SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarter Ended
March 31, 1996
Commission File Number 1-8889
[Logo] MORRISON KNUDSEN CORPORATION
A Delaware Corporation
IRS Employer Identification No. 82-0393735
MORRISON KNUDSEN PLAZA, BOISE, IDAHO 83729
208/386-5000
The registrant's common stock is registered on the New York and Pacific Stock
Exchanges.
At April 30, 1996, 33,231,191 shares of the registrant's common stock were
outstanding (excluding 461,666 shares held in treasury).
The registrant has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months and has
been subject to such filing requirements for the past 90 days.
/X/ Yes / / No
MORRISON KNUDSEN CORPORATION
Quarterly Report Form 10-Q for the
Three Months Ended March 31, 1996
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
PAGE
Item 1. Consolidated Condensed Financial Statements and Notes
Thereto
Statements of Operations for the Three Months
Ended March 31, 1996 and 1995 I-1
Balance Sheets at March 31, 1996 and
December 31, 1995 I-2
Statements of Cash Flows for the
Three Months Ended March 31, 1996 and 1995 I-4
Notes to Financial Statements I-5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations I-17
PART II. OTHER INFORMATION
Item 3. Legal Proceedings II-1
Item 6. Exhibits and Reports on Form 8-K II-3
Signatures II-3
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MORRISON KNUDSEN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995 (UNAUDITED)
(THOUSANDS OF DOLLARS EXCEPT SHARE DATA)
1996 1995 (a)
Revenue $ 324,203 $ 366,486
Cost of revenue (309,474) (361,463)
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Operating income from continuing operations 14,729 5,023
General and administrative expenses (13,498) (10,619)
Interest expense (5,224) (5,431)
Equity in net income of unconsolidated affiliates 3,241 11,947
Gain (loss) on dispositions of investments in affiliates and other assets, net 2,130 (20,019)
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Income (loss) from continuing operations before income taxes 1,378 (19,099)
Income tax expense (1,082) (537)
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Income (loss) from continuing operations 296 (19,636)
Discontinued operations:
Loss from discontinued MK Rail and Transit,
net of tax expense of $107 -- (6,183)
Loss on disposition of discontinued operations -- (25,500)
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Net income (loss) $ 296 $ (51,319)
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Income (loss) per common share:
Continuing operations $.01 $ (.60)
Discontinued operations -- (.96)
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Net income (loss) $.01 $(1.56)
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Common shares used to compute earnings (loss) per share 33,240,000 32,865,000
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(a) Certain amounts reclassified to conform to 1996 financial presentation.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
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MORRISON KNUDSEN CORPORATION
CONSOLIDATED BALANCE SHEETS
AT MARCH 31, 1996 (UNAUDITED) AND DECEMBER 31, 1995
(THOUSANDS OF DOLLARS EXCEPT SHARE DATA)
ASSETS 1996 1995
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CURRENT ASSETS
Cash and cash equivalents $ 78,638 $ 63,086
Accounts receivable including retentions of $13,739 and $16,952 141,100 166,104
Unbilled receivables 78,132 87,902
Refundable income taxes, net -- 22,803
Investments in and advances to construction joint ventures 16,998 15,186
Deferred income taxes 11,975 10,590
Investments in unconsolidated affiliates held for sale 5,389 32,189
Net assets of discontinued MK Rail operations 72,000 72,000
Other 18,615 14,944
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Total current assets 422,847 484,804
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INVESTMENTS AND OTHER ASSETS
Securities available for sale, at fair value 27,256 24,440
Investments in and advances to unconsolidated affiliates 54,093 51,031
Goodwill and other intangibles, net 3,776 4,006
Other investments and assets 5,664 7,787
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Total investments and other assets 90,789 87,264
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PROPERTY AND EQUIPMENT, AT COST
Land and mineral rights 10,302 10,507
Leasehold improvements 67,878 60,079
Machinery and equipment 3,049 9,140
Construction equipment 101,163 132,776
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Total property and equipment 182,392 212,502
LESS ACCUMULATED DEPRECIATION (137,714) (156,410)
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Property and equipment, net 44,678 56,092
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TOTAL ASSETS $ 558,314 $ 628,160
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
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LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
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CURRENT LIABILITIES
Short-term and current portion of long-term debt $ 213,345 $ 251,226
Estimated reimbursement obligations of discontinued Transit operations 111,444 111,444
Accounts payable including retentions of $18,266 and $20,076 101,136 130,969
Accrued salaries, wages and benefits 43,802 45,362
Accruals for estimated losses on uncompleted contracts 26,058 21,973
Accrued and deferred interest on antecedent debt 14,427 9,320
Other accrued liabilities 53,960 64,284
Billings in excess of costs and earnings on uncompleted contracts 66,088 63,252
Advances from customers 9,968 19,181
Income taxes payable 1,996 --
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Total current liabilities 642,224 717,011
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NON-CURRENT LIABILITIES
Deferred income taxes 9,115 8,061
Deferred compensation 14,467 12,999
Deferred income 9,534 10,572
Accrued workers' compensation insurance and other non-current liabilities 20,887 19,006
Accrued postretirement benefit obligation 30,479 29,193
Accrued litigation settlements 25,000 25,000
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Total non-current liabilities 109,482 104,831
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COMMITMENTS AND CONTINGENCIES (Note 8)
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STOCKHOLDERS' EQUITY (DEFICIENCY)
Preferred stock, par value $.10, authorized 10,000,000 shares, none
Common stock, par value $1.67, authorized 100,000,000 shares, issued
33,692,857 shares 56,156 56,156
Capital in excess of par value 270,553 270,661
Accumulated deficit (509,851) (510,147)
Treasury stock, 450,089 and 454,914 shares, at cost (7,655) (7,757)
Unearned compensation - restricted stock (1,155) (1,582)
Cumulative translation adjustments (1,626) (1,578)
Net unrealized holding gain on securities available for sale 186 565
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Total stockholders' equity (deficiency) (193,392) (193,682)
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) $ 558,314 $ 628,160
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MORRISON KNUDSEN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1996, AND 1995 (UNAUDITED)
(THOUSANDS OF DOLLARS)
1996 1995 (a)
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OPERATING ACTIVITIES
Net income (loss) $ 296 $ (51,319)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Results of discontinued operations and loss on disposal -- 31,683
(Gain) loss on disposition of businesses and assets, net (2,130) 20,019
Depreciation and amortization 4,491 4,370
Provision for (realization of) estimated losses on uncompleted contracts, net 4,085 (20,270)
Increase in working capital from cancellation
of accounts receivable sales -- (60,000)
Other changes in working capital, net 20,134 1,917
Increase (decrease) in other assets and liabilities, net 553 3,526
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Net cash provided (used) by operating activities 27,429 (70,074)
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INVESTING ACTIVITIES
Property and equipment acquisitions (3,077) (1,140)
Property and equipment disposals 3,566 2,698
Purchase of securities available for sale (9,845) (6,875)
Proceeds from securities available for sale 6,648 15,035
Proceeds from sales of investments in affiliates and other assets 29,264 --
Investments in and advances to unconsolidated affiliates (551) 671
Other investing activities -- (149)
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Net cash provided (used) by investing activities 26,005 10,240
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Net cash used by discontinued operations -- (37,397)
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FINANCING ACTIVITIES
Borrowing (repayments) under credit agreements and short-term debt, net
including $60,000 from cancellation of accounts receivable sales in 1995 (37,882) 117,131
Dividends paid -- (6,164)
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Net cash provided (used) by financing activities (37,882) 110,967
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Cash and cash equivalents of businesses held for sale -- (3,518)
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Increase in cash and cash equivalents 15,552 10,218
Cash and cash equivalents at beginning of period 63,086 66,864
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Cash and cash equivalents at end of period $ 78,638 $ 77,082
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OTHER CASH FLOW INFORMATION FOR CONTINUING AND DISCONTINUED OPERATIONS
Interest paid $ 1,716 $6,417
Income taxes paid (refunded), net (21,300) 527
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(a) Certain amounts reclassified to conform to 1996 financial presentation.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
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MORRISON KNUDSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLAR AMOUNTS IN THOUSANDS)
THE TERM "CORPORATION" AS USED IN THIS QUARTERLY REPORT INCLUDES MORRISON
KNUDSEN CORPORATION AND ITS CONSOLIDATED SUBSIDIARIES UNLESS OTHERWISE
INDICATED.
1. BASIS OF PRESENTATION AND MANAGEMENT'S PLANS
The accompanying consolidated financial statements include the accounts of the
Corporation and its majority-owned subsidiaries. Investments in 20 percent to 50
percent owned companies and joint ventures are accounted for by the equity
method. The Corporation's proportionate share of joint venture revenue, cost of
revenue and operating income is included in the consolidated statements of
operations. Intercompany accounts and transactions have been eliminated.
The consolidated financial statements have been prepared without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain financial information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. These consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
included in the Corporation's Annual Report on Form 10-K for the year ended
December 31, 1995. The comparative consolidated balance sheet and financial
statement footnotes included herein as December 31, 1995 amounts have been
derived from the audited balance sheet and financial statement footnotes at
December 31, 1995.
The preparation of the Corporation's consolidated financial statements in
conformity with generally accepted accounting principles necessarily requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the balance sheet dates and the reported amounts of revenues and costs during
the reporting periods for long-term contracts. Actual results of contract
operations could differ from the estimates.
On October 17, 1995, the Corporation reached an agreement to transfer
substantially all of the assets, certain liabilities, all contract operations
and management of Transit to American Passenger Rail Car Company, L.L.C.
("Amerail") a newly-formed company wholly-owned by persons not affiliated with
the Corporation. The Corporation has accounted for the disposition of Transit as
a discontinued operation. The Corporation remains liable for certain net cash
losses resulting from Amerail's performance of contracts transferred to Amerail.
In this connection, the Corporation agreed to guarantee Amerail's reimbursement
obligations to certain banks ("Metra Banks") and its bonding company which are
providing a standby letter of credit and credit facilities to support the
performance of the contract with the Illinois Commuter Rail Division of the
Regional Transit Authority ("Metra") d/b/a Metra/Metropolitan Rail ("Metra
Contract") and the existing manufacturing and refurbishing contracts, other than
the Metra Contract, with various transit agencies (the "Non-Metra Contracts")
transferred to Amerail. The Corporation has agreed to reimburse the Metra Banks
and its bonding company for certain amounts borrowed by Amerail under these
facilities.
The Corporation, in estimating its Transit reimbursement obligations makes
significant assumptions concerning cost estimates, projected to the estimated
completion dates of contracts which are in their early stages of production, for
labor productivity rates, material price and usage, for interest expense on the
estimated borrowings under the credit facilities extended to Amerail, additional
general and administrative expenses and unabsorbed manufacturing overhead due to
the anticipated absence of new work during the period of Amerail's performance
of the contracts transferred to Amerail. The Corporation has no management
control over Amerail and therefore must rely on financial and operating
information provided by Amerail to estimate its reimbursement obligations. Due
to uncertainties in the estimation process, it is at least reasonably possible
that estimated costs to complete the Metra Contract will be further revised in
the near-term. See Note 2. "Changes in Business - Discontinued Transit
Operations and Reimbursement Obligations."
The Corporation has a substantial history of making reasonably dependable
estimates of the extent of progress towards completion, contract revenues, and
contract costs on its long-term construction contracts. However, due to
uncertainties inherent in the estimation process, the Corporation can give no
assurance that it will not revise its estimates of completion costs in the
near-term for certain construction projects.
The Corporation recognizes revenue on construction contracts, including
substantially all of its construction joint-venture contracts, on the
percentage-of-completion method, based on the proportion of costs incurred on
the contract to total estimated contract costs. Construction-management and
engineering contract revenue is recognized on the accrual method.
Revisions in uncompleted contract revenue and cost estimates are reflected
in the accounting period when known. Any anticipated losses on uncompleted
contracts are charged to operations as soon as they are determinable. Claims for
addi-
I-5
tional contract revenue in excess of original contract price are recognized when
an offer to settle has been received from the customer.
The unaudited consolidated financial statements included herein reflect all
adjustments consisting of normal recurring adjustments which are, in the opinion
of management, necessary to a fair presentation of the results of operations and
cash flows for the interim periods. The results of operations for the three
month period ended March 31, 1996 are not necessarily indicative of the results
to be expected for the full year.
The Corporation's consolidated financial statements have been prepared on
the basis that it will continue as a going concern, which contemplates
continuity of operations, realization of assets and liquidation of liabilities
in the ordinary course of business. There are certain conditions that raise
substantial doubt about the Corporation's ability to continue as a going
concern:
- The Corporation reported losses from continuing operations of $79,636 and
$155,698 for the years ended December 31, 1995 and 1994, respectively. The
Corporation reported net losses of $261,938 and $349,635 for the years ended
December 31, 1995 and 1994, respectively, including losses from discontinued MK
Rail Corporation ("MK Rail") and Transit segment ("Transit") operations of
$182,302 and $193,937 in 1995 and 1994, respectively.
- Net cash used by the discontinued MK Rail and Transit operating activities
was $76,998 and $200,883 for the years ended December 31, 1995 and 1994,
respectively.
- At March 31, 1996 the Corporation had a stockholders' deficiency of
$193,392 which included an accumulated deficit of $509,851.
- At March 31, 1996 and December 31, 1995 the Corporation had working capital
deficiencies of $219,377 and $232,207, respectively.
- The Corporation expects negative cash flows from operations in 1996.
- The Corporation does not expect to make its required debt repayments in
1996.
The Corporation's ability to continue as a going concern is dependent upon
the Corporation successfully obtaining relief from the burden of its existing
indebtedness, including its antecedent debt and Transit reimbursement
obligations and returning the Corporation to profitable operations. In this
connection the Corporation is pursuing a recapitalization through a partial
prepackaged plan of reorganization under Chapter 11 of the United States
Bankruptcy Code.
RECAPITALIZATION PLAN
The Corporation, which has been experiencing significant operating losses and is
facing severe liquidity problems, has been discussing with certain of its
secured and unsecured creditors, including holders of the Corporation's existing
secured indebtedness, its bonding company, lessors in connection with certain
long-term, noncancelable leases, and representatives of potential investors,
alternatives to reduce or liquidate the Corporation's current and future
financial obligations to permit the continuation of the Corporation as a going
concern. These alternatives included, among other things, a number of remedies
available to the Corporation, the goal of which is to alleviate the problems
caused by the Corporation's excessive debt levels, debt service and certain
long-term lease payment obligations, to enable the Corporation to continue to
implement its revised business strategy and to help assure the Corporation's
long-term viability. For that purpose, the Corporation initially presented a
proposed recapitalization plan (the "Recapitalization") to certain of its
secured creditors at a meeting held in February 1996, and has continued to
discuss the terms of the Recapitalization with those secured creditors. Pursuant
to the Recapitalization, the Corporation would exchange its existing secured
indebtedness, consisting of its antecedent debt and Transit reimbursement
obligations and certain long-term lease obligations for a new issue of the
Corporation's common stock, (which initially will represent all of the
outstanding common stock of the Corporation) and common stock of MK Rail
representing the Corporation's 65% ownership interest in MK Rail, the
Corporation's $52,200 principal amount of its note receivable from MK Rail with
interest at the prime rate (8.25% at March 31, 1996) and certain other assets.
Existing stockholders and the securities class actions claimants would receive
new common stock purchase warrants in exchange for all of the outstanding shares
of common stock and all the shares of common stock to be issued by the
Corporation in settlement of the MK Securities Class Actions and MK Rail
Securities Class Actions.
On April 15, 1996, the Corporation solicited acceptances of its
Recapitalization from its impaired creditors (holders of the Corporation's
existing secured indebtedness) and requested its impaired creditors to return
their completed ballots no later than 5:00 p.m. Eastern Daylight time on May 24,
1996. The Recapitalization would be effected through a partial prepackaged plan
of reorganization pursuant to Chapter 11 of the United States Bankruptcy Code
("prepackaged plan"). The objective of a prepackaged plan under Chapter 11 would
be to allow the Corporation to achieve its objectives in the shortest time
possible, and continue operations in its recapitalized form without the full
burden of debt that existed prior to the bankruptcy proceedings.
I-6
The prepackaged plan contemplates a settlement of the Corporation's
obligations to its impaired secured creditors, while the Corporation's unsecured
creditors, its vendors, subcontractors and material suppliers will not be
impaired. The Corporation intends to conduct its business as usual, and the
prepackaged plan will permit the Corporation to carry on its business, to bid,
propose and negotiate for new contract awards and to continue to perform its
existing contracts, including its contracts with various agencies of the U.S.
Government. The prepackaged plan would provide that valid claims of trade
creditors, including subcontractors and material suppliers, are to be paid in
full and on time and that the holders of such claims shall not be required to
file a proof of claim or take other formal action to obtain such payment.
To ensure the continuity of its work force and to further accommodate the
unimpaired treatment of employee benefits, the Corporation intends that
salaries, wages, expense reimbursements, vacations, health related benefits,
severance benefits and similar benefits of employees, as well as the health
benefits of its covered retirees, their spouses and dependents, will be
unaffected in the reorganization contemplated by the prepackaged plan.
The Recapitalization, through the prepackaged plan, is designed to
substantially reduce the Corporation's secured debt obligations, lessen the risk
of a protracted Chapter 11 proceeding, which would have a significant adverse
impact on the Corporation's business, and create a capital structure that allows
the Corporation to continue in operation and maintain and enhance its
competitive position. In addition, management anticipates that the prepackaged
plan would also allow management to concentrate more of their time on improving
the Corporation's business opportunities, rather than on managing its debt
obligations.
As of the date of this Quarterly Report on Form 10-Q, the Corporation has
not reached final agreement with its secured creditors. The final form or
results of a Recapitalization cannot be predicted, and there can be no assurance
that a restructuring can be accomplished through a prepackaged plan. Any such
restructuring, if successful, would substantially dilute or eliminate the value
of existing stockholders' interests. The Corporation continues to explore
opportunities with potential investors.
On May 16, 1996, the Corporation and Washington Construction Group, Inc.
("Washington") reached a preliminary non-binding agreement in principle (the
"agreement") as to the economic terms of the merger of the Corporation with and
into Washington subject to the successful negotiation and execution of a
definitive agreement and the successful completion of the Corporation's proposed
Recapitalization, among other things.
Under the terms of the agreement, Washington would (i) issue shares of
common stock representing 45% of the combined companies (estimated to be 24.1
million shares) and pay $13,300 cash to the holders of certain claims set forth
in the Corporation's proposed Recapitalization plan and (ii) issue warrants to
purchase an aggregate of 2,765,000 shares of new common stock of the combined
companies at an exercise price of $12.00 per share for a term of five years in
exchange for all of the outstanding shares of the Corporation's common stock.
In the event the Corporation fails to proceed with the proposed
Recapitalization or agrees, following termination of the agreement, to sell a
majority of its stock or any of its principal operating businesses to a party
other than Washington and in either event, Washington was not in default of its
obligations under the agreement, the Corporation would be liable for a break-up
fee in the maximum amount of $12,000 plus certain out-of-pocket expenses of
Washington not to exceed $1,000. In connection with its Recapitalization plan,
Washington would pay in full the Corporation's debtor-in-possession loan, not to
exceed $50,000.
The Corporation's management believes that further refinancings of the
Corporation's existing secured indebtedness are unavailable, but that even if
available they would not be sufficient to enable the Corporation to continue as
a going concern, because of the overwhelming burden of existing debt and the
Corporation's inability to make its required debt repayments in 1996. If the
Corporation does not effect a financial restructuring and reorganization as
contemplated under the prepackaged plan or is unable to arrange a transaction
with a strategic investor, the Corporation will be forced to consider other
available options, which may include the commencement or continuation of a
Chapter 11 case without a preapproved plan. A nonprepackaged Chapter 11 case
would likely be lengthier, involve more contested issues with creditors and
other parties in interest, and result in significantly increased Chapter 11
expenses for professional consultants, a negative impact on cash flow due to
lack of customer confidence resulting in a reduction in new contract awards, and
a corresponding reduction in the consideration received by the Corporation's
creditors and existing stockholders than would be the case with a prepackaged
plan.
Any recapitalization, including the proposed Recapitalization, if
successful, will substantially dilute or eliminate the value of existing
stockholders' and the securities class action claimants' interests. Under the
terms of the Corporation's proposed Recapitalization the sole recovery for
existing stockholders and the securities class action claimants (other than the
cash settlement proceeds provided by the Corporation's insurers) would be
represented by the proposed stock purchase warrants.
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DEBT RESTRUCTURING
During 1995 and through March 31, 1996, the Corporation completed a number of
divestiture transactions with respect to its numerous businesses and assets and
received federal and state tax refunds, which provided aggregate cash proceeds
of approximately $117,000 to fund operations and to repay obligations under the
bridge loan facility. Despite these developments in the financial and
operational restructuring of the Corporation, it became apparent to management
in the first quarter of 1996 that the proceeds from divestitures and tax refunds
would at most provide sufficient funds to meet the Corporation's bridge loan
repayment obligation on March 31, 1996. Moreover, the Corporation had hoped that
the divestiture of the Transit business and the restructuring of its bank
facilities and the Transit bonding exposure accomplished during 1995 would allow
the Corporation to attract new business and achieve positive operating results
that would allow the Corporation to access the public debt or equity markets or
to arrange an equity infusion from a strategic investor in 1996.
On March 31, 1996, the Corporation and certain of its secured creditors
agreed to amend certain terms and conditions of the bridge loan facility, which
expired on March 31, 1996. The amendments to the bridge loan facility included,
among other things, establishment of a new borrowing capacity of $47,500, and
extension of its termination date to September 30, 1996. Outstanding borrowing
under the amended bridge loan facility will be subject to interest at the prime
rate plus one and one-half percent per annum (9.75% at March 31, 1996) due and
payable on the last day of each month and on September 30, 1996. On April 2,
1996, as partial consideration for the extension of the bridge loan facility,
the Corporation paid $14,427 interest on the antecedent debt that had been
accrued and deferred from July 1, 1995 through March 31, 1996. Outstanding
borrowings under the bridge loan facility as of the date of this Quarterly
Report on Form 10-Q were $14,500. See Note 6. "Short-Term Debt"Note to
Consolidated Financial Statements.
2. CHANGES IN BUSINESS
DISCONTINUED TRANSIT OPERATIONS AND REIMBURSEMENT OBLIGATIONS: On October 17,
1995, the Corporation reached an agreement to transfer substantially all of the
assets, certain liabilities, all contract operations and management of Transit
to Amerail. Amerail has managerial authority over its operations including the
completion of all of the Transit contracts transferred to Amerail. The
Corporation cannot exercise any control over the management of Amerail and the
execution of the contracts transferred to Amerail. The Corporation has accounted
for the disposition of Transit as a discontinued operation.
In connection with the disposition of Transit, two new credit facilities
were provided to Amerail, (i) an $80,000 facility guaranteed by the
Corporation's bonding company to fund the non-Metra Contracts and (ii) a $65,000
revolving credit facility provided by the Metra Banks to fund the Metra
Contract. The Corporation's reimbursement obligation to its bonding company for
the surety's future losses on the Metra and non-Metra Contracts including the
guarantee of the $80,000 facility is governed by the Transit Reimbursement
Agreement. The agreement provides, among other things, that the Corporation's
maximum reimbursement obligation to its bonding company for net cash losses of
the Metra and non-Metra Contracts is $31,249. Such actual net cash losses of the
bonding company were estimated to exceed the Corporation's maximum reimbursement
obligation at March 31, 1996.
The Corporation's reimbursement obligation to the Metra Banks, which are
providing a standby letter of credit and revolving credit facility up to an
aggregate commitment of $138,664 at April 30, 1996, includes the $65,000
revolving credit facility to fund the Metra Contract, is governed by the Metra
Guaranty. The amount available under the standby letter of credit is reduced by
a predetermined amount for each transit car delivered to and accepted by Metra.
For purposes of estimating the Corporation's reimbursement obligation under
the Metra Guaranty, the Corporation has assumed, among other things, (i) that
the standby letter of credit is not drawn, if ever, prior to the reduction of
the letter of credit to approximately $80,000, based on continued delivery by
Amerail of transit cars under the Metra Contract, and (ii) that the Metra Banks
do not increase their commitment to provide financing to Amerail for the Metra
Contract beyond approximately $80,000. Although the completion of the Metra
Contract by Amerail may require financing over and above such amount, the
Corporation has assumed that such additional financing would be provided by the
bonding company. Any such additional financing by the bonding company would be
subject to the $31,249 maximum reimbursement obligation of the Corporation to
the bonding company. However, if Amerail were to default under the Metra
Contract prior to the reduction of the standby letter of credit to such amount
and the letter of credit is drawn or the Metra Banks provide financing over and
above such amount, then the reimbursement obligation of the Corporation under
the Metra Guaranty could increase above the estimated amount.
The Corporation's reimbursement obligation under the Transit Reimbursement
Agreement is governed by a Distribution Agreement among the Corporation, the
bonding company and the agent for the antecedent debt (the "Distribution
Agreement"). Under the Distribution Agreement, the amount owing to the bonding
company under the Transit Reimbursement Agreement becomes subject to a maximum
of $31,249, and becomes payable 90 days after the date the last rail car is
accepted by a transit agency which is estimated to be 1998. Prior to this date,
however, the Distribution Agreement
I-8
requires certain amounts to be placed in escrow for the benefit of the bonding
company to cover such future payment of the ultimate amount owing under the
Transit Reimbursement Agreement. These escrow requirements are tied to when (i)
dispositions of assets are made requiring payments to be made on account of
antecedent debt and (ii) payments are made on account of antecedent debt.
The Corporation's reimbursement obligation under the Metra Guaranty
(estimated at $80,195 at March 31, 1996) is subject to the terms and conditions
of the Amended and Restated Override Agreement dated as of October 10, 1995
("Override Agreement") governing the repayment of the remainder of the
Corporation's antecedent debt. Optional and mandatory payments under the
Override Agreement, in addition to repaying funded antecedent debt, are escrowed
on account of the contingent Metra Guaranty repayment obligation and other
contingent antecedent debt obligations until, among other things, such amount
becomes fixed and liquidated.
The Corporation's proposed Recapitalization contemplates a settlement of
the Corporation's debt obligations with its secured creditors, which includes
the discharge of estimated reimbursement obligations of its discontinued Transit
operations through an exchange of a new issue of the Corporation's common stock,
common stock representing its 65% ownership interest in MK Rail and $52,200
principal amount of its note receivable from MK Rail and other assets.
Discontinued MK Rail Operations: In March 1995, the Corporation adopted a plan
to dispose of its 65% ownership interest in MK Rail Corporation. Accordingly,
the Corporation has accounted for the planned divestiture as a discontinued
operation. In connection with its decision to dispose of MK Rail, the
Corporation has recorded an estimated loss on disposition of its ownership
interest in and note receivable from MK Rail based upon the best information
available in the circumstances.
Summary results of operations for the discontinued segment for the three
months ended March 31, 1996 and 1995 follows:
RESULTS OF OPERATIONS (Unaudited) (Unaudited)
THREE MONTHS ENDED MARCH 31, 1996 1995
--------------------------------------------------------------------------------
Revenue $69,655 $ 78,404
Operating income (loss) 5,562 (1,351)
Net income (loss) 2,584 (8,162)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Corporation's share of net income (loss) $ 1,680 $ (5,305)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
The Corporation recognized its share of MK Rail's net income for the first
quarter of 1996. However, in determining the estimated recovery value of its
investment in and note receivable from MK Rail, the Corporation accrued an
equivalent expected loss on disposition at March 31, 1996.
The assets and liabilities of MK Rail have been segregated on the
consolidated balance sheets atMarch 31, 1996 and December 31, 1995. Such amounts
are summarized as follows:
(Unaudited)
March 31, 1996 December 31, 1995
-----------------------------------------------------------------------------------------
Cash and cash equivalents $ 6,556 $ 5,696
Accounts receivable and unbilled receivables 52,390 43,934
Inventories 95,188 99,459
Other current assets 2,923 2,903
Property and equipment, net 61,463 61,587
Deferred income taxes 27,211 28,363
Goodwill and other intangibles, net 30,564 31,575
Prepaid lease cost 6,973 7,182
Short-term and current portion of long-term debt (51,930) (60,825)
Accounts payable and accrued liabilities (48,999) (51,780)
Advances from customers (7,360) --
Debt due after one year (10,031) (7,198)
Other non-current liabilities (11,019) (10,901)
Minority interests (36,016) (35,083)
Cumulative translation losses 5,206 5,223
Accrual for estimated loss on disposal (51,119) (48,135)
-----------------------------------------------------------------------------------------
Net assets of discontinued MK Rail operations $ 72,000 $ 72,000
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
I-9
MK RAIL INTERCOMPANY AGREEMENTS: On June 15, 1995, the Corporation entered into
an agreement with MK Rail regarding the amount of intercompany indebtedness owed
by MK Rail to the Corporation and certain other matters. The agreement resulted
in the Corporation reducing its receivable from MK Rail through a capital
contribution of $29,500. The remaining balance of $52,200 was converted into a
promissory note, with interest at the prime rate, due in 2000 with earlier
repayments under certain default and change-of-interest conditions. The
outstanding balance of the promissory note is due and payable in full upon the
acquisition of all of the common stock or substantially all of the assets of MK
Rail by a third party. The estimated loss on disposition of MK Rail recognized
in the consolidated statements of operations includes the effects of this
additional capital contribution to MK Rail and the adjustment to realized value
upon the sale of MK Rail's promissory note subsequent to December 31, 1995. The
Corporation, in connection with its proposed Recapitalization plan, has proposed
to exchange the $52,200 principal amount of its MK Rail promissory note and
accrued interest thereon, together with other consideration for the discharge of
the Corporation's existing secured indebtedness.
3. DISPOSITIONS OF INVESTMENTS IN AFFILIATES AND OTHER ASSETS
DISPOSITIONS IN 1996
MCCONNELL DOWELL CORPORATION, LIMITED: In the first quarter of 1996, the
Corporation sold its 62.8% ownership interest in MDC for $28,000 net cash
proceeds and recognized a gain on disposal of $2,130. The Corporation, MDC and
MDC's lender banks, as of the date of this Quarterly Report on Form 10-Q, are
holding discussions concerning the banks release of the Corporation's financial
guarantees amounting to $25,838 in support of MDC's contract performance
obligations to its customers.
STRAIT CROSSING DEVELOPMENT, INC.: On March 29, 1996, the Corporation and the
SCDI members reached an agreement in connection with the Corporation's
withdrawal from the joint venture (the "withdrawal agreement") under which the
Corporation, in exchange for being indemnified by SCDI members against
liabilities relating to the project including contract performance guarantees
and those outstanding liabilities or potential liabilities to the bonding
companies and those under a bank-provided letter of credit, the Corporation
agreed among other things, to transfer its $24,841 investment in the joint
venture and its 36% ownership interest in SCDI, to the SCDI members, as well as
assign to an SCDI member, as maker, the promissory note received as partial
consideration for the sale of its 9% ownership interest in SCDI. The
Corporation, further agreed to sell its title to and interest in certain marine
equipment to the SCDI members.
The Government of Canada has consented to the terms and conditions of the
withdrawal agreement and has released the Corporation from its contract
performance guarantee under the development agreement. The Corporation had fully
provided for the divestiture of its investment in the joint venture and
cancelation of its note receivable and accrued interest thereon at December 31,
1995. The Corporation recognized a gain of $4,831 in connection with the sale of
its marine equipment to the SCDI members and its withdrawal from the SCDI joint
venture in March 1996.
DISPOSITIONS IN 1995
SALE OF INVESTMENT IN MK GOLD COMPANY ("MK GOLD"): On June 6, 1995, the
Corporation sold its 46.4% ownership interest in MKGold for $22,500 cash. As a
condition to the purchase of the shares, the buyer acquired MKGold's $20,000
bank credit facility and released the Corporation from its guarantee obligations
under the facility. The Corporation recognized a loss on disposal of $9,256.
MK INVESTMENTS, INC. (NORTH PACIFIC CONSTRUCTION OPERATIONS)("MKI"): Based on
preliminary negotiations with a prospective buyer of the Corporation's North
Pacific construction operations the Corporation recognized a provision of $7,554
to write-down the carrying amount of its 100% ownership interest in MKI to its
estimated recovery value. In September 1995, the Corporation completed the sale
of certain MKI net assets and operations for $17,100 cash.
SALE OF MORRISON KNUDSEN DEPOT ("DEPOT"): Based on an indicative offer by the
City of Boise to buy the Depot the Corporation wrote-down its carrying amount by
$3,209. In December 1995, the Corporation completed the sale of the Depot for
$1,500 cash, payable in three equal installments ending June 1996.
4. CONSTRUCTION JOINT VENTURES
The Corporation has from time to time entered into a number of partnership
arrangements with other contractors commonly referred to as "joint ventures".
Construction joint ventures frequently have a short life span, since they are
designed and created for the sole purpose of bidding on, negotiating for, and
completing one specific project and are liquidated when the project is
completed. The number of joint ventures in which the Corporation participates
and the size, scope and duration of the projects vary between periods. Specific
joint ventures change from period to period, and the comparability of the
following summary financial information between periods may not be meaningful.
The following table pre-
I-10
sents summarized financial information of the construction joint ventures on a
combined 100 percent basis at March 31, 1996 and December 31, 1995 and for the
three months in the periods ended March 31, 1996 and 1995.
(Unaudited)
FINANCIAL POSITION AT MARCH 31, 1996 DECEMBER 31, 1995
----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 27,996 $ 49,781
Other current assets 62,230 65,781
Non-current assets -- 22,112
Property and equipment, net 2,034 67,038
Advances from customers (16,051) (16,197)
Other current liabilities (50,753) (161,066)
----------------------------------------------------------------------------------------------------------------
NET ASSETS $ 25,456 $ 27,449
----------------------------------------------------------------------------------------------------------------
Corporation's investments in and advances to construction joint ventures $ 16,998 $ 15,186
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS (Unaudited) (Unaudited)
THREE MONTHS ENDED MARCH 31, 1996 1995
----------------------------------------------------------------------------------------------------------------
Combined joint ventures, net
Revenue $ 126,489 $ 218,089
Cost of revenue (104,686) (210,317)
Operating income $ 21,803 $ 7,772
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Corporation's share, net
Revenue $ 24,821 $ 68,496
Cost of revenue (22,011) (65,283)
----------------------------------------------------------------------------------------------------------------
Operating income $ 2,810 $ 3,213
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
5. INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES
The following table presents summarized financial information of the
unconsolidated affiliated companies accounted for by the equity method on a
combined 100 percent basis at March 31, 1996 and December 31, 1995 and for the
three months in the periods ended March 31, 1996 and 1995. Amounts for all
periods presented include the accounts of the following individually significant
investees (the Corporation's ownership interests therein are shown
parenthetically): AmerBank (29.5%); Westmoreland Resources, Inc. (24%),
Mitteldeutsche Braunkohlengesellschaft mbH ("MIBRAG mbH") (33%) and McConnell
Dowell Corporation, Limited ("MDC") (62.8%) until its disposition in March 1996.
Because of the Corporation's decision to dispose of its ownership interest
in AmerBank the carrying amount of its investment therein is reflected in the
accompanying balance sheets at March 31, 1996 and December 31, 1995 under the
caption "Investments in Unconsolidated Affiliates Held for Sale". The carrying
amount of the Corporation's 29.5% ownership interest in AmerBank at March 31,
1996 was $5,389 and was less than the fair market value of AmerBank's publicly
traded stock, based on published market prices at March 31, 1996.
(Unaudited)
FINANCIAL POSITION AT MARCH 31, 1996 DECEMBER 31, 1995
-------------------------------------------------------------------------------------------------------------------------
Current assets $ 506,820 $ 618,701
Non-current assets 738,160 754,462
Current liabilities (183,740) (274,537)
Long-term debt (255,059) (211,331)
Other non-current liabilities (614,458) (665,662)
-------------------------------------------------------------------------------------------------------------------------
NET ASSETS $ 191,723 $ 221,633
-------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
Corporation's investments in and advances to unconsolidated affiliates $ 54,093 $ 51,031
-------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
I-11
RESULTS OF OPERATIONS (Unaudited) (Unaudited)
THREE MONTHS ENDED MARCH 31, 1996 1995
--------------------------------------------------------------------------------------------
Revenue $217,579 $197,871
Operating income 11,682 20,563
Net income 9,010 28,823
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
Corporation's equity in net income of unconsolidated affiliates $ 3,241 $ 11,947
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
The Corporation's equity in the net income of unconsolidated affiliates of
$11,947 for the three months ended March 31, 1995 includes its $8,005
proportionate share of MDC's net income. Because of the Corporation's decision
to sell its ownership interest in MDC, the Corporation has accounted for its
investment in MDC during 1995 by the equity method. In the first quarter of
1996, the Corporation sold its 62.8% ownership interest in MDC. See Note 3.
"Dispositions of Investments in Affiliates and Other Assets."
6. SHORT-TERM DEBT
Short-term debt at March 31, 1996 and December 31, 1995 consisted of the
following:
(Unaudited)
MARCH 31, 1996 DECEMBER 31, 1995
------------------------------------------------------------------------------------------------
Antecedent debt, interest rates of 8.25% and 8.5% at
March 31, 1996 and 8.5% at December 31, 1995 $213,344 $213,344
Bridge loan, interest rate of 11.5%
at December 31, 1995 -- 37,882
------------------------------------------------------------------------------------------------
Total short-term debt $213,344 $251,226
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
The weighted average interest rates on short-term borrowings outstanding at
March 31, 1996 and December 31, 1995 were 8.25% and 9.0%, respectively.
NEW AND AMENDED CREDIT FACILITIES: On August 10, 1995, the Corporation, its bank
lenders and sureties agreed as of July 31, 1995 to a restructuring of the
Corporation's existing indebtedness and provided for an increase in the amount
of the bridge loan from $122,100 to $129,000. In addition, the restructuring in
contemplation of the planned divestiture of Transit, provided for the
establishment of interim credit facilities, expiring September 1, 1995, to
advance funds to Transit of up to approximately $50,000 with interest at the
prime rate to finance its operations in connection with the Transit contracts.
On October 17, 1995, the Corporation reached an agreement to dispose of
Transit. In connection with the disposition of Transit (i) outstanding
borrowings under the two interim credit facilities to fund Transit's operations
were paid off on October 17, 1995 and (ii) the maximum borrowing amount under
the bridge loan was reduced from $129,000 to $100,000. Outstanding borrowings
under the bridge loan were subject to interest at the prime rate plus three
percent per annum (11.25% at March 31, 1996) and were due and payable on March
31, 1996. On March 29, 1996 the Corporation paid the outstanding balance owing
under the bridge loan.
On March 31, 1996, the Corporation and certain of its secured creditors
agreed to amend certain terms and conditions of the bridge loan facility, which
expired on March 31, 1996. The amendments to the bridge loan facility included,
among other things, establishment of a new borrowing capacity of $47,500, and
extension of its termination date to September 30, 1996. Outstanding borrowing
under the amended bridge loan facility will be subject to interest at the prime
rate plus one and one-half percent per annum (9.75% at March 31, 1996) due and
payable on the last day of each month and on September 30, 1996.
Under the restructuring agreements, the antecedent debt was secured by
security interests and mortgages on substantially all of the assets of the
Corporation and certain of its subsidiaries. The restructuring agreements permit
the deferral of principal payments on the antecedent debt from July 1, 1995
until December 31, 1996, except, the Corporation is required to repay $100,000
on September 30, 1996 plus interest and periodic bank fees accrued to that date.
Outstanding borrowings under the antecedent debt bear interest at the prime rate
(8.25% at March 31, 1996). Interest accrued on outstanding borrowings after July
1, 1995, was allowed to be deferred and paid in six equal monthly installments,
together with accrued interest thereon at the prime rate on the unpaid interest,
commencing April 30, 1996 unless repaid with optional principal prepayments. The
Corporation had deferred $14,427 of accrued interest payable on antecedent debt
from July 1, 1995 in the accompanying consolidated balance sheet at March 31,
1996. On April 2, 1996, as partial consideration for the extension of the bridge
loan facility the Corporation paid the $14,427 interest, which funds were drawn
from the bridge loan facility. Outstanding borrowings under the bridge loan
facility as of the date of this Quarterly Report on Form 10-Q were $14,500.
I-12
In addition to the required $100,000 repayment under the antecedent debt at
September 30, 1996 and $113,344 on December 31, 1996, the restructuring
agreements also provide for (i) optional prepayments and (ii) mandatory
prepayments. The Corporation may, at its option, prepay at any time all or part
of the amount outstanding under the antecedent debt. The Corporation must prepay
any prepayments or repayments received by the Corporation on the $52,200 note
receivable from MK Rail, net cash proceeds from the sales of certain businesses
and assets currently held for sale, and any tax refunds received.
7. LEGAL PROCEEDINGS
The Corporation is subject to a number of lawsuits in the following four general
categories that were either settled or are currently pending against the
Corporation and/or MK Rail and their respective directors and or officers (the
"defendants") (i) class actions relating to transactions in the common stock of
the Corporation (ii) class actions relating to the issuance of, and transactions
in, the common stock of MK Rail (iii) derivative actions brought by persons who
claim to be stockholders of the Corporation and (iv) claims brought by the
former stockholders of three corporations, Touchstone, Inc., TMS, Inc. and Clark
Industries, Inc., ("Clark") acquired by the Corporation in exchange for shares
of the Corporation's common stock. The plaintiffs in these actions have sought
various remedies, including compensatory and punitive damages and injunctive
relief.
Settlement discussions have been held among the Corporation, MK Rail,
certain of their respective present and former officers and directors, their
insurance carriers, the underwriting defendants and plaintiffs with respect to
all of the pending cases except Pilarczyk. These discussions have resulted in
agreements to settle the MK Securities Class Actions, the MK Rail Securities
Class Actions, the Derivative Actions, the Touchstone Actions and the Clark
Action.
The settlements, other than that of the Touchstone, Inc. Actions, and the
Clark Action must be submitted to, and approved by, the courts presiding over
the various cases. That process is ongoing and, as of this date, stands as
follows:
The settlement of the MK Securities Class Actions has been approved by the
United States District Court for the District of Idaho in a final judgment
entered on December 1, 1995. A court approved settlement fund was established
and settlement proceeds (cash of $35,000, which was provided by insurers, and a
share certificate for 2,976,923 shares of the Corporation's common stock) were
deposited therein during 1995. The issuance of the common stock represented by
such certificate and the transfer of the settlement proceeds from the settlement
fund to the control of the plaintiffs is subject to nonappealable judgments
approving the settlements in the MK Rail Securities Class Actions and the
MK Derivative Actions.
The settlement of the MK Rail Securities Class Actions was approved on March
29, 1996 by the United States District Court for the District of Idaho, subject
to appeal for a period of 30 days following March 29, 1996. No appeal was filed.
A court-approved settlement fund was established and the Corporation deposited a
share certificate for 869,231 shares of its common stock into such fund after
the settlement was approved. The issuance of the common stock represented by
such certificate and the transfer of the settlement proceeds to the control of
the plaintiffs is subject to the entry of a final nonappealable judgment
approving the settlement of the "Double Derivative Action". The effectiveness of
the settlement of the MK Rail Securities Class Actions is not, however, subject
to the final judicial approval of the settlements in the MK Securities Class
Actions or the MK Derivative Actions.
The settlements of the MK Derivative Actions has been submitted for
approval by the Delaware Chancery Court and the Idaho District Court for Ada
County. In connection with the settlements of the MK Derivative Actions, the
Corporation reached an agreement with the Corporation's former chairman with
respect to his severance benefits, including pension rights, to which the
plaintiffs do not object. The settlement of the MK Derivative Actions was
approved on April 15, 1996 by the Delaware Court of Chancery. A hearing has been
scheduled for May 21, 1996 before the Idaho District Court. If approved by final
orders of the Delaware Chancery Court and the Idaho District Court that become
final and nonappealable the settlement proceeds from the MK Derivative Actions
(less attorneys' fees and expenses) will be transferred to the control of the
settlement fund in the MK Securities Class Actions and, thus, the effectiveness
of the settlement is subject to certain conditions, including the entry of
final, nonappealable judgments approving the settlements in the MK Securities
Class Actions (which condition has been satisfied), the MK Rail Securities Class
Actions (which condition has been satisfied) and the Double Derivative Action
asserted on behalf of MK Rail.
Settlement of the Double Derivative Action asserted on behalf of MK Rail
was reached on March 4, 1996. A hearing with respect to such approval has been
set for May 21, 1996. The Corporation has no monetary or other obligations under
the settlement of the actions resulting from the Double Derivative Action.
However, $4,500 in the reduction of intercompany debt owed by MK Rail to the
Corporation is attributable to the settlement of the Double Derivative Action,
the MK Securities Class Actions and the MK Rail Securities Class Actions. The
effectiveness of the settlement is conditioned upon a judgment
I-13
by the Idaho Court approving the settlement that becomes final and nonappealable
and approval of the settlement in the MK Rail Securities Class Actions (which
condition has been satisfied).
The settlement terms will require the Corporation, as its share of the
settlements, to (i) issue 2,976,923 shares of common stock in settlement of the
MK Securities Class Actions; and (ii) issue 869,231 shares of common stock in
settlement of the MK Rail Securities Class Actions. Under the Corporation's
Recapitalization plan and the Washington agreement, plaintiffs in the
MK Securities Class Actions and MK Rail Securities Class Actions would be
entitled to receive a pro-rata share of the proposed stock purchase warrants.
The settlement of the Derivative Actions requires the implementation of certain
"therapeutic measures"with respect to corporate governance. The Corporation's
insurance carriers have paid $35,000 on behalf of the individual defendants in
the MK Securities Class Actions and the Derivative Actions, and MK Rail's
insurance carrier has paid $6,000 into a settlement fund created in connection
with the settlement of the MK Rail Securities Class Actions.
The Touchstone, Inc. Actions have been settled and notices of voluntary
dismissal with prejudice were filed on January 16, 1996. Under the terms of the
settlement, the Corporation paid $425 to the plaintiffs, paid the plaintiffs
their actual out-of-pocket fees and costs in the amount of $146 in April 1996,
and agreed to pay the difference, if any, between $5,250 and the sum of all
proceeds received by the plaintiffs as members of the class from the settlement
of the MK Securities Class Actions.
The Clark Action has been settled in principle and it is expected that a
definitive Settlement Agreement will be executed by all parties no later than
May 15, 1996. Under the terms of the Settlement the plaintiffs will be paid $275
(which will be provided by the Corporation's insurer) and, in addition to the
exchange of general releases, the plaintiffs will be specifically released from
their obligations pursuant to a Deposit Escrow Agreement plaintiffs entered into
for the benefit of the Corporation. On May 8, 1996, the court entered an order
dismissing the case with prejudice, with leave to refile for thirty-five days in
the event that a settlement is not consummated.
If settlement agreements in connection with the class actions relating to
transactions in the Corporation's common stock, class actions relating to the
issuance of, and transactions in, the common stock of MK Rail and claims brought
by the former stockholders of Touchstone, Inc., are approved as contemplated in
their present form, the Corporation expects, that the amounts provided in the
accompanying consolidated financial statements for these actions will likely
exceed the ultimate liability of these actions.
Other claims, lawsuits, disputes with third parties, investigations and
administrative proceedings against the Corporation and its subsidiaries relating
to matters that are in the ordinary course of its business activities, including
environmental matters, are not expected to have a material adverse effect on the
Corporation's financial position or results of operations.
8. COMMITMENTS AND CONTINGENCIES
The Corporation has commitments and performance guarantees arising from
engineering and construction contracts including those of its construction joint
ventures. The Corporation is self insured for workers' compensation, automobile,
general liability and third party errors and omissions. The Corporation has
insurance agreements with insurers for losses in excess of self-insured limits.
CF SYSTEMS: In 1990, the Corporation acquired CF Systems, which had developed a
solvent-extraction technology. The Corporation's investment in CF Systems, was
$2,862 at March 31, 1996 and $4,844 at December 31, 1995.
In March 1995, the Corporation was awarded a $26,700 fixed-price contract
by the Texas Natural Resource Conservation Commission ("TNRCC") for remediation
of contaminated soil at a Superfund Site in Texas. Among other provisions, the
contract will require CF Systems to (i) front-end (design, procure, fabricate,
assemble and start-up) an on-site solvent-extraction facility and (ii) provide a
guarantee in the form of a letter of credit for the estimated front-end costs of
$13,600. TNRCC will make periodic payments to CF Systems for the front-end
costs, until completion of the start-up phase in August 1996, up to a maximum of
$13,600. CF Systems has billed and received $5,752 of front-end costs at March
31, 1996. If the completed facility is successful in meeting certain specified
performance criteria at the end of the start-up phase, CF Systems will proceed
to the operations phase and complete the contract. If CF Systems does not meet
the performance criteria, such failure will be grounds for termination and TNRCC
would recover the front-end costs from the Corporation. After revision of the
estimated costs to complete the design, fabrication and erection of the
solvent-extraction facility, among other things, a $2,000 provision for
anticipated loss was recorded in March 1996 to reflect estimated contract
completion costs in excess of contract revenue.
DISCONTINUED SHIPBUILDING AND REAL ESTATE DEVELOPMENT OPERATIONS: In April 1989,
the Corporation sold its ownership interest in National Steel and Shipbuilding
Company ("NASSCO") and in June 1994, the Corporation renegotiated and amended
the April 1989 sale agreement with NASSCO. Under the terms of the amended
agreement the Corporation agreed to provide NASSCO a $21,000 credit facility.
The Corporation's commitment to provide the $21,000 credit facility will ter-
I-14
minate concurrently with the delivery and acceptance by the U.S. Navy of the
last NASSCO-built ship in a multiple-ship contract. The U.S. Navy and NASSCO, as
of the date of this Quarterly Report on Form 10-Q, are negotiating the
acceptance date of such ship, which is expected to occur on or before May 31,
1996. Prior to the third quarter of 1995, the Corporation also guaranteed a
stand-alone bank credit facility for NASSCO. In the third quarter of 1995,
NASSCO negotiated a stand-alone bank credit facility without a Corporation
guarantee.
The Corporation has also guaranteed $21,000 of NASSCO's port facility bonds
until not later than December 1, 2002, and guaranteed $1,375 of NASSCO's federal
workers' compensation bonds. NASSCO's floating dry dock is pledged as collateral
for the $21,000 port facility bonds. The agreement in connection with the
Corporation's guarantee of NASSCO's $21,000 indebtedness includes certain
default provisions including the occurrence of an event of bankruptcy
proceedings under the United States Bankruptcy Code. Upon the occurrence of an
event of default, payment of the $21,000 indebtedness could be accelerated.
At March 31, 1996, the Corporation was liable for $11,928 of secured bank
loans due June 30, 1996 in connection with commercial real estate operations of
its Emkay Development Company, Inc. subsidiary, discontinued in 1987. Net
liabilities of the discontinued real estate operations were included in the
accompanying consolidated balance sheets at March 31, 1996 and December 31, 1995
under the caption "Other Accrued Liabilities".
(Unaudited)
FINANCIAL POSITION AT MARCH 31, 1996 DECEMBER 31, 1995
----------------------------------------------------------------------------------------------------------
Real estate assets held for sale $ 8,388 $ 11,928
Other assets and liabilities, net 267 318
Secured term bank loans, due June 30, 1996, interest rate of 8.75%
at March 31, 1996 and December 31, 1995 (11,928) (15,519)
----------------------------------------------------------------------------------------------------------
Net liabilities $ (3,273) $ (3,273)
----------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
LETTERS OF CREDIT: At March 31, 1996 the Corporation was contingently liable, in
the normal course of business, for $81,419 related to letters of credit under
contract performance obligations to customers not reflected in the balance sheet
at March 31, 1996. Of this aggregate amount, $20,378 in letters of credit were
for contract performance obligations to customers of its discontinued MK Rail
and Transit operations and $25,838 in letters of credit in support of contract
performance obligations to customers of MDC. In the first quarter of 1996, the
Corporation sold its 62.8% ownership interest in MDC. The Corporation and MDC's
lender banks, as of the date of this Quarterly Report on Form 10-Q, are holding
discussions concerning the banks release of the Corporation's financial
guarantees.
In addition, at March 31, 1996, the Corporation had provided guarantees for
$61,505 in letters of credit issued by third parties, in connection with
Amerail's performance of the Metra Contract. In addition, the Corporation was
contingently liable for $14,563 related to letters of credit to meet the
reinsurance requirements of the Corporation's captive insurance subsidiary. The
credit risk is mitigated by the insurance subsidiary's portfolio of high quality
investments ($27,256 fair value at March 31, 1996) used to collateralize the
letters of credit.
GOVERNMENT AUDITS: The Corporation has a number of cost reimbursable contracts
with the U.S. Government, the allowable costs of which are subject to
adjustments upon audit by various agencies of the U.S. Government. Audits
currently in progress are in varying stages of completion and relate to years
ended 1987 through 1994. Some audits have resulted in proposed claims and cost
disallowances. The Corporation must complete cost analysis for the years under
audit before it can determine the merit of the issues raised and quantify the
amount of any potential disallowance. The Corporation expects that the
resolution of these matters will not materially effect the Corporation's results
of operations or financial position.
9. SUBSEQUENT EVENTS
RETENTION AND SEVERANCE PAY PLANS: Effective June 30, 1995, the Corporation
adopted key employee retention and severance plans to retain certain key
executives and key employees (the "1995 plans"). The plans encourage employees
to remain employed with the Corporation by providing additional compensation
from the date of adoption through July 1, 1996, and by providing enhanced
severance benefits under certain circumstances to any covered employee who is
involuntarily terminated prior to July 1, 1996. On April 10, 1996, the
Corporation's board of directors approved amendments to the retention and
severance plans and adopted a new severance plan (the "1996 plan").
Under the 1995 retention plan, covered employees would receive awards in
cash and stock ranging from 18.3% to 70.0% of their annual base salaries,
partially payable in cash on December 15, 1995, and the remainder payable in
stock and/or cash on July 1, 1996. The 1995 retention plan also provided that in
the event of a Chapter 11 Bankruptcy filing, the stock award would be forfeited
and the remaining cash to be paid on July 1, 1996 would be doubled. The
retention plan, as amended, provides that, covered employees will have the
option of receiving a cash payment on July 1, 1996 equal to twice
I-15
the cash payment received on December 15, 1995 ("initial cash payment"), or
elect (prior to April 30, 1996) to postpone the July 1, 1996 cash payment until
the earlier of the Corporation's emergence from a Chapter 11 proceeding or
September 30, 1996. Covered employees who elect to postpone payment will receive
an additional cash amount equal to the initial cash payment prorated on the
number of days from July 1, 1996 to September 30, 1996, but no later than
September 30, 1996 and no less than 25% of the initial cash payment.
Under the 1995 severance plan, covered employees who are involuntarily
terminated (without cause) after the occurrence of (i) a change in control of
the covered employee's division, (ii) a bankruptcy filing, or (iii) a change in
any consecutive two year period of a majority of the directors (unless each new
director was approved by a vote of two-thirds of the remaining directors), will
receive cash awards ranging from four to nine months of annual base salary. The
severance plan terminates on the confirmation of any Chapter 11 plan concerning
the Corporation or July 1, 1996 provided that no triggering event has occurred.
The 1996 severance plan is substantially similar to the 1995 severance plan but,
provides covered employees with severance benefits if they are involuntarily
terminated (without cause) between April 10, 1996 and December 31, 1997. Covered
employees for the purposes of the 1996 severance plan are employees who elect to
postpone payment of their cash award under the retention plan until after July
1, 1996. The estimated liability for retention plan awards of $4,357 was
included in the accompanying consolidated balance sheet at March 31, 1996 under
the caption "Other Accrued Liabilities". Minimum and maximum cash awards under
the retention plan are estimated to be $5,200 and $6,900, respectively.
REORGANIZATION BONUS: On April 2, 1996, the compensation committee of the Board
of Directors awarded to certain key employees cash bonuses totaling $1,115,
payment of which is conditioned upon the successful reorganization of the
Corporation.
NEW BOISE OFFICE LEASE AGREEMENT: In May 1996, the Corporation and its Boise
office landlord agreed in principle to, among other things, cancellation of the
existing lease with a remaining term of approximately 19 years, execution of a
new lease agreement with lower periodic rent and an initial term of seven years
and certain tenant and landlord improvements, subject to, among other things,
approval by the Corporation's secured creditors of the landlord's rejection
damages claim of approximately $13,000 as an impaired claim against the
Corporation pursuant to its Recapitalization under Chapter 11 of the United
States Bankruptcy Code.
ACQUISITION AGREEMENT: On May 16, 1996, the Corporation and Washington
Construction Group, Inc. ("Washington") reached a preliminary non-binding
agreement in principle (the "agreement") as to the economic terms of the merger
of the Corporation with and into Washington subject to the successful
negotiation and execution of a definitive agreement and the successful
completion of the Corporation's proposed Recapitalization, among other things.
Under the terms of the agreement, Washington would (i) issue shares of
common stock representing 45% of the combined companies (estimated to be 24.1
million shares) and pay $13,300 cash to the holders of certain claims set forth
in the Corporation's proposed Recapitalization plan and (ii) issue warrants to
purchase an aggregate of 2,765,000 shares of new common stock of the combined
companies at an exercise price of $12.00 per share for a term of five years in
exchange for all of the outstanding shares of the Corporation's common stock.
In the event the Corporation fails to proceed with the proposed
Recapitalization or agrees, following termination of the agreement, to sell a
majority of its stock or any of its principal operating businesses to a party
other than Washington and in either event, Washington was not in default of its
obligations under the agreement, the Corporation would be liable for a break-up
fee in the maximum amount of $12,000 plus certain out-of-pocket expenses of
Washington not to exceed $1,000. In connection with its Recapitalization plan,
Washington would pay in full the Corporation's debtor-in-possession loan, not to
exceed $50,000.
I-16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1995
(Millions of dollars)
QUARTER ENDED MARCH 31,
-------------------------------------
1996 1995
Revenue $324.2 $366.5
Operating income from continuing operations 14.7 5.0
General and administrative expenses (13.5) (10.6)
Interest expense (5.2) (5.4)
Equity in net income of unconsolidated affiliates 3.2 11.9
Gain (loss) on disposition of investments in affiliates, net 2.1 (20.0)
----------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
REVENUE: Revenue from continuing operations for the first quarter of 1996 was
$324.2 million, a decrease of $42.3 million compared to $366.5 million for
comparable period of 1995. The decrease was primarily due to (i) the sale in
September 1995 of certain net assets and operations of the Corporation's North
Pacific construction operations with revenues of $36.1 million in the first
quarter of 1995 and (ii) the execution and completion of a number of heavy civil
construction contracts, principally for public works, with revenues of
approximately $16.0 million in the first quarter of 1995.
OPERATING INCOME: Operating income from continuing operations for the first
quarter of 1996 was $14.7 million, an increase of $9.7 million compared to $5.0
million for the comparable period of 1995. Operating income of all of the
Corporation's business units increased for the first quarter of 1996 compared to
the comparable period of 1995, after recognition in each of the periods of a
number of unusual items described below. In addition, the Corporation's
wholly-owned German subsidiary recognized approximately $2.0 million of mining
services fees earned in the first quarter of 1996 in connection with its mining
services contract with MIBRAG mbH. Because of restrictions on repatriation of
funds pursuant to the terms of the MIBRAG mbH purchase agreement the Corporation
did not recognize any mining services fees in the first quarter of 1995.
Operating income from continuing operations for the first quarter of 1996 was
affected by the recognition of a number of unusual items, the net result of
which was to decrease operating income by $.8 million and included $6.8 million
of provisions for anticipated losses on a number of fixed-price contracts
substantially offset by the recognition of a $4.8 million gain in connection
with the sale of marine equipment to SCDI members and the Corporation's
withdrawal from the SCDI joint venture, and $1.2 million of additional revenue
from a negotiated claim settlement of a contract completed in a prior period.
Operating income from continuing operations for the first quarter of 1995
was also affected by the recognition of a number of unusual items, the net
result of which was to increase operating income by $2.2 million and included
$3.3 million in additional revenue from a negotiated claim settlement partially
offset by a $1.1 million increase in legal costs and expenses in connection with
the Corporation's pursuit of additional claim revenues.
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses for the
first quarter of 1996 were $13.5 million, an increase of $2.9 million compared
to $10.6 million for the comparable period of 1995 principally due to a $3.1
million decrease in costs and expenses allocated to cost of revenue in the first
quarter of 1996 compared to the comparable period of 1995.
INTEREST EXPENSE: Interest expense for the first quarter of 1996 was $5.2
million, a slight decrease of $.2 million compared to $5.4 million for the
comparable period of 1995. The decrease was the result of lower average
outstanding borrowings in 1996 of $236.3 million with an effective weighted
average interest rate of 8.6% compared to average outstanding borrowings in 1995
of $324.3 million with an effective weighted average interest rate of 8.4%.
EQUITY IN NET INCOME (LOSS) OF UNCONSOLIDATED AFFILIATES: The Corporation's
share of unconsolidated affiliates' income for the first quarter of 1996 was
$3.2 million, a decrease of $8.7 million compared to $11.9 million for the
comparable period of 1995. The Corporation's equity in the net income of MDC in
the first quarter of 1996 was $.9 million compared to $8.0 million in the
comparable period of 1995, which included the Corporation's $6.3 million share
of MDC's non-recurring gain from the sale of a subsidiary. In addition, the
Corporation's equity in the net income of MIBRAG mbH in the first quarter of
1996 was $2.2 million or $1.9 million less than the comparable period of 1995
principally due to the renegotiation of long-term coal supply contracts. In
consideration for customer's agreements to extend certain coal supply contracts,
MIBRAG mbH agreed to a reduction in the unit price of the coal.
I-17
DISPOSITION OF INVESTMENTS IN AFFILIATES AND OTHER ASSETS: The $2.1 million gain
on disposition of investments in affiliates for the first quarter of 1996 stems
from the Corporation's sale of its 62.8% ownership interest in MDC.
The $20.0 million loss on disposition of investments in affiliates and
other assets for the first quarter of 1995 consisted of a $9.3 million loss on
the Corporation's sale in June 1995 of its remaining ownership interest in MK
Gold Company, a loss provision of $7.5 million to write-down the carrying amount
of its investment in MK Investments, Inc. (North Pacific construction
operations) and a $3.2 million loss provision to write-down the carrying amount
of the Morrison Knudsen Depot. See Note 3. "Dispositions of Investments in
Affiliates and Other Assets".
INCOME TAX EXPENSES: The Corporation recognized tax expense for the first
quarter of 1996 and 1995 of $1.1 million and $.5 million, respectively,
consisting only of estimated foreign and state income taxes relating to certain
jurisdictions in which the Corporation had net taxable income. The Corporation
provided federal tax expense on income from continuing operations in 1996,
however this provision was offset by the reversal of an equal amount of the
valuation allowance established in prior periods. The Corporation did not
provide a federal tax benefit in 1995 because of the substantial doubt of
realization due to the uncertainty of the outcome of the Corporation's proposed
Recapitalization plan, among other things.
DISCONTINUED OPERATIONS: In connection with its decision to dispose of MK Rail
in March 1995 and the disposition of Transit, effective June 1995, the
Corporation recorded an aggregate loss from discontinued operations of $31.7
million, without providing any future tax benefit. The loss includes (i) a $25.5
million write-down of the Corporation's carrying value of its investment in MK
Rail to estimated net realizable value based upon the best information available
in the circumstances, (ii) an estimated $5.9 million provision for the
Corporation's share of MK Rail's net operating loss of $5.3 million for the
three months ended March 31, 1995 and estimated net operating loss until the
expected time of disposal and (iii) $.3 million loss from Transit's operations
for the three months ended March 31, 1995.
FINANCIAL CONDITION
Liquidity and capital resources (THOUSANDS OF DOLLARS) MARCH 31,
1996 1995
---------------------------------
CASH AND CASH EQUIVALENTS:
Beginning of period $ 63,086 $ 66,864
End of period 78,638 77,082
TOTAL DEBT, including accrued interest on antecedent
debt of $14,427 and $9,320, respectively 339,216 371,990
THREE MONTHS ENDED
MARCH 31,
---------------------------------
1996 1995
NET CASH PROVIDED (USED) BY:
Operating activities $ 27,429 $ (70,074)
Investing activities 26,005 10,240
Financing activities (37,882) 110,967
Total capitalization at March 31, 1996 was $145.8 million, and consisted of
$339.2 million debt and $193.4 million stockholders' deficiency compared to
total capitalization at December 31, 1995 of $178.3 million, which consisted of
$372.0 million debt and $193.7 million stockholders' deficiency.
The Corporation was able to generate internal cash flow from operations in
the first quarter of 1996 principally from the collection of accounts receivable
and receipt of $21.3 million of income tax refunds. In addition, the Corporation
received gross proceeds of $29.3 million from the sale of MDC and the Depot. The
combined cash from operating and investing activities and tax refunds in the
first quarter of 1996 enabled the Corporation to repay the $37.9 million of
outstanding borrowings under its bridge loan and increase its consolidated cash
balance at March 31, 1996 by $15.6 million. On April 2, 1996, as partial
consideration for the extension of the bridge loan facility, the Corporation was
paid the $14.4 million deferred interest on its antecedent debt with funds drawn
from the loan facility. Outstanding borrowings under the bridge loan facility as
of the date of this Quarterly Report on Form 10-Q were $14.5 million.
Net cash used by continuing operations in the first quarter of 1995 of
$70.1 million consisted of an increase in accounts receivable at March 31, 1995
of $60.0 million. These accounts receivable were sold at December 31, 1994,
cancelled effective March 31, 1995, and subsequently absorbed into the new bank
credit facility on April 11, 1995. In addition, approximately $24.0 million of
cash was used to fund cost overruns on a number of fixed-price contracts. Net
cash provided by
I-18
investing activities in the first quarter of 1995 of $10.2 million arose
substantially from the $8.2 million net proceeds from sales less purchases of
securities available for sale and $2.4 million from sales of property, equipment
and other assets. See Note 3. "Disposition of Investments in Affiliates and
Other Assets". Net cash provided by financing activities in the first quarter of
1995 of $111.0 million included $117.1 million additional borrowings under bank
credit agreements less the cash payment of the fourth quarter 1994 dividend of
$6.1 million.
LIQUIDITY
The Corporation expects negative cash flows from operations for 1996. Cash flows
in 1996 will be negatively impacted by general and administrative costs and
expenses in connection with its proposed recapitalization plan and stockholders'
litigation, the required funding for the remainder of its fixed-price
construction contract losses recognized in 1994, 1995 and 1996 and its
continuing debt service. On April 2, 1996, as partial consideration for the
extension of the bridge loan facility from March 31, 1996 to September 31, 1996
the Corporation paid $14.4 million interest on the antecedent debt that had been
accrued and deferred from July 1, 1995 through March 31, 1996. The Corporation's
repayment obligations on existing indebtedness, after having paid the
outstanding balance of the bridge loan on March 29, 1996, include (i) repayment
of $100.0 million of antecedent debt on September 30, 1996, (ii) repayment of
the $113.3 million balance of the antecedent debt on December 31, 1996, and
(iii) the additional amounts required to be escrowed in connection with its
Transit reimbursement obligations for the benefit of the bonding company and
Metra Banks on such dates and to ultimately fund the remaining $31.2 million
reimbursement obligation to the bonding company and the estimated amount owing
on the Metra Guaranty, currently $80.2 million at March 31, 1996. Even if the
Corporation has sufficient liquidity to meet its obligations prior to the
maturity of its antecedent debt, the Corporation believes that further
refinancings of its existing indebtedness would not be sufficient to enable the
Corporation to continue as a going concern. The Corporation further believes
that cash generated from operations and the proceeds from the sale of its
remaining investment held for sale will not be sufficient to meet its existing
antecedent debt obligations and the required escrow payments under the Transit
reimbursement obligations in 1996.
On March 29, 1996, the Corporation paid the outstanding balance owing under
its bridge loan facility. On March 31, 1996, the Corporation and certain of its
secured creditors agreed to amend certain terms and conditions of the bridge
loan facility, which expired on March 31, 1996. The amendments to the bridge
loan facility included, among other things, establishment of a new borrowing
capacity of $47.5 million, and extension of its termination date to September
30, 1996. Outstanding borrowing under the amended bridge loan facility will be
subject to interest at the prime rate plus one and one-half percent per annum
(9.75% at March 31, 1996) due and payable on the last day of each month and on
September 30, 1996. On April 2, 1996, as partial consideration for the extension
of the bridge loan facility, the Corporation paid $14.4 million interest on the
antecedent debt that had been accrued and deferred from July 1, 1995 through
March 31, 1996, which funds were drawn from the extended bridge loan facility.
See Note 6. "Short-Term Debt - New and Amended Credit Facilities"to the
Consolidated Financial Statements.
The Corporation, which has been experiencing significant operating losses
and is facing severe liquidity problems, has been discussing with certain of its
secured and unsecured creditors, including holders of the Corporation's existing
secured indebtedness, its bonding company, lessors in connection with certain
long-term, noncancelable leases, and representatives of potential investors,
alternatives to reduce or liquidate the Corporation's current and future
financial debt obligations to permit the continuation of the Corporation as a
going concern. These alternatives included, among other things, a number of
remedies available to the Corporation, the goal of which is to alleviate the
problems caused by the Corporation's excessive debt levels, debt service and
certain long-term lease payment obligations, to enable the Corporation to
continue to implement its revised business strategy and to help assure the
Corporation's long-term viability. For that purpose, the Corporation initially
presented a proposed recapitalization plan (the "Recapitalization") to certain
of its secured creditors at a meeting held in February 1996, and has continued
to discuss the terms of the Recapitalization with those secured creditors.
Pursuant to the Recapitalization, the Corporation would exchange its existing
secured indebtedness consisting of its antecedent debt and Transit reimbursement
obligations and certain long-term lease obligations for a new issue of the
Corporation's common stock (which initially will represent all of the
outstanding common stock of the Corporation) and common stock of MK Rail
representing the Corporation's 65% ownership interest in MK Rail, the
Corporation's $52.2 million principal amount of its note receivable from MK Rail
with interest at the prime rate (8.25% at March 31, 1996) and certain other
assets. Existing stockholders and the Securities Class Actions claimants would
receive new common stock purchase warrants in exchange for all the outstanding
shares of common stock and all the shares of common stock to be issued by the
Corporation in settlement of the MK Securities Class Actions and MK Rail
Securities Class Actions. The Recapitalization contemplated effecting the
exchange through a partial prepackaged plan of reorganization pursuant to
Chapter 11 of the United States Bankruptcy Code (prepackaged plan). The
objective of a prepackaged plan under Chapter 11 would be to allow the
Corporation to achieve its objectives without unanimous approval of its
creditors in the shortest
I-19
time possible and continue to resume operations in its recapitalized form
without the full burden of debt that existed prior to the bankruptcy
proceedings.
On April 15, 1996, the Corporation solicited acceptances of its
Recapitalization from its impaired creditors (holders of the Corporation's
existing secured indebtedness) and requested its impaired creditors to return
their completed ballots no later than 5:00 p.m. Eastern Daylight time on May 24,
1996. The Recapitalization, through the prepackaged plan is designed to
substantially reduce the Corporation's secured debt obligations, lessen the risk
of a protracted Chapter 11 proceedings which would significantly impact the
Corporation's business and create a capital structure that allows the
Corporation to continue in operation and maintain and enhance its competitive
position. In addition, management anticipates that the proposed prepackaged plan
would also allow management to concentrate more of its time on improving the
Corporation's business opportunities, rather than on managing its debt
obligations.
As of the date of this Quarterly Report on Form 10-Q, the Corporation has
not reached final agreement with its secured creditors. The final form or
results of a restructuring cannot be predicted, and there can be no assurance
that a restructuring can be accomplished through a prepackaged plan. Any such
restructuring, if successful, would substantially dilute or eliminate the value
of existing stockholders' interests. If the Corporation is unable to effect a
prepackaged plan, the Corporation will be forced to evaluate other available
options, which may include the commencement or continuation of a Chapter 11 case
without a preapproved plan. A nonprepackaged Chapter 11 case would likely be
lengthier, involve more contested issues with creditors and other parties in
interest, and result in significantly increased Chapter 11 expenses for
professional consultants, a negative impact on cash flow due to lack of customer
confidence resulting in reduction in new contract awards, and a corresponding
reduction in the consideration received by the Corporation's secured creditors
and existing stockholders than would be the case with a prepackaged plan.
The Corporation's financial statements have been prepared assuming that the
Corporation will continue as a going concern. As discussed herein, the
Corporation: had substantial losses and negative cash flow from operations in
1994 and 1995, which significantly reduced stockholders' equity and resulted in
a substantial accumulated deficit and working capital deficiency at March 31,
1996; and does not expect to be able to make its required debt repayments in
1996. Thus, unless the Corporation is able to effect the Recapitalization or
arrange a transaction with a strategic investor, these conditions raise
substantial doubt about the Corporation's ability to continue as a going
concern. The accompanying consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
On May 16, 1996, the Corporation and Washington Construction Group, Inc.
("Washington") reached a preliminary non-binding agreement in principle (the
"agreement") as to the economic terms of the merger of the Corporation with and
into Washington subject to the successful negotiation and execution of a
definitive agreement and the successful completion of the Corporation's proposed
Recapitalization, among other things.
Under the terms of the agreement, Washington would (i) issue shares of
common stock representing 45% of the combined companies (estimated to be 24.1
million shares) and pay $13.3 million cash to the holders of certain claims set
forth in the Corporation's proposed Recapitalization plan and (ii) issue
warrants to purchase an aggregate of 2,765,000 shares of new common stock of the
combined companies at an exercise price of $12.00 per share for a term of five
years in exchange for all of the outstanding shares of the Corporation's common
stock.
In the event the Corporation fails to proceed with the proposed
Recapitalization or agrees, following termination of the agreement, to sell a
majority of its stock or any of its principal operating businesses to a party
other than Washington and in either event, Washington was not in default of its
obligations under the agreement, the Corporation would be liable for a break-up
fee in the maximum amount of $12.0 million plus certain out-of-pocket expenses
of Washington not to exceed $1.0 million. In connection with its
Recapitalization plan, Washington would pay in full the Corporation's
debtor-in-possession loan, not to exceed $50.0 million.
NEW BUSINESS AND BACKLOG
NEW BUSINESS: The Corporation booked new business of $111.1 million in the first
quarter of 1996 compared to $53.0 million in the last quarter of 1995. New
business consists of new engineering, construction, environmental and mining
services contracts and changes to existing contracts.
BACKLOG: Backlog of all uncompleted contracts at March 31, 1996 was $3,651.3
million, compared with $3,864.4 million at year-end 1995. Backlog consists of
uncompleted portions of engineering and construction contracts, including the
proportionate share of construction joint-venture contracts, the next five-year
portion of long-term mining services contracts and the funded and unfunded
portions of long-term contracts and subcontracts with various agencies of the
U.S. Government. The Corporation has a number of contracts and subcontracts with
various agencies of the U.S. Government principally for environmental
remediation and restoration work, which contracts extend beyond one year and for
which government funding has not yet been approved. Contracts and subcontracts
with agencies of the U.S. Government are sub-
I-20
ject to unilateral termination at the option of the U.S. Government. The
Corporation does not expect any material portion of its government contracting
business to be terminated.
The following table sets forth the contract revenue backlog (in thousands
of dollars) at March 31, 1996 and December 31, 1995 and the new business booked
in each of the quarters ended March 31, 1996 and December 31, 1995.
DECEMBER 31, 1995 MARCH 31, 1996
NEW BUSINESS BACKLOG NEW BUSINESS BACKLOG
---------------------------- ----------------------------
$53,000 $3,864,400 $111,100 $3,651,300
The Corporation's business is being adversely affected by its poor
financial condition, and by the reluctance of many potential customers to engage
the Corporation on new or additional projects. The Corporation has experienced a
decline in new business booked in the first quarter of 1996 and the year ended
December 31, 1995 compared to 1994. The decline in new business has had a
material adverse effect on the Corporation. If the Corporation's diminished
ability to secure new work continues, it will further adversely impact the
Corporation's ability to continue as a going concern.
I-21
PART II. OTHER INFORMATION
(all dollar amounts in thousands)
ITEM 3. LEGAL PROCEEDINGS
The Corporation is subject to a number of lawsuits in the following four general
categories that were either settled or are currently pending against the
Corporation and/or MK Rail and their respective directors and or officers (the
"defendants") (i) class actions relating to transactions in the common stock of
the Corporation (ii) class actions relating to the issuance of, and transactions
in, the common stock of MK Rail (iii) derivative actions brought by persons who
claim to be stockholders of the Corporation and (iv) claims brought by the
former stockholders of three corporations, Touchstone, Inc., TMS, Inc. and Clark
Industries, Inc., ("Clark") acquired by the Corporation in exchange for shares
of the Corporation's common stock. These actions have been described in detail
in prior reports.
Settlement discussions have been held among the Corporation, MK Rail,
certain of their respective present and former officers and directors, their
insurance carriers, the underwriting defendants and plaintiffs with respect to
all of the pending cases except Pilarczyk. These discussions have resulted in
agreements to settle the MK Securities Class Actions, the MK Rail Securities
Class Actions, the Derivative Actions, the Touchstone Actions and the Clark
Action.
The settlements, other than that of the Touchstone, Inc. Actions, and the
Clark Action must be submitted to, and approved by, the courts presiding over
the various cases. That process is ongoing and, as of this date, stands as
follows:
The settlement of the MK Securities Class Actions has been approved by the
United States District Court for the District of Idaho in a final judgment
entered on December 1, 1995. A court approved settlement fund was established
and settlement proceeds (cash of $35,000, which was provided by insurers, and a
share certificate for 2,976,923 shares of the Corporation's common stock) were
deposited therein during 1995. The issuance of the common stock represented by
such certificate and the transfer of the settlement proceeds from the settlement
fund to the control of the plaintiffs is subject to nonappealable judgments
approving the settlements in the MK Rail Securities Class Actions and the
MK Derivative Actions.
The settlement of the MK Rail Securities Class Actions was approved on March
29, 1996 by the United States District Court for the District of Idaho, subject
to appeal for a period of 30 days following March 29, 1996. No appeal was filed.
A court-approved settlement fund was established and the Corporation deposited a
share certificate for 869,231 shares of its common stock into such fund after
the settlement was approved. The issuance of the common stock represented by
such certificate and the transfer of the settlement proceeds to the control of
the plaintiffs is subject to the entry of a final nonappealable judgment
approving the settlement of the "Double Derivative Action". The effectiveness of
the settlement of the MK Rail Securities Class Actions is not, however, subject
to the final judicial approval of the settlements in the MK Securities Class
Actions or the MK Derivative Actions.
The settlements of the MK Derivative Actions has been submitted for
approval by the Delaware Chancery Court and the Idaho District Court for Ada
County. In connection with the settlements of the MK Derivative Actions, the
Corporation reached an agreement with the Corporation's former chairman with
respect to his severance benefits, including pension rights, to which the
plaintiffs do not object. The settlement of the MK Derivative Actions was
approved on April 15, 1996 by the Delaware Court of Chancery. A hearing has been
scheduled for May 21, 1996 before the Idaho District Court. If approved by final
orders of the Delaware Chancery Court and the Idaho District Court that become
final and nonappealable the settlement proceeds from the MK Derivative Actions
(less attorneys' fees and expenses) will be transferred to the control of the
settlement fund in the MK Securities Class Actions and, thus, the effectiveness
of the settlement is subject to certain conditions, including the entry of
final, nonappealable judgments approving the settlements in the MK Securities
Class Actions (which condition has been satisfied), the MK Rail Securities Class
Actions (which condition has been satisfied) and the Double Derivative Action
asserted on behalf of MK Rail.
Settlement of the Double Derivative Action asserted on behalf of MK Rail
was reached on March 4, 1996. A hearing with respect to such approval has been
set for May 21, 1996. The Corporation has no monetary or other obligations under
the settlement of the actions resulting from the Double Derivative Action.
However, $4,500 in the reduction of intercompany debt owed by MK Rail to the
Corporation is attributable to the settlement of the Double Derivative Action,
the MK Securities Class Actions and the MK Rail Securities Class Actions. The
effectiveness of the settlement is conditioned upon a judgment by the Idaho
Court approving the settlement that becomes final and nonappealable and approval
of the settlement in the MK Rail Securities Class Actions (which condition has
been satisfied).
The settlement terms will require the Corporation, as its share of the
settlements, to (i) issue 2,976,923 shares of common stock in settlement of the
MK Securities Class Actions; and (ii) issue 869,231 shares of common stock in
settlement of the MK Rail Securities Class Actions. The settlement of the
Derivative Actions requires the implementation of certain "therapeutic
measures with respect to corporate governance. The Corporation's insurance
carriers have paid $35,000 on behalf
II-1
of the individual defendants in the MK Securities Class Actions and the
Derivative Actions, and MK Rail's insurance carrier has paid $6,000 into a
settlement fund created in connection with the settlement of the MK Rail
Securities Class Actions.
The Touchstone, Inc. Actions have been settled and notices of voluntary
dismissal with prejudice were filed on January 16, 1996. Under the terms of the
settlement, the Corporation paid $425 to the plaintiffs, paid the plaintiffs
their actual out-of-pocket fees and costs in the amount of $146 in April 1996,
and agreed to pay the difference, if any, between $5,250 and the sum of all
proceeds received by the plaintiffs as members of the class from the settlement
of the MK Securities Class Actions.
The Clark Action has been settled in principle and it is expected that a
definitive Settlement Agreement will be executed by all parties no later than
May 15, 1996. Under the terms of the Settlement the plaintiffs will be paid $275
(which will be provided by the Corporation's insurer) and, in addition to the
exchange of general releases, the plaintiffs will be specifically released from
their obligations pursuant to a Deposit Escrow Agreement plaintiffs entered into
for the benefit of the Corporation. On May 8, 1996, the court entered an order
dismissing the case with prejudice, with leave to refile for thirty-five days in
the event that a settlement is not consummated.
If settlement agreements in connection with the class actions relating to
transactions in the Corporation's common stock, class actions relating to the
issuance of, and transactions in, the common stock of MK Rail and claims brought
by the former stockholders of Touchstone, Inc., are approved as contemplated in
their present form, the Corporation expects, that the amounts provided in the
accompanying consolidated financial statements for these actions will likely
exceed the ultimate liability of these actions.
SEC INVESTIGATIONS. The Corporation previously reported that it had been
notified that the staff of the Central Regional Offices of the Securities and
Exchange Commission planned to recommend to the Commission that one of the
Corporation's subsidiaries be named as a respondent in an administrative action
in connection with an ongoing investigation of the issuance by the City and
County of Denver of revenue bonds to finance the construction of the Denver
International Airport. The Corporation has since filed a brief with the
Commission disputing the staff recommendation. The Commission has not announced
a decision. The Corporation also previously reported that MK Rail and the
Corporation are subject to a formal investigation by the Pacific Regional Office
of the Commission. The Corporation continues to provide documents in response to
discovery requests and otherwise cooperate with the Commission's staff in
connection with this investigation.
II-2
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
FILED IN PART I
None
FILED IN PART II
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
The Registrant filed a current report on Form 8-K on February
19, 1996 to report that it had begun preliminary negotiations
with its secured creditors concerning a proposed exchange of
its existing indebtedness for a new issue of the Registrant's
common stock (which initially would represent all of the
outstanding common stock of the Registrant) and certain other
assets.
All other items required under Part II are omitted because they are not
applicable.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MORRISON KNUDSEN CORPORATION
/S/G.A. Crockett
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Vice President - Business Management and
Controller and Principal Accounting Officer,
in his respective capacities as such
Date: May 20, 1996