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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Fiscal Year Ended
NOVEMBER 30, 1998
Commission File Number 1-12054
[LOGO OF MORRISON KNUDSEN CORPORATION]
A Delaware Corporation
IRS Employer Identification No. 33-0565601
MORRISON KNUDSEN PLAZA, BOISE, IDAHO 83729
208 / 386-5000
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SECURITIES REGISTERED & NUMBER OF REGISTRANT'S COMMON SHARES OUTSTANDING
At January 15, 1999, 53,187,567 shares of the registrant's $.01 par value common
stock were outstanding. Such common stock and warrants to purchase an aggregate
of 2,757,734 shares of such common stock are listed on the New York Stock
Exchange and registered pursuant to Section 12(b) of the Securities Exchange
Act. The registrant has no securities registered under Section 12(g) of the
Securities Exchange Act.
COMPLIANCE WITH REPORTING REQUIREMENTS
The registrant has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports) and
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
DISCLOSURE PURSUANT TO ITEM 405 OF REGULATION S-K
Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Yes [X] No [ ]
AGGREGATE MARKET VALUE OF COMMON STOCK HELD BY NONAFFILIATES
At January 15, 1999, the aggregate market value of the registrant's common stock
held by nonaffiliates of the registrant, based on the New York Stock Exchange
closing price on January 15, 1999, was approximately $360,469,005, excluding the
aggregate market value of $216,635,625 of 20,270,000 shares which are assumed to
be held by affiliates of the registrant for the purposes of this calculation.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for its annual meeting
of stockholders to be held on April 8, 1999, which is expected to be filed with
the Securities and Exchange Commission not later than March 31, 1999, are
incorporated by reference into Part III of this Annual Report on Form 10-K. In
the event such proxy statement is not so filed by March 31, 1999, the required
information will be filed as an amendment to this Annual Report on Form 10-K no
later than such date.
MORRISON KNUDSEN CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED NOVEMBER 30, 1998
TABLE OF CONTENTS
PAGE
PART I
Item 1. Business I-1
Item 2. Properties I-8
Item 3. Legal Proceedings I-8
Item 4. Submission of Matters to a Vote of Security Holders I-9
PART II
Item 5. Market for the Registrant's Common Stock and
Related Stockholder Matters II-1
Item 6. Selected Financial Data II-2
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations II-3
Item 7A. Quantitative and Qualitative Disclosure About
Market Risk II-11
Item 8. Financial Statements and Supplementary Data II-12
Item 9. Change in and Disagreements with Accountants on
Accounting and Financial Disclosure II-40
PART III
Item 10. Directors and Executive Officers of the Registrant III-1
Item 11. Executive Compensation III-1
Item 12. Security Ownership of Certain Beneficial Owners
and Management III-1
Item 13. Certain Relationships and Related Transactions III-1
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports
on Form 8-K IV-1
SIGNATURES
NOTE REGARDING FORWARD-LOOKING INFORMATION
This Annual Report on Form 10-K and other reports and statements filed by
Morrison Knudsen Corporation (the "Corporation") from time to time with the
Securities and Exchange Commission (collectively, "SEC Filings") contain or may
contain forward-looking statements. When used in SEC Filings, the words "may,"
"will," "anticipate," "believe," "estimate," "expect," "future," "intend,"
"plan," "could," "should," "potential," or "continue" or the negative or other
variations thereof, as well as other statements regarding matters that are not
historical fact, are or may constitute forward-looking statements. Such forward-
looking statements are necessarily based on various assumptions and estimates
and are inherently subject to various risks and uncertainties including, in
addition to any risks and uncertainties disclosed in the text surrounding such
statements or elsewhere in the SEC Filings, risks and uncertainties relating to
the possible invalidity of the underlying assumptions and estimates and possible
changes or developments in social, economic, business, industry, market, legal
and regulatory circumstances and conditions and actions taken or omitted to be
taken by third parties, including the Corporation's customers, suppliers,
business partners and competitors and legislative, regulatory, judicial and
other governmental authorities and officials. Should the Corporation's
assumptions or estimates prove to be incorrect, or should one or more of these
risks or uncertainties materialize, actual amounts, results, events and
circumstances may vary significantly from those reflected in such forward-
looking statements.
PART I
ITEM 1. BUSINESS
(In thousands of dollars except per share data)
Unless the context otherwise requires, references to 1998, 1997 and 1996 are
references to the Corporation's fiscal years ended November 30, 1998, 1997 and
1996, respectively.
I. GENERAL
The Corporation is an international provider of a broad range of design,
engineering, construction, construction management, facilities management,
environmental remediation and mining services to diverse public and private
sector clients. Through its various operating units, the Corporation:
. Provides design, construction and renovation services for plants and
facilities in the general manufacturing, chemical, petrochemical, food and
beverage, pharmaceuticals, high-technology and institutional buildings
markets;
. Provides a full range of engineering and construction services to power
generation utilities, including construction of new plants, retrofitting of
existing plants and decommissioning and decontamination of nuclear plants
that have reached the end of their operating lives;
. Provides total facilities management to industrial clients, including
maintenance, engineering and construction, and operations and logistics
management at manufacturing plants and related facilities and at toll
roads;
. Provides facilities management and environmental remediation services to
governmental agencies, such as the Department of Energy and the Department
of Defense;
. Provides design, engineering, construction and construction management
services for infrastructure projects in the transportation, marine and
water resources markets, including highway, bridge, railroad, airport,
marine port and water distribution and storage facilities projects; and
. Provides contract mining services in the fossil fuel and industrial
minerals markets, together with technical and engineering services such as
resource evaluation, geologic modeling, mine planning and development,
equipment selection and remediation.
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In providing its services, the Corporation enters into three basic types of
contracts:
. Fixed-price or lump-sum contracts providing for a fixed price for the
total amount of work to be performed;
. Unit-price contracts providing for a fixed price for each unit of work
performed; and
. Cost-type contracts providing for reimbursement of costs plus a fee.
Both anticipated income and economic risk are greater under fixed-price and
unit-price contracts than under cost-type contracts. Engineering, construction
management and environmental and hazardous substance remediation contracts are
typically awarded on a cost-plus-fee basis. See "Risk Factors - The
Corporation's fixed-price and unit-price contracts place the risk of increased
project costs on the Corporation."
The Corporation also participates often as sponsor and manager in construction
joint ventures that are formed for the purpose of bidding, negotiating and
completing specific projects. In addition, the Corporation participates in the
following mining ventures: Westmoreland Resources, Inc., a coal mining company
in Montana, and MIBRAG mbH, a company that operates lignite coal mines and power
plants in Germany. See Note 6. "Ventures" of Notes to Consolidated Financial
Statements in Part II of this Annual Report on Form 10-K .
The Corporation was originally formed in Delaware on April 28, 1993 under the
name Kasler Holding Company to become the parent company of WCG Holdings, Inc.
("WCG") and Kasler Corporation ("Kasler"), which were active in the
infrastructure, contract mining, environmental remediation, commercial
construction and construction materials markets. In April 1996, the name of the
Corporation was changed from Kasler Holding Company to Washington Construction
Group, Inc.
On September 11, 1996, the Corporation acquired the net assets and the
engineering and construction operations of Morrison Knudsen Corporation, a
Delaware corporation ("Old MK"), in a transaction structured as a merger of Old
MK with and into the Corporation, and changed its name to Morrison Knudsen
Corporation. The acquisition of Old MK was an integral part of the
reorganization of Old MK pursuant to a plan of reorganization (the "Plan") filed
by Old MK in the United States Bankruptcy Court for the District of Delaware
(the "Bankruptcy Court"). The Plan was confirmed by the Bankruptcy Court on
August 26, 1996, and became effective concurrently with the merger on September
11, 1996. The Corporation has no remaining obligations under the Plan.
The Corporation's executive offices are located at Morrison Knudsen Plaza,
Boise, Idaho 83729, and its telephone number is (208) 386-5000.
II. OPERATING UNITS
The Corporation's operations have been conducted through three market-driven
operating units: The Engineers and Constructors Group based in Cleveland, Ohio,
and the Heavy Civil Construction Group and the Mining Group based in Boise,
Idaho. In January 1999, the Corporation announced the consolidation of the Heavy
Civil Construction Group and the Mining Group into "Morrison Knudsen Contractors
Group."
ENGINEERS AND CONSTRUCTORS GROUP:
The Engineers and Constructors Group, which is the largest and most diverse of
the Corporation's operating groups, is comprised of five divisions:
. Industrial/Process Division: This division primarily targets Fortune 100
clients and provides design and construction services for new construction
or renovations of plants and facilities in the general manufacturing,
chemical, petrochemical, food and beverage, pharmaceuticals, high-technology
and institutional-buildings markets.
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. Energy Division: This division offers a full range of engineering and
construction services to power generation utilities. These services include
construction of power plants, installation of flue-gas scrubber systems and
plant retrofit projects such as the replacement of steam generators in
nuclear power plants, a division specialty. This division also provides
decommissioning and decontamination of nuclear power plants that have
reached the end of their operating lives.
. Operating and Maintenance Division: This division primarily provides total
facilities management services to industrial clients. These services
include maintenance, engineering and construction and operations and
logistics management at manufacturing plants and related facilities and at
toll roads. These services are typically outsourced by firms that want to
focus internal resources on plant production.
. Transportation Division: This division, which operates as "MK Centennial
Engineering," specializes in engineering and construction management of
highway, bridge, railroad, airport and water resource infrastructure
projects.
. Federal Programs Division: This division specializes in the operation and
environmental remediation of government facilities, primarily for the
Department of Energy and the Department of Defense .
The Engineers and Constructors Group also performs private sector environmental
remediation work, builds and operates chemical weapons demilitarization
facilities and constructs infrastructure projects internationally.
HEAVY CIVIL CONSTRUCTION GROUP:
The Heavy Civil Construction Group, which is one of the largest organizations
of its kind in the United States, provides services both as a general contractor
and in a design-build capacity. This group targets infrastructure projects in
the transportation, marine and water resources markets. This group also provides
site development at mine, industrial, commercial, recreational and large
residential sites.
MINING GROUP:
The Mining Group is an international provider of contract mining services for
the fossil fuel and industrial minerals markets. In addition, this group offers
a full range of technical and engineering services, including resource
evaluation, geologic modeling, mine planning and development, environmental
permitting, equipment selection and remediation.
III. GOVERNMENT CONTRACTS AND BACKLOG
Government contracts are a significant part of the Corporation's business. See
"Risk Factors - The government can audit and potentially disallow claims for
compensation under the Corporation's government contracts, and can terminate
such contracts without cause."
Backlog consists of uncompleted portions of engineering and construction
contracts, including the Corporation's proportionate share of construction
joint-venture contracts and its share of revenues from mining service contracts
and ventures for the next five years. Backlog of all uncompleted contracts at
November 30, 1998 totaled $2.7 billion compared with November 30, 1997 backlog
of $3.7 billion as originally reported and $2.8 billion as restated. (See the
following paragraph for a description of the principal reasons for this decrease
in backlog.) Approximately $657 million or 25% of the backlog at November 30,
1998 was comprised of U.S. government contracts which are subject to termination
by the government, $402 million of which had not been funded. Terminations for
convenience of the government generally provide for recovery of contract costs
and related earnings. Approximately $1.2 billion or 44% of 1998 year-end backlog
is expected to be recognized as revenue in 1999.
Although backlog reflects business which is considered to be firm,
cancellations or scope adjustments may occur. Backlog has been adjusted to
reflect known project cancellations, deferrals and revisions in project scope
and cost, both
I-3
upward and downward. In the third quarter of 1998, the Corporation reduced
backlog by approximately $102 million reflecting the reduction in scope of an
environmental contract for the U.S. government. In anticipation of its pending
acquisition of certain businesses presently owned and operated by CBS
Corporation (see Note 14. "Acquisition of Westinghouse Businesses" of Notes to
Consolidated Financial Statements) which are engaged in the performance of
significant government contracts, and to reduce the exposure to material
adjustments due to scope and funding issues on other government contracts
included in reported backlog, the Corporation made an assessment of its policy
of including in backlog unfunded U.S. government contracts. During the fourth
quarter of 1998, the Corporation adopted a new policy which excludes from
backlog unfunded government contracts which management is not highly confident
will be funded within two years. Backlog has been reduced by $843 million in the
fourth quarter, primarily as a result of the adoption of this new policy. The
reduction in backlog is not an impairment of the revenues or earnings potential
of the Corporation. However, there can be no assurance that future contract
cancellations or modifications will not reduce backlog and future revenues.
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COMPOSITION OF YEAR END BACKLOG
(IN THOUSANDS OF DOLLARS)
YEAR ENDED NOVEMBER 30, 1998 % 1997 %
RESTATED*
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Fee-type contracts $ 901,000 34% $1,218,000 44%
Fixed-price and unit-price contracts 1,779,100 66% 1,541,300 56%
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Total backlog $2,680,100 $2,759,300 100%
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*Amounts have been restated to conform with the adoption of the new policy in
1998. The Corporation typically has, at any given point in time, 25% to 35%
additional unreported backlog representing awarded yet unfunded contracts and
any mining business beyond five years.
IV. EMPLOYEES
The Corporation's total worldwide employment varies widely with the volume,
type and scope of operations under way at any given time and other factors.
At November 30, 1998, the Corporation employed a total of approximately 9,000
employees -- including 5,800 salaried and project direct-hire craft employees
and 3,200 employees covered by collective bargaining agreements.
V. RAW MATERIALS
Raw materials and components necessary for the rendering of construction,
environmental and hazardous substance remediation and contract mining services
are generally available from numerous sources. The Corporation does not foresee
any unavailability of raw materials and components which would have a material
adverse effect on its business in the near term.
VI. COMPETITION
Engineering and construction is a highly competitive business, particularly
for contracts obtained by competitive bidding. The Corporation competes based
primarily on price, reputation and reliability with other general and specialty
contractors, both foreign and domestic. Success or failure in the engineering
and construction industry is, in large measure, based upon the ability to
compete successfully for contracts and to provide the engineering, planning,
procurement, management and project financing skills required to complete them
in a timely and cost-efficient manner. See "Risk Factors - The Corporation is
engaged in highly competitive businesses and must bid against competitors to
obtain engineering, construction and service contracts."
I-4
VII. ENVIRONMENTAL MATTERS
The Corporation's environmental and hazardous substance remediation and
contract mining services involve risks of liability under federal, state and
local environmental laws and regulations, including the Comprehensive
Environmental Response, Compensation, and Liability Act ("CERCLA"). The
Corporation performs environmental remediation at Superfund sites as a response
action contractor for the Environmental Protection Agency (the "EPA") and, in
such capacity, is exempt from liability under any federal law, including CERCLA,
unless its conduct was negligent; moreover, the Corporation may be entitled to
indemnification from the United States against liability arising out of
negligent performance of work in such capacity. A determination that the
Corporation is liable under environmental laws and regulations for the cost of
environmental remediation due to its performance of contract mining or
environmental remediation could have a material adverse effect on the financial
position, results of operations and cash flows of the Corporation. Amendments
to, or more stringent implementation of, current environmental laws and
regulations also could have such adverse effects.
For additional information regarding environmental matters, see "Summitville
environmental matters" and "Other environmental matters" in Note 13.
"Contingencies and Commitments" of Notes to Consolidated Financial Statements.
See also "Risk Factors - The Corporation could be subject to liability under
environmental laws."
VIII. RISK FACTORS
The Corporation and its businesses are subject to a number of risks, including
those enumerated below. Any or all of such risks could have a material adverse
effect on the business, financial condition, results of operations and cash
flows of the Corporation and on the market price for the Corporation's
securities. See also "Note Regarding Forward-Looking Information."
THE CORPORATION IS ENGAGED IN HIGHLY COMPETITIVE BUSINESSES AND MUST BID AGAINST
COMPETITORS TO OBTAIN ENGINEERING, CONSTRUCTION AND SERVICE CONTRACTS:
The Corporation is engaged in highly competitive businesses, particularly
those portions relating to engineering, construction and other service contracts
that are awarded through competitive bidding processes. The Corporation competes
with other general and specialty contractors, both foreign and domestic,
including large international contractors and small local contractors. Certain
competitors have greater financial and other resources than the Corporation
which, in some instances, could give them a competitive advantage over the
Corporation.
ECONOMIC DOWNTURNS AND REDUCTIONS IN GOVERNMENT FUNDING COULD HAVE A NEGATIVE
IMPACT ON THE CORPORATION'S BUSINESSES:
Demand for the services offered by the Corporation has been, and is expected
to continue to be, subject to significant fluctuations due to a variety of
factors beyond its control, including economic conditions. During economic
downturns, the ability of both private and governmental entities in targeted
markets to make capital expenditures on infrastructure improvement may decline
significantly. There can be no assurance that economic or political conditions
generally will be favorable or that there will not be significant fluctuations
adversely affecting the industry as a whole or key markets targeted by the
Corporation. In addition, the Corporation's operations are in part dependent
upon governmental funding of infrastructure and environmental projects.
Significant changes in the level of government funding of these projects could
have an unfavorable impact on the operating results of the Corporation.
THE CORPORATION'S FIXED-PRICE AND UNIT-PRICE CONTRACTS PLACE THE RISK OF
INCREASED PROJECT COSTS ON THE CORPORATION:
The Corporation's fixed-price and unit-price contracts involve risks relating
to the inability of the Corporation to receive additional compensation in the
event that the costs of performing such contracts prove to be greater than
anticipated. The Corporation's cost of performing such contracts may be greater
than anticipated due to uncertainties inherent in estimating contract completion
costs, contract modifications by customers, failure of subcontractors and
I-5
joint-venture partners to perform and other unforseen events and conditions. Any
one or more of these risks could result in reduced profits or increase losses on
a particular contract or contracts.
THE GOVERNMENT CAN AUDIT AND POTENTIALLY DISALLOW CLAIMS FOR COMPENSATION UNDER
THE CORPORATION'S GOVERNMENT CONTRACTS, AND CAN TERMINATE SUCH CONTRACTS WITHOUT
CAUSE:
Government contracts are a significant part of the Corporation's business. In
addition to other significant government contracts, contracts and subcontracts
with the United States Department of Energy accounted for approximately 14% of
the Corporation's revenues for the year ended November 30, 1998. See Note 12.
"Geographic and Customer Information" of Notes to Consolidated Financial
Statements. The Corporation has a number of cost reimbursement contracts with
various agencies of the U.S. government. Allowable costs under these contracts
are subject to audit by the U.S. government. To the extent that such audits
result in determinations that costs claimed as reimbursable are not allowable
costs or were not allocated in accordance with federal government regulations,
the Corporation could be required to reimburse the U.S. government for amounts
previously paid. See "Government Contracts and Backlog" for the relative
significance of U.S. government contracts included in year-end 1998 backlog and
related risks. See Note 13. "Contingencies and Commitments -- Contract related
matters" of Notes to Consolidated Financial Statements.
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 extend beyond one year and for which government funding
has not yet been approved. There can be no assurance that such funding will be
approved. All contracts with agencies of the U.S. government and some commercial
and foreign contracts are subject to unilateral termination at the option of the
customer. In the event of a termination, the Corporation would not receive
projected revenues or profits associated with the terminated portion of such
contracts.
THE CORPORATION'S BUSINESSES INVOLVE MANY PROJECT-RELATED AND CONTRACT-RELATED
RISKS:
The engineering and construction business is subject to a variety of project-
related risks, including changes in political and other circumstances,
particularly since contracts for major projects are performed over extended
periods of time. These risks include the failure of applicable governing
authorities to take certain necessary actions, opposition by third parties to
particular projects and the failure to obtain adequate financing for particular
projects. Due to these factors, losses on a particular contract or contracts
could occur, and the Corporation could experience significant changes in
operating results on a quarterly or annual basis.
Because of the size and complexity of major infrastructure projects, a
relatively small number of projects may provide a significant percentage of the
Corporation's revenue in a given year. The loss of one or more major contracts
or the inability of the Corporation to perform profitably under one or more
major contracts, could have a material adverse effect on the Corporation's
financial condition, results of operations and cash flows.
The Corporation may also be adversely affected by various risks and hazards,
including industrial accidents, labor disputes, geological conditions,
environmental hazards, weather and other natural phenomena such as earthquakes
and floods.
THE CORPORATION'S SUCCESS DEPENDS ON ATTRACTING AND RETAINING QUALIFIED
PERSONNEL IN A COMPETITIVE ENVIRONMENT:
The Corporation is dependent upon its ability to attract and retain highly
qualified managerial, technical and business development personnel. Competition
for such personnel is intense. There can be no assurance that the Corporation
can retain its key managerial, technical and business development personnel or
that it can attract, assimilate or retain such personnel in the future.
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THE CORPORATION'S INTERNATIONAL OPERATIONS INVOLVE SPECIAL RISKS:
The Corporation pursues project opportunities throughout the world through
foreign and domestic subsidiaries as well as agreements with foreign joint-
venture partners. These foreign operations are subject to special risks,
including:
. Uncertain political and economic environments,
. Potential incompatibility with foreign joint-venture partners,
. Foreign currency controls and fluctuations,
. Civil disturbances, and
. Labor strikes.
Events outside of the Corporation's control may limit or disrupt operations,
restrict the movement of funds, result in deprivation of contract rights,
increase foreign taxation or limit repatriation of earnings. In addition, in
certain cases applicable law and joint-venture or other agreements may provide
that each joint-venture partner is jointly and severally liable for all
liabilities of the venture. See Note 12. "Geographic and Customer Information"
of Notes to Consolidated Financial Statements.
THE CORPORATION COULD BE SUBJECT TO LIABILITY UNDER ENVIRONMENTAL LAWS:
The Corporation is subject to a variety of environmental laws and regulations
governing, among other things, discharges to air and water, the handling,
storage, and disposal of hazardous or solid waste materials and the remediation
of contamination associated with releases of hazardous substances. Such laws
and regulations and the risk of attendant litigation can cause significant
delays to a project and add significantly to its cost. Violations of these
environmental laws and regulations could subject the Corporation and its
management to civil and criminal penalties and other liabilities. There can be
no assurance that such laws and regulations will not become more stringent, or
more stringently implemented, in the future.
Various federal, state and local environmental laws and regulations, as well
as common law, may impose liability for property damage and costs of
investigation and cleanup of hazardous or toxic substances on property currently
or previously owned by the Corporation or arising out of the Corporation's waste
management activities. Such laws may impose responsibility and liability
without regard to knowledge of or causation of the presence of the contaminants,
and the liability under such laws is joint and several. The Corporation has
potential liabilities associated with its past waste management and contract
mining activities and with its current and prior ownership of certain property.
See "Business -- Environmental Matters" and "Other environmental matters" in
Note 13. "Contingencies and Commitments" of Notes to Consolidated Financial
Statements.
THE FAILURE OF THE CORPORATION OR ITS BUSINESS PARTNERS TO BE YEAR 2000
COMPLIANT COULD HAVE ADVERSE CONSEQUENCES:
Like most other companies and organizations, the Corporation relies on
computer-based technology in the conduct of its business. The Corporation has
been and is continuing to address the impact of the "Year 2000" issue. This
issue is the result of computer programs that were written using two digits
rather than four to define calendar years. These programs may fail to properly
differentiate between calendar years in the twenty-first century and calendar
years in the twentieth century (e.g., they may recognize a date using "00" as
the year 1900 rather than the year 2000). If not corrected, the Year 2000 issue
could result in complete system failures or miscalculations causing significant
disruption of normal business activities.
I-7
The Corporation has been and is continuing to assess and resolve Year 2000
issues associated with its material internal systems and its material third-
party relationships. Although the Corporation believes that its Year 2000
readiness efforts are designed to appropriately identify and address those Year
2000 issues that are within the Corporation's control, there can be no assurance
that the Corporation's efforts will be fully effective. The newness and
complexity of the issues presented and the Corporation's dependence on the
technical skills and preparedness of third parties are among the factors that
could cause the Corporation's efforts to be less than fully effective. Moreover,
Year 2000 issues present many risks that are simply beyond the Corporation's
control, such as the potential effects of Year 2000 issues on the economy in
general and on the Corporation's business partners, vendors, subcontractors and
customers in particular. See "The Year 2000 Issue" in Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
ONE SHAREHOLDER'S LARGE OWNERSHIP INTEREST IN THE CORPORATION, PROVISIONS OF
DELAWARE LAW AND THE CORPORATION'S ORGANIZATIONAL DOCUMENTS COULD INHIBIT A
TAKEOVER OF THE CORPORATION:
As of November 30, 1998, Dennis R. Washington, the Chairman of the Board of
Directors of the Corporation, beneficially owned 37.88% of the 53,352,410 shares
of outstanding common stock of the Corporation. As of February 3, 1999, Mr.
Washington is also President and Chief Executive Officer of the Corporation. Mr.
Washington's substantial ownership interest and certain provisions of the
Delaware General Corporation Law, the Corporation's Certificate of Incorporation
and Bylaws and certain agreements to which the Corporation is a party, may have
the effect of delaying, deterring or preventing a change in control of the
Corporation. In addition, the Certificate of Incorporation authorizes the
issuance of up to 100,000,000 shares of common stock and 10,000,000 shares of
preferred stock of the Corporation. The Board of Directors has the power to
determine the price and terms under which any such additional capital stock may
be issued and to fix the terms of such preferred stock, and existing
stockholders of the Corporation will not have preemptive rights with respect
thereto.
ITEM 2. PROPERTIES
(In thousands of dollars)
At November 30, 1998, the Corporation owned more than 3,500 units of heavy and
light mobile construction, environmental remediation and contract mining
equipment.
The Corporation does not own significant real property for operations other
than certain land and improvements in Highland and Petaluma, California. At
November 30, 1998, the Corporation had real estate held for sale in Nevada. The
two principal administrative office facilities in Boise, Idaho, and Cleveland,
Ohio, of approximately 214,700 square feet and 246,700 square feet,
respectively, are leased under long-term, noncancelable leases expiring in 2003
and 2010, respectively. The Corporation's long-term aggregate rental obligations
for the Boise and Cleveland facilities under these noncancelable leases for each
of the next five years approximate $6,970, $6,970, $7,495, $7,545 and $6,911,
respectively.
Annual rental payments for real estate and equipment leased by the
Corporation during the year ended November 30, 1998 aggregated $52,067. See Note
13. "Contingencies and Commitments -- Long-term leases" of Notes to Consolidated
Financial Statements.
Construction, environmental remediation and mining equipment and leased
administrative and engineering facilities are considered by the Corporation to
be well maintained and suitable for current operations.
ITEM 3. LEGAL PROCEEDINGS
Information regarding legal proceedings set forth under the caption "Other" in
Note 13. "Contingencies and Commitments" of Notes to Consolidated Financial
Statements is incorporated by reference in response to this Item 3.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Corporation did not submit any matters to a vote of security holders
during the fourth quarter of 1998.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
MARKET INFORMATION:
The Corporation's voting common stock is traded on the New York Stock Exchange
under the symbol "MK." At the close of business on January 15, 1999, the
Corporation had 53,187,567 shares of common stock issued and outstanding.
The New York Stock Exchange composite high and low sales prices of the
Corporation's common stock traded on the New York Stock Exchange for each
quarterly period within the two most recent fiscal years are set forth under the
caption "Quarterly Financial Data" in Part II of this Annual Report on Form 10-K
and are incorporated by reference in response to this Item 5.
HOLDERS:
The number of record holders of the Corporation's voting common stock at
January 15, 1999 was approximately 1,391 and does not include beneficial owners
of the Corporation's common stock held in the name of nominees.
DIVIDENDS:
The Corporation has not paid a cash dividend since the first quarter of fiscal
1994 and does not anticipate payment of dividends in the near term. The
Corporation is not restricted from paying dividends unless an event of default
exists under its credit facility. See Note 8. "Credit Facilities" of Notes to
Consolidated Financial Statements.
II-1
ITEM 6. SELECTED FINANCIAL DATA
(In thousands except per share data)
- --------------------------------------------------------------------------------------------------
OPERATIONS SUMMARY 1998 1997 1996(A) 1995 1994
- --------------------------------------------------------------------------------------------------
Revenue $1,862,174 $1,677,301 $659,100 $228,537 $258,739
Gross profit 86,542 79,315 33,344 24,113 19,849
Operating income (loss) 58,743 52,827 (8,594) 7,926 1,724
Net income (loss) 37,553 32,031 (4,780) 8,165 657
Income (loss) per common share - basic .70 .59 (.14) .28 .02
Shares used to compute basic income per
common share 53,891 54,044 34,790 29,454 29,453
- --------------------------------------------------------------------------------------------------
FINANCIAL POSITION SUMMARY
- --------------------------------------------------------------------------------------------------
Current assets $ 427,722 $ 405,014 $459,249 $ 85,721 $111,184
Total assets 788,151 770,244 839,637 185,301 182,618
Current liabilities 303,024 299,895 400,604 42,188 47,005
Long-term debt - - - 5,042 5,490
Redeemable preferred stock - 18,000 18,000 - -
Stockholders' equity 370,903 343,131 312,004 128,951 119,956
Stockholders' equity per common share 6.95 6.33 5.80 4.37 4.08
Dividends declared per share - - - - .05
- --------------------------------------------------------------------------------------------------
(a) On September 11, 1996, the Corporation acquired Old MK in a transaction
accounted for as a purchase. The Corporation's results of operations include Old
MK. See Item 1. "Business -- General" in Part I of this Annual Report on Form
10-K and Note 2. "Business Combination" of Notes to Consolidated Financial
Statements.
II-2
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
1998 COMPARED TO 1997
- -----------------------------------------------------------------------------
QUARTER ENDED YEAR ENDED
NOVEMBER 30, NOVEMBER 30,
- -----------------------------------------------------------------------------
(In millions) 1998 1997 1998 1997
- -----------------------------------------------------------------------------
Revenue $543.3 $439.3 $1,862.2 $1,677.3
Gross profit 24.1 21.3 86.5 79.3
General and administrative expenses (6.5) (6.0) (24.2) (22.9)
Goodwill amortization (.9) (.9) (3.6) (3.6)
Investment income 1.1 3.8 5.8 9.1
Interest expense (.2) (.2) (.9) (.9)
Other income (expense), net 1.5 - 3.8 (1.1)
Net income 10.7 9.4 37.6 32.0
- -----------------------------------------------------------------------------
REVENUE AND GROSS PROFIT:
Revenue for the fourth quarter and year ended November 30, 1998 increased
$104.0 million to $543.3 million and $184.9 million to $1,862.2, respectively,
compared to $439.3 million and $1,677.3 million for the comparable periods in
1997. These increases were principally due to an increase in the volume of
industrial/process, operation and maintenance and energy project work executed
by the Engineers and Constructors Group. Revenue increased slightly for the
fourth quarter and year ended November 30, 1998 in the Heavy Civil Construction
Group and for the fourth quarter in the Mining Group over the comparable periods
in 1997. The increase in the Corporation's revenue for the year ended November
30, 1998 was partially offset by a decrease in revenue from the Mining Group,
which experienced a lower demand for coal production and power generation from
the MIBRAG mbH mining venture in Germany during the first nine months of 1998
and the completion of a significant long-term mining contract in the third
quarter of 1997. MIBRAG mbH increased coal production in the fourth quarter of
1998 over each of the previous three quarters of the year.
Gross profit for the fourth quarter and year ended November 30, 1998 increased
$2.8 million to $24.1 million and $7.2 million to $86.5 million, respectively,
compared to $21.3 million and $79.3 million for the comparable periods of 1997.
Gross profit for the fourth quarter of 1998 included favorable results from each
of the Corporation's operating groups. During the fourth quarter of 1997, the
Corporation recognized a $3.9 million pretax loss on a large, fixed-price joint-
venture contract. Gross profit for the year ended November 30, 1998 included
improved profitability in the Heavy Civil Construction Group and a $5.7 million
settlement on an environmental contract. These increases were partially offset
by lower demand for coal production and power generation from the MIBRAG mbH
mining venture during the first nine months of the year, the recognition of a
loss related to start up difficulties on a fixed-price construction contract and
$5.4 million net losses related to the write-off of investment in a solvent
extraction facility and a related contract to treat contaminated soil. Gross
profit for the year ended November 30, 1997 included earnings from a significant
long-term mining contract completed in the third quarter of 1997, offset by
provisions for losses at completion for contracts in progress of $9.5 million
and a $3.9 million pretax loss on a large, fixed-price joint-venture contract.
Gross profit as a percentage of revenue for the fourth quarter and year ended
November 30, 1998 was 4.4% and 4.6%, respectively, compared to 4.8% and 4.7% for
the same periods in 1997. The decrease in gross profit percentage in 1998 was
primarily due to a higher proportion of revenue attributable to the Engineers
and Constructors Group,
II-3
which had lower operating margins than the comparable period of 1997. The
Engineers and Constructors Group typically executes cost-plus contracts which
have less risk but lower margins. Gross profit percentage for the fourth quarter
of 1998 increased slightly from 4.3% for the third quarter of 1998.
The Corporation's operating margins often vary between periods due to inherent
risks and rewards on fixed-price contracts causing unexpected gains and losses
on contracts. Operating margins may also vary between periods due to changes in
the mix and timing of contracts executed by the Corporation, which contain
various risk and profit profiles and uncertainties inherent in the estimation
process. The Corporation strives to offset certain of the risks inherent in its
contracts through geographic, customer and risk diversification.
At November 30, 1998, backlog of $2,680 million was comprised of $901 million
(34%) of revenue from fee-type contracts and $1,779 million (66%) of revenue
from fixed-price contracts and the Corporation's share of revenue from mining
ventures.
GENERAL AND ADMINISTRATIVE EXPENSES:
General and administrative expenses for the fourth quarter and year ended
November 30, 1998 increased $.5 million and $1.3 million, respectively, compared
to the comparable periods of 1997. The increase is attributable to an increase
in implementation costs of new computer information systems for financial, human
resource and payroll functions and the reengineering of the Corporation's
financial processes. The Corporation's implementation costs are anticipated to
continue through 1999. The Corporation expects the system implementation and
reengineering will improve the efficiency and cost of processing accounting and
financial data, but anticipates that the initial cost savings will be somewhat
offset by expenses associated with training costs and amortization of the new
computer software.
COST IN EXCESS OF NET ASSETS ACQUIRED ("GOODWILL"):
Goodwill amortization for the fourth quarter and year ended November 30, 1998
was $.9 million and $3.6 million, respectively, principally reflecting the
amortization of the $124.1 million of goodwill recorded in connection with the
acquisition of Old MK. The Corporation allocated the purchase price of Old MK to
the assets acquired and liabilities assumed, including preacquisition
contingencies, on the basis of estimated fair values at September 11, 1996.
Resolution and revaluation of certain preacquisition contingencies and tax law
changes extending the net operating loss ("NOL") carryforward period from 15 to
20 years resulted in an adjustment to goodwill in the third quarter of 1997.
During the fourth quarter of 1998, management evaluated the likelihood of the
future realization of the tax benefits of deductible temporary differences and
NOL carryforwards relating to Old MK and concluded, based on available evidence,
that it is more likely than not that a portion of the tax benefits previously
reserved would be realized. This conclusion resulted in an increase in deferred
tax assets and a decrease in recorded goodwill of $20 million at November 30,
1998. The decrease in goodwill will reduce future annual goodwill amortization
by $.5 million. A further adjustment to deferred tax assets and related goodwill
may be likely in connection with the Corporation's pending acquisition of
certain businesses presently owned and operated by CBS Corporation. See Note 14.
"Acquisition of Westinghouse Businesses" of Notes to Consolidated Financial
Statements.
INVESTMENT INCOME:
Investment income for the fourth quarter and year ended November 30, 1998
decreased $2.7 million and $3.3 million, respectively, from the comparable
periods of 1997 due to a decrease in interest recognized in 1997 from U.S.
federal income tax refunds received in January 1998 and a note receivable
collected in October 1997. These reductions in investment income were partially
offset by increased interest income on corporate cash in short-term asset
management accounts.
INTEREST EXPENSE:
Interest expense for the fourth quarter and year ended November 30, 1998 of
$.2 million and $.9 million, respectively, was comparable to interest expense
incurred for the same periods of 1997. Interest expense consists
II-4
primarily of periodic amortization of prepaid underwriting fees and quarterly
commitment fees in connection with the Corporation's five-year, $200 million
revolving loan and letter of credit facility obtained in the fourth quarter of
1996.
OTHER INCOME (EXPENSE), NET:
Other income (expense) for the fourth quarter and year ended November 30,
1998, of $1.5 million and $3.8 million, respectively, reflects the recognition
of $1.1 million and $3.2 million of income associated with the settlement of the
Corporation's defined benefit pension plan obligation. Final distribution of
surplus plan assets to eligible plan participants is expected to be made in
early 1999.
Other income (expense) for the quarter ended November 30, 1997 includes (i) a
$1.7 million income adjustment of the accrued pension benefit obligation
reflecting the estimate of termination benefits to be settled with cash
proceeds from liquidation of plan assets and (ii) $1.9 million of expensed
acquisition costs associated with the Corporation's cancellation of the proposed
acquisition of Montana Resources, Inc. In addition, for the year ended November
30, 1997, the Corporation recognized an $.8 million loss on the sale of an
equity investment in a foreign bank and a $.6 million gain on adjustment of
insurance premiums paid in prior periods.
INCOME TAX EXPENSE:
The effective tax rate for the fourth quarter and year ended November 30, 1998
was 44%, compared to 48% and 47% in the comparable periods of 1997, principally
due to a decrease in foreign tax expense and a lower proportion of non-
deductible expenses to pretax income. The effective tax rate is higher than the
U.S. federal statutory rate of 35% because of state income taxes and foreign
income taxes not currently eligible for use as credits against U.S. federal
income taxes and non-deductible expenses. It is anticipated that future foreign
income tax will be eligible for use as credits against U.S. federal income taxes
in 1999 and future periods.
1997 COMPARED TO 1996
THE CONSOLIDATED RESULTS OF OPERATIONS FOR THE YEAR ENDED NOVEMBER 30, 1996
INCLUDE THE RESULTS OF OLD MK FOR THE PERIOD FROM SEPTEMBER 12 TO NOVEMBER 30,
1996.
REVENUE AND GROSS PROFIT:
Revenue and gross profit for the year ended November 30, 1997 increased
$1,018.2 and $46.0, respectively, compared to 1996 primarily due to the
acquisition of Old MK on September 11, 1996, which was accounted for as a
purchase. Gross profit, as a percent of revenue for the year, was 4.7% for 1997
compared to 5.1% for 1996. During 1997, the Corporation's gross profit
benefitted from strong performances on several contracts which more than offset
the losses incurred on certain fixed-price contracts. In the fourth quarter of
1997, the Corporation assumed sponsorship of a large, fixed-price joint venture
due to the bankruptcy of the previous sponsor and recorded a $3.9 million pretax
loss because of the uncertainties on the project, including change orders and
potential project claims.
GENERAL AND ADMINISTRATIVE EXPENSES:
General and administrative expenses for the year ended November 30, 1997
increased $.3 million compared to the year ended November 30, 1996. The
Corporation incurred approximately $1 million in expenses related to an
enterprise-wide implementation of new computer information systems for the
Corporation's financial, human resource and payroll functions.
IMPAIRMENT OF LONG-LIVED ASSETS:
In 1996, the Corporation recognized impairment losses of $18.2 million on
certain real property held for sale or use and operating assets of a subsidiary
held for sale.
II-5
COST IN EXCESS OF NET ASSETS ACQUIRED ("GOODWILL"):
Goodwill amortization for the year ended November 30, 1997 increased to $3.6
million from $1.2 million in 1996, reflecting the $124.1 million of goodwill
recorded in connection with the acquisition of Old MK. The Corporation allocated
the purchase price of Old MK to the assets acquired and liabilities assumed,
including preacquisition contingencies, on the basis of estimated fair values at
September 11, 1996. Resolution and revaluation of certain preacquisition
contingencies and the recent tax law change extending the NOL carryforward
period from 15 to 20 years, resulted in a net decrease in goodwill of $1.0
million in the third quarter of 1997. The extension of the NOL carryforward
period resulted in a decrease to goodwill of $19.7 million after adjusting the
valuation allowance related to the deferred tax asset. This decrease was offset
by an accrual for preacquisition contingencies of $18.7 million, primarily for
legal proceedings.
INVESTMENT INCOME:
Investment income was comprised of (i) earnings from cash equivalents,
securities jointly held with customers as contract retentions and securities
available for sale, and (ii) interest on a note receivable collected in the
fourth quarter of 1997 and U.S. federal income tax refund receivables.
Investment income for the year ended November 30, 1997 increased $5.4 million
from 1996 principally due to interest recognized on U.S. federal income tax
refunds and earnings from securities available for sale.
INTEREST EXPENSE:
Interest expense for the year ended November 30, 1997 decreased $.1 million
compared to 1996. Interest expense for 1997 consisted primarily of periodic
amortization of prepaid underwriting fees and quarterly commitment fees in
connection with the Corporation's five-year, $200 million revolving loan and
letter of credit facility obtained in the fourth quarter of 1996.
OTHER INCOME (EXPENSE), NET:
Other expense for the year ended November 30, 1997 included (i) $1.7 million
income adjustment of the accrued pension benefit obligation reflecting the
estimate of termination benefits to be settled with cash proceeds from
liquidation of plan assets and (ii) $1.9 million of expensed acquisition costs
associated with the Corporation's cancellation of the proposed acquisition of
Montana Resources, Inc. In addition, the Corporation recognized an $.8 million
loss on the sale of an equity investment in a foreign bank and a $.6 million
gain on adjustment of insurance premiums paid in prior periods.
INCOME TAX EXPENSE:
The effective tax rate for the year ended November 30, 1997 was 47%. The
effective rate was greater than the U.S. federal statutory rate of 35%,
primarily due to the impact of state and foreign income taxes and non-deductible
goodwill amortization. For the year ended November 30, 1996, the Corporation
recognized an income tax benefit of $.5 million which reflected recoverable
federal income taxes, net of foreign and state income tax expense.
II-6
FINANCIAL CONDITION AND LIQUIDITY
The Corporation has three principal sources of near-term liquidity: (1)
existing cash and cash equivalents; (2) cash generated by its operations; and
(3) revolving loan borrowings under its credit facility. Management believes the
Corporation's liquidity and capital resources should be sufficient to meet its
reasonably foreseeable working capital, capital expenditure and other
anticipated cash requirements.
- ----------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES NOVEMBER 30,
(IN THOUSANDS) 1998 1997
- ----------------------------------------------------------
Cash and cash equivalents
Beginning of period $ 53,215 $48,310
End of period 67,054 53,215
- ----------------------------------------------------------
YEAR ENDED
NOVEMBER 30,
1998 1997
- ----------------------------------------------------------
Net cash provided (used) by:
Operating activities $ 71,728 $ 9,290
Investing activities (28,155) (7,487)
Financing activities (29,734) 3,102
- ----------------------------------------------------------
Cash and cash equivalents increased $13.8 million during the year ended
November 30, 1998 to $67.1 million at November 30, 1998. This increase reflects
net cash provided from operating activities of $71.7 million offset by net cash
used in investing and financing activities of $28.1 million and $29.7 million,
respectively. The favorable operating cash flow for 1998 was attributable to
improved profitability and a greater focus on cash flow and working capital
management. Cash provided by operations also included $25.2 million from an
income tax refund and related interest; of which $18.0 million was applied as
required to the redemption of the Corporation's Series A redeemable preferred
stock. These increases were partially offset by additional capital requirements
for three significant construction joint ventures in the Heavy Civil
Construction Group. Cash provided or used from operating activities from period
to period is affected to a large extent by the mix, timing, state of completion
and commercial terms of engineering and construction contracts which is
reflected in changes in net operating assets and liabilities. The Corporation
anticipates that the execution of existing backlog can be managed through future
operating cash flows and available cash and cash equivalents without need for
additional capital resources.
Net cash used for investing activities in 1998 of $28.2 million included net
$20.5 million of property and equipment acquisitions, the net purchase of $5.9
million of securities available for sale in connection with the Corporation's
self-insured risk management program and $4.0 million primarily for the purchase
of a ready-mix concrete business offset by $2.8 million in cash proceeds from
the sale of a non-core business.
Cash used in financing activities in 1998 of $29.7 million included $18.0
million for the redemption of the Corporation's Series A redeemable preferred
stock and $12.8 million for repurchase of 973,100 shares of the Corporation's
outstanding common stock. The Corporation received authorization in January 1998
to repurchase, in open market transactions, block trades or otherwise up to 2
million shares of the Corporation's outstanding common stock to counteract the
dilutive effect of the issuance of stock under its stock option plans, and up to
2.765 million of its warrants to purchase common stock. Subject to market
conditions and other factors, these purchases may be commenced, discontinued and
resumed from time to time without prior notice. It is anticipated that future
purchases will be funded from available cash and equivalents and operating cash
flows. Depending upon conditions in capital markets and other factors, the
Corporation may consider the possible issuance of long-term debt or other
securities.
The Corporation anticipates capital expenditures for major construction
equipment of approximately $25 million
II-7
during 1999 for normal replacement and to meet equipment requirements of its
expanding business.
The Corporation has a five-year, $200.0 million revolving loan and letter of
credit facility from the Bank of Montreal. Under the credit facility,
outstanding revolving loan borrowings are limited to $125.0 million. During
1998, the Corporation had no outstanding borrowings under the facility and was
in compliance with its covenants, the most restrictive of which is fixed charge
coverage.
The Corporation is subject to foreign currency translation and exchange
issues, primarily with regard to its mining venture, MIBRAG mbH, in Germany. At
November 30, 1998, the cumulative adjustments for translation losses net of
related income tax benefits was $3.0 million. The Corporation realized a pretax
gain on foreign currency exchange transactions of $358 thousand for the year
ended November 30, 1998. The Corporation endeavors to enter into contracts with
foreign customers with repayment terms in U.S. currency as a protection from
foreign exchange risk.
As discussed in Note 14. "Acquisition of Westinghouse Businesses," the
Corporation intends to fund its share of the purchase price for certain
businesses presently owned and operated by CBS Corporation and its share of the
working capital requirements of such businesses using existing financing
facilities, additional financing facilities for which the Corporation has
received commitments or an offering of senior unsecured notes, together with
cash on hand and cash from other operations. The terms of such additional
borrowings have not yet been finalized.
The Corporation may, from time to time, pursue opportunities to complement
existing operations through business combinations and participation in ventures,
which may require additional financing and utilization of the Corporation's
capital resources.
THE YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs written and electronic
circuitry that use two digits rather than four to define calendar years. These
programs may fail to properly differentiate between calendar years in the
twenty-first century and calendar years in the twentieth century (e.g., they may
recognize a date using "00" as the year 1900 rather than the year 2000). If not
corrected, the Year 2000 issue could result in complete system failures or
miscalculations causing significant disruption of normal business activities.
The Year 2000 issue affects virtually all companies and organizations, including
the Corporation.
The Corporation employs a number of information technology ("IT") systems in
its operations including, without limitation, computer networking systems,
financial systems and other similar systems. Throughout its operations, the
Corporation also employs numerous non-IT devices such as building security and
safety devices and other devices containing embedded electronic circuits. Both
IT systems and non-IT devices are subject to potential failure or error due to
the Year 2000 issue.
The Corporation has developed and implemented a strategic plan (the "Year
2000 Project") to achieve Year 2000 readiness. The Year 2000 Project's
activities are intended to remediate the Year 2000 issue in all major categories
of systems and electronic devices in use by the Corporation, including IT
systems, non-IT devices and supply chain relationships so that the Corporation
may continue its operations without interruption or with minimal disruption. It
also includes communication with critical third parties such as clients,
vendors, subcontractors and other business partners to determine the expected
degree of Year 2000 compliance of those parties, and to monitor their progress
towards Year 2000 readiness. The Year 2000 Project includes the following
phases: (1) awareness, (2) inventory, (3) assessment, (4) remediation, (5)
testing/validation and (6) return to production. Progress reports on the Year
2000 Project are presented regularly to the Corporation's senior management and
periodically to the Audit Committee of the Board of Directors.
Because of the scope of its operations, the Corporation believes it is
impractical to seek to eliminate all potential Year 2000 problems before they
arise. As a result, the Corporation expects that its Year 2000 assessments and
corrections will include ongoing remedial efforts into the year 2000. The
Corporation is using a risk-based analysis of
II-8
its operations to identify those items that are critical to the Corporation and
at risk. Critical items are being identified through the "inventory" phase of
the Year 2000 Project.
The Corporation is in various "inventory," "assessment" and "remediation"
phases with regard to its state of readiness related to non-IT devices
containing embedded circuitry and issues related to third parties with whom the
Corporation has material relationships. The Corporation is in various states of
the "inventory," "assessment," "remediation" and "testing/validation" phases
with regard to its IT systems. As part of the Year 2000 Project regarding IT
systems, the Corporation continues implementing new or upgraded Year 2000
compliant systems for financial information, human resources and payroll. These
systems are expected to be completed in July, 1999.
The Corporation is corresponding with its major clients and joint-venture and
other business partners, and with all vendors and subcontractors that have been
determined, through practical risk assessment techniques, to be critical to the
Corporation, in order to determine the Year 2000 readiness or progress of those
entities and to assess any related risks.
As part of the Year 2000 Project, the Corporation is exploring alternative
solutions and developing contingency plans to address the possibility that the
Corporation and third parties with whom it has material relationships will not
be fully Year 2000 ready on a timely basis. Such plans have not yet been fully
developed, and the Corporation will continue to develop them as necessary to
address each area of Year 2000 risk. Completion of the Year 2000 Project,
including the development of contingency plans, is expected by September 30,
1999.
The Corporation's Year 2000 Project utilizes both internal and external
resources. The total cost of the Corporation's activities to achieve Year 2000
readiness is currently estimated at approximately $21.6 million. As of November
30, 1998, the direct costs incurred by the Corporation to remediate Year 2000
issues were approximately $6.7 million.
Although the Corporation believes that its Year 2000 readiness efforts are
designed to appropriately identify and address those Year 2000 issues that are
within the Corporation's control, there can be no assurance that the
Corporation's efforts will be fully effective. The newness and complexity of the
issues presented and the Corporation's dependence on the technical skills and
preparedness of third parties are among the factors that could cause the
Corporation's efforts to be less than fully effective. Moreover, Year 2000
issues present many risks that are simply beyond the Corporation's control, such
as the potential effects of Year 2000 issues on the economy in general and on
the Corporation's business partners, vendors, subcontractors and customers in
particular.
While the Corporation believes that the impact of any individual Year 2000
failure will most likely be localized and limited to specific facilities or
operations, the Corporation is not yet able to assess the likelihood of
significant business interruptions occurring in one or more of its operations
around the world. Such interruptions could prevent the Corporation, at least
temporarily, from delivering contractual services. Furthermore, it has been
widely reported that significant litigation is expected to occur related to
business interruptions caused by Year 2000 failures. It is uncertain whether, or
to what extent, the Corporation will be affected by such litigation. The failure
of the Corporation, its clients (including U.S. government agencies), vendors,
joint-venture partners or others upon whom the Corporation relies to achieve
Year 2000 readiness could adversely affect the Corporation's business
operations, which could have a material adverse effect on the Corporation's
business, financial condition and results of operations.
The foregoing disclosure is based upon the Corporation's current expectations,
estimates and projections, which could ultimately be found to be inaccurate.
Because of uncertainties and circumstances beyond the Corporation's control, the
actual effects of Year 2000 issues on the Corporation may be different than the
foregoing assessment. See "Note Regarding Forward-Looking Information."
ENVIRONMENTAL CONTINGENCY
From July 1985 to June 1989, a subsidiary of the Corporation performed certain
contract mining services at the
II-9
Summitville mine near Del Norte, Colorado. The EPA has notified the Corporation
and approximately 20 other parties that each is a potentially responsible party
("PRP") with regard to hazardous substances generated or disposed of at the
Summitville Mine Superfund Site ("Site"). The EPA has not commenced any
litigation or other proceedings against the Corporation. The Corporation has had
only preliminary discussions with the EPA but has been informally advised that
the EPA does not consider the Corporation eligible for a de minimis settlement
(the basis for settlement by several PRPs considered to have contributed less
than 3% volume and toxicity of the hazardous substances at the Site).
According to a report published in August 1996, the EPA estimated that the
total remediation costs incurred and to be incurred at the Site will be $120.0
million. The Corporation is not a party to any agreement regarding an allocation
of responsibility, and the EPA has not made an allocation of responsibility
among the PRPs. The Corporation's share, if any, of the aggregate environmental
liability associated with the Site is not presently determinable and depends
upon, among other things, the manner in which liability may be allocated to or
among the Corporation or other PRPs associated with the Site, the efficacy of
any defenses that the Corporation or such other PRPs may have to any assertion
of liability, the willingness and ability of such other PRPs to discharge such
liability as may be allocated to them and the outcome of any negotiations or
settlement discussions between the Corporation and the EPA and/or such other
PRPs. Accordingly, no remediation costs have been accrued at November 30, 1998.
Management believes that the ultimate resolution of this matter could have a
material adverse effect on the Corporation's financial position and could
materially and adversely effect its results of operations and cash flows in one
or more periods.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued Statements No. 128
Earnings Per Share, No. 130 Reporting Comprehensive Income, No. 131 Disclosures
about Segments of an Enterprise and Related Information, No. 132 Employers'
Disclosures about Pensions and Other Postretirement Benefits and No. 133
Accounting for Derivative Instruments and Hedging Activities. The American
Institute of Certified Public Accountants has issued Statement of Position
("SOP") 98-1 Accounting for Costs of Computer Software Developed or Obtained for
Internal Use. Descriptions of Statements No. 128, 130, 131, 132 and 133 and SOP
98-1 are included in the Notes to Consolidated Financial Statements.
Statement No. 128 was first effective for the Corporation for its fiscal
quarter ended February 28, 1998. Basic and diluted earnings per share determined
pursuant to the requirements of Statement No. 128 are presented on the face of
the income statement and in the Notes to Consolidated Financial Statements.
Statement No. 130 will require the Corporation to provide additional disclosures
commencing with its fiscal quarter ending February 28, 1999. Statements No. 131
and 132 will require the Corporation to provide additional disclosures
commencing with its fiscal year ending November 30, 1999. The Corporation will
be required to implement Statement No. 133 commencing with its first fiscal
quarter of 2000. The Corporation is in compliance with SOP 98-1.
II-10
QUARTERLY FINANCIAL DATA
(In thousands except per share data)
- --------------------------------------------------------------------------------
Selected quarterly financial data for the years ended November 30, 1998 and 1997
are presented below. Income (loss) per share is computed separately for each
quarterly and annual period presented.
- --------------------------------------------------------------------
1998 QUARTERS ENDED FEBRUARY 28 MAY 31 AUGUST 31 NOVEMBER 30
- --------------------------------------------------------------------
Revenue $385,041 $436,069 $497,795 $543,269
Gross profit 18,976 22,121 21,307 24,138
Net income 8,222 9,084 9,579 10,668
Income per share
Basic $ .15 $ .17 $ .18 $ .20
Diluted .15 .17 .18 .20
- --------------------------------------------------------------------
Market price
High $ 12.44 $ 12.25 $ 14.94 $ 11.88
Low 9.06 10.88 11.06 8.75
- --------------------------------------------------------------------
- --------------------------------------------------------------------
1997 QUARTERS ENDED FEBRUARY 28 MAY 31 AUGUST 31 NOVEMBER 30
- --------------------------------------------------------------------
Revenue $389,530 $414,225 $434,288 $439,258
Gross profit 18,104 19,206 20,742 21,263
Net income 7,004 7,419 8,235 9,373
Income per share
Basic $ .13 $ .14 $ .15 $ .17
Diluted .13 .14 .15 .17
- --------------------------------------------------------------------
Market price
High $ 10.50 $ 12.75 $ 14.63 $ 13.88
Low 8.63 9.75 11.38 9.75
- --------------------------------------------------------------------
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
(IN THOUSANDS)
The Corporation's exposure to market risk for changes in interest rates
relates primarily to the Corporation's short-and long-term investment portfolio
and debt obligations. The Corporation's short-term investment portfolio consists
primarily of highly liquid instruments with maturities of one month or less. The
Corporation's long-term investment portfolio consists primarily of high-quality
debt instruments with maturities under 10 years and an average maturity of 3.5
years. These long-term instruments are held to fund potential workers
compensation obligations of the Corporation. The Corporation seeks to match the
maturities of these instruments as closely as possible with its anticipated
workers compensation obligations and to hold these instruments to maturity in
order to minimize market risk exposure. As of November 30, 1998, the Corporation
had $39,644 of short-term investments classified as cash equivalents and $45,985
in its long-term investment portfolio.
The Corporation may from time to time effect borrowings under its bank credit
facility for general corporate purposes, including working capital requirements,
capital expenditures and acquisitions. Borrowings under the bank credit facility
bear interest at the applicable LIBOR or base rate and, therefore, the
Corporation is subject to fluctuations in interest rates. As of November 30,
1998, the Corporation had no outstanding debt obligations.
II-11
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
MORRISON KNUDSEN CORPORATION AND SUBSIDIARIES
Consolidated Financial Statements as of November 30, 1998 and 1997, and for
each of the three years in the period ended November 30, 1998
PAGE(S)
Report of Independent Accountants II-13
Consolidated Statements of Operations II-14
Consolidated Balance Sheets II-15, II-16
Consolidated Statements of Cash Flows II-17
Consolidated Statements of Stockholders' Equity II-18
Notes to Consolidated Financial Statements II-19 to II-39
II-12
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Morrison Knudsen Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of Morrison
Knudsen Corporation and subsidiaries (the "Corporation") at November 30, 1998
and 1997, and the results of their operations and their cash flows for each of
the three years in the period ended November 30, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Corporation's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 3 to the consolidated financial statements, the
Corporation changed its method of accounting for impairment of long-lived assets
in 1996 to conform with Statement of Financial Accounting Standards No. 121.
As discussed in Note 13 to the consolidated financial statements, the
Corporation has been named as a potentially responsible party at the Summitville
Mine Superfund Site. The Corporation's share, if any, of the ultimate
environmental liability at the site is not presently determinable and,
accordingly, no remediation costs have been accrued in the accompanying
financial statements.
Boise, Idaho
January 25, 1999
II-13
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
- -------------------------------------------------------------------------------------------------
YEAR ENDED NOVEMBER 30, 1998 1997 1996
- -------------------------------------------------------------------------------------------------
Revenue $ 1,862,174 $ 1,677,301 $ 659,100
Cost of revenue (1,775,632) (1,597,986) (625,756)
- -------------------------------------------------------------------------------------------------
Gross profit 86,542 79,315 33,344
General and administrative expenses (24,202) (22,910) (22,574)
Impairment loss on long-lived assets - - (18,200)
Goodwill amortization (3,597) (3,578) (1,164)
- -------------------------------------------------------------------------------------------------
Operating income (loss) 58,743 52,827 (8,594)
Investment income 5,774 9,075 3,679
Interest expense (869) (890) (993)
Other income (expense), net 3,757 (1,116) 634
- -------------------------------------------------------------------------------------------------
Income (loss) before income taxes 67,405 59,896 (5,274)
Income tax (expense) benefit (29,852) (27,865) 494
- -------------------------------------------------------------------------------------------------
Net income (loss) $ 37,553 $ 32,031 $ (4,780)
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
Income (loss) per share
Basic $.70 $.59 $(.14)
Diluted .69 .59 (.14)
- -------------------------------------------------------------------------------------------------
Common shares used to compute income (loss) per share
Basic 53,891,191 54,044,004 34,790,085
Diluted 54,136,295 54,181,062 34,977,464
- -------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
II-14
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
- --------------------------------------------------------------------------------------------
NOVEMBER 30, 1998 1997
- --------------------------------------------------------------------------------------------
ASSETS
- --------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents $ 67,054 $ 53,215
Accounts receivable, including retentions of $18,627 and $26,970 175,513 187,311
Unbilled receivables 74,552 74,514
Refundable income taxes 780 14,331
Investments in and advances to construction joint ventures 70,855 29,270
Deferred income taxes 26,489 30,173
Other 12,479 16,200
- --------------------------------------------------------------------------------------------
Total current assets 427,722 405,014
- --------------------------------------------------------------------------------------------
INVESTMENTS AND OTHER ASSETS
Securities available for sale, at fair value 45,985 39,314
Investments in mining ventures 67,967 57,439
Assets held for sale 14,169 13,301
Cost in excess of net assets acquired, net of accumulated amortization
of $9,330 and $5,755 112,994 136,150
Deferred income taxes 30,965 31,183
Other 8,077 7,594
- --------------------------------------------------------------------------------------------
Total investments and other assets 280,157 284,981
- --------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, AT COST
Construction equipment 179,337 172,154
Land and improvements 6,993 6,993
Buildings and improvements 6,341 6,276
Equipment and fixtures 63,534 53,483
- --------------------------------------------------------------------------------------------
Total property and equipment 256,205 238,906
LESS ACCUMULATED DEPRECIATION (175,933) (158,657)
- --------------------------------------------------------------------------------------------
Property and equipment, net 80,272 80,249
- --------------------------------------------------------------------------------------------
Total assets $ 788,151 $ 770,244
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
II-15
- ---------------------------------------------------------------------------------------------------------
NOVEMBER 30, 1998 1997
- ---------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable $ 56,388 $ 53,448
Subcontracts payable, including retentions of $22,843 and $20,266 59,857 42,513
Billings in excess of cost and estimated earnings on uncompleted contracts 40,959 34,163
Estimated costs to complete long-term contracts 49,228 73,103
Accrued salaries, wages and benefits 58,939 52,618
Income taxes payable 1,535 1,371
Other accrued liabilities 36,118 42,679
- ---------------------------------------------------------------------------------------------------------
Total current liabilities 303,024 299,895
- ---------------------------------------------------------------------------------------------------------
NON-CURRENT LIABILITIES
Postretirement benefit obligation 53,456 53,689
Accrued workers' compensation 39,625 34,088
Pension and deferred compensation liabilities 16,390 15,334
Environmental remediation obligations 4,753 6,107
- ---------------------------------------------------------------------------------------------------------
Total non-current liabilities 114,224 109,218
- ---------------------------------------------------------------------------------------------------------
CONTINGENCIES AND COMMITMENTS (Note 13)
- ---------------------------------------------------------------------------------------------------------
REDEEMABLE PREFERRED STOCK, issued 1,800,000 shares of Series A - 18,000
- ---------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred stock, par value $.01, 10,000,000 shares authorized; zero
and 1,800,000 redeemable shares of Series A issued and outstanding
Common stock, par value $.01, authorized 100,000,000 shares;
issued 54,334,898 and 54,299,160 544 543
Capital in excess of par value 248,277 247,820
Stock purchase warrants 6,555 6,557
Retained earnings 131,411 93,858
Treasury stock, 982,488 and 57,806 shares, at cost (12,960) (685)
Cumulative translation adjustments, net of income tax benefit (3,050) (5,512)
Unrealized net gain on securities available for sale, net of income tax liability 796 550
Minimum pension liability adjustment, net of income tax benefit (670) -
- ---------------------------------------------------------------------------------------------------------
Total stockholders' equity 370,903 343,131
- ---------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $788,151 $770,244
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
II-16
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
- ---------------------------------------------------------------------------------------------------
YEAR ENDED NOVEMBER 30, 1998 1997 1996
- ---------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income (loss) $ 37,553 $ 32,031 $ (4,780)
Adjustments to reconcile net income (loss) to cash provided
by operating activities:
Depreciation of property and equipment 20,522 22,808 11,773
Amortization of goodwill 3,575 3,577 1,164
Provision for losses on uncompleted contracts, net change (9,580) (11,516) 5,724
Deferred income taxes 23,902 20,974 703
Equity in net income of mining ventures less dividends received (7,157) (9,502) (2,636)
Accrued workers' compensation 5,537 6,799 1,966
Gain on sale of assets, net (716) (1,602) (694)
Other (2,685) (4,849) (2,860)
Provision for impairment of long-lived assets - - 18,200
Changes in other assets and liabilities, net of effects of
business combination:
Receivables and unbilled receivables 11,762 63,580 (3,541)
Investment in and advances to construction joint ventures (41,297) (9,388) (9,522)
Other assets 751 1,199 (43)
Accounts payable, accrued salaries, other accrued liabilities,
and subcontracts payable 18,816 (62,908) (6,925)
Billings in excess of costs and estimated earnings 11,393 (26,743) 4,599
Estimated cost to complete long-term contracts (14,428) (8,054) 3,136
Income taxes 13,780 (7,116) (3,052)
- ---------------------------------------------------------------------------------------------------
Net cash provided by operating activities 71,728 9,290 13,212
- ---------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Property and equipment acquisitions (25,493) (19,700) (26,172)
Property and equipment disposals 5,017 6,675 11,013
Purchase of securities available for sale (19,293) (22,191) (1,096)
Sale and maturities of securities available for sale 13,377 13,387 -
Purchase of business (4,037) - -
Sale of business 2,758 - -
Collection of notes receivable - 8,087 7,595
Other investing activities (484) 6,255 1,257
Cash acquired in business combination - - 52,640
- ---------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities (28,155) (7,487) 45,237
- ---------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Redemption of redeemable preferred stock, Series A (18,000) - -
Purchase of treasury stock (12,848) - -
Other financing activities 1,114 3,102 (1,293)
Borrowing under credit agreement - - 30,000
Repayments under credit agreement - - (63,839)
Payments of long-term borrowings - - (5,042)
- ---------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (29,734) 3,102 (40,174)
- ---------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 13,839 4,905 18,275
Cash and cash equivalents at beginning of period 53,215 48,310 30,035
- ---------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 67,054 $ 53,215 $ 48,310
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (Note 15)
The accompanying notes are an integral part of the financial statements.
II-17
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands except per share data)
- -----------------------------------------------------------------------------------------------------------------------------------
CAPITAL IN STOCK UNEARNED CUMULATIVE
COMMON EXCESS OF PURCHASE RETAINED TREASURY COMPENSATION - TRANSLATION
STOCK PAR VALUE WARRANTS EARNINGS STOCK RESTRICTED STOCK ADJUSTMENTS OTHER
- -----------------------------------------------------------------------------------------------------------------------------------
NOVEMBER 30, 1995 $295 $ 62,134 $ 66,607 $ (85)
Net loss (4,780)
Shares issued under stock
award plan 1 413 66
Shares and warrants
issued for business
combination 242 180,122 $6,564
Foreign currency
translation adjustments $ (154)
Change in unrealized gain
on securities available for
sale, net $579
- -----------------------------------------------------------------------------------------------------------------------------------
NOVEMBER 30, 1996 538 242,669 6,564 61,827 (19) (154) 579
Net income 32,031
Shares issued under
(acquired for) stock
award plan 5 4,725 $(685) 19
Stock purchase warrants
converted to shares of
common stock 32 (7)
Compensation related to
stock option plans 394
Foreign currency
translation adjustments,
net (5,358)
Change in unrealized gain on
securities available for
sale, net (29)
- -----------------------------------------------------------------------------------------------------------------------------------
NOVEMBER 30, 1997 543 247,820 6,557 93,858 (685) - (5,512) 550
Net income 37,553
Shares issued under
stock award plan 1 221 573
Stock purchase warrants
converted to shares of
common stock 17 (2)
Compensation related to
stock option plans 219
Treasury stock acquisitions (12,848)
Foreign currency transla-
tion adjustments, net 2,462
Change in unrealized gain
on securities available for
sale, net 246
Minimum pension liability
adjustment (670)
- -----------------------------------------------------------------------------------------------------------------------------------
NOVEMBER 30, 1998 $544 $248,277 $6,555 $131,411 $(12,960) $ - $(3,050) $ 126
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
II-18
MORRISON KNUDSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS EXCEPT SHARE DATA)
The term "Corporation" as used in this Annual Report includes Morrison Knudsen
Corporation and its consolidated subsidiaries unless otherwise indicated.
1. SIGNIFICANT ACCOUNTING POLICIES
BUSINESS:
The Corporation is a provider of (i) engineering and construction management
services to industrial companies, electric utilities and public agencies, (ii)
comprehensive environmental and hazardous substance remediation services to
governmental and private-sector clients, (iii) diverse heavy construction
services for the highway, airport, water resource, railway and commercial
building industries, and (iv) mine planning, engineering and contract mining
services for diverse customers. In providing such services, the Corporation
enters into three basic types of contracts: fixed-price or lump-sum contracts
providing for a fixed price for the total amount of work to be performed, unit-
price contracts providing for a fixed price for each unit of work performed, and
cost-type contracts providing for reimbursement of costs plus a fee. Both
anticipated income and economic risk are greater under fixed-price and unit-
price contracts than under cost-type contracts. Engineering, construction
management and environmental and hazardous substance remediation contracts are
typically awarded on a cost-plus-fee basis.
The Corporation also participates in construction joint ventures, often as
sponsor and manager of projects, which are formed for the sole purpose of
bidding, negotiating and completing specific projects. In addition, the
Corporation participates in the following mining ventures: Westmoreland
Resources, Inc., a coal mining company in Montana, and MIBRAG mbH, a company
that operates lignite coal mines and power plants in Germany.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Corporation
and all of its majority-owned subsidiaries. Investments in mining ventures and
all joint ventures are accounted for by the equity method. The Corporation's
proportionate share of construction joint-venture and mining venture revenue,
cost of revenue and gross profit (loss) is included in the consolidated
statements of operations. Intercompany accounts and transactions have been
eliminated.
REVENUE RECOGNITION:
Revenue is generally recognized on a percentage-of-completion method.
Completion is generally measured for engineering and construction contracts
based on the proportion of costs incurred to total estimated contract costs. For
certain long-term contracts involving mining, environmental and hazardous
substance remediation, completion is measured on estimated physical completion
or units of production.
Revenue recognition on certain fixed-price construction contracts begins when
progress is sufficient to estimate the probable outcome or on the completed
contract method if the probable outcome cannot be reasonably estimated. The
cumulative effect of revisions to contract revenue and completion costs,
including incentive awards, penalties, change orders and anticipated losses, is
recorded in the accounting period in which the amounts are known and can be
reasonably estimated. Such revisions could occur at any time, and the effects
could be material. Revenue from claims are recorded, to the extent that contract
costs have been incurred, when it is probable that the claim will result in
additional contract revenue and it can be reliably estimated.
The Corporation has a history of making reasonably dependable estimates of the
extent of progress towards completion, contract revenue and contract completion
costs on its long-term engineering and construction contracts.
II-19
However, due to uncertainties inherent in the estimation process, it is possible
that actual completion costs may vary from estimates in the near term.
USE OF ESTIMATES:
The preparation of the Corporation's consolidated financial statements in
conformity with generally accepted accounting principles necessarily requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the balance sheet date and the reported amounts of revenue and costs during the
reporting periods. Actual results could differ in the near term from those
estimates.
UNBILLED RECEIVABLES:
Unbilled receivables at November 30, 1998 arise from the use of the
percentage-of-completion method of accounting, cost reimbursement-type contracts
and the timing of billings. Substantially all of the unbilled receivables at
November 30, 1998 are expected to be billed and collected within one year.
CLASSIFICATION OF CURRENT ASSETS AND LIABILITIES:
The Corporation includes in current assets and liabilities amounts realizable
and payable under engineering and construction contracts that extend beyond one
year. Accounts receivable at November 30, 1998 include approximately $2,180 of
contract retentions which are not expected to be collected within one year. At
November 30, 1998 accounts receivable include $1,931 of short-term marketable
securities jointly held with customers as contract retentions, the market value
of which approximated the carrying amounts. The Corporation recognizes interest
income from marketable securities as earned. Advances from customers are non-
interest bearing.
CASH EQUIVALENTS:
Cash equivalents consist of liquid securities with original maturities of
three months or less readily convertible to known amounts of cash.
CREDIT RISK CONCENTRATION:
The Corporation, by policy, limits the amount of credit exposure to any one
financial institution and places investments with financial institutions
evaluated as highly creditworthy. Concentrations of credit risk with respect to
accounts receivable and unbilled receivables are believed to be limited due to
the number, diversification and character of the obligors and the Corporation's
credit evaluation process. Typically, the Corporation has not required
collateral for such obligations, but can place liens against property, plant or
equipment constructed if a default occurs. Historically, the Corporation has not
incurred any material credit-related losses.
COST IN EXCESS OF NET ASSETS ACQUIRED:
Cost in excess of net assets acquired in business combinations ("goodwill") is
amortized using the straight-line method over 40 years. The carrying value of
goodwill is reviewed for impairment on a quarterly basis. If impairment is
indicated by the facts and circumstances, an impairment loss will be recognized
based on a comparison of the carrying value of the long-lived assets and
associated goodwill with the undiscounted cash flow of such assets. The carrying
amount of the goodwill identifiable with such assets will be eliminated before
recognition of impairment of the related long-lived assets and identifiable
intangibles.
PROPERTY AND EQUIPMENT:
Property and equipment is stated at cost. Major renewals and improvements are
capitalized, while maintenance and
II-20
repairs are expensed when incurred. Depreciation of construction equipment is
provided on straight-line and accelerated methods, after an allowance for
estimated salvage value, over estimated lives of two to 10 years. Depreciation
of buildings is provided on the straight-line method over estimated lives of 10
to 20 years, and improvements are amortized over the shorter of the asset life
or lease term. Depreciation of equipment, principally computer systems, is
provided under the straight-line method generally over three to five years. Upon
disposition, cost and related accumulated depreciation of property and equipment
are removed from the accounts and the gain or loss is reflected in results of
operations.
FOREIGN CURRENCY TRANSLATION:
The functional currency for foreign operations is generally the local
currency. Translation of assets and liabilities to U.S. dollars is based on
exchange rates at the balance sheet date. Translation of revenue and expenses to
U.S. dollars is based on a weighted-average exchange rate during the period.
Translation gains or losses, net of income tax effects, are reported as a
component of stockholders' equity for foreign subsidiaries. Because of the
short-term duration of construction and engineering projects, related
translation gains or losses are recognized currently. Gains or losses from
foreign currency transactions are included in the results of operations of the
period in which the transaction is completed.
ENVIRONMENTAL LIABILITIES:
Accruals for estimated costs of response actions for environmental matters are
recorded when it is probable that a liability has been incurred and the amount
of the liability can be reasonably estimated. On a quarterly basis, the
Corporation reviews estimates of costs of response actions at various sites,
including sites in respect of which government agencies have designated the
Corporation as a potentially responsible party. Accrued liabilities may be
discounted and are exclusive of claims for recovery, if any. However, due to
uncertainties inherent in the estimation process, it is possible that actual
results may vary from estimates in the near term.
INCOME TAXES:
Deferred income tax assets and liabilities are recognized for the effects of
temporary differences between the carrying amounts and the income tax basis of
assets and liabilities using enacted tax rates. A valuation allowance is
established when it is more likely than not that net deferred tax assets will
not be realized. Tax credits are recognized in the year they arise.
INCOME (LOSS) PER SHARE:
Basic income (loss) per share is based on the weighted-average number of
outstanding common shares during the applicable period. Diluted income (loss)
per share is based on the weighted-average number of outstanding common shares
plus the weighted-average number of potential outstanding common shares. The
additional weighted-average number of potential outstanding common shares for
purposes of computed diluted earnings per share consisted solely of stock
options for all periods presented. Income (loss) per share is computed
separately for each quarterly and annual period presented.
RECLASSIFICATIONS:
Certain reclassifications have been made in prior period financial statements
to conform to the 1998 presentation.
2. BUSINESS COMBINATION
On September 11, 1996, the Corporation (which was then known as Washington
Construction Group, Inc.) acquired the net assets and the engineering and
construction operations of Morrison Knudsen Corporation ("Old MK") for $221,736,
and changed its name to Morrison Knudsen Corporation.
II-21
The purchase price consisted of (i) $13,300 of cash, (ii) 24,161,421 newly
issued shares of common stock of the Corporation valued at $180,364 in the
aggregate, or $7.465 per share, (iii) 1,800,000 newly issued shares of preferred
stock valued at $18,000, (iv) warrants to purchase 2,952,848 shares of the
Corporation's common stock at $12.00 per share valued at $6,564, and (v) $3,508
of acquisition costs. The acquisition of Old MK was structured as a merger of
Old MK with and into the Corporation and was accounted for using the purchase
method of accounting. The purchase price was allocated to the assets acquired
and liabilities assumed based on estimated fair values at September 11, 1996.
The consolidated results of operations for periods subsequent to September 11,
1996 reflect the merged operations. The cost in excess of the net assets
acquired is being amortized under the straight-line method over 40 years.
- --------------------------------------------------
PURCHASE PRICE ALLOCATION AS OF SEPTEMBER 11, 1996
- ---------------------------------------------------
Net working capital $ 22,880
Investments and other assets 155,800
Cost in excess of net assets acquired 124,115
Property and equipment 28,730
Non-current liabilities (109,789)
- ---------------------------------------------------
Purchase price $ 221,736
- ---------------------------------------------------
- ---------------------------------------------------
The following unaudited pro forma information presents the Corporation's
consolidated results of operations as if the acquisition of Old MK had occurred
on December 1, 1995 and after giving effect to certain adjustments, including
amortization of goodwill, depreciation expense, reduction in investment income
and related tax effects. The unaudited pro forma results of operations for 1996
include Old MK's results of operations for the eleven months ended November 30,
1996. The pro forma results of operations for 1996 reflect certain adjustments
made in 1997 to reflect revenue on mining ventures consistent with the 1997
presentation and to eliminate certain after tax losses on disposal of assets and
professional fees. Such pro forma information does not purport to be indicative
of operating results that would have been reported had the acquisition of Old MK
occurred on December 1, 1995 or of future operating results.
- -----------------------------------------------------------
PRO FORMA RESULTS OF OPERATIONS (UNAUDITED)
PERIOD ENDED NOVEMBER 30, 1996
- -----------------------------------------------------------
Revenue $1,751,389
Income from continuing operations 22,597
Income per common share -- basic and diluted .43
- -----------------------------------------------------------
3. ADOPTION OF ACCOUNTING PRINCIPLE
During 1998, the Corporation adopted Statement of Financial Accounting
Standards No. 128 Earnings Per Share ("SFAS No. 128") which changed the standard
for computing and presenting earnings per share ("EPS"). Basic EPS excludes
dilution and is computed by dividing net income by the weighted-average number
of shares outstanding for the period. Diluted EPS is computed by dividing net
income by the sum of the weighted-average number of shares outstanding plus the
weighted-average number of potential common shares outstanding. Potential common
shares consist of shares issuable upon the exercise of stock options and
warrants. Earnings per share computations exclude stock options and potential
shares for stock purchase warrants to the extent that their effect would be
antidilutive.
During 1998, the Corporation also adopted the provisions of Statement of
Position ("SOP") 98-1 Accounting for Costs of Computer Software Developed or
Obtained for Internal Use issued by the American Institute of Certified Public
Accountants. The SOP provides guidance on accounting for the costs of computer
software developed or obtained for internal use. In general, the SOP calls for
expensing software costs incurred in the preliminary project stage and post-
implementation/operation stage and the capitalization of software costs incurred
during the application development stage, including payroll and payroll-related
costs for employees who are directly associated with the
II-22
project.
In the third quarter of 1996, the Corporation adopted Statement of Financial
Accounting Standards No. 121 Accounting for the Impairment of Long-Lived Assets
and Long-Lived Assets to be Disposed of , which requires that long-lived assets
and certain identifiable intangible assets be periodically reviewed for
impairment. The impairment loss on long-lived assets aggregating $18,200 in 1996
was comprised of the following:
(i) The Corporation's Board of Directors approved a plan to offer for sale
certain assets of a non-core subsidiary with a carrying amount of $17,486 at
August 31, 1996. The Corporation recognized an estimated impairment loss of
$6,500 to reduce the carrying amount of the assets to estimated fair value.
(ii) Land previously held primarily for lease with a carrying amount of $8,266
at August 31, 1996 was reclassified to land held for sale. The Corporation
recognized an estimated impairment loss of $5,600 and established a new
carrying amount of $2,666 at August 31, 1996, based upon an appraisal of the
current fair value net of the estimated improvement and disposal costs
required for a near-term bulk sale of the land.
(iii) As of August 31, 1996, the Corporation recognized an estimated
impairment loss of $6,100 on the land and buildings in Highland, California,
which comprised the Corporation's headquarters prior to relocation of the
headquarters to Boise, Idaho. The loss reflects the change in use and the
impairment of the $7,016 carrying amount of the Highland property. The
impairment loss was estimated based on an appraisal of the current fair value.
4. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement No.
130 Reporting Comprehensive Income ("SFAS No. 130"). SFAS No. 130 establishes
standards for the reporting and display of comprehensive income but does not
effect the current principles of measurement of revenue. Comprehensive income is
defined as the change in equity of a business enterprise during a period from
transactions and other events and circumstances from non-owner sources. The
adoption of SFAS No. 130 is effective for the Corporation commencing with the
quarter ending February 28, 1999.
In June 1997, the Financial Accounting Standards Board issued Statement No.
131 Disclosures about Segments of an Enterprise and Related Information ("SFAS
No. 131"). SFAS No. 131 requires publicly-held companies to report segment and
other financial information which is utilized by the chief operating decision
maker and to reconcile the segment information to financial statement amounts.
Specific information to be reported for individual segments includes profit or
loss, certain revenue and expense i