<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
FEBRUARY 28, 1997
Commission File Number 1-12054
MORRISON KNUDSEN CORPORATION
A Delaware Corporation
IRS Employer Identification No. 33-0565601
MORRISON KNUDSEN PLAZA, BOISE, IDAHO 83729
208 / 386-5000
At February 28, 1997, 53,836,296 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 FEBRUARY 28, 1997
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
PAGE
Item 1. Condensed Consolidated Financial Statements and Notes Thereto
Statements of Operations for the Three Months Ended
February 28, 1997 and February 29, 1996 I-1
Balance Sheets at February 28, 1997 and November 30, 1996 I-2
Statements of Cash Flows for the Three Months Ended
February 28, 1997 and February 29, 1996 I-4
Notes to Financial Statements I-5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations I-11
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 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 MONTHS ENDED FEBRUARY 28, 1997 AND FEBRUARY 29, 1996 (UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
1997 1996
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Revenue $ 389,530 $ 62,006
Cost of revenue (371,426) (58,544)
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Gross profit 18,104 3,462
General and administrative expenses (5,505) (5,290)
Goodwill amortization (905) (105)
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Operating income (loss) 11,694 (1,933)
Investment income 2,050 867
Interest expense (257) (190)
Other income (expense), net (67) 43
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Income (loss) before income taxes 13,420 (1,213)
Income tax (expense) benefit (6,416) 425
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Net income (loss) $ 7,004 $ (788)
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Income (loss) per share $ .13 $ (.03)
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Common shares used to compute income (loss) per share 53,834 29,482
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
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MORRISON KNUDSEN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
AT FEBRUARY 28, 1997 (UNAUDITED) AND NOVEMBER 30, 1996
(THOUSANDS OF DOLLARS EXCEPT SHARE DATA)
ASSETS 1997 1996
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CURRENT ASSETS
Cash and cash equivalents $ 37,498 $ 48,310
Accounts receivable, including retentions of
$29,967 in 1997 and $28,348 in 1996 204,044 222,341
Unbilled receivables 90,670 101,564
Refundable income taxes, net 10,806 10,806
Current portion of note receivable 3,000 3,000
Investments in and advances to construction
joint ventures 28,512 24,538
Deferred income taxes 29,452 31,291
Other 14,537 17,399
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Total current assets 418,519 459,249
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INVESTMENTS AND OTHER ASSETS
Securities available for sale, at fair value 32,099 30,494
Investments in mining ventures 59,432 56,210
Assets held for sale 18,843 18,853
Cost in excess of net assets acquired, net of
accumulated amortization of $3,082 in 1997 and
$2,177 in 1996 139,523 140,677
Note receivable, net of current portion 4,185 4,935
Deferred income taxes 29,624 31,555
Other 9,733 12,330
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Total investments and other assets 293,439 295,054
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PROPERTY AND EQUIPMENT, AT COST
Construction equipment 181,587 179,483
Land and improvements 7,110 7,110
Buildings and improvements 25,770 25,062
Equipment and fixtures 31,222 30,388
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Total property and equipment 245,689 242,043
LESS ACCUMULATED DEPRECIATION (162,470) (156,709)
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Property and equipment, net 83,219 85,334
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Total assets $ 795,177 $ 839,637
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
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LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
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CURRENT LIABILITIES
Accounts payable $ 51,287 $ 68,926
Subcontracts payable, including retentions of
$23,285 in 1997 and $27,006 in 1996 53,565 75,036
Billings in excess of cost and estimated earnings
on uncompleted contracts 57,354 49,626
Advances from customers 7,931 11,280
Estimated costs to complete long-term contracts 99,394 100,832
Accrued salaries, wages and benefits 43,763 49,136
Income taxes payable 7,873 8,255
Other accrued liabilities 27,255 37,513
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Total current liabilities 348,422 400,604
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NON-CURRENT LIABILITIES
Postretirement benefit obligation 53,568 53,433
Accrued workers' compensation 26,518 26,061
Pension and deferred compensation liabilities 20,279 20,563
Environmental remediation obligations 8,815 8,972
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Total non-current liabilities 109,180 109,029
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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, authorized 10,000,000 shares,
issued and outstanding 1,799,984 redeemable shares
of Series A
Common stock, par value $.01 per share; authorized
100,000,000 shares; issued 53,858,101 and 53,808,748 539 538
Capital in excess of par value 243,821 242,669
Stock purchase warrants 6,564 6,564
Retained earnings 68,831 61,827
Treasury stock, 21,805 shares, at cost (198) --
Unearned compensation - restricted stock (19) (19)
Cumulative translation adjustments (206) (154)
Net unrealized gain on securities available for sale 243 579
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Total stockholders' equity 319,575 312,004
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Total liabilities and stockholders' equity $795,177 $839,637
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MORRISON KNUDSEN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED FEBRUARY 28, 1997 AND FEBRUARY 29, 1996 (UNAUDITED)
(THOUSANDS OF DOLLARS)
1997 1996
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OPERATING ACTIVITIES
Net income (loss) $ 7,004 $ (788)
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating activities:
Depreciation of property and equipment 6,899 2,174
Amortization of goodwill 905 205
Deferred income taxes 3,770 --
Equity in net income of mining ventures (3,053) --
Other investments and assets 2,665 --
Increase in net operating assets (25,129) (1,600)
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Net cash used by operating activities (6,939) (9)
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INVESTING ACTIVITIES
Acquisitions of property and equipment (2,917) (2,063)
Disposals of property and equipment 691 326
Purchases of securities available for sale (3,026) --
Proceeds from sales of securities available for sale 1,054 --
Collection of note receivable 750 --
Other investing activities (425) (37)
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Net cash used in investing activities (3,873) (1,774)
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FINANCING ACTIVITIES
Repayment of long-term debt -- (108)
Proceeds from stock issued and other equity transactions -- (2)
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Net cash used in financing activities -- (110)
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Decrease in cash and cash equivalents (10,812) (1,893)
Cash and cash equivalents at beginning of period 48,310 30,035
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Cash and cash equivalents at end of period $ 37,498 $ 28,142
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Supplemental disclosure of cash flow information:
Interest paid $ 248 $190
Income taxes paid 1,112 15
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
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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., and formerly known as Kasler Holding Company) acquired
the net assets and the engineering and construction 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 is an international provider of (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 for diverse customers.
BASIS OF PRESENTATION: The accompanying 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 joint 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 have been eliminated.
The 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 financial statement footnote disclosures included
herein as November 30, 1996 amounts have been derived from the audited balance
sheet and financial statement footnotes at November 30, 1996.
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.
The Corporation has a substantial history of making reasonably dependable
estimates of the extent of progress towards completion, contract revenue and
contract completion costs on its long-term construction contracts. However, due
to uncertainties inherent in the estimation process, it is at least reasonably
possible that actual completion costs may vary from estimates in the near term.
The unaudited consolidated financial statements included herein 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. The results of operations for the three
months ended February 28, 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 February 28, 1997 include
approximately $6,682 of contract retentions that are not expected to be
collected within one year. Accounts receivable at February 28, 1997 include
$9,511 of short-term marketable securities jointly held with customers as
contract retentions, the market value 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 one year of the
acquisition date will be included in the allocation of the purchase price as an
adjustment to the goodwill recorded at September 11, 1996. The effects of
resolving preacquisition contingencies after one year of the acquisition date
will be recognized in the determination of net income.
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Unresolved preacquisition contingencies at February 28, 1997, in connection with
the acquisition of Old MK on September 11, 1996, include long-term contract
obligations, claims for additional revenue, performance guarantees, letters of
credit, environmental liabilities, results of government audits and legal
proceedings.
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. However, it also allows continued use of the intrinsic value based method
of accounting and reporting prescribed by previous accounting standards. The
Corporation has elected to continue to use the intrinsic value method of
accounting for stock-based compensation plans. Accordingly, 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 requirements of this Statement are effective December 1,
1998. The Statement requires, in all instances, dual presentation of a basic
earnings per share ("EPS"), which excludes dilution, and a diluted EPS, which
reflects the potential dilution that could occur if actions taken in respect of
convertible securities or other obligations to issue common stock resulted in
the issuance of common stock. It also requires a reconciliation of the income
available to common stockholders and weighted-average shares of the basic EPS
computation to the income available to common stockholders and weighted-average
shares plus dilutive potential common shares of the diluted EPS computation. The
adoption of the Statement by the Corporation for periods beginning after
November 30, 1997 is not expected to have a material effect on the Corporation's
EPS.
3. VENTURE SUMMARY FINANCIAL INFORMATION
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, of which the size, scope and duration
vary among periods.
<TABLE>
<CAPTION>
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(UNAUDITED)
COMBINED FINANCIAL POSITION OF CONSTRUCTION JOINT VENTURES FEBRUARY 28, 1997 NOVEMBER 30, 1996
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<S> <C> <C>
Current assets $ 233,352 $ 247,869
Property and equipment, net 6,594 5,684
Current liabilities (178,911) (216,763)
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Net assets $ 61,035 $ 36,790
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</TABLE>
<TABLE>
<CAPTION>
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COMBINED RESULTS OF OPERATIONS OF CONSTRUCTION JOINT VENTURES (UNAUDITED) (UNAUDITED)
THREE MONTHS ENDED FEBRUARY 28, 1997 FEBRUARY 29, 1996
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<S> <C> <C>
Revenue $ 155,309 $ 20,674
Cost of revenue (123,113) (19,121)
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Gross profit $ 32,196 $ 1,553
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</TABLE>
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<TABLE>
<CAPTION>
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CORPORATION'S SHARE OF RESULTS OF OPERATIONS OF CONSTRUCTION
JOINT VENTURES (UNAUDITED) (UNAUDITED)
THREE MONTHS ENDED FEBRUARY 28, 1997 FEBRUARY 29, 1996
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<S> <C> <C>
Revenue $ 62,608 $ 9,329
Cost of revenue (53,818) (8,505)
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Gross profit $ 8,790 $ 824
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</TABLE>
Combined financial position at February 28, 1997 and November 30, 1996 and
results of operations of construction joint ventures for the three months ended
February 28, 1997 reflect ownership interests in and operating results of
construction joint ventures acquired in the business combination with Old MK at
September 11, 1996.
MINING VENTURES: At February 28, 1997, the Corporation had ownership interests
in two 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 FEBRUARY 28, 1997 NOVEMBER 30, 1996
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<S> <C> <C>
Current assets $ 364,228 $ 352,586
Non-current assets 104,485 114,835
Property and equipment, net 544,574 509,919
Current liabilities (115,244) (128,435)
Long-term debt (291,613) (259,084)
Other non-current liabilities (417,261) (411,432)
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Net assets $ 189,169 $ 178,389
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</TABLE>
<TABLE>
<CAPTION>
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COMBINED RESULTS OF OPERATIONS OF MINING VENTURES (UNAUDITED)
THREE MONTHS ENDED FEBRUARY 28, 1997
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<S> <C>
Revenue $107,574
Cost of revenue (97,878)
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Gross profit $ 9,696
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</TABLE>
<TABLE>
<CAPTION>
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CORPORATION'S SHARE OF RESULTS OF OPERATIONS OF MINING VENTURES (UNAUDITED)
THREE MONTHS ENDED FEBRUARY 28, 1997
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<S> <C>
Revenue $ 34,546
Cost of revenue (31,493)
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Gross profit $ 3,053
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</TABLE>
On December 23, 1996, Westmoreland Coal and four subsidiaries, including
Westmoreland Resources, filed for protection under Chapter 11 of the United
States Bankruptcy Code. At February 28, 1997, the carrying amount of the
Corporation's ownership interest in Westmoreland Resources was $5,447. The
Corporation cannot presently predict with any certainty to what extent, if any,
the ownership interest in Westmoreland Resources will ultimately be impaired,
but a loss, if any, is not expected to have a material adverse effect on the
Corporation's financial position, results of operations or cash flows.
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4. TRANSACTIONS WITH AFFILIATES
The Corporation rented construction equipment and aircraft and purchased spare
parts, mechanical and transportation services from, and made charitable
contributions to, affiliates of a principal stockholder and Chairman of the
Board of Directors of the Corporation in the three months ended February 28,
1997 and February 29, 1996. The Corporation is obligated under an agreement
dated August 1993 to purchase certain administrative, financial and business
consulting, public and government relations and aviation services from
affiliates of this principal stockholder for an 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 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 services are
reported in the accompanying statements of operations as follows:
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(UNAUDITED) (UNAUDITED)
THREE MONTHS ENDED FEBRUARY 28, 1997 FEBRUARY 29, 1996
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Cost of revenue $925 $941
General and administrative expenses 566 459
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The Corporation also 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 and recognized revenue of $11 and $1,464
in the three months ended February 28, 1997 and February 29, 1996, respectively.
In 1997 and 1996, the Corporation participated in a construction joint
venture with an entity controlled by a principal stockholder and Chairman of the
Board of Directors of the Corporation and recognized revenue of $356 and
earnings of $243 for the three months ended February 28, 1997 and revenue of
$196 and earnings of $22 for the three months ended February 29, 1996. The
Corporation's investment in the joint venture was $1,024 at February 28, 1997
and $1,080 at November 30, 1996.
5. CONTINGENCIES AND COMMITMENTS
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, no remediation costs have been accrued at
February 28, 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.
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OTHER ENVIRONMENTAL MATTERS: The Corporation assumed a liability of Old MK of
$4,000 for the estimated costs of monitoring and treatment of ground water
contamination at or adjacent to rail facilities in Boise, Idaho, previously
owned by Old MK. In December 1996, the current owner and operator of the
facilities qualified for a post-closure permit and assumption of related
monitoring and treatment obligations for such facilities. The Corporation has
not adjusted the accrued liability pending fulfillment of the obligation by the
current owner. The cost, and the Corporation's share thereof, if any, of
remediation of the contamination at the facilities cannot be estimated at this
time and, accordingly, no liability has been accrued.
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 undiscounted liability of Old MK, which at
February 28, 1997 was $1,815, for environmental cleanup activities at four other
sites. The Corporation estimates that such costs could range from $1,550 to
$3,300 in the aggregate.
CONTRACT-RELATED MATTERS: In 1995, Old MK entered into a fixed-price contract
with the Texas Natural Resource Conservation Commission ("TNRCC") for
construction of a solvent-extraction facility and treatment of contaminated soil
at a Superfund site in Texas. Before treating the hazardous wastes, the facility
is required to meet certain specified performance criteria. If the treatment
facility does not meet the performance criteria, the contract may be terminated
and the customer may recover up to $13,619 of advances through a letter of
credit issued at the request of the Corporation. Management believes it is
probable that the required performance can be achieved.
In connection with a 1989 sale of Old MK's ownership interest in a
shipbuilding subsidiary, the Corporation assumed a guarantee of port facility
industrial revenue bonds of $21,000 through 2002. The former subsidiary has
collateralized the bonds with certain assets and has established a sinking fund
of $2,065 for the bonds. The Corporation does not anticipate a loss as a result
of this guarantee.
The Corporation is contingently liable under a residual value guarantee at
the termination of a long-term locomotive lease agreement in 2005 between a
third-party equipment lessor and one of Old MK's customers relating to the sale
by Old MK of 25 remanufactured locomotives to the lessor. The estimated range of
the contingent liability is from $1,500 at February 28, 1997, increasing over
the lease term to $11,300 in 2005. The Corporation does not anticipate a loss as
a result of this guarantee.
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 $23,000. The
Corporation believes that the government's claims and disallowances are
overstated and has an accrued liability at February 28, 1997 of approximately
$14,000. 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 February 28, 1997, $48,336 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 $16,106 in face amount of certain
letters of credit.
OTHER: Former shareholders (the plaintiffs) of TMS, Inc. ("TMS"), which was
acquired by Old MK in December 1992, filed an action on December 22, 1995
alleging they were induced to enter into an agreement to exchange TMS shares for
common stock of Old MK (the defendant) and also enter into noncompete agreements
by the defendants' allegedly false statements. 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 is pending before the court. The Corporation believes that it has
insurance coverage for all or a substantial part of any damages that may be
awarded in this matter. Although the ultimate outcome of this matter
cannot be predicted with certainty, management believes that
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<PAGE>
the outcome will not have a material adverse effect on the Corporation's
financial position, results of operations or cash flows.
There are other claims, lawsuits, disputes with third parties,
investigations and administrative proceedings against the Corporation and its
subsidiaries relating to matters in the ordinary course of its business
activities that are not expected to have a material adverse effect on the
Corporation's financial position, results of operations or cash flows.
6. SUBSEQUENT EVENTS
POSSIBLE BUSINESS ACQUISITION FROM RELATED PARTY: The principal stockholder and
Chairman of the Board of Directors of the Corporation disclosed in a public
filing with the Securities and Exchange Commission on March 19, 1997 his intent
to explore the possible exchange of stock owned by him in an entity which has a
50.1% ownership interest in a copper and molybdenum mine in Butte, Montana, for
newly issued shares of the Corporation's common stock having a market value of
approximately $125,000. The Corporation's Board of Directors has appointed a
special committee of three directors to evaluate and make a recommendation to
the Board regarding such a transaction. The special committee of the Board has
retained independent legal counsel and engaged the services of a financial
advisor. The Corporation has agreed to pay all expenses of the special
committee, including legal and financial advisor's fees and expenses. The public
filing also disclosed, among other things, that any such transaction would be
subject to a number of conditions, including approval by the special committee
and satisfaction of contractual rights of the minority ownership interest in the
mine, if any. There can be no assurance that such a transaction will be
completed or, if completed, as to the timing or terms thereof.
STOCK COMPENSATION PLAN: On April 11, 1997, the Corporation's stockholders
voted for the adoption of the 1997 Stock Option and Incentive Plan for Non-
employee Directors (the "1997 plan") which will provide for grants in the form
of nonqualified stock options and restricted stock awards. Grant prices per
share for stock options will be at fair market value at the date of grant. The
maximum number of shares available for grant will be 500,000, which includes
100,000 shares for restricted stock awards. Grants of nonqualified stock options
and restricted stock awards under the 1997 plan will not preclude grants of
nonqualified stock options to non-employee directors under the Corporation's
1994 stock compensation plan.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE CORPORATION'S FINANCIAL POSITION AT FEBRUARY 28, 1997, ITS RESULTS OF
OPERATIONS AND CASH FLOWS FOR THE QUARTER 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
QUARTER ENDED FEBRUARY 28, 1997 COMPARED TO THE QUARTER ENDED FEBRUARY 29, 1996
THE CONSOLIDATED RESULTS OF OPERATIONS FOR THE QUARTER ENDED FEBRUARY 28, 1997
AND FEBRUARY 29, 1996 INCLUDE THE RESULTS OF OLD MK'S OPERATIONS FOR THE QUARTER
ENDED FEBRUARY 28, 1997.
- --------------------------------------------------------------------------------
(MILLIONS OF DOLLARS) 1997 1996
- --------------------------------------------------------------------------------
Revenue $389.5 $62.0
Gross profit 18.1 3.5
General and administrative expenses (5.5) (5.3)
Goodwill amortization (.9) (.1)
Investment income 2.0 .9
Interest expense (.3) (.2)
Other income (expense), net (.1) .0
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
REVENUE AND GROSS PROFIT: Revenue and gross profit for the quarter ended
February 28, 1997 increased significantly compared to the quarter ended February
29, 1996, principally due to the acquisition of Old MK. Gross profit, as a
percent of revenue, was 4.6% for the first quarter of 1997 compared to 5.6% for
the comparable period of 1996. Gross profit for the quarter ended February 28,
1997 was adversely impacted by provisions of $3.7 million for anticipated losses
on fixed-price construction and environmental remediation contracts. The
Corporation's proportionate share of construction joint venture revenue and
gross profit was $62.6 million and $8.8 million, respectively. During the first
quarter of 1997, approximately 58% of revenue was derived from cost-type
contracts for engineering, construction management and environmental response
services under which gross profit was approximately 3.2% of revenue.
Revenue for the first quarter ended February 28, 1997 decreased $27.2
million or 6.5% compared to the fourth quarter ended November 30, 1996,
primarily due to the completion and substantial completion of two major
environmental remediation service contracts, as well as a reduction in U.S.
government funding on a third contract.
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses of $5.3
million in the first quarter of 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 first quarter
of 1997 increased $1.3 million from the comparable period of 1996, principally
due to the retention of substantially all of Old MK's administrative functions
necessary to support its expanded engineering, construction, mining and
environmental response services both domestically and internationally.
GOODWILL AMORTIZATION: Goodwill amortization for the first quarter of 1997
increased to $.9 million from $.1 million in the comparable period of 1996,
reflecting the periodic amortization of the $125.1 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.
However, resolution of certain preacquisition contingencies may effect the
amount of goodwill and the related amortization.
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 first quarter of 1997 increased compared to the
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comparable period of 1996 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 first quarter of 1997 increased to
$.3 million from $.2 million for the comparable period of 1996 principally due
to the periodic amortization of the $1.1 million prepaid underwriting fee in
connection with the Corporation's five-year, $200.0 million revolving loan and
letter of credit facility obtained in the fourth quarter of 1996.
INCOME TAX BENEFIT (EXPENSE): The effective tax rate for the first quarter of
1997 was 48%, which is higher than the U.S. federal statutory rate of 35%
because of state income and foreign income taxes not currently eligible for use
as credits against U.S. federal income taxes. The $.4 million income tax benefit
for the comparable period of 1996 was provided at the U.S. statutory rate of
35%.
FINANCIAL CONDITION
The Corporation has three principal sources of near-term liquidity: (i) existing
cash and equivalents; (ii) cash generated by its operations, and (iii) the
revolving loan borrowings under its credit facility. 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 equivalents at February 28, 1997 decreased $10.8 million to $37.5
million from $48.3 million at November 30, 1996, reflecting primarily the use of
$6.9 million for operations and $2.2 million for net additions of property and
equipment and a net increase in securities held for sale of $2.0 million. The
Corporation had no outstanding borrowings under its credit facility at February
28, 1997.
The Corporation anticipates capital expenditures for major construction
equipment of approximately $26.0 million during 1997 to meet equipment
requirements of its expanded backlog. Capital expenditures for the first quarter
of 1997 were $2.9 million.
The Corporation may pursue opportunities to complement existing operations
through business combinations and participation in ventures, which may require
additional financing and utilization of the Corporation's capital resources, and
may materially effect the Corporation's financial position, results of
operations and cash flows. The principal stockholder and Chairman of the Board
of Directors of the Corporation disclosed on March 19, 1997 in a public filing
with the Securities and Exchange Commission his intent to explore the possible
exchange of stock owned by him in an entity which has a 50.1% ownership interest
in a copper and molybdenum mine in Butte, Montana, for newly issued shares of
the Corporation's common stock having a market value of approximately $125.0
million. See Note 6 "Subsequent Events -- Possible Business Acquisition from
Related Party" of Notes to Condensed Consolidated Financial Statements.
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.
The Financial Accounting Standards Board has issued Statements No. 123
ACCOUNTING FOR STOCK-BASED COMPENSATION and No. 128 EARNINGS PER SHARE. See
Note 2 "Statements of Financial Accounting Standards" of Notes to Condensed
Consolidated Financial Statements.
BACKLOG
Backlog of all uncompleted contracts at February 28, 1997 was $3,453 million,
compared with $3,520 million at November 30, 1996.
ENVIRONMENTAL CONTINGENCY
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 ("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 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
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<PAGE>
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 $120.0
million. 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, no remediation costs have been accrued.
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.
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<PAGE>
PART II. OTHER INFORMATION
(ALL DOLLAR AMOUNTS IN THOUSANDS)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of the Corporation's stockholders was held on
April 11, 1997 at Boise, Idaho.
(b) At the annual meeting, stockholders of record on February 28, 1997 were
entitled to vote 53,836,296 shares of common stock and 1,799,984 shares of
Series A preferred stock (entitled to 1/10,000 of a vote, or an equivalent
of 180 voting shares) for an aggregate of 53,836,476 equivalent shares. The
results of voting at the annual meeting are summarized below:
(1) Nominees for terms of office to continue until 2000:
For Withheld
David H. Batchelder 47,798,008 560,179
Robert S. Miller, Jr. 48,268,773 89,414
Robert A. Tinstman 48,268,471 89,716
Directors whose terms of office continue after the meeting:
Dorn Parkinson Leonard R. Judd
Terry W. Payne William C. Langley
Dennis R. Washington John D. Roach
(2) Approval of the adoption of the 1997 Stock Option and Incentive
Plan for non-employee directors of the Corporation:
For approval 45,990,735
Against 2,173,220
Abstained 194,232
(3) Ratification of the appointment of Coopers & Lybrand L.L.P. as
independent auditors of the Corporation for the year ending
November 30, 1997:
For ratification 48,271,058
Against 48,529
Abstained 38,600
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
All other items required under Part II are omitted because they are not
applicable.
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<PAGE>
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/James E. McCallum
--------------------------------------------
Acting Controller and Principal Accounting
Officer, in his respective capacities as such
Date: April 14, 1997
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<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 consolidated financial statements and financial statement footnotes
of Morrison Knudsen Corporation for the three months ended February 28, 1997,
and is qualified in its entirety by reference to such consolidated financial
statements and financial statement footnotes:
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-END> FEB-28-1997
<CASH> 37,498
<SECURITIES> 0
<RECEIVABLES> 207,044
<ALLOWANCES> 1,497
<INVENTORY> 0
<CURRENT-ASSETS> 418,519
<PP&E> 245,689
<DEPRECIATION> 162,470
<TOTAL-ASSETS> 795,177
<CURRENT-LIABILITIES> 348,422
<BONDS> 0
0
18,000
<COMMON> 539
<OTHER-SE> 319,036
<TOTAL-LIABILITY-AND-EQUITY> 795,177
<SALES> 5,422
<TOTAL-REVENUES> 389,530
<CGS> 1,561
<TOTAL-COSTS> 371,426
<OTHER-EXPENSES> 4,600
<LOSS-PROVISION> 1,821
<INTEREST-EXPENSE> 257
<INCOME-PRETAX> 13,420
<INCOME-TAX> (6,416)
<INCOME-CONTINUING> 7,004
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,004
<EPS-PRIMARY> .13
<EPS-DILUTED> 0
</TABLE>
