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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
DATE OF REPORT: JANUARY 7, 1997
MORRISON KNUDSEN CORPORATION
(formerly Washington Construction Group, Inc.)
Commission File Number 1-12054
A Delaware corporation
IRS Employer Identification No. 33-0565601
MORRISON KNUDSEN PLAZA, BOISE, IDAHO 83729
208/386-5000
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ITEM 5. OTHER MATERIAL IMPORTANT EVENTS.
The Company has prepared for informational purposes an audited consolidated
balance sheet as of September 11, 1996, the date on which Morrison Knudsen
Corporation, a Delaware corporation (Commission File No. 1-8889), merged with
and into the Company, which audited consolidated balance sheet is filed as
Exhibit 99.1 hereto and incorporated herein by this reference.
SIGNATURE
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
January 7, 1997 By: /s/ Stephen G. Hanks
--------------------------------
Stephen G. Hanks
Executive Vice President, Chief
Legal Officer and Acting Chief
Financial Officer
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EXHIBIT 99.1
MORRISON KNUDSEN CORPORATION
(FORMERLY WASHINGTON CONSTRUCTION GROUP, INC.)
CONSOLIDATED BALANCE SHEET
AT SEPTEMBER 11, 1996
AND
REPORT OF INDEPENDENT ACCOUNTANTS
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MORRISON KNUDSEN CORPORATION
(FORMERLY WASHINGTON CONSTRUCTION GROUP, INC.)
INDEX
Report of Independent Accountants.................................... 1
Consolidated Balance Sheet........................................... 2 - 3
Notes to Consolidated Balance Sheet.................................. 4 - 14
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Morrison Knudsen Corporation
We have audited the accompanying consolidated balance sheet of Morrison Knudsen
Corporation as of September 11, 1996. This consolidated balance sheet is the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on this consolidated balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated balance sheet. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall consolidated balance sheet
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated balance sheet referred to above presents
fairly, in all material respects, the consolidated financial position of
Morrison Knudsen Corporation as of September 11, 1996 in conformity with
generally accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
Boise, Idaho
January 3, 1997
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MORRISON KNUDSEN CORPORATION
(FORMERLY WASHINGTON CONSTRUCTION GROUP, INC.)
CONSOLIDATED BALANCE SHEET
(THOUSANDS OF DOLLARS EXCEPT SHARE DATA)
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SEPTEMBER 11, 1996
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ASSETS
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CURRENT ASSETS
Cash and cash equivalents $ 81,433
Accounts receivable, including retentions of $28,320 225,136
Unbilled receivables 103,686
Notes receivable 12,896
Investments in and advances to construction joint ventures 21,172
Deferred income taxes 31,256
Other 19,889
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Total current assets 495,468
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INVESTMENTS AND OTHER ASSETS
Deferred income taxes 36,580
Securities available for sale, at fair value 28,817
Assets held for sale 18,896
Investments in mining joint ventures 55,161
Cost in excess of net assets acquired,
net of accumulated amortization of $1,408 143,858
Other 7,364
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Total investments and other assets 290,676
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PROPERTY AND EQUIPMENT, AT COST
Land 7,110
Buildings and equipment 55,014
Construction equipment 177,169
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Total property and equipment 239,293
LESS ACCUMULATED DEPRECIATION (163,156)
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Property and equipment, net 76,137
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Total assets $862,281
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
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LIABILITIES AND STOCKHOLDERS' EQUITY
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CURRENT LIABILITIES
Short-term debt $ 35,158
Accounts payable 62,436
Subcontracts payable, including retentions of $31,424 89,928
Accrued salaries, wages and benefits 47,905
Accumulated provisions for anticipated losses on
uncompleted contracts 24,409
Other accrued liabilities 105,888
Billings in excess of cost and earnings on uncompleted contracts 49,274
Advances from customers 13,661
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Total current liabilities 428,659
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NON-CURRENT LIABILITIES
Deferred compensation 15,636
Accrued workers' compensation insurance 27,342
Accrued postretirement benefit obligation 53,252
Accrued pension benefit obligation 4,861
Accrued environmental remediation obligations 8,972
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Total non-current liabilities 110,063
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COMMITMENTS AND CONTINGENCIES (Note 10).
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REDEEMABLE PREFERRED STOCK, issued 1,800,000 shares 18,000
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STOCKHOLDERS' EQUITY
Preferred stock, authorized 10,000,000 shares,
issued 1,800,000 shares of Series A redeemable reported above
Common stock, par value $.01, authorized 100,000,000 shares,
issued and outstanding 53,809,272 shares 538
Capital in excess of par value 242,755
Stock purchase warrants outstanding 6,564
Retained earnings 55,702
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Total stockholders' equity 305,559
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Total liabilities and stockholders' equity $862,281
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MORRISON KNUDSEN CORPORATION
(FORMERLY WASHINGTON CONSTRUCTION GROUP, INC.)
NOTES TO CONSOLIDATED BALANCE SHEET
(THOUSANDS OF DOLLARS EXCEPT SHARE DATA)
1. MERGER WITH MORRISON KNUDSEN CORPORATION AND BASIS OF PRESENTATION
On September 11, 1996, Morrison Knudsen Corporation, a Delaware corporation,
("Old MK") merged with and into Washington Construction Group, Inc. (the
"Corporation") pursuant to the Restructuring and Merger Agreement, dated May 28,
1996 (the "Merger Agreement"), by and between the Corporation and Old MK, with
the Corporation being the surviving corporation in the merger (the "Merger") and
being renamed Morrison Knudsen Corporation.
The Merger was an integral part of the reorganization of Old MK pursuant to a
plan of reorganization (the "Plan") filed by Old MK in the United States
Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). The Plan
was confirmed by the Bankruptcy Court on August 26, 1996 (the "Confirmation
Date") and became effective concurrently with the Merger on September 11, 1996
(the "Effective Date").
On the Effective Date, substantially all of Old MK's senior debt obligations
were discharged and all of Old MK's outstanding common stock was cancelled.
Pursuant to the Plan, certain creditors of Old MK received or will receive
distributions consisting of (i) $47,930 in cash (including $34,630 in proceeds
from the cancellation of the promissory note of MK Rail Corporation ("MK Rail")
owned by Old MK and $13,300 of cash of the Corporation), (ii) all of the common
stock of MK Rail owned by Old MK, (iii) 24,161,421 newly issued shares of common
stock of the Corporation, (iv) 1,800,000 newly issued shares of preferred stock
of the Corporation entitling the holders thereof to receive up to $18,000 of
certain tax refunds that may be received by the Corporation as successor to Old
MK, and (v) the proceeds of exercises of the rights ("Rights") described below
(in lieu of a portion of the distributions described in clauses (i) through (iv)
of this sentence).
Pursuant to the Plan, each holder of record of shares of Old MK common stock as
of the close of business on the Confirmation Date (including shares held for
distribution to certain securities litigation plaintiffs) received, on the
Effective Date, a number of Rights, equal to the number of shares of Old MK
common stock held by such holder, to purchase a portion of the consideration
otherwise distributable under the Plan to certain of Old MK's creditors as
described above and will receive, following proper surrender of the certificates
representing such holder's shares of Old MK common stock in accordance with the
Plan, a pro rata share of warrants exercisable during a term of six and one-half
years to purchase from the Corporation an aggregate of 2,765,000 shares of the
Corporation's common stock at an exercise price of $12.00 per warrant (subject
to adjustment).
The total purchase price paid by the Corporation for the acquired net assets of
Old MK has been estimated to be $203,736, consisting of (i) $13,300 of cash
provided by the Corporation, (ii) $186,127 of equity issued by the Corporation
and (iii) $4,309 of estimated costs of acquisition. The acquisition was
accounted for using the purchase method of accounting. Accordingly, the purchase
price has been allocated to the assets acquired and liabilities assumed based on
estimated fair market values at September 11, 1996, the date of acquisition. The
cost in excess of the net assets acquired was $127,476, which is being
amortized over 40 years using the straight-line method. The allocations were
based on preliminary estimates which are subject to change based on resolution
of certain contingencies.
PURCHASE PRICE ALLOCATION SEPTEMBER 11, 1996
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Net working capital $ 38,815
Investments and other assets 136,778
Cost in excess of net assets acquired 127,476
Property and equipment 28,730
Non-current liabilities (128,063)
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Purchase price $203,736
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2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated balance sheet includes the
accounts of the Corporation and all of its majority-owned subsidiaries.
Investments in 20%- to 50%-owned companies and all joint ventures are accounted
for by the equity method. Intercompany accounts and transactions have been
eliminated.
BUSINESS: The Corporation engages in all types of general construction work
including industrial, heavy civil and marine, mechanical, pipeline, buildings
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 also provides mining services throughout the world.
CONSTRUCTION CONTRACTS: 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. Engineering
and construction management 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 recognized when determinable. Claims for additional contract
revenue in excess of original contract price are generally not recognized until
settled.
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.
USE OF ESTIMATES: The preparation of the Corporation's consolidated balance
sheet, 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 date. Actual results could differ from those
estimates.
UNBILLED RECEIVABLES: Unbilled receivables at September 11, 1996 represent
amounts (i) arising from the use of the percentage-of-completion method of
accounting, (ii) to be billed under cost reimbursement-type contracts, or (iii)
arising from routine lags in billing. Substantially all the unbilled receivables
at September 11, 1996, are expected to be billed and collected within twelve
months.
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
September 11, 1996 include $11,332 of contract retentions, generally payable by
customers on final acceptance, which amounts are not expected to be collected
within twelve months.
Cash advances by customers are non-interest bearing current liabilities until
the contract is substantially or fully completed.
CASH EQUIVALENTS: Cash equivalents consist of investments in highly liquid
securities purchased with original maturities of three months or less.
FINANCIAL INSTRUMENTS: Financial instruments which potentially subject the
Corporation to concentrations of credit risks consist of cash equivalents,
securities available for sale, and accounts receivable and unbilled receivables.
Concentrations of credit risk are limited due to the Corporation's credit
evaluation process. Historically, the Corporation has not required
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collateral and has not incurred any significant credit-related losses. The fair
value approximates the carrying value of financial instruments at September 11,
1996.
COST IN EXCESS OF NET ASSETS ACQUIRED: Cost in excess of net assets acquired in
business acquisitions is amortized on the straight-line method over 40 years.
The Corporation periodically evaluates the existence or extent of an impairment
of the unamortized cost using projected future cash flows expected to be
generated over the remaining lives of each business unit's assets, whenever
events or changes in circumstances indicate the carrying amount may not be
recoverable.
LONG-LIVED ASSETS: Long-lived assets to be held and used are recorded at cost.
Periodically, management reviews long-lived assets and the related identifiable
intangibles for impairment whenever events or changes in circumstances indicate
the carrying amount of an asset may not be recoverable. If, upon evaluation, the
expected future net cash flows from an asset and its disposition are not
sufficient to recover its carrying amount, the carrying amount is adjusted to
the asset's fair value. Whenever the Corporation commits to dispose of
long-lived assets through sale or abandonment, the assets are thereafter
recorded at the lower of cost or fair value, less the cost of disposal.
Depreciation of construction equipment is provided on the straight-line and
accelerated methods over the life of the construction equipment. Depreciation of
buildings and equipment is provided on the straight-line method over the life of
the building and the equipment.
FOREIGN CURRENCY TRANSLATION: The functional currency for the majority of the
Corporation's foreign operations is the applicable local currency. Translation
of assets and liabilities from foreign currencies to U.S. dollars is based on
exchange rates at the balance sheet date. Gains or losses, net of applicable
deferred income taxes, resulting from such translation are deferred as a
separate component of stockholders' equity until disposition or substantial
disposition of the investment in foreign operations.
ENVIRONMENTAL CLEANUP MATTERS: The Corporation expenses environmental
expenditures related to existing conditions resulting from past or current
operations and from which no current or future benefit is discernible. The
Corporation determines its liability on a site by site basis and records a
liability at the time when it is probable and can be reasonably estimated. The
Corporation's estimated liability is reduced to reflect the anticipated
participation of other potentially responsible parties in those instances where
it is probable that such parties are legally responsible and financially capable
of paying their respective shares of the relevant costs. The estimated
liabilities of the Corporation are discounted where appropriate and are not
reduced for possible recoveries from insurance carriers.
INCOME TAXES: Deferred income tax assets and liabilities are recognized for the
effects of temporary differences between the 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. A valuation allowance is
established when it is more likely than not that net deferred tax assets will
not be realized.
3. STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued Statement No. 123 ACCOUNTING
FOR STOCK-BASED COMPENSATION ("FAS 123"). The requirements of FAS 123 are
effective December 1, 1996. 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 ("APB 25").
The Corporation has elected to continue accounting for stock-based compensation
in accordance with APB 25, and to make pro forma disclosures of net income and
income per share beginning in fiscal 1997 as if the fair value based method of
accounting had been applied.
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4. SECURITIES AVAILABLE FOR SALE
At September 11, 1996, securities available for sale consisted primarily of
foreign government bonds held to meet liquidity needs of the Corporation's
self-insured risk management programs, principally workers' compensation
liabilities.
MATURITIES OF DEBT SECURITIES SEPTEMBER 11, 1996
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DUE IN FISCAL YEAR COST AND FAIR VALUE
- --------------------------------------------------------------------------------
1997 $ 5,859
1998 - 2002 19,472
2003 - 2007 3,486
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Totals $28,817
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The Corporation self-insures for additional workers' compensation losses through
its captive insurance subsidiary and reinsurance agreements with outside
insurers.
5. JOINT VENTURES
CONSTRUCTION JOINT VENTURES: Construction joint ventures are generally created
for the sole purpose of bidding on, negotiating for, and completing one specific
project. The number of construction joint ventures in which the Corporation
participates and the size, scope and duration of the projects vary between
periods.
FINANCIAL POSITION OF THE CONSTRUCTION JOINT VENTURES SEPTEMBER 11, 1996
- --------------------------------------------------------------------------------
Current assets $208,243
Property and equipment, net 7,573
Current liabilities (176,992)
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Net assets $ 38,824
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MINING JOINT VENTURES: At September 11, 1996, the Corporation had ownership
interests in two mining joint ventures, Mitteldeutsche Braunkohlengesellschaft
mbH of 33% and Westmoreland Resources, Inc. ("Westmoreland Resources") of 24%.
On September 30, 1996, the Corporation sold 4% of its ownership interest to
Westmoreland Coal Company ("Westmoreland Coal") reducing its ownership interest
in Westmoreland Resources to 20%. The Corporation provides contract mining
services to these joint ventures.
FINANCIAL POSITION OF THE MINING JOINT VENTURES SEPTEMBER 11, 1996
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Current assets $ 383,349
Non-current assets 148,452
Property and equipment, net 499,157
Current liabilities (122,126)
Long-term debt (194,770)
Other non-current liabilities (535,860)
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Net assets $ 178,202
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On December 23, 1996, Westmoreland Coal and four subsidiaries, including
Westmoreland Resources, filed for protection under Chapter 11 of the Federal
Bankruptcy Code. At November 30, 1996, the carrying amount of the Corporation's
ownership interest in Westmoreland Resources was $5,186. The Corporation cannot
presently predict with any certainty
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to what extent, if any, its investment will ultimately be impaired, but any loss
is not expected to have a material adverse effect on the financial condition,
results of operations and cash flows of the Corporation.
6. ASSETS HELD FOR SALE
At September 11, 1996, assets held for sale are stated at the lower of cost or
estimated net realizable value and are comprised of (i) assets of a non-core
subsidiary with a carrying amount of $10,986, (ii) land in a real estate
development project with a carrying amount of $2,666 and (iii) a 29.5% stock
ownership interest in a foreign bank with a carrying amount of $5,244.
7. SHORT-TERM DEBT AND CREDIT ARRANGEMENTS
SHORT-TERM DEBT SEPTEMBER 11, 1996
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Note payable to bank, interest at 8.2% $ 5,158
Borrowings under revolving credit facility, interest at 8.25% 30,000
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Short-term debt $35,158
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The $30,000 borrowings at September 11, 1996 was paid in full by September 23,
1996 and the $5,158 note payable to bank was paid in full on November 27, 1996.
Under a four-year revolving credit facility which was superseded by a new credit
agreement on October 31, 1996, the Corporation could borrow the lesser of
$60,000 or the Corporation's "borrowing base", which exceeded the $60,000 loan
limit at September 11, 1996. Outstanding borrowings under the credit facility
were collateralized by the stock and assets of the Corporation's subsidiaries.
The credit facility allowed borrowings at the London Interbank Offering Rate
(LIBOR) + 1% or prime, required that certain financial ratios be maintained and
placed restrictions on additional debt financing, dividends, guaranties and
investments. The Corporation was in compliance with the covenants at September
11, 1996.
NEW REVOLVING CREDIT AGREEMENT: On October 31, 1996, the Corporation obtained
from the Bank of Montreal a new five-year, $200,000 revolving loan and letter
of credit facility (the "Facility"). Revolving loan borrowings under the
Facility are limited to $125,000. At October 31, 1997, and at the end of each
year thereafter, subject to the approval of the Corporation and the bank, the
Facility may be extended by an additional year. In connection with the Facility,
the Corporation paid to the bank an underwriting fee of $1,100, and is required
to pay commitment fees on the unused portion of the Facility and letter of
credit fees upon issuance of letters of credit.
The Facility is collateralized by substantially all of the assets of Morrison
Knudsen Corporation and certain of its material domestic subsidiaries. The
Facility includes a provision releasing such collateral at such time as the
Corporation obtains an investment grade credit rating and contains covenants
requiring the maintenance of financial ratios (such as debt service coverage and
debt to total capitalization) and minimum levels of net worth. In addition, the
Facility agreement places limitations on, among other things, additional
indebtedness, investments and loans guarantees.
The Facility agreement provides for revolving loans bearing interest at (i) the
applicable LIBOR rate plus an additional margin or (ii) the base rate (the
higher of (a) prime commercial rate or (b) the Federal Funds Rate plus 1/2%)
plus an additional margin. Both the applicable base rate and LIBOR rate
additional margins are determined by a financial ratio of the Corporation's
funded debt to earnings before interest, taxes, depreciation and amortization,
and could range from 3/4% to 1 1/8% for the LIBOR rate and zero to 1/4% for the
base rate. Interest is payable quarterly in arrears.
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8. TAXES ON INCOME
DEFERRED TAX ASSETS AND LIABILITIES SEPTEMBER 11, 1996
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ASSETS LIABILITIES TOTAL
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Employee benefit plans $ 35,354 $ -- $ 35,354
Provisions for estimated losses 63,358 -- 63,358
Revenue recognition 5,889 -- 5,889
Alternative minimum tax 13,902 -- 13,902
Joint ventures 5,521 -- 5,521
Depreciation -- (3,813) (3,813)
Basis difference in affiliates -- (9,036) (9,036)
Self-insurance liability 23,533 -- 23,533
Net operating loss carryforwards 83,474 -- 83,474
Valuation allowance (126,878) -- (126,878)
Other, net -- (23,468) (23,468)
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Total deferred tax assets (liabilities) $104,153 $(36,317) $ 67,836
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At September 11, 1996, the Corporation had consolidated regular tax net
operating loss carryforwards for federal, state and foreign tax purposes of
approximately $205,300, $143,500 and $1,200, respectively, which expire in the
years 2000 through 2012. In addition, the Corporation had alternative minimum
tax credits of $13,902 at September 11, 1996 which carry forward indefinitely,
and general business credit and foreign tax credit carryforwards of
approximately $1,900 and $1,070 respectively, which expire in the years 1998
through 2007. The ability of the Corporation to use the net operating loss
carryforwards and tax credits prior to their expiration is limited. The
valuation allowance of $126,878 reduces these net operating loss carryforwards
and other deferred tax assets to a level which, more likely than not, will be
realized based on future taxable income. The valuation allowance is subject to
change based on the occurrence of future events, and any such change could be
material. As of September 11, 1996, U.S. Federal income tax returns for the open
years 1987 through 1994 were in the process of examination. All years prior to
1987 are closed to further examination. The Corporation believes that adequate
provision has been made for possible assessments of additional taxes.
9. BENEFIT PLANS
PENSION PLANS: The Corporation sponsors a defined benefit pension plan under
which benefits have been frozen and no further benefits have been accrued since
1991. Management expects to terminate sponsorship of the plan and effect a
settlement of the plan's accumulated benefit obligation through lump-sum cash
payments and the purchase of nonparticipating annuities. Accordingly, the
accumulated benefit obligation at September 11, 1996 reflects the Corporation's
estimate of the ultimate termination benefits to be settled with the cash
proceeds from liquidation of the plan's assets supplemented by additional funds
from the Corporation's cash resources as necessary at the date of termination.
Pending such settlement, vesting of benefits continues and the plan holds
assets, pays benefits and receives additional employer contributions.
FUNDED STATUS OF THE PLAN SEPTEMBER 11, 1996
- --------------------------------------------------------------------------------
Accumulated benefit obligation $ 55,279
Plan assets at fair value (50,418)
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Accrued pension benefit obligation $ 4,861
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At September 11, 1996, approximately 50% of plan assets were invested in equity
securities, 44% in fixed-income (corporate and U.S. government) securities and
6% in cash equivalents. The discount rate used in determining the actuarial
present value of the accumulated benefit obligation was 7.25%. The expected rate
of return on plan assets was 8.0%.
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. Under the Employee Retirement Income Security Act, 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. 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 $7,000. The Corporation has long maintained policies and
procedures which have successfully avoided withdrawal liabilities under
construction industry multiemployer pension plans. Accordingly, no payments
have been required and no accruals have been made.
DEFERRED COMPENSATION: The Corporation has unfunded supplemental retirement
income arrangements for former employees and an unfunded defined benefit pension
plan for former non-employee directors with an accumulated benefit obligation
and accrued liability at September 11, 1996 of $14,000. The discount rate used
in determining the actuarial present value of the accumulated benefit obligation
was 7.5%.
POSTRETIREMENT HEALTH CARE PLAN: Employees who retire after July 1, 1993 are
not eligible for postretirement health care benefits. The Corporation has an
unfunded plan to provide certain health care benefits for employees who retired
before July 1, 1993 including their surviving spouses and dependent children.
The accumulated postretirement benefit obligation ("APBO") and accrued
liability at September 11, 1996 was $53,252. The APBO was determined using the
projected unit credit method and an assumed discount rate of 7.5%. In addition,
an annual rate increase of 9.5% in the per capita cost of health care benefits
was assumed, gradually declining to 5.5% in the year 2008 and continuing
thereafter over the projected payout period of the benefits. The health care
cost trend rate assumption has a significant effect on the APBO. For example, a
1% increase in the health care cost trend rate would increase the APBO at
September 11, 1996 by approximately $5,214. In past years, the Corporation has
amended, and it reserves the right to amend or terminate, the postretirement
health care benefits currently provided under the plan and may increase
participants' contributions at any time.
10. COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL MATTERS: The Corporation's contract mining and environmental
remediation services involve risks for which the Corporation could become liable
under federal, state and local environmental laws and regulations, including the
Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA"), which imposes strict, joint and several, retroactive liability upon
parties who are responsible for the cost of environmental remediation under such
Act. Old MK has performed, and the Corporation will continue to perform,
environmental remediation work at Superfund sites as a response action
contractor for the U.S. Environmental Protection Agency (the "EPA") and, as
such, is exempt from liability under any federal law, including CERCLA, for
contribution or indemnification and for death or injury to persons or property
resulting from the release of hazardous substances, unless its conduct was
negligent, grossly negligent, or constitutes intentional misconduct; the
Corporation may, however, be entitled to indemnification from the United States
against any liability arising out of negligent performance of the work. While
the Corporation believes that it is in material compliance with environmental
laws and regulations, a determination that the Corporation is liable under
environmental laws and regulations for the cost of environmental remediation
could have a material adverse effect on the financial position, results of
operations and cash flows of the Corporation. Amendments to, or more stringent
implementation of, current environmental laws and regulations also could have
such adverse effects.
The American Institute of Certified Public Accountants recently issued Statement
of Position ("SOP") 96-1, ENVIRONMENTAL REMEDIATION LIABILITIES, which addresses
specific accounting issues present in the recognition, measurement, display and
disclosure of environmental remediation liabilities. The provisions of SOP 96-1
are effective
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beginning December 1, 1997; however, the Corporation has applied the guidance of
SOP 96-1 in assessing its potential environmental remediation liabilities.
The EPA has notified the Corporation of its potential liability in connection
with hazardous substances generated or disposed of at the Summitville Mine
Superfund Site (the "Site") near Del Norte, Colorado, and regards the
Corporation as a potentially responsible party ("PRP") with respect to the Site.
The EPA has not commenced any litigation or other proceedings against the
Corporation, and the Corporation has had only preliminary discussions with the
EPA regarding the Corporation's potential responsibility with respect to the
Site. However, the EPA has informally advised the Corporation that the EPA does
not believe the Corporation is eligible for a de minimis settlement (as was
offered by the EPA to several PRPs which contributed less than 3% volume and
toxicity of the hazardous substances at the Site).
According to a recently published report, the EPA estimates that the total
remediation costs incurred and to be incurred at the Site will be $120,000. The
EPA has reportedly notified approximately 20 other parties associated with the
Site of their potential liability. The Corporation is not a party to any
agreement regarding an allocation of responsibility among the PRPs (several of
which have entered into de minimis settlements with the EPA) and the EPA has not
made an allocation of responsibility among the PRPs. The Corporation's share,
if any, of the aggregate environmental liability associated with the Site cannot
be estimated at this time and depends upon, among other things, the manner in
which liability may be allocated to or among the Corporation or other PRPs
associated with the Site, the efficacy of any defenses that the Corporation or
such other PRPs may have to any assertion of liability, the willingness and
ability of such other PRPs to discharge such liability as may be allocated to
them and the outcome of any negotiations or settlement discussions between the
Corporation and the EPA and/or such other PRPs. Accordingly, no liability has
been accrued at September 11, 1996.
The Corporation is involved in environmental cleanup activities at four sites
that require cleanup based on environmental pollution, some of which have been
designated as Superfund sites by the EPA. The Corporation has been named as a
PRP at two of the sites. The Corporation estimates a range of possible
remediation costs to be $1,550 to $3,300. The Corporation has accrued an
undiscounted liability at September 11, 1996 of $1,972, which represents the
best estimate available in the circumstances. Liabilities at the Superfund sites
are joint and several; however, the Corporation does not currently anticipate
defaults by other PRPs and has made no accrual therefor.
The Corporation is subject to a Resource Conservation and Recovery Act Part B
Post Closure Permit (the "Permit") issued by the EPA and the Idaho Department of
Health and Welfare, Division of Environmental Quality, relating to the
monitoring and treatment of groundwater contamination on, and adjacent to, Old
MK's former Boise Locomotive facility. The expected aggregate undiscounted
costs to be incurred over the next 25 years, adjusted for inflation at 3% per
annum, is estimated to be $5,100 based on the Permit's Corrective Action Plan,
and $4,400 for contingent additional Permit compliance requirements related to
off-site groundwater contamination. The discounted liability at September 11,
1996, using a discount rate of 6.5%, was $2,100 based on the Permit's Corrective
Action Plan and $1,900 for contingent additional Permit compliance requirements
related to off-site groundwater contamination. The estimated outlays for each of
the five succeeding years from 1996 to 2000 are: $245, $253, $260, $268 and
$317. The Boise locomotive facilities were transferred to Old MK's former
subsidiary, MK Rail, in 1995 and an application to transfer the permit and the
related compliance requirements to MK Rail is pending approval. No additional
liability has been accrued for remediation costs related to the contamination at
the facilities as such costs and the Corporation's share thereof, if any, are
not subject to estimation at this time.
The Corporation has been identified as a PRP and is contingently liable for
remediation liabilities in connection with Old MK's former Transit business
which was disposed of in 1995. The Corporation has agreed to indemnify the buyer
of the Transit business for remediation costs and, accordingly, accrued an
estimated undiscounted liability at September 11, 1996 of $3,000. It is possible
that the ultimate cost, which cannot be determined at this time, could exceed
the Corporation's recorded liability.
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Management believes that the ultimate resolution of these matters could have a
material adverse effect on the Corporation's financial position and could
materially and adversely effect its results of operations and cash flows in one
or more future periods.
LONG-TERM LEASES: Future minimum rental payments under operating leases, some
of which contain renewal or escalation clauses, with remaining noncancelable
terms in excess of one year at September 11, 1996 were as follows:
FISCAL YEAR ENDING NOVEMBER 30, REAL ESTATE EQUIPMENT TOTAL
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1996 $ 2,984 $1,354 $ 4,338
1997 9,609 2,841 12,450
1998 8,057 1,902 9,959
1999 7,323 1,471 8,794
2000 7,985 963 8,948
2001 6,041 -- 6,041
2002 and after 49,695 -- 49,695
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Totals $91,694 $8,531 $100,225
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Administrative offices and engineering facilities in Boise, Idaho, and
Cleveland, Ohio, are rented under long-term, non-cancelable leases expiring in
2004 and 2010, respectively, with aggregate lease obligations of $12,145 for the
Boise and $68,800 for the Cleveland facilities.
LETTERS OF CREDIT AND FINANCIAL GUARANTEES: At September 11, 1996, the
Corporation was contingently liable, in the normal course of business, for
$36,704 related to letters of credit under contract performance obligations to
customers not reflected in the balance sheet at September 11, 1996. In addition,
the Corporation provides off balance sheet guarantees for $14,443 in letters of
credit issued by third parties to meet the reinsurance requirements of the
Corporation's captive insurance subsidiary. Securities held for sale are pledged
as collateral for the $14,443 letters of credit.
In connection with the sale of Old MK's ownership interest of a shipbuilding
subsidiary in 1989, the Corporation has guaranteed $21,000 of the former
subsidiary's port facility bonds until not later than December 1, 2002. The
former subsidiary has collateralized the bonds with certain of its assets and
has paid $1,701 into a sinking fund through September 11, 1996 to repay the
bonds. The Corporation does not anticipate that it will incur losses as a result
of this guarantee.
The Corporation is contingently liable for $10,937 under a residual value
guarantee at the termination in 2005 of a long-term locomotive lease agreement
between a third party equipment lessor and one of Old MK's customers relating to
the sale of 25 remanufactured locomotives from Old MK to the equipment lessor.
The Corporation does not anticipate that it will incur losses as a result of
this guarantee.
The Corporation has commitments and performance guarantees arising in the
ordinary course of its business from construction contracts, including those of
its joint ventures.
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 the
years ended 1987 through 1995. Some audits have resulted in proposed claims and
cost disallowances of approximately $15,000. The Corporation has concluded its
investigation of these matters and believes that the government's claims are
based on incomplete financial information and, based on an evaluation of the
merits of individual claims and review of historical financial data, the
Corporation accrued a liability at September 11, 1996 of $6,425 which represents
the best estimate available in the circumstances. It
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is possible that the ultimate cost, which cannot be determined at this time,
could exceed the Corporation's recorded liability.
EMPLOYMENT AGREEMENTS AND SEVERANCE PAY PLANS: 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 September 11, 1996 were to be terminated without cause, the
Corporation's liability would be approximately $6,700. Several employees were
terminated as a result of the Merger, resulting in an accrued liability at
September 11, 1996 of $1,919.
In addition, the Corporation has severance pay plans adopted by Old MK that
provide enhanced severance benefits under certain circumstances to certain
covered employees who are involuntarily terminated prior to December 31, 1997.
If all of the covered employees under contract at September 11, 1996 were to be
terminated, the Corporation's liability would be approximately $6,800.
OTHER: The Corporation is a party to various other claims and legal proceedings
incidental to its business. In management's opinion, the outcome of these claims
and proceedings and the aforementioned guarantees will not have a material
adverse effect on the financial condition, results of operations and cash flows
of the Corporation.
11. REDEEMABLE PREFERRED STOCK
On September 11, 1996, the Corporation issued 1,800,000 shares of Series A
preferred stock authorized under the Certificate of Incorporation. The
Corporation is obligated to redeem all of the outstanding shares of Series A
preferred stock, if it has not been cancelled by the fifth anniversary of its
issuance, at a redemption price per share equal to a pro rata share of certain
refunds of federal income tax that may be received by the Corporation as
successor to Old MK in connection with Old MK's amended federal tax returns
filed prior to January 1, 1996 provided, however, that the cumulative total
amount shall not exceed $18,000. In addition, holders of the Series A preferred
stock are not entitled to dividends. Each share of Series A preferred stock is
entitled to 1/100 of a vote, and in the event of liquidation, each holder will
be entitled to be paid in cash in preference to holders of common stock.
12. CAPITAL STOCK, STOCK PURCHASE WARRANTS AND STOCK OPTIONS
CAPITAL STOCK: On September 11, 1996, the Corporation's stockholders approved
certain amendments to the Corporation's Certificate of Incorporation including
(i) increasing the number of total authorized shares of the Corporation's common
stock from 39,000,000 to 100,000,000 and (ii) the number of total authorized
shares of the Corporation's preferred stock from 1,000,000 to 10,000,000.
STOCK PURCHASE WARRANTS: At September 11, 1996, the Corporation had outstanding
stock purchase warrants to acquire 2,952,848 shares of the Corporation's common
stock at an exercise price of $12.00 per warrant. Warrants to purchase 2,765,000
shares expire in March 2003, and warrants to purchase 187,848 shares expire in
September 2001.
STOCK OPTIONS: The Corporation has a Stock Option and Incentive Plan for
Officers, Directors and Key Employees of the Corporation, as amended (the "1994
Plan"), under which a total of 3% of the outstanding shares of common stock as
of December 1 of each year are reserved for issuance under the 1994 Plan.
Options for 3,152,454 shares of common stock were reserved for issuance at
September 11, 1996.
The 1994 Plan authorizes the grant of both incentive and nonstatutory stock
options and the award of restricted stock to participants. The options and
restricted stock are subject to such vesting requirements as the Compensation
Committee of the Board of Directors determines, but are generally
conditioned on continued employment during the restrictive
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periods. A recipient of a restricted stock award has all the rights of a
stockholder except that the shares are held by the Corporation until certain
conditions have been met.
OPTION SHARES UNDER THE 1994 PLAN
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Outstanding at December 1, 1995 940,986
Granted 232,770
Cancelled (17,000)
Exercised ($4.625 to $10.00 per share) (166,667)
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Outstanding at September 11, 1996 ($4.625 to $10.00 per share) 990,089
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Exercisable at September 11, 1996 392,592
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