compensatory and punitive damages and injunctive
relief.
Settlement discussions have been held among the Corporation, MK Rail,
certain of their respective present and former officers and directors, their
insurance carriers, the underwriting defendants and plaintiffs with respect to
all of the pending cases except Pilarczyk. These discussions have resulted in
agreements to settle the MK Securities Class Actions, the MK Rail Securities
Class Actions, the Derivative Actions, the Touchstone Actions and the Clark
Action.
The settlements, other than that of the Touchstone, Inc. Actions, and
the Clark Action must be submitted to, and approved by, the courts presiding
over the various cases. That process is ongoing and, as of this date, stands as
follows:
The settlement of the MK Securities Class Actions has been approved by
the United States District Court for the District of Idaho in a final judgment
entered on December 1, 1995. A court approved settlement fund was established
and settlement proceeds (cash of $35,000, which was provided by insurers, and a
share certificate for 2,976,923 shares of the Corporation's common stock) were
deposited therein during 1995. The issuance of the common stock represented by
such certificate and the transfer of the settlement proceeds from the settlement
fund to the control of the plaintiffs is subject to nonappealable judgments
approving the settlements in the MK Rail Securities Class Actions and the
MKDerivative Actions.
The settlement of the MKRail Securities Class Actions was approved on
March 29, 1996 by the United States District Court for the District of Idaho,
subject to appeal for a period of 30 days following March 29, 1996. No appeal
was filed. A court-approved settlement fund was established and the Corporation
deposited a share certificate for 869,231 shares of its common stock into such
fund after the settlement was approved. The issuance of the common stock
represented by such certificate and the transfer of the settlement proceeds to
the control of the plaintiffs is subject to the entry of a final nonappealable
judgment approving the settlement of the "Double Derivative Action". The
effectiveness of the settlement of the MK Rail Securities Class Actions is not,
however, subject to the final judicial approval of the settlements in the MK
Securities Class Actions or the MK Derivative Actions.
The settlements of the MK Derivative Actions has been submitted for
approval by the Delaware Chancery Court and the Idaho District Court for Ada
County. In connection with the settlements of the MK Derivative Actions, the
Corporation reached an agreement with the Corporation's former chairman with
respect to his severance benefits, including pension rights, to which the
plaintiffs do not object. The settlement of the MKDerivative Actions was
approved on April 15, 1996 by the Delaware Court of Chancery. A hearing has been
scheduled for May 21, 1996 before the Idaho District Court. If approved by final
orders of the Delaware Chancery Court and the Idaho District Court that become
final and nonappealable the settlement proceeds from the MK Derivative Actions
(less attorneys' fees and expenses) will be transferred to the control of the
settlement fund in the MKSecurities Class Actions and, thus, the effectiveness
of the settlement is subject to certain conditions, including the entry of
final, nonappealable judgments approving the settlements in the MK Securities
Class Actions (which condition has been satisfied), the MK Rail Securities Class
Actions (which condition has been satisfied) and the Double Derivative Action
asserted on behalf of MK Rail.
Settlement of the Double Derivative Action asserted on behalf of MK
Rail was reached on March 4, 1996. A hearing with respect to such approval has
been set for May 21, 1996. The Corporation has no monetary or other obligations
under the settlement of the actions resulting from the Double Derivative Action.
However, $4,500 in the reduction of intercompany debt owed by MKRail to the
Corporation is attributable to the settlement of the Double Derivative Action,
the MKSecurities Class Actions and the MKRail Securities Class Actions. The
effectiveness of the settlement is conditioned upon a judgment
I-13
<PAGE>
by the Idaho Court approving the settlement that becomes final and nonappealable
and approval of the settlement in the MK Rail Securities Class Actions (which
condition has been satisfied).
The settlement terms will require the Corporation, as its share of the
settlements, to (i) issue 2,976,923 shares of common stock in settlement of the
MK Securities Class Actions; and (ii) issue 869,231 shares of common stock in
settlement of the MK Rail Securities Class Actions. Under the Corporation's
Recapitalization plan and the Washington agreement, plaintiffs in the
MKSecurities Class Actions and MK Rail Securities Class Actions would be
entitled to receive a pro-rata share of the proposed stock purchase warrants.
The settlement of the Derivative Actions requires the implementation of certain
"therapeutic measures"with respect to corporate governance. The Corporation's
insurance carriers have paid $35,000 on behalf of the individual defendants in
the MK Securities Class Actions and the Derivative Actions, and MK Rail's
insurance carrier has paid $6,000 into a settlement fund created in connection
with the settlement of the MK Rail Securities Class Actions.
The Touchstone, Inc. Actions have been settled and notices of
voluntary dismissal with prejudice were filed on January 16, 1996. Under the
terms of the settlement, the Corporation paid $425 to the plaintiffs, paid the
plaintiffs their actual out-of-pocket fees and costs in the amount of $146 in
April 1996, and agreed to pay the difference, if any, between $5,250 and the sum
of all proceeds received by the plaintiffs as members of the class from the
settlement of the MK Securities Class Actions.
The Clark Action has been settled in principle and it is expected that
a definitive Settlement Agreement will be executed by all parties no later than
May 15, 1996. Under the terms of the Settlement the plaintiffs will be paid $275
(which will be provided by the Corporation's insurer) and, in addition to the
exchange of general releases, the plaintiffs will be specifically released from
their obligations pursuant to a Deposit Escrow Agreement plaintiffs entered into
for the benefit of the Corporation. On May 8, 1996, the court entered an order
dismissing the case with prejudice, with leave to refile for thirty-five days in
the event that a settlement is not consummated.
If settlement agreements in connection with the class actions relating
to transactions in the Corporation's common stock, class actions relating to the
issuance of, and transactions in, the common stock of MK Rail and claims brought
by the former stockholders of Touchstone, Inc., are approved as contemplated in
their present form, the Corporation expects, that the amounts provided in the
accompanying consolidated financial statements for these actions will likely
exceed the ultimate liability of these actions.
Other claims, lawsuits, disputes with third parties, investigations
and administrative proceedings against the Corporation and its subsidiaries
relating to matters that are in the ordinary course of its business activities,
including environmental matters, are not expected to have a material adverse
effect on the Corporation's financial position or results of operations.
8. COMMITMENTS AND CONTINGENCIES
The Corporation has commitments and performance guarantees arising from
engineering and construction contracts including those of its construction joint
ventures. The Corporation is self insured for workers' compensation, automobile,
general liability and third party errors and omissions. The Corporation has
insurance agreements with insurers for losses in excess of self-insured limits.
CF Systems: In 1990, the Corporation acquired CFSystems, which had developed a
solvent-extraction technology. The Corporation's investment in CFSystems, was
$2,862 at March 31, 1996 and $4,844 at December 31, 1995.
In March 1995, the Corporation was awarded a $26,700 fixed-price
contract by the Texas Natural Resource Conservation Commission ("TNRCC") for
remediation of contaminated soil at a Superfund Site in Texas. Among other
provisions, the contract will require CFSystems to (i) front-end (design,
procure, fabricate, assemble and start-up) an on-site solvent-extraction
facility and (ii) provide a guarantee in the form of a letter of credit for the
estimated front-end costs of $13,600. TNRCCwill make periodic payments to
CFSystems for the front-end costs, until completion of the start-up phase in
August 1996, up to a maximum of $13,600. CFSystems has billed and received
$5,752of front-end costs at March 31, 1996. If the completed facility is
successful in meeting certain specified performance criteria at the end of the
start-up phase, CFSystems will proceed to the operations phase and complete the
contract. If CFSystems does not meet the performance criteria, such failure will
be grounds for termination and TNRCC would recover the front-end costs from the
Corporation. After revision of the estimated costs to complete the design,
fabrication and erection of the solvent-extraction facility, among other things,
a $2,000 provision for anticipated loss was recorded in March 1996 to reflect
estimated contract completion costs in excess of contract revenue.
Discontinued Shipbuilding and Real Estate Development Operations: In April 1989,
the Corporation sold its ownership 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
agreement the Corporation agreed to provide NASSCO a $21,000 credit facility.
The Corporation's commitment to provide the $21,000 credit facility will ter-
I-14
<PAGE>
minate concurrently with the delivery and acceptance by the U.S. Navy of the
last NASSCO-built ship in a multiple-ship contract. The U.S. Navy and NASSCO, as
of the date of this Quarterly Report on Form 10-Q, are negotiating the
acceptance date of such ship, which is expected to occur on or before May 31,
1996. Prior to the third quarter of 1995, the Corporation also guaranteed a
stand-alone bank credit facility for NASSCO. In the third quarter of 1995,
NASSCO negotiated a stand-alone bank credit facility without a Corporation
guarantee.
The Corporation has also guaranteed $21,000 of NASSCO's port facility
bonds until not later than December 1, 2002, and guaranteed $1,375 of NASSCO's
federal workers' compensation bonds. NASSCO's floating dry dock is pledged as
collateral for the $21,000 port facility bonds. The agreement in connection with
the Corporation's guarantee of NASSCO's $21,000 indebtedness includes certain
default provisions including the occurrence of an event of bankruptcy
proceedings under the United States Bankruptcy Code. Upon the occurrence of an
event of default, payment of the $21,000 indebtedness could be accelerated.
At March 31, 1996, the Corporation was liable for $11,928 of secured
bank loans due June 30, 1996 in connection with commercial real estate
operations of its Emkay Development Company, Inc. subsidiary, discontinued in
1987. Net liabilities of the discontinued real estate operations were included
in the accompanying consolidated balance sheets at March 31, 1996 and December
31, 1995 under the caption "Other Accrued Liabilities".
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
(Unaudited)
Financial Position at March 31, 1996 December 31, 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Real estate assets held for sale $ 8,388 $ 11,928
Other assets and liabilities, net 267 318
Secured term bank loans, due June 30, 1996, interest rate of 8.75%
at March 31, 1996 and December 31, 1995 (11,928) (15,519)
- --------------------------------------------------------------------------------------------------------------
Net liabilities $ (3,273) $ (3,273)
==============================================================================================================
</TABLE>
Letters of Credit: At March 31, 1996 the Corporation was contingently liable, in
the normal course of business, for $81,419 related to letters of credit under
contract performance obligations to customers not reflected in the balance sheet
at March 31, 1996. Of this aggregate amount, $20,378 in letters of credit were
for contract performance obligations to customers of its discontinued MK Rail
and Transit operations and $25,838 in letters of credit in support of contract
performance obligations to customers of MDC. In the first quarter of 1996, the
Corporation sold its 62.8% ownership interest in MDC. The Corporation and MDC's
lender banks, as of the date of this Quarterly Report on Form 10-Q, are holding
discussions concerning the banks release of the Corporation's financial
guarantees.
In addition, at March 31, 1996, the Corporation had provided
guarantees for $61,505 in letters of credit issued by third parties, in
connection with Amerail's performance of the Metra Contract. In addition, the
Corporation was contingently liable for $14,563 related to letters of credit to
meet the reinsurance requirements of the Corporation's captive insurance
subsidiary. The credit risk is mitigated by the insurance subsidiary's portfolio
of high quality investments ($27,256 fair value at March 31, 1996) used to
collateralize the letters of credit.
Government Audits: The Corporation has a number of cost reimbursable contracts
with the U.S. Government, the allowable costs of which are subject to
adjustments upon audit by various agencies of the U.S. Government. Audits
currently in progress are in varying stages of completion and relate to years
ended 1987 through 1994. Some audits have resulted in proposed claims and cost
disallowances. The Corporation must complete cost analysis for the years under
audit before it can determine the merit of the issues raised and quantify the
amount of any potential disallowance. The Corporation expects that the
resolution of these matters will not materially effect the Corporation's results
of operations or financial position.
9. SUBSEQUENT EVENTS
Retention and Severance Pay Plans: Effective June 30, 1995, the Corporation
adopted key employee retention and severance plans to retain certain key
executives and key employees (the "1995 plans"). The plans encourage employees
to remain employed with the Corporation by providing additional compensation
from the date of adoption through July 1, 1996, and by providing enhanced
severance benefits under certain circumstances to any covered employee who is
involuntarily terminated prior to July 1, 1996. On April 10, 1996, the
Corporation's board of directors approved amendments to the retention and
severance plans and adopted a new severance plan (the "1996 plan").
Under the 1995 retention plan, covered employees would receive awards
in cash and stock ranging from 18.3% to 70.0% of their annual base salaries,
partially payable in cash on December 15, 1995, and the remainder payable in
stock and/or cash on July 1, 1996. The 1995 retention plan also provided that in
the event of a Chapter 11 Bankruptcy filing, the stock award would be forfeited
and the remaining cash to be paid on July 1, 1996 would be doubled. The
retention plan, as amended, provides that, covered employees will have the
option of receiving a cash payment on July 1, 1996 equal to twice
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<PAGE>
the cash payment received on December 15, 1995 ("initial cash payment"), or
elect (prior to April 30, 1996) to postpone the July 1, 1996 cash payment until
the earlier of the Corporation's emergence from a Chapter 11 proceeding or
September 30, 1996. Covered employees who elect to postpone payment will receive
an additional cash amount equal to the initial cash payment prorated on the
number of days from July 1, 1996 to September 30, 1996, but no later than
September 30, 1996 and no less than 25% of the initial cash payment.
Under the 1995 severance plan, covered employees who are involuntarily
terminated (without cause) after the occurrence of (i) a change in control of
the covered employee's division, (ii) a bankruptcy filing, or (iii) a change in
any consecutive two year period of a majority of the directors (unless each new
director was approved by a vote of two-thirds of the remaining directors), will
receive cash awards ranging from four to nine months of annual base salary. The
severance plan terminates on the confirmation of any Chapter 11 plan concerning
the Corporation or July 1, 1996 provided that no triggering event has occurred.
The 1996 severance plan is substantially similar to the 1995 severance plan but,
provides covered employees with severance benefits if they are involuntarily
terminated (without cause) between April 10, 1996 and December 31, 1997. Covered
employees for the purposes of the 1996 severance plan are employees who elect to
postpone payment of their cash award under the retention plan until after July
1, 1996. The estimated liability for retention plan awards of $4,357 was
included in the accompanying consolidated balance sheet at March 31, 1996 under
the caption "Other Accrued Liabilities". Minimum and maximum cash awards under
the retention plan are estimated to be $5,200 and $6,900, respectively.
Reorganization Bonus: On April 2, 1996, the compensation committee of the Board
of Directors awarded to certain key employees cash bonuses totaling $1,115,
payment of which is conditioned upon the successful reorganization of the
Corporation.
New Boise Office Lease Agreement: In May 1996, the Corporation and its Boise
office landlord agreed in principle to, among other things, cancellation of the
existing lease with a remaining term of approximately 19 years, execution of a
new lease agreement with lower periodic rent and an initial term of seven years
and certain tenant and landlord improvements, subject to, among other things,
approval by the Corporation's secured creditors of the landlord's rejection
damages claim of approximately $13,000 as an impaired claim against the
Corporation pursuant to its Recapitalization under Chapter 11 of the United
States Bankruptcy Code.
Acquisition Agreement: On May 16, 1996, the Corporation and Washington
Construction Group, Inc. ("Washington") reached a preliminary non-binding
agreement in principle (the "agreement") as to the economic terms of the merger
of the Corporation with and into Washington subject to the successful
negotiation and execution of a definitive agreement and the successful
completion of the Corporation's proposed Recapitalization, among other things.
Under the terms of the agreement, Washington would (i) issue shares of
common stock representing 45% of the combined companies (estimated to be 24.1
million shares) and pay $13,300 cash to the holders of certain claims set forth
in the Corporation's proposed Recapitalization plan and (ii) issue warrants to
purchase an aggregate of 2,765,000 shares of new common stock of the combined
companies at an exercise price of $12.00 per share for a term of five years in
exchange for all of the outstanding shares of the Corporation's common stock.
In the event the Corporation fails to proceed with the proposed
Recapitalization or agrees, following termination of the agreement, to sell a
majority of its stock or any of its principal operating businesses to a party
other than Washington and in either event, Washington was not in default of its
obligations under the agreement, the Corporation would be liable for a break-up
fee in the maximum amount of $12,000 plus certain out-of-pocket expenses of
Washington not to exceed $1,000. In connection with its Recapitalization plan,
Washington would pay in full the Corporation's debtor-in-possession loan, not to
exceed $50,000.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 1995
<TABLE>
<CAPTION>
(Millions of dollars)
Quarter Ended March 31,
-------------------------------
1996 1995
<S> <C> <C>
Revenue $324.2 $366.5
Operating income from continuing operations 14.7 5.0
General and administrative expenses (13.5) (10.6)
Interest expense (5.2) (5.4)
Equity in net income of unconsolidated affiliates 3.2 11.9
Gain (loss) on disposition of investments in affiliates, net 2.1 (20.0)
===============================================================================================================
</TABLE>
Revenue: Revenue from continuing operations for the first quarter of 1996 was
$324.2 million, a decrease of $42.3 million compared to $366.5 million for
comparable period of 1995. The decrease was primarily due to (i) the sale in
September 1995 of certain net assets and operations of the Corporation's North
Pacific construction operations with revenues of $36.1 million in the first
quarter of 1995 and (ii) the execution and completion of a number of heavy civil
construction contracts, principally for public works, with revenues of
approximately $16.0 million in the first quarter of 1995.
Operating Income: Operating income from continuing operations for the first
quarter of 1996 was $14.7 million, an increase of $9.7 million compared to $5.0
million for the comparable period of 1995. Operating income of all of the
Corporation's business units increased for the first quarter of 1996 compared to
the comparable period of 1995, after recognition in each of the periods of a
number of unusual items described below. In addition, the Corporation's wholly-
owned German subsidiary recognized approximately $2.0 million of mining services
fees earned in the first quarter of 1996 in connection with its mining services
contract with MIBRAG mbH. Because of restrictions on repatriation of funds
pursuant to the terms of the MIBRAG mbH purchase agreement the Corporation did
not recognize any mining services fees in the first quarter of 1995. Operating
income from continuing operations for the first quarter of 1996 was affected by
the recognition of a number of unusual items, the net result of which was to
decrease operating income by $.8 million and included $6.8 million of provisions
for anticipated losses on a number of fixed-price contracts substantially offset
by the recognition of a $4.8 million gain in connection with the sale of marine
equipment to SCDI members and the Corporation's withdrawal from the SCDI joint
venture, and $1.2 million of additional revenue from a negotiated claim
settlement of a contract completed in a prior period.
Operating income from continuing operations for the first quarter of
1995 was also affected by the recognition of a number of unusual items, the net
result of which was to increase operating income by $2.2 million and included
$3.3 million in additional revenue from a negotiated claim settlement partially
offset by a $1.1 million increase in legal costs and expenses in connection with
the Corporation's pursuit of additional claim revenues.
General and Administrative Expenses: General and administrative expenses for the
first quarter of 1996 were $13.5 million, an increase of $2.9 million compared
to $10.6 million for the comparable period of 1995 principally due to a $3.1
million decrease in costs and expenses allocated to cost of revenue in the first
quarter of 1996 compared to the comparable period of 1995.
Interest Expense:Interest expense for the first quarter of 1996 was $5.2
million, a slight decrease of $.2 million compared to $5.4 million for the
comparable period of 1995. The decrease was the result of lower average
outstanding borrowings in 1996 of $236.3 million with an effective weighted
average interest rate of 8.6% compared to average outstanding borrowings in 1995
of $324.3 million with an effective weighted average interest rate of 8.4%.
Equity in Net Income (Loss) of Unconsolidated Affiliates: The Corporation's
share of unconsolidated affiliates' income for the first quarter of 1996 was
$3.2 million, a decrease of $8.7 million compared to $11.9 million for the
comparable period of 1995. The Corporation's equity in the net income of MDCin
the first quarter of 1996 was $.9 million compared to $8.0 million in the
comparable period of 1995, which included the Corporation's $6.3 million share
of MDC's non-recurring gain from the sale of a subsidiary. In addition, the
Corporation's equity in the net income of MIBRAG mbH in the first quarter of
1996 was $2.2 million or $1.9 million less than the comparable period of 1995
principally due to the renegotiation of long-term coal supply contracts. In
consideration for customer's agreements to extend certain coal supply contracts,
MIBRAG mbH agreed to a reduction in the unit price of the coal.
I-17
<PAGE>
Disposition of Investments in Affiliates and Other Assets: The $2.1 million gain
on disposition of investments in affiliates for the first quarter of 1996 stems
from the Corporation's sale of its 62.8% ownership interest in MDC.
The $20.0 million loss on disposition of investments in affiliates and
other assets for the first quarter of 1995 consisted of a $9.3 million loss on
the Corporation's sale in June 1995 of its remaining ownership interest in MK
Gold Company, a loss provision of $7.5 million to write-down the carrying amount
of its investment in MKInvestments, Inc. (North Pacific construction operations)
and a $3.2 million loss provision to write-down the carrying amount of the
Morrison Knudsen Depot. See Note 3. "Dispositions of Investments in Affiliates
and Other Assets".
Income Tax Expenses: The Corporation recognized tax expense for the first
quarter of 1996 and 1995 of $1.1 million and $.5 million, respectively,
consisting only of estimated foreign and state income taxes relating to certain
jurisdictions in which the Corporation had net taxable income. The Corporation
provided federal tax expense on income from continuing operations in 1996,
however this provision was offset by the reversal of an equal amount of the
valuation allowance established in prior periods. The Corporation did not
provide a federal tax benefit in 1995 because of the substantial doubt of
realization due to the uncertainty of the outcome of the Corporation's proposed
Recapitalization plan, among other things.
Discontinued Operations: In connection with its decision to dispose of MK Rail
in March 1995 and the disposition of Transit, effective June 1995, the
Corporation recorded an aggregate loss from discontinued operations of $31.7
million, without providing any future tax benefit. The loss includes (i) a $25.5
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, (ii) an estimated $5.9 million provision for the
Corporation's share of MK Rail's net operating loss of $5.3 million for the
three months ended March 31, 1995 and estimated net operating loss until the
expected time of disposal and (iii) $.3 million loss from Transit's operations
for the three months ended March 31, 1995.
FINANCIAL CONDITION
<TABLE>
<CAPTION>
Liquidity and capital resources (thousands of dollars) March 31,
-----------------------------
1996 1995
<S> <C> <C>
Cash and cash equivalents:
Beginning of period $ 63,086 $ 66,864
End of period 78,638 77,082
Total debt, including accrued interest on antecedent
debt of $14,427 and $9,320, respectively 339,216 371,990
<CAPTION>
Three Months Ended
March 31,
-----------------------------
1996 1995
<S> <C> <C>
Net cash provided (used) by:
Operating activities $ 27,429 $(70,074)
Investing activities 26,005 10,240
Financing activities (37,882) 110,967
</TABLE>
Total capitalization at March 31, 1996 was $145.8 million, and
consisted of $339.2 million debt and $193.4 million stockholders' deficiency
compared to total capitalization at December 31, 1995 of $178.3 million, which
consisted of $372.0 million debt and $193.7 million stockholders' deficiency.
The Corporation was able to generate internal cash flow from
operations in the first quarter of 1996 principally from the collection of
accounts receivable and receipt of $21.3 million of income tax refunds. In
addition, the Corporation received gross proceeds of $29.3 million from the sale
of MDC and the Depot. The combined cash from operating and investing activities
and tax refunds in the first quarter of 1996 enabled the Corporation to repay
the $37.9 million of outstanding borrowings under its bridge loan and increase
its consolidated cash balance at March 31, 1996 by $15.6 million. On April 2,
1996, as partial consideration for the extension of the bridge loan facility,
the Corporation was paid the $14.4 million deferred interest on its antecedent
debt with funds drawn from the loan facility. Outstanding borrowings under the
bridge loan facility as of the date of this Quarterly Report on Form 10-Q were
$14.5 million.
Net cash used by continuing operations in the first quarter of 1995 of
$70.1 million consisted of an increase in accounts receivable at March 31, 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, approximately $24.0 million of
cash was used to fund cost overruns on a number of fixed-price contracts. Net
cash provided by
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<PAGE>
investing activities in the first quarter of 1995 of $10.2 million arose
substantially from the $8.2 million net proceeds from sales less purchases of
securities available for sale and $2.4 million from sales of property, equipment
and other assets. See Note 3. "Disposition of Investments in Affiliates and
Other Assets". Net cash provided by financing activities in the first quarter of
1995 of $111.0 million included $117.1 million additional borrowings under bank
credit agreements less the cash payment of the fourth quarter 1994 dividend of
$6.1 million.
LIQUIDITY
The Corporation expects negative cash flows from operations for 1996. Cash flows
in 1996 will be negatively impacted by general and administrative costs and
expenses in connection with its proposed recapitalization plan and stockholders'
litigation, the required funding for the remainder of its fixed-price
construction contract losses recognized in 1994, 1995 and 1996 and its
continuing debt service. On April 2, 1996, as partial consideration for the
extension of the bridge loan facility from March 31, 1996 to September 31, 1996
the Corporation paid $14.4 million interest on the antecedent debt that had been
accrued and deferred from July 1, 1995 through March 31, 1996. The Corporation's
repayment obligations on existing indebtedness, after having paid the
outstanding balance of the bridge loan on March 29, 1996, include (i) repayment
of $100.0 million of antecedent debt on September 30, 1996, (ii) repayment of
the $113.3 million balance of the antecedent debt on December 31, 1996, and
(iii) the additional amounts required to be escrowed in connection with its
Transit reimbursement obligations for the benefit of the bonding company and
Metra Banks on such dates and to ultimately fund the remaining $31.2 million
reimbursement obligation to the bonding company and the estimated amount owing
on the Metra Guaranty, currently $80.2 million at March 31, 1996. Even if the
Corporation has sufficient liquidity to meet its obligations prior to the
maturity of its antecedent debt, the Corporation believes that further
refinancings of its existing indebtedness would not be sufficient to enable the
Corporation to continue as a going concern. The Corporation further believes
that cash generated from operations and the proceeds from the sale of its
remaining investment held for sale will not be sufficient to meet its existing
antecedent debt obligations and the required escrow payments under the Transit
reimbursement obligations in 1996.
On March 29, 1996, the Corporation paid the outstanding balance owing
under its bridge loan facility. On March 31, 1996, the Corporation and certain
of its secured creditors agreed to amend certain terms and conditions of the
bridge loan facility, which expired on March 31, 1996. The amendments to the
bridge loan facility included, among other things, establishment of a new
borrowing capacity of $47.5 million, and extension of its termination date to
September 30, 1996. Outstanding borrowing under the amended bridge loan facility
will be subject to interest at the prime rate plus one and one-half percent per
annum (9.75% at March 31, 1996) due and payable on the last day of each month
and on September 30, 1996. On April 2, 1996, as partial consideration for the
extension of the bridge loan facility, the Corporation paid $14.4 million
interest on the antecedent debt that had been accrued and deferred from July 1,
1995 through March 31, 1996, which funds were drawn from the extended bridge
loan facility. See Note 6. "Short-Term Debt - New and Amended Credit
Facilities"to the Consolidated Financial Statements.
The Corporation, which has been experiencing significant operating
losses and is facing severe liquidity problems, has been discussing with certain
of its secured and unsecured creditors, including holders of the Corporation's
existing secured indebtedness, its bonding company, lessors in connection with
certain long-term, noncancelable leases, and representatives of potential
investors, alternatives to reduce or liquidate the Corporation's current and
future financial debt obligations to permit the continuation of the Corporation
as a going concern. These alternatives included, among other things, a number of
remedies available to the Corporation, the goal of which is to alleviate the
problems caused by the Corporation's excessive debt levels, debt service and
certain long-term lease payment obligations, to enable the Corporation to
continue to implement its revised business strategy and to help assure the
Corporation's long-term viability. For that purpose, the Corporation initially
presented a proposed recapitalization plan (the "Recapitalization") to certain
of its secured creditors at a meeting held in February 1996, and has continued
to discuss the terms of the Recapitalization with those secured creditors.
Pursuant to the Recapitalization, the Corporation would exchange its existing
secured indebtedness consisting of its antecedent debt and Transit reimbursement
obligations and certain long-term lease obligations for a new issue of the
Corporation's common stock (which initially will represent all of the
outstanding common stock of the Corporation) and common stock of MKRail
representing the Corporation's 65% ownership interest in MKRail, the
Corporation's $52.2 million principal amount of its note receivable from MKRail
with interest at the prime rate (8.25% at March 31, 1996) and certain other
assets. Existing stockholders and the Securities Class Actions claimants would
receive new common stock purchase warrants in exchange for all the outstanding
shares of common stock and all the shares of common stock to be issued by the
Corporation in settlement of the MK Securities Class Actions and MKRail
Securities Class Actions. The Recapitalization contemplated effecting the
exchange through a partial prepackaged plan of reorganization pursuant to
Chapter 11 of the United States Bankruptcy Code (prepackaged plan). The
objective of a prepackaged plan under Chapter 11 would be to allow the
Corporation to achieve its objectives without unanimous approval of its
creditors in the shortest
I-19
<PAGE>
time possible and continue to resume operations in its recapitalized form
without the full burden of debt that existed prior to the bankruptcy
proceedings.
On April 15, 1996, the Corporation solicited acceptances of its
Recapitalization from its impaired creditors (holders of the Corporation's
existing secured indebtedness) and requested its impaired creditors to return
their completed ballots no later than 5:00 p.m. Eastern Daylight time on May 24,
1996. The Recapitalization, through the prepackaged plan is designed to
substantially reduce the Corporation's secured debt obligations, lessen the risk
of a protracted Chapter 11 proceedings which would significantly impact the
Corporation's business and create a capital structure that allows the
Corporation to continue in operation and maintain and enhance its competitive
position. In addition, management anticipates that the proposed prepackaged plan
would also allow management to concentrate more of its time on improving the
Corporation's business opportunities, rather than on managing its debt
obligations.
As of the date of this Quarterly Report on Form 10-Q, the Corporation
has not reached final agreement with its secured creditors. The final form or
results of a restructuring cannot be predicted, and there can be no assurance
that a restructuring can be accomplished through a prepackaged plan. Any such
restructuring, if successful, would substantially dilute or eliminate the value
of existing stockholders' interests. If the Corporation is unable to effect a
prepackaged plan, the Corporation will be forced to evaluate other available
options, which may include the commencement or continuation of a Chapter 11 case
without a preapproved plan. A nonprepackaged Chapter 11 case would likely be
lengthier, involve more contested issues with creditors and other parties in
interest, and result in significantly increased Chapter 11 expenses for
professional consultants, a negative impact on cash flow due to lack of customer
confidence resulting in reduction in new contract awards, and a corresponding
reduction in the consideration received by the Corporation's secured creditors
and existing stockholders than would be the case with a prepackaged plan.
The Corporation's financial statements have been prepared assuming
that the Corporation will continue as a going concern. As discussed herein, the
Corporation: had substantial losses and negative cash flow from operations in
1994 and 1995, which significantly reduced stockholders' equity and resulted in
a substantial accumulated deficit and working capital deficiency at March 31,
1996; and does not expect to be able to make its required debt repayments in
1996. Thus, unless the Corporation is able to effect the Recapitalization or
arrange a transaction with a strategic investor, these conditions raise
substantial doubt about the Corporation's ability to continue as a going
concern. The accompanying consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
On May 16, 1996, the Corporation and Washington Construction Group,
Inc. ("Washington") reached a preliminary non-binding agreement in principle
(the "agreement") as to the economic terms of the merger of the Corporation with
and into Washington subject to the successful negotiation and execution of a
definitive agreement and the successful completion of the Corporation's proposed
Recapitalization, among other things.
Under the terms of the agreement, Washington would (i) issue shares of
common stock representing 45% of the combined companies (estimated to be 24.1
million shares) and pay $13.3 million cash to the holders of certain claims set
forth in the Corporation's proposed Recapitalization plan and (ii) issue
warrants to purchase an aggregate of 2,765,000 shares of new common stock of the
combined companies at an exercise price of $12.00 per share for a term of five
years in exchange for all of the outstanding shares of the Corporation's common
stock.
In the event the Corporation fails to proceed with the proposed
Recapitalization or agrees, following termination of the agreement, to sell a
majority of its stock or any of its principal operating businesses to a party
other than Washington and in either event, Washington was not in default of its
obligations under the agreement, the Corporation would be liable for a break-up
fee in the maximum amount of $12.0 million plus certain out-of-pocket expenses
of Washington not to exceed $1.0 million. In connection with its
Recapitalization plan, Washington would pay in full the Corporation's debtor-in-
possession loan, not to exceed $50.0 million.
NEW BUSINESS AND BACKLOG
New Business: The Corporation booked new business of $111.1 million in the first
quarter of 1996 compared to $53.0 million in the last quarter of 1995. New
business consists of new engineering, construction, environmental and mining
services contracts and changes to existing contracts.
Backlog: Backlog of all uncompleted contracts at March 31, 1996 was $3,651.3
million, compared with $3,864.4 million at year-end 1995. Backlog consists of
uncompleted portions of engineering and construction contracts, including the
proportionate share of construction joint-venture contracts, the next five-year
portion of long-term mining services contracts and the funded and unfunded
portions of long-term contracts and subcontracts with various agencies of the
U.S. Government. The Corporation has a number of contracts and subcontracts with
various agencies of the U.S. Government principally for environmental
remediation and restoration work, which contracts extend beyond one year and for
which government funding has not yet been approved. Contracts and subcontracts
with agencies of the U.S. Government are sub-
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<PAGE>
ject to unilateral termination at the option of the U.S. Government. The
Corporation does not expect any material portion of its government contracting
business to be terminated.
The following table sets forth the contract revenue backlog (in
thousands of dollars) at March 31, 1996 and December 31, 1995 and the new
business booked in each of the quarters ended March 31, 1996 and December 31,
1995.
<TABLE>
<CAPTION>
December 31, 1995 March 31, 1996
New Business Backlog New Business Backlog
------------------------ -------------------------
<S> <C> <C> <C>
$53,000 $3,864,400 $111,100 $3,651,300
</TABLE>
The Corporation's business is being adversely affected by its poor
financial condition, and by the reluctance of many potential customers to engage
the Corporation on new or additional projects. The Corporation has experienced a
decline in new business booked in the first quarter of 1996 and the year ended
December 31, 1995 compared to 1994. The decline in new business has had a
material adverse effect on the Corporation. If the Corporation's diminished
ability to secure new work continues, it will further adversely impact the
Corporation's ability to continue as a going concern.
I-21
<PAGE>
PART II. OTHER INFORMATION
(All dollar amounts in thousands)
Item 3. Legal Proceedings
The Corporation is subject to a number of lawsuits in the following four general
categories that were either settled or are currently pending against the
Corporation and/or MKRail and their respective directors and or officers (the
"defendants") (i) class actions relating to transactions in the common stock of
the Corporation (ii) class actions relating to the issuance of, and transactions
in, the common stock of MK Rail (iii) derivative actions brought by persons who
claim to be stockholders of the Corporation and (iv) claims brought by the
former stockholders of three corporations, Touchstone, Inc., TMS, Inc. and Clark
Industries, Inc., ("Clark") acquired by the Corporation in exchange for shares
of the Corporation's common stock. These actions have been described in detail
in prior reports.
Settlement discussions have been held among the Corporation, MK Rail,
certain of their respective present and former officers and directors, their
insurance carriers, the underwriting defendants and plaintiffs with respect to
all of the pending cases except Pilarczyk. These discussions have resulted in
agreements to settle the MK Securities Class Actions, the MK Rail Securities
Class Actions, the Derivative Actions, the Touchstone Actions and the Clark
Action.
The settlements, other than that of the Touchstone, Inc. Actions, and
the Clark Action must be submitted to, and approved by, the courts presiding
over the various cases. That process is ongoing and, as of this date, stands as
follows:
The settlement of the MK Securities Class Actions has been approved by
the United States District Court for the District of Idaho in a final judgment
entered on December 1, 1995. A court approved settlement fund was established
and settlement proceeds (cash of $35,000, which was provided by insurers, and a
share certificate for 2,976,923 shares of the Corporation's common stock) were
deposited therein during 1995. The issuance of the common stock represented by
such certificate and the transfer of the settlement proceeds from the settlement
fund to the control of the plaintiffs is subject to nonappealable judgments
approving the settlements in the MK Rail Securities Class Actions and the
MKDerivative Actions.
The settlement of the MKRail Securities Class Actions was approved on
March 29, 1996 by the United States District Court for the District of Idaho,
subject to appeal for a period of 30 days following March 29, 1996. No appeal
was filed. A court-approved settlement fund was established and the Corporation
deposited a share certificate for 869,231 shares of its common stock into such
fund after the settlement was approved. The issuance of the common stock
represented by such certificate and the transfer of the settlement proceeds to
the control of the plaintiffs is subject to the entry of a final nonappealable
judgment approving the settlement of the "Double Derivative Action". The
effectiveness of the settlement of the MK Rail Securities Class Actions is not,
however, subject to the final judicial approval of the settlements in the MK
Securities Class Actions or the MK Derivative Actions.
The settlements of the MK Derivative Actions has been submitted for
approval by the Delaware Chancery Court and the Idaho District Court for Ada
County. In connection with the settlements of the MK Derivative Actions, the
Corporation reached an agreement with the Corporation's former chairman with
respect to his severance benefits, including pension rights, to which the
plaintiffs do not object. The settlement of the MKDerivative Actions was
approved on April 15, 1996 by the Delaware Court of Chancery. A hearing has been
scheduled for May 21, 1996 before the Idaho District Court. If approved by final
orders of the Delaware Chancery Court and the Idaho District Court that become
final and nonappealable the settlement proceeds from the MK Derivative Actions
(less attorneys' fees and expenses) will be transferred to the control of the
settlement fund in the MKSecurities Class Actions and, thus, the effectiveness
of the settlement is subject to certain conditions, including the entry of
final, nonappealable judgments approving the settlements in the MK Securities
Class Actions (which condition has been satisfied), the MK Rail Securities Class
Actions (which condition has been satisfied) and the Double Derivative Action
asserted on behalf of MK Rail.
Settlement of the Double Derivative Action asserted on behalf of MK
Rail was reached on March 4, 1996. A hearing with respect to such approval has
been set for May 21, 1996. The Corporation has no monetary or other obligations
under the settlement of the actions resulting from the Double Derivative Action.
However, $4,500 in the reduction of intercompany debt owed by MKRail to the
Corporation is attributable to the settlement of the Double Derivative Action,
the MKSecurities Class Actions and the MKRail Securities Class Actions. The
effectiveness of the settlement is conditioned upon a judgment by the Idaho
Court approving the settlement that becomes final and nonappealable and approval
of the settlement in the MK Rail Securities Class Actions (which condition has
been satisfied).
The settlement terms will require the Corporation, as its share of the
settlements, to (i) issue 2,976,923 shares of common stock in settlement of the
MK Securities Class Actions; and (ii) issue 869,231 shares of common stock in
settlement of the MK Rail Securities Class Actions. The settlement of the
Derivative Actions requires the implementation of certain "therapeutic
measures"with respect to corporate governance. The Corporation's insurance
carriers have paid $35,000 on behalf
II-1
<PAGE>
of the individual defendants in the MK Securities Class Actions and the
Derivative Actions, and MK Rail's insurance carrier has paid $6,000 into a
settlement fund created in connection with the settlement of the MK Rail
Securities Class Actions.
The Touchstone, Inc. Actions have been settled and notices of
voluntary dismissal with prejudice were filed on January 16, 1996. Under the
terms of the settlement, the Corporation paid $425 to the plaintiffs, paid the
plaintiffs their actual out-of-pocket fees and costs in the amount of $146 in
April 1996, and agreed to pay the difference, if any, between $5,250 and the sum
of all proceeds received by the plaintiffs as members of the class from the
settlement of the MK Securities Class Actions.
The Clark Action has been settled in principle and it is expected that
a definitive Settlement Agreement will be executed by all parties no later than
May 15, 1996. Under the terms of the Settlement the plaintiffs will be paid $275
(which will be provided by the Corporation's insurer) and, in addition to the
exchange of general releases, the plaintiffs will be specifically released from
their obligations pursuant to a Deposit Escrow Agreement plaintiffs entered into
for the benefit of the Corporation. On May 8, 1996, the court entered an order
dismissing the case with prejudice, with leave to refile for thirty-five days in
the event that a settlement is not consummated.
If settlement agreements in connection with the class actions relating
to transactions in the Corporation's common stock, class actions relating to the
issuance of, and transactions in, the common stock of MK Rail and claims brought
by the former stockholders of Touchstone, Inc., are approved as contemplated in
their present form, the Corporation expects, that the amounts provided in the
accompanying consolidated financial statements for these actions will likely
exceed the ultimate liability of these actions.
SEC Investigations. The Corporation previously reported that it had been
notified that the staff of the Central Regional Offices of the Securities and
Exchange Commission planned to recommend to the Commission that one of the
Corporation's subsidiaries be named as a respondent in an administrative action
in connection with an ongoing investigation of the issuance by the City and
County of Denver of revenue bonds to finance the construction of the Denver
International Airport. The Corporation has since filed a brief with the
Commission disputing the staff recommendation. The Commission has not announced
a decision. The Corporation also previously reported that MK Rail and the
Corporation are subject to a formal investigation by the Pacific Regional Office
of the Commission. The Corporation continues to provide documents in response to
discovery requests and otherwise 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 on February 19,
1996 to report that it had begun preliminary negotiations with
its secured creditors concerning a proposed exchange of its
existing indebtedness for a new issue of the Registrant's common
stock (which initially would represent all of the outstanding
common stock of the Registrant) and certain other assets.
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 - Business Management and
Controller and Principal Accounting
Officer, in his respective capacities
as such
Date: May 20, 1996
II-3
<PAGE>
EXHIBIT 7
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Fiscal Year Ended
December 31, 1995
Commission File Number 1-8889
[LOGO OF MORRISON KNUDSEN CORPORATION APPEARS HERE]
A Delaware Corporation
IRS Employer Identification No. 82-0393735
MORRISON KNUDSEN PLAZA, BOISE, IDAHO 83729
208/386-5000
- --------------------------------------------------------------------------------
SECURITIES REGISTERED AND NUMBER OF REGISTRANT'S
COMMON SHARES OUTSTANDING
At March 31, 1996, 33,231,191 shares of registrant's $1.67 par value common
stock (registered pursuant to Securities Exchange Act Section 12(b) on the New
York Stock Exchange and the Pacific Stock Exchange, Inc.) were outstanding,
excluding 461,666 shares held in treasury. The registrant has no securities
registered under Securities Exchange Act Section 12(g).
COMPLIANCE WITH REPORTING REQUIREMENTS
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
Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K required
under Item 10, is included in Part III of this Form 10-K.
AGGREGATE MARKET VALUE OF VOTING STOCK HELD BY NONAFFILIATES
At March 31, 1996, the aggregate market value of the registrant's voting common
stock held by nonaffiliates of the registrant, based on the New York Stock
Exchange closing price on March 29, 1996 for shares traded on the exchange, was
approximately $41,155,100, excluding $383,900 market value of 307,131 shares,
which are assumed to be held by affiliates of the registrant for the purposes of
this calculation.
<PAGE>
MORRISON KNUDSEN CORPORATION
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
DECEMBER 31, 1995
PAGE
PART I
Item 1. Business I-1
Item 2. Properties I-11
Item 3. Legal Proceedings I-12
Item 4. Submission of Matters to a Vote of Security Holders I-16
PART II
Item 5. Market for the Registrant's Common Stock
and Related Stockholder Matters II-1
Item 6. Selected Financial Data II-2
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations II-3
Item 8. Financial Statements and Supplementary Data II-18
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure II-45
PART III
Item 10. Directors and Executive Officers of the Registrant III-1
Item 11. Executive Compensation III-3
Item 12. Security Ownership of Certain Beneficial
Owners and Management III-13
Item 13. Certain Relationships and Related Transactions III-14
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K IV-1
Signatures IV-2
i
<PAGE>
PART I
ITEM 1. BUSINESS
(All dollar amounts in thousands)
RECENT DEVELOPMENTS
Morrison Knudsen Corporation's (the "Corporation") results of
operations and liquidity have been adversely affected by various factors
discussed herein. See Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Item 8. "Financial Statements and
Supplementary Data" in Part II of this Annual Report on Form 10-K. The
Corporation's future viability will be dependent upon its ability to obtain new
business and resolve the liquidity problems faced by the Corporation in the near
term.
The Corporation's accompanying consolidated financial statements have
been prepared on the basis that it will continue as a going concern, which
contemplates continuity of operations, realization of assets and liquidation of
liabilities in the ordinary course of business. There are certain conditions
that raise substantial doubt about the Corporation's ability to continue as a
going concern:
. The Corporation incurred losses from continuing operations of $79,636 and
$155,698 for the years ended December 31, 1995 and December 31, 1994,
respectively. The Corporation reported a net loss of $261,938 for the year
ended December 31, 1995 and a net loss of $349,635 for the year ended
December 31, 1994, including losses from discontinued MK Rail Corporation
("MKRail") and Transit segment ("Transit") operations of $182,302 and
$193,937, in 1995 and 1994, respectively.
. Net cash used by the Corporation's continuing operating activities was
$24,959 for the year ended December 31, 1995. Net cash used by the
discontinued MK Rail and Transit operating activities was $76,998and $200,883
for the years ended December 31, 1995 and December 31, 1994, respectively.
. At December 31, 1995 the Corporation had a stockholders' deficiency of
$193,682 which included an accumulated deficit of $510,147.
. At December 31, 1995 the Corporation had a working capital deficiency of
$232,207.
. The Corporation expects negative cash flows from operations in 1996.
. The Corporation does not expect to make its required debt repayments in
1996.
The Corporation's ability to continue as a going concern is dependent
upon the Corporation successfully obtaining relief from the burden of its
existing indebtedness, including its antecedent debt and Transit reimbursement
obligations and returning the Corporation to profitable operations. In this
connection the Corporation is pursuing a number of remedies available including,
among other things, a recapitalization through a partial prepackaged plan of
reorganization under Chapter 11 of the United States Bankruptcy Code.
Recapitalization Plan
The Corporation, which has been experiencing significant operating losses and is
facing severe liquidity problems, has been discussing with certain of its
secured and unsecured creditors, including holders of the Corporation's existing
secured indebtedness, its bonding company, lessors in connection with certain
long-term, noncancelable leases, and representatives of potential investors,
alternatives to reduce or liquidate the Corporation's current and future
financial obligations to permit the continuation of the Corporation as a going
concern. These alternatives included, among other things, a number of remedies
available to the Corporation, the goal of which is to alleviate the problems
caused by the Corporation's excessive debt levels, debt service and certain
long-term lease payment obligations, to enable the Corporation to continue to
implement its revised business strategy and to help assure the Corporation's
long-term viability. For that purpose, the Corporation initially presented a
proposed recapitalization plan (the "Recapitalization") to certain of its
secured creditors at a meeting held in February 1996, and has continued to
discuss the terms of the Recapitalization with those creditors. Pursuant to the
Recapitalization, the Corporation would exchange its existing secured
indebtedness, consisting of the antecedent debt and Transit reimbursement
obligations and certain long-term lease obligations for a new issue of the
Corporation's common stock, (which initially will represent all of the
outstanding common stock of the Corporation) and common stock of MKRail
representing the Corporation's 65% ownership interest in MK Rail, the
Corporation's $52,200 principal amount of its note receivable from MK Rail with
interest at the prime rate (8.25% at March 31, 1996) and certain other assets.
Existing stockholders and the securities class actions claimants would receive
new common stock purchase warrants in exchange for all of the current
outstanding shares of common stock and all the shares of common stock to be
issued by the Corporation in settlement of the MK Securities Class Actions and
MK Rail Securities Class Actions. See Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Outlook" in Part II
of this Annual Report on Form 10-K.
I-1
<PAGE>
On or about April 15, 1996, the Corporation will solicit acceptances
of its Recapitalization from its impaired creditors (holders of the
Corporation's existing secured indebtedness). The Recapitalization would be
effected through a partial prepackaged plan of reorganization pursuant to
Chapter 11 of the United States Bankruptcy Code ("prepackaged plan"). The
objective of a prepackaged plan under Chapter 11 would be to allow the
Corporation to achieve its objectives in the shortest time possible, and
continue operations in its recapitalized form without the full burden of debt
that existed prior to the bankruptcy proceedings.
The prepackaged plan contemplates a settlement of the Corporation's
obligations to its impaired secured creditors, while the Corporation's unsecured
creditors, its vendors, subcontractors and material suppliers will not be
impaired. The Corporation intends to conduct its business as usual, and the
prepackaged plan will permit the Corporation to carry on its business, to bid,
propose and negotiate for new contract awards and to continue to perform its
existing contracts, including its contracts with various agencies of the U.S.
Government. The prepackaged plan would provide that valid claims of trade
creditors, including subcontractors and material suppliers, are to be paid in
full and on time and that the holders of such claims shall not be required to
file a proof of claim or take other formal action to obtain such payment.
To ensure the continuity of its work force and to further accommodate
the unimpaired treatment of employee benefits, the Corporation intends that
salaries, wages, expense reimbursements, vacations, health related benefits,
severance benefits and similar benefits of employees, as well as the health
benefits of its covered retirees, their spouses and dependents, will be
unaffected in the reorganization contemplated by the prepackaged plan.
The Recapitalization, through the prepackaged plan, is designed to
substantially reduce the Corporation's secured debt obligations, lessen the risk
of a protracted Chapter 11 proceeding, which would have a significant adverse
impact on the Corporation's business and create a capital structure that allows
the Corporation to continue in operation and maintain and enhance its
competitive position. In addition, management anticipates that the prepackaged
plan would also allow management to concentrate more of its time on improving
the Corporation's business opportunities, rather than on managing its debt
obligations.
As of the date of this Annual Report on Form 10-K, the Corporation has
not reached final agreement with its secured creditors. The final form or
results of a restructuring cannot be predicted, and there can be no assurance
that a restructuring can be accomplished through a prepackaged plan. Any such
restructuring, if successful, would substantially dilute or eliminate the value
of existing stockholders' interests. The Corporation continues to explore
opportunities with potential investors.
The Corporation's management believes that further refinancings of its
existing secured indebtedness would not be sufficient to enable the Corporation
to continue as a going concern, because of the overwhelming burden of existing
debt and the Corporation's inability to make its required debt repayments in
1996. If the Corporation does not effect a financial restructuring and
reorganization as contemplated under the prepackaged plan or is unable to
arrange a transaction with a strategic investor, the Corporation will be forced
to consider other available options, which may include the commencement or
continuation of a Chapter 11 case without a preapproved plan. A nonprepackaged
Chapter 11 case would likely be lengthier, involve more contested issues with
creditors and other parties in interest, and result in significantly increased
Chapter 11 expenses for professional consultants, a negative impact on cash flow
due to lack of customer confidence resulting in a reduction in new contract
awards, and a corresponding reduction in the consideration received by the
Corporation's creditors and existing stockholders than would be the case with a
prepackaged plan. Any such recapitalization, if successful, would substantially
dilute or eliminate the value of existing stockholders' interests. Under the
terms of the Corporation's proposed Restructuring the sole recovery for existing
stockholders would be represented by the proposed stock purchase warrants.
SeeItem 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Outlook" in Part II of this Annual Report on Form 10-K.
Debt Restructuring
On August 10, 1995, the Corporation, its lender banks and sureties
agreed as of July 31, 1995 to a restructuring of the Corporation's existing
indebtedness from lender banks 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 secured bridge loan from $122,100 to $129,000.
Outstanding borrowings under the bridge loan were due and payable on March 31,
1996. On March 29, 1996 the Corporation paid the outstanding balance owing under
the bridge loan. The restructuring agreements require the Corporation to repay
its existing indebtedness (the "antecedent debt") as follows; $100,000 on
September 30, 1996 and $113,344 on December 31, 1996 and required escrow
payments under its Transit reimbursement obligations upon such repayments. In
addition to these required payments, the restructuring agreements also provide
for the Corporation to repay any outstanding borrowings under the antecedent
debt and bridge loans in the amount of, and upon receipt of, any prepayments or
repayments received by the Corporation on the $52,200 principal amount of its
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 by security interests in and
mortgages
I-2
<PAGE>
on substantially all of the assets of the Corporation. 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 at
an exercise price of $6.75 per share.
On October 17, 1995, the Corporation reached an agreement to dispose
of Transit. Under this agreement, the Corporation transferred substantially all
of the assets, certain liabilities, all contract 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 (i) outstanding borrowings under the
two interim credit facilities to fund Transit's operations were paid off on
October 17, 1995 and (ii) the borrowing amount under the bridge loan was reduced
from $129,000 to $100,000. In connection with the disposition of Transit, the
two interim credit facilities provided to Amerail were replaced by two new
credit facilities, (i) a $65,000 facility provided by certain lender banks in
support of the contract with the Illinois Commuter Rail Division of the Regional
Transit Authority d/b/a Metra/Metropolitan Rail transferred by the Corporation
(the "Metra Contract") and (ii) an $80,000 facility provided by the
Corporation's bonding company in support of the existing manufacturing and
refurbishing contracts, other than the Metra Contract, with various transit
agencies (the "Non-Metra Contracts"). The Corporation has agreed to reimburse
the lender banks and its bonding company for certain amounts borrowed by Amerail
under these facilities. The Corporation's reimbursement obligation to certain
banks which are providing a standby letter of credit and a new credit facility
to support the performance of the Metra Contract is governed by the Metra
Guaranty.The Corporation's reimbursement obligation to its bonding company for
the surety's future losses (maximum of $31,249) on the Metra and Non-Metra
Contracts is governed by a reimbursement agreement (the "Transit Reimbursement
Agreement"). The Corporation's reimbursement obligation, estimated at $80,195 at
December 31, 1995, 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 debt and the Transit reimbursement obligation to its bonding company
under the Transit Reimbursement Agreement.
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 environmental projects. In connection with 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) minimum earnings (loss) before
taxes, (ii) minimum net income (loss), and (iii) minimum net worth (deficit).
Since September 30, 1995, the Corporation has not been in compliance with the
minimum net income (loss) and minimum net worth (deficit) provisions of the New
Bonds Agreement. Nevertheless, the Corporation, from September 30, 1995, through
the date of this Annual Report on Form 10-K, has presented many of its bonding
needs to its surety on a request-by-request basis. The surety, when considering
the merits of the Corporation's requests for bonding, has applied many of the
conditions contained in the New Bonds Agreement. Some bond requests have been
considered favorably by the surety, and some have not. Due to the Corporation's
limited bonding capacity, the Corporation will continue to pursue environmental
and construction projects in partnership arrangements with other contractors to
support the Corporation's performance of contracts. Such partnership
arrangements mean that the Corporation is forced to surrender some benefits from
new bidding opportunities to its competitors, at a cost to the Corporation's
operating performance.
During 1995 and through March 31, 1996, the Corporation completed a
number of divestiture transactions with respect to its numerous businesses and
received federal and state tax refunds, which provided aggregate cash proceeds
of approximately $117,000 to fund operations and to repay obligations under the
bridge loan facility. Despite these developments in the financial and
operational restructuring of the Corporation, it became apparent to management
in the first quarter of 1996 that the proceeds from divestitures and tax refunds
would at most provide sufficient funds to meet the Corporation's repayment
obligation on March 31, 1996 with respect to the bridge loan. Moreover, the
Corporation had hoped that the divestiture of the Transit business and the
restructuring of its bank facilities and the Transit bonding exposure
accomplished during 1995 would allow the Corporation to attract new business and
achieve positive operating results that would allow the Corporation to access
the public debt or equity markets or to arrange an equity infusion from a
strategic investor in 1996.
On March 31, 1996, the Corporation and certain of its secured
creditors agreed to amend certain terms and conditions of the bridge loan
facility, which expired on March 31, 1996. The amendments to the bridge loan
facility included, among other things, establishment of a new borrowing capacity
of $47,500, and extension of its termination date to September 30, 1996.
Outstanding borrowing under the amended bridge loan facility will be subject to
interest at the prime rate plus one and one-half percent per annum (9.75% at
March 31, 1996) due and payable on the last day of each month and on September
30, 1996. On April 2, 1996, as partial consideration for the extension of the
bridge loan facility, the Corporation paid $14,427 interest on the antecedent
debt that had been accrued and deferred from July 1, 1995 through March 31,
1996. See the "Short-Term
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<PAGE>
Debt - New and Amended Credit Facilities" Note to Consolidated Financial
Statements in Part II of this Annual Report on Form 10-K.
General
Morrison-Knudsen Company, Inc., the predecessor to the Corporation, was
incorporated in Delaware in 1932 to carry on a business founded eighty-four
years ago at Boise, Idaho. The Corporation's principal executive offices are
located at Morrison Knudsen Plaza, Boise, Idaho 83729. The Corporation, after
giving effect to the disposition of its Transit segment in July, 1995 and its
decision to dispose of its 65% ownership interest in MKRail in March 1995,
operates in one industry segment, engineering and construction. See the
accompanying consolidated financial statements and related financial statement
footnotes for a description of the Corporation's revenues, operating income
(loss) and assets in Part II of this Annual Report on Form 10-K.
The Corporation engages in all types of general construction work
including industrial, heavy civil and marine, mechanical, pipeline, building,
and underground, for a wide range of public and private customers throughout the
world. In addition, the Corporation renders design services in practically all
engineering disciplines. Other markets for its services include nuclear and
fossil-fueled power plants, environmental and hazardous waste abatement and
operations and maintenance for military and commercial facilities. As a general
contractor, the Corporation provides construction services in accordance with
the terms and specifications of each contract, including planning and
scheduling, marshalling of manpower, procurement of equipment and materials,
awarding of subcontracts and direction and overall management of the project.
The Corporation is also responsible for any failure to perform on the part of a
subcontractor. In order to minimize the potential for losses caused by such
defaults, the Corporation normally requires performance and payment bonds or
other adequate assurances of operational and financial capacity from
subcontractors. The Corporation also operates, through a number of domestic and
foreign subsidiaries, coal and lignite mines in the U.S. and Germany under long-
term mining services contracts.
The Corporation's ability to obtain new contracts, change orders to
existing contracts and bonding for such contracts is severely impacted by its
limited sources of additional liquidity. Partnering arrangements and strategic
alliances are being pursued to help provide bonding capacity and additional
financial support. See Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in Part II of this Annual Report
on Form 10-K.
Unconsolidated Affiliates: In addition, the Corporation and its majority-owned
subsidiaries had investments in a number of unconsolidated affiliated companies
at December 31, 1995 accounted for by the equity method including the following
principal unconsolidated affiliates, (the Corporation's ownership interests
therein are shown parenthetically): AmerBank (29.5%); Westmoreland Resources,
Inc. (24%); and Mitteldeutsche Braunkohlengesellschaft mbH ("MIBRAGmbH") (33%).
AmerBank is a licensed bank operating in Poland. Westmoreland Resources, Inc. is
a mining company that operates a surface coal mine in Montana. MIBRAG mbH was
formed by the German Government to own and operate lignite coal mines, power and
process plants in Germany. Also at December 31, 1995, the Corporation had a
62.8% ownership interest in McConnell Dowell Corporation, Limited ("MDC") an
engineering and construction contractor based in Australia. Subsequent to
December 31, 1995, the Corporation sold its 62.8% ownership interest in MDC. The
Corporation is pursuing the possible sale of its ownership interest in AmerBank.
See the "Investments in and Advances to Unconsolidated Affiliates" and
"Subsequent Events - McConnell Dowell Corporation, Limited" Notes to
Consolidated Financial Statements in Part II of this Annual Report on Form 10-K
for additional information related to unconsolidated affiliates.
Significant Risks and Uncertainties: In connection with its engineering and
construction business, the Corporation, in order to balance risk with reward,
enters into three basic types of contracts: fixed-price or lump-sum contracts
providing for a single price for the total amount of work to be performed; unit-
price contracts providing for a specified price for each unit of work performed,
under which both risk and anticipated income are the highest; and cost-type
contracts (including cost-plus) providing for reimbursement of allowable or
otherwise defined costs incurred plus a fee, under which risk is minimal and
anticipated income is earned solely from the fee received for services provided.
In connection with its engineering contracts, including design and program
management, the Corporation's compensation is typically on a cost-plus-fee
basis.
Regardless of the type of contract, the construction business always
has been subject to unusual risks, including unforeseen conditions encountered
during construction, the impact of inflation upon costs and financing
requirements of clients, and changes in political and legal circumstances,
particularly since contracts for major projects are performed over extended
periods of time. Other risks include the failure of third party project
participants, including joint venture partners and subcontractors, to obtain
required permits or to perform essential functions on a timely basis, the
failure of local governing authorities to take certain required actions,
opposition by community groups in the locality of a project or by other
interested third parties to the project's development, and the failure to obtain
adequate financing for the project. The Corporation may be exposed to
significant risks and uncertainties in the performance of contracts,
particularly fixed-price
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<PAGE>
contracts. Although the Corporation constantly seeks to minimize and spread the
risks over a large number of contracts, a combination of unusual circumstances
could result in losses on a particular contract or contracts, and the
Corporation may experience significant changes in operating results on a
quarterly or annual basis.
Because of the size of major infrastructure projects, a relatively
small number of projects has provided a significant percentage of the
Corporation's revenues in a given year. The Corporation expects that this
dependence on major projects will continue. The loss of one or more major
contracts or a financial loss incurred by the Corporation with respect to its
performance under one or more major contracts could have a material adverse
effect on the Corporation or its financial results. Demand for the services
offered by the Corporation has been, and is expected to continue to be, subject
to significant fluctuations due to a variety of factors beyond the control of
the Corporation, including economic conditions. During economic downturns, the
ability of private entities or U.S. Government agencies in the targeted markets
to make capital expenditures on infrastructure improvement may decline
significantly. There can be no assurance there will not be significant
fluctuations adversely affecting the industry as a whole or key markets targeted
by the Corporation and, as a result, the Corporation's financial results of
operations.
In addition, the Corporation's operations are in part dependent upon
funding of infrastructure and environmental projects by agencies of the U.S.
Government. Significant changes in the level of government funding of these
projects could have a favorable or unfavorable impact on the operating results
of the Corporation. Contract mining services operations may also be adversely
affected by weather conditions, the potential for changes in technology, product
demand, product substitution and economic factors which affect alternative fuel
decisions.
The Corporation periodically assesses its reimbursement obligations in
connection with the disposition of its Transit operations. The Corporation makes
significant assumptions concerning cost estimates, projected to the estimated
completion dates of new transit car contracts which are in their early stages of
production, for labor productivity rates, material price and usage, for interest
expense on the estimated borrowings under the credit facilities extended to
Amerail, 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 contracts transferred to Amerail. The
Corporation has no management control over Amerail and therefore must rely on
financial and operating information provided by Amerail to estimate its
reimbursement obligations. Due to uncertainties inherent in this estimation
process, it is reasonably possible that estimated costs to complete these long-
term new transit car contracts will be further revised in the near term.
Joint Ventures: The Corporation frequently participates (often as sponsor and
manager of the projects) in entities commonly referred to as joint ventures. In
the engineering and construction industry, joint ventures often include
arrangements for pooling equipment, bonding, financing and for sharing skills
such as engineering, design, and construction. Construction joint ventures vary
in their legal forms. They include corporations, and general and limited
partnerships. These entities are often viewed as joint ventures - even though
one of the investors may have a majority voting interest or may otherwise have
effective control of the entity. The results of operations are shared in a
variety of ways and may not be related to the method of sharing management or
other project responsibilities.
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. These single-purpose joint ventures
last only as long as the construction project undertaken, which can be less than
one year, but are frequently longer on major construction projects. See the
"Construction Joint Ventures" Note to Consolidated Financial Statements in Part
II of this Annual Report on Form 10-K for additional summary joint venture
financial information.
Changes in Business
There were significant changes in the business of the Corporation and in the
services and products offered during 1995 including the dispositions of Transit
and certain investments and businesses, the planned dispositions of its 65%
ownership interest in MK Rail Corporation and its 62.8% ownership interest in
McConnell Dowell Corporation, Limited, the termination of Navasota Mining
Company, Inc. mining services contract and the withdrawal from its participation
in Strait Crossing Development, Inc. described below. See the "Subsequent
Events" Note to Consolidated Financial Statements in Part II of this Annual
Report on Form 10-K.
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, all contract
operations and management of Transit to Amerail. The Corporation cannot exercise
any control over the management of Amerail and the execution of the Transit
contracts. The Corporation has accounted for the disposition of Transit as a
discontinued operation. In connection with the disposition of Transit, the
Corporation agreed to guarantee Amerail's reimbursement obligation,
estimated at $80,195 at December 31, 1995, to certain banks which are providing
a standby letter of credit and a new revolving credit facility up to an
aggregate amount of $141,700 to support Amerail's performance of the Metra
Contract. Also in connection with the disposition of Transit, the Corporation
agreed to reimburse its bonding company for the surety's
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<PAGE>
future losses up to a maximum of $31,249 on (i) its payment and performance
bonds supporting the Metra and Non-Metra Contracts transferred by the
Corporation to Amerail and (ii) its guaranty of Amerail's secured financing for
performance of certain Transit contracts or its direct financing of Amerail for
the performance of the Transit contracts. The Corporation's estimated liability
at December 31, 1995 for its Transit reimbursement obligations under the Metra
Guaranty and the Transit Reimbursement Agreement was $111,444 and is reflected
as a current liability in the accompanying consolidated balance sheet at
December 31, 1995. The Corporation has recognized its reimbursement obligations
through the estimated final completion of these contracts based upon the best
information available in the circumstances. However, there can be no assurance
the net cash losses ultimately realized at completion of these contracts will
not exceed the Corporation's estimated reimbursement obligations at December 31,
1995.
Discontinued MK Rail Corporation Operations: In March 1995, the Corporation
adopted a plan to dispose of its 65% ownership interest in MK Rail. Accordingly,
the Corporation has accounted for the planned divestiture of MK Rail as a
discontinued operation. At December 31, 1995, the Corporation has written-down
the carrying amount of its investment in and note receivable from MK Rail to
their estimated recovery values. The Corporation has been unable to negotiate an
acceptable transaction for the sale of its ownership interest in MK Rail, and
there can be no assurance that the Corporation will be able to consummate a sale
of its ownership interest in and/or its note receivable from MK Rail or, if the
Corporation does consummate such sales that the net proceeds realized will not
be less than the estimated recovery values. The Corporation currently
contemplates that its ownership interest in MK Rail and its note receivable from
MK Rail will be exchanged for the Corporation's secured indebtedness in
connection with the proposed Recapitalization. See "Recent Developments -
Recapitalization Plan."
In January 1996, MK Rail's Board of Directors adopted a Stockholders'
Rights Plan (the "Rail Rights Plan"). Under the terms of the Rail Rights Plan,
preferred stock purchase rights ("Rail Rights") were distributed as a dividend
at the rate of one Rail Right for each share of MK Rail's common stock held as
of the close of business on January 30, 1996. The number of Rail Rights
outstanding is subject to adjustment under certain circumstances, and all Rail
Rights expire on January 30, 2006.
Each Rail Right will entitle the holder to buy 1/100th of a share of
the MK Rail's Series C Junior Participating Preferred Stock at an exercise price
of $16 for each 1/100th of a share. Each preferred share is designed to be
equivalent in voting and dividend rights to 100 shares of common stock. The Rail
Rights will be exercisable and will trade separately from the common stock only
if a person or group of persons (such as a potential acquisition of the
Corporation's 65% ownership interest in MK Rail) becomes the beneficial owner of
10 percent or more of MK Rail's common stock, if a person commences a tender or
exchange offer the consummation of which would result in such person becoming
the beneficial owner of 10 percent or more of MK Rail's common stock, if a
current holder (such as the Corporation) of 10 percent or more of the common
stock acquires additional shares of the MK Rail's common stock, or if a "change
of control event" occurs with respect to a current holder (such as the
Corporation) of 20 percent or more of the MK Rail's common stock.
In addition, under certain circumstances, each Rail Right would permit
its holder to purchase, for the exercise price of the Rail Right, shares of
MK Rail's common stock or shares of the voting stock of the acquiring company
having a market value of two times the exercise price of the Rail Right.
MK Rail will be entitled to redeem the Rail Rights at a price of $.001
per Rail Right at any time prior to the time any person acquires 10 percent or
more of MK Rail's common stock or a current holder of 10 percent or more of the
common stock acquires additional shares of the common stock, or, with respect to
a current holder that owns more than 20 percent of the common stock, a "change
of control event" occurs.
In April 1996, the MK Rail Board of Directors amended the Rail Rights
Plan to provide that the Corporation's secured creditors would not be deemed to
beneficially own shares of MK Rail by reason of negotiations among the
Corporation and those secured creditors with respect to the Recapitalization or
other restructuring alternatives. The Corporation has requested that MK Rail's
Board of Directors further amend the Rail Rights Plan to exclude agreements with
respect to, or implementation of, the Corporation's Recapitalization from the
triggering events under the Rail Rights Plan. The MK Rail Board has not yet
agreed to adopt such amendments.
Discontinued Real Estate Development Operations: Since it withdrew from the
development and sale of real property in 1987, Emkay Development Company, Inc.
("Emkay"), a wholly-owned subsidiary of the Corporation, has been selling its
remaining real estate and paying down the outstanding balance of its secured
bank loans. During 1995, and particularly during the fourth quarter, Emkay sold
a substantial number of real estate assets and paid down its secured bank loans
with $15,559 of net cash proceeds from such sales. In addition, the Corporation
has further liquidated $3,591 of its bank loans subsequent to December 31, 1995
and as of the date of this Annual Report on Form 10-K, Emkay has outstanding
bank debt of $11,928. The Corporation has provided for its estimated losses on
disposition of the real estate assets held for sale at December 31, 1995.
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McConnell Dowell Corporation, Limited ("MDC"): Subsequent to December 31, 1995,
the Corporation sold its 62.8% ownership interest in MDC for $28,000 net cash
proceeds.
Sale of MK Investments, Inc. (North Pacific construction operations)("MKI"): On
September 22, 1995, the Corporation completed the sale of certain MKI assets and
business for $17,100 cash. In the first six months of 1995, the Corporation
recognized a provision of $8,836 to write-down the carrying amount of its
investment in MKI to its estimated recovery 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 100% ownership interest in Western for $4,900 cash which approximated
the Corporation's carrying amount 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 for $22,500 cash. As a
condition to the purchase of the shares, the buyer 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.
Write-off of Investment in Morrison Knudsen of Australia ("MKA"): The
Corporation, having been unsuccessful in its search for potential buyers for the
assets and/or business of MKA, decided to discontinue its financial support for
MKA and, effective December 31, 1995, wrote-off its $2,362 investment in MKA.
Navasota Mining Services Contract: The Corporation, through its wholly-owned
subsidiary Navasota Mining Company, Inc. ("Navasota") had a mining services
contract with Texas Municipal Power Agency, a separate municipal corporation
("TMPA") to operate a lignite mine in Texas. In early 1995, TMPA announced its
intentionto switch from lignite mined by Navasota to Wyoming steam coal, and in
late 1995, TMP Anotified Navasota to cease mining lignite on or about February
29, 1996. Other than the loss of future revenue and earnings, the Corporation
does not expect the termination of its mining services contract with TMPA will
have a material adverse effect on its results of operations and financial
condition. See the "Subsequent Events - Navasota Mining Services Contract" Note
to Consolidated Financial Statements in Part II of this Annual Report on Form
10-K.
Strait Crossing Development, Inc. ("SCDI"): In October 1993, SCDI, then a 45%
owned unconsolidated subsidiary of the Corporation, 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. Concurrently, SCDI members formed Strait
Crossing Joint Venture (the "joint venture") to complete the bridge construction
(the "project") and each SCDI member's ownership interest in SCDI was replicated
in the joint venture.
In 1994, the Corporation sold for cash and a note receivable, 9% of
its ownership interest in SCDI to a third party thereby reducing its ownership
interest to 36%. In the fourth quarter of 1995 the Corporation ceased its
proportionate-share funding for the joint venture and advised the other members
of SCDI that it proposed to withdraw from the joint venture.
On March 29, 1996, the Corporation and the SCDI members reached an
agreement in connection with the Corporation's withdrawal from the joint venture
(the "withdrawal agreement"). The withdrawal agreement provides, among other
things, for SCDI members' indemnification of the Corporation against liabilities
relating to the project in exchange for the transfer of the Corporation's
$24,841 investment in the joint venture and its 36% ownership interest in SCDI
to the SCDI members, as well as assign to an SCDImember, as maker, the
promissory note received as partial consideration for the sale of its 9%
ownership interest in SCDI. The Corporation has fully provided for the
divestiture of its investment in the joint venture and cancelation of its note
receivable and accrued interest thereon at December 31, 1995. See the
"Subsequent Events - Strait Crossing Development, Inc." Note to Consolidated
Financial Statements in Part II of this Annual Report on Form 10-K.
Foreign Operations
The Corporation operates outside the United States through foreign and domestic
subsidiaries which are qualified to do business in various foreign countries. In
addition, as part of its efforts to expand its presence in international
markets, the Corporation, in the past few years, has entered into several
agreements with foreign joint venture partners for construction abroad. Such
foreign joint-venture operations are subject to uncertain political and economic
environments, incompatibility between the partners, foreign currency controls
and fluctuations, civil disturbances, labor strikes, as well as other
uncertainties associated with operations in foreign countries. Other political
and economic events may limit or disrupt operations, restrict the movement of
funds, result in deprivation of contract rights, increase foreign taxation or
limit or delay repatriation of earnings.
The Corporation recorded revenues from foreign operations of
approximately $410,400 in 1995, $644,800 in 1994, and $569,000 in 1993. In
addition, the Corporation's equity in the net income (loss) of its
unconsolidated foreign affiliates was $22,375 net income in 1995, $15,142 net
income in 1994, and an $832 net loss in 1993. See the "Investments in and
Advances
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to Unconsolidated Affiliates and Geographic Operating Data" Notes to
Consolidated Financial Statements in Part II of this Annual Report on Form 10-K
for additional operating and asset data for each of the three years in the
period ended December 31, 1995.
Backlog
Backlog consists of uncompleted portions of engineering and construction
contract revenue including the Corporation's proportionate share of construction
joint venture contract revenue, the next five-year portion of long-term mining
services contract revenue and the funded and unfunded portions of long-term
contract and subcontract revenue with various agencies of the U.S. Government.
The Corporation has a number of contracts and subcontracts with various agencies
of the U.S. Government principally for environmental remediation and restoration
work, which contracts extend beyond one year and for which government funding
has not yet been approved. Backlog of all uncompleted contracts at December 31,
1995 totaled $3,864,400 compared with $4,134,700 at December 31, 1994. The
unfunded portions of such contract revenue included in backlog at December 31,
1995 and 1994 were $1,986,900 and $1,702,600, respectively. Contracts and
subcontracts with agencies of the U.S. Government are subject to unilateral
termination at the option of the U.S. Government. The Corporation does not
expect any material portion of its government contracting business to be
terminated. See Item 1. "U.S. Government Contracts".
The following table reflects the composition of contract revenue
backlog at December 31, 1995 and 1994, distinguished on the basis of their
pricing arrangements.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
COMPOSITION OF YEAR-END BACKLOG
(Thousands of dollars)
Year Ended December 31, 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
Fee-type contracts $3,163,700 $2,982,600
Fixed-price and unit-price contracts 700,700 1,152,100
- --------------------------------------------------------------------------------
Total backlog $3,864,400 $4,134,700
================================================================================
</TABLE>
The Corporation's business is being adversely affected by its poor
financial condition, and by the reluctance of many potential customers to engage
the Corporation on new or additional projects. The Corporation has experienced a
16% decline in new business booked in 1995 compared to 1994. The decline in new
business has had a material adverse effect on the Corporation. If the
Corporation's diminished ability to secure new work continues, it will further
adversely impact the Corporation's ability to continue as a going concern.
See Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in Part II of this Annual Report on
Form 10-K. Additional information concerning the Corporation's backlog of
uncompleted contracts is set forth under the caption "New Business and Backlog"
in Part II of this Annual Report on Form 10-K.
U.S. Government Contracts
U.S. Government contracts continue to be an important part of the Corporation's
business. For each of the three years in the period ended December 31, 1995,
revenue of approximately $383,000 (22 percent) in 1995, $544,400 (27 percent) in
1994 and $603,900 (26 percent) in 1993, were derived from various U.S.
Government agencies. At December 31, 1995, the Corporation's $3,864,400 backlog
contained approximately $2,714,400 (70 percent) of both fixed-price and fee-
type, funded and unfunded portions of contracts and subcontracts with various
agencies of the U.S. Government which are subject to unilateral termination at
the option of the U.S. Government. Terminations for convenience of the
Government generally provide for payments to a contractor, for its unrecovered
contract costs and a portion of its contract income. The Corporation does not
expect any material portion of its government contracting business to be
terminated.
The Corporation's poor financial condition may have a
disproportionately adverse impact on the Corporation's ability to obtain new
U.S. Government contracts. This adverse impact may be significantly greater if
the Corporation decides to pursue a prepackaged plan as the Corporation's
management believes that it is unlikely that any U.S. Government procurement
officer will award new contracts to the Corporation during the period during
which the Corporation is pursuing a bankruptcy alternative. In the event that
the Corporation is unable to obtain access to new U.S. Government contracts,
there would be material adverse effect on the Corporation.
The Corporation has a number of cost reimbursable contracts with
various agencies of the U.S. Government, the allowable costs of which are
subject to audit by the U.S. Government. As a result of such audits, the
government auditors assert from time to time that certain costs claimed as
reimbursable under government contracts either were not allowable costs or were
not allocable in accordance with federal government regulations. The resolution
of these audits may result in various sanctions including repayments of amounts
previously paid by the U.S. Government to the Corporation. Some audits have
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resulted in cost disallowance and claims for reimbursement by the government.
See the "Commitments and Contingencies-Government Audits" Note to Consolidated
Financial Statements in Part IIof this Annual Report on Form 10-K.
Competition
The Corporation's competitive position in the markets it serves has been
adversely impacted by the limited bonding capacity and its limited sources of
additional liquidity which among other things inhibits its ability to secure
project financing. The Corporation is engaged in highly competitive businesses,
particularly those portions which relate to engineering and construction
contracts obtained by competitive bidding. The Corporation competes with other
general and specialty contractors both foreign and domestic, including a number
of regional contractors. Most of the Corporation's competitors have greater
financial resources and thus have a substantially stronger competitive position
than does the Corporation. Competition is based primarily on price, reputation
and reliability. There can be no assurance that competition in one or more of
the engineering and construction markets will not adversely affect the
Corporation and its results of operations. Success or failure in the engineering
and construction industry is, in large measure, based upon the ability to
compete successfully for contracts and to provide the engineering, planning,
procurement, management and project financing skills required to complete them
in a timely and cost-efficient manner. Exact statistical data are not available
for determining the relative size of engineering and construction companies.
Environmental Matters
Morrison Knudsen Corporation: The Corporation is subject to a variety of
environmental laws and regulations governing, among other things, discharges to
air and water, the handling, storage and disposal of hazardous or solid waste
materials and the remediation of contamination associated with releases of
hazardous substances. Such laws and regulations and the risk of attendant
litigation can cause significant delays to a project and add significantly to
its cost. Violations of these environmental laws and regulations could subject
the Corporation and its management to civil and criminal penalties and other
liabilities.
The Comprehensive Environmental Response, Compensation and Liability
Act (also known as "CERCLA" or "Superfund") is a federal law regarding abandoned
hazardous waste sites which imposes joint and several liability, without regard
to fault or the legality of the original act, on certain classes of persons,
including those who contribute to the release of a "hazardous substance" into
the environment. The Corporation has been the subject of an investigation by the
U.S. Environmental Protection Agency ("EPA") relating to a Superfund site
located in Fresno County, California. In September 1991, the EPAissued an
administrative order under CERCLA, naming Morrison Knudsen Engineers, Inc.
("MKE"), a wholly-owned subsidiary of the Corporation, and eight other entities
as respondents. The EPAalleged that MKE and the other named respondents, among
others, generated waste oils and solvents that were transported to the Fresno
site for recycling and were released into the environment. Although the
Corporation and MKEhave denied responsibility for any contamination at the site,
the Corporation has cooperated with the other respondents in complying with the
terms of the administrative order. In addition, the Corporation has entered into
an agreement with two former joint venture partners (which are not named as
respondents) under which these partners will share 50% of the cost of complying
with the order. The Corporation and these partners have agreed to pay
approximately 8.39% of the cost of designing a groundwater treatment system,
which has now been constructed at a cost of approximately $2,000. The
respondents have not yet agreed on the sharing of the costs of operating and
maintaining this system, which is expected to cost approximately $11,200. The
Corporation also has been notified by the EPA that the EPA believes MKE may be
one of the parties liable for the cost of implementing certain remedial actions
relating to soil contamination at the Fresno site, which could cost as much as
$36,200. As of the date of this Annual Report on Form 10-K, it is unclear how
much of this total cost, if any, the Corporation and/or MKE will be expected to
bear. The Corporation and other respondents have agreed to design the soil
remediation system, pursuant to an Administrative Consent Order with the EPA,
other respondents, and certain other entities identified as potentially
responsible parties. In the meantime, the Corporation and other respondents are
proceeding with an alternative dispute resolution process, in order to fix the
percentage for which each respondent is liable.
The Corporation has been named one of several hundred defendants, in
an action in Utah brought by approximately 50 to 100 plaintiffs who have been
ordered by the EPA to clean up a waste oil treatment facility known as the
Ekotek Superfund Site. The total current estimate to clean up the entire site is
$30,000 to $60,000. The Corporation has not admitted liability and is unable to
determine, as of the date of this Annual Report on Form 10-K, what the
Corporation's percentage of responsibility, if any, may be. Based on the
Corporation's current available information, the Corporation does not believe
that the plaintiffs will be able to establish that the Corporation was
responsible for any significant amount of the pollution at the Ekotek site, but
there can be assurances in this regard.
The Corporation and one other defendant have been named in a lawsuit
brought by the owner of certain land in Sacramento, California. Plaintiff seeks
a maximum of $604 from the defendants as a result of alleged pollution of
plaintiff's land by the seepage of pollutants from the defendants' land to the
plaintiffs' land. The Corporation has denied liability.
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On July 26, 1994, the New York State Department of Environmental
Conservation sent the Corporation a letter in which it claimed that the
Corporation, as the owner and operator of transit car manufacturing facilities
in Hornell, New York, was a potentially responsible party for the cleanup of
hazardous substances from the site. The State of New York has not specifically
requested any monies and has not instituted any proceedings since the notice
letter. Further, there is no estimate of the cost of cleanup, except a March
1994 Record of Decision in which it was estimated that the total cost may be as
high as $2,000, with an annual operation and maintenance cost for five years of
$113.
In late 1995, the Corporation received a Notice of Potential Liability
and Request for Participation in Cleanup Activities from the Maine Department of
Environmental Protection with respect to the Portland Bangor Waste Oil Site in
the State of Maine. The Corporation is one of approximately 110 potentially
responsible parties. The Maine DEP has determined that the Corporation has a
1.7116% share of the gallons of waste oil contributed to the site, that such a
percentage makes the Corporation about the fifth or sixth largest contributor,
and that the total site cleanup cost would be approximately $30,000.
On January 23, 1996, the Corporation was notified by a committee of
potentially responsible parties of possible environmental liability on the part
of the Corporation with respect to the Barrels, Inc. site in Michigan. The site
was a drum recycling facility that operated in the 1980s and was cleaned up by
the Michigan Department of Natural Resources in 1986. Approximately 254
customers have been identified who allegedly shipped drums to the site for
recycling. As of December 31, 1995, the state of Michigan spent approximately
$1,300 to clean up the site. The Corporation has denied all responsibility.
With the foregoing exceptions, the Corporation to the best of its
knowledge believes that it is presently in substantial compliance with all
applicable federal and state environmental laws and does not anticipate that
such compliance will have a material impact on its future capital expenditures,
earnings or competitive position. However, the risk of environmental liabilities
and charges associated with maintaining compliance with environmental laws is
inherent in the nature of the Corporation's business and there can be no
assurance that material environmental liabilities and compliance charges will
not arise.
MK Rail Corporation: The Corporation commenced its locomotive operations at its
Boise Locomotive Plant in 1969. At the time, solvents were used in the process
of cleaning equipment at the facility. Wastewaters generated from the equipment
cleaning process containing solvents were discharged from the process to in-
ground wastewater treatment basins that were connected to drainfields. This
wastewater treatment system was in place until 1984. In 1985, the Corporation
received notices from the Idaho Department of Health and Welfare, Division of
Environmental Quality ("IDEQ") and the United States Environmental Protection
Agency ("EPA"), indicating that it was in violation of state and federal
environmental laws with respect to the Boise Locomotive Plant. These notices led
to the issuance in 1991 of a Post Closure Permit, which is the formal permit
pursuant to which a detailed corrective action plan is specified for a cleanup
process following the "closure"or termination of the releases which created the
problem (the "Permit"). In compliance with the Permit, more than 57 wells have
been drilled on the property and on property adjacent to its Boise Locomotive
Plant by the Corporation and MK Rail to retrieve and treat non-potable
contaminated shallow groundwater, to monitor any movement of the contaminated
plume and to monitor the deeper potable groundwaters at the facility. In May
1994, MK Rail Corporation, then a wholly-owned subsidiary of the Corporation,
completed an Initial Public Offering ("IPO") which decreased the Corporation's
investment in MK Rail to 65%. The Boise Locomotive Plant was among the assets
transferred to MK Rail prior to MK Rail's IPO.
MK Rail has estimated that it will cost approximately $125 per year in
1996 dollars over the next 25 years to comply with the remediation and
monitoring requirements of the Permit, and approximately $120 per year in 1996
dollars over the next 25 years for response to off-site groundwater
contamination.
In addition, MK Rail would be liable for any damages resulting from
hazardous substances migrating from the facility to the regional aquifer system
which serves most of the domestic and industrial users of groundwater in the
area (which includes and extends beyond Boise). In the event of contamination of
the regional aquifer, MK Rail would be required, among other things, to provide
potable water to affected users and to install a treatment system to clean up
the polluted water, and could incur other liabilities, the combined cost of
which cannot be estimated, but would be expected to be material in amount. The
regional aquifer system, however, occurs at a depth which is approximately 190
feet below groundwater levels currently identified as contaminated. While MK
Rail's management has stated that it believes there is no evidence that the
regional aquifer system is currently threatened by releases of contaminants from
the Boise Locomotive Plant, no assurance can be given in this regard.
Foster Wheeler Energy Corporation ("FWEC") is named as a potentially
responsible party with respect to the MK Rail's Mountaintop, Pennsylvania plant,
which has been listed by the EPAin its data base of potential hazardous waste
sites, the Comprehensive Environmental Response, Compensation and Liability
Information System ("CERCLIS"). FWEC, the
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seller of the Mountaintop property to the Corporation in 1989, has agreed to
indemnify the Corporation against any liabilities associated with this Superfund
site. MK Rail's management believes that this indemnification arrangement is
enforceable and, although such obligation is unsecured and therefore
structurally subordinate to secured indebtedness of FWEC, that FWEC has the
financial resources to honor its obligations under this indemnification
arrangement. This indemnification does not alter MK Rail's potential liability
to third parties (other than FWEC) or governmental agencies under CERCLA but
creates contractual obligations on the part of FWEC for such liabilities.
MK Rail is currently voluntarily remediating surficial contamination
resulting from a release of xylene in connection with a storage tank leak at its
St. Louis, Missouri facility. MK Rail notified the relevant state regulatory
agency of its remediation plan and, with the concurrence of the state agency,
initiated site remediation in 1994. Based on monitoring results, MK Rail
anticipates discontinuing site remediation in 1996.
Availability of Raw Materials
Raw materials and components necessary for the rendering of construction and
engineering services for the Corporation are generally available from numerous
sources. The Corporation does not foresee any unavailability of materials and
components which would have a material adverse effect on its overall business in
the near term.
Employees
The Corporation's total worldwide employment varies widely since it depends upon
the volume, type and scope of operations under way at any given time, as well as
upon weather conditions and other factors.
At December 31, 1995, the Corporation employed a total of
approximately 7,800 employees including project direct-hire craft employees.
The Corporation's primary assets are its highly skilled professionals,
who have the ability to leave the Corporation and so deprive it of the skill and
knowledge essential for performance of new and existing contracts. The
Corporation is a service business; it is highly dependent on its customers'
belief that the Corporation will perform professional tasks of the highest
standards over an extended period of time. Continued deterioration of the
Corporation's business, or loss of a number of key professionals, will have a
material adverse effect on the Corporation and may threaten its ability to
survive as a going concern.
Effective June 30, 1995, the Corporation, adopted key employee
retention and severance plans to retain certain key professionals on which the
Corporation's business is dependent while the Corporation proceeds with
restructuring alternatives. The plans encourage key employees to remain employed
with the Corporation by providing them with additional compensation and by
providing enhanced severance benefits under certain circumstances to any covered
employee that may be involuntarily terminated.
On April 10, 1996, the Corporation's board of directors approved
amendments to the retention and severance plans and adopted a new severance
plan. The retention plan, as amended, provides that covered employees will have
the option of receiving a cash payment on July 1, 1996 equal to twice the cash
payment received on December 15, 1995 ("initial cash payment"), or elect (prior
to April 30, 1996) to postpone the July 1, 1996 cash payment until the earlier
of the Corporation's emergence from a Chapter 11 proceeding or September 30,
1996. Covered employees who elect to postpone payment will receive an additional
cash amount equal to the initial cash payment prorated on the number of days
from July 1, 1996 to September 30, 1996, but no later than September 30, 1996
and no less than 25% of the initial cash payment.
Under the amended severance plan, covered employees who are
involuntarily terminated (without cause) after the occurrence of (i) a change in
control of the covered employee's division,(ii) a bankruptcy filing, or (iii) a
change in any consecutive two year period of a majority of the directors (unless
each new director was approved by a vote of two-thirds of the remaining
directors), will receive cash awards ranging from four to nine months of annual
base salary. The severance plan terminates on the confirmation of any Chapter 11
plan concerning the Corporation or July 1, 1996 provided that no triggering
event has occurred. On April 10, 1996, the Corporation's board of directors also
adopted a substantially similar severance plan which provides covered employees
with severance benefits if they are involuntarily terminated (without cause)
between April 10, 1996 and December 31, 1997. Covered employees for the purpose
of this new plan are employees who elect to postpone payment of their cash award
under the retention plan until after July 1, 1996. The Corporation paid $2,167
of the retention award on December 15, 1995 and has accrued an estimated
liability for retention plan awards of $3,657 at December 31, 1995. See the
"Benefit Plans - Retention and Severance Pay Plans" Note to Consolidated
Financial Statements in Part IIof this Annual Report on Form 10-K.
ITEM 2. PROPERTIES
(all dollar amounts in thousands)
At December 31, 1995, the Corporation and its consolidated subsidiaries owned
more than 1,650 units of heavy and light major mobile construction and contract
mining equipment.
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Because of the mobile nature of its construction business, the
Corporation does not own any significant amount of real property. All four of
its principal administrative office facilities in Boise, Idaho; Cleveland, Ohio;
Denver, Colorado and San Antonio, Texas are leased under long-term,
noncancelable leases. The Boise and Cleveland administrative offices and
engineering facilities consisting of approximately 337,300 square feet and
246,700 square feet, respectively, are rented under long-term, noncancelable
leases expiring in 2015 and 2010, respectively. The Corporation's obligations,
net of sublease income for the Boise and Cleveland facilities under these
noncancelable leases, at December 31, 1995 was $154,700.
The Corporation has been holding discussions with the landlord of its
Boise administrative office facility with the intent to amend certain terms and
conditions of its noncancelable lease expiring in 2015, including a reduction in
the annual rental and a reduction in the term of the lease.
Aggregate annual rental payments on real estate and equipment leased
by the Corporation during the year ended December 31, 1995 was approximately
$34,550. For further information on rentals and minimum rental commitments, see
the "Commitments and Contingencies - Long-Term Leases" Note to Consolidated
Financial Statements in Part II of this Annual Report on Form 10-K.
The Corporation considers that its owned construction and mining
equipment and its leased administrative properties are well maintained and
suitable for its current operations. Maintenance and repair expenses,
principally for keeping its construction and mining equipment fleet at a
standard of operating condition, of approximately $32,300 in 1995, $35,800 in
1994 and $39,600 in 1993, have been charged to operations. Maintenance and
repair expenses of approximately $32,500 for the year 1995 included $11,800 of
such expenses incurred in connection with the Navasota mining services contract
which was terminated February 29, 1996. See the "Subsequent Events - Navasota
Mining Services Contract" Note to Consolidated Statements in Part II of the
Annual Report on Form 10-K.
ITEM 3. LEGAL PROCEEDINGS
(all dollar amounts in thousands)
The Corporation has previously reported regarding lawsuits in the following four
general categories that were either settled or are currently pending against the
Corporation and/or MK Rail and their respective directors and/or officers:
(1) class actions relating to transactions in the common stock of the
Corporation; (2) class actions relating to the issuance of, and transactions in,
the common stock of MK Rail; (3) derivative actions brought by persons who claim
to be stockholders of the Corporation; and (4) claims brought by the former
stockholders of three corporations, Touchstone, Inc., TMS, Inc. and Clark
Industries, Inc., acquired by the Corporation in exchange for shares of the
Corporation's common stock and the businesses of which are now part of MK Rail.
The plaintiffs in these actions have sought various remedies, including
compensatory and punitive damages and injunctive relief.
1. MK Securities Class Actions. Seven separate cases have been consolidated as
In Re Morrison Knudsen Securities Litigation, No. 940334SEJL (U.S. District
Court, District of Idaho) (first filed July 28, 1994). The plaintiffs in this
consolidated action represent the class of stockholders who purchased shares of
the Corporation's common stock during the period of October 15, 1993 to March
31, 1995. Defendants include the Corporation, certain of the Corporation's
current and former officers, and the Corporation's auditors. The plaintiffs
purport to state claims for violation of certain federal and state securities
laws and certain common law claims, and seek damages in an unspecified amount.
As discussed more fully below, the parties have entered into a court-approved
settlement, the ultimate effectiveness of which is contingent upon settlement of
other actions.
2. MK Rail Securities Class Actions. Two cases relating to the issuance of, and
transactions in, the common stock of MK Rail have been consolidated in the U.S.
District Court for the District of Idaho. These are: Susser, et al. v. Agee, et
al., No. CIV 940477SLMB (U.S.D.C. D. Idaho), and Newman, et al. v. Agee, et al.,
No. CIV 940478SEJL (U.S.D.C. D. Idaho) (both filed October 20, 1994). The
plaintiffs in these consolidated actions represent the class of stockholders who
purchased shares of common stock of MK Rail during the period of April 26, 1994
to April 25, 1995. 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. The plaintiffs
purport to state claims for violation of certain federal securities laws and
certain common law claims and seek damages in an unspecified amount. A
settlement agreement (described below) was approved by the court on March 29,
1996, and is subject to appeal for a period of 30 days following March 29, 1996.
The ultimate effectiveness of the MK Rail Securities Class Actions is contingent
upon other settlements.
3. Derivative Actions. Thirteen derivative actions have been filed in state
courts in Idaho and Delaware, naming as defendants certain of the Corporation's
present and former directors and officers. The Corporation is a nominal
defendant in each of these actions. Five of the cases are pending in the Idaho
Fourth District Court in Ada County, and eight of the cases are pending in the
Delaware Chancery Court in New Castle County. The plaintiffs alleged, among
other things, that the
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Corporation's former chairman breached fiduciary duties to the Corporation, and
that the remaining defendants authorized or acquiesced to his allegedly wrongful
conduct and failed to properly supervise his activities; that the defendants
breached fiduciary duties to the Corporation and/or MK Rail by exposing the
Corporation and MK Rail to securities fraud claims and by artificially inflating
the price of the Corporation's and MK Rail's stock; that the defendant directors
breached fiduciary duties by allowing the Corporation's former chairman to
pursue high-risk strategies and manipulate assets without reasonable inquiry,
and by failing to implement effective internal controls relating to
dissemination of certain information relating to the Corporation; and that the
defendant directors breached fiduciary duties by wasting corporate assets
through payment of excessive compensation to the Corporation's former chairman.
The five Idaho derivative cases are as follows: (i) DeKlotz, et al. v. Morrison
Knudsen Co., et al., No. CV009500605D (Idaho Dist. Ct., Ada Cty.) (filed
February 13, 1995); (ii) Wohlgelernter v. Agee, et al., No. CVOC9500656D (Idaho
Dist. Ct., Ada Cty.) (filed March 24, 1995); (iii) Flinn v. Agee, et al., No.
CVOC9500765D (Idaho Dist. Ct., Ada Cty.)(filed February 21, 1995); (iv) Steiner
v. Agee, et al., No. CVOC9500745D (Idaho Dist. Ct., Ada Cty.) (filed February
17, 1995); and (v) State Board of Administration of Florida v. Morrison Knudsen
Corp., et al. (herein referred to as "Florida"), No. CVOC9502463D (Idaho Dist.
Ct., Ada Cty.) (filed June 2, 1995). Settlement agreements (described below) are
scheduled for court review on May 21, 1996. The eight Delaware derivative cases
are as follows: (i) Stern v. Agee, et al., Civil Action No. 14032 (Del. Ch.)
(filed February 13, 1995); (ii) Hager v. Agee, et al., Civil Action No. 14034
(Del. Ch.) (filed February 14, 1995); (iii) Troy v. Agee, et al., Civil Action
No. 14167 (Del. Ch.) (filed March 31, 1995); (iv) Caffrey v. Agee, et al., Civil
Action No. 14033 (Del. Ch.) (filed February 13, 1995); (v) Hammerslough v. Agee,
et al., Civil Action No. 14042 (Del. Ch.) (filed February 17, 1995; (vi) Rosenn
v. Agee, et al., Civil Action No. 14106 (Del. Ch.) (filed March 9, 1995); (vii)
Citron v. Agee, et al., Civil Action No. 14136 (Del. Ch.) (filed March 22,
1995); and (viii) Antonicello v. Agee, et al., Civil Action No. 14182 (Del. Ch.)
(filed April 4, 1995). Settlement agreements (described below) are scheduled for
court review on April 15, 1996.
4. MK Rail Components Actions.
Theodore E. Nelson v. Morrison Knudsen Corp., No. 951029 (U.S.D.C. W.D.
Tenn.) (filed February 7, 1995; Richard Jacobs, et al. v. Morrison Knudsen
Corp., No. 951024 (U.S.D.C. W.D. Tenn.) (filed February 7, 1995); and
Richard Jacobs, et al. v. Agee, No. 951168 (U.S.D.C. W.D. Tenn.) (filed
July 18, 1995).
The plaintiffs in these actions claim to have been all of the
stockholders of Touchstone prior to the Corporation's acquisition of Touchstone
through an exchange offer. The Corporation is the sole defendant. The Plaintiffs
allege that certain financial statements of the Corporation upon which they
based their decision to exchange Touchstone shares were misleading. The
plaintiffs purport to state claims for violation of federal and Tennessee
securities laws, and Tennessee common law. The plaintiffs further allege that
the Corporation violated the exchange agreement under which they exchanged their
Touchstone shares. As described below, the cases have been settled.
Karol Pilarczyk, et al. v. Morrison Knudsen Corp., MK Rail Corp., Agee,
Hanks, Cleary, Smith, Herbots and O'Donnell, No. 95CV1835 (U.S.D.C.
N.D.N.Y.) (filed December 22, 1995; First Amended Complaint filed
December 28, 1995).
Plaintiffs in this action are the former shareholders of TMS, Inc.
("TMS"). On December 30, 1992, the Corporation acquired TMS under an exchange
agreement, pursuant to which plaintiffs exchanged their TMS shares for shares of
the Corporation's common stock then allegedly valued at $14,000, a portion of
which was allegedly placed into escrow for ten years, one-tenth of which is
released annually, in exchange for the agreement of certain plaintiffs not to
compete with the Corporation. Plaintiffs claim that the Corporation warranted in
the exchange agreement that its 1991 Annual Report, report on Form 10-K, Proxy
Statement and its Quarterly Reports to Shareholders and reports on Form 10-Q for
the first three quarters of 1992 were true and accurate but that those reports,
as well as later statements by the Corporation and certain of the individual
defendants, were false and misleading. Plaintiffs claim that they were induced
to enter into the exchange agreement and the noncompete agreements by the
defendants' allegedly false statements. Plaintiffs assert claims under and/or
for: (S)(S) 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b5
thereunder; breach of the Exchange Agreement; breach of an alleged covenant of
good faith and fair dealing with respect to the Exchange Agreement and
noncompete agreements; unjust enrichment; common law fraud; negligent
misrepresentation; and rescission of the exchange agreement. Plaintiffs together
seek compensatory damages of not less than $7,500, treble damages, punitive
damages of not less than $5,000, pre and postjudgment interest and attorneys'
fees. The defendants filed a motion to dismiss the First Amended Complaint on
April 8, 1996.
Richard J. Clark, et al. v. Morrison Knudsen Corp. and Agee, No. 952305
(U.S.D.C. C.D. Ill.) (filed December 29, 1995).
Plaintiffs in this action are the former shareholders of Clark
Industries, Inc. ("Clark Industries"). On December 30, 1993, the Corporation
acquired Clark Industries under an exchange agreement, pursuant to which
plaintiffs exchanged their Clark Industries stock for shares of the
Corporation's common stock then allegedly valued at $2,108, a portion of which
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was allegedly placed into escrow for ten years, one-tenth of which is released
annually, in exchange for the agreement of the plaintiffs not to compete with
the Corporation. Plaintiffs claim that the Corporation represented to the
plaintiffs that its Annual Report on Form 10-K for the year ended December 31,
1992 and its reports on Form 10-Q for the first three quarters of 1993 were
accurate, but that those reports were inaccurate. Plaintiffs claim that they
were induced by the defendants' false and misleading statements to enter into
the exchange agreement. Plaintiffs assert claims under and/or for: (S)(S) 10(b)
and 20(a) of the Security Exchange Act of 1934 and Rule 10b5 thereunder; the
Racketeer Influenced and Corrupt Organization Act ("RICO"), 18 U.S.C. (S)(S)
1961 et seq.; the Illinois Consumer Fraud Act, (S) 815 Ill. Consol. Stat. (S)(S)
5 et seq.; the Illinois Consumer Fraud Act, (S) 815 Ill. Consol. Stat. (S)(S)
505 et seq., and common law fraud. Plaintiffs seek compensatory damages of
approximately $1,000, treble damages under RICO, punitive damages of $3,000,
attorney's fees and prejudgment interest. The Corporation filed a motion to
dismiss on March 20, 1996.
Settlements. Settlement discussions have been held among the Corporation, MK
Rail, certain of their respective present and former officers and directors,
their insurance carriers, the underwriting defendants and plaintiffs with
respect to all of the pending cases except Pilarczyk. These discussions have
resulted in agreements to settle the MK Securities Class Actions, the MK Rail
Securities Class Actions, the Derivative Actions and the Touchstone Actions. No
agreement to settle has been reached in the Clark action.
The settlements, other than that of the Touchstone Actions, must be
submitted to, and approved by, the courts presiding over the various cases.
There can be no assurance that the settlements will be approved by the courts or
consummated in the form described below or in any other form. The process of
court approval of the settlements as of this date, stands as follows:
1. MK Securities Class Actions. The settlement of the MK Securities Class
Actions has been approved by the United States District Court for the District
of Idaho in a final judgment entered on December 1, 1995. One objection to the
settlement was filed by the plaintiffs in the Touchstone Actions and then
withdrawn before the entry of judgment. No appeal has been filed. A court
approved settlement fund was established and settlement proceeds (cash of
$35,000, which was provided entirely by insurers, and a share certificate for
2,976,923 shares of the Corporation's common stock) were deposited therein
during 1995. The issuance of the common stock represented by such certificate
and the transfer of the settlement proceeds from the settlement fund to the
control of the plaintiffs and, thus, the effectiveness of the settlement is,
however, subject to certain conditions, including the entry of final,
nonappealable judgments approving the settlements in the MK Rail Securities
Class Actions and the MK Derivative Actions.
2. MK Rail Securities Class Actions. The settlement of the MK Rail Securities
Class Actions was approved on March 29, 1996 by the United States District Court
for the District of Idaho, subject to appeal for a period of 30 days following
March 29, 1996. A court-approved settlement fund was established and the
Corporation deposited a share certificate for 869,231 shares of its common stock
into such fund after the settlement was approved. In addition to a condition
that the settlement be approved by an order of the Court that becomes final and
nonappealable, the issuance of the common stock represented by such certificate
and the transfer of the settlement proceeds to the control of the plaintiffs
and, thus, the effectiveness of the settlement is subject to certain other
conditions, including the entry of a final nonappealable judgment approving the
settlement of the "Double Derivative" Claims in Wohlgelernter. The effectiveness
of the settlement of the MK Rail Securities Class Actions is not, however,
subject to the final judicial approval of the settlements in the MK Securities
Class Actions or the MK Derivative Actions.
3. MK Derivative Actions. The settlements of the MK Derivative Actions has been
submitted for approval by the Delaware Chancery Court and the Idaho District
Court for Ada County. The settlements do not include the "Double Derivative"
Claim asserted on behalf of MK Rail in Wohlgelernter. In connection with the
settlements of the MK Derivative Actions, the Corporation reached an agreement
with Mr. Agee with respect to his severance benefits, including pension rights,
to which the plaintiffs do not object. Pursuant to Preliminary Orders of the
Courts, notice has been sent to the stockholders and a hearing has been
scheduled for April 15, 1996 before the Delaware Court of Chancery and for May
21, 1996 before the Idaho District Court. If approved by final orders of the
Delaware Chancery Court and the Idaho District Court that become final and
nonappealable, settlement proceeds from the MK Derivative Actions (less
attorneys' fees and expenses) will be transferred to the control of the
settlement fund in the MK Securities Class Actions and, thus, the effectiveness
of the settlement is subject to certain conditions, including the entry of
final, nonappealable judgments approving the settlements in the MK Securities
Class Actions (which condition has been satisfied), the MK Rail Securities Class
Actions and the "Double Derivative" Claims asserted on behalf of MK Rail in
Wohlgelernter. The settlement of Florida has been submitted to the Idaho
District Court for Ada County for approval. Pursuant to the Court's Preliminary
Approval Order, notice has been sent to the stockholders, and a hearing has been
set for May 21, 1996 before the Court. Under the terms of the settlement in
Florida, MK is obligated to pay the plaintiffs' attorneys' fees awarded by the
Court in an amount not to exceed $140. The effectiveness of the settlement is
conditioned only on the entry by the Idaho Court of a judgment approving the
settlement that becomes final and nonappealable.
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4. "Double Derivative" Claims. Settlement of the "Double Derivative" Claims
asserted on behalf of MK Rail in Wohlgelernter was reached on March 4, 1996. The
stipulation of settlement has been submitted to the Idaho District Court for Ada
County for approval and a hearing with respect to such approval has been set for
May 21, 1996. The Corporation has no monetary or other obligations under the
settlement of the actions resulting from the "Double Derivative" claims (the
"Double Derivative Actions"). However, $4,500 in the reduction of intercompany
debt owed by MK Rail to the Corporation is attributable to the settlement of the
Double Derivative Actions, the MK Securities Class Actions and the MK Rail
Securities Class Actions. The effectiveness of the settlement is conditioned
upon the entry by the Idaho Court of a judgment approving the settlement that
becomes final and nonappealable and upon the entry of a final, nonappealable
judgment approving the settlement in the MK Rail Securities Class Actions.
If final, nonappealable judgments approving the settlements are
entered and all other conditions to the effectiveness of the various settlements
are satisfied, the settlement terms will require the Corporation, as its share
of the settlements, to (i) issue 2,976,923 shares of common stock in exchange
for the share certificate held by the settlement fund created in connection with
the settlement of the MK Securities Class Actions; and (ii) issue 869,231 shares
of common stock in exchange for the share certificate held by the settlement
fund created in connection with the settlement of the MK Rail Securities Class
Actions. The settlement fund created in connection with the MK Securities Class
Actions will transfer the net (after plaintiffs' attorneys' fees and related
expenses) insurance proceeds received by the Corporation in connection with the
settlement of the MK Securities Class Actions and the MK Derivative Actions
(excluding Florida) into a settlement account to be distributed to the
plaintiffs in connection with the settlement of the MK Securities Class Actions.
The settlement of the Derivative Actions also requires the implementation of
certain "therapeutic measures" with respect to corporate governance. Those
measures 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 certain
nonrecurring items without stockholder approval, and (in connection with the
separate settlement of Florida) 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 would 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 $1,000.
The Corporation's insurance carriers have paid $35,000 on behalf of the
individual defendants in the MK Securities Class Actions and the Derivative
Actions, and MK Rail's insurance carrier has paid $6,000 into a settlement fund
created in connection with the settlement of the MK Rail Securities Class
Actions. 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
$1,000. In a separate transaction, the Corporation has entered into an agreement
with MK Rail to reduce the principal amount of the intercompany debt owed to the
Corporation by MK Rail on account of the consideration to be paid by MK Rail in
settlement of the MK Rail Securities Class Actions. The agreement between the
Corporation and MK Rail further provides that such reduction will be adjusted in
the event the settlement is not consummated. The Corporation's auditors
separately reached a settlement with the plaintiffs in the MK Securities Class
Actions. The Corporation and the auditors have agreed to release one another
from claims arising from the litigation; such releases are subject to certain
conditions, including effectiveness of the respective settlements by the
Corporation and the auditors of the MK Securities Class Actions. If the
Corporation consummates a financial restructuring in the form of the Plan, the
Corporation expects that plaintiffs who receive shares of the Corporation's
common stock in the foregoing settlements will be treated the same as the other
existing stockholders of the Corporation. See the disclosure under Item 1.
"Business - Recapitalization Plan" for a discussion of the proposed treatment of
existing stockholders of the Corporation under the recapitalization plan in
Part I of this Annual Report on Form 10-K.
5. Touchstone Actions. The Touchstone Actions have been settled and notices of
voluntary dismissal with prejudice were filed on January 16, 1996. Under the
terms of the settlement, the Corporation (i) paid $425 to the plaintiffs; (ii)
paid to the plaintiffs their additional actual out-of-pocket fees and costs, in
the amount of $156, on or about April 1, 1996; and (iii) agreed to pay the
difference, if any, between $5,250 and the sum of (x) all proceeds received by
the plaintiffs as members of the class from the settlement of the MK Securities
Class Actions and (y) the amount paid to plaintiffs under subparagraph (ii). The
amount payable to the plaintiffs under subparagraph (iii) is due (a) on January
1, 1997 if plaintiffs receive the proceeds of the MK Securities Class Actions on
or before that date; (b) if plaintiffs receive the proceeds of the settlement of
the MK Securities Class Actions between January 3 and June 30, 1997, within ten
days of receipt; or (c) on June 30, 1997 if plaintiffs have not received the
proceeds of the settlement of the MK Securities Class Actions by that date, in
which event plaintiffs have agreed to assign their interests in the proceeds of
the settlement of the MK Securities Class Actions to the Corporation. The
agreement provides that the Corporation may, at its election, pay up to 50% of
the amount
I-15
<PAGE>
due under subparagraph (iii) above in the form of unrestricted, freely tradable
shares of its common stock, valued at the closing price on the fifth trading day
preceding the applicable payment date. The settlement also provides for certain
changes in the escrow agreements securing the noncompete agreements of certain
plaintiffs.
SEC Investigations. The Corporation previously reported that it had been
notified that the staff of the Central Regional Offices of the Securities and
Exchange Commission planned to recommend to the Commission that one of the
Corporation's subsidiaries be named as a respondent in an administrative action
in connection with an ongoing investigation of the issuance by the City and
County of Denver of revenue bonds to finance the construction of the Denver
International Airport. The Corporation has since filed a brief with the
Commission disputing the staff recommendation. The Commission has not announced
a decision. The Corporation also previously reported that MK Rail and the
Corporation are subject to a formal investigation by the Pacific Regional Office
of the Commission. The Corporation continues to provide documents in response to
discovery requests and otherwise cooperate with the Commission's staff in
connection with this investigation.
See the disclosure under the caption Item 1. "Business - Environmental Matters"
for discussion of pending environmental matters in Part I of this Annual Report
on Form 10-K.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Corporation did not submit any matters to a vote of security holders during
the fourth quarter of 1995.
I-16
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
Market Information: The Corporation's voting common stock is traded on the New
York and Pacific Stock Exchanges under the Symbol MRN. At the close of business
on March 31, 1996 the Corporation had 33,231,191 shares issued and outstanding.
The New York and Pacific Stock Exchanges have certain listing criteria
applicable to companies listed on such exchanges including financial criteria
and minimum requirements as to the number of holders of listed securities. The
Corporation currently does not meet the financial listing criteria for the New
York Stock Exchange or the Pacific Stock Exchange. Continuing losses that may be
sustained by the Corporation or transactions the Corporation may pursue in
connection with a possible reorganization could adversely impact the
Corporation's continuing eligibility for listing on such exchanges. In the event
that the New York Stock Exchange or the Pacific Stock Exchange were to seek to
delist the Corporation's common stock, the Corporation would seek to obtain
relief from the New York Stock Exchange or the Pacific Stock Exchange, as the
case may be. However, there can be no assurance that such efforts would be
successful. In the event that the Corporation was unable to list its common
stock with either exchange, there would be reduced liquidity for the
Corporation's stockholders, which would have a material adverse effect on the
Corporation's stockholders.
Holders: The approximate number of record holders of the Corporation's voting
common stock at March 31, 1996 was approximately 8,350 and does not include
beneficial owners of the Corporation's common stock held in the name of a
broker, dealer, bank, voting trustee or other nominee. The cash dividends
declared and the New York Stock Exchange composite high and low sales prices of
the Corporation's common stock traded on the New York and Pacific Stock
Exchanges for each quarterly period within the two most recent fiscal years are
set forth under the caption "Quarterly Financial Data" in Part II of this Annual
Report on Form 10-K.
Dividends: The Corporation paid a cash dividend of $.20 a share in each of the
calendar quarters of 1994 and the first calendar quarter of 1995. The
Corporation has not paid any cash dividends after its $.20 quarterly dividend in
1995. Under the terms of its bank credit agreements and the applicable
requirements of Delaware law, the Corporation is currently prohibited from
paying cash dividends.
II-1
<PAGE>
<TABLE>
<CAPTION>
ITEM 6. SELECTED FINANCIAL DATA
(Thousands of dollars except share data)
- ---------------------------------------------------------------------------------------------------------------------------
OPERATING SUMMARY 1995 1994 (a) 1993 (a) 1992 (a) 1991 (a)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue $ 1,708,666 $ 2,021,003 $ 2,329,876 $ 2,002,960 $ 1,573,769
Operating income (loss) from
continuing operations 18,822 (100,768) 60,553 43,731 60,727
Income (loss) from continuing operations
before extraordinary charge and
cumulative effect of accounting change (79,636) (155,698) 28,918 10,136 23,535
Income (loss) from discontinued operations,
net of tax (182,302) (193,937) 6,849 3,300 11,921
Extraordinary charge from write-off of
unamortized debt issue cost, net of tax -- -- -- (3,096) --
Cumulative effect of accounting change for
postretirement health care costs, net of tax -- -- -- (17,403) --
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (261,938) $ (349,635) $ 35,767 $ (7,063) $ 35,456
===========================================================================================================================
Income (loss) per common and common
equivalent share:
Income (loss) from continuing operations
before extraordinary charge and
cumulative effect of accounting change $(2.41) $(4.79) $.93 $.33 $.82
Income (loss) from discontinued operations (5.52) (5.96) .22 .11 .42
Extraordinary charge -- -- -- (.10) --
Cumulative effect of accounting change -- -- -- (.57) --
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) $(7.93) $(10.75) $1.15 $(.23) $1.24
===========================================================================================================================
Dividends declared per share $-- $.80 $.80 $.80 $.74
===========================================================================================================================
FINANCIAL POSITION SUMMARY
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 63,086 $ 66,864 $ 80,000 $ 127,263 $ 136,808
Net assets of discontinued MK Rail operations 72,000 142,424 128,447 85,178 66,076
Other current assets 349,718 428,062 486,778 424,409 469,598
Investments and other assets 87,264 152,368 197,827 220,865 216,434
Property and equipment, net 56,092 113,229 148,494 149,647 138,108
Total assets 628,160 902,947 1,041,546 1,007,362 1,027,024
Short-term and current portion of long-term debt 251,226 192,152 36,292 3,853 1,226
Estimated reimbursement obligations of
discontinued Transit operations 111,444 -- -- -- --
Other current liabilities 354,341 447,570 436,848 335,638 317,964
Debt due after one year -- 7,873 8,368 457 195,152
Obligations and advances in excess of
investment in Transit operations -- 79,438 39,666 180,906 35,258
Other non-current liabilities and minority interests 104,831 118,118 113,405 110,737 81,274
Stockholders' equity (deficiency) (193,682) 57,796 406,967 375,771 396,150
- ---------------------------------------------------------------------------------------------------------------------------
Book value per share $(5.83) $1.76 $12.87 $12.26 $13.17
Shares outstanding at year end 33,237,900 32,864,200 31,618,000 30,640,000 30,086,300
- ---------------------------------------------------------------------------------------------------------------------------
(a) Reclassified to give effect to the discontinuance of MK Rail Corporation and Transit operations.
</TABLE>
II-2
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
DESCRIPTION OF BUSINESS
The Corporation operates in one industry segment, engineering and construction.
The Corporation provides design, engineering, construction,
procurement, project-management and construction-management services in the
infrastructure market, including transportation, water resources, heavy civil
and energy developments, as well as industrial buildings. The Corporation also
provides services to the nuclear and fossil-fueled power markets and in
cogeneration, waste-to-energy, environmental and hazardous waste, and wastewater
treatment fields; and in addition serves the hydroelectric, oil and gas, and
mine engineering markets. A number of subsidiaries are engaged in long-term
contract mining of coal and lignite at mines in the United States and Germany.
Other markets include operations and maintenance services for military and
commercial facilities.
At December 31, 1995, the Corporation had less-than-majority equity
interests in Westmoreland Resources, Inc., a coal mining company in Montana, and
Mitteldeutsche Braunkohlengesellschaft mbH ("MIBRAG mbH"), a company that
operates lignite coal mines, power and process plants in Germany. Also at
December 31, 1995, the Corporation had a 62.8% majority interest in McConnell
Dowell Corporation, Limited ("MDC") an engineering and construction contractor
based in Australia. Subsequent to December 31, 1995, the Corporation sold its
62.8% ownership interest in MDC. Because of the Corporation's decision to sell
its ownership interest in MDC, the Corporation has accounted for its investment
in MDCduring the year 1995 by the equity method. See the "Subsequent Events -
McConnell Dowell Corporation, Limited" Note to Consolidated Financial
Statements.
NEW BUSINESS AND BACKLOG
New Business: The Corporation booked new business of $1,438.3 million in 1995
compared to $1,772.3 million in 1994. Of the $1,438.3 million of new work booked
in 1995, $665.0 million (46%) consisted of the Corporation's proportionate share
of a major highway joint-venture project in Colorado and its proportionate share
of a joint-venture project providing environmental restoration and waste
management services at a Superfund site in Colorado. New business consists of
new engineering, construction, environmental and mining services contracts and
changes to existing contracts.
Backlog: Backlog of all uncompleted contracts at December 31, 1995 was $3,864.4
million, compared with $4,134.7 million at year-end 1994. Backlog consists of
uncompleted portions of engineering and construction contracts, including the
proportionate share of construction joint -venture contracts, the next five-year
portion of long-term mining services contracts and the funded and unfunded
portions of long-term contracts and subcontracts with various agencies of the
U.S. Government. The Corporation has a number of contracts and subcontracts with
various agencies of the U.S. Government principally for environmental
remediation and restoration work, which contracts extend beyond one year and for
which government funding has not yet been approved. The unfunded portions of
such contracts included in backlog at December 31, 1995 and 1994 were $1,986.9
million and $1,702.6 million, respectively. Contracts and subcontracts with
agencies of the U.S. Government are subject to unilateral termination at the
option of the U.S. Government. The Corporation does not expect any material
portion of its government contracting business to be terminated. See Item 1.
"Backlog" and "U.S. Government Contracts" in Part I of this Annual Report on
Form 10-K.
The following table sets forth the contract revenue backlog at
December 31, 1995 and 1994 and the new business booked in each of the two years
in the period ended December 31, 1995.
NEW BUSINESS AND BACKLOG
(Thousands of dollars)
- --------------------------------------------------------------------------------
1995 1994
New Business Backlog New Business Backlog
------------------------- -------------------------
$1,438,300 $3,864,400 $1,772,300 $4,134,700
================================================================================
The 1995 year-end backlog of $3,864.4 million was comprised of 18%
fixed-price and 82% fee-type contracts. The 1994 year-end backlog of $4,134.7
million was comprised of 28% fixed-price and 72% fee-type contracts.
The Corporation's business is being adversely affected by its poor
financial condition, and by the reluctance of many potential customers to engage
the Corporation on new or additional projects. The Corporation has experienced a
16% decline in new business booked in 1995 compared to 1994. The decline in new
business has had a material adverse effect on the Corporation. If the
Corporation's diminished ability to secure new work continues, it will further
adversely impact the Corporation's ability to continue as a going concern.
II-3
<PAGE>
Approximately $1,165.0 million or 62% of 1995 year-end backlog of
$1,877.5 million (excluding the $1,986.9 million unfunded portion of U.S.
Government contracts) is expected to be recognized as revenue in 1996. Although
backlog reflects only business which is considered to be firm and is an
indication of expected future revenues, there can be no assurance that contract
cancelations or scope adjustments will not occur or when revenue and earnings
from such backlog will be realized.
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS
1995 COMPARED TO 1994
Quarter Ended Year Ended
December 31, December 31,
----------------- -----------------
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Revenue $390.3 $ 485.1 $1,708.7 $2,021.0
Operating income (loss)
from continuing operations 14.3 (108.7) 18.8 (100.8)
General and administrative
expenses (14.9) (9.6) (59.2) (33.1)
Interest expense (6.1) (2.4) (28.2) (4.9)
Other income (expense), net (1.8) (18.7) (4.4) (19.7)
Equity in net income of
unconsolidated affiliates 4.7 4.1 23.0 11.4
Loss on disposition of
investments in affiliates,
net (2.3) (6.1) (19.7) (15.1)
Gain on MK Gold Company's
sale of stock -- -- -- 1.3
Provision for stockholders'
litigation settlements -- (25.0) -- (25.0)
</TABLE>
================================================================================
Revenue: Revenue from continuing operations for the fourth quarter of 1995 was
$390.3 million, a decrease of $94.8 million compared to $485.1 million for the
comparable period of 1994, and revenue from continuing operations for the year
ended December 31, 1995 was $1,708.7 million, a decrease of $312.3 million
compared to $2,021.0 million for the year ended 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 periods of 1994, contrasted with decreases in
similar new construction because of a decline in new contract awards in 1994 and
1995. The Corporation's decline in new contract awards has continued in the
first quarter of 1996. See "New Business and Backlog" above.
Operating Income (Loss): The Corporation reported operating income from
continuing operations for the fourth quarter of 1995 of $14.3 million compared
to an operating loss of $108.7 million from continuing operations for the same
period of 1994. Operating income from continuing operations for the year ended
December 31, 1995 was $18.8 million compared to an operating loss of $100.8
million from continuing operations for the year 1994.
Year ended December 31, 1995 operating results were affected by the
recognition of a number of unusual items, the net result of which was to
adversely impact operating income for 1995 by $.9 million. Items having an
adverse impact included provisions of $25.3 million for anticipated losses on a
number of fixed-price construction contracts, including $16.8 million in
connection with the Corporation's participation in a joint-venture contract to
construct a toll bridge in the maritime provinces of Canada, $2.2 million
provision for the anticipated costs of settling a long-term noncancelable lease
obligation and $6.3 million provision to write-off certain assets in the fourth
quarter of 1995, the carrying amount of which had been impaired. Items having a
beneficial impact included $18.9 million proceeds from the settlements of claims
on fixed-price contracts completed in prior periods and $14.0 million of mining
services fees recognized in the fourth quarter of 1995. These mining service
fees represent income earned during the years 1994 and 1995 from providing mine
planning, engineering and related services to MIBRAG mbH, but because of
restrictions on repatriation of funds imposed as a consequence of German
government loan guarantees of MIBRAG mbH's current andfuture indebtedness, the
Corporation, pursuant to the terms of the purchase agreement with the German
government, was precluded from realizing the full amount of the fees during the
periods when they were earned. The German government, in consideration for a
reduction in its loan guarantees has, among other things, agreed to lift the
restrictions on payment of mining service fees by MIBRAG mbH to the Corporation
and in addition, lift limitations on any future payment of dividends by MIBRAG
mbH. See the "Investments in and Advances to Unconsolidated Affiliates" Note to
Consolidated Financial Statements.
Fourth quarter 1994 and year ended December 31, 1994 results of
operations were adversely impacted by the recognition of $103.3 million of
charges to operating results consisting of (i) $12.8 million provision to write-
off the Corporation's remaining investment in the Vertac environmental
remediation and waste disposal project due to the termination for convenience of
the contract by the U.S. Government, (ii) $17.5 million provision for
anticipated losses because of customer-disputed change orders on a number of
light trackwork projects, (iii) $6.3 million provision for anticipated losses
for customer-initiated scope change orders subsequently rejected by the customer
in connection with a power plant project, (iv) $13.0 million provision for
anticipated losses on a fixed-price contract to construct a toll bridge in the
maritime provinces
II-4
<PAGE>
of Canada, (v) $9.1 million provision for anticipated engineering and labor cost
overruns on fixed-priced petrochemical and railroad electrification projects,
(vi) $28.0 million provision for anticipated losses because the fixed-priced
Taipei subway project encountered unstable subsoil conditions that affected
tunnel boring progress, (vii) $8.0 million provision to write-down the
Corporation's investment in the net assets of the North Pacific construction
operations to their net recoverable value, based on the Corporation's decision
in late 1994 to sell the assets and business of its North Pacific construction
operations and (viii) $8.6 million provision for miscellaneous other write-downs
of operating assets and investments and provisions for anticipated losses on
uncompleted fixed-price contracts.
The Corporation reported operating income from continuing operations
for the first nine months of 1995 of $4.5 million (after accounting for its
investment in MDC by the equity method for 1995) compared to $7.9 million
operating income for the same period of 1994. The results of continuing
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
provision 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 noncancelable lease obligation partially offset by (ii) a $18.9 million
gain from the settlements of a number of claims on fixed-price contracts
completed in prior periods.
The results of continuing operations for the first nine months of 1994
were affected by the recognition of aggregate charges to operating results of
$17.6 million consisting of (i) $4.3 million provision to write-down certain
surplus tunnel-boring equipment to their estimated net recoverable values (ii)
$2.3 million provision for anticipated losses due to delays on the Taipei subway
project (iii) $5.0 million provision to write-down its investment in Vertac and
a $6.0 million provision to write-down the capitalized cost of a CF Systems'
processing facility to their then estimated net recoverable values. Vertac was a
remediation and waste disposal project terminated for convenience of the U.S.
Government and CF Systems is a wholly-owned subsidiary currently performing
environmental remediation work. See the "Commitments and Contingencies -
CF Systems" Note to Consolidated Financial Statements.
General and Administrative Expenses: General and administrative expense for the
fourth quarter and the year ended 1995 increased $5.3 million and $26.1 million,
respectively, from the same periods of 1994. The increases are due to
substantial non-recurring costs and expenses for legal and other professional
costs and expenses associated with stockholder litigation, restructuring of the
Corporation's secured debt and contingent obligations. In addition, the
Corporation accrued $3.0 million and $6.0 million in the fourth quarter and year
ended December 31, 1995, respectively, for additional compensation in connection
with the adoption in July 1995 of a twelve month retention plan for key
employees. The Corporation paid $2.2 million of the retention award on December
15, 1995 and has accrued an estimated liability for retention plan awards of
$3.7 million at December 31, 1995. See Item 1 "Business - Employees" for a
discussion of the retention and severance pay plans for key employees in Part I
of this Annual Report on Form 10-K and the "Benefit Plans - Retention and
Severance Pay Plans" Note to Consolidated Financial Statement.
General and administrative expenses for the fourth quarter of 1994
included estimated non-recurring accruals of $4.9 million for legal and
professional expenses associated with pending stockholder litigation and
employee severance costs.
Interest Expense: Interest expense for the fourth quarter and year ended
December 31, 1995 increased $3.7 million and $23.3 million, respectively, from
the same periods of 1994. The significant increase in interest expense in 1995
is attributed to a substantially higher weighted average level of debt
outstanding during 1995 compared to 1994 ($294.4 million compared to $154.5
million) and a weighted average cost of borrowing during the fourth quarter and
the year ended December 31, 1995 of 9.3% and 9.0%, respectively, compared to
6.9% and 5.7%, respectively, during the comparable periods of 1994.
Other Income (Expense), Net: Other net expense of $4.4 million for the year
ended December 31, 1995 is comprised principally of a $3.6 million provision to
write-down the carrying amount of the Morrison Knudsen Depot sold in January
1996, $5.9 million provision to write-off investments and an uncollectible notes
receivable, and $1.1 million provision to recognize losses on future rent costs
on certain long-term noncancelable real estate leases to the extent they will
not be offset by sub-lease rental income. These expenses were partially offset
by $4.9 million of interest and dividend income and net gains from sales of
marketable securities and $1.9 million underwriting income of the insurance
subsidiary. See the "Other Income (Expense), Net" Note to Consolidated Financial
Statements.
Other net expense of $19.7 million for the year ended December 31,
1994 was due principally to the recognition of $24.0 million of provisions for
write-downs of investments and assets reflecting the Corporation's decision in
late 1994 to accelerate repatriation of certain off-shore investments and
receivables, reduce the carrying amount of the Corporation's investment in
Western Aircraft, Inc., to estimated net recoverable value and provide an
allowance for the estimated reduction in realizable values of accounts and notes
receivable due to the Corporation's decision to accelerate collection. See the
"Other Income (Expense) Net" Note to Consolidated Financial Statements.
II-5
<PAGE>
Equity in Net Income (Loss) of Unconsolidated Affiliates: Equity in the net
income of unconsolidated affiliates of $23.0 million for the year ended December
31, 1995 increased $11.6 million compared to $11.4 million for the year 1994.
Equity in the results of operations of the unconsolidated affiliates in 1995
consisted of $13.7 million income from MIBRAG mbH, $10.8 million income from
MDC, $.7 million income from Westmoreland Resources, Inc. and $2.2 million loss
from MKA. The increase is primarily due to the inclusion in 1995 of $10.8
million representing the Corporation's 62.8% share of the net income of MDC.
Subsequent to December 31, 1995, the Corporation sold its 62.8% ownership
interest in MDC. Because of the Corporation's decision to sell its ownership
interest in MDC, the Corporation has accounted for its investment in MDC for the
year ended December 31, 1995 by the equity method. The Corporation reported MDC
as a consolidated subsidiary for the year ended December 31, 1994. See the
"Investments in and Advances to Unconsolidated Affiliates and Subsequent Events
- - McConnell Dowell Corporation, Limited" Notes to Consolidated Financial
Statements.
Equity in the results of operations of unconsolidated affiliates of
$11.4 million for the year ended December 31, 1994 consisted primarily of the
recognition of $15.5 million income from MIBRAG mbH offset by $4.6 million loss
from the Corporation's equity in the results of operations of two development
stage companies. The Corporation also recognized a $7.2 million loss on
disposition of its investments in the development stage companies stemming from
the Corporation's decision to discontinue its financial support for these non-
core businesses. See Dispositions of Investments in Affiliates following.
Dispositions of Investments in Affiliates: The $19.7 million net loss on
disposition of investments in affiliates for the year ended December 31, 1995
consisted of a $9.3 million loss on the Corporation's sale in June 1995 of its
remaining ownership interest in MK Gold Company, an $8.1 million loss on the
sale in September 1995 of its investment in MK Investments, Inc. (North Pacific
construction operations) and a $2.3 million loss to write-off the Corporation's
investment in MKA stemming from its decision in December 1995 to no longer
provide MKA with financial support. See the "Disposition of Investments in
Affiliates - Dispositions in 1995" Note to Consolidated Financial Statements.
The $15.1 million net loss on dispositions of investments in
affiliates for the year ended December 31, 1994 consisted of a $4.9 million gain
on the Corporation's sale in 1994 of a portion of its ownership interest in SCDI
offset by a $12.7 million loss from writing-off the Corporation's investment in
Texas TGV in June 1994 after Texas TGV's failure to provide equity financing for
a high speed rail system project as required under the franchise agreement and a
$7.2 million loss on the disposition of two development-stage companies stemming
from the Corporation's decision in December 1994 to discontinue its financial
support for these non-core businesses. See the "Dispositions of Investments in
Affiliates - Dispositions in 1994" Note to Consolidated Financial Statements.
Provision for Litigation Settlements: Agreements as to the principal economic
terms of settlements of securities class actions and derivative actions were
reached in June 1995, subject to, among other things, approval by the
appropriate courts. The settlement terms provided, among other things, for the
Corporation's insurance carriers to deposit $35.0 million cash into a court-
approved settlement fund and for the Corporation to deposit into this settlement
fund a certificate for 2,976,923 shares of common stock in connection with the
MK Securities Class Actions and a certificate for 869,231 shares of common stock
in connection with the MK Rail Securities Class Actions. Both the cash and stock
certificates were deposited into the settlement fund during 1995. Upon the
approval of the settlements by the various courts, the Corporation will issue
3,846,154 shares of new common stock to the plaintiffs. Effective December 1994,
the Corporation recognized an aggregate pretax charge of $25.0 million for the
estimated cost of the litigation settlements representing the then fair value of
the common stock expected to be issued. The estimated liability for the $25.0
million litigation settlements is included in the accompanying balance sheets at
December 31, 1995 and 1994 as a non-current liability. Assuming court approval
and issuance of the stock, the cost of the settlements will be adjusted to
reflect the current fair market value of the Corporation's stock at the time of
court approval. However, there can be no assurance that such final settlements
will be approved by the appropriate courts. These settlements do not include the
two actions brought by the former stockholders of a number of companies whose
stock was acquired by the Corporation through an exchange of the Corporation's
common stock. See Item 3. "Legal Proceedings" in Part I of this Annual Report on
Form 10-K and the "Legal Proceedings" Note to Consolidated Financial Statements.
Income Tax Expenses: The Corporation recognized income tax expense for the year
ended December 31, 1995 of $9.9 million on a pretax loss of $69.7 million
whereas in 1994 the Corporation recognized a tax benefit of $30.9 million on a
pretax loss of $185.9 million. The 1995 income tax expense is for 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
due to substantial doubt of realization based on circumstances described in the
"Basis of Presentation and Management's Plans" Note to Consolidated Financial
Statements whereas a partial tax benefit was provided on the Corporation's 1994
pretax loss. The net deferred tax assets reflect management's estimate of the
amount which will, more likely than not, be realized. See the "Taxes on Income"
Note to Consolidated Financial Statements.
II-6
<PAGE>
Discontinued Operations: In connection with the disposition of Transit, the
Corporation recorded a $95.8 million loss for the year ended December 31, 1995,
without providing future tax benefits. The loss includes (i) a $3.6 million loss
from operations for the six month period ended June 30, 1995, the effective date
of disposal, (ii) $85.5 million provision for the Corporation's estimated
reimbursement obligations for the net cash losses resulting from Amerail's
performance of certain transit car contracts transferred to Amerail, and (iii)
$6.7 million accrual for transaction costs and employee severance and benefits
costs associated with the decision to dispose. The Corporation has recognized
its Transit reimbursement obligations through the estimated final completion of
the transit car contracts based upon the best information available which
included financial and operating information provided by Amerail, over which the
Corporation has no control. There can be no assurance that the net cash losses
ultimately realized upon completion of such contracts will not exceed the
Corporation's estimated reimbursement obligations at December 31, 1995. See the
"Changes in Business - Discontinued Transit Operations" Note to Consolidated
Financial Statements.
In connection with its decision to sell MKRail, the Corporation
recorded an $86.5 million net loss for the year ended December 31, 1995 after
providing a net tax benefit of $10.9 million. The loss includes (i) a $3.8
million net loss from operations for the three month period ended March 31,
1995, the measurement date, and (ii) $82.7 million loss from disposal including
$18.1 million loss from discontinued operations of MK Rail and $64.6 million
loss provision to write-down the Corporation's carrying amount of its investment
in and note receivable from MK Rail to their estimated net realizable values
based upon the best information available in the circumstances. See the "Changes
in Business - Discontinued MKRail Operations" Note to Consolidated Financial
Statements.
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 periods prior to December 31, 1995 and the
Corporation's after-tax gain of $20.0 million recognized from MKRail's sale of
stock in May 1994 have been segregated and reported as discontinued operations
in the consolidated statements of operations. In addition, the net assets and
liabilities (current and non-current) related to MK Rail are segregated in the
balance sheet at December 31, 1995 and 1994.
II-7
<PAGE>
RESULTS OF OPERATIONS
1994 Compared to 1993
The Corporation's revenue decreased for both the fourth quarter and the year
ended December 1994 compared to the same periods of 1993. This decline was
principally due to the execution and completion of contracts during the previous
year, contrasted with decreases in new contract awards and postponements of the
start-up of major new infrastructure projects in 1994.
The Corporation reported a $97.7 million operating loss in the fourth
quarter of 1994 compared to $10.9 million operating income in the comparable
period of 1993 and a $82.2 million operating loss for the year 1994 compared to
$55.4 million operating income in 1993. The results of operations for both the
quarter and the year ended December 1994 were influenced by the decrease in new
contract awards and postponements of the start-up of previously awarded
contracts and adversely affected by the recognition of write-downs of operating
assets and investments as well as provisions for anticipated losses on
uncompleted fixed-price contracts. The Corporation recognized $103.3 million of
pretax charges to operating results in the fourth quarter of 1994 consisting of:
$ 12.8 million Write-off of the Corporation's remaining investment in Vertac
stemming from the U.S. Environmental Protection Agency's (the
"EPA") notification in December 1994 to terminate on-site
incineration of hazardous waste at the Arkansas Superfund site.
Prior to this notification the Corporation had incinerated
several types of hazardous waste under various contracts with
the EPA and had anticipated additional contracts to dispose of
the waste that remains at the site.
17.5 million Contract scope changes initiated by the customer during the
fourth quarter on a number of light rail transportation projects
have subsequently been disputed by the customers. These disputed
change orders have given rise to claims asserted against the
customers for additional revenue. In accordance with the
Corporation's accounting policy no revenue was recognized for
these items. The cost overruns stemming from the disputed change
orders caused the estimated contract costs to be in excess of
contract revenue. A provision for anticipated losses was
recorded to reflect these excess costs.
6.3 million Change orders for customer-initiated scope changes on a power
plant project were rejected by the customer. These change orders
were then included in a claim asserted against the customer. In
accordance with the Corporation's accounting policy no revenue
was recognized for these items. The cost overruns stemming from
the unapproved change orders caused the estimated contract costs
to be in excess of contract revenue. A provision for anticipated
losses was recorded to reflect these excess costs.
13.0 million Establishment of a liability for anticipated losses on a fixed-
price contract to construct a toll bridge in the maritime
provinces of Canada. The anticipated losses are based on
additional costs expected to be incurred in the completion of
the project based on actual experience during the 1994
mobilization phase of the project.
9.1 million Provision for anticipated engineering and labor cost overruns
on a fixed-price petrochemical project and a fixed-price
railroad electrification project.
28.0 million Provision for anticipated losses on the Taipei fixed-price
subway project. The project encountered subsoil conditions in
November 1994 that will adversely affect the tunnel boring
progress. It is anticipated that these adverse subsoil
conditions will extend the time required to complete the project
by more than 12 months.
8.0 million Write-down of the Corporation's investment in the net assets of
the North Pacific construction operations. This write-down is
based on the Corporation's decision in late 1994 to attempt to
sell the assets and business of its North Pacific construction
operations.
8.6 million Miscellaneous other write-downs of operating assets and
investments and provisions for anticipated losses on uncompleted
contracts.
- --------------
$103.3 million
==============
In addition, the Corporation's results of operations for the first nine
months of 1994 also were adversely impacted by write-downs of operating assets
and provisions for anticipated losses on uncompleted contracts. The Corporation
recognized $17.6 million of pretax charges to operating results through
September 30, 1994 consisting of (i) $4.3 million write-down of its surplus
tunnel-boring equipment to their estimated net recoverable values (ii) $2.3
million provision for anticipated losses due to delays on the Taipei subway
project and (iii) $5.0 million provision to write-down its investment in Vertac
and a $6.0 million provision to write-down the capitalized cost of a processing
facility of
II-8
<PAGE>
CF Systems. Vertac was a remediation and waste disposal project terminated for
convenience of the U.S. government and CF Systems is a wholly-owned subsidiary
currently performing environmental remediation work. See the "Commitments and
Contingencies - CF Systems" Note to Consolidated Financial Statements.
Excluding the effects of the aggregate $120.9 million pretax charges for the
year 1994, enumerated above, the Corporation's operating income for the year
1994 was $38.7 million, a decrease of $16.7 million from $55.4 million operating
income in the year 1993.
General and Administrative Expenses: General and administrative expenses for the
fourth quarter and year ended December, 1994 decreased $2.2 million and $4.3
million, respectively, from the same periods of 1993. The decreases in 1994 are
due to cost reduction efforts. General and administrative expenses for the
fourth quarter 1994 included estimated non-recurring pretax accruals of $4.9
million for legal and professional fees associated with pending stockholders
litigation and employee severance costs.
Interest Expense: Interest expense for the fourth quarter and year ended
December 31, 1994 increased $3.6 million and $8.4 million, respectively, from
the same periods of 1993. The increase reflects the rise in both short- and
long-term debt outstanding from $47.0 million at December 31, 1993, to $242.3
million at December 31, 1994, at a weighted average cost of borrowing for the
quarter and year ended December 31, 1994 of 6.91% and 5.72%, respectively.
Other Income (Expense) Net: Other net expense of $19.7 million for the year 1994
was due principally to recognition of $24.0 million of provisions for write-
downs of investments and assets reflecting the Corporation's decision in late
1994 to accelerate repatriation of certain off-shore investments and
receivables, and reduce the carrying amount of the Corporation's investment in
Western Aircraft, Inc., as well as, provide an allowance for estimated reduction
in realizable values of accounts and notes receivable due to the decision to
accelerate collection. See the "Other Income (Expense) Net" Note to Consolidated
Financial Statements.
Other net income of $26.8 million for the year ended December 31, 1993 was
due principally to the recognition of $35.8 million of interest, dividends and
net gains on sales of marketable securities partially offset by an aggregate of
$9.0 million net losses principally from losses on disposals and write-down of
assets. See the "Other Income (Expense) Net" Note to Consolidated Financial
Statements.
Equity in Net Income (Loss) of Unconsolidated Affiliates: The Corporation's
share of unconsolidated affiliates' income increased from $.5 million in the
fourth quarter ended December 31, 1993 to $4.1 million income in the comparable
period of 1994. The increase is primarily due to the recognition by the
Corporation of its $6.4 million equity in the net income of MIBRAG mbH, acquired
effective January 1994. The Corporation's share of investee earnings increased
from a $5.8 million loss in the year ended December 1993 to $11.4 million income
in the year 1994. The increase is principally due to (i) recognition of $15.5
million equity in the net income of MIBRAG mbH offset by losses of $4.6 million,
principally from its equity investments in a number of development stage
companies for which the Corporation decided to discontinue its funding and (ii)
the Corporation's share of the combined $4.6 million operating losses for Joy
MKProjects Company and McConnell Dowell Corporation, Ltd. in 1993 prior to their
consolidation in April and June 1993, respectively. See the "Investments in and
Advances to Unconsolidated Affiliates" Note to Consolidated Financial
Statements.
Gains on Subsidiaries Sales of Stock: In the fourth quarter of 1993, MK Gold
completed an IPO of 8,000,000 shares of its common stock. The Corporation
recognized a $10.6 million pretax gain because MK Gold's selling price per share
exceeded the Corporation's carrying amount per share. In January 1994, 1,350,000
shares of MK Gold's common stock were sold under an option granted by MK Gold to
its IPO underwriters to cover over-allotments. The Corporation recognized a $1.3
million pretax gain with respect to such shares, because MK Gold's public
offering price per share exceeded the Corporation's carrying amount per share.
Disposition of Investments in Affiliates: The loss of $6.1 million on
disposition of investments in affiliates for the fourth quarter of 1994
consisted of a net pretax charge of $7.2 million by the Corporation in
connection with the disposition of two development-stage companies stemming from
its decision in December 1994 to discontinue its financial support for these
non-core businesses offset by the recovery of $1.1 million of its previous
write-off of its investment in Texas TGV resulting from the sale in December
1994 of substantially all of its ownership interest in Texas TGV.
In addition, the loss of $8.9 million on disposition of investments for the
first nine months of 1994 consists of (i) a $13.8 million pretax charge in the
second quarter of 1994 for the write-off of the Corporation's investment in
Texas TGV, and (ii) a $4.9 million pretax gain in the first quarter of 1994 on
the sale of a portion of its ownership interest in SCDI. See the "Disposition of
Investments in Affiliates" and the "Subsequent Events - Strait Crossing
Development, Inc." Notes to Consolidated Financial Statements.
Provision for Litigation Settlements: Preliminary agreements as to the principal
economic terms of settlement of securities class actions and derivative actions
were reached in June 1995, subject to, among other things, approval by the
appro-
II-9
<PAGE>
priate courts. The Corporation's settlement will include payment of cash and the
issuance of stock. The Corporation's insurance carriers will pay $35.0 million
in cash. The Corporation will issue new common stock. Effective December 1994,
the Corporation recognized an aggregate pretax charge of $25.0 million for the
estimated cost of the settlements. The estimated liability for the $25.0 million
settlements is included in the balance sheet at December 31, 1994 as a non-
current liability. Assuming court approval and issuance of the stock, the
current fair market value of the Corporation's stock at the time of court
approval will be reflected in stockholders' equity. However, there can be no
assurance that the final settlements will be approved by the appropriate
courts.These settlements do not include actions brought by the former
stockholders of a number of companies acquired through an exchange of stock. See
Item 3. "Legal Proceedings" in Part I of this Annual Report on Form 10-K and the
"Legal Proceedings" Note to Consolidated Financial Statements.
Income Tax (Expense) Benefit: The Corporation recognized a tax benefit in 1994
of 16.6% of pretax loss whereas in 1993 the Corporation's tax expense was 41.8%
of pretax income. A full tax benefit was not provided on the Corporation's 1994
loss due to uncertainty of realization causing the disparity in the rate of the
tax benefit recognized in 1994 compared to the rate of tax expense recognized in
1993. After recognizing a tax benefit for that portion of the Corporation's loss
which is available for carryback to prior years, the remaining net deferred tax
assets, consisting of deductible temporary differences, were reduced by a
valuation allowance which was established to reduce the carrying amount of
deferred tax assets to a level which, more likely than not, will be realized.
The net deferred tax assets reflect management's estimate of the amount which
will be realized from future taxable income which can be predicted with
reasonable certainty. See the "Taxes on Income" Note to Consolidated Financial
Statements.
Minority Interest in Net (Income) Loss of Subsidiary: The Corporation's
consolidated balance sheet at December 31, 1994 includes 100% of the assets and
liabilities of MDC and the consolidated statement of operations for the year
ended December 31, 1994 includes 100% of MDC's revenues and expenses. The
minority interest share of MDC's accumulated earnings (losses) at December 31,
1995 and MDC's net loss for the year ended December 31, 1994 are reflected as
"Minority Interest in Subsidiary" and "Minority Interest in Net Loss of
Subsidiary" in the accompanying balance sheet at December 31, 1994 and statement
of operations for the year ended December 31, 1994, respectively.
Discontinued Operations: Transit reported a loss from operations of $224.4
million for the year 1994 compared to $11.0 million operating income for the
year 1993. The 1994 loss included $199.0 million of charges for anticipated
cost-overruns on uncompleted fixed-price contracts for new transit cars in their
early stages of production, after revision in the second and fourth quarters of
1994, of the estimated costs and earnings (losses) at completion. The cost
overruns were anticipated as a result of Transit's actual experience for
incurred labor and other direct manufacturing costs with new transit cars that
went into production in late 1994 and early 1995 being much worse than
originally estimated. In addition these anticipated cost overruns were also
associated with engineering and design changes on new transit cars for the
California Department of Transportation and National Railroad Passenger
Corporation, which caused significant increases in estimated costs for materials
and labor and were expected to cause delays in deliveries which required the
recognition of contingency losses for liquidating damages.
In addition, Transit recognized (i) a $14.7 million provision in the fourth
quarter of 1994 to write-off the balance of its capitalized initial design and
engineering costs because the estimated operating margins on the then current
uncompleted and future contracts was not expected to be sufficient to allow
recovery of those deferred costs and (ii) a $9.2 million provision in the third
quarter of 1994 for anticipated losses to manufacture 42 of 133 locomotives on
the uncompleted MK Rail fixed-price contract with Southern Pacific Railroad (the
"SP").
Transit reported operating income of $11.0 million for the year 1993,
primarily the result of the increased volume of net transit cars manufactured
and delivered under a successful contract with a midwest transit authority.
MK Rail Corporation reported a loss from operations of $50.0 million for the
year 1994 compared to $10.3 million operating income for the year 1993. The 1994
loss included $39.2 million of unusual charges consisting of (i) a $12.4 million
provision for aggregate losses on uncompleted locomotive remanufacturing
contracts including $8.2 million in connection with the SP contract (completed
in February 1995) caused by higher than expected labor and materials costs and a
$4.2 million provision for losses in connection with a maintenance contract in
the United States and remanufacturing contracts in Australia (ii) $7.3 million
accrual for estimated legal and professional fees primarily attributable to
stockholders' litigation (iii) aggregate provisions of $8.4 million, comprised
of $3.7 million provision for noncancelable purchase commitments of research and
development services under contract with outside firms, $2.7 million provision
for future lease losses on the prospective lease of new MK5000 locomotives and
$2.0 million provision for estimated manufacturing costs in excess of market
value, all of which stem from MK Rail's decision to curtail its ongoing
activities in new locomotive manufacturing and technology and (iv) $11.1 million
provision for the loss on disposition of its Argentine operations. In the fourth
quarter of 1994 MK Rail Corporation made a determination to dispose of
substantially all of its Argentine operations.
II-10
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL CONDITION
Liquidity and capital resources (thousands of dollars) December 31,
-------------------------
1995 1994
<S> <C> <C>
Cash and cash equivalents:
Beginning of period $ 66,864 $ 80,000
End of period 63,086 66,864
Total debt, including $9,320 of accrued and deferred
interest
on antecedent debt at December 31, 1995 371,990 200,025
<CAPTION>
Year Ended
December 31,
-------------------------
1995 1994
<S> <C> <C>
Net cash provided (used) by:
Operating activities $(24,959) $ 22,244
Investing activities 45,715 20,957
Financing activities 52,464 145,422
</TABLE>
Total capitalization at December 31, 1995 was $178.3 million, and
consisted of $372.0 million debt net of a $193.7 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.
After funding the discontinued operations of MK Rail and Transit,
losses on a number of major fixed-price construction and environmental projects
and the losses on a number of failed development-stage transportation and other
investments in prior years, the Corporation's financial condition continued to
deteriorate during 1995. During 1995, the Corporation continued to fund
operating losses on a number of long-term fixed-price construction contracts,
pay substantial period costs and expenses including the expenses of
professionals associated with the Corporation's financial restructuring,
proposed recapitalization plan and stockholders' litigation and service its debt
burden by paying $22.6 million interest in 1995.
The Corporation's sources of cash used to fund its operations in 1995
were principally $42.0 million from sales of investments in affiliates and $26.5
million in federal tax refunds. As a result, cash and cash equivalents decreased
$3.8 million during 1995 to a year-end balance of $63.1 million.
LIQUIDITY
On August 10, 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 debt to December 31, 1996,
(iii) mandatory repayment of $100.0 million of antecedent debt on September 30,
1996 and $113.3 million on December 31, 1996 and required escrow payments under
the Transit reimbursement obligations upon such repayments, (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 the bonding company. The restructuring
provides that ongoing indebtedness of the Corporation to the lender banks and
the bonding company be secured. On October 17, 1995, the Corporation reached an
agreement to dispose of Transit by transferring substantially all of the assets,
certain liabilities, all contract operations 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 maximum
borrowing amount under the bridge loan was reduced 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 contracts
transferred to Amerail by virtue of the Transit Reimbursement Agreement with its
bonding company. The amount owing to the bonding company under the Transit
Reimbursement Agreement will not, by agreement, exceed $31.2 million. In
connection with the disposition of Transit, the Corporation agreed to guarantee
Amerail's reimbursement obligation to certain banks which are providing a
standby letter of credit and a new credit facility up to an aggregate amount of
$141.7 million to support Amerail's performance of the Metra Contract (the
"Metra Guaranty"). The amount owing under the Metra Guaranty is estimated to be
$80.2 million at December 31, 1995. The Corporation estimates its reimbursement
obligations for such net cash losses on the Transit contracts transferred to
Amerail to be $111.4 million at December 31, 1995. 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 December 31, 1995. The
II-11
<PAGE>
Corporation expects negative cash flows from operations for 1996. Cash
flows in 1996 will be negatively impacted by general and administrative costs
and expenses in connection with its proposed recapitalization plan and
stockholders' litigation, the required funding for the remainder of its fixed-
price construction contract losses recognized in 1994 and 1995 and its
continuing debt service including the accrued and deferred interest on its
antecedent debt. On April 2, 1996, as partial consideration for the extension of
the bridge loan facility from March 31, 1996 to September 31, 1996 the
Corporation paid $14.4 million interest on the antecedent debt that had been
accrued and deferred from July 1, 1995 through March 31, 1996. The Corporation's
repayment obligations on existing indebtedness, after having paid the
outstanding balance of the bridge loan on March 29, 1996, include (i) repayment
of $100.0 million of antecedent debt on September 30, 1996, (ii) repayment of
the $113.3 million balance of the antecedent debt on December 31, 1996, and
(iii) the additional amounts required to be escrowed in connection with its
Transit reimbursement obligations for the benefit of the bonding company and
certain lender banks on such dates and to ultimately fund the remaining $31.2
million reimbursement obligation to the bonding company and the estimated amount
owing on the Metra Guaranty, currently $80.2 million at December 31, 1995. Even
if the Corporation has sufficient liquidity to meet its obligations prior to the
maturity of its antecedent debt, the Corporation believes that further
refinancings of its existing indebtedness would not be sufficient to enable the
Corporation to continue as a going concern. The Corporation further believes
that cash generated from operations and the proceeds from the few contemplated
asset and investment sales will not be sufficient to meet its existing
antecedent debt obligations and the required escrow payments under the Transit
reimbursement obligations in 1996.
On March 29, 1996, the Corporation paid the outstanding balance owing
under its bridge loan facility. On March 31, 1996, the Corporation and certain
of its secured creditors agreed to amend certain terms and conditions of the
bridge loan facility, which expired on March 31, 1996. The amendments to the
bridge loan facility included, among other things, establishment of a new
borrowing capacity of $47.5 million, and extension of its termination date to
September 30, 1996. Outstanding borrowing under the amended bridge loan facility
will be subject to interest at the prime rate plus one and one-half percent per
annum (9.75% at March 31, 1996) due and payable on the last day of each month
and on September 30, 1996. On April 2, 1996, as partial consideration for the
extension of the bridge loan facility, the Corporation paid $14.4 million
interest on the antecedent debt that had been accrued and deferred from July 1,
1995 through March 31, 1996. See the "Short-Term Debt - New and Amended Credit
Facilities" Note to Consolidated Financial Statements.
The Corporation, which has been experiencing significant operating
losses and is facing severe liquidity problems, has been discussing with certain
of its secured and unsecured creditors, including holders of the Corporation's
existing secured indebtedness, its bonding company, lessors in connection with
certain long-term, noncancelable leases, and representatives of potential
investors, alternatives to reduce or liquidate the Corporation's current and
future financial debt obligations to permit the continuation of the Corporation
as a going concern. These alternatives included, among other things, a number of
remedies available to the Corporation, the goal of which is to alleviate the
problems caused by the Corporation's excessive debt levels, debt service and
certain long-term lease payment obligations, to enable the Corporation to
continue to implement its revised business strategy and to help assure the
Corporation's long-term viability. For that purpose, the Corporation initially
presented a proposed recapitalization plan (the "Recapitalization") to certain
of its secured creditors at a meeting held in February 1996, and has continued
to discuss the terms of the Recapitalization with those creditors. Pursuant to
the Recapitalization, the Corporation would exchange its existing secured
indebtedness consisting of the antecedent debt and Transit reimbursement
obligations and certain long-term lease obligations for a new issue of the
Corporation's common stock (which initially will represent all of the
outstanding common stock of the Corporation) and common stock of MK Rail
representing the Corporation's 65% ownership interest in MK Rail, the
Corporation's $52.2 million principal amount of its note receivable from MK Rail
with interest at the prime rate (8.25% at March 31, 1996) and certain other
assets. Existing stockholders and the Securities Class Actions claimants would
receive new common stock purchase warrants in exchange for all the current
outstanding shares of common stock and all the shares of common stock to be
issued by the Corporation in settlement of the MK Securities Class Actions and
MK Rail Securities Class Actions. See Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Outlook" in this
Part II. The Recapitalization contemplated effecting the exchange through a
partial prepackaged plan of reorganization pursuant to Chapter 11 of the United
States Bankruptcy Code (prepackaged plan). The objective of a prepackaged plan
under Chapter 11 would be to allow the Corporation to achieve its objectives
without unanimous approval of its creditors in the shortest time possible and
continue to resume operations in its recapitalized form without the full burden
of debt that existed prior to the bankruptcy proceedings.
On or about April 15, 1996, the Corporation will solicit acceptances
of its Recapitalization from its impaired creditors (holders of the
Corporation's existing secured indebtedness). The Recapitalization, through the
prepackaged plan is designed to
II-12
<PAGE>
substantially reduce the Corporation's secured debt obligations, lessen the risk
of a protracted Chapter 11 proceedings which would significantly impact the
Corporation's business and create a capital structure that allows the
Corporation to continue in operation and maintain and enhance its competitive
position. In addition, management anticipates that the proposed prepackaged plan
would also allow management to concentrate more of its time on improving the
Corporation's business opportunities, rather than on managing its debt
obligations.
As of the date of this Annual Report on Form 10-K, the Corporation has
not reached final agreement with its secured creditors. The final form or
results of a restructuring cannot be predicted, and there can be no assurance
that a restructuring can be accomplished through a prepackaged plan. Any such
restructuring, if successful, would substantially dilute or eliminate the value
of existing stockholders' interests. If the Corporation is unable to effect a
prepackaged plan, the Corporation will be forced to evaluate other available
options, which may include the commencement or continuation of a Chapter 11 case
without a preapproved plan. A nonprepackaged Chapter 11 case would likely be
lengthier, involve more contested issues with creditors and other parties in
interest, and result in significantly increased Chapter 11 expenses for
professional consultants, a negative impact on cash flow due to lack of customer
confidence resulting in reduction in new contract awards, and a corresponding
reduction in the consideration received by the Corporation's secured creditors
and existing stockholders than would be the case with a prepackaged plan.
The Corporation's financial statements have been prepared assuming
that the Corporation will continue as a going concern. As discussed herein, the
Corporation: had substantial losses and negative cash flow from operations in
1994 and 1995, which significantly reduced stockholders' equity and resulted in
a substantial accumulated deficit and working capital deficiency at December 31,
1995; and does not expect to be able to make its required debt repayments in
1996. Thus, unless the Corporation is able to effect the Recapitalization or
arrange a transaction with a strategic investor, these conditions raise
substantial doubt about the Corporation's ability to continue as a going
concern. The accompanying consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Dividends
The Corporation has not paid cash dividends since the first quarter of 1995;
however, under the terms of its bank credit agreements and the applicable
requirements of Delaware law, the Corporation is prohibited from paying cash
dividends. The Corporation is permitted to pay cash dividends under Delaware law
only (i) out of its surplus (the excess of the current assets of the Corporation
over its capital) or (ii) out of the net profits of the Corporation for the
fiscal year in which the dividend is declared and/or the preceding fiscal year.
Currency Risks
In the normal course of its business, the Corporation evaluates the use of
forward contracts and options to hedge, reduce or eliminate its exposure to
fluctuations in foreign currencies. The Corporation does not currently have in
place any such direct hedging arrangements.
Financial Accounting Standards Board Statement ("FASB Statement")
The requirements of FASB Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed of ("FAS 121"), which are
effective January 1, 1996, will not have a material effect on the Corporation's
financial condition or results of operations because the Corporation's current
accounting policies are in compliance with the requirements of FAS 121.
The requirements of FASB Statement 123, Accounting for Stock-based
Compensation which are effective January 1, 1996 will not have a material effect
on the Corporation's financial condition or results of operations because the
Corporation has elected to remain with the accounting for stock-based
compensation prescribed by Accounting Principles Board Opinion 25, Accounting
for Stock Issued to Employees.
Outlook
Except for historical information, the material in this Outlook Section of
Management's Discussion and Analysis of Financial Condition and Results of
Operations is forward-looking. For the purposes of the safe harbor provisions
for forward-looking statements contained in the Private Securities Litigation
Reform Act of 1995, actual results may differ materially due to a variety of
factors including that there can be no assurance that the proposed
recapitalization and financial restructuring can be accomplished at all or on
the terms and conditions proposed or in a timely manner and even if a
recapitalization is achieved, there can be no assurance that the existing
stockholders of the Corporation will receive any recovery on their investment.
In order to allow the Corporation to effect a bankruptcy
reorganization under Chapter 11 of the United States Bankruptcy Code in the
quickest and least costly manner, the Corporation will, on or about April 15,
1996, solicit accep-
II-13
<PAGE>
tances of its prepackaged plan from its impaired creditors (holders of the
Corporation's existing secured indebtedness). Under a prepackaged plan, the
acceptance of impaired creditors is solicited prior to filing a Chapter 11
bankruptcy reorganization pursuant to a disclosure statement. The vote of the
Corporation's existing stockholders will be solicited after filing the
prepackaged plan.
Chapter 11 is the principal business reorganization chapter of the
Bankruptcy Code. Under Chapter 11, a debtor may remain in possession of its
assets and business and attempt to reorganize its business for the benefit of
the debtor, its creditors and other parties in interest. The prepackaged plan,
as proposed by the Corporation, provides for the reorganization of the
Corporation's capital structure, thereby enabling the Corporation to continue
operations as a viable enterprise. A reorganization of the Corporation's capital
structure will be effected through an exchange of certain of the Corporation's
existing secured indebtedness, consisting of the secured antecedent debt and
Transit reimbursement obligations and certain long-term lease obligations, for
the issuance by the Corporation of new common stock, common stock of MK Rail
representing the Corporation's 65% ownership interest in MK Rail, the
Corporation's $52.2 million principal amount of its note receivable from MK Rail
and certain other assets. Existing stockholders and the Securities Class Actions
claimants would receive new common stock purchase warrants in exchange for all
of the current outstanding shares of common stock and the shares of common stock
to be issued by the Corporation in settlements of the MK Securities Class
Actions and MK Rail Securities Class Actions.The common stock purchase warrants
would have a term of five years and would represent the right to purchase
approximately 10% of the Corporation's new common stock at an exercise price
that would reflect more than full recovery by the holders of the Corporation's
existing secured indebtedness. Therefore, the Corporation expects that the
initial market value of the new common stock will be significantly less than the
exercise price of the warrants.
No agreement has yet been reached with the Corporation's secured
creditors and there can be no assurance that the proposed recapitalization and
financial restructuring can be accomplished.
II-14
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
At December 31, 1995
Pro Forma AccountingTreatment
The accompanying unaudited pro forma consolidated balance sheet at December 31,
1995 has been prepared giving effect to:
(i) the adjustments to reflect the consummation of the proposed
recapitalization plan which contemplates an exchange of the Corporation's
existing secured indebtedness, consisting of the secured antecedent debt and
Transit reimbursement obligations and certain long-term lease obligations for
a new issue of the Corporation's common stock, (which initially will
represent all of the outstanding common stock of the Corporation), common
stock of MK Rail representing the Corporation's 65% ownership interest in
MK Rail, the Corporation's $52.2 million principal amount of its note
receivable from MK Rail and certain other assets, and;
(ii) the adjustments in connection with the adoption of fresh start reporting
as required by AICPAStatement of Position 90-7, including recognition of the
subsequent gain on debt discharge of prepetition liabilities, the adjustments
to reflect assets and liabilities at their fair values, including the
recognition of the excess of reorganization value over amounts allocable to
identifiable assets, elimination of the accumulated deficit in retained
earnings and other transactions contemplated in connection with the proposed
recapitalization plan.
For purposes of preparing "fresh start" accounting statements as
specified in the American Institute of Certified Public Accountants Statement of
Position 90-7 "Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code", the Corporation, with the assistance of its independent
advisors, has estimated the reorganization value of the reorganized Corporation.
This value will be allocated, based on estimated fair market values, to specific
tangible or identifiable assets, and the Corporation will record an intangible
asset equal to the reorganization value in excess of amounts allocable to
identifiable assets. The total reorganization value includes a value attributed
to common stock and the indebtedness contemplated by the reorganization but is
not indicative of the trading values for those securities.
The estimate of reorganization value is based upon, among other
things, a review of the operating performance of publicly traded companies in
each of the Corporation's businesses that offer services that are comparable to
or competitive with the Corporation's services and the market valuation
multiples of these companies. Market valuation multiples were applied to the
Corporation's historical and projected financial information. The Corporation
did not independently verify the information for the comparable companies
considered in its valuation, which information was obtained from publicly
available reports. The reorganization value takes into account, among other
matters, (i) assumptions underlying the Corporation's projected financial
information, (ii) the financial terms, to the extent publicly available, of
certain historical acquisitions of companies whose operating businesses are
believed to be reasonably comparable to certain businesses of the Corporation,
(iii) the results of discounted cash flow analyses for certain of the
Corporation's businesses on a going concern basis, based on projected financial
information, and (iv) other economic and industry information relevant to the
operating businesses of the Corporation.
The projected financial information was based on estimates and
assumptions about circumstances and events that have not yet taken place. Such
estimates and assumptions are inherently subject to significant economic and
competitive uncertainties and contingencies beyond the control of the
Corporation, including, but not limited to, those with respect to the future
courses of the Corporation's business activity. Accordingly, there will usually
be differences between projections and actual results because events and
circumstances frequently do not occur as expected, and those differences may be
material.
No agreement has yet been reached with the Corporation's secured
creditors and there can be no assurance that the proposed recapitalization and
financial restructuring can be accomplished.
The unaudited pro forma balance sheet at December 31, 1995 is not
necessarily indicative of how the Corporation's balance sheet would have been
presented had the transactions actually been consummated at December 31, 1995,
nor is it necessarily indicative of the presentation of the Corporation's
balance sheet for any future period. The unaudited pro forma balance sheet
should be read in conjunction with the accompanying audited consolidated
financial statements of the Corporation and the related financial statement
footnotes thereto included elsewhere in this Annual Report on Form 10-K.
II-15
<PAGE>
<TABLE>
<CAPTION>
Unaudited Pro Forma Consolidated Balance Sheet
December 31, 1995 Pro Forma December 31, 1995
(Amounts in thousands) Historical Adjustments(a) Pro Forma
- ---------------------------------------------------------------------------------------------------
ASSETS
Current assets
<S> <C> <C> <C>
Cash and equivalents $ 63,086 $ -- $ 63,086
Deferred income taxes 10,590 (10,590) --
Net assets of discontinued MK Rail
operations 72,000 (72,000) --
Other current assets 339,128 -- 339,128
- ---------------------------------------------------------------------------------------------------
Total current assets 484,804 (82,590) 402,214
- ---------------------------------------------------------------------------------------------------
Investments and other assets
Other investments and assets 87,264 (8,816) 78,448
Reorganization value in excess of amounts
allocable to identifiable assets -- 98,406 98,406
- ---------------------------------------------------------------------------------------------------
Total investments and other assets 87,264 89,590 176,854
- ---------------------------------------------------------------------------------------------------
Property and equipment, net 56,092 4,300 60,392
- ---------------------------------------------------------------------------------------------------
Total assets $ 628,160 $ 11,300 $639,460
===================================================================================================
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIENCY)
Current liabilities
Short-term debt $ 37,882 $ -- $ 37,882
Liabilities subject to compromise 324,788 (324,788) --
Other current liabilities 354,341 -- 354,341
- ---------------------------------------------------------------------------------------------------
Total current liabilities 717,011 (324,788) 392,223
- ---------------------------------------------------------------------------------------------------
Non-current liabilities
Deferred income taxes 8,061 (8,061) --
Accrued postretirement benefit obligation 29,193 23,549 52,742
Accrued litigation settlements 25,000 (25,000) --
Other non-current liabilities 42,577 -- 42,577
- ---------------------------------------------------------------------------------------------------
Total non-current liabilities 104,831 (9,512) 95,319
- ---------------------------------------------------------------------------------------------------
Redeemable preferred stock -- 18,000 18,000
- ---------------------------------------------------------------------------------------------------
Stockholders' equity (deficiency)
Old common stock 319,060 (319,060) --
New common stock -- 133,918 133,918
Accumulated deficit (510,147) 510,147 --
Other accounts (2,595) 2,595 --
- ---------------------------------------------------------------------------------------------------
Total stockholders' equity (deficiency) (193,682) 327,600 133,918
- ---------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity
(deficiency) $ 628,160 $ 11,300 $639,460
===================================================================================================
</TABLE>
(a) To record the settlement of liabilities subject to compromise and recognize
the subsequent gain on debt discharge, cancel all prepetition ownership
interests in the Corporation, record the adjustments to reflect assets and
liabilities at their fair values, eliminate the accumulated deficit in retained
earnings, and record other transactions contemplated in connection with the
proposed recapitalization plan.
The prepackaged plan as currently proposed would have resulted in the
discharge of approximately $349.8 million of prepetition claims against the
Corporation including the accrued litigation settlements through the issuance of
new Common Stock to secured creditors with a book value of $133.9 million,
(which initially will represent all of the outstanding common stock of the
Corporation), distribution of the Corporation's 65% ownership interest in MK
Rail and its note receivable from MK Rail with an aggregate carrying amount of
$72.0 million and $18.0 million of redeemable preferred stock, and would have
resulted in an anticipated gain on debt discharge of $125.9 million. No
agreement has yet been reached with the Corporation's secured creditors and
there can be no assurance that the proposed recapitalization and financial
restructuring can be accomplished.
II-16
<PAGE>
QUARTERLY FINANCIAL DATA
(Thousands of dollars except share data)
- --------------------------------------------------------------------------------
Selected quarterly financial data for each of the two years in the period ended
December 31, 1995, are presented below. Computations of income (loss) per common
share for each quarter and the annual period are independent.
<TABLE>
<CAPTION>
Quarter
-----------------------------------------------
1995 1st (a) 2nd (a) 3rd 4th Year
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
Revenue $366,486 $459,209 $ 492,639 $ 390,332 $ 1,708,666
Operating income (loss) from continuing operations 4,708 10,628 (10,849) 14,335 18,822
Loss from continuing operations $(19,636) $(10,436) $ (37,882) $ (11,682) $ (79,636)
Income (loss) from discontinued operations (31,683) (1,952) (66,742) (81,925) (182,302)
- -----------------------------------------------------------------------------------------------------------------------------
Net loss $(51,319) $(12,388) $(104,624) $ (93,607) $ (261,938)
=============================================================================================================================
Loss per common share:
Continuing operations $(.60) $(.31) $ (1.15) $(.35) $(2.41)
Discontinued operations (.96) (.06) (2.02) (2.47) (5.52)
- -----------------------------------------------------------------------------------------------------------------------------
Net loss $(1.56) $(.37) $(3.17) $(2.82) $(7.93)
=============================================================================================================================
Market price
High $13.00 $9.50 $9.62 $8.00 $13.00
Low 5.62 4.75 6.00 4.00 4.00
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Quarter
-----------------------------------------------
1994 1st (a) 2nd (a) 3rd 4th Year
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Revenue $449,397 $495,798 $ 590,679 $ 485,129 $2,021,003
Operating income (loss) from continuing operations 9,349 (10,634) 9,215 (108,698) (100,768)
Income (loss) from continuing operations $7,043 $(20,167) $ 3,166 $(145,740) $(155,698)
Loss from discontinued operations 2,609 (20,299) (6,367) (169,880) (193,937)
- ------------------------------------------------------------------------------------------------------------------------------
Net loss $9,652 $(40,466) $ (3,201) $(315,620) $(349,635)
==============================================================================================================================
Income (loss) per common share:
Continuing operations $.22 $(.62) $.10 $(4.45) $(4.79)
Discontinued operations .08 (.62) (.20) (5.19) (5.96)
- ------------------------------------------------------------------------------------------------------------------------------
Net loss $.30 $(1.24) $(.10) $(9.64) $(10.75)
==============================================================================================================================
Dividends declared $.20 $.20 $.20 $.20 $.80
Market price
High $29.12 $29.87 $21.50 $17.87 $29.87
Low 24.37 20.12 15.12 12.25 12.25
- ------------------------------------------------------------------------------------------------------------------------------
(a) Reclassified to give effect to the discontinuance of MK Rail Corporation and Transit operations.
</TABLE>
II-17
<PAGE>
ITEM8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
MORRISON KNUDSEN CORPORATION AND SUBSIDIARIES
Consolidated Financial Statements as of December31, 1995 and 1994, and for
each of the three years in the period ended December 31, 1995
PAGE(S)
Independent Auditors' Report II-19
Consolidated Statements of Operations II-20
Consolidated Balance Sheets II-21, II-22
Consolidated Statements of Cash Flow II-23
Consolidated Statements of Stockholders' Equity (Deficiency) II-24
Notes to Consolidated Financial Statements II-25 - II-44
II-18
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
Morrison Knudsen Corporation
We have audited the accompanying consolidated balance sheets of Morrison Knudsen
Corporation and subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of operations, stockholders' equity (deficiency), and
cash flows for each of the three years in the period ended December 31, 1995.
Our audits also included the financial statement schedule listed in the Table of
Contents at Item 14. These financial statements and the financial statement
schedule are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on the financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Morrison Knudsen Corporation and
subsidiaries at December 31, 1995 and 1994, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1995 in conformity with generally accepted accounting principles. Also, in
our opinion, such financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein.
The accompanying consolidated financial statements have been prepared assuming
the Corporation will continue as a going concern. As discussed in "Notes to
Consolidated Financial Statements - Basis of Presentation and Management's
Plans", the Corporation: had substantial losses and negative cash flow from
operations in 1994 and 1995, which significantly reduced stockholders' equity
and resulted in a substantial retained deficit and a working capital deficit at
December 31, 1995; and does not expect to be able to make its required debt
repayments in 1996. These conditions raise substantial doubt about the
Corporation's ability to continue as a going concern. Management's plans in
regard to these matters are also described in "Notes to Consolidated Financial
Statements - Basis of Presentation and Management's Plans." The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Deloitte & Touche, LLP
DELOITTE & TOUCHE, LLP
Boise, Idaho
April 12, 1996
II-19
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
(Thousands of dollars except share data)
- ---------------------------------------------------------------------------------
Year Ended December 31, 1995 1994 (a) 1993 (a)
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $ 1,708,666 $ 2,021,003 $ 2,329,876
Cost of revenue (1,689,844) (2,121,771) (2,269,323)
- ---------------------------------------------------------------------------------
Operating income (loss)
from continuing operations 18,822 (100,768) 60,553
General and administrative
expenses (59,243) (33,087) (37,358)
Interest expense (28,217) (4,934) (3,114)
Other income (expense), net (4,408) (19,665) 26,808
Equity in net income
(loss) of unconsolidated
affiliates 23,042 11,390 (5,757)
Loss on disposition of
investments in
affiliates, net (19,738) (15,063) --
Gain on subsidiary sale of
stock -- 1,255 10,602
Provision for litigation
settlements -- (25,000) --
- ---------------------------------------------------------------------------------
Income (loss) from
continuing operations
before income
taxes and minority interest (69,742) (185,872) 51,734
Income tax (expense)
benefit (9,894) 30,894 (21,631)
Minority interests in net
(income) loss of
subsidiaries -- (720) (1,185)
- ---------------------------------------------------------------------------------
Income (loss) from
continuing operations (79,636) (155,698) 28,918
Discontinued operations:
Income (loss) from discontinued
MK Rail and Transit operations,
net of tax expense of $107 for
1995, tax benefit of $49,359
for 1994, and tax expense of
$4,828 for 1993 (7,436) (213,972) 6,849
Losses on disposals of
discontinued operations, net of
tax benefit of $10,881 (174,866) -- --
Gain on MK Rail's sale of
stock, net of tax expense
of $3,994 -- 20,035 --
- ---------------------------------------------------------------------------------
Net income (loss) $(261,938) $(349,635) $35,767
=================================================================================
Income (loss) per common share:
Continuing operations $(2.41) $(4.79) $.93
Discontinued operations (5.52) (5.96) .22
=================================================================================
Net income (loss) $(7.93) $(10.75) $1.15
=================================================================================
Common shares used to
compute income (loss) per
common share 33,050,900 32,528,000 30,991,200
=================================================================================
Dividends declared per
common share $-- $.80 $.80
=================================================================================
</TABLE>
(a) Certain amounts reclassified to conform to 1995 financial statement
presentation.
The accompanying notes are an integral part of the financial statements.
II-20
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(Thousands of dollars except share data)
- ------------------------------------------------------------------------------
December 31, 1995 1994 (a)
- ------------------------------------------------------------------------------
ASSETS
- ------------------------------------------------------------------------------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 63,086 $ 66,864
Accounts receivable including retentions of $16,952 and
$32,256 166,104 177,614
Unbilled receivables 87,902 123,189
Refundable income taxes, net 22,803 20,607
Investments in and advances to construction joint ventures 15,186 12,854
Deferred income taxes 10,590 63,885
Investments in unconsolidated affiliates held for sale 32,189 --
Net assets of discontinued MK Rail operations 72,000 142,424
Other 14,944 29,913
- ------------------------------------------------------------------------------
Total current assets 484,804 637,350
- ------------------------------------------------------------------------------
Investments and other assets
Securities available for sale, at fair value 24,440 25,101
Investments in and advances to unconsolidated affiliates 51,031 71,382
Goodwill and other intangibles, net 4,006 15,947
Other investments and assets 7,787 39,938
- ------------------------------------------------------------------------------
Total investments and other assets 87,264 152,368
- ------------------------------------------------------------------------------
Property and equipment, at cost
Land and mineral rights 10,507 18,402
Leasehold improvements 60,079 84,754
Machinery and equipment 9,140 21,808
Construction equipment 132,776 187,053
- ------------------------------------------------------------------------------
Total property and equipment 212,502 312,017
Less accumulated depreciation (156,410) (198,788)
- ------------------------------------------------------------------------------
Property and equipment, net 56,092 113,229
- ------------------------------------------------------------------------------
Total assets $ 628,160 $ 902,947
==============================================================================
</TABLE>
(a) Certain amounts reclassified to conform to 1995 financial statement
presentation.
The accompanying notes are an integral part of the financial statements.
II-21
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
December 31, 1995 1994
- -------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
- -------------------------------------------------------------------------------
<S> <C> <C>
Current liabilities
Short-term and current portion of long-term debt $ 251,226 $ 192,152
Estimated reimbursement obligations of discontinued
Transit operations 111,444 --
Accounts payable including retentions of $20,076 and
$29,348 130,969 194,867
Accrued salaries, wages and benefits 45,362 40,286
Accruals for estimated losses on uncompleted contracts 21,973 38,110
Accrued and deferred interest on antecedent debt 9,320 --
Other accrued liabilities 64,284 51,112
Billings in excess of costs and earnings on
uncompleted contracts 63,252 104,611
Advances from customers 19,181 18,584
- -------------------------------------------------------------------------------
Total current liabilities 717,011 639,722
- -------------------------------------------------------------------------------
Non-current liabilities
Deferred income taxes 8,061 22,651
Deferred compensation 12,999 18,001
Deferred income 10,572 11,082
Accrued workers' compensation insurance and other
non-current liabilities 19,006 11,027
Accrued postretirement benefit obligation 29,193 26,710
Debt due after one year -- 7,873
Obligations and advances in excess of investment in
Transit operations -- 79,438
Accrued litigation settlements 25,000 25,000
- -------------------------------------------------------------------------------
Total non-current liabilities 104,831 201,782
- -------------------------------------------------------------------------------
Commitments and contingencies
- -------------------------------------------------------------------------------
Minority interest in subsidiary -- 3,647
- -------------------------------------------------------------------------------
Stockholders' equity (deficiency)
- -------------------------------------------------------------------------------
Preferred stock, par value $.10, authorized 10,000,000
shares, none issued
Common stock, par value $1.67, authorized 100,000,000
shares, issued 33,692,857 and 33,490,664 shares 56,156 55,818
Capital in excess of par value 270,661 272,594
Accumulated deficit (510,147) (248,209)
Treasury stock, 454,914 and 626,434 shares, at cost (7,757) (11,116)
Unearned compensation - restricted stock (1,582) (2,473)
Cumulative translation adjustments (1,578) (8,239)
Net unrealized holding gain (loss) on securities
available for sale 565 (579)
- -------------------------------------------------------------------------------
Total stockholders' equity (deficiency) (193,682) 57,796
- -------------------------------------------------------------------------------
Total liabilities and stockholders' equity (deficiency) $ 628,160 $ 902,947
===============================================================================
</TABLE>
II-22
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of dollars)
- ------------------------------------------------------------------------------------------
Year Ended December 31, 1995 1994 (a) 1993 (a)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities
Net income (loss) $(261,938) $(349,635) $ 35,767
Reconciliation of net income (loss) to net
cash provided (used) by operating
activities:
Depreciation and amortization 23,179 34,198 30,196
Equity in net (income) loss of investees
less dividends received (22,382) (10,490) 5,973
Results of discontinued operations and
loss on disposal 182,302 213,972 (6,849)
Gain on MK Rail's sale of stock -- (20,035) --
Provisions for (reversals of) estimated
losses on uncompleted contracts (19,154) 46,083 (6,161)
Provision for (benefit from) deferred
income taxes 40,575 (9,979) 2,375
Provisions for non-current liabilities 5,550 24,962 6,895
Provision for litigation settlements -- 25,000 --
Gains on subsidiaries sales of stock -- (1,255) (10,602)
Loss on disposition of investments in
affiliates, net 19,738 16,318 --
(Gain) loss on dispositions of property (1,675) 7,000 (14,692)
Write-downs of investments and non-current
assets 11,278 28,287 --
Minority interests in net income of
subsidiaries -- 720 572
Cash paid to prefund workers' compensation
liability -- (44,100) --
Other items, net 13,416 (10,728) 16,786
Change in current assets and liabilities,
net of effects of purchases of businesses:
Increase in working capital from
cancelation of accounts receivable sales (60,000) -- --
Accounts receivable and unbilled
receivables (4,892) 17,257 (68,325)
Investments in and advances to
construction joint ventures (6,096) 67,693 (286)
Other current assets 1,410 12,111 (3,998)
Accounts payable, accrued compensation
and other liabilities 75,472 (53,578) 8,465
Income taxes payable (refundable) (2,196) 2,128 (3,398)
Billings in excess of costs and earnings
on uncompleted contracts (20,239) 8,844 52,430
Customer advances, net 693 17,471 (8,706)
- ------------------------------------------------------------------------------------------
Net cash provided (used) by continuing
operating activities (24,959) 22,244 36,442
- ------------------------------------------------------------------------------------------
Investing activities
Short-term investments, net -- -- 47,859
Property and equipment acquisitions (15,813) (30,138) (19,928)
Property and equipment disposals 8,855 29,583 5,327
Purchase of securities available for sale (14,187) (24,786) --
Proceeds from sales of securities
available for sale 16,077 51,821 --
Investments in and receivables from
unconsolidated affiliates (537) (10,992) (2,979)
Proceeds from sales of investments in
unconsolidated affiliates 42,017 2,640 --
Collection of affiliate receivables 1,195 5,413 4,013
Other investing activities, net 8,108 (2,584) 24,832
- ------------------------------------------------------------------------------------------
Net cash provided by continuing investing
activities 45,715 20,957 59,124
- ------------------------------------------------------------------------------------------
Net cash used by discontinued operations (76,998) (200,883) (164,753)
- ------------------------------------------------------------------------------------------
Financing activities
Net borrowings under credit agreements and
short-term debt 59,074 135,243 45,858
Borrowings of long-term debt -- 48,027 126
Payments of long-term debt -- (12,744) (399)
Proceeds from stock issued and other
equity transactions -- 509 503
Dividends paid (6,610) (25,613) (24,164)
- ------------------------------------------------------------------------------------------
Net cash provided by continuing financing
activities 52,464 145,422 21,924
- ------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash -- (876) --
- ------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (3,778) (13,136) (47,263)
Cash and cash equivalents at beginning of
period 66,864 80,000 127,263
- ------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 63,086 $ 66,864 $ 80,000
==========================================================================================
Supplemental Disclosures of Cash Flow
information
Interest paid $ 22,616 $ 4,991 $ 5,966
Income taxes paid (refunded), net (26,483) (24,095) 23,962
==========================================================================================
</TABLE>
(a) Certain amounts reclassified to conform to 1995 financial statement
presentation.
The accompanying notes are an integral part of the financial statements.
II-23
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Thousands of dollars except share data)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Shares of
Common Stock (a) Capital in Retained
Common Excess of Earnings Treasury
Issued Treasury Stock Par Value (Deficit) Stock Other
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1992 32,072,353 (1,432,378) $53,453 $ 236,337 $ 116,330 $(25,959) $ (4,390)
Net income 35,767
Dividends declared (24,631)
Stock issued in
business combinations 471,996 787 11,653
Stock option and award plans 153,830 365,567 254 4,260 6,847 (3,087)
Treasury stock acquired (13,373) (323)
Compensation amortization 910
Foreign currency
translation adjustments (1,241)
- -------------------------------------------------------------------------------------------------------------------------------
December 31, 1993 32,698,179 (1,080,184) 54,494 252,250 127,466 (19,435) (7,808)
Net loss
Dividends declared (26,040)
Stock issued in business
combinations 770,000 1,283 19,012
Stock option and award plans 109,473 380,852 186 2,646 7,161
Reclassifications (86,988) 86,988 (145) (1,314) 1,459
Treasury stock acquired (14,090) (301)
Compensation amortization 3,364
Foreign currency
translation adjustments (6,268)
Unrealized holding gain (loss), net (579)
- -------------------------------------------------------------------------------------------------------------------------------
December 31, 1994 33,490,664 (626,434) 55,818 272,594 (248,209) (11,116) (11,291)
Net loss (261,938)
Stock option and award plans 202,193 198,593 338 (1,933) 3,731
Treasury stock acquired (27,073) (372)
Compensation amortization 891
Foreign currency
translation adjustments 6,661
Unrealized holding gain (loss), net 1,144
- -------------------------------------------------------------------------------------------------------------------------------
December 31, 1995 33,692,857 (454,914) $56,156 $ 270,661 $(510,147) $ (7,757) $ (2,595)
===============================================================================================================================
</TABLE>
(a) Treasury stock at December 31, 1995 included 375,144 shares held in trust
for distribution under variable-price stock options.
The accompanying notes are an integral part of the financial statements.
II-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of dollars except share data)
The term "Corporation" as used in this
Annual Report includes Morrison Knudsen Corporation and its consolidated
subsidiaries unless otherwise indicated.
SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include the
accounts of the Corporation and all of its majority-owned subsidiaries except
for the accounts of McConnell Dowell Corporation Limited ("MDC"). See the
"Investments in and Advances to Unconsolidated Affiliates" Note to Consolidated
Financial Statements. 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.
Use of Estimates: The preparation of the Corporation's consolidated financial
statements in conformity with generally accepted accounting principles
necessarily requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the balance sheet dates and the reported amounts of
revenues and costs during the reporting periods for long-term contracts.
The Corporation, in estimating its Transit reimbursement obligations
makes significant assumptions concerning cost estimates, projected to the
estimated completion dates of contracts which are in their early stages of
production, for labor productivity rates, material price and usage, for interest
expense on the estimated borrowings under the credit facilities extended to
Amerail, 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 contracts transferred to Amerail. The
Corporation has no management control over Amerail and therefore must rely on
financial and operating information provided by Amerail to estimate its
reimbursement obligations. Due to uncertainties in the estimation process, it is
at least reasonably possible that estimated costs to complete the Metra contract
will be further revised in the near-term.
The Corporation has a substantial history of making reasonably
dependable estimates of the extent of progress towards completion, contract
revenues, and contract costs on its long-term construction contracts. However,
due to uncertainties inherent in the estimation process, it is at least
reasonably possible that completion costs will be further revised in the near-
term for certain major construction projects in the early stages of progress.
Recognition of Revenue: The Corporation recognizes revenue on construction
contracts, including substantially all of its construction joint-venture
contracts, on the percentage-of-completion method, based on the proportion of
costs incurred on the contract to total estimated contract costs. Construction-
management and engineering contract revenue is recognized on the accrual method.
Revisions in uncompleted contract revenue and cost estimates are
reflected in the accounting period when known. Any anticipated losses on
uncompleted contracts are charged to operations as soon as they are
determinable. Claims for additional contract revenue in excess of original
contract price are recognized when an offer to settle has been received from the
customer.
Unbilled Receivables: Unbilled receivables arise when revenues have been
recorded but amounts cannot be billed under the terms of the contracts but are
recoverable from customers upon various measures of performance such as
quantities excavated or delivered, costs incurred, time schedules or completion
of the contracts. Amounts of unbilled receivables in the balance sheets at
December 31, 1995 and 1994 represent (i) unbilled amounts arising from the use
of the percentage-of-completion method of accounting, (ii) incurred costs to be
billed under cost-reimbursement-type contracts, or (iii) amounts arising from
routine lags in billing (for example, for work completed in one month but not
billed until the next month pursuant to contract terms). Substantially all the
unbilled receivables at December 31, 1995, net of progress payments, if any, are
expected to be collected during 1996.
Classification of Current Assets and Liabilities: The Corporation includes in
current assets and liabilities amounts realizable and payable under engineering
and construction contracts that extend beyond one year. Accounts receivable at
December 31, 1995 include $7,337 of contract retentions, generally payable by
customers on final acceptance, which amounts are expected to be collected after
1996.
Cash advances by customers to provide a revolving fund from which to pay
contract-related costs are reflected as liabilities until the contract is
substantially or fully completed. The Corporation does not pay interest on
customer advances.
Cash Equivalents: Cash equivalents consist of investments in highly liquid
securities purchased with an original maturity of three months or less.
Credit Risks: Financial instruments which potentially subject the Corporation to
concentrations of credit risks
II-25
<PAGE>
consist of cash equivalents, securities available for sale and accounts
receivable and unbilled receivables.
The Corporation by policy, limits the amount of credit exposure to any
one financial institution and places the investments with financial institutions
evaluated as highly creditworthy. Concentrations of credit with respect to
accounts receivable and unbilled receivables are limited due to the
Corporation's credit evaluation process. Historically, the Corporation has not
incurred any significant credit-related losses.
Depreciation and Amortization: The cost of leasehold improvements is depreciated
on the straight-line method over varying periods not in excess of applicable
lease terms. The cost of construction equipment (less salvage values of up to
20%) is depreciated on the straight-line method over periods from five to 10
years. Certain construction specialty equipment is depreciated using the units-
of-production method and may have salvage values which exceed 20% of original
cost. The cost and accumulated depreciation of property and equipment disposals
are removed from the accounts, and gains or losses are reflected in the results
of operations of the period in which the transaction is completed.
Goodwill and Other Intangibles: Goodwill, cost in excess of the net assets of
businesses acquired, is amortized on the straight-line method over periods not
exceeding three years. Cost of patents is amortized on the straight-line method
over their useful lives or the date of their expiration. In periods subsequent
to purchase acquisitions giving rise to goodwill or other intangible assets, the
Corporation periodically evaluates the existence or extent of an impairment of
the unamortized amounts. Accumulated amortization of intangibles at December 31,
1995 was $4,906.
Foreign Currency Translation: The functional currency for the majority of the
Corporation's foreign operations is the applicable local currency. Translation
from the applicable foreign currencies to U.S. dollars is performed for asset
and liability accounts using current exchange rates in effect at the balance
sheet date and for revenue and expense accounts using a weighted average
exchange rate during the period. Gains or losses, net of applicable deferred
income taxes, resulting from such translation are deferred as a separate
component of stockholders' equity (deficiency)until disposition or substantial
disposition of the investment. Gains or losses resulting from foreign currency
transactions are included in the results of operations of the period in which
the transaction is completed.
Income Taxes: Deferred income tax assets and liabilities are recognized for the
effects of temporary differences between the financial statement carrying
amounts and the income tax basis of assets and liabilities using enacted tax
rates in effect in the years in which the differences are expected to reverse.
In addition, future tax benefits, such as net operating loss carryforwards are
recognized currently to the extent such benefits are more likely than not to be
realized as an economic benefit in the form of a reduction of income taxes in
future years.
Investments in Debt and Equity Securities: The Corporation classifies
investments in equity securities that have readily determinable fair values and
all investments in debt securities into three categories at the time of purchase
and re-evaluates such designation as of each balance sheet date. Equity and debt
securities not classified as trading securities nor as held-to-maturity
securities are classified as available-for-sale securities in the balance
sheets. Unrealized holding gains and losses are reflected as a separate
component of stockholders' equity (deficiency).
Derivatives: Gains and losses on hedges of existing assets or liabilities are
included in the carrying amounts of those assets or liabilities and are
ultimately recognized in the results of operations as part of those carrying
amounts. Gains and losses related to qualifying hedges of firm commitments or
anticipated transactions also are deferred and recognized in the results of
operations or as adjustments of carrying amounts when the hedged transaction
occurs.
Valuation of Carrying Amounts of Investments: When the Corporation decides to
sell an investment in a consolidated subsidiary or an unconsolidated affiliate,
and the carrying amount of the investment exceeds its estimated recovery value,
the Corporation accrues an expected loss on disposition. The Corporation
determines estimated recovery value based on the best information available in
the circumstances.
Accounting for Divestitures: At the time the Corporation commits to a formal
plan to dispose, whether by sale or abandonment, of a component of the
Corporation whose operations represent an entire line of business or an entire
class of customer, (the "measurement date") it reports the disposal of such a
segment in the discontinued operations format as required under Accounting
Principles Board Opinion No. 30 ("APB 30"). APB 30 provides for separate
disclosure in the statement of operations of the amount, net of any applicable
income taxes, of (i) the results of discontinued operations prior to the
measurement date, (ii) the gain (loss) from disposal of the business segment,
including estimated future income (loss) from discontinued operations during the
period from the measurement date to expected time of disposal (the "phase-out
period") and (iii) expenses directly associated with the decision to dispose.
Any income accrued for the phase-out period is limited to the loss on disposal
of the assets of the segment and accrued costs directly associated with the
decision to dispose, any excess income is recognized when realized at the time
of disposal. If a gain is expected from disposal of a segment, including
estimated future income from discontinued operations during the phase-out
period, the
II-26
<PAGE>
Corporation recognizes such gain when earned. In addition, the Corporation
segregates the net assets and liabilities (current and non-current) related to
the discontinued segment in the balance sheet following the measurement date and
in the balance sheets of periods ended prior to the measurement date.
Income (Loss) Per Share: Income (loss) per share are computed based on the
weighted average number of shares outstanding plus the dilutive effect of shares
issuable upon assumed exercise of stock options and stock purchase warrants,
reduced by the shares which could be purchased with the assumed proceeds from
such exercise, if dilutive.
STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued Statement No. 121 Accounting
for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of
("FAS 121") and Statement No. 123 Accounting for Stock-Based Compensation ("FAS
123"). The requirements of both FAS 121 and 123 are effective January 1, 1996.
FAS 121 requires that long-lived assets and certain identifiable
intangible assets to be held and used be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable and that long-lived assets and certain identifiable
intangibles held for disposal be reported at the lower of their carrying amount
or fair value less the cost to sell. Adoption of FAS 121 will not have a
material effect on the Corporation's financial position or results of operations
because the Corporation's current accounting policies are in compliance with the
requirements of FAS 121.
FAS 123 defines a fair value based method of accounting for an employee
stock option or similar equity instrument and encourages all entities to adopt
that method of accounting for all their employee stock compensation plans.
However, FAS 123 also allows an entity to continue to measure periodic
compensation cost for its stock compensation plans using the intrinsic value
based method of accounting prescribed by Accounting Principles Board Opinion 25
Accounting for Stock Issued to Employees. The Corporation has elected to remain
with the accounting in APB Opinion 25, however, it will make pro forma
disclosures of net income and income per share beginning in 1996 as if the fair
value based method of accounting had been applied.
BASIS OF PRESENTATION AND MANAGEMENT'S PLANS
The Corporation's accompanying consolidated financial statements have been
prepared on the basis that it will continue as a going concern, which
contemplates continuity of operations, realization of assets and liquidation of
liabilities in the ordinary course of business. There are certain conditions
that raise substantial doubt about the Corporation's ability to continue as a
going concern:
. The Corporation incurred losses from continuing operations of $79,636 and
$155,698 for the years ended December 31, 1995 and December 31, 1994,
respectively. The Corporation reported a net loss of $261,938 for the year
ended December 31, 1995 and a net loss of $349,635 for the year ended December
31, 1994, including losses from discontinued MK Rail and Transit operations of
$182,302 and $193,937, in 1995 and 1994, respectively.
. Net cash used by the Corporation's continuing operating activities was $24,959
for the year ended December 31, 1995. Net cash used by the discontinued MK
Rail and Transit operating activities was $76,998and $200,883 for the years
ended December 31, 1995 and December 31, 1994, respectively.
. At December 31, 1995, the Corporation had a stockholders' deficiency of
$193,682which included an accumulated deficit of $510,147.
. At December 31, 1995 the Corporation had a working capital deficiency of
$232,207.
. The Corporation expects negative cash flow from operations in 1996.
. The Corporation does not expect to make the required debt repayments of its
antecedent debt and required escrow payments under its Transit reimbursement
obligations.
The Corporation's ability to continue as a going concern is dependent
upon the Corporation successfully obtaining relief from its antecedent debt and
Transit reimbursement obligations and returning the Corporation to profitable
operations. In this connection, the Corporation intends:
. Through its proposed Recapitalization plan to effect an exchange of its
antecedent debt, Transit reimbursement obligations and certain long-term lease
obligations for a new issue of the Corporation's common stock and common stock
of MKRail representing the Corporation's 65% ownership interest in MKRail, the
Corporation's $52,200 principal amount of its note receivable from MKRail with
interest at the prime rate (8.25% at March 31, 1996) and certain other assets.
. Continue to obtain new, profitable contracts and to generate positive cash
flows from continuing operations.
The results of these plans cannot be predicted and no assurance can be
given that the proposed Recapitalization and operating plans will be successful.
The Corporation is also unable to determine if such Recapitalization can be
accomplished through a prepackaged plan pursuant to Chapter 11 of the United
States Bankruptcy Code or whether a protracted Chapter 11 proceeding would be
required. Any such recapitalization, if successful, will substantially dilute or
eliminate existing stockholders' interests.
II-27
<PAGE>
CHANGES IN BUSINESS
Discontinued Transit Operations and Reimbursement Obligations: 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, all contract 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. Amerail has
managerial authority over its operations including the completion of all of the
Transit contracts transferred to Amerail. The Corporation cannot exercise any
control over the management of Amerail and the execution of the contracts
transferred to Amerail. The Corporation has accounted for the disposition of
Transit as a discontinued operation, and the consolidated financial statements
for prior periods have been reclassified to present Transit as a discontinued
operation. In connection with the disposition of Transit, the Corporation
recorded a $95,772 million loss for the year ended December 31, 1995, without
providing future tax benefits. The loss includes (i) a $3,630 million loss from
operations for the six month period ended June 30, 1995, the effective date of
disposal, (ii) $85,462 million provision for the Corporation's estimated
reimbursement obligations for the net cash losses resulting from Amerail's
performance of certain transit car contracts transferred to Amerail, and (iii)
$6,680 million accrual for transaction costs and employee severance and benefits
costs associated with the decision to dispose.
The Corporation remains liable for certain net cash losses resulting
from Amerail's performance of contracts transferred to Amerail. In this
connection, the Corporation agreed to guarantee Amerail's reimbursement
obligation to certain banks which are providing a standby letter of credit and
credit facility up to an aggregate amount of $141,700 to support the performance
of the contract with the Illinois Commuter Rail Division of the Regional Transit
Authority d/b/a Metra/Metropolitan Rail ("Metra Contract") transferred to
Amerail. The Corporation has estimated its reimbursement obligation for such net
cash losses of the Metra Contract to be $80,195 at December 31, 1995. The
Corporation's reimbursement obligation to certain banks which are providing the
standby letter of credit and the new credit facility to support the performance
of the Metra Contract is governed by the Metra Guaranty.
The Corporation also agreed to reimburse its bonding company for the
surety's future losses up to a maximum of $31,249 on the payment and performance
bonds supporting the performance of the existing manufacturing and refurbishing
contracts with various transit agencies, other than the Metra Contract, ("Non-
Metra Contracts") transferred to Amerail. The Corporation's reimbursement
obligation to its bonding company for the surety's future losses on the Non-
Metra Contracts is governed by a reimbursement agreement (the "Transit
Reimbursement Agreement"). Accordingly the Corporation has reflected the
reimbursement obligations totaling $111,444 as a current liability on the
accompanying consolidated balance sheet at December 31, 1995.
The Corporation's estimate of the reimbursement obligation for the Metra
Contract includes anticipated costs, projected to the estimated completion date
of the Metra Contract, for interest expense on the estimated outstanding
borrowings under the credit facility extended to Amerail for completion of the
Metra Contract, 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 Metra Contract. The Corporation has
recognized its reimbursement obligation through the estimated final completion
of the Metra Contract based upon the best information available, which includes
financial and operating information provided by Amerail, over which the
Corporation has no control. However, there can be no assurance that the net cash
losses ultimately realized at completion of the Metra Contract will not exceed
the Corporation's estimated reimbursement obligation at December 31, 1995.
The Corporation's repayment obligation under the Transit Reimbursement
Agreement is governed by a Distribution Agreement among the Corporation, the
bonding company and the agent for the antecedent debt (the "Distribution
Agreement"). Under the Distribution Agreement, the amount owing to the bonding
company under the Transit Reimbursement Agreement becomes subject to a maximum
of $31,249, and becomes payable 90 days after the date the last rail car is
accepted by a transit agency which is estimated to be 1998. 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 debt and (ii) payments
are made on account of antecedent debt.
The Corporation's repayment obligation under the Metra Guaranty
(estimated at $80,195 at December 31, 1995) is 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 debt. Optional and mandatory payments under the
Override Agreement, in addition to repaying funded antecedent debt, are escrowed
on account of the contingent Metra Guaranty repayment obligation and other
contingent antecedent debt obligations until, among other things, such amount
becomes fixed and liquidated.
II-28
<PAGE>
Summary results of operations of Transit for the six months ended June
30, 1995 (the effective date of disposition) and the year ended December 31,
1994 follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
Results of Operations June 30, 1995 December 31, 1994
<S> <C> <C>
Revenue $216,539 $ 114,759
Operating loss (3,630) (224,377)
</TABLE>
Discontinued MKRail Corporation Operations: In March 1995, the Corporation
adopted a plan to dispose of its 65% ownership interest in MKRail Corporation
and has accounted for the planned divestiture of MK Rail as a discontinued
operation, and the accompanying consolidated financial statements have been
reclassified to report the net assets and the results of operations of MKRail
separately. Consolidated financial statements for prior periods have been
reclassified to present MK Rail as a discontinued operation. In connection with
its decision to sell MKRail, the Corporation recorded an $86,530 net loss for
the year ended December 31, 1995 after providing a net tax benefit of $10,774.
The loss includes (i) a $3,806 net loss from operations for the three month
period ended March 31, 1995, the measurement date, and (ii) $82,724 loss from
disposal including $18,081 loss from discontinued operations of MK Rail and
$64,643 loss provision to write-down the Corporation's carrying amount of its
investment in and note receivable from MK Rail to their estimated net realizable
values (without providing future tax benefits) 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 investment in and
accounts receivable from MK Rail will not be less than the estimated recovery
value assumed at December 31, 1995.
Summary results of operations of MK Rail for the two years in the
period ended December 31, 1995, follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Results of Operations
Year Ended December 31, 1995 (1) 1994 (2)
- --------------------------------------------------------------------------------
<S> <C> <C>
Revenue $263,718 $368,537
Operating loss (51,113) (49,977)
Net loss (40,414) (42,793)
================================================================================
Corporation's share of net loss $(21,887) $(27,815)
================================================================================
</TABLE>
(1) MK Rail's results of 1995 operations were adversely impacted by $40,838 of
pretax charges consisting of (i) $20,273 to exit the high-horsepower
locomotive business, including the write-down of its completed locomotives and
raw material inventories, and a provision for anticipated losses in connection
with current locomotive lease obligations, (ii) $9,570 to write-down its
manufacturing facility and equipment in Mountaintop, Pennsylvania, to their
estimated net realizable values because the Mountaintop facility represented
excess capacity and was no longer a core asset, (iii) $7,064 to write-down the
carrying amounts of a majority of its owned locomotives in its lease fleet to
their estimated net realizable values, including a provision for anticipated
losses on the leased locomotives in contemplation of the eventual sale of its
lease fleet, (iv) $2,849 to recognize a write-down on the sale of its
Australian operations prior to transferring its ownership interest to the
Corporation and (v) $1,082 provision for contract losses and stockholder's
litigation costs.
(2) MK Rail's results of 1994 operations were adversely impacted by $39,216 of
pretax charges consisting of (i) $12,418 for aggregate losses on uncompleted
locomotive remanufacturing contracts, (ii) $11,060 to write-off investments in
affiliates in connection with MKRail's decision to dispose of its Argentine
affiliates, (iii) $8,398 provision for noncancelable purchase commitments of
research and development services under contract, and anticipated future
losses on prospective leases of new high-horsepower locomotives, stemming from
MK Rail's decision to curtail its ongoing activities in new locomotive
manufacturing and technology and (iv) $7,340 provision primarily for legal
expenses in connection with MKRail stockholder's litigation.
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 accompanying consolidated balance sheets atDecember 31, 1995
and December 31, 1994. Such amounts are summarized as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
December 31, 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents $ 5,696 $ 12,459
Accounts receivable and unbilled receivables 43,934 46,068
Inventories 99,459 116,526
Other current assets 2,903 8,119
Property and equipment, net 61,587 71,426
Deferred income taxes 28,363 19,171
Goodwill and other intangibles, net 31,575 29,511
Prepaid lease cost 7,182 8,017
Short-term and current portion
of long-term debt (60,825) (2,776)
Accounts payable and accrued liabilities (51,780) (66,693)
Debt due after one year (7,198) (38,091)
Other non-current liabilities (10,901) (19,646)
Minority interests (35,083) (41,667)
Cumulative translation losses 5,223 --
Accrual for estimated loss on disposal (48,135) --
- --------------------------------------------------------------------------------
Net assets of discontinued operations $ 72,000 $142,424
================================================================================
</TABLE>
MK Rail Intercompany Agreements: On June 15, 1995, the Corporation entered into
an agreement with MKRail regarding the amount of intercompany indebtedness owed
by MKRail to the Corporation and certain other matters. The agreement resulted
in the Corporation reducing its receivable from MKRail through a capital
contribution of $29,500. The remaining balance of $52,200 was converted into a
promissory 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 promissory note is due and payable in full upon the
acquisition of all of the common stock or substantially
II-29
<PAGE>
all of the assets of MK Rail by a third party. The estimated loss on disposition
of MK Rail recognized in the consolidated statements of operations includes the
effects of this additional capital contribution to MK Rail and the adjustment to
realized value upon the sale of MK Rail's promissory note subsequent to December
31, 1995. The Corporation, in connection with its proposed reorganization plan,
has proposed to exchange the $52,200 principal amount of its MKRail promissory
note and accrued interest thereon, together with other consideration for the
Corporation's existing secured indebtedness.
SECURITIES AVAILABLE FOR SALE AND WORKERS' COMPENSATION LIABILITY
The Corporation had a portfolio of securities available for sale at December 31,
1995 which consisted primarily of foreign government bonds held for unspecified
periods of time and sold to meet liquidity needs as part of the Corporation's
self-insured risk management programs, principally workers' compensation
liabilities. Maturities of debt securities in the portfolio at December 31, 1995
follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
December 31, 1995
- --------------------------------------------------------------------------------
Fair
Due in Value Cost
- --------------------------------------------------------------------------------
<S> <C> <C>
1996 $ 8,900 $ 8,900
1997 - 2000 12,166 11,772
2001 - 2005 3,374 3,203
- --------------------------------------------------------------------------------
Totals $24,440 $23,875
================================================================================
</TABLE>
Gross unrealized holding gains and losses at December 31, 1995, were
$588 and $23, respectively. The change in net unrealized holding gain from
January 1, 1995 to December 31, 1995 was a $1,144 net unrealized holding gain.
During 1995, the Corporation sold $15,978 of debt securities from the portfolio
which resulted in $16,077 of net cash proceeds, $108 of realized gains and $9 of
realized losses based upon specific identification of the debt securities sold.
In March 1994, the Corporation and an insurance company entered into
an agreement under which the Corporation novated its reinsurance agreements and
prefunded its estimated $53,829 self-insurance liability for workers'
compensation claims incurred through March 31, 1994 with cash of $44,100. The
Corporation recorded a deferred gain of $9,729 on the transaction. The
Corporation recognizes the deferred gain over the period of the outstanding
liability beginning January 1994, based on the proportion of cumulative claims
paid, to the total estimated liability for claims. The Corporation continues to
self-insure for additional workers' compensation losses through its captive
insurance subsidiary and reinsurance agreements with outside insurers. The
unamortized deferred gain of $5,646 is included in the accompanying balance
sheet at December 31, 1995 under the caption "Deferred income".
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.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Financial Position
December 31, 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents 49,781 $ 124,627
Other current assets 65,781 143,521
Non-current assets 22,112 19,365
Property and equipment, net 67,038 32,299
Advances from customers (16,197) (88,214)
Other current liabilities (161,066) (213,295)
- --------------------------------------------------------------------------------
Net assets $ 27,449 $ 18,303
================================================================================
Corporation's investment in and advances
to construction joint ventures $ 15,186 $ 12,854
================================================================================
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Results of Operations
Year Ended December 31, 1995 1994 1993
- --------------------------------------------------------------------------------
Combined joint ventures, net
Revenue $ 748,026 $ 1,026,702 $1,025,376
Cost of revenue (695,985) (1,057,888) (985,314)
- --------------------------------------------------------------------------------
Operating income (loss) $ 52,041 $ (31,186) $ 40,062
================================================================================
Corporation's share, net
Revenue $ 289,405 $ 331,866 $ 485,393
Cost of revenue (264,764) (359,420) (465,301)
Operating income (loss) $ 24,641 $ (27,554) $ 20,092
================================================================================
</TABLE>
INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES
The following table presents summarized financial information of the
unconsolidated affiliated companies accounted for by the equity method on a
combined 100 percent basis. Amounts presented include the accounts of the
following individually significant investees (the Corporation's ownership
interests therein are shown parenthetically): AmerBank (29.5%); Westmoreland
Resources, Inc. (24%); MIBRAG mbH (33%); McConnell Dowell Corporation, Limited
("MDC") (62.8%) and Morrison Knudsen of Australia ("MKA") (100%). The summary
financial position presented at December 31, 1994, and the summary results of
operations for each of the three years in the period ended December 31, 1995
include the accounts of MK Gold Company until its disposition in June 1995.
Because of the Corporation's decision to dispose of its investments in AmerBank
and
II-30
<PAGE>
MDC, the carrying amounts of the Corporation's investments therein are included
in the accompanying balance sheet at December 31, 1995 under the caption
"Investments in unconsolidated affiliates held for sale". The Corporation,
unsuccessful in its search for potential buyers for the assets and/or business
of MKA, wrote-off its $2,362 investment in MKA at December 31, 1995. See the
"Dispositions of Investments in Affiliates - Dispositions in 1995" Note to
Consolidated Financial Statements.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Financial Position
December 31, 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
Current assets $ 618,701 $(446,260
Non-current assets 754,462 494,560
Current liabilities (274,537) (241,174)
Long-term debt (211,331) (75,455)
Other non-current liabilities (665,662) (440,987)
- --------------------------------------------------------------------------------
Net assets $ 221,633 $(183,204
================================================================================
Corporation's investment in
and advances
to unconsolidated affiliates $ 51,031 $ 71,382
Investments in unconsolidated affiliates
held for sale $ 32,189 $ --
================================================================================
</TABLE>
<TABLE>
<CAPTION>
Results of Operations
Year Ended December 31, 1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $ 730,279 $ 614,131 $199,110
Operating income 83,575 77,769 4,046
Net income (loss) 62,542 79,259 (2,734)
================================================================================
Corporation's equity in net
income (loss) of
unconsolidated affiliates $ 23,042(1) $ 11,390 $(5,757)(2)
================================================================================
</TABLE>
(1) The increase in the Corporation's equity in the net income of investees in
1995 is due to the recognition of its $10,820 proportionate share of MDC's net
income for the year 1995. Because of the Corporation's decision to sell its
ownership interest in MDC, the Corporation has accounted for its investment in
MDCduring 1995 by the equity method. See the "Subsequent Events - McConnell
Dowell Corporation, Limited" Note to Consolidated Financial Statements.
(2) The Corporation recognized a net loss from its investee's operations in
1993 primarily because of $4,600 combined net losses of Joy MK Projects
Company, then a 50% owned unconsolidated affiliate, and MDC, then a 48.9%
owned unconsolidated affiliate. Joy MK Projects Company became a wholly-owned
subsidiary in April 1993 and MDC became a majority-owned consolidated
subsidiary in June 1993.
The carrying amount of the Corporation's 29.5% ownership interest in AmerBank
at December 31, 1995 was $5,389. The carrying amount of 796,535 shares of
AmerBank's common stock held for sale by the Corporation was approximately equal
to the fair market value of AmerBank's publicly traded stock, based on published
market prices at December 31, 1995.
The Corporation received dividends from unconsolidated affiliates of $660,
$900 and $216 in 1995, 1994 and 1993, respectively.
The Corporation's consolidated accumulated deficit at December 31, 1995
includes $30,527 of accumulated undistributed earnings of its unconsolidated
affiliates accounted for by the equity method.
Effective January 1, 1994, the Corporation and two nonaffiliated investors
acquired majority ownership of MIBRAG mbH from the German government. The
Corporation, through its wholly-owned German subsidiary Morrison Knudsen
Deutschland ("MKD"), has an agreement to provide mine planning, engineering and
related services to MIBRAG mbH. In the fourth quarter of 1995, the Corporation
recognized $14,000 of mining service fees. Representing income earned during the
year 1994 and 1995 from providing mine planning, engineering and related
services to MIBRAG mbH. But because of restrictions on repatriation of funds
imposed as a consequence of German government loan guarantees of MIBRAG mbH's
current and future indebtedness, the Corporation, pursuant to the terms of the
purchase agreement with the German government, was precluded from realizing the
full amount of the fees during the periods when they were earned. In December
1995, an agreement was reached between MIBRAG mbH, certain outside investors and
the German government under which agreement MIBRAG mbH made a capital
contribution of certain productive power plant assets to a limited partnership
("partnership") and the outside investors contributed cash to the partnership in
exchange for a 99% interest in the partnership and rights to receive certain tax
depreciation benefits accruing to MIBRAG mbH. The addition of cash by the
outside investors effectively reduced MIBRAG mbH's future financing
requirements. The German government, in consideration for a reduction in its
loan guarantees, has, among other things, agreed to lift the restrictions on
payment of mining services fees by MIBRAG mbH to the Corporation and in
addition, lift limitations on any future payment of dividends by MIBRAG mbH. The
Corporation anticipates that it will continue to both recognize and realize the
mining services fees in future periods.
DISPOSITIONS OF INVESTMENTS IN AFFILIATES
Dispositions in 1995
Write-off of Investment in Morrison Knudsen of Australia ("MKA"): The
Corporation, unsuccessful in its search for potential buyers for the assets
and/or business of MKA, decided to discontinue its financial support for MKA
and, effective December 31, 1995, wrote-off its $2,362 investment in MKA.
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 $17,100 cash. In the first six months of 1995, the
Corporation recognized a provision
II-31
<PAGE>
of $8,836 to write-down the carrying amount of its 100% investment in MKI to its
estimated recovery 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 100% ownership interest in Western for $4,900 cash which approximated
the Corporation's carrying amount of its investment in Western.
Sale of Investment in MK Gold Company ("MKGold"): On June 6, 1995, the
Corporation sold its 46.4% ownership interest in MKGold for $22,500 cash. As a
condition to the purchase of the shares, the buyer acquired MKGold'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.
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 TGVfailed 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. In December 1994, the Corporation
recognized a pretax gain of $1,125 from the sale of substantially all of its
ownership interest in Texas TGV.
Sale of Interest in Strait Crossing Development, Inc. ("SCDI"): In October 1993,
SCDI, 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. In 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 recorded a pretax gain of $4,877 on the change
of interest. See the "Subsequent Events - Strait Crossing Development, Inc."
Note to Consolidated Financial Statements.
Sale of Investments in Development Stage Companies: In December 1994, the
Corporation recognized a $7,237 pretax charge to operations representing its
$1,600 investment in and $5,637 of expected losses for loan guarantees for two
development-stage, non-core businesses. The Corporation decided to discontinue
its financial support for Beacon Light, a manufacturer of light enhancement
products, and dataCACHE, a computer software company.
In February 1995, dataCACHE was sold and the Corporation received $500
cash for its ownership interest and the rights to receive future product
royalties, if any, up to $12,000. The $500 cash proceeds were applied towards
the outstanding balance of the guaranteed loan. The $2,832 outstanding balance
of the guaranteed loan was included in the Corporation's antecedent debt at
December 31, 1995.
On June 2, 1995, the Corporation sold its ownership interest in Beacon
Light for $1,000 cash and applied the $1,000 proceeds to pay down the
outstanding balance of the guaranteed loan. The $1,639 outstanding balance of
the guaranteed loan was included in the Corporation's antecedent debt at
December 31, 1995.
SHORT-TERM DEBT
Short-term debt at December 31, 1995 and 1994 consisted of the following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
December 31, 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
Antecedent debt, interest rates of 8.5% at
December 31, 1995, 6.5% at December 31, 1994 $213,344 $139,000
Bridge loan, interest rates of 11.5% at
December 31, 1995, 6.7% at December 31, 1994 37,882 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 $251,226 $192,152
================================================================================
</TABLE>
The weighted average interest rates on short-term borrowings
outstanding at December 31, 1995 and 1994 were 9.0% 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 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.
II-32
<PAGE>
New and Amended Credit Facilities: On August 10, 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 maximum borrowing amount under
the bridge loan was reduced from $129,000 to $100,000. Outstanding borrowings
under the bridge loan were subject to interest at the prime rate plus three
percent per annum (11.25% at March 31, 1996) and were due and payable on March
31, 1996. On March 29, 1996 the Corporation paid the outstanding balance owing
under the bridge loan.
On March 31, 1996, the Corporation and certain of its secured
creditors agreed to amend certain terms and conditions of the bridge loan
facility, which expired on March 31, 1996. The amendments to the bridge loan
facility included, among other things, establishment of a new borrowing capacity
of $47,500, and extension of its termination date to September 30, 1996.
Outstanding borrowing under the amended bridge loan facility will be subject to
interest at the prime rate plus one and one-half percent per annum (9.75% at
March 31, 1996) due and payable on the last day of each month and on September
30, 1996.
Under the restructuring agreements, the antecedent 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 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 debt bear interest at the prime rate
(8.5% at December 31, 1995). Interest accrued on outstanding borrowings after
July 1, 1995, was allowed to 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 $9,320 of accrued interest payable on
antecedent debt in the accompanying consolidated balance sheet at December 31,
1995. On April 2, 1996, as partial consideration for the extension of the bridge
loan facility, the Corporation paid $14,427 interest on the antecedent debt that
had been accrued and deferred from July 1, 1995 through March 31, 1996.
In addition to the required $100,000 repayment under the antecedent
debt at September 30, 1996 and $113,344 on December 31, 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 debt. The Corporation must prepay
any prepayments or repayments received by the Corporation on the $52,200 note
receivable from MKRail, 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 new and
amended credit facility, 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 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 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 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 warrant
covering 830,039 shares 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.
II-33
<PAGE>
TAXES ON INCOME
The components of the U.S. federal, state and foreign income tax expense
(benefit) reflected in the accompanying statements of operations for the three
years in the period ended December 31, 1995 were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Year Ended December 31, 1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Currently payable
U.S. federal $(31,776) $(12,762) $11,508
State and foreign 2,965 3,222 5,547
- --------------------------------------------------------------------------------
Current (28,811) (9,540) 17,055
- --------------------------------------------------------------------------------
Deferred
U.S. federal 31,776 (15,493) 513
State and foreign 6,929 (5,861) 4,063
- --------------------------------------------------------------------------------
Deferred 38,705 (21,354) 4,576
- --------------------------------------------------------------------------------
Income tax expense (benefit) from
continuing operations $ 9,894 $(30,894) $21,631
================================================================================
</TABLE>
The income tax expense (benefit) applicable to continuing and
discontinued operations for the three years in the period ended December 31,
1995 were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Year Ended December 31, 1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Continuing operations
Current $(28,811) $ (9,540) $17,055
Deferred 38,705 (21,354) 4,576
- --------------------------------------------------------------------------------
9,894 (30,894) 21,631
Discontinued operations (10,774) (45,365) 4,828
- --------------------------------------------------------------------------------
Income tax expense (benefit) $ (880) $(76,259) $26,459
================================================================================
</TABLE>
As of December 31, 1995, U.S. Federal income tax returns for the years
1987 through 1993 were in the process of examination or appeal. All years prior
to 1987 are closed to further examination. The Company believes that adequate
provision has been made for possible assessments of additional taxes.
Deferred tax assets and liabilities as of December 31, 1995 and 1994
were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
December 31, 1995 Assets Liabilities Total
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Employee benefit plans $ 22,545 $ -- $ 22,545
Provision for estimated losses 93,424 -- 93,424
Revenue recognition 1,022 -- 1,022
Alternative minimum tax 13,802 -- 13,802
Joint ventures 3,851 -- 3,851
Depreciation -- (7,506) (7,506)
Basis difference in affiliates 17,997 -- 17,997
Self insurance liability 23,908 -- 23,908
Net operating loss 62,613 -- 62,613
Valuation allowance -- (237,002) (237,002)
Other, net 7,875 -- 7,875
- --------------------------------------------------------------------------------
Deferred tax assets (liabilities)
Continuing operations 247,037 (244,508) 2,529
Discontinued operations 30,336 -- 30,336
- --------------------------------------------------------------------------------
Total $277,373 $(244,508) $ 32,865
================================================================================
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
December 31, 1994 Assets Liabilities Total
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Employee benefit plans $ 17,871 $ $ 17,871
Provision for estimated losses 77,902 -- 77,902
Revenue recognition 38,745 -- 38,745
Alternative minimum tax 12,689 -- 12,689
Joint ventures 1,244 -- 1,244
Depreciation -- (11,523) (11,523)
Basis difference in affiliates -- (15,605) (15,605)
Self insurance liability 26,352 -- 26,352
Net operating loss 7,871 -- 7,871
Valuation allowance -- (127,594) (127,594)
Other, net 13,282 -- 13,282
- --------------------------------------------------------------------------------
Deferred tax assets (liabilities)
Continuing operations 195,956 (154,722) 41,234
Discontinued operations 19,072 -- 19,072
- --------------------------------------------------------------------------------
Total $215,028 $(154,722) $ 60,306
================================================================================
</TABLE>
At December 31, 1995, the Corporation had consolidated regular tax net
operating loss carryforwards for federal, state and foreign tax purposes of
approximately $99,848, $15,235 and $12,431, respectively, which begin to expire
in the year 2000. In addition, the Corporation had alternative minimum tax
credits of $13,802 at December 31, 1995 which carry forward indefinitely. The
Corporation also had general business credit and foreign tax credit
carryforwards of $2,639 and $1,068, respectively, which begin to expire in 1998.
The ability of the Corporation to use the net operating loss carryforwards and
tax credits prior to their expiration could be limited.The valuation allowance
increased by $109,408 in 1995 from $127,594 at December 31, 1994 to $237,002 at
December 31, 1995 to offset these net operating loss carryforwards and other
deferred tax assets due to substantial doubt of their realization based on
circumstances described in the "Basis of Presentation and Management's Plans"
Note to Consolidated Financial Statements.
Income tax expense (benefit) of continuing operations differed from
income taxes at the U.S. federal statutory tax rate of 35% for the three years
in the period ended December 31, 1995 for the following reasons:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Year Ended December 31, 1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax at federal statutory rate $(24,410) $(65,055) $18,107
Expense (benefit) for:
State taxes (9,221) (9,989) 2,804
Foreign taxes 393 5,443 3,838
Change in valuation allowance 36,123 80,354 --
Nondeductible expenses
(nontaxable income), net 7,009 5,193 (2,350)
Adjustment of prior years'
accruals -- (46,504) --
Other -- (336) (768)
- --------------------------------------------------------------------------------
Income tax expense (benefit)
of continuing operations $ 9,894 $(30,894) $21,631
================================================================================
</TABLE>
The increase in valuation allowance in 1995 of $36,123 is net of the
valuation allowance of $73,285 allocated to discontinued operations. The
increase in the valuation allowance in 1994 of $80,354 is net of the valuation
allowance of $47,240 allocated to discontinued operations.
II-34
<PAGE>
The domestic and foreign components of income (loss) before income
taxes for the three years in the period ended December 31, 1995 were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Year Ended December 31, 1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
United States $(92,855) $(191,174) $31,362
Foreign 23,113 5,302 20,372
- --------------------------------------------------------------------------------
Income (loss) from continuing
operations before income taxes $(69,742) $(185,872) $51,734
================================================================================
</TABLE>
LEGAL PROCEEDINGS
The Corporation is subject to a number of lawsuits in the following four general
categories that were either settled or are currently pending against the
Corporation and/or MKRail and their respective directors and or officers (the
"defendants") (i) class actions relating to transactions in the common stock of
the Corporation (ii) class actions relating to the issuance of, and transactions
in, the common stock of MK Rail (iii) derivative actions brought by persons who
claim to be stockholders of the Corporation and (iv) claims brought by the
former stockholders of three corporations, Touchstone, Inc., TMS, Inc. and Clark
Industries, Inc., ("Clark") acquired by the Corporation in exchange for shares
of the Corporation's common stock. The plaintiffs in these actions have sought
various remedies, including compensatory and punitive damages and injunctive
relief.
MK Securities Class Actions: Seven separate cases first filed on July 28, 1994,
have been consolidated. The plaintiffs in this consolidated action represent the
class of stockholders who purchased shares of the Corporation's common stock
during the period of October 15, 1993 to March 31, 1995. Defendants include the
Corporation, certain of the Corporation's current and former officers, and the
Corporation's auditors. The plaintiffs purport to state claims for violation of
certain federal and state securities laws and certain common law claims, and
seek damages in an unspecified amount. The parties have entered into a court
approved settlement, the ultimate effectiveness of which is contingent upon
settlement of other actions.
MK Rail Securities Class Actions: Two cases both filed on October 20, 1994,
relating to the issuance of, and transaction in, the common stock of MK Rail
have been consolidated. The plaintiffs in these consolidated actions represent
the class of stockholders who purchased shares of common stock of MK Rail during
the period of April 26, 1994 to April 25, 1995. 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. The plaintiffs purport to state claims for violation of certain
federal securities laws and certain common law claims and seek damages in an
unspecified amount. The parties have entered into a court approved settlement,
the ultimate effectiveness of which is contingent upon settlement of other
actions.
Derivative Actions: Thirteen derivative actions have been filed in state courts
in Idaho and Delaware, naming as defendants certain of the Corporation's present
and former directors and officers. The Corporation is a nominal defendant in
each of these actions. Settlement agreements are scheduled for court review on
April 15, 1996 and May 21, 1996.
MK Rail Components Actions: The plaintiffs in actions filed February 7, 1995,
allege that certain financial statements of the Corporation upon which they
based their decision to exchange Touchstone, Inc. shares for the Corporation's
common stock were misleading. The plaintiffs purport to state claims for
violation of federal and Tennessee securities laws. The plaintiffs further
allege that the Corporation violated the exchange agreement under which they
exchanged their Touchstone shares. The cases have been settled.
The plaintiffs in an action filed December 22, 1995 ("Pilarczyk")
allege that they were induced to enter into an exchange agreement to exchange
TMS, Inc. shares for the Corporation's common stock and also to enter into
noncompete agreements by the defendants' allegedly false statements. Plaintiffs
assert claims under the Securities Exchange Act of 1934 for breach of the
exchange agreement; breach of an alleged covenant of good faith and fair dealing
with respect to the exchange agreement and noncompete agreements; unjust
enrichment; common law fraud; negligent misrepresentation; and rescission of the
exchange agreement. Plaintiffs together seek compensatory damages of not less
than $7,500, treble damages, punitive damages of not less than $5,000, pre and
postjudgment interest and attorneys' fees. The defendants filed a motion to
dismiss the First Amended Complaint on April 8, 1996.
The plaintiffs in an action filed December 29, 1995 allege that they
were induced by the defendants' false and misleading statements to enter into an
exchange agreement to exchange Clark shares for the Corporation's common stock.
Plaintiffs assert claims under the Security Exchange Act of 1934 and the
Racketeer Influenced and Corrupt Organization Act ("RICO"), and common law
fraud. Plaintiffs seek compensatory damages of approximately $1,000, treble
damages under RICO, punitive damages of $3,000, attorney's fees and prejudgment
interest. The Corporation filed a motion to dismiss on March 20, 1996.
Settlements: Settlement discussions have been held among the Corporation, MK
Rail, certain of their respective present
and former officers and directors, their insurance carriers, the underwriting
defendants and plaintiffs with respect to all of the pending cases except
Pilarczyk. These discussions have resulted in agree-
II-35
<PAGE>
ments to settle the MK Securities Class Actions, the MK Rail Securities Class
Actions, the Derivative Actions and the Touchstone Actions. No agreement to
settle has been reached in the Clark action.
The settlements, other than that of the Touchstone, Inc. Actions, must
be submitted to, and approved by, the courts presiding over the various cases.
That process is ongoing and, as of this date, stands as follows:
The settlement of the MK Securities Class Actions has been approved by
the United States District Court for the District of Idaho in a final judgment
entered on December 1, 1995. A court approved settlement fund was established
and settlement proceeds (cash of $35,000, which was provided by insurers, and a
share certificate for 2,976,923 shares of the Corporation's common stock) were
deposited therein during 1995. The issuance of the common stock represented by
such certificate and the transfer of the settlement proceeds from the settlement
fund to the control of the plaintiffs is subject to nonappealable judgments
approving the settlements in the MK Rail Securities Class Actions and the
MK Derivative Actions.
The settlement of the MK Rail Securities Class Actions was approved on
March 29, 1996 by the United States District Court for the District of Idaho,
subject to appeal for a period of 30 days following March 29, 1996. A court-
approved settlement fund was established and the Corporation deposited a share
certificate for 869,231 shares of its common stock into such fund after the
settlement was approved. The issuance of the common stock represented by such
certificate and the transfer of the settlement proceeds to the control of the
plaintiffs is subject to the entry of a final nonappealable judgment approving
the settlement of the "Double Derivative" Claims. The effectiveness of the
settlement of the MK Rail Securities Class Actions is not, however, subject to
the final judicial approval of the settlements in the MK Securities Class
Actions or the MK Derivative Actions.
The settlements of the MK Derivative Actions has been submitted for
approval by the Delaware Chancery Court and the Idaho District Court for Ada
County. In connection with the settlements of the MK Derivative Actions, the
Corporation reached an agreement with the Corporation's former chairman with
respect to his severance benefits, including pension rights, to which the
plaintiffs do not object. A hearing has been scheduled for April 15, 1996 before
the Delaware Court of Chancery and for May 21, 1996 before the Idaho District
Court. If approved by final orders of the Delaware Chancery Court and the Idaho
District Court that become final and nonappealable the settlement proceeds from
the MK Derivative Actions (less attorneys' fees and expenses) will be
transferred to the control of the settlement fund in the MKSecurities Class
Actions and, thus, the effectiveness of the settlement is subject to certain
conditions, including the entry of final, nonappealable judgments approving the
settlements in the MK Securities Class Actions (which condition has been
satisfied), the MK Rail Securities Class Actions and the "Double Derivative"
Claims asserted on behalf of MK Rail.
Settlement of the "Double Derivative" Claims asserted on behalf of MK
Rail was reached on March 4, 1996. A hearing with respect to such approval has
been set for May 21, 1996. The Corporation has no monetary or other obligations
under the settlement of the actions resulting from the "Double Derivative"
claims (the "Double Derivative Actions"). However, $4,500 in the reduction of
intercompany debt owed by MKRail to the Corporation is attributable to the
settlement of the Double Derivative Actions, the MKSecurities Class Actions and
the MKRail Securities Class Actions. The effectiveness of the settlement is
conditioned upon a judgment by the Idaho Court approving the settlement that
becomes final and nonappealable and approval of the settlement in the MK Rail
Securities Class Actions.
The settlement terms will require the Corporation, as its share of the
settlements, to (i) issue 2,976,923 shares of common stock in settlement of the
MK Securities Class Actions; and (ii) issue 869,231 shares of common stock in
settlement of the MK Rail Securities Class Actions. The settlement of the
Derivative Actions requires the implementation of certain "therapeutic
measures"with respect to corporate governance. The Corporation's insurance
carriers have paid $35,000 on behalf of the individual defendants in the MK
Securities Class Actions and the Derivative Actions, and MK Rail's insurance
carrier has paid $6,000 into a settlement fund created in connection with the
settlement of the MK Rail Securities Class Actions.
The Touchstone, Inc. Actions have been settled and notices of
voluntary dismissal with prejudice were filed on January 16, 1996. Under the
terms of the settlement, the Corporation paid $425 to the plaintiffs, paid the
plaintiffs their actual out-of-pocket fees and costs in the amount of $146 on or
about April 1, 1996, and agreed to pay the difference, if any, between $5,250
and the sum of all proceeds received by the plaintiffs as members of the class
from the settlement of the MK Securities Class Actions.
If settlement agreements in connection with the class actions relating
to transactions in the Corporation's common stock, class actions relating to the
issuance of, and transactions in, the common stock of MK Rail and claims brought
by the former stockholders of Touchstone, Inc., are approved as contemplated in
their present form, the Corporation expects, that the amounts provided in the
accompanying consolidated financial statements for these actions will likely
exceed the ultimate liability of these actions.
II-36
<PAGE>
Other claims, lawsuits, disputes with third parties, investigations
and administrative proceedings against the Corporation and its subsidiaries
relating to matters that are in the ordinary course of its business activities,
including environmental matters, are not expected to have a material adverse
effect on the Corporation's financial position or results of operations.
OTHER INCOME (EXPENSE) NET
Other income (expense) items for the three years in the period ended December
31, 1995 were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Year Ended December 31, 1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest, dividends and net gains
and losses on sales of marketable
securities $ 4,874 $ 3,980 $35,829
Net loss on disposals and
write-downs of assets, net (10,472) (20,494) (4,578)
Underwriting income (expense)
of insurance subsidiary, net 1,899 4,117 (1,480)
Amortization of goodwill -- (1,061) (180)
Miscellaneous income
(expense), net (709) (6,207) (2,783)
- --------------------------------------------------------------------------------
Other income (expense), net $ (4,408) $(19,665) $26,808
================================================================================
</TABLE>
COMMITMENTS AND CONTINGENCIES
The Corporation has commitments and performance guarantees arising from
engineering and construction contracts including those of its construction joint
ventures. The Corporation is self insured for workers' compensation, automobile,
general liability and third party errors and omissions. The Corporation has
insurance agreements with insurers for losses in excess of self-insured limits.
Long-Term Leases: Total rental payments for real estate and equipment under
lease, and charged to operations in 1995, 1994 and 1993 were $34,550, $30,980
and $33,590, respectively. Future minimum rental payments under operating leases
with remaining noncancelable terms in excess of one year at December 31, 1995
were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Year Real Estate Equipment Total
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1996 $ 13,167 $3,491 $ 16,658
1997 11,324 2,125 13,449
1998 10,276 1,310 11,586
1999 10,059 917 10,976
2000 11,937 393 12,330
2001 and after 109,700 -- 109,700
- --------------------------------------------------------------------------------
Totals $166,463 $8,236 $174,699
================================================================================
</TABLE>
The Boise, Idaho and Cleveland, Ohio administrative offices and
engineering facilities consisting of approximately 337,300 square feet and
246,700 square feet, respectively, are rented under long-term, noncancelable
leases expiring in 2015 and 2010, respectively. The Corporation's aggregate
lease obligations, net of sublease income for the Boise and Cleveland facilities
under these noncancelable leases, at December 31, 1995 was $154,700.
The Corporation, through its wholly-owned subsidiary Navasota Mining
Company, Inc., had leased mining equipment under operating leases through 2012
with a basic annual rent of $6,686, which were reimbursable and funded under a
mining services contract with the mine owner. The mining services contract was
terminated for convenience by the mine owner on February 29, 1996 and pursuant
to the mining services contract, the mine owner assumed the obligations under
the lease agreements. See the "Subsequent Events - Navasota Mining Services
Contract" Note to Consolidated Financial Statements.
CF Systems: In 1990, the Corporation acquired CF System, which had developed a
solvent-extraction technology. The Corporation's investment in CF System, was
$4,844 at December 31, 1995 and $4,400 at December 31, 1994.
In March 1995, the Corporation was awarded a $26,700 fixed-price
contract by the Texas Natural Resource Conservation Commission ("TNRCC") for
remediation of contaminated soil at a Superfund Site in Texas. Among other
provisions, the contract will require CF System to (i) front-end (design,
procure, fabricate, assemble and start-up) an on-site solvent-extraction
facility and (ii) provide a guarantee in the form of a letter of credit for the
estimated front-end costs of $13,600. TNRCCwill make periodic payments to
CF System for the front-end costs, until completion of the start-up phase in
August 1996, up to a maximum of $13,600. CF System has billed and received
$3,523of front-end costs at December 31, 1995. If the completed facility is
successful in meeting certain specified performance criteria at the end of the
start-up phase, CF System will proceed to the operations phase and complete the
contract. If CF System does not meet the performance criteria, such failure will
be grounds for termination and TNRCC will recover the front-end costs from the
Corporation.
Discontinued Shipbuilding and Real Estate
Development Operations: In April 1989, the Corporation sold its ownership
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 agreement the Corporation agreed to
provide NASSCO a $21,000 credit facility. The Corporation's commitment to
provide the $21,000 credit facility will terminate concurrently with the
delivery and acceptance by the U.S. Navy of the last NASSCO-built ship in a
multiple-ship contract. The U.S. Navy and NASSCO currently are negotiating the
acceptance date of such ship, which is expected to occur on or before May 31,
1996. Prior to the third quarter of 1995, the Corporation also guaranteed a
stand-alone bank credit facility for NASSCO. In the third quarter of 1995,
NASSCO negotiated a stand-alone bank credit facility without a Corporation
guarantee.
The Corporation has also guaranteed $21,000 of NASSCO's port facility
bonds until not later than December 1, 2002, and guaranteed $1,375 of NASSCO's
federal workers' compensation bonds. NASSCO's floating dry dock is pledged as
collateral for the $21,000 port facil-
II-37
<PAGE>
ity bonds. The agreement in connection with the Corporation's guarantee of
NASSCO's $21,000 indebtedness includes certain default provisions including the
occurrence of an event of bankruptcy proceedings under the United States
Bankruptcy Code. Upon the occurrence of an event of default, payment of the
$21,000 indebtedness could be accelerated.
At December 31, 1995, the Corporation was liable for $15,519 of
secured bank loans due June 30, 1996 in connection with commercial real estate
operations of its Emkay Development Company, Inc., subsidiary ("Emkay"),
discontinued in 1987. Net liabilities of the discontinued real estate operations
are included in the accompanying consolidated balance sheet at December 31, 1995
under the caption "Other Accrued Liabilities". Net assets of the discontinued
real estate operations are included in the accompanying consolidated balance
sheet at December 31, 1994 under the caption "Other Investments and Assets".
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
December 31, 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
Notes receivable $ -- $ 25,504
Real estate assets held for sale 11,928 5,920
Other assets and liabilities, net 318 2,853
Secured term bank loans, due June 30, 1996,
8.75% at December 31, 1995, 6.4% and
6.9% at December 31, 1994 (15,519) (31,078)
- --------------------------------------------------------------------------------
Net assets (liabilities) $ (3,273) $ 3,199
================================================================================
</TABLE>
In the fourth quarter of 1995, the maker of a $16,360 secured
promissory note payable to the Corporation defaulted on the note. The note was
secured by deeds of trust on certain real estate assets. In December 1995, the
maker purchased for cash a portion of the real estate assets and transferred
title to the remaining real estate assets to the Corporation. The Corporation
has provided for its estimated losses on disposition of the real estate assets
held for sale at December 31, 1995.
Letters of Credit: At December 31, 1995 the Corporation was contingently liable,
in the normal course of business, for $117,300 related to letters of credit
under contract performance obligations to customers not reflected in the balance
sheet at December 31, 1995. Of this aggregate amount, $20,570 in letters of
credit were for contract performance obligations to customers of its
discontinued MK Rail and Transit operations and $28,650 in letters of credit in
support of contract performance obligations to customers of MDC. Subsequent to
December 31, 1995, the Corporation sold its 62.8% ownership interest in MDC. The
Corporation and MDC's lender banks, as of the date of this Annual Report on Form
10-K, are holding discussions concerning the banks release of the Corporation's
financial guarantees.
In addition, the Corporation provides guarantees for $75,245 in
letters of credit issued by third parties, $61,505 of which were in connection
with Amerail's performance of the Metra Contract and $13,740 to meet the
reinsurance requirements of the Corporation's captive insurance subsidiary. The
credit risk is mitigated by the insurance subsidiary's portfolio of high quality
investments ($24,440 fair value at December 31, 1995) used to collateralize the
letters of credit.
Government Audits: The Corporation has a number of cost reimbursable contracts
with the U.S. Government, the allowable costs of which are subject to
adjustments upon audit by various agencies of the U.S. Government. Audits
currently in progress are in varying stages of completion and relate to years
ended 1987 through 1994. Some audits have resulted in proposed claims and cost
disallowances. The Corporation must complete cost analysis for the years under
audit before it can determine the merit of the issues raised and quantify the
amount of any potential disallowance. The Corporation expects that the
resolution of these matters will not materially effect the Corporation's results
of operations or financial position.
Employment Agreements: The Corporation has employment agreements with several of
its key employees which generally provide for salary continuation for a number
of years plus continuation of certain benefits in the event of termination of
employment without cause (as defined), including a change of control in the
Corporation (as defined). If all of the key employees under contract at December
31, 1995 were to be terminated without cause, the Corporation's liability would
be approximately $4,600.
GEOGRAPHIC OPERATING DATA
The Corporation engages in all types of general construction work
including industrial, heavy civil and marine, mechanical, pipeline, building,
and underground, for a wide range of public and private customers throughout the
world. In addition, the Corporation renders design services in practically all
engineering disciplines. Other markets for its services include nuclear and
fossil-fueled power plants, environmental and hazardous waste abatement and
operations and maintenance for military and commercial facilities. The
Corporation's operations by geographic area for the three years in the period
ended December 31, 1995 were as follows:
II-38
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Geographic Data
Year Ended December 31, 1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue
United States $1,298,312 $1,376,197 $1,760,914
Canada 68,867 55,477 43,744
Europe 88,619 90,227 100,012
Asia/Pacific 92,064 411,066 309,706
Middle East 83,816 62,578 76,194
Other international 76,988 25,458 39,306
- --------------------------------------------------------------------------------
Total revenue $1,708,666 $2,021,003 $2,329,876
================================================================================
Operating income (loss)
United States $ 27,909 $ (85,133) $ 31,951
Canada (21,278) (7,923) 1,710
Europe 13,836 1,593 2,691
Asia/Pacific (6,436) (14,331) 12,188
Middle East 3,604 5,208 7,824
Other international 1,187 (182) 4,189
- --------------------------------------------------------------------------------
Total operating income (loss) $ 18,822 $ (100,768) $ 60,553
================================================================================
Identifiable operating assets
United States $ 260,401 $ 353,711 $ 461,466
Canada 11,689 4,297 22,747
Europe 61,913 42,584 9,505
Asia/Pacific 53,861 209,649 157,285
Middle East 38,185 49,001 32,794
Other international 71,266 17,078 42,964
Corporate assets 130,845 226,627 314,785
- --------------------------------------------------------------------------------
Total assets $ 628,160 $ 902,947 $1,041,546
================================================================================
</TABLE>
Operating income (loss) represents total contract revenues less direct
contract costs and expenses and certain indirect overhead and excludes corporate
income and expenses, interest expense and income taxes. Identifiable operating
assets are those assets employed in each geographic location. Corporate assets
consist primarily of cash, tax assets, investments held for sale, securities
available for sale and assets not employed in contract services.
Ten percent or more of the Corporation's revenue was derived from
contracts with various agencies of the U.S. Government of $383,000 in 1995,
$544,400 in 1994 and $603,900 in 1993.
STOCK PLANS
Stock Option and Restricted Stock Awards: The Corporation has three stock award
plans (i) the 1991 Stock Incentive Plan (the "1991 Plan") (ii) the 1994 Stock
Compensation Plan (the "1994 Plan") adopted with stockholder approval in 1994
and (iii) the 1995 Plan (the "1995 Plan") approved by the Board of Directors in
March, 1995. Both the 1991 and 1994 Plans permit the issuance of stock options,
stock appreciation rights (SAR's), limited SAR's, and restricted stock to
selected employees of the Corporation. The 1991 Plan reserved 1,367,324 shares
for options, SAR's, limited SAR's and restricted stock and the 1994 Plan
reserved 1,275,000 shares for options, SAR's or limited SAR's and 225,000 shares
for restricted stock. The 1995 Plan reserved 250,000 shares for options and
20,000 shares for restricted stock awards. During 1995, 305,000 options were
granted under the 1991 and 1994 Plans, in tandem with limited SARs. During 1995,
stock options for 250,000 shares were granted and 20,000 shares of restricted
stock were awarded under the 1995 Plan. Restrictions on the 20,000 shares of
restricted stock lapsed in October 1995. SAR's and limited SAR's granted in
tandem with an option shall be exercisable only to the extent the underlying
option is exercisable and the grant price shall be equal to the exercise price
of the underlying option.
Under the terms of the 1991, 1994 and 1995 Plans, options may be either
nonqualified or incentive stock options and the exercise price may not be less
than the fair market value of a share on the date of grant. However, under the
terms of the 1991 Plan, variable-price nonqualified stock options may be
exercised at(i) the fair market value on the date of exercise if less than the
grant price or (ii) the grant price less any market appreciation from date of
grant to date of exercise, but not less than par value of $1.67 per share.
Restricted stock awards are granted at no cost to selected employees.
During 1995, 192,500 restricted shares were granted under the 1991 and 1994
Plans. Other than the restrictions which limit the sale and transfer of
restricted stock, the employees are entitled to all the rights of a stockholder.
At December 31, 1995, there were 249,167 restricted shares outstanding under the
plans, with restriction periods ranging from one to four years.
Options granted under the 1991, 1994 and 1995 Plans become exercisable
cumulatively over periods of three to six years from the date of grant. At
December 31, 1995, options were exercisable to purchase 772,315 shares.
Unexercised options expire 10 years after the date of grant.
At December 31, 1995, 375,144 shares of treasury stock were held in
trust for distribution under variable-price options.
The following table summarizes the changes in shares under option and
the price range thereof under the 1991, 1994 and 1995 Plans:
<TABLE>
<CAPTION>
Price Range
Shares Per Share
<S> <C> <C>
Shares under option, December 31, 1992 991,704 $11.06-27.84
Options granted 448,000 $21.19-26.44
Options exercised (51,250) $ 3.87-24.88
Options canceled/expired (85,186)
Shares under option, December 31, 1993 1,303,268 $14.03-27.84
Options granted 263,500 $16.06-25.31
Options exercised (23,408) $14.03-27.84
Options canceled/expired (189,817)
Shares under option, December 31, 1994 1,353,543 $16.06-27.84
Options granted 555,000 $ 6.00- 8.00
Options exercised --
Options canceled/expired (442,367)
- --------------------------------------------------------------------------------
Shares under option, December 31, 1995 1,466,176 $ 6.00-27.84
================================================================================
</TABLE>
The number of shares of common stock reserved for granting future
options and restricted stock awards under the 1991, 1994 and 1995 Plans were
1,435,974, 1,700,674 and 405,874, at December 31, 1995, 1994, and 1993,
respectively.
II-39
<PAGE>
In addition, the Corporation has issued 240,117 shares of restricted
stock, with restriction periods of three, five and ten years, to former
stockholders of acquired businesses as consideration for noncompete agreements
and in return for an agreement to provide services to the Corporation's 65%
owned subsidiary MKRail during specific future periods. During 1995, the
recipients acquired full rights to 27,754 shares. At December 31, 1995, 171,198
shares remained outstanding.
Directors Stock Option Plan: The Corporation has a directors stock option plan
adopted in 1990, under which 192,000 shares of common stock were reserved for
issuance to non-employee directors. As of December 31, 1995 options to purchase
144,000 shares have been granted under the plan, net of cancelations, of which
99,000 are exercisable. The plan entitles the non-employee directors to purchase
shares of common stock at a 50 percent discount from market value at the date of
grant. The options granted become exercisable in one-third increments over a
three-year period beginning one year after the date of grant.
Compensation expense for the employee and non-employee restricted
stock award plans and the non-employee directors stock option plan was $1,410 in
1995, $1,361 in 1994 and $852 in 1993.
Savings Plans: The Corporation has a voluntary 401(k) savings plan ("401(k)
plan") and had, until May 1995, an Employee Stock Ownership Plan ("ESOP")
covering eligible salaried employees. Through March 31, 1995, the Corporation
matched participant's salary deferrals to the 401(k) plan up to 5% of
participant's eligible compensation. The match consisted of an allocation of
shares in the ESOP Trust not to exceed 3% of participant's eligible compensation
and cash paid into the 401(k) plan, not to exceed 2% of eligible compensation.
Beginning April 1995, the Corporation began matching participant's salary
deferrals to the 401(k) plan entirely with cash, not to exceed 5% of
participant's eligible compensation. The unallocated ESOP shares remaining from
the original 2,441,932 prefunded shares, were allocated to participants in May
1995. On May 10, 1995, the ESOP was terminated and allocated common stock was
made available for distribution to participants. Compensation expense charged to
operations for (i) cash contributions to the 401(k) plan and (ii) the fair
market value of the allocated shares in the ESOPTrust and the redistribution of
Corporation dividends on unallocated shares paid in cash to plan participants in
1995, 1994 and 1993 was $11,938, $12,818 and $13,761, respectively.
BENEFIT PLANS
Pension Plans: The Corporation sponsors a defined benefit pension plan which was
curtailed so that employees do not earn additional defined benefits for future
service. Future service however is counted toward vesting of benefits
accumulated based on prior service. The plan remains in existence and continues
to pay benefits, to invest assets and to receive employer contributions, if
necessary.
Pension cost for each of the three years in the period ended December
31, 1995 included the following components:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Pension Cost
Year Ended December 31, 1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest cost on accumulated
benefit obligation $ 3,111 $ 3,055 $ 2,869
Actual return on plan assets (9,306) (3,690) (4,240)
Net amortization and deferral 6,195 890 1,602
- --------------------------------------------------------------------------------
Pension cost $ -- $ 255 $ 231
================================================================================
The funded status of the plan at December 31, 1995 and 1994 follows:
- --------------------------------------------------------------------------------
Prepaid Pension Cost
December 31, 1995 1994
- --------------------------------------------------------------------------------
Accumulated benefit obligation,
including vested benefits
of $(45,714) and $(35,393) $(47,593) $(37,444)
Plan assets at fair value 50,300 42,542
- --------------------------------------------------------------------------------
Plan assets in excess of accumulated
benefit obligation 2,707 5,098
Unrecognized net loss 8,816 6,425
Prepaid pension cost $ 11,523 $ 11,523
================================================================================
</TABLE>
The prepaid pension cost is included in the accompanying consolidated
balance sheets at December 31, 1995 and 1994 under the caption "Other
investments and assets".
At December 31, 1995, approximately 43% of plan assets were invested
in common stocks, 15% in corporate bonds, 24% in U.S. government securities and
18% in cash equivalents.
The discount rates used in determining the actuarial present value of
the accumulated benefit obligation were 7% for 1995 and 8.5% for 1994. The
expected long-term rate of return on plan assets was 8% for 1995 and 1994.
The Corporation sponsors several defined contribution pension plans
for certain hourly contract mining services and construction services employees.
Pension cost charged to operations, based on hours worked, amounted to $1,195 in
1995, $2,036 in 1994 and $2,232 in 1993.
The Corporation participates in and makes contributions to numerous
construction-industry multiemployer pension plans. Generally, the plans provide
defined benefits to substantially all direct-hire craft employees covered by
collective bargaining agreements. The Corporation charged to operations pension
cost under the plans amounting to $6,721 in 1995, $6,751 in 1994 and $9,154 in
1993. Under ERISA, as amended by the Multiemployer Pension Plan Amendment Act of
1980, a contributor to a multiemployer plan is liable upon termination of the
plan or its withdrawal from the plan, for its share of the multiemployer plan's
unfunded vested liabilities.
II-40
<PAGE>
The Corporation has long maintained policies and procedures to attempt
to preclude it from being subject to withdrawal liability for any portion of an
unfunded vested liability under a construction industry multiemployer pension
plan. Based on information provided by the multiemployer plan administrators to
the U.S. Department of Labor, the Corporation's share of such plans' unfunded
vested liabilities as of the most recent disclosures available was approximately
$5,900.
Incentive Plans: The Corporation has an executive incentive plan and two long-
term incentive and benefit plans for officers and key employees. The cost of
incentive plans was $1,313 in 1995, nil in 1994 and $5,536 in 1993.
Supplemental Retirement Income Arrangements: The Corporation has unfunded
supplemental retirement income arrangements for officers and key employees and
an unfunded defined benefit pension plan for non-employee directors.
Periodic cost of the supplemental retirement income arrangements and
director's pension plan for each of the three years in the period ended December
31, 1995 included the following components:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Periodic Cost
Year Ended December 31, 1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost-benefits earned
during year $ 239 $ 1,464 $ 336
Interest cost on accumulated
benefit obligation 415 837 693
Net amortization and deferral 955 1,805 350
- --------------------------------------------------------------------------------
Periodic cost $ 1,609 $ 4,106 $1,379
================================================================================
</TABLE>
<TABLE>
<CAPTION>
The unfunded status of the plans at December 31, 1995 and 1994
follows:
Accrued Benefit Obligation
December 31, 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
Accumulated benefit obligation,
including vested benefits
of $(13,733) and $(10,698) $(13,749) $(11,005)
Projected compensation increases (102) (197)
- --------------------------------------------------------------------------------
Projected benefit obligation (13,851) (11,202)
Prior service cost not yet recognized 39 519
Unrecognized net (gain) loss 1,993 (1,089)
Minimum liability adjustment -- (452)
- --------------------------------------------------------------------------------
Accrued benefit obligation $(11,819) $(12,224)
================================================================================
</TABLE>
The accrued benefit obligation is included in the accompanying
consolidated balance sheets at December 31, 1995 and 1994 under the caption
"Deferred compensation".
The settlement terms of the derivative actions, provided for (i) the
curtailment of the supplemental retirement income arrangement with the
Corporation's former chairman including a substantial reduction of his
supplemental retirementbenefit and (ii) the curtailment of pension benefits of
certain directors including forfeiture of a portion of their credited service
and loss of their retirement benefits. These curtailments resulted in the
Corporation recognizing a curtailment gain of $1,407 in 1995 partially offset by
unrecognized losses and prior service costs of $1,054.
The discount rate used in determining the actuarial present value of
the accumulated benefit obligation was 7% and 8.5%, respectively, for 1995 and
1994. The rate of assumed increase in directors' future compensation was 6% for
1995 and 1994.
Postretirement Health Care Plan: The Corporation provides certain health care
benefits for employees who retired before July 1, 1993 including their surviving
spouses and dependent children. Employees who retire after July 1, 1993 are not
eligible for postretirement health care benefits. In past years the Corporation
amended certain provisions of the plan which amendments have reduced benefits
and increased participant's contributions. The Corporation reserves the right to
amend or terminate the postretirement health care benefits currently provided
under the plan and increase participants' contributions at any time.
The periodic expense for postretirement health care benefits for each
of the three years in the period ended December 31, 1995 included the following
components.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Postretirement Health Care Expense
Year Ended December 31, 1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest cost on accumulated
postretirement benefit obligation $ 4,415 $ 2,443 $2,494
Amortization of net loss from changes
in assumptions and experience 1,683 527 --
- --------------------------------------------------------------------------------
Postretirement health care expense $ 6,098 $ 2,970 $2,494
================================================================================
</TABLE>
<TABLE>
<CAPTION>
The following table sets forth the plan's activity and unfunded
balances at December 31, 1995 and 1994.
- --------------------------------------------------------------------------------
Accrued Postretirement Benefit Obligation
December 31, 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement
benefit obligation (1) $(52,742) $(53,989)
Unrecognized net loss from changes
in assumptions and experience 23,549 27,279
- --------------------------------------------------------------------------------
Accrued postretirement benefit obligation $(29,193) $(26,710)
================================================================================
</TABLE>
(1) The net decrease in the accumulated postretirement benefit
obligation ("APBO") from December 31, 1994 to December 31, 1995 was $1,247. The
reasons for the net decrease stem from updating the actuarial assumptions used
in the computation of the APBO, plan amendments, and adjustments to reflect
current experience. The individual effects of these changes are (i) a decrease
of $4,800 from lower than expected health care costs (ii) a decrease of $2,743
from plan amendments which curtailed benefits and increased participant's
contributions, partially offset by (iii) an increase of $6,296 from lowering the
discount rate from 8.5% to 7%.
Gains and losses that occur because of changes in assumptions, plan
amendments, and because actual experience differs from that assumed are deferred
and amortized over 12 years - the average future expected
II-41
<PAGE>
lifetime of retirees and their surviving spouses - and recognized as a component
of postretirement health care expense in subsequent years. The postretirement
health care expense for 1996 is estimated to be approximately $5,100 compared to
$6,098 in 1995.
The APBO was determined using the projected unit credit method and an
assumed discount rate of 7% for 1995 and 8.5% for 1994. In addition, an annual
rate increase of 12.0% and 9.4% in the per capita cost of health care benefits
was assumed for 1995 and 1994, respectively, gradually declining to 5.5% in the
year 2008 and thereafter over the projected payout period of the benefits. The
health care cost trend rate assumption has a significant effect on the amounts
reported. For example, a 1% increase in the health care cost trend rate would
increase the APBO at December 31, 1995 by approximately $5,164 and the 1995
postretirement health care expense by approximately $427.
Retention and Severance Pay Plans: Effective June 30, 1995, the Corporation
adopted key employee retention and severance plans to retain certain key
executives and key employees (the "1995 plans"). The plans encourage employees
to remain employed with the Corporation by providing additional compensation
from the date of adoption through July 1, 1996, and by providing enhanced
severance benefits under certain circumstances to any covered employee who is
involuntarily terminated prior to July 1, 1996. On April 10, 1996, the
Corporation's board of directors approved amendments to the retention and
severance plans and adopted a new severance plan (the "1996 plan").
Under the 1995 retention plan, covered employees would receive awards
in cash and stock ranging from 18.3% to 70.0% of their annual base salaries,
partially payable in cash on December 15, 1995, and the remainder payable in
stock and/or cash on July 1, 1996. The 1995 retention plan also provided that in
the event of a Chapter 11 Bankruptcy filing, the stock award would be forfeited
and the remaining cash to be paid on July 1, 1996 would be doubled. The
retention plan, as amended, provides that, covered employees will have the
option of receiving a cash payment on July 1, 1996 equal to twice the cash
payment received on December 15, 1995 ("initial cash payment"), or elect (prior
to April 30, 1996) to postpone the July 1, 1996 cash payment until the earlier
of the Corporation's emergence from a Chapter 11 proceeding or September 30,
1996. Covered employees who elect to postpone payment will receive an additional
cash amount equal to the initial cash payment prorated on the number of days
from July 1, 1996 to September 30, 1996, but no later than September 30, 1996
and no less than 25% of the initial cash payment.
Under the 1995 severance plan, covered employees who are involuntarily
terminated (without cause) after the occurrence of (i) a change in control of
the covered employee's division, (ii) a bankruptcy filing, or (iii) a change in
any consecutive two year period of a majority of the directors (unless each new
director was approved by a vote of two-thirds of the remaining directors), will
receive cash awards ranging from four to nine months of annual base salary. The
severance plan terminates on any Chapter 11 plan concerning the Corporation or
July 1, 1996 provided that no triggering event has occurred. The 1996 severance
plan is substantially similar to the 1995 severance plan but, provides covered
employees with severance benefits if they are involuntarily terminated (without
cause) between April 10, 1996 and December 31, 1997. Covered employees for the
purposes of the 1996 severance plan are employees who elect to postpone payment
of their cash award under the retention plan until after July 1, 1996. The
Corporation had an estimated liability for retention plan awards of $3,657 at
December 31, 1995.
FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments at December 31, 1995 and 1994
have been determined by the Corporation, using available market information and
appropriate valuation methodologies. However, considerable judgment is necessary
in interpreting market data to develop the estimates of fair value. Accordingly,
the estimates presented herein are not necessarily indicative of the amounts
that the Corporation could realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies may have a material
effect on the estimated fair value amounts. The contract or notional amounts
reflect the extent of involvement the Corporation has in particular classes of
financial instruments.
The carrying amounts and estimated fair values of financial
instruments at December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Contract or
Carrying Fair Notional
Amount Value Amount
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
December 31, 1995
Financial assets
Customer retentions $ 16,952 $ 16,250
Other investments and assets:
Discontinued real estate
operations -
Notes and interest receivable 257 257
Notes payable 15,519 15,519
Financial liabilities
Antecedent debt 213,344 138,674
Retentions 20,076 19,244
Customers advances 19,181 18,386
Off-balance sheet financial instruments
Committed revolving credit
agreements 1,080 $ 94,011
Standby letters of credit 823 131,073
Financial guarantees 83,880
- --------------------------------------------------------------------------------
</TABLE>
II-42
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Contract or
Carrying Fair Notional
Amount Value Amount
- --------------------------------------------------------------------------------
December 31, 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Financial assets
Customer retentions $32,256 $ 31,197
Other investments and assets:
Discontinued real estate
operations -
Notes and interest receivable 25,504 25,066
Notes payable 31,078 31,078
Other financial assets 7,116 6,726
Financial liabilities
Retentions 29,348 28,385
Customers advances 18,584 17,982
Off-balance sheet financial instruments
Committed revolving credit
agreements 601 $224,952
Standby letters of credit 3,089 419,037
Financial guarantees 59,964
- --------------------------------------------------------------------------------
</TABLE>
Cash and Cash Equivalents, Accounts Receivable (less retentions), Unbilled
Receivables, Securities Available for Sale, Accounts Payable, Billings in
Excess, Short-Term and Long-Term Debt: The carrying amounts of these items
approximate their fair values.
Customer Retentions: Bank prime interest rate for 1995 and interest rates
previously available to the Corporation for the sale of its receivables at a
discount for 1994 were used to estimate fair value.
Discontinued Real Estate Operations: The carrying amounts of notes and interest
receivable and notes payable approximate their fair values.
Other Financial Assets: The projected cash flows of notes receivable at December
31, 1994 were discounted at current market rates to estimate fair value.
Antecedent Debt:Fair value of the antecedent debt was determined based on recent
sales of portions of the Corporation's debt and public sales of the debt of
similar financially distressed companies.
Customer Advances: Net present value of future expected cash flows discounted at
bank prime rate for 1995 and rates than currently available for short-term debt
for 1994 were used to estimate fair value.
Off-Balance Sheet Financial Instruments: The fair value of committed revolving
credit agreements, standby letters of credit, and lending commitments were
estimated using fees currently charged to the Corporation taking into account
remaining terms and the creditworthiness of the counterparty.
Financial Guarantees: The estimated fair value of financial guarantees were
based upon rates charged for similar agreements or estimated cost to terminate
them determined from the amount of exposure under the guarantee and the
likelihood of performance being required.
Derivative Financial Instruments: Forward exchange contracts and hedges are
valued based on quoted prices for financial instruments with identical or
similar terms. The Corporation operates internationally, giving rise to
occasional exposure to market risks from changes in foreign exchange rates.
Derivative financial instruments are utilized by the Corporation to reduce those
risks. The Corporation has only limited involvement with derivative financial
instruments and does not hold or issue financial instruments for trading
purposes. At December 31, 1995 the Corporation was not party to any derivative
financial instruments.
SUBSEQUENT EVENTS
McConnell Dowell Corporation, Limited: Subsequent to December 31, 1995 the
Corporation sold its 62.8% ownership interest in MDCfor $28,000 net cash
proceeds. The Corporation, MDC and MDC's lender banks, as of the date of this
Annual Report on Form 10-K, are holding discussions concerning the banks release
of the Corporation's financial guarantees amounting to $28,650 in support of MDC
contract performance obligations to its customers.
Strait Crossing Development, Inc.: In October 1993, SCDI, then a 45% owned
unconsolidated subsidiary of the Corporation, 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 (the "development agreement"). Concurrently,
SCDI members formed Strait Crossing Joint Venture (the "joint venture") to
complete the bridge construction (the "project") and each SCDI member's
ownership interest in SCDI was replicated in the joint venture.
In 1994, the Corporation sold for cash and a note receivable, 9% of
its ownership interest in SCDI to a third party who is currently a member of
SCDI, thereby reducing its ownership interest to 36%. In the fourth quarter of
1995 the Corporation ceased its proportionate-share funding for the project and
advised the SCDI members that it proposed to withdraw from the joint venture.
On March 29, 1996, the Corporation and the SCDI members reached an
agreement in connection with the Corporation's withdrawal from the joint venture
(the "withdrawal agreement") under which the Corporation, in exchange for being
indemnified by SCDI members against liabilities relating to the project
including contract performance guarantees and those outstanding liabilities or
potential liabilities to the bonding companies and those under a bank-provided
letter of credit, the Corporation agreed among other things, to transfer its
$24,841 investment in the joint venture and its 36% ownership interest in SCDI,
to the SCDI members, as well as assign to an SCDI member, as maker, the
promissory note received as partial consideration for the sale of its 9%
ownership interest in SCDI. The
II-43
<PAGE>
Corporation, further agreed to sell its title to and interest in certain marine
equipment to the SCDI members.
The Government of Canada has consented to the terms and conditions of
the withdrawal agreement and has released the Corporation from its contract
performance guarantee under the development agreement. The Corporation has fully
provided for the divestiture of its investment in the joint venture and
cancelation of its note receivable and accrued interest thereon at December 31,
1995. The Corporation does not expect to recognize any loss from the sale of its
marine equipment.
Navasota Mining Services Contract: The Corporation, through its wholly-owned
subsidiary Navasota Mining Company, Inc. ("Navasota") had a mining services
contract with Texas Municipal Power Agency, ("TMPA") a separate municipal
corporation to operate a lignite mine in Texas. In early 1995, TMPA announced
its intentionto switch from lignite mined by Navasota to Wyoming steam coal, and
in late 1995, TMPAnotified Navasota to cease mining lignite on or about February
29, 1996. In connection with the mine closing, TMPAacknowledged its obligations
to (i) pay Navasota certain termination costs and (ii) assume Navasota's
interest as lessee under a leveraged lease concurrent with the termination date.
In addition, TMPAasserted a claim against the Corporation and Navasota relating
to adverse consequences to TMPA as a result of excessive groundwater conditions
which occurred at the mine in past years. TMPAand the Corporation are currently
attempting to resolve these matters as part of a comprehensive settlement of all
matters relating to the mining services contract and its termination. Other than
the loss of future revenue and earnings, the Corporation does not expect that
resolution of these matters will have a material adverse effect on its 1996
results of operations or financial condition.
Bridge Loan Repayment and Bridge Loan Extension: On March 29, 1996, the
Corporation paid the outstanding balance owing under the bridge loan. On March
31, 1996, the Corporation agreed to amend certain terms and conditions of the
bridge loan facility including, among other things, establishment of a new
borrowing capacity and extension of the maturity date. On April 2, 1996, as
partial consideration for the extension of the bridge loan facility, the
Corporation paid $14,427 interest on the antecedent debt that had been accrued
and deferred from July 1, 1995 through March 31, 1996. See the "Short-Term Debt
- - New and Amended Credit Facilities"Note to Consolidated Financial Statements.
MKRail Stockholders' Rights Plans: In January 1996, MKRail's Board of Directors
adopted a Stockholders' Rights Plan (the "Rail Rights Plan"). Under the terms of
the Rail Rights Plan, preferred stock purchase rights ("Rail Rights") were
distributed as a dividend at the rate of one Rail Right for each share of
MKRail's common stock held as of the close of business on January 30, 1996. The
number of Rail Rights outstanding is subject to adjustment under certain
circumstances, and all Rail Rights expire on January 30, 2006.
Each Rail Right will entitle the holder to buy 1/100th of a share of
the MK Rail's Series C Junior Participating Preferred Stock at an exercise price
of $16 for each 1/100th of a share. Each preferred share is designed to be
equivalent in voting and dividend rights to 100 shares of common stock. The Rail
Rights will be exercisable and will trade separately from the common stock only
if a person or group of persons (such as a potential acquisition of the
Corporation's 65% ownership interest in MKRail) becomes the beneficial owner of
10 percent or more of MK Rail's common stock, if a person commences a tender or
exchange offer the consummation of which would result in such person becoming
the beneficial owner of 10 percent or more of MKRail's common stock, if a
current holder (such as the Corporation) of 10 percent or more of the common
stock acquires additional shares of the MKRail's common stock, or if a "change
of control event" occurs with respect to a current holder (such as the
Corporation) of 20 percent or more of the MK Rail's common stock.
MK Rail will be entitled to redeem the Rail Rights at a price of $.001
per Rail Right at any time prior to the time any person acquires 10 percent or
more of MK Rail's common stock or a current holder of 10 percent or more of the
common stock acquires additional shares of the common stock, or, with respect to
a current holder that owns more than 20 percent of the common stock, a "change
of control event" occurs.
In April 1996, the MK Rail Board of Directors amended the Rail Rights
Plan to provide that the Corporation's creditors would not be deemed to
beneficially own shares of MKRail by reason of negotiations among the
Corporation and those creditors with respect to the Recapitalization or other
restructuring alternatives. The Corporation has requested that MK Rail's Board
of Directors further amend the Rail Rights Plan to exclude agreements with
respect, or implementation of, the Corporation's Recapitalization from the
triggering events under the Rail Rights Plan. The MK Rail Board has not yet
agreed to adopt such amendments.
II-44
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
II-45
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
Following is a list as of March 31, 1996, of the names and ages of the
directors of the Corporation, all positions held by them with the Corporation,
their terms of office as directors together with the date of their election as
such, the business experience of each director during the past five years and
other directorships held by each director.
Directors Whose Terms of Office Continue Until 1996
---------------------------------------------------
Christopher B. Hemmeter, Age 56
Owner, Hemmeter Companies (Real Estate Development), Los Angeles, California.
Formerly, Partner of Hemmeter Partners and Chairman of Hemmeter Enterprises,
Inc., Denver, Colorado. Mr. Hemmeter also serves as director for Hemmeter
Enterprises, Inc. and Harrah's Jazz Company, neither of which is a parent,
subsidiary or affiliate of the Corporation. Mr. Hemmeter has served as a
director since 1988.
Member: Executive Compensation and Nominating Committee
Robert A. McCabe, Age 61
President, Pilot Capital Corporation (Private Equity Financing), New York,
New York. Mr. McCabe also serves as a director for Church & Dwight Co., Inc.,
Thermo Electron Corporation, Thermo Instruments Systems, Inc. and Borg-Warner
Security Corporation, none of which is a parent, subsidiary or affiliate of the
Corporation. Mr. McCabe has served as a director since 1972.
Member: Executive Compensation and Nominating Committee.
Robert S. Miller, Jr., Age 54
Chairman of the Board of the Corporation. Formerly, Senior Partner, James D.
Wolfensohn, Inc. (Investment Banking Firm) and formerly, Vice Chairman of
Chrysler Corporation. Mr. Miller also serves as a director of MK Rail
Corporation, a majority-owned subsidiary of the Corporation, and as a director
for Coleman Corp., Federal-Mogul Corp., Fluke Corporation, Pope & Talbot, Inc.
and Symantec Corp., none of which is a parent, subsidiary or affiliate of the
Corporation. Mr. Miller has served as a director since 1995.
Directors Whose Terms of Office Continue Until 1997
---------------------------------------------------
Peter S. Lynch, Age 52
Trustee, the Fidelity Group of Funds and Vice Chairman, Fidelity Management &
Research Company (Mutual Fund and Pension Management Firm), Boston,
Massachusetts. Formerly, Portfolio Manager, Fidelity Magellan Fund, Boston,
Massachusetts. Mr. Lynch also serves as a director for W. R. Grace & Co., which
is not a parent, subsidiary or affiliate of the Corporation. Mr. Lynch has
served as a director since 1988.
Member: Audit Committee.
Gerard R. Roche, Age 64
Chairman of the Board, Heidrick & Struggles, Inc. (International Executive
Search Firm), New York, New York. Heidrick & Struggles, Inc. performs general
executive search services for the Corporation. Mr. Roche has served as a
director since 1990.
Member: Audit Committee.
Robert A. Tinstman, Age 49
President and Chief Executive Officer of the Corporation. Formerly, President
of the Corporation's Mining Group. Mr. Tinstman has served as a director since
1995.
Directors Whose Terms of Office Continue Until 1998
---------------------------------------------------
Lindsay E. Fox, Age 58
Founder and Non-Executive Chairman, Fox Group Holdings Pty. Ltd. (Transport,
Warehousing and Logistics), Melbourne Australia. Formerly, Chairman of Linfox
Group, Melbourne, Australia. Mr. Fox also serves as a director for Premier
Investments, Limited, which is not a parent, subsidiary or affiliate of the
Corporation. Mr. Fox has served as a director since 1992.
Member: Executive Compensation and Nominating Committee.
III-1
<PAGE>
John W. Rogers, Jr., Age 37
Founder and President, Ariel Capital Management, Inc. (Institutional Money
Management and Investment Advisor Firm), Chicago, Illinois. Mr. Rogers also
serves as a director for Aon Corporation which is not a parent, subsidiary or
affiliate of the Corporation. Mr. Rogers has served as a director since 1993.
Member: Audit Committee.
EXECUTIVE OFFICERS.
Following is a list as of March 31, 1996, of the names and ages of the executive
officers and all positions held by them with the Corporation together with the
date of their election to corporate office. Executive officers of the
Corporation are elected by the Board of Directors for terms of one year or until
their successors are elected and qualified.
<TABLE>
<CAPTION>
POSITIONS WITH OFFICER
NAME AGE THE CORPORATION SINCE
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Robert A. Tinstman 49 President and Chief Executive 1995
(Principal Executive Officer)
Stephen G. Hanks 45 Executive Vice President, 1990
Chief Legal Officer and Secretary
Denis M. Slavich 55 Executive Vice President and 1995
Chief Financial Officer
(Principal Financial Officer)
Gregg A. Crockett 37 Vice President - Business 1995
Management and Controller
(Principal Accounting Officer)
Thomas H. Zarges 48 Senior Vice President - Operations 1995
Thomas F. Kealey 44 Senior Vice President - Finance 1994
Douglas L. Brigham 30 Vice President and Treasurer 1993
Charles W. Simpson 59 Vice President-Government February 1996
and Public Affairs
Alvia L. Henderson 46 Vice President - Human Resources 1995
</TABLE>
During the past five years, Messrs. Tinstman, Hanks, Crockett, Brigham
and Simpson and Ms. Henderson served the Corporation and its subsidiaries in
various executive or management capacities.
Prior business experience of executive officers that have not been
employed by the Corporation in an executive or managerial capacity during the
last five years:
Mr. Slavich was previously vice president, marketing of Fluor Daniel,
Inc. Prior to his association with Fluor Daniel, Inc., he served as corporate
director, senior vice president and manager of international power projects and
chief financial officer of Bechtel Group, Inc., where he was employed for 20
years.
Mr. Zarges served the Corporation as president of the engineering and
construction group since his employment with the Corporation in August 1991.
Prior to his employment with the Corporation, Mr. Zarges served as vice
president of Business Development and Support Services of United Engineers &
Constructors, a subsidiary of Raytheon Corporation.
Mr. Kealey served the Corporation as senior vice president - finance
since his employment with the Corporation in August 1994. Prior to his
employment with the Corporation, Mr. Kealey served as senior vice president -
business development and international of GE Capital Railcar Services, a unit of
General Electric Company in Chicago, Illinois where he was employed for four and
one-half years. Prior to his employment with GECapital Railcar Services he
served for four years as President of The RoadRailer Company and President of
Transportation Corporation of America, subsidiaries of Duchossois Enterprises,
Elmhurst, Illinois.
III-2
<PAGE>
CERTAIN LEGAL PROCEEDINGS
See the disclosure under Item 3. "Legal Proceedings" for a discussion
concerning certain lawsuits either settled or currently pending against the
Corporation and its directors and/or officers.
In addition, Christopher B. Hemmeter, a director of the Corporation,
has served as an executive officer of each Hemmeter Enterprises, Inc. and Grand
Palais Riverboat, Inc., and a member of the executive committee of Harrah's Jazz
Company, which companies have filed petitions under Chapter 11 of the Federal
bankruptcy laws.
FILING DISCLOSURE
Section 16(a) of the Securities Exchange Act of 1934 and the rules
thereunder require the Corporation's officers and directors and persons who own
more than 10% of the Corporation's common stock to file reports of beneficial
ownership and changes in beneficial ownership in the Corporation's common stock
with, among others, the Securities and Exchange Commission and to furnish the
Corporation with copies.
Based on its review of the copies of such forms received by it, or
written representations from certain reporting persons, the Corporation believes
that, during the last completed fiscal year, the following late reports were
filed with the Securities and Exchange Commission by directors, officers and/or
beneficial owners of more than 10 percent of the Company's common stock: J.
Arrillaga, a director of the Corporation, filed an amended Form 5, Annual
Statement of Changes in Beneficial Ownership, dated January 25, 1996, to report
the acquisition from March 1992 through January 1995 of 480.822 shares of the
Corporation's common stock under the Corporation's Dividend Reinvestment
Program; T.F. Kealey, an executive officer of the Corporation, filed a Form 4,
Statement of Changes in Beneficial Ownership, dated August 24, 1995, to report
the sale on July 14, 1995 of 1,000 shares of the Corporation's common stock;
T.H. Zarges, an executive officer of the Corporation, filed a Form 4, Statement
of Changes in Beneficial Ownership, dated September 8, 1995, to report the
disposition on May 13, 1995 of 624 shares of the Corporation's common stock
surrendered in payment of taxes upon vesting of restricted stock pursuant to tax
withholding rights under the Corporation'sStock Compensation Plan.
ITEM 11. EXECUTIVE COMPENSATION
Director Compensation. Non-employee directors receive a retainer fee
of $5,000 per quarter, plus $1,000 for each day of attendance at a Board of
Directors meeting and $500 for each standing or special committee meeting
attended. Committee chairmen receive an additional $3,000 per year. Directors
who are employees of the Corporation receive no additional compensation for
serving as directors.
William P. Clark was elected to the position of Acting Chairman of the
Board on February 9, 1995, and served therein until his resignation on March 20,
1995. During that time, Mr. Clark did not receive any retainer or meeting fees.
On March 27, 1995, the Board approved payment to Mr. Clark of the amount of
$147,000, which was invoiced by Mr. Clark for services he rendered as Chairman
of the Succession and Search Committee of the Board and as Acting Chairman of
the Board.
On April 1, 1995, the Corporation entered into a three-year agreement
with Robert S. Miller, Jr., pursuant to which Mr. Miller was retained as a non-
executive Chairman of the Board. Under the terms of the agreement, Mr. Miller is
to receive an annual fee of $180,000. In addition to the options normally
granted to new directors under the Stock Option Plan for Non-Employee Directors
(as described below), he was also granted options to purchase 250,000 shares of
the Corporation's common stock at an exercise price of $6.00 per share. Such
options are scheduled to vest with respect to 100,000 shares on April 1, 1996,
100,000 shares on April 1, 1997 and the remaining 50,000 shares on April 1,
1998. Mr. Miller was also awarded 20,000 shares of restricted stock, all of
which vested on October 1, 1995. Mr. Miller is paid no meeting or retainer fees.
On February 9, 1996, the Executive Compensation and Nominating Committee of the
Board of Directors ("Compensation Committee") awarded a bonus to Mr. Miller in
the amount of $250,000 in recognition of his efforts in the restructuring of the
Corporation.
Non-employee directors may also participate in the Corporation's group
health and dental plan, group life insurance plan and group travel accident
insurance plan. The Corporation pays all costs associated with the non-employee
directors' participation in the group plans, although such costs are imputed as
taxable income to the directors. During 1995, Mrs. Peden and Messrs. Brzezinski,
Clark, McCabe, Roche and Rogers participated in some or all of the group plans.
Retirement Plan for Non-employee Directors. In order to attract and
retain qualified outside directors, the Corporation maintains the Retirement
Plan for Non-employee Directors. The plan provides that non-employee directors
are eligible for a retirement benefit if they retire from the Board (i) at age
55 or above with at least five years of service, (ii) at any age with at least
15 years of service or (iii) after becoming disabled while serving. An eligible
non-employee director who becomes disabled or who retires from the Board is
entitled to receive an annual benefit over a period of time equal to the number
of months such eligible non-employee director served on the Board (not to exceed
180 months). The amount of such annual benefit is equal to 100% of the
director's total compensation for the final 12 months immediately preceding
III-3
<PAGE>
retirement from the Board. This benefit is referred to as the "standard
benefit." Pursuant to the terms of the settlement of derivative litigation,
incumbent non-employee directors who were defendants in such litigation (other
than Mrs. Peden) will relinquish five years of credited service under the plan.
See Item 3. "Legal Proceedings."
In lieu of the standard benefit, non-employee directors who were first
elected to the Board prior to November 20, 1992 have the following retirement
options: (i) for retirement after reaching mandatory retirement age (currently
age 70 unless waived by the Board of Directors) or after having served at least
15 years, such director may elect to receive an annual benefit for life equal to
50% of the director's total compensation for the final 12 months immediately
preceding retirement from the Board, (ii) for disability or retirement prior to
mandatory retirement age or 15 years of service, such director may elect to
receive for a period of time equal to the number of months he or she served on
the Corporation's Board an annual benefit equal to 50% of the director's total
compensation for the final 12 months immediately preceding retirement from the
Board. Payments under the plan are made quarterly in equal amounts.
Stock Option Plan for Non-employee Directors. The Corporation's Stock
Option Plan for Non-employee Directors was approved by stockholders of the
Corporation on April 30, 1990. The purpose of the plan is to encourage the
highest level of performance from members of the Board of Directors who are not
employees of the Corporation by providing non-employee directors with a
proprietary interest in the financial success of the Corporation. Under the
plan, non-employee directors are granted discounted options to purchase the
Corporation's common stock. Each current non-employee director has been granted
an option to purchase 12,000 shares of common stock. The purchase price per
share for shares covered by the option award is equal to 50% of the fair market
value of the Corporation's common stock on the date of grant. Options granted
under the plan are nontransferable and nonassignable by the participant other
than by will or by the laws of descent and distribution.
The options granted under the plan vest over a three-year period in
annual increments of one-third on each anniversary of the date of grant for
participants who continue to serve on the Board of Directors. If a participant
ceases to be a non-employee director for any reason except termination for
cause, all vested options then held are exercisable for a period of three years
and all unvested options terminate 30 days after the participant ceases to be a
non-employee director. If a participant is terminated for cause, all vested
options are exercisable for a period of 30 days and all unvested options
automatically terminate.
Non-employee Directors Deferred Compensation Plan. The Corporation's
Non-employee Directors Deferred Compensation Plan provides non-employee
directors with the option of electing to defer compensation (which is defined as
retainer and meeting attendance fees). The plan provides for compensation to be
deferred until a time following the participant's termination as a director.
Such compensation may be deferred to a cash account which accrues interest at
prime rate (established by Citibank, N.A.) or into stock units, upon which
dividends, if any, are credited in the form of additional stock units. Stock
units are distributed in the form of actual shares of the Corporation's common
stock in a single sum or in annual installments over a period of between five
and 20 years, at the participant's election. Cash accounts may be distributed
over the same periods.
III-4
<PAGE>
Executive Compensation. The following table summarizes all plan and
non-plan compensation awarded or paid to, or earned by, each of the Named
Executives (all individuals who acted as the chief executive officer during the
last fiscal year and the other four most highly-compensated executive officers
of the Corporation and its subsidiaries, plus Mr. L.E. Salci, who would have
been included as one of the Named Executives but for the fact that he terminated
employment with the Corporation prior to year-end):
SUMMARY COMPENSATION TABLE FOR FISCAL YEARS ENDED 1993, 1994 AND 1995
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
-----------------------------------------------------------------
Awards Payouts
-------------------------------------------------------------
Securities
Other Restricted Underlying All
Annual Stock Options/ LTIP Other
Name and Principal Salary Bonus Compensation Award(s) SARs Payouts Comp.
Position Year ($) ($) ($) ($) (#) ($)/16/ ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
R. A. Tinstman 1995 305,481 35,000 24,241/1/ 211,505/15/ 100,000 0 29,220/17/
President and 1994 284,615 0 23,988/2/ 0 0 0 28,851
Chief Executive Officer 1993 250,000 140,000 23,430/3/ 0 0 102,515 37,379
S. G. Hanks 1995 316,442 35,000 20,050/4/ 211,505/15/ 100,000 0 22,720/18/
Executive Vice President 1994 358,173 0 16,548/5/ 1,010,000/15/ 50,000 0 31,216
and Chief Legal Officer 1993 250,000 150,000 13,311/6/ 0 0 102,515 35,320
T. H. Zarges 1995 250,000 29,166 13,390/7/ 176,256/15/ 0 0 25,052/19/
Senior Vice President - 1994 243,700 0 6,322/8/ 108,125/15/ 0 0 23,844
Operations and President - 1993 206,768 10,000 0 123,125/15/ 7,000 -- 16,235
Engineering & Construction
Group
D. M. Slavich 1995 219,231 35,000 7,203/9/ 211,505/15/ 100,000 0 24,107/20/
Executive Vice President and 1994 -- -- -- -- -- -- --
Chief Financial Officer 1993 -- -- -- -- -- -- --
S. Y. Chi 1995 214,212 26,250 0 0 0 0 9,872/21/
President - Mining Group 1994 175,000 60,000 0 0 10,000 0 11,972
1993 147,500 55,000 0 123,125/15/ 15,000 0 8,449
W. J. Agee 1995 115,385 0 4,345/10/ 0 0 0 5,769/22/
Chairman, President and 1994 750,000 0 198,508/11/ 0 0 0 70,040
Chief Executive Officer 1993 750,000 950,000 169,761/12/ 0 0 395,415 164,919
through 2/09/95
L. E. Salci 1995 253,205 125,000 15,450/13/ 0 0 0 40,181/23/
President - Transit Group 1994 186,539 37,500 8,168/14/ 432,500 25,000 0 470
through 10/20/95 1993 -- -- -- -- -- -- --
</TABLE>
/1/Disability insurance premium of $12,164 and tax gross-up of $12,077 on the
foregoing disability insurance premium and the value of the term life insurance
premium reported under footnote 17 to this table.
/2/Disability insurance premium of $12,089 and tax gross-up of $11,899 on the
foregoing disability insurance premium and the value of the term life insurance
premium included for such year in the last column to this table.
/3/Disability insurance premium of $12,020 and tax gross-up of $11,410 on the
foregoing disability insurance premium and the value of the term life insurance
premium included for such year in the last column to this table.
/4/Disability insurance premium of $10,073 and tax gross-up of $9,977 on the
foregoing disability insurance premium and the value of the term life insurance
premium reported under footnote 18 to this table.
/5/Disability insurance premium of $8,243 and tax gross-up of $8,305 on the
foregoing disability insurance premium and the value of the term life insurance
premium included for such year in the last column to this table.
/6/Disability insurance premium of $6,783 and tax gross-up of $6,528 on the
foregoing disability insurance premium and the value of the term life insurance
premium included for such year in the last column to this table.
/7/Disability insurance premium of $6,482 and tax gross-up of $6,908 on the
foregoing disability insurance premium and the value of the term life insurance
premium reported under footnote 19 to this table.
/8/Disability insurance premium of $2,957 and tax gross-up of $3,365 on the
foregoing disability insurance premium and the value of the term life insurance
premium included for such year in the last column to this table.
/9/Disability insurance premium of $3,252 and tax gross-up of $3,951 on the
foregoing disability insurance premium and the value of the term life insurance
premium reported under footnote 20 to this table.
/10/Reimbursement for medical coverage continuation upon termination of his
employment with the Corporation.
/11/Imputed income of $46,075 for use of the Corporation facilities and $48,898
tax gross-up thereon, gross-up of $90,621 on prior years' salary adjustment for
use of Corporation facilities, disability insurance premium of $4,533 and tax
gross-up of $8,381 on the foregoing disability insurance premium and the value
of the term life insurance premium included for such year in the last column to
this table.
III-5
<PAGE>
/12/Imputed income of $40,403 for use of Corporation facilities and $37,713 tax
gross-up thereon, $81,212 tax gross-up on prior years' salary adjustments for
use of Corporation facilities, disability insurance premium of $4,423 and tax
gross-up of $6,010 on the foregoing disability insurance premium and the value
of the term life insurance premium included for such year in the last column to
this table.
/13/Disability insurance premium of $8,737 and tax gross-up of $6,713 on the
foregoing disability insurance premium.
/14/Disability insurance premium of $4,415 and tax gross-up of $3,753 on the
foregoing disability insurance premium and the value of the term life insurance
premium included for such year in the last column to this table.
/15/As of December 31, 1995, the number and value of shares of restricted stock
held by Messrs. Tinstman, Hanks, Zarges, Slavich, Chi, Agee, and Salci were,
respectively: Mr. Tinstman held 31,334 shares granted under the Stock
Compensation Plan valued at $135,128 at year-end 1995. As of March 15, 1996,
such shares carried a value of $47,001. Mr. Hanks held 31,334 shares granted
under the Stock Compensation Plan valued at $135,128 at year-end 1995. As of
March 15, 1996, such shares carried a value of $47,001. Mr. Hanks also held
24,000 shares granted under the Stock Incentive Plan valued at $103,500 at year-
end 1995. As of March 15, 1996, such shares carried a value of $36,000. Mr.
Zarges held 2,500 shares granted under the Stock Incentive Plan valued at
$10,781 at year-end 1995. As of March 15, 1996, such shares carried a value of
$3,750. Mr. Zarges also held 29,862 shares granted under the Stock Compensation
Plan valued at $128,780 at year-end 1995. As of March 15, 1996, such shares
carried a value of $44,793. Mr. Slavich held 31,334 shares granted under the
Stock Compensation Plan valued at $135,128 at year-end 1995. As of March 15,
1996, such shares carried a value of $47,001. Mr. Chi held 2,500 shares granted
under the Stock Incentive Plan valued at $10,781 at year-end 1995. As of March
15, 1996, such shares carried a value of $3,750. Messrs. Agee and Salci each
hold 0 shares of restricted stock. Dividends are payable on shares of restricted
stock granted under the Stock Incentive Plan and the Stock Compensation Plan to
the extent the Corporation declares a dividend. On June 30, 1995, Mr. Tinstman,
Mr. Hanks and Mr. Slavich were each granted an award of 31,334 shares under the
Stock Compensation Plan (each valued at $47,001 as of March 15, 1996) which will
vest based upon the formula described in the second paragraph to this footnote
15. On February 7, 1994, Mr. Hanks was granted an award of 40,000 shares of
restricted stock (valued at $60,000 as of March 15, 1996), which vested
immediately with respect to 20% of the shares, with the remainder vesting in
four equal increments over the following four years. On June 30, 1995, Mr.
Zarges was granted an award of 26,112 shares of stock under the Stock
Compensation Plan (valued at $39,168 as of March 15, 1996) which will vest based
upon the formula described in the second paragraph to this footnote 15. On
August 6, 1993, Mr. Zarges was granted an award of 5,000 shares of restricted
stock (valued at $7,500 as of March 15, 1996), which vests in four equal
increments on each of the first, second, third, and fourth anniversaries of the
date of grant. On May 13, 1994, Mr. Zarges was granted an award of 5,000 shares
of restricted stock (valued at $7,500 as of March 15, 1996), which vests in four
equal increments on each of the first, second, third, and fourth anniversaries
of the date of grant. On August 8, 1993, Mr. Chi was granted an award of 5,000
shares of restricted stock (valued at $7,500 as of March 15, 1996), which vests
in four equal increments on each of the first, second, third and fourth
anniversaries of the date of grant.
Shares of restricted stock awarded to the Named Executives on June 30, 1995
under the Stock Compensation Plan are subject to a vesting schedule determined
by the following formula: The number of shares of each Named Executive for which
restrictions will lapse on July 1, 1996, up to a maximum 100% vesting, equals
(X/Y) x N, where X = the Award Date Value; Y = the Incentive Fair Market Value
of the Shares, and N = the number of Shares of Restricted Stock awarded on June
30, 1995. The Award Date Value of each Named Executive is determined by
multiplying each Named Executive's Incentive Award (70% of base salary) by two-
thirds. The Award Date Value for Messrs. Tinstman, Hanks, and Slavich is
$140,000 each, and the Award Date Value for Mr. Zarges is $116,667. The
Incentive Fair Market Value for each Named Executive is determined by
multiplying the number of shares under each Named Executive's award by the
lesser of (i) the average fair market value of a share between July 1, 1995 and
July 1, 1996 and (ii) the average fair market value of a share between June 1,
1996 and July 1, 1996. Any shares which remain subject to restrictions on July
2, 1996 will be forfeited by the Named Executives. The restricted stock granted
to the Named Executives on June 30, 1995 will be forfeited if the Corporation
files bankruptcy under Title 11 of the United States Code prior to July 1, 1996.
/16/This column discloses amounts paid under the Corporation's 3-Year Plan. For
a description of such plan, see the section herein titled "Long-Term Incentive
Plans. A. 3-Year Plan."
/17/Amount is comprised of $7,909 matching contributions to employee's ESOP and
401(k) accounts, $489 matching contribution to employee's Deferred Compensation
Plan account, $3,274 attributable to a rebate paid to Mr. Tinstman by the
Corporation as a result of savings realized by booking air travel at an economy
class, and $17,548 attributable to a life insurance policy on Mr. Tinstman's
life under the Key Executive Life Insurance Plan, of which $584 represents the
dollar value of the term life insurance premium and $16,964 represents Mr.
Tinstman's interest in the policy's cash surrender value as projected on an
actuarial basis attributable to the 1995 premium.
/18/Amount is comprised of $7,998 matching contributions to employee's ESOP and
401(k) accounts, $864 for service recognition, and $13,858 attributable to a
life insurance policy on Mr. Hanks' life under the Key Executive Life Insurance
Plan, of which $458 represents the dollar value of the term life insurance
premium and $13,400 represents Mr. Hanks' interest in the policy's cash
surrender value as projected on an actuarial basis attributable to the 1995
premium.
/19/Amount is comprised of $7,849 matching contributions to employee's ESOP and
401(k) accounts, $80 matching contribution to employee's Deferred Compensation
Plan account, and $17,123 attributable to a life insurance policy on Mr. Zarges'
life under the Key Executive Life Insurance Plan, of which $440 represents the
dollar value of the term life insurance premium and $16,683 represents Mr.
Zarges' interest in the policy's cash surrender value as projected on an
actuarial basis attributable to the 1995 premium.
/20/Amount is comprised of $6,010 matching contributions to employee's ESOP and
401(k) accounts and $18,097 attributable to a life insurance policy on Mr.
Slavich's life under the Key Executive Life Insurance Plan, of which $918
represents the dollar value of the term life insurance premium and $17,179
represents Mr. Slavich's interest in the policy's cash surrender value as
projected on an actuarial basis attributable to the 1995 premium.
/21/Amount is comprised of $7,940 matching contributions to employee's ESOP and
401(k) accounts, $1,050 matching contributions to employee's Deferred
Compensation Plan account, and $882 for service recognition.
/22/Amount is comprised of matching contributions to Mr. Agee's ESOP and 401(k)
accounts.
/23/Amount is comprised of $22,269 paid to Mr. Salci in a lump sum as
compensation for a forfeited retirement benefit with his previous employer, and
$17,912 attributable to a life insurance policy on Mr. Salci's life under the
Key Executive Life Insurance Plan, of which $495 represents the dollar value of
the term life insurance premium and $17,417 represents Mr. Salci's interest in
the policy's cash surrender value as projected on an actuarial basis
attributable to the 1995 premium.
III-6
<PAGE>
Option Grants. The following table summarizes pertinent information
concerning individual grants of stock options, including a theoretical grant
date present value for each such grant.
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Individual Grants
- -----------------------------------------------------------------------------
Number of
Securities
Underlying % of Total
Options/ Options/SARs Exercise
SARs Granted to or Base
Granted Employees Price Expiration Grant Date
Name (#)/1/ in Fiscal Year ($/Sh) Date Present Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
R. A. Tinstman 100,000/2/ 32.8 $6.00 4/01/05 $343,696/4/
S. G. Hanks 100,000/2/ 32.8 $6.00 4/01/05 $343,696/4/
T. H. Zarges 0 0 N/A N/A 0
D. M. Slavich 100,000/3/ 32.8 $8.00 3/08/05 $460,689/4/
S. Y. Chi 0 0 N/A N/A 0
W. J. Agee 0 0 N/A N/A 0
L. E. Salci 0 0 N/A N/A 0
</TABLE>
/1/Limited Stock Appreciation Rights ("LSARs") in a like number were granted to
the optionee in conjunction with the grant of stock options. An LSAR provides
the optionee with the right, under certain circumstances, to receive cash in an
amount equal to the difference between the exercise price of the option and its
fair market value on the date of exercise. Subject to the conditions below,
LSARs are exercisable only to the extent the underlying options are exercisable.
When an LSAR is exercised, the underlying option is canceled, and vice versa.
LSARs may not be exercised within six months of the date of grant and may be
exercised only during the 60-day period following a "trigger event", as defined
in the plan pursuant to which the LSARs were granted. Such trigger events
generally involve circumstances constituting a change in control of the
corporation granting the stock option.
/2/The stock options were granted on April 1, 1995. The options vested with
respect to 50% of the shares on October 1, 1995, with the remaining shares
vesting on April 1, 1996. Limited Stock Appreciation Rights in a like number
were granted in connection with the options. For a description of such Limited
Stock Appreciation Rights, see footnote 1 to this table.
/3/The stock options were granted by the Corporation on March 8, 1995. All of
such options were immediately exercisable. Limited Stock Appreciation Rights in
a like number were granted in connection with the option. For a description of
such Limited Stock Appreciation Rights, see footnote 1 to this table.
/4/These dollar amounts are the result of calculations using the Black-Scholes
based option valuation model. In calculating the grant date present value set
forth in the table, a factor of 43.1% has been assigned to the volatility of the
common stock and the annualized dividend yield has been set at 0.0%, based on 36
months of historical data. The risk-free rate of return has been determined to
equal the yield on the U.S. Treasury Security whose duration matches the
expected life of each option. The expected option life of seven years has been
used and the grant date present value has been calculated considering a 3% per
year forfeiture rate for nonvested options. The grant date present value set
forth in the table is a theoretical value and may not accurately determine
present value. The actual value, if any, the optionee will realize will depend
on the excess of the market value of the common stock over the exercise price on
the date the option is exercised.
Aggregate Option Exercises and Fiscal Year-End Option Values. The
following table summarizes pertinent information concerning the exercise of
stock options during fiscal year 1995 by each of the Named Executives and the
fiscal year-end value of unexercised options:
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Number of Value of Unexercised,
Securities Underlying In-the-Money
Unexercised Options/SARs at
Options/SARs Fiscal Year End ($)
at Fiscal Year End (#)
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise (#) Realized ($) Unexercisable Unexercisable
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
R. A. Tinstman 0 0 101,602 / 0 /
55,000 0
S. G. Hanks 0 0 119,952 / 0 /
133,750 0
T. H. Zarges 0 0 19,000 / 0 /
6,000 0
D. M. Slavich 0 0 100,000 / 0 /
0 0
S. Y. Chi 0 0 21,238 / 0 /
17,500 0
W. J. Agee 0 0 0 / 0 /
0 0
L. E. Salci 0 0 25,000 / 0 /
0 0
</TABLE>
III-7
<PAGE>
Long-Term Incentive Plans.
A. 3-Year Plan. On October 3, 1991 the Corporation established the 3-
Year Plan. Participation in the 3-Year Plan is limited to those individuals who
are able to significantly influence the Corporation's long-term performance and
who are selected to participate by the Compensation Committee.
The 3-Year Plan is designed to compare Total Shareholder Return for
the Corporation at the end of the initial three-year period (January 1, 1989 to
December 31, 1991) and each rolling three-year period thereafter, against Total
Shareholder Return for the same period for each of 12 other companies
("Competitors")1 which operate primarily in the same markets in which the
Corporation operates.
At the end of each three-year performance period, each Competitor and
the Corporation are ranked based upon their Total Shareholder Return. The 3-Year
Plan provides that targeted bonuses2, if any, are paid at the end of each
performance period according to the following table:
<TABLE>
<CAPTION>
Corporation's Percentile Ranking Percent of Target Bonus Earned
Within Competitor Group by Participants
------------------------------------------------------------------------
<S> <C>
0 to 35th 0%
47.5th 50%
60th 100%
72.5th 150%
85 to 100th 200%
</TABLE>
A percentile ranking falling between numbers is interpolated.
In the event of a change in control, as defined in the 3-Year Plan,
bonuses become immediately payable. Such bonuses would be based upon Total
Shareholder Return calculated as of the last day of the month immediately
preceding the month in which the change in control occurred and would be
prorated based upon the number of full calendar months of service rendered by
the participant during the performance period and prior to the change in
control.
On February 10, 1995, Messrs. Tinstman, Hanks, Salci, and Zarges were
designated as participants in the 3-Year Plan for the 1995-1997 performance
period. Accordingly, the following table summarizes estimated payment
information under the 3-Year Plan for the performance period January 1, 1995
through December 31, 1997.
LONG-TERM INCENTIVE PLAN - ESTIMATED PAYOUTS UNDER 3-YEAR PLAN
<TABLE>
<CAPTION>
Estimated Future Payouts
-------------------------------------------------------------------------------
Number of Shares, Units Performance Threshold/2/ Target/3/ Maximum/4/
Name or Other Rights (#)/1/ Period Until Payout ($) ($) ($)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
R. A. Tinstman January 1, 1995 - December 31, 1997 5,712 105,000 210,000
S. G. Hanks January 1, 1995 - December 31, 1997 5,712 105,000 210,000
T. H. Zarges January 1, 1995 - December 31, 1997 4,760 87,500 175,000
L. E. Salci/5/ January 1, 1995 - December 31, 1997 0 0 0
</TABLE>
- ----------------------------
/1/ This column is left blank because payouts under the 3-Year Plan are made in
cash, rather than stock or stock units.
/2/ Assumes that the Corporation's Total Shareholder Return falls on the 36.36th
percentile when ranked with the Competitors.
/3/ Assumes that the Corporation's Total Shareholder Return falls on the 60th
percentile when ranked with the Competitors.
/4/ Assumes that the Corporation's Total Shareholder Return falls above the 85th
percentile when ranked with the Competitors.
/5/ In order for a participant to be entitled to an award under the 3-Year Plan,
such individual generally must be rendering services to the Corporation on the
last day of the performance period. Mr. Salci constructively terminated on
October 20, 1995, under the terms of his employment agreement. Under the terms
of the agreement, Mr. Salci's award became immediately vested on that date.
Because the Corporation's ranking as of that date was below the threshold, the
value of the award was zero. Accordingly, Mr. Salci is not entitled to any
benefit thereunder.
B. 5-Year Plans. During 1993, Messrs. Hanks and Tinstman were awarded
participation in long-term incentive plans that were tailored to each of their
positions (the "Individual 5-Year Plans"). Such plans provide the participants
with an opportunity for a cash award at the end of a five-year performance
period. No shares of Corporation common stock, performance units or other stock
rights are involved.
/1/ The Competitors are Guy F. Atkinson Company of California; Enserch
Corporation; Floor Corporation; Foster Wheeler Corporation; Jacobs Engineering
Group, Inc.; McDermott International, Inc.; Perini Corporation; Stone & Webster,
Incorporated and The Turner Corporation.
/2/ The Compensation Committee, in conjunction with recommendations previously
made by compensation experts, has set each participant's target bonus, which is
a percentage of his base salary. Target bonus percentages for the three-year
period ending on December 31, 1995, were 35% for each of Messrs. Tinstman,
Hanks, and Chi and 45% for Mr. Agee. The first three-year period for which
Messrs. Zarges and Salci are elligible to receive an award would by the
three-year period ending December 31, 1996.
III-8
<PAGE>
Mr. Hanks' Individual 5-Year Plan measures annually (over the five-
year period January 1, 1993 to December 31, 1997) the Corporation's after-tax
net income as a percentage of its average total capital. In the case of Mr.
Tinstman, who was President of the Mining Group at the time he was awarded
participation in his Individual 5-Year Plan, the performance formula is modified
to measure over the same period the contribution to net income at the Mining
Group level over such group's average capital employed ("ROTC").
A positive award pool is created each year during the performance
period in an amount equal to the Corporation's net income (in the case of Mr.
Hanks) or contribution to net income by each group (in the case of Mr. Tinstman)
in excess of the predetermined ROTC goal set by the Compensation Committee. If
net income or contribution to net income falls below the ROTC goal in any given
year, the amounts by which the Corporation or Mining Group failed to meet its
goal become a negative award pool for such individual. The negative award pool
is not capped at any maximum amount.
Each participant shares in the annual award pool (which may be
positive or negative based upon Corporation or group performance) applicable to
his position in accordance with a sharing percentage established by the
Compensation Committee. The participant's share of the award pool, which may be
positive or negative, is not paid to the executive. Rather, such amounts are
tracked throughout the five-year performance period by the Corporation and
"netted" at the end thereof. With respect to Mr. Hanks, a "cumulative" five-year
award greater than zero can be adjusted upward if the compound annual growth
rate in the Corporation's stock price exceeds targets established by the
Compensation Committee. Payments to participants under the Individual 5-Year
Plans, if any, are reduced by payments received by participants during the same
period under the Corporation's 3-Year Plan and for awards of restricted stock
granted as incentive compensation during such period.
Except in the case of death, disability or termination without cause,
any payments due to participants under the Individual 5-Year Plans will be made
within 120 days following December 31, 1997. In the event of a change in
control, as defined in the Individual 5-Year Plans, the participants' accrued
awards are immediately vested and payable.
It is impossible for the Corporation to estimate with reasonable
accuracy the many variables affecting potential payments under the Individual 5-
Year Plans. Thus, it is impossible to determine whether participation in the
Individual 5-Year Plans by Messrs. Hanks and Tinstman will result in cash
bonuses to them at the end of the performance period and, if so, in what
amounts. However, if one assumed that such plans were terminated as of December
31, 1995, Messrs. Hanks and Tinstman would be entitled to receive the following
unaudited amounts: $0 and $1,618,093 respectively.
Although Mr. Zarges was awarded participation in an Individual 5-Year
Plan during 1994 applicable to his position as President of the Engineering and
Construction Group, no such plan was drafted. If such plan is ultimately drafted
for Mr. Zarges, it will function in all material respects as the plan described
for Mr. Tinstman.
Although Mr. Salci was awarded participation in an Individual 5-Year
Plan during 1994 applicable to his position as President of the Transit Group,
no such plan was drafted prior to his departure from the Corporation.
C. CEO 5-Year Plan. In February 1991, the Compensation Committee
approved the Key Executive Long-Term Incentive Plan ("CEO 5-Year Plan") upon the
advice of independent compensation experts. The plan measures annually return on
total capital ("ROTC") over the five-year period January 1, 1991 to December 31,
1995. An award pool is created each year in the amount by which net income
exceeds the ROTC goal set by the Compensation Committee at the beginning of the
five-year performance period. If net income for a given year meets but does not
exceed the ROTC goal established by the Compensation Committee, the award pool
for such year is $0. Finally, the award pool is negative in the amount by which
net income falls below the ROTC goal for a given year.
On February 9, 1995, Mr. Agee terminated employment with the
Corporation. Mr. Agee's net accrual for years 1991 through his termination was
negative. Thus, Mr. Agee received no award from the CEO 5-Year Plan.
Pension. Corporation retirement or actuarial benefits to the Named
Executives are derived principally from three sources: (i) an annuity issued by
United Pacific Life Insurance Company arising out of the termination of the
Morrison Knudsen Corporation Retirement Plan established January 1, 1970 and
terminated December 12, 1987 ("UPL Annuity"); (ii) a retirement benefit from the
Morrison Knudsen Corporation Retirement Plan established January 1, 1988 and
frozen December 31, 1991 ("Frozen MKRP Benefit"); and (iii) a retirement benefit
from supplemental retirement benefit agreements ("SRBA Benefit"). The details as
to the source and amount of each Named Executive's retirement benefits are
provided below.
III-9
<PAGE>
The following table summarizes the estimated annual benefits payable
in the form of a straight-life annuity upon normal retirement to each of the
Named Executives:
<TABLE>
<CAPTION>
PENSION TABLE
Frozen MKRP SRBA Benefit/3/ Total Annual
UPL Annuity/1/ Benefit/2/ at Age 65 Benefit at Age 65
Name ($) ($) ($) ($)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
R. A. Tinstman 9,385 17,860 10,568 37,813
S. G. Hanks 7,284 13,755 0 21,039
T. H. Zarges 0 0 0 0
D. M. Slavich 0 0 0 0
S. Y. Chi 13,983 7,513 0 21,496
W. J. Agee 0 9,052 99,750 99,750/4/
L. E. Salci 0 0 0 0
</TABLE>
/1/The amounts shown in this column are fixed amounts based upon the formula
contained in the Morrison Knudsen Corporation Retirement Plan established
January 1, 1970 and terminated December 12, 1987. Such amounts will not increase
due to compensation paid or service rendered by the Named Executive after
December 12, 1987.
/2/The amounts shown in this column are fixed amounts based upon the formula
contained in the Morrison Knudsen Corporation Retirement Plan established
January 1, 1988 and frozen December 31, 1991. Such amounts will not increase due
to compensation paid or service rendered by the Named Executive after December
31, 1991.
/3/The Corporation has entered into a nonqualified and unfunded SRBA to provide
retirement income to Mr. Tinstman. The SRBA provides Mr. Tinstman with a
retirement benefit equal to the difference between (a) the retirement benefit
that would be payable to him under the Morrison Knudsen Corporation Retirement
plan established January 1, 1988 and frozen December 31, 1991, if it were not
for certain limits imposed on him under the Internal Revenue Code of 1986, as
amended; and (b) his Frozen MKRP Benefit. This difference is referred to
hereafter as the "Standard SRBA Benefit." Mr. Tinstman's Standard SRBA Benefit
will not increase, absent any future amendments to his SRBA, due to compensation
paid or services rendered after December 31, 1991. Mr. Tinstman currently has 14
years credited service under the Frozen MKRP with the Corporation. Mr. Agee's
SRBA Benefit is fixed pursuant to a settlement agreement between Mr. Agee and
the Corporation dated September 20, 1995. Under the terms of such agreement, Mr.
Agee waived his rights to any benefit otherwise payable under a Corporation-
sponsored nonqualified pension plan or SRBA, and is provided with a supplemental
employee retirement pension plan ("SERP") benefit of $99,750 per year for his
life and the life of his wife. Mr. Hanks and Mr. Chi currently have 16 and 15
years credited service with the Corporation, respectively.
/4/Under the aforementioned settlement agreement with Mr. Agee, when Mr. Agee
reaches age 65, his SERP benefit will be reduced by the amount of his Frozen
MKRP Benefit, for a total annual benefit of $99,750.
Key Employee Retention Plans. Effective June 30, 1995 the Corporation
approved the following plans to attract and retain employees in key positions
during the ensuing critical 12-month period which plans were amended on April
10, 1996. An additional plan was adopted on April 10, 1996 as described below:
A. Key Employee Retention Incentive Plan. The Corporation approved
the Key Employee Retention Incentive Plan. The plan is designed to attract and
retain key employees by providing them with additional compensation from the
date of adoption through July 1, 1996. The identified employees are paid a
Retention Incentive Award expressed as a percentage of salary. The award
percentage varies by salary and/or organization level. The award levels follow
for members of the employee group who are not Statutory Insiders ("Statutory
Insiders" are defined as officers, directors, or beneficial owners of 10% or
more of the Corporation's common stock for purposes of Section 16 of the
Securities Exchange Act of 1934, as amended.): Executive Management (70%),
Senior Management (62.5%), and Management/Professional and Technical (55%) of
base salary as of June 30, 1995. The Award levels for Statutory Insiders by
employee group are: Executive Management (23.3%); Senior Management (20.83%);
Professional/Technical (18.33%) of base salary as of June 30, 1995. The
individual Retention Incentive Award to each key employee is equal to the
employee's annual base salary as of June 30, 1995, times the multiplier set
forth in the Plan, which corresponds to the relevant employee group/organization
level. The Retention Incentive Award for key employees other than Statutory
Insiders is comprised of one-third cash (half of which was paid on December 15,
1995 and the remaining half to be paid on July 1, 1996) and two-thirds stock (to
be issued on July 1, 1996). The Retention Incentive Award for the Statutory
Insiders, including the Named Executives other than Mr. Chi, is a cash payment
equal to the named executive officer's annual base salary multiplied by the
appropriate multiplier listed in the Plan (23.3% for the Named Executives), half
of which was paid on December 15, 1995 and the remaining half of which is to be
paid on July 1, 1996. However, in the event of a Chapter 11 bankruptcy filing,
covered employees will have the option of receiving a cash payment on July 1,
1996 equal to twice the cash payment received on December 15, 1995 ("initial
cash payment"), or elect to postpone the July 1, 1996 cash payment until the
earlier of the Corporation's emergence from a Chapter 11 proceeding or September
30, 1996. Covered employees who elect (prior to April 30, 1996) to postpone
payment will receive an additional cash amount equal to the initial cash payment
prorated on the number of days from July 1, 1996 to September 30, 1996, but no
later than September 30, 1996 and no less than twenty-five percent (25%) of the
initial cash payment.
B. Retention Severance Pay Plan. The Corporation approved the
Retention Severance Pay Plan. This plan encourages employees to remain
employees of the Corporation notwithstanding the outcome of reorganization or
restructuring of the Corporation over the 12-month period beginning July 1,
1995, by providing enhanced severance benefits to employees who are
involuntarily terminated during the 12-month period. If certain events trigger
the effective date of the plan and a participating employee suffers an
involuntary termination of employment other than for cause during the term of
the plan, such employee will receive an amount equal to four, six or nine months
of his or her base salary, depending upon
III-10
<PAGE>
which group/organization level the employee falls within, reduced by (i) amounts
paid or payable to the employee under the Morrison Knudsen Corporation Severance
Pay Plan other than the payments made thereunder with respect to placement
assistance, and (ii) in the event restrictions lapse on the restricted stock
granted to the Statutory Insiders pursuant to the action of the Compensation
Committee on June 30, 1995 under Section 11(c) of the Morrison Knudsen
Corporation Stock Compensation Plan, the value of such stock on the date the
restrictions lapse. Events that would trigger the effective date under the Plan
are (a) if the Corporation sells or transfers to one or more persons,
corporations or entities more than one-half of the voting shares or assets of
any business unit, division or subsidiary of the Corporation, unless exempted by
affirmative vote of two-thirds of the members of the Board of Directors; or (b)
the filing of a petition for bankruptcy under Title 11 of the United States
Code. If no event triggers the effective date of the plan, the plan
automatically terminates on July 1, 1996. The plan also terminates on the
confirmation of any Chapter 11 plan concerning the Corporation. Mr. Chi is the
only Named Executive participating in the plan. The additional plan adopted on
April 10, 1996 is substantially similar but provides covered employees with
severance benefits if they are involuntarily terminated (without cause) between
April 10, 1996 and December 31, 1997. Covered employees for the purposes of the
new plan are employees who elect to postpone payment of their cash award under
the Employee Retention Incentive Plan until after July 1, 1996.
Employment Contracts, Termination of Employment, and Change In Control
Arrangements. The Corporation has entered into the following employment
agreements with the Named Executives:
A. Messrs. Hanks, Tinstman and Zarges. Effective January 1, 1993, the
Corporation entered into five-year employment agreements (January 1, 1993
through December 31, 1997) with Messrs. Tinstman and Hanks. Effective January 1,
1994, the Corporation entered into a similar five-year employment agreement with
Mr. Zarges (January 1, 1994 through December 31, 1998). Pursuant to the terms of
the employment agreements, Messrs. Tinstman, Hanks and Zarges are entitled to
receive a minimum annual base salary of $250,000 each and to participate in the
Corporation's annual bonus plan applicable to their corporate position or
operating group position. They are also entitled to participate in (i) an
Individual 5-Year Plan tailored to their corporate position or operating group
position (for a description of such plans, see the section herein titled "Long-
Term Incentive Plans. B. Individual 5-Year Plans"); (ii) the Key Executive Life
Insurance Plan (which provides pre-retirement life insurance of three times base
salary, inclusive of the Corporation's group plan and which provides post-
retirement life insurance of one times base salary); (iii) the Key Executive
Disability Insurance Plan (which provides a disability benefit of 60% of base
salary and annual bonus, inclusive of all Corporation and government programs);
and (iv) all other health and welfare benefits generally available to executive
officers of the Corporation.
Under the employment agreements, Messrs. Tinstman, Hanks and Zarges
are also entitled to receive a severance benefit equal to twice their annual
base compensation (which includes such items as, base salary in effect
immediately preceding the termination of employment for Mr. Zarges and, for
Messrs. Tinstman and Hanks, the greater of base salary in effect immediately
preceding termination of employment or base salary in effect immediately
preceding a salary reduction experienced by such individuals in February 1995,
and also bonuses and participation in health and retirement programs) if their
employment is terminated for a reason other than death, disability, cause,
voluntary resignation under circumstances not constituting constructive
termination, or the expiration of their employment agreements. Under such
circumstances, the Corporation will fully vest all unvested stock options and
restricted stock awards previously granted except those granted on June 30,
1995, and fully vest and immediately pay any accrued awards and bonuses. If any
payments due under the employment agreements will result in liability by Messrs.
Tinstman, Hanks, and Zarges for any excise tax imposed by Section 4999 of the
Internal Revenue Code of 1986, as amended, the Corporation has agreed to pay to
them an amount which (after deducting any Federal, state and local income taxes
payable with respect to such amount) is sufficient to fully satisfy such tax.
Messrs. Tinstman, Hanks and Zarges were awarded by the Compensation Committee on
April 2, 1996, additional cash bonuses of $250,000, $150,000 and $125,000, equal
to 83% , 50% and 50% of their annual base salaries, respectively, payment of
which is conditioned upon the successful reorganization of the Corporation.
B. Mr. Slavich. Effective April 9, 1995, the Corporation entered into a
four-year employment agreement (March 8, 1995 through March 7, 1999) with Mr.
Slavich. Pursuant to the terms of the agreement, Mr. Slavich is entitled to
receive an annual base salary of $300,000 and to participate in the
Corporation's annual bonus plan applicable to his corporate position. He was
also granted options to purchase 100,000 shares of the Corporation's common
stock under the Stock Compensation Plan at an exercise price of $8.00 per share,
which options vested immediately. Mr. Slavich is also entitled to participate in
(i) the Key Executive Life Insurance Plan (ii) the Key Executive Disability
Insurance Plan and (iii) all other health and welfare benefits generally
available to executive officers of the Corporation.
Under the agreement, Mr. Slavich is also entitled to receive a severance
benefit equal to twice his annual base salary if his employment is terminated
for a reason other than death, disability, cause, voluntary resignation under
circumstances not constituting constructive termination, or the expiration of
his employment agreement. Mr. Slavich was awarded by the Compensation Committee
on April 2, 1996, an additional cash bonus of $150,000 equal to 50% of his
annual base salary, payment of which is conditioned upon the successful
reorganization of the Corporation.
III-11
<PAGE>
C. Mr. Chi. On April 2, 1996, the Compensation Committee authorized the
Company to enter into an employment agreement with Mr. Chi extending through
December 31, 1998. Under the terms of such employment agreement, should Mr. Chi
experience an involuntary termination of employment, other than for cause, he
would be entitled to receive a severance benefit equal to 18 months of his base
compensation. Mr. Chi was awarded by the Compensation Committee on April 2,
1996, an additional cash bonus of $67,500 equal to 30% of his annual base
salary, payment of which is conditioned upon the successful reorganization of
the Corporation.
D. Mr. Agee. On April 2, 1991, the Corporation entered into a five-year
employment agreement (April 2, 1991 through December 31, 1995) with Mr. Agee.
Pursuant to the terms of the employment agreement, Mr. Agee was entitled to
receive a minimum annual base salary of $750,000 and was to be considered for an
annual bonus of at least 50% of his base salary, with the actual bonus
determined by the Compensation Committee after an assessment of the
Corporation's financial performance and Mr. Agee's strategic accomplishments. He
was also entitled to participate in (i) the CEO 5-Year Plan, (ii) the Key
Executive Life Insurance Plan (which provides pre-retirement life insurance of
three times base salary, inclusive of the Corporation's group plan and which
provides post-retirement life insurance of one times base salary), (iii) the Key
Executive Disability Insurance Plan (which provides a disability benefit of 60%
of base salary and annual bonus, inclusive of all Corporation and government
programs), and (iv) all other health and welfare benefits generally available to
executive officers of the Corporation. Upon retirement at age 65, he was to be
entitled to receive a retirement benefit of 45% of his final average
compensation, less any benefits provided under the Corporation's frozen MKRP
Benefit and Standard SRBA Benefit. Lesser benefits were payable if he retired
before age 65.
Under the employment agreement, Mr. Agee was also entitled to receive a
severance benefit equal to twice his base compensation (which includes such
items as base salary, bonuses and participation in health and retirement
programs) if his employment was terminated for a reason other than death,
disability, cause (as defined in such agreement), voluntary resignation under
circumstances not constituting constructive termination or the expiration of the
employment agreement. Under such circumstances, the Corporation was to fully
vest all unvested stock options and restricted stock awards previously granted
and fully vest and immediately pay any accrued awards and bonuses. Finally, if
any payments due under the employment agreement were to result in liability to
Mr. Agee for any excise tax imposed by Section 4999 of the Internal Revenue Code
of 1986, as amended, the Corporation has agreed to pay him an amount which
(after deducting any Federal, state and local income taxes payable with respect
to such amount) would be sufficient to fully satisfy such tax. Under the
employment agreement, if Mr. Agee's employment were terminated for death,
disability, cause, as defined in the employment agreement, voluntary resignation
not constituting constructive termination, or upon expiration of the agreement,
Mr. Agee would not be entitled to any of the benefits described above.
Pursuant to a settlement reached with Mr. Agee in September of 1995, Mr. Agee
has waived his right to all compensation, including salary, bonuses, unvested
stock options, unvested restricted stock, and pensions, with the following
exceptions: (i) Mr. Agee will receive an annual supplemental employee retirement
pension plan payment of $99,750 per year, offset by any payments from the
Corporation's frozen Retirement Plan, for the remainder of his life, with a
right of survivorship for the term of his wife's life; (ii) Mr. Agee received
payment of the balance remaining in his deferred compensation plan account,
equal to $367,062.30; (iii) the Corporation was to reimburse Mr. Agee for
medical continuation payments made by him during the period from March 1, 1995
through December 31, 1995; (iv) continued coverage will be provided under the
Corporation's comprehensive medical, health and dental insurance benefit plan
for Mr. Agee and his dependents (the Corporation will pay all costs associated
with such medical, health and dental insurance benefits and will report the
actuarial value of the coverage as income to Mr. Agee); and (v) the Corporation
agreed to advance legal fees and expenses and to indemnify Mr. Agee in
connection with any claims brought against him by reason of, or arising out of,
his tenure at the Corporation.
E. Mr. Salci. Effective March 22, 1994, the Corporation entered into a five-
year employment agreement (March 22, 1994 through March 21, 1999) with Mr.
Salci. Pursuant to the terms of the employment agreement, Mr. Salci was entitled
to receive a minimum annual base salary of $250,000 and to participate in the
Corporation's annual bonus plan applicable to his operating group position. He
was also entitled to participate in (i) an Individual 5-Year Plan tailored to
his operating group position (for a description of such plans, see the section
herein titled "Long-Term Incentive Plans. B. Individual 5-Year Plans"); (ii) the
Key Executive Life Insurance Plan (iii) the Key Executive Disability Insurance
Plan and (iv) all other health and welfare benefits generally available to
executive officers of the Corporation. In addition, a recommendation was to be
made to the Compensation Committee that Mr. Salci be granted options to purchase
25,000 shares of the Corporation's common stock under the Corporation's Stock
Compensation Plan, which option would vest over a four-year period, and 20,000
restricted shares of the Corporation's common stock under the Stock Compensation
Plan, which award would vest immediately with respect to 20% of the shares, with
the remaining shares vesting in four equal increments over the first, second,
third and fourth anniversaries of the date of grant. The Corporation was also to
provide
III-12
<PAGE>
Mr. Salci with a Deferred Compensation Agreement intended to compensate Mr.
Salci for those pension benefits provided by his previous employer that he
forfeited as a result of his resignation from that corporation.
Under the employment agreement, Mr. Salci was also entitled to receive a
severance benefit equal to twice his annual base compensation (which includes
such items as base salary in effect immediately preceding the termination of
employment, bonuses and participation in health and retirement programs) upon
termination of his employment for a reason other than death, disability, cause,
voluntary resignation under circumstances not constituting constructive
termination, or the expiration of his employment agreement. Under such
circumstances, the Corporation would fully vest all unvested stock options and
restricted stock awards previously granted, and fully vest and immediately pay
any accrued awards and bonuses. If any payments due under the employment
agreement would result in liability by Mr. Salci for an excise tax imposed by
Section 4999 of the Internal Revenue Code of 1986, as amended, the Corporation
agreed to pay to him an amount which (after deducting any Federal, state and
local income taxes payable with respect to such amount) is sufficient to fully
satisfy such tax.
Mr. Salci's employment with the Corporation constructively terminated on
October 20, 1995, in connection with the divestiture of the Corporation's
transit operations. Pursuant to the terms of his employment agreement, Mr. Salci
will receive his base compensation for a period of two years, including
continued participation in the Corporation's Key Executive Long-Term Disability
Insurance Plan, and immediate and full vesting of his unvested stock options and
restricted stock. Since he immediately began work with American Passenger Rail
Car Company, L.L.C. upon his termination from the Corporation, he is no longer
eligible to participate in the Corporation's health and retirement plans.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Voting Securities and Principal Holders Thereof. The Company knows of no
person (as the term is used in Section 13(d)(3) of the Securities Exchange Act
of 1934) who beneficially owns more than 5% of the Company's common stock.
The following table shows beneficial ownership as of February 14, 1996 of the
common stock of the Company and its subsidiaries for all directors of the
Company, Named Executives, and directors and executive officers of the Company
as a group. Unless otherwise noted, the amount beneficially owned in column (2)
below reflects shares for which the beneficial owner has sole voting power and
sole investment power.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Common Stock of the Company
- --------------------------------------------------------------------------------------------------
(1) (2) (3) (4)
Amount & Nature Options to Purchase Shares
Name of of Beneficial Ownership/1/ Within 60 Days % of
Beneficial Owner (Including Options in Column/3/) of February 14, 1996 Class
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Directors
Lindsay E. Fox 12,000 12,000 *
Christopher B. Hemmeter 12,000 12,000 *
Peter S. Lynch 19,000 12,000 *
Robert A. McCabe 12,806 12,000 *
Robert S. Miller, Jr. 124,000 104,000 *
Gerard R. Roche 12,000 8,000 *
John W. Rogers, Jr. 14,500 12,000 *
Robert A. Tinstman 218,345/2/ 154,602 *
Named Executives
William J. Agee/3/ 19,000/4/ 0 *
Steven Y. Chi 31,944/5/ 26,238 *
Stephen G. Hanks/6/ 248,325/7/ 178,702 *
Larry E. Salci 0 0 *
Denis M. Slavich 132,276/8/ 100,000 *
Thomas H. Zarges 55,731/9/ 19,000 *
All Directors and
Executive Officers
as a Group (16)10 960,685/11/ 653,554 2.85%
</TABLE>
- -----------------------------
*Indicates that the percentage of shares beneficially owned does not exceed 1%
of the class.
/1/For purposes of this table, shares are considered to be "beneficially" owned
if the person directly or indirectly has the sole or shared power to vote or
direct the voting of the securities or the sole or shared power to dispose of or
direct the disposition of the securities; and a person is considered to be the
beneficial owner of shares if that person has the right to acquire the
beneficial ownership of the shares within 60 day of February 14, 1996.
/2/Mr. Tinstman shares voting power with the Corporation's 401(k) Savings Plan
trustee as to 3,425 shares owned pursuant to such plan; shares voting and
dispositive power with his wife as to 4,036 shares; and has no dispositive power
as to 31,334 unvested shares of restricted stock granted under the Corporation's
Stock Compensation Plan.
/3/Amounts included in this table for Mr. Agee are based on best records
available to the Corporation.
/4/Amount represents 19,000 shares issued in the name of The Semper Charitable
Foundation of which Mr. Agee is a director and, as such, shares voting and
dispositive power with one other director over such shares.
III-13
<PAGE>
/5/Mr. Chi shares voting power with the Corporation's 401(k) Savings Plan
trustee as to 1,190 shares owned pursuant to such plan; and has no dispositive
power as to 2,500 unvested shares of restricted stock granted pursuant to the
Corporation's Stock Incentive Plan.
/6/Mr. Hanks also has the right to acquire 25,000 shares of common stock in MK
Rail Corporation, a majority owned subsidiary of the Corporation, which amount
represents less than one percent of the class.
/7/Mr. Hanks shares voting power with the Corporation's 401(k) Savings Plan
trustee as to 3,124 shares owned pursuant to such plan; has no dispositive power
as to 16,000 unvested shares of restricted stock granted pursuant to the
Corporation's Stock Incentive Plan; and has no dispositive power as to 31, 334
unvested shares of restricted stock granted under the Corporation's Stock
Compensation Plan.
/8/Mr. Slavich shares voting power with the Corporation's 401(k) Savings Plan
trustee as to 942 shares owned pursuant to such plan; and has no dispositive
power as to 31, 334 unvested shares of restricted stock granted under the
Corporation's Stock Compensation Plan.
/9/Mr. Zarges shares voting power with the Corporation's 401(k) Savings Plan
trustee as to 1,679 shares owned pursuant to such plan; has no dispositive power
as to 2,500 unvested shares of restricted stock granted pursuant to the
Corporation's Stock Incentive Plan; and has no dispositive power as to 29,862
unvested shares of restricted stock granted pursuant to the Corporation's Stock
Compensation Plan.
/10/In addition to the shares of MK Rail Corporation beneficially owned by Mr.
Hanks (see footnote 6), executive officers of the Corporation beneficially own
13,200 shares of MK Rail Corporation common stock, a majority owned subsidiary
of the Corporation, which amount includes the right to acquire 10,000 shares and
represents less than one percent of the class.
/11/The directors and executive officers as a group share voting power with the
Corporation's 401(k) Savings Plan trustee as to 17,719 shares owned pursuant to
such plan; have no dispositive power as to 21,000 unvested shares of restricted
stock granted pursuant to the Corporation's Stock Incentive Plan ; and have no
dispositive power as to 181,707 unvested shares of restricted stock granted
pursuant to the Corporation's Stock Compensation Plan.
Change in Control. See the disclosure under Item 1. "Recent Developments".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Transactions with Management and Certain Business Relationships. There
are no directors or executive officers of the Corporation who were, at any time
during the last three completed fiscal years, parties to any transactions in
excess of $60,000 to which the Corporation or any of its subsidiaries was a
party or who had any other business relationships with the Corporation or any of
its subsidiaries required to be disclosed in Item 13.
Indebtedness of Management. Mr. Tinstman previously entered into
promissory notes with the Company in connection with the exercise of a portion
of his options to purchase the Company's common stock. Pursuant to such notes,
payment of the exercise price for each purchase is deferred over twenty quarters
with interest on the principal balance of six percent per annum. The notes are
collateralized by the shares of the Corporation's common stock which were
purchased by Mr. Tinstman upon each option exercise. In 1993, the largest
aggregate amount of indebtedness owed by Mr. Tinstman to the Corporation was
$62,929 with a current balance owing at April 5, 1996 of $8,841. No other
director or executive officer of the Corporation has been indebted to the
Corporation at any time since the beginning of the last three completed fiscal
years in an amount in excess of $60,000.
III-14
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.
PAGE(S)
(a) Documents filed as a part of this Annual Report on Form 10-K.
1. The Consolidated Financial Statements, together with
the report thereon of Deloitte & Touche, LLP
dated April 12, 1996, are included in Part II, Item 8
of this Annual Report on Form 10-K
Independent Auditors' Report II-19
Consolidated Statements of Operations for years ended
December 31, 1995, 1994, and 1993 II-20
Consolidated Balance Sheets at December 31, 1995
and 1994 II-21, II-22
Consolidated Statements of Cash Flows for years ended
December 31, 1995, 1994 and 1993 II-23
Consolidated Statements of Stockholders' Equity
(Deficiency) for years ended December 31, 1995, 1994
and 1993 II-24
Notes to Consolidated Financial Statements II-25- II-44
2. Financial Statement Schedule as of December 31, 1995
and 1994 included in Part IV of this Annual Report on
Form 10-K
Valuation and Qualifying Accounts IV-3
Financial statement schedules not listed above are
omitted because they are not required or are not
applicable, or the required information is given in the
financial statements including the notes thereto.
Captions and column headings have been omitted
where not applicable.
3. Exhibits
The exhibits to this Annual Report on Form 10-K are listed
in the Exhibit Index contained else-where in this Annual Report.
(b) Reports on Form 8-K.
The registrant filed a current report on Form 8-K dated October 17,
1995 to report that it had reached an agreement to transfer
substantially all of the assets, certain liabilities, contract
operations and management of its Transit segment to American Passenger
Rail Car Company, L.L.C., ("Amerail") a newly-formed company wholly-
owned by persons not affiliated with the registrant. The registrant has
accounted for the disposition of Transit as a discontinued operation.
In connection with the disposition of Transit, the registrant and
certain of its creditors agreed to (i) reduce the maximum secured
borrowing amount under the registrant's bridge loan from $129 million
to $100 million, (ii) replace the registrant's standby letter of credit
supporting Transit's performance under a contract with the Metra
Transit Authority with the registrant's guaranty of Amerail's
reimbursement obligations to the same bank creditors under a
replacement letter of credit and a new $141 million credit facility for
Amerail to support performance of the Metra contract and (iii) enter
into a reimbursement agreement with its bonding company pursuant to
which the registrant's reimbursement obligation to its bonding company
for the bonding company's losses in connection with certain non-Metra
contracts was capped at approximately $31 million. In addition, the
registrant completed the sale of its North Pacific Operations on
September 22, 1995 for $17 million in cash.
The registrant filed a current report on Form 8-K dated November 15,
1995 to report that preliminary results of operations for the quarter
ended September 30, 1995 were expected to result in an after-tax loss
from continuing operations of $37 million and an after-tax loss from
discontinued operations of approximately $68 million for a consolidated
net loss of approximately $105 million.
IV-1
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Corporation has duly caused this Annual Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized on April
14, 1996.
Morrison Knudsen Corporation
By /s/ R.A.Tinstman
------------------------------------------------------
R.A. Tinstman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual
Report has been signed below on April 14, 1996 by the following persons on
behalf of the Corporation in the capacities indicated.
President and Chief Executive Officer and
Director
/s/ R.A. Tinstman (Principal Executive Officer)
- -----------------------------
R.A. Tinstman
Executive Vice President and Chief
Financial Officer
/s/ D.M. Slavich (Principal Financial Officer)
- -----------------------------
D.M. Slavich
Vice President and Controller
/s/ G.A. Crockett (Principal Accounting Officer)
- -----------------------------
G.A. Crockett
Director
- -----------------------------
L.E. Fox
/s/ C.B. Hemmeter* Director
- -----------------------------
C.B. Hemmeter
/s/ P.S. Lynch* Director
- -----------------------------
P.S. Lynch
/s/ R.A. McCabe* Director
- -----------------------------
R.A. McCabe
/s/ R.S. Miller, Jr.* Director
- -----------------------------
R.S. Miller, Jr.
/s/ J.W. Rogers, Jr.* Director
- -----------------------------
J.W. Rogers, Jr.
/s/ G.R. Roche* Director
- -----------------------------
G.R. Roche
* Stephen G. Hanks, by signing his name hereto, does hereby sign this Annual
Report on Form 10-K on behalf of each of the above-named officers and directors
of Morrison Knudsen Corporation, pursuant to powers of attorney executed on
behalf of each such officer and director.
*By /s/ S.G. Hanks
----------------------------------------------
S.G. Hanks, Attorney-in-fact
IV-2
<PAGE>
MORRISON KNUDSEN CORPORATION
SCHEDULE II. VALUATION AND QUALIFYING AND RESERVE ACCOUNTS
For the Years Ended December 31, 1995 and 1994
(Thousands of dollars)
Allowance for Doubtful Notes and Accounts Receivables Deducted in the Balance
Sheet from Accounts Receivable
<TABLE>
<CAPTION>
Balance at Provisions Balance at
Beginning Charged to End of
Year Ended of Year Operations Deductions Period
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1995 $(16,156) $ (1,746) $5,098 $(12,804)
December 31, 1994 (1) (1,179) (15,411) 434 (16,156)
December 31, 1993 (1) (1,148) (778) 747 (1,179)
<CAPTION>
Deferred Income Tax Asset Valuation Allowance Deducted in the Balance Sheet from
Deferred Income Taxes
Balance at Provisions Balance at
Beginning Charged to End of
Year Ended of Year Operations Deductions Period
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1995 $(127,594) $(109,408) -- $(237,002)
December 31, 1994 (1) -- (127,594) -- (127,594)
<CAPTION>
Accruals for Estimated Losses on Uncompleted Contracts Reflected in the Balance
Sheet
Balance at Provisions Balance at
Beginning Charged to End of
Year Ended of Year Operations Deductions Period
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1995 $(38,110) $(12,444) $28,581 $(21,973)
December 31, 1994 (930) (39,400) 2,220 (38,110)
December 31, 1993 (7,091) (1,869) 8,030 (930)
<CAPTION>
Accruals for Estimated Losses on Uncompleted Contracts Deducted in the
Balance Sheet from Investments in and Advances to Construction
Joint Ventures
Balance at Provisions Balance at
Beginning Charged to End of
Year Ended of Year Operations Deductions Period
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1995 $(31,861) $(16,800) $35,680 $(12,981)
December 31, 1994 (1) (2,569) (29,292) -- (31,861)
December 31, 1993 (1) (216) (2,569) 216 (2,569)
</TABLE>
(1) Amounts restated to give effect to the recognition of MK Rail Corporation
and Transit as discontinued operations.
IV-3
<PAGE>
MORRISON KNUDSEN CORPORATION
EXHIBIT INDEX
Copies of exhibits will be supplied upon request. Exhibits will be provided at a
fee of $.25 per page requested.
Exhibits marked with an asterisk are filed herewith, the remainder of the
exhibits have heretofore been filed with the Commission and are
incorporated by reference.
Exhibit
Number Exhibits
- ------ --------
3.1 The registrant's Restated Certificate of Incorporation, including all
amendments thereto (filed as Exhibit 4.1 to Form S-3 Registration
Statement No. 33-55402 filed on December 4, 1992 and incorporated herein
by reference.)
3.2 The registrant's Restated By-Laws, including all amendments thereto
(filed as Exhibit 3.2 to Form 10-K Annual Report for year ended December
31, 1994 and incorporated herein by reference.)
4.1.1 The registrant's Rights Agreement dated as of June 12, 1986 (the "Rights
Agreement") with Bank of America National Trust and Savings Association,
as Rights Agent (filed as Exhibit 2.1 to Registration Statement on Form
8-A filed on June 25, 1986 and incorporated herein by reference).
4.1.2 Amendment dated as of July 7, 1988 to the registrant's Rights Agreement
with Bank of America National Trust and Savings Association (filed as
Exhibit 28 to Form 8-K Current Report dated July 7, 1988 and
incorporated herein by reference.)
4.1.3 Second Amendment dated as of December 23, 1994 to the registrant's
Rights Agreement with Norwest Bank Minnesota, N.A., as Successor Rights
Agent (filed as part of Exhibit 4.1 to Form 10K Annual Report for year
ended December 31, 1994 and incorporated herein by reference.)
4.1.4 Third Amendment effective as of August 1, 1995 to the registrant's
Rights Agreement with Norwest Bank Minnesota, N.A., as Successor Rights
Agent to Bank of America National Trust and Savings Association (filed
as Exhibit 4.1 to Form 10-Q Quarterly Report for quarter ended June 30,
1995 and incorporated hereby by reference.)
4.1.5* Fourth Amendment dated as of April 10, 1996 to the registrant's Rights
Agreement with Norwest Bank Minnesota, N.A., as Successor Rights Agent
to Bank of America National Trust and Savings Association.
4.2 The form of Warrant to Purchase 9,415,696 Shares of Common Stock of the
registrant by the financial institutions named therein (filed as Exhibit
4.6 to Form 10-Q Quarterly Report for quarter ended June 30, 1995 and
incorporated hereby by reference.)
4.3 The form of Warrant to Purchase 4,613,695 Shares of Common Stock of the
registrant by the financial institutions named therein (filed as Exhibit
4.7 to Form 10-Q Quarterly Report for quarter ended June 30, 1995 and
incorporated hereby by reference.)
4.4 The form of Warrant to Purchase 830,039 of Common Stock of the
registrant by Fidelity and Deposit Company of Maryland and certain
cosureties and other reinsurers (filed as Exhibit 4.8 to Form 10-Q
Quarterly Report for quarter ended June 30, 1995 and incorporated hereby
by reference.)
4.5 The registrant's Registration Rights Agreement dated as of July 31, 1995
with certain financial institutions in connection with Warrants to
Purchase 14,029,391 shares of Common Stock of the registrant (filed as
Exhibit 4.11 to Form 10-Q Quarterly Report for quarter ended June 30,
1995 and incorporated hereby by reference.)
4.6 The registrant's Registration Rights Agreement dated as of July 31, 1995
with Fidelity and Deposit Company of Maryland and certain cosureties and
other reinsurers in connection with Warrants to Purchase 830,039 shares
of Common Stock of the registrant (filed as Exhibit 4.12 to Form 10-Q
Quarterly Report for quarter ended June 30, 1995 and incorporated hereby
by reference.)
4.7 The registrant's amended standby letter of credit and reimbursement
agreement dated as of August 4, 1992 with Bank of America National Trust
and Savings Association, as Agent, and other financial institutions with
combined commitments of the banks in the aggregate amount of $190
million (filed as Exhibit 4.4 to Form 10K/A Annual Report for year ended
December 31, 1993 filed on April 13, 1995 and incorporated herein by
reference.)
4.8 The registrant's Revolving Credit Agreement with Bank of America
National Trust and Savings Association, as Agent, and other financial
institutions named therein (filed as Exhibit 4.5 to Form 10-Q Quarterly
Report for quarter ended June 30, 1995 and incorporated hereby by
reference.)
E-1
<PAGE>
Exhibit
Number Exhibits
- ------ --------
4.9 The registrant's Security Purchase Agreement dated as of July 31, 1995
with Mellon Bank, N.A., as Agent, and other financial institutions named
therein (filed as Exhibit 4.9 to Form 10-Q Quarterly Report for quarter
ended June 30, 1995 and incorporated hereby by reference.)
4.10 The registrant's Securities Purchase Agreement dated as of July 31, 1995
with Fidelity and Deposit Company of Maryland and certain cosureties and
other reinsurers (filed as Exhibit 4.10 to Form 10-Q Quarterly Report
for quarter ended June 30, 1995 and incorporated hereby by reference.)
4.11 The registrant's Indemnification and Reimbursement Agreement dated as of
July 31, 1995 with Fidelity and Deposit Company of Maryland and Colonial
American Casualty and Surety Company (filed as Exhibit 4.13 to Form 10-Q
Quarterly Report for quarter ended June 30, 1995 and incorporated hereby
by reference.)
4.12 The registrant's Guaranty dated as of July 31, 1995, with Bank of
America National Trust and Savings Association, as agent, and other
financial institutions named therein (filed as Exhibit 4.14 to Form 10-Q
Quarterly Report for quarter ended June 30, 1995 and incorporated hereby
by reference.)
4.13 Amended and Restated Override Agreement dated as of October 10, 1995,
among the registrant, Morrison Knudsen Corporation, an Ohio corporation
and a wholly owned subsidiary of registrant, The Banks and Other
Financial Institutions named therein, Mellon Bank, N.A., as Agent, and
Bank of America National Trust and Savings Association, as Metra Agent
(filed as Exhibit 4.1 to Form 8-K Current Report dated October 17, 1995
and incorporated herein by reference.)
4.14 The registrant's Amended and Restated Credit Agreement dated as of July
31, 1995 with Mellon Bank, N.A., as Administrative Agent and Co-Agent,
and Bank of America National Trust and Savings Association, as Co-Agent,
and other financial institutions named therein with combined commitments
of the banks in the aggregate of $129 million (filed as Exhibit 4.3 to
Form 10-Q Quarterly Report for quarter ended June 30, 1995 and
incorporated hereby by reference.)
4.15 First Amendment dated as of October 10, 1995 to the Amended and Restated
Credit Agreement dated as of July 31, 1995, among the registrant,
Morrison Knudsen Corporation, an Ohio corporation and a wholly owned
subsidiary of registrant, the banks and other financial institutions
named on Schedule A therein ("Lenders"), Mellon Bank, N.A., as
administrative agent for the Lenders, and Mellon Bank, N.A. and Bank of
America National Trust and Savings Association as coagents for the
Lenders (filed as Exhibit 4.2 to Form 8-K Current Report dated October
17, 1995 and incorporated herein by reference.)
4.16* Second Amendment dated as of January 18, 1996 to the Amended and
Restated Credit Agreement dated as of July 31, 1995, among the
registrant, Morrison Knudsen Corporation, an Ohio corporation and a
wholly owned subsidiary of registrant, the banks and other financial
institutions named on Schedule A therein ("Lenders"), Mellon Bank, N.A.,
as administrative agent for the Lenders, and Mellon Bank, N.A. and Bank
of America National Trust and Savings Association as coagents for the
Lenders.
4.17* Third Amendment dated as of March 31, 1996 to the Amended and Restated
Credit Agreement dated as of July 31, 1995, among the registrant,
Morrison Knudsen Corporation, an Ohio corporation and a wholly owned
subsidiary of registrant, the banks and other financial institutions
named on Schedule A therein ("Lenders"), Mellon Bank, N.A., as
administrative agent for the Lenders, and Mellon Bank, N.A. and Bank of
America National Trust and Savings Association as coagents for the
Lenders
4.18 Reimbursement Agreement dated as of October 10, 1995, among the
registrant, Morrison Knudsen Corporation, an Ohio Corporation and a
wholly owned subsidiary of registrant, and each of the affiliates of the
registrant listed on the signature pages thereof, to and for the benefit
of Fidelity and Deposit Company of Maryland (filed as Exhibit 4.3 to
Form 8-K Current Report dated October 17, 1995 and incorporated herein
by reference.)
4.19 Guaranty dated as of October 10, 1995 by Morrison Knudsen Corporation,
an Ohio corporation and a wholly owned subsidiary of registrant, in
favor of Bank of America National Trust and Savings Association, as
Metra Agent, guarantying the obligations of American Passenger Rail Car
Company, L.L.C. under that certain Revolving Credit Agreement dated as
of October 10, 1995 among American Passenger Rail Car Company, L.L.C.,
Bank of America National Trust and Savings Association and the Lenders
identified therein (filed as Exhibit 4.4 to Form 8-K Current Report
dated October 17, 1995 and incorporated herein by reference.)
E-2
<PAGE>
Exhibit
Number Exhibits
- ------ --------
4.20 New Bonds Agreement dated as of October 10, 1995, by and among the
registrant, Fidelity and Deposit Company of Maryland, Morrison Knudsen
Corporation, an Ohio corporation and a wholly owned subsidiary of
registrant, and the entities listed on Annex A thereto (filed as Exhibit
4.5 to Form 8-K Current Report dated October 17, 1995 and incorporated
herein by reference.)
4.21* Amendment dated as of March 29, 1996 to the New Bonds Agreement dated as
of October 10, 1995, by and among the registrant, Fidelity and Deposit
Company of Maryland, Morrison Knudsen Corporation, an Ohio corporation
and a wholly owned subsidiary of registrant, and the entities listed on
Annex A thereto.
4.22 The registrant agrees to provide the Securities and Exchange Commission,
upon request, with copies of instruments defining the rights of holders
of other long-term debt of the registrant.
10.1 Form of Guaranty by the registrant, as Guarantor, in favor of Morgan
Guaranty Trust Company of New York, as Trustee (filed as Exhibit 4.2 to
Amendment No. 1 to Form S-3 Registration Statement No. 33-50046 filed on
October 30, 1992 and incorporated herein by reference.)
10.2 Form of Indenture of Trust between the City of San Diego and Morgan
Guaranty Trust Company of New York, as Trustee (filed as Exhibit 4.3 to
Amendment No. 1 to Form S-3 Registration Statement No. 33-50046 filed on
October 30, 1992 and incorporated herein by reference.)
10.3 Form of Loan Agreement between the City of San Diego and National Steel
and Shipbuilding Company (filed as Exhibit 4.4 to Amendment No. 1 to
Form S-3 Registration Statement No. 33-50046 filed on October 30, 1992
and incorporated herein by reference.)
10.4 Transfer Agreement between the registrant and MK Rail Corporation (filed
as Exhibit 10.4 to Form 10-Q Quarterly Report for quarter ended June 30,
1994 and incorporated herein by reference.)
10.5 Environmental Liability Transfer Agreement between the registrant and MK
Rail Corporation (filed as Exhibit 10.5 to Form 10-Q Quarterly Report
for quarter ended June 30, 1994 and incorporated herein by reference.)
10.6 Tax Matters Agreement between the registrant and MK Rail Corporation
(filed as Exhibit 10.6 to Form 10-Q Quarterly Report for quarter ended
June 30, 1994 and incorporated herein by reference.)
10.7 Employee Transfer and Benefits Agreement between the registrant and MK
Rail Corporation (filed as Exhibit 10.7 to Form 10-Q Quarterly Report
for quarter ended June 30, 1994 and incorporated herein by reference.)
10.8 Indemnification Agreement dated October 20, 1994 between Morrison
Knudsen Corporation, an Ohio corporation, and MK Rail Corporation (filed
as Exhibit 10.1 to Form 10-Q Quarterly Report for quarter ended
September 30, 1994 and incorporated herein by reference.)
10.9 The registrant's Global Settlement Agreement dated as of June 15, 1995
with MK Rail Corporation (filed as Exhibit 10.10 to Form 10-K Annual
Report for year ended December 31, 1994 and incorporated herein by
reference.)
10.10 Form of Note Agreement between the registrant and MK Rail Corporation
(filed as Exhibit 10.11 to Form 10-K Annual Report for year ended
December 31, 1994 and incorporated herein by reference.)
10.11 Form of Mutual Release between the registrant and MK Rail Corporation
(filed as Exhibit 10.12 to Form 10-K Annual Report for year ended
December 31, 1994 and incorporated herein by reference.)
10.12 Form of Indemnification Agreement between the registrant and MK Rail
Corporation (filed as Exhibit 10.13 to Form 10-K Annual Report for year
ended December 31, 1994 and incorporated herein by reference.)
10.13 The registrant's Share Purchase Agreement dated as of June 15, 1995 with
MK Rail Corporation (filed as Exhibit 10.14 to Form 10-K Annual Report
for year ended December 31, 1994 and incorporated herein by reference.)
10.14 Shareholders Agreement dated December 18, 1993 among Morrison Knudsen
BV, a wholly owned subsidiary of the registrant, Lambique Beheer BV and
Ergon Overseas Holdings Limited (filed as Exhibit 10.15 to Form 10-K
Annual Report for year ended December 31, 1994 and incorporated herein
by reference.) [Subject to Freedom of Information Act request for
confidential treatment.]
10.15 The registrant's Agreement of Indemnity dated July 1, 1992 with Fidelity
and Deposit Company of Maryland and Amendment thereto dated March 3,
1995 (filed as Exhibit 10.16 to Form 10-K Annual Report for year ended
December 31, 1994 and incorporated herein by reference.)
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<PAGE>
Exhibit
Number Exhibits
- ------ --------
10.16* Amendment dated September 21, 1995 to the registrant's Agreement of
Indemnity dated July 1, 1992, as amended, with Fidelity and Deposit
Company of Maryland.
10.17 Agreement of Indemnity dated February 1, 1995 between MK Rail
Corporation and Fidelity and Deposit Company of Maryland (filed as
Exhibit 10.17 to Form 10-K Annual Report for year ended December 31,
1994 and incorporated herein by reference.)
10.18 Stock Purchase Agreement dated as of May 12, 1995 between the registrant
and Leucadia National Corporation, as amended by Amendment No. 1 to
Stock Purchase Agreement dated as of May 17, 1995, Amendment No. 2 to
Stock Purchase Agreement dated as of May 22, 1995, and Amendment No. 3
to Stock Purchase Agreement dated as of May 24, 1995 (filed as Exhibit
10.18 to Form 10-K Annual Report for year ended December 31, 1994 and
incorporated herein by reference.)
10.19 Stock Purchase Agreement dated as of June 2, 1995 between the registrant
and Western Acquisition Corp (filed as Exhibit 10.19 to Form 10-K Annual
Report for year ended December 31, 1994 and incorporated herein by
reference.)
10.20 The registrant's Forbearance Agreement dated as of June 30, 1995, with
Mellon Bank, N.A., United States National Bank of Oregon and Emkay
Development Company, Inc., a wholly owned subsidiary of registrant
(filed as Exhibit 10.1 to Form 10-Q Quarterly Report for quarter ended
June 30, 1995 and incorporated herein by reference.)
10.21 Asset Purchase Agreement dated as of October 10, 1995 by and among the
registrant, American Passenger Rail Car Company, L.L.C., Morrison
Knudsen Corporation, an Ohio corporation and a wholly owned subsidiary
of registrant, and the entities listed on Schedule 1 thereto (filed as
Exhibit 10.1 to Form 8-K Current Report dated October 17, 1995 and
incorporated herein by reference.)
10.22 Stock Purchase Agreement dated as of September 21, 1995, by and between
the registrant, Morrison Knudsen Corporation, an Ohio corporation and a
wholly owned subsidiary of registrant, and Tutor-Saliba Corporation, a
California corporation (filed as Exhibit 10.2 to Form 8-K Current Report
dated October 17, 1995 and incorporated herein by reference.)
10.23* The registrant's Withdrawal Agreement dated as of March 29, 1996
relating to the Strait Crossing Joint Venture and Strait Crossing
Development, Inc.
10.24* The registrant's news release dated March 22, 1996 in connection with
the registrant's sale of all of its shares in McConnell Dowell
Corporation Limited.
10.25 The registrant's Securities Litigation Memorandum of Understanding
between Plaintiffs and the registrant filed as Exhibit 10.1 to Form 8-K
Current Report dated September 20, 1995 and incorporated herein by
reference.)
10.26 The registrant's Securities Litigation Memorandum of Understanding
between Plaintiffs and the Individual Defendants (filed as Exhibit 10.2
to Form 8-K Current Report dated September 20, 1995 and incorporated
herein by reference.)
10.27 The registrant's Derivative Litigation Memorandum of Understanding
(filed as Exhibit 10.3 to Form 8-K Current Report dated September 20,
1995 and incorporated herein by reference.)
10.28 The MK Rail Corporation Securities Litigation Memorandum of
Understanding among Plaintiffs, the Underwriter Defendants, MK Rail
Corporation and the registrant (filed as Exhibit 10.4 to Form 8-K
Current Report dated September 20, 1995 and incorporated herein by
reference.)
10.29 The MK Rail Corporation Securities Litigation Memorandum of
Understanding between Plaintiffs and the Individual Defendants (filed as
Exhibit 10.5 to Form 8-K Current Report dated September 20, 1995 and
incorporated herein by reference.)
10.30 The MK Rail Corporation Derivative Litigation Memorandum of
Understanding (filed as Exhibit 10.6 to Form 8-K Current Report dated
September 20, 1995 and incorporated herein by reference.)
10.31 Separation Agreement dated September 20, 1995 between the registrant and
William J. Agee (filed as Exhibit 10.7 to Form 8-K Current Report dated
September 20, 1995 and incorporated herein by reference.)
10.32* The registrant's Securities Litigation Stipulation of Settlement dated
as of 9/11/95.
E-4
<PAGE>
Exhibit
Number Exhibits
- ------ --------
10.33* The registrant's Securities Litigation Final Judgement and Order dated
as of 12/1/95.
10.34* The registrant's Securities Litigation Stipulation of Settlement
relating to Deloitte & Touche LLP dated as of 10/1/95.
10.35* The registrant's Securities Litigation Final Judgement and Order
relating to Deloitte & Touche LLP dated as of 12/1/95.
10.36* The registrant's Derivative Litigation Stipulation of Settlement dated
as of 1/26/96.
10.37* The registrant's Derivative Litigation Stipulation of Settlement
relating to State Board of Administration of Florida v. Morrison Knudsen
Corporation, et al dated as of 11/95.
10.38* The registrant's Settlement Agreement and Release relating to Theodore
E. Nelson v. Morrison Knudsen Corporation dated as of 1/1/96.
10.39* MK Rail Corporation Securities Litigation Stipulation of Settlement
dated as of 12/22/95.
10.40* MK Rail Corporation Securities Litigation Final Judgement and Order
dated as of 3/29/96.
10.41* MK Rail Corporation Derivative Litigation Stipulation of Settlement
dated as of 3/12/96.
Management contract or compensatory plan or arrangement which is
separately identified in accordance with Item 14(a) (3) of Form 10-K.
10.42 The registrant's Executive Incentive Plans for the years 1972
through 1981, inclusive (filed as Exhibit 10.2 to Form 10-K Annual
Report for year ended December 31, 1990 and incorporated herein by
reference.)
10.43 The registrant's 1982 Executive Incentive Plan, as amended (filed
as Exhibit 10.7 to Form 10-K Annual Report for year ended December
31, 1993 and incorporated herein by reference.)
10.44 A description of the registrant's Key Executive Disability
Insurance Plan (filed as Exhibit 10.12 to Form 10-K Annual Report
for year ended December 31, 1992 and incorporated herein by
reference.)
10.45 The registrant's Key Executive Life Insurance Plan (filed as
Exhibit 10.13 to Form 10-K Annual Report for year ended December
31, 1992 and incorporated herein by reference.)
10.46 The registrant's Key Executive Long-Term Incentive Plan (filed as
Exhibit 10.2 to Form 10-Q Quarterly Report for quarter ended March
31, 1991 and incorporated herein by reference.)
10.47 The registrant's Long-Term Performance Compensation Benefit Plan
(filed as Exhibit 10.8 to Form 10-K Annual Report for year ended
December 31, 1991 and incorporated herein by reference.)
10.48 The registrant's Long-Term Incentive Plan for Corporate Executives
(filed as Exhibit 10.3 to Form 10-Q Quarterly Report for quarter
ended March 31, 1994 and incorporated herein by reference.)
10.49 The registrant's Long-Term Incentive Plan for the Engineering and
Construction Group (filed as Exhibit 10.4 to Form 10-Q Quarterly
Report for quarter ended March 31, 1994 and incorporated herein by
reference.)
10.50* The registrant's Long-Term Incentive Plan for the Mining Group.
10.51 The registrant's Stock Incentive Plan, as amended (filed as Exhibit
10.16 to Form 10K Annual Report for year ended December 31, 1992
and incorporated herein by reference.)
10.52 The registrant's Chief Executive Officer Incentive Plan (filed as
Appendix I to Proxy Statement dated April 4, 1994 and incorporated
herein by reference.)
10.53 The registrant's Stock Compensation Plan (filed as Appendix II to
Proxy Statement dated April 4, 1994 and incorporated herein by
reference.)
10.54 The registrant's Non-Employee Directors' Deferred Compensation
Plan, as amended (filed as Exhibit 10.31 to Form 10-K Annual Report
for year ended December 31, 1994 and incorporated herein by
reference.)
10.55 The registrant's Retirement Plan for Non-Employee Directors, as
amended (filed as Exhibit 10.22 to Form 10-K Annual Report for year
ended December 31, 1992 and incorporated herein by reference.)
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<PAGE>
Exhibit
Number Exhibits
- ------ --------
10.56 The registrant's Stock Option Plan for Non-Employee Directors, as
amended (filed as Exhibit 10.23 to Form 10-K Annual Report for year
ended December 31, 1992 and incorporated herein by reference.)
10.57* The registrant's Amended and Restated Key Employee Retention
Incentive Plan adopted on April 10, 1996.
10.58 The registrant's Retention Severance Pay Plan adopted on June 30,
1995 (filed as Exhibit 10.3 to Form 10-Q Quarterly Report for
quarter ended June 30, 1995 and incorporated herein by reference.)
10.59* The registrant's First Amendment to Retention Severance Pay Plan
adopted on April 10, 1996.
10.60* The registrant's 1996 Retention Severance Pay Plan adopted on April
10, 1996.
10.61* The form of registrant's Restricted Stock Agreement relating to
restricted stock granted to certain employees on June 30, 1995
under the registrant's Stock Compensation Plan in connection with
the registrant's financial restructuring. [A schedule listing the
individuals with whom the registrant has entered into such
agreements is filed herewith.]
10.62* The form of registrant's Revised Employee Benefit Agreement entered
into with certain key employees in connection with the registrant's
financial restructuring. [A schedule listing the individuals with
whom the registrant has entered into such agreements is filed
herewith.]
10.63* The form of registrant's Employment Agreement relating to extended
severance benefits for certain key employees in connection with the
registrant's financial restructuring. [A schedule listing the
individuals with whom the registrant has entered into such
agreements is filed herewith.]
10.64 Form of registrant's Indemnification Agreement (filed as Exhibit B
to Proxy Statement dated March 23, 1987, and incorporated herein by
reference.) [A schedule listing the individuals with whom the
registrant has entered into such agreements is filed herewith.]
10.65 Form of registrant's Supplemental Retirement Benefit Agreement
(filed as Exhibit 10.6 to Form 10-K Annual Report for year ended
December 31, 1988 and incorporated herein by reference.) [A
schedule listing the individuals with whom the registrant has
entered into such agreements is filed herewith.]
10.66 The registrant's employment agreement with Robert S. Miller, Jr.
dated as of April 1, 1995 (filed as Exhibit 10.43 to Form 10-K
Annual Report for year ended December 31, 1994 and incorporated
herein by reference.)
10.67* The registrant's employment agreement with Robert A. Tinstman dated
as of January 1, 1993 and form of amendment thereto approved on
April 2, 1996.
10.68* The registrant's employment agreement with Stephen G. Hanks dated
as of January 1, 1993 and form of amendment thereto approved on
April 2, 1996.
10.69 The registrant's employment agreement with Denis M. Slavich dated
as of March 9, 1995 (filed as Exhibit 10.44 to Form 10-K Annual
Report for year ended December 31, 1994 and incorporated herein by
reference.)
10.70* The registrant's employment agreement with Thomas F. Kealey dated
as of July 11, 1994.
10.71* The registrant's employment agreement with Thomas H. Zarges dated
as of January 1, 1994.
10.72* The registrant's employment agreement with Larry E. Salci dated as
of March 22, 1994 and amendment thereto dated April 19, 1995.
21.* Subsidiaries of the registrant.
23.* Consent of Deloitte & Touche, independent auditors.
24.* Powers of Attorney.
27.* Financial Data Schedule.
E-6
