<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarter Ended
AUGUST 31, 1997
Commission File Number 1-12054
[LOGO APPEARS HERE] MORRISON KNUDSEN CORPORATION
A Delaware Corporation
IRS Employer Identification No. 33-0565601
MORRISON KNUDSEN PLAZA, BOISE, IDAHO 83712
208 / 386-5000
At August 31, 1997, 54,236,165 shares of the registrant's $.01 par value common
stock were outstanding.
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 (or for
such shorter period that the registrant was required to file such reports) and
has been subject to such filing requirements for the past 90 days.
[X] Yes [ ] No
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MORRISON KNUDSEN CORPORATION
QUARTERLY REPORT FORM 10-Q FOR THE
THREE MONTHS ENDED AUGUST 31, 1997
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
PAGE
Item 1. Condensed Consolidated Financial Statements and Notes Thereto
Statements of Operations for the Three and Nine Months
Ended August 31, 1997 and 1996 I-1
Balance Sheets at August 31, 1997 and November 30, 1996 I-2
Statements of Cash Flows for the Nine Months Ended
August 31, 1997 and 1996 I-4
Notes to Financial Statements I-5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations I-12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings II-1
Item 6. Exhibits and Reports on Form 8-K II-1
SIGNATURES
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MORRISON KNUDSEN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED AUGUST 31, 1997 AND 1996 (UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
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- ------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
AUGUST 31, AUGUST 31,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
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Revenue $ 434,288 $ 97,750 $ 1,238,043 $ 242,449
Cost of revenue (413,546) (92,698) (1,179,991) (228,139)
- ------------------------------------------------------------------------------------------------------
Gross profit 20,742 5,052 58,052 14,310
General and administrative expenses (5,551) (5,033) (16,937) (14,153)
Goodwill amortization (895) (185) (2,691) (395)
Losses for impairment of long-lived assets -- (18,200) -- (18,200)
- ------------------------------------------------------------------------------------------------------
Operating income (loss) 14,296 (18,366) 38,424 (18,438)
Investment income 1,773 605 5,258 2,212
Interest expense (185) (182) (660) (564)
Other income (expense), net (970) (44) (1,097) 72
- ------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 14,914 (17,987) 41,925 (16,718)
Income tax (expense) benefit (6,679) 6,765 (19,267) 6,322
- ------------------------------------------------------------------------------------------------------
Net income (loss) $ 8,235 $(11,222) $ 22,658 $ (10,396)
======================================================================================================
Income (loss) per share $.15 $(.38) $.42 $(.35)
======================================================================================================
Common shares used to compute income (loss) per share 54,191 29,488 53,979 29,484
======================================================================================================
The accompanying notes are an integral part of the financial statements.
</TABLE>
I-1
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MORRISON KNUDSEN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
AT AUGUST 31, 1997 (UNAUDITED) AND NOVEMBER 30, 1996
(THOUSANDS OF DOLLARS EXCEPT SHARE DATA)
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ASSETS 1997 1996
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CURRENT ASSETS
Cash and cash equivalents $ 38,991 $ 48,310
Accounts receivable, including retentions of $34,507 in 1997
and $28,348 in 1996 188,266 222,341
Unbilled receivables 86,934 101,564
Refundable income taxes, net 7,836 10,806
Current portion of note receivable 3,000 3,000
Investments in and advances to construction joint ventures 38,334 24,538
Deferred income taxes 32,039 31,291
Other 9,558 17,399
- --------------------------------------------------------------------------------------
Total current assets 404,958 459,249
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INVESTMENTS AND OTHER ASSETS
Securities available for sale, at fair value 36,605 30,494
Investments in mining ventures 54,572 56,210
Assets held for sale 17,684 18,853
Cost in excess of net assets acquired, net of accumulated
amortization of $4,869 in 1997 and $2,177 in 1996 137,036 140,677
Note receivable, net of current portion 2,685 4,935
Refundable income taxes 2,508 --
Deferred income taxes 41,538 31,555
Other 10,702 12,330
- --------------------------------------------------------------------------------------
Total investments and other assets 303,330 295,054
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PROPERTY AND EQUIPMENT, AT COST
Construction equipment 172,296 179,483
Land and improvements 7,110 7,110
Buildings and improvements 26,812 25,062
Equipment and fixtures 31,743 30,388
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Total property and equipment 237,961 242,043
LESS ACCUMULATED DEPRECIATION (157,900) (156,709)
- --------------------------------------------------------------------------------------
Property and equipment, net 80,061 85,334
- --------------------------------------------------------------------------------------
Total assets $ 788,349 $ 839,637
======================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
I-2
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<TABLE>
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LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
<S> <C> <C>
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CURRENT LIABILITIES
Accounts payable $ 53,975 $ 68,926
Subcontracts payable, including retentions of $20,387 in 1997
and $27,006 in 1996 42,592 75,036
Billings in excess of cost and estimated earnings on uncompleted contracts 42,900 49,626
Advances from customers 9,567 11,280
Estimated costs to complete long-term contracts 84,582 100,832
Accrued salaries, wages and benefits 46,235 49,136
Income taxes payable 1,870 8,255
Other accrued liabilities 44,404 37,513
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Total current liabilities 326,125 400,604
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NON-CURRENT LIABILITIES
Postretirement benefit obligation 53,909 53,433
Accrued workers' compensation 31,295 26,061
Pension and deferred compensation liabilities 20,304 20,563
Environmental remediation obligations 6,122 8,972
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Total non-current liabilities 111,630 109,029
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CONTINGENCIES AND COMMITMENTS (Note 5)
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REDEEMABLE PREFERRED STOCK, issued 1,799,984 shares of Series A 18,000 18,000
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STOCKHOLDERS' EQUITY
Preferred stock, 10,000,000 shares authorized,
1,799,984 redeemable shares of Series A issued and outstanding
Common stock, par value $.01 per share; authorized 100,000,000 shares;
issued 54,298,424 and 53,808,748 543 538
Capital in excess of par value 247,644 242,669
Stock purchase warrants 6,557 6,564
Retained earnings 84,485 61,827
Treasury stock, 62,259 shares, at cost (737) --
Unearned compensation - restricted stock (12) (19)
Cumulative translation adjustments (6,324) (154)
Net unrealized gain on securities available for sale 438 579
- --------------------------------------------------------------------------------------------------
Total stockholders' equity 332,594 312,004
- --------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $788,349 $839,637
==================================================================================================
</TABLE>
I-3
<PAGE>
MORRISON KNUDSEN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED AUGUST 31, 1997 AND 1996 (UNAUDITED)
(THOUSANDS OF DOLLARS)
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<CAPTION>
1997 1996
- ---------------------------------------------------------------------------------------------------------
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 22,658 $(10,396)
Adjustments to reconcile net income (loss) to net cash from operating activities:
Depreciation of property and equipment 17,550 7,131
Amortization of goodwill 2,691 315
Provision for impairment losses on long-lived assets -- 18,200
Deferred income taxes 6,263 --
Equity in net income of mining ventures, net of dividends received (7,805) --
Decrease in cash from changes in operating assets and liabilities (40,190) (16,881)
- ---------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 1,167 (1,631)
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (12,875) (5,909)
Proceeds from disposals of property and equipment 2,301 2,152
Purchases of securities available for sale (10,605) --
Proceeds from sales of securities available for sale 4,321 --
Proceeds from collection of note receivable 2,250 --
Other investing activities 1,068 (48)
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Net cash used in investing activities (13,540) (3,805)
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CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of long-term debt -- (332)
Proceeds from stock issued and other 3,054 --
- ---------------------------------------------------------------------------------------------------------
Cash provided by (used in) financing activities 3,054 (332)
- ---------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (9,319) (5,768)
Cash and cash equivalents at beginning of period 48,310 30,035
- ---------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 38,991 $ 24,267
=========================================================================================================
Supplemental disclosure of cash paid for:
Interest $ 660 $ 563
Income taxes 10,028 755
Noncash investing activities:
Property and equipment classified as assets held for sale -- 25,324
Other current assets classified as assets held for sale -- 428
Investment in mining ventures adjusted for cumulative translation adjustments,
net of taxes (5,873) --
- ---------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
I-4
<PAGE>
MORRISON KNUDSEN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS EXCEPT SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION: On September 11, 1996, the Corporation (then known as Washington
Construction Group, Inc.) acquired the net assets and the engineering,
construction, environmental response service and mining service operations of
Morrison Knudsen Corporation ("Old MK") in a business combination accounted for
as a purchase and changed its name to Morrison Knudsen Corporation. The
acquisition of Old MK was an integral part of the reorganization of Old MK
pursuant to a plan of reorganization filed by Old MK in the United States
Bankruptcy Court for the District of Delaware, which Plan was confirmed by the
Bankruptcy Court on August 26, 1996, and became effective concurrently with the
business combination on September 11, 1996.
The Corporation provides global (i) engineering and construction management
services to industrial companies, electric utilities and public agencies, (ii)
comprehensive environmental and hazardous substance remediation services to
governmental and private-sector clients, (iii) diverse heavy construction
services for the highway, airport, water resource, railway and commercial
building industries, and (iv) mine planning, engineering and contract mining
services.
BASIS OF PRESENTATION: The accompanying condensed consolidated financial
statements include the accounts of the Corporation and all of its majority-owned
subsidiaries. Investments in 20% to 50% owned companies and all construction
joint ventures and mining ventures are accounted for by the equity method. The
Corporation's proportionate share of construction joint venture and mining
venture revenue, cost of revenue and gross profit (loss) is included in the
consolidated statements of operations. Intercompany accounts and transactions
are eliminated.
The accompanying unaudited consolidated financial statements and financial
statement footnotes should be read in conjunction with the audited consolidated
financial statements and financial statement footnotes included in the
Corporation's Annual Report on Form 10-K for the year ended November 30, 1996.
The comparative consolidated balance sheet and related disclosures at November
30, 1996 have been derived from the audited balance sheet and financial
statement footnotes.
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 revenue and cost during the
reporting periods. Actual results could differ in the near term from those
estimates. Due to uncertainties inherent in the process of estimating on its
long-term contracts, actual amounts of revenue and costs may vary from estimates
in the near term.
The accompanying consolidated financial statements reflect all adjustments,
consisting of normal recurring adjustments, that in the opinion of management
are necessary to a fair presentation of the results of operations and cash flows
for the interim periods presented. The results of operations for the nine months
ended August 31, 1997 are not necessarily indicative of the operating results to
be expected for the full year.
CLASSIFICATION OF CURRENT ASSETS AND LIABILITIES: The Corporation includes in
current assets and liabilities amounts realizable and payable under contracts
that extend beyond one year. Accounts receivable at August 31, 1997 included
approximately $4,098 of contract retentions that are not expected to be
collected within one year, and $8,764 of short-term marketable securities
jointly held with customers as contract retentions, the market values of which
approximated the carrying amounts.
PREACQUISITION CONTINGENCIES: The Corporation allocated the purchase price of
Old MK to the assets acquired and liabilities assumed, including preacquisition
contingencies, on the basis of estimated fair values at September 11, 1996. The
effects of resolving preacquisition contingencies within approximately one year
of the acquisition date are reflected as an adjustment to the goodwill recorded
at the acquisition date. The effects of resolving preacquisition contingencies
after approximately one year from the acquisition date will be recognized in the
determination of net income.
I-5
<PAGE>
RECLASSIFICATIONS: Certain reclassifications have been made in prior period
financial statements to conform to the 1997 presentation.
2. STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
The Financial Accounting Standards Board Statement No. 123 Accounting for Stock-
Based Compensation became effective December 1, 1996. The Statement defines a
fair value based method of accounting and reporting for stock-based compensation
plans and allows continued use of the intrinsic value based method. The
Corporation has elected to continue to use the intrinsic value method, however,
the Corporation will make pro forma disclosures of net income and income per
share for the year ending November 30, 1997 reflecting the hypothetical effects
of the application of the fair value based method of accounting for such plans.
The Financial Accounting Standards Board has issued Statement No. 128 Earnings
Per Share. The Corporation will implement the provisions of the Statement in the
quarter ending February 28, 1998. If the provisions of the Statement had been
implemented effective December 1, 1996, the amounts of basic EPS for the three
and nine months ended August 31, 1997 would be the same as the reported income
per share amounts. The hypothetical issuance of shares subject to outstanding
stock options and warrants would not have had a dilutive effect on the amounts
of basic EPS reported for the three and nine months ended August 31, 1997.
The Financial Accounting Standards Board has issued Statement No. 129
Disclosure of Information about Capital Structure. The Statement continues the
requirements to disclose certain information about an enterprise's capital
structure prescribed by previous accounting standards. The Corporation's current
disclosures are in compliance with the requirements of the Statement.
The Financial Accounting Standards Board has issued Statement No. 130
Reporting Comprehensive Income. The Corporation will implement the provisions of
the Statement in the quarter ending February 28, 1999. The provisions of the
Statement are limited to issues of reporting and presentation.
The Financial Accounting Standards Board has issued Statement No. 131
Disclosures about Segments of an Enterprise and Related Information which
supersedes Statement No. 14 Financial Reporting for Segments of a Business
Enterprise. The Statement requires an enterprise to report information about the
revenues derived from its products or services (or groups of similar products or
services), about the countries in which the enterprise earns revenues and holds
assets, and about major customers, regardless of whether that information is
used in making operating decisions. The Corporation will implement the
provisions of the Statement for the year ending November 30, 1999.
3. VENTURE SUMMARY FINANCIAL INFORMATION
Generally, the Corporation is jointly and severally liable with its construction
joint venture and mining venture partners for project performance and certain
financial obligations.
CONSTRUCTION JOINT VENTURES: The Corporation participates in joint ventures,
generally as sponsor and manager of the joint ventures, which are formed to bid,
negotiate and complete specific projects, the size, scope and duration of which
vary among periods.
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(UNAUDITED)
COMBINED FINANCIAL POSITION OF CONSTRUCTION JOINT VENTURES AUGUST 31, 1997 NOVEMBER 30, 1996
<S> <C> <C>
- --------------------------------------------------------------------------------------------------
Current assets $ 303,083 $ 247,869
Property and equipment, net 8,790 5,684
Current liabilities (236,097) (216,763)
- --------------------------------------------------------------------------------------------------
Net assets $ 75,776 $ 36,790
==================================================================================================
</TABLE>
I-6
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<TABLE>
<CAPTION>
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COMBINED RESULTS OF OPERATIONS OF CONSTRUCTION JOINT VENTURES (UNAUDITED) (UNAUDITED)
NINE MONTHS ENDED AUGUST 31, 1997 1996
<S> <C> <C>
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Revenue $ 593,337 $103,252
Cost of revenue (527,974) (94,407)
- -----------------------------------------------------------------------------------------
Gross profit $ 65,363 $ 8,845
=========================================================================================
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CORPORATION'S SHARE OF RESULTS OF OPERATIONS OF CONSTRUCTION
JOINT VENTURES (UNAUDITED) (UNAUDITED)
NINE MONTHS ENDED AUGUST 31, 1997 1996
- -----------------------------------------------------------------------------------------
Revenue $ 232,431 $ 43,076
Cost of revenue (207,502) (39,389)
- -----------------------------------------------------------------------------------------
Gross profit $ 24,929 $ 3,687
=========================================================================================
</TABLE>
MINING VENTURES: At August 31, 1997, the Corporation had ownership interests in
two unconsolidated mining ventures, MIBRAG mbH (33%) and Westmoreland Resources,
Inc. ("Westmoreland Resources") (20%).
<TABLE>
<CAPTION>
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(UNAUDITED)
COMBINED FINANCIAL POSITION OF MINING VENTURES AUGUST 31, 1997 NOVEMBER 30, 1996
<S> <C> <C>
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Current assets $ 306,879 $ 352,586
Non-current assets 109,203 114,835
Property and equipment, net 472,669 509,919
Current liabilities (99,957) (128,435)
Long-term debt (258,255) (259,084)
Other non-current liabilities (355,006) (411,432)
- -------------------------------------------------------------------------------------------------------
Net assets $ 175,533 $ 178,389
=======================================================================================================
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COMBINED RESULTS OF OPERATIONS OF MINING VENTURES (UNAUDITED)
NINE MONTHS ENDED AUGUST 31, 1997
- -------------------------------------------------------------------------------------------------------
Revenue $ 276,020
Cost of revenue (248,727)
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Gross profit $ 27,293
=======================================================================================================
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CORPORATION'S SHARE OF RESULTS OF OPERATIONS OF MINING VENTURES (UNAUDITED)
NINE MONTHS ENDED AUGUST 31, 1997
- -------------------------------------------------------------------------------------------------------
Revenue $ 87,731
Cost of revenue (79,125)
- -------------------------------------------------------------------------------------------------------
Gross profit $ 8,606
=======================================================================================================
</TABLE>
I-7
<PAGE>
The Corporation received dividend distributions of $802 from mining ventures
during the nine months ended August 31, 1997.
On December 23, 1996, Westmoreland Coal and four subsidiaries, including
Westmoreland Resources, filed for protection under Chapter 11 of the United
States Bankruptcy Code. The debtor corporations are in possession of their
respective properties and assets and are operating as debtors in possession
pursuant to the provisions of the Bankruptcy Code. The debtor corporations have
not filed a plan of reorganization as of the date of this quarterly report, but
expect to file one in the near term. No assurance can be given that the debtor
corporations will be successful in reorganizing their affairs pursuant to the
Chapter 11 bankruptcy proceedings. At August 31, 1997, the carrying amount of
the Corporation's ownership interest in Westmoreland Resources was $5,923, and
the Corporation's proportionate share of Westmoreland Resources' revenue and
earnings included in the accompanying condensed consolidated statement of
operations for the nine months ended August 31, 1997 was $6,414 and $736,
respectively. The Corporation believes that the outcome of the bankruptcy
proceedings will not have a material adverse effect on its ownership interest in
Westmoreland Resources.
4. RELATED PARTY TRANSACTIONS
BUSINESS ACQUISITION: On August 25, 1997, the Corporation's Board of Directors,
upon the recommendation of a special committee of three independent directors,
approved an agreement in principle to purchase from a principal stockholder and
Chairman of the Board of Directors the outstanding capital stock of Montana
Resources, Inc. ("MRI"), which owns a 50.1% ownership interest in a copper and
molybdenum mine in Butte, Montana, in exchange for 2,200,000 newly issued shares
of the Corporation's Series B convertible preferred stock for an estimated
purchase price of $117,415, including $4,415 of estimated transaction costs. The
consummation of the transaction is conditioned upon, among other things,
approval by the Corporation's stockholders and compliance with applicable
regulatory requirements.
OTHER TRANSACTIONS: During the nine months ended August 31, 1997 and August 31,
1996, the Corporation rented construction equipment and aircraft, and purchased
construction equipment, spare parts, mechanical and transportation services from
affiliates of a principal stockholder and Chairman of the Board of Directors of
the Corporation. The Corporation, by certain agreements dated August 1, 1993,
purchases certain administrative, financial and business consulting, public and
government relations and aviation services from affiliates of this principal
stockholder for an aggregate annual fee of $1,140 plus expenses. In addition,
the Corporation and a brokerage firm owned by a member of the Board of Directors
entered into an agreement with respect to the provision to the Corporation of
insurance brokerage services for the period from August 1, 1996 through December
31, 1997, pursuant to which the brokerage firm receives an annual fee of $1,280
inclusive of commissions. The costs of these transactions are reported in the
accompanying condensed consolidated financial statements as follows:
<TABLE>
<CAPTION>
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(UNAUDITED) (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
AUGUST 31, AUGUST 31,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------
Property and equipment $ -- $ 53 $ 404 $ 545
Cost of revenue 859 1,950 3,106 4,474
General and administrative expenses 412 635 1,470 1,688
- ------------------------------------------------------------------------------------
</TABLE>
The Corporation also participated in a construction joint venture with,
performed construction services for, and rented and sold equipment to,
affiliates of a principal stockholder and Chairman of the Board of Directors of
the Corporation. The Corporation's investment in the joint venture was $634 at
August 31, 1997 and $1,080 at November 30, 1996. The revenue and gross profit
from these operations and transactions are included in the accompanying
statements of operations as follows:
I-8
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<TABLE>
<CAPTION>
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(UNAUDITED) (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
AUGUST 31, AUGUST 31,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------
Revenue $1,274 $1,595 $1,797 $5,976
Gross profit 8 162 201 997
- ----------------------------------------------------------------
</TABLE>
5. CONTINGENCIES AND COMMITMENTS
PREACQUISITION CONTINGENCIES: The Corporation allocated the purchase price of
Old MK to the assets acquired and liabilities assumed, including preacquisition
contingencies, on the basis of estimated fair values at September 11, 1996.
Resolution and revaluation of certain preacquisition contingencies and the
recent tax law change extending the net operating loss carryforward ("NOL")
period from 15 to 20 years, resulted in a net decrease in goodwill of $950. The
extension of the NOL carryforward period resulted in a decrease to goodwill of
$19,688 after adjusting the valuation allowance related to the deferred tax
asset. This decrease was offset by an accrual for preacquisition contingencies
of $18,738, primarily for legal proceedings.
SUMMITVILLE ENVIRONMENTAL MATTERS: From July 1985 to June 1989, a subsidiary of
the Corporation performed certain contract mining services at the Summitville
mine near Del Norte, Colorado. The United States Environmental Protection Agency
(the "EPA") has notified the Corporation and approximately 20 other parties that
each is a potentially responsible party ("PRP") with regard to hazardous
substances generated or disposed of at the Summitville Mine Superfund Site (the
"Site"). The EPA has not commenced any litigation or other proceedings against
the Corporation. The Corporation has had only preliminary discussions with the
EPA but has been informally advised that the EPA does not consider the
Corporation eligible for a de minimis settlement (the basis for settlement by
several PRPs considered to have contributed less than 3% volume and toxicity of
the hazardous substances at the Site).
According to a report published in August 1996, the EPA estimated that the
total remediation costs incurred and to be incurred at the Site will be
$120,000. The Corporation is not a party to any agreement regarding an
allocation of responsibility, 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 is not presently
determinable 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, the Corporation has no accrued liability
for remediation costs at August 31, 1997.
Management believes that the ultimate resolution of this matter could have a
material adverse effect on the Corporation's financial position and could
materially and adversely affect its results of operations and cash flows in one
or more periods.
OTHER ENVIRONMENTAL MATTERS: The Corporation has been identified as a PRP and is
contingently liable for remediation liabilities in connection with Old MK's
former Transit business. The Corporation agreed to indemnify the buyer of the
Transit business for remediation costs and recorded an estimated undiscounted
liability of $3,000. It is possible that the ultimate cost, which cannot be
determined at this time, could exceed the Corporation's recorded liability by a
material amount.
The Corporation has recorded an aggregate undiscounted liability of Old MK,
which at August 31, 1997 was $3,122 for environmental cleanup activities at four
other sites. The Corporation estimates that such costs could range from $2,600
to $4,100 in the aggregate. Because the environmental liability associated with
ground water contamination at or adjacent to rail facilities in Boise formerly
operated by Old MK is being fulfilled by the current owner and operator of those
facilities, the Corporation reduced its accrual for environmental liabilities by
$4,000.
I-9
<PAGE>
CONTRACT-RELATED MATTERS: In 1995, Old MK entered into a fixed-price contract
with the TNRCC for construction of a solvent-extraction facility and treatment
of contaminated soil at a Superfund site in Texas. The contract requires the
facility to meet certain specific treatment and volume performance criteria. The
facility has been processing contaminated waste and exceeding the treatment
criteria, but has not met the volume criteria. On July 7, 1997, TNRCC notified
the Corporation that, subject to a ninety-day "cure" period, TNRCC was
terminating the contract due to the failure of the Corporation to fulfill its
obligations thereunder. This cure period has been extended by agreement between
the Corporation and TNRCC to October 31, 1997. If the treatment facility does
not meet the volume criteria by the expiration of the extended cure period or
the Corporation does not successfully negotiate modifications that extend the
cure period further and effectively change, among other things, the manner of
performance and/or the period for completion of the work, TNRCC may seek to
recover up to $13,619 of advances by drawing on an outstanding letter of credit
issued at the request of the Corporation (and under which the Corporation would
have an obligation to reimburse the issuer for any amounts so drawn). At August
31, 1997, the Corporation has provided for the estimated costs to complete the
contract. While there can be no assurance with respect thereto, the Corporation
believes that it can resolve the matter without incurring costs or obligations
in excess of such accrual. In addition, the Corporation has asserted claims
against TNRCC for additional revenue resulting from customer-caused delays,
changed conditions and other causes of unanticipated costs.
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 of the Corporation's
allocations of periodic costs of self-insurance programs and general and
administrative expenses for years ended 1987 through 1995 are in progress.
Proposed claims and cost disallowances aggregate approximately $24,000. The
Corporation believes that the government's claims and disallowances are
overstated and has an accrued liability at August 31, 1997 of approximately
$16,000. The Corporation does not believe that the ultimate cost, which cannot
be determined at this time, will exceed the Corporation's accrued liability.
LETTERS OF CREDIT: In the normal course of business, the Corporation causes
letters of credit to be issued in connection with contract performance
obligations which are not reflected in the balance sheet. The Corporation is
obligated to reimburse the issuer of such letters of credit for any payments
made thereunder. At August 31, 1997, $47,892 in face amount of such letters of
credit were outstanding, including a $13,619 letter of credit issued in
connection with the contract performance obligation to TNRCC discussed above.
The Corporation has pledged securities available for sale as collateral for its
reimbursement obligations in respect of $6,106 in face amount of certain letters
of credit.
OTHER: On July 18, 1997, a purported class action complaint (the "Blyler
Complaint") was filed in the United States District Court for the District of
Idaho (John B. Blyler and Malcolm J. Corse v. William J. Agee. et. al., Civil
Action No. 97-0332-S-BLW). The action purports to be brought under the Employee
Retirement Income Security Act ("ERISA") on behalf of participants in the Old MK
Employee Stock Ownership Plan ("ESOP") and/or Old MK's 401(k) Savings Plan
("401(k) Plan") to recover account losses resulting from alleged breaches of
fiduciary duty by the fiduciaries of the two plans. The Blyler Complaint
alleges, among other things, that beginning on December 31, 1993, and continuing
through the completion of the bankruptcy reorganization of Old MK in September
1996, the defendants breached their fiduciary duties to the plans by: (i)
causing the plans to retain Old MK stock at a time when the stock was an
unsuitable investment for the retirement plans; (ii) failing to retain
independent and impartial fiduciaries who would have recommended the sale of Old
MK stock by the plans; and (iii) failing to protect and represent the interests
of the plan participants and beneficiaries with respect to potential claims
relating to the unsuitability of the investment in Old MK stock.
The Corporation believes that it has insurance coverage for all or a
substantial part of any damages that may be awarded in the matter. Although the
ultimate outcome of this matter cannot be predicted with certainty, management
believes that the outcome will not have a material adverse effect on the
Corporation's financial position, results of operation or cash flows.
Former shareholders of TMS, Inc. ("TMS"), which was acquired by Old MK in
December 1992, filed an action in December 1995 alleging they were falsely
induced to enter into an agreement to exchange TMS shares for common stock of
Old MK and related noncompetition agreements by Old MK. Plaintiffs seek
compensatory damages of $7,500, treble damages, punitive damages of $5,000, pre-
and postjudgment interest and attorneys' fees. The Corporation's motion to
dismiss the action was granted on May 23, 1997. The plaintiffs' notice of appeal
regarding the dismissal was pending as of the date of this report. The
Corporation believes that it has insurance coverage for all or a substantial
part of any
I-10
<PAGE>
damages that may be awarded in this matter. Although the ultimate outcome of
this matter cannot be predicted with certainty, management believes that the
outcome will not have a material adverse effect on the Corporation's financial
position, results of operations or cash flows.
On September 12, 1997, a purported stockholder's derivative action was
commenced pursuant to a complaint (the "Radwell Complaint") filed in the Court
of Chancery of the State of Delaware in and for New Castle County (Martin
Radwell v. Dennis R. Washington, et. al., Civil Action No. 15934) against
members of the Corporation's Board of Directors (the "Individual Defendants"),
MRI and the Corporation (as nominal defendant). The Radwell Complaint alleges,
among other things, that: (i) the Individual Defendants have breached fiduciary
duties of loyalty, care and good faith owed to the Corporation and its
stockholders by pursuing the acquisition of MRI from Washington; (ii) the
transaction is, among other things, substantively unfair and inadequate from the
Corporation's standpoint; and (iii) the Corporation has sustained and will
continue to sustain serious damage and irreparable injury. The Radwell Complaint
seeks, among other things, preliminary and permanent injunctive relief against
the Individual Defendants and MRI or, alternatively, compensatory damages from
the named defendants. The Corporation has been advised that the Individual
Defendants and MRI deny all allegations of wrongdoing set forth in the Radwell
Complaint and intend to seek the dismissal of the Action.
In addition to the foregoing, there are various other claims, lawsuits,
disputes with third parties, investigations and administrative proceedings
against the Corporation and its subsidiaries arising out of the conduct of their
business activities, none of which is expected to have a material adverse effect
on the Corporation's financial position, results of operations or cash flows.
I-11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE CORPORATION'S FINANCIAL POSITION AT AUGUST 31, 1997 AND ITS RESULTS OF
OPERATIONS AND CASH FLOWS FOR THE THREE AND NINE MONTHS THEN ENDED WERE
SIGNIFICANTLY IMPACTED BY THE ACQUISITION OF OLD MK ON SEPTEMBER 11, 1996 AND
ARE NOT COMPARABLE TO THE CORPORATION'S FINANCIAL POSITION, RESULTS OF
OPERATIONS AND CASH FLOWS FOR PRIOR PERIODS.
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED AUGUST 31, 1997 COMPARED TO
THE THREE AND NINE MONTHS ENDED AUGUST 31, 1996
The consolidated results of operations for the three and nine months ended
August 31, 1997 and August 31, 1996 include the results of Old MK's operations
for only the three and nine months ended August 31, 1997.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
AUGUST 31, AUGUST 31,
(MILLIONS OF DOLLARS) 1997 1996 1997 1996
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------
Revenue $434.3 $ 97.7 $1,238.0 $242.4
Gross profit 20.7 5.0 58.0 14.3
General and administrative expenses (5.6) (5.0) (16.9) (14.2)
Goodwill amortization (.9) (.2) (2.7) (.3)
Losses for impairment of long-lived assets -- (18.2) -- (18.2)
Investment income 1.8 .6 5.3 2.2
Interest expense (.2) (.2) (.7) (.6)
Other income (expense), net (1.0) -- (1.1) .1
Income (loss) before income taxes 14.9 (18.0) 41.9 (16.7)
Income tax (expense) benefit (6.7) 6.8 (19.2) 6.3
Net income (loss) 8.2 (11.2) 22.7 (10.4)
- -------------------------------------------------------------------------------------
</TABLE>
REVENUE AND GROSS PROFIT: Revenue and gross profit for the three and nine months
ended August 31, 1997 increased significantly compared to the three and nine
months ended August 31, 1996, principally due to the acquisition of Old MK.
Gross profit, as a percent of revenue, was 4.8% and 4.7% for the three and nine
months ended August 31, 1997 compared to 5.2% and 5.9% for the comparable
periods of 1996.
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses of
$14.2 million for the nine months ended August 31, 1996 include $1.5 million of
expenses for termination and other costs related to the reorganization and
consolidation of certain corporate functions from Montana to California.
Excluding these nonrecurring expenses, general and administrative expenses for
the three and nine months ended August 31, 1997 increased $.6 million and $4.2
million, respectively, from the comparable periods of 1996, principally due to
the retention of substantially all of Old MK's administrative functions
necessary to support the Corporation's expanded engineering, construction,
environmental response services and mining service operations both domestically
and internationally.
GOODWILL AMORTIZATION: Goodwill amortization for the three and nine months ended
August 31, 1997 increased $.8 million and $2.4 million, respectively, from the
comparable periods of 1996, reflecting the periodic amortization of the $124.1
million goodwill recorded in connection with the acquisition of Old MK, using
the straight-line method over 40 years. Goodwill amortization for 1997 is
estimated to be $3.6 million. See Note 5 "Contingencies and Commitments" of
Notes to Condensed Consolidated Financial Statements.
I-12
<PAGE>
LOSSES FOR IMPAIRMENT OF LONG-LIVED ASSETS: On November 8, 1996, the
Corporation's Board of Directors approved a plan to offer for sale certain
assets of a non-core subsidiary and the Corporation recognized an impairment
loss of $6.5 million to reduce the carrying amount of the assets to their
estimated fair value. In addition, the Corporation recognized estimated
aggregate impairment losses of $11.7 million at August 31, 1996, based on
appraisals of fair values, stemming from its decisions to (i) sell certain land
previously held for lease and (ii) change the use of its Highland, California,
property by consolidating certain administrative and operating functions and
moving its headquarters to Boise, Idaho.
INVESTMENT INCOME: Investment income is comprised of (i) earnings from cash
equivalents, securities jointly held with customers as contract retentions and
securities available for sale, and (ii) interest on a note receivable and
anticipated claims for U.S. federal income tax refunds. Investment income for
the three and nine months ended August 31, 1997 increased $1.2 million and $3.1
million, respectively, from the comparable periods of 1996, principally due to
interest recognized on claims for U.S. federal income tax refunds and earnings
from securities available for sale.
INTEREST EXPENSE: Interest expense for the three and nine months ended August
31, 1997 increased slightly from the comparable periods of 1996, principally due
to the periodic amortization of the $1.1 million prepaid underwriting fee in
connection with the Corporation's five-year, $200 million revolving loan and
letter of credit facility obtained in the fourth quarter of 1996.
OTHER INCOME (EXPENSE), NET: Other expense for the three and nine months ended
August 31, 1997 increased over the comparable periods in 1996 primarily due to a
$.8 million loss from the sale of the Corporation's equity investment in a
foreign bank.
INCOME TAX EXPENSE: The effective tax rates for the three and nine months ended
August 31, 1997 were 45% and 46%, respectively. These effective rates were
greater than the U.S. federal statutory rate of 35%, primarily due to the impact
of (i) state and foreign income taxes and (ii) expenses which are not deductible
in computing taxable income. The income tax benefit for the comparable three and
nine months ended August 31, 1996 was recognized at a rate of 35%.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES (THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
- -----------------------------------------------------
AUGUST 31,
1997 1996
<S> <C> <C>
- -----------------------------------------------------
CASH AND CASH EQUIVALENTS:
Beginning of period $ 48,310 $30,035
End of period 38,991 24,267
- -----------------------------------------------------
NINE MONTHS ENDED
AUGUST 31,
1997 1996
- -----------------------------------------------------
NET CASH PROVIDED (USED) IN:
Operating activities $ 1,167 $(1,631)
Investing activities (13,540) (3,805)
Financing activities 3,054 (332)
- -----------------------------------------------------
</TABLE>
The Corporation has three principal sources of near-term liquidity: (i)
existing cash and cash equivalents; (ii) cash generated by operations, and (iii)
available revolving loan borrowings. Management believes the Corporation's
liquidity and capital resources should be sufficient to meet its reasonably
foreseeable working capital, capital expenditure and other anticipated cash
requirements.
Cash and cash equivalents at August 31, 1997 decreased $9.3 million to $39.0
million from $48.3 million at November 30, 1996, reflecting primarily
expenditures of $10.6 million for net acquisitions of property and equipment and
$6.3 million for net purchases of securities held for sale, offset by $1.2
million provided by operating activities and an aggregate of $5.3 million cash
proceeds from stock transactions and payments on a note receivable. The
Corporation had no
I-13
<PAGE>
outstanding borrowings under its credit facility at August 31, 1997.
The Corporation is subject to foreign currency translation and exchange risks,
primarily with regard to its mining venture in Germany. At August 31, 1997 and
November 30, 1996, the cumulative adjustments for translation losses net of
related income tax benefits was $6.3 million and $.2 million, respectively. For
the nine months ended August 31, 1997, the Corporation realized a pretax gain of
$.4 million on foreign currency exchange transactions. The Corporation had no
foreign operations prior to the acquisition of Old MK on September 11, 1996.
The Corporation anticipates capital expenditures for major construction
equipment of approximately $14.4 million during the remainder of 1997 for normal
replacement and to meet near-term equipment requirements for new work. Capital
expenditures for the nine months ended August 31, 1997 were $12.9 million.
As discussed in Note 5 "Contingencies and Commitments," in connection with a
fixed-price contract for the construction of a solvent extraction facility and
treatment of contaminated soil at a Superfund site in Texas, the TNRCC may seek
to recover up to $13,619 of advances by drawing on an outstanding letter of
credit under which the Corporation would have an obligation to reimburse the
issuer for any amounts drawn.
On August 25, 1997, the Corporation's Board of Directors, upon the
recommendation of a special committee of three independent directors, approved
an agreement in principle to purchase from a principal stockholder and Chairman
of the Board of Directors the outstanding capital stock of MRI, which owns a
50.1% ownership interest in a copper and molybdenum mine in Butte, Montana, in
exchange for 2,200,000 newly issued shares of the Corporation's Series B
convertible preferred stock for an estimated purchase price of $117,415,
including $4,415 of estimated transaction costs. The consummation of the
transaction is conditioned upon, among other things, approval by the
Corporation's stockholders and compliance with applicable regulatory
requirements.
The Corporation may pursue other opportunities to complement existing
operations through business combinations and ownership interests in ventures,
which may require additional financing and utilization of the Corporation's
capital resources, and may materially affect the Corporation's financial
position, results of operations and cash flows.
Depending upon conditions in the capital markets and other factors, the
Corporation may from time to time consider the possible issuance of long-term
debt or other securities or other capital market transactions.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued Statements No. 123
Accounting for Stock-Based Compensation, No. 128 Earnings Per Share, No. 129
Disclosure of Information about Capital Structure, No. 130 Reporting
Comprehensive Income and No. 131 Disclosures about Segments of an Enterprise and
Related Information. See Note 2 "Statements of Financial Accounting Standards"
of Notes to Condensed Consolidated Financial Statements for the impact, if any,
that recently issued accounting standards are expected to have on the
Corporation's financial statements when adopted.
BACKLOG
Backlog of all uncompleted contracts at August 31, 1997 was $3,607 million,
compared with $3,520 million at November 30, 1996.
ENVIRONMENTAL CONTINGENCY
The United States Environmental Protection Agency ("EPA") has notified the
Corporation and approximately 20 other parties that each is a potentially
responsible party ("PRP") with regard to hazardous substances generated or
disposed of at the Summitville Mine Superfund Site. See Note 5 "Contingencies
and Commitments" of Notes to Condensed Consolidated Financial Statements.
I-14
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS (IN THOUSANDS)
The information regarding legal proceedings set forth under the caption "Other"
in Note 5 "Contingencies and Commitments" of Notes to Condensed Consolidated
Financial Statements is incorporated by reference in response to this Item 1.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Filed in Part I
None
Filed in Part II
The Exhibits to this Quarterly Report on Form 10-Q are listed in the
Exhibit Index contained elsewhere in this Quarterly Report.
(b) Reports on Form 8-K
On July 29, 1997, the registrant filed a current report of Form 8-K to
announce the appointment of Douglas L. Brigham as Vice President and
Controller and Frank S. Finlayson as Vice President and Treasurer.
On August 25, 1997, the registrant filed a current report of Form 8-K to
disclose that, upon the recommendation of a special committee of
independent directors, the Corporation's Board of Directors had approved
an agreement in principle regarding the purchase by the Corporation of
MRI.
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/ Anthony S. Cleberg
--------------------------------------------
Executive Vice President and
Chief Financial Officer,
in his respective capacities as such
Date: October 20, 1997
II-1
<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
- ------ --------
27. * Financial Data Schedule.
E-1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
FOOTNOTES OF MORRISON KNUDSEN CORPORATION FOR THE NINE MONTHS ENDED AUGUST 31,
1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT FOOTNOTES:
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> AUG-31-1997
<CASH> 38,991
<SECURITIES> 0
<RECEIVABLES> 191,266
<ALLOWANCES> (10,680)
<INVENTORY> 0
<CURRENT-ASSETS> 404,958
<PP&E> 237,961
<DEPRECIATION> (157,900)
<TOTAL-ASSETS> 788,349
<CURRENT-LIABILITIES> 326,125
<BONDS> 0
0
18,000
<COMMON> 543
<OTHER-SE> 332,051
<TOTAL-LIABILITY-AND-EQUITY> 788,349
<SALES> 0
<TOTAL-REVENUES> 1,238,043
<CGS> 0
<TOTAL-COSTS> (1,179,991)
<OTHER-EXPENSES> (19,628)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (660)
<INCOME-PRETAX> 41,925
<INCOME-TAX> (19,267)
<INCOME-CONTINUING> 22,658
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,658
<EPS-PRIMARY> .42
<EPS-DILUTED> 0
</TABLE>
