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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, 1997
Commission File Number 1-12054
MORRISON KNUDSEN CORPORATION
A Delaware Corporation
IRS Employer Identification No. 33-0565601
MORRISON KNUDSEN PLAZA, BOISE, IDAHO 83729
208 / 386-5000
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SECURITIES REGISTERED AND NUMBER OF REGISTRANT'S COMMON SHARES OUTSTANDING
At January 16, 1998, 54,241,507 shares of the registrant's $.01 par value common
stock were outstanding. Such common stock and warrants to purchase an aggregate
of 2,760,225 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.
[X] Yes [ ] 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.
[X] Yes [ ] No
AGGREGATE MARKET VALUE OF COMMON STOCK HELD BY NONAFFILIATES
At January 16, 1998, 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 16, 1998, was approximately $341,938,914, excluding
$203,866,250 market value of 20,260,000 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, 1998, which is expected to be filed with
the Securities and Exchange Commission not later than March 31, 1998, 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, 1998, 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, 1997
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
PAGE
PART I
Item 1. Business I-1
Item 2. Properties I-4
Item 3. Legal Proceedings I-4
Item 4. Submission of Matters to a Vote of Security Holders I-4
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-8
Item 8. Financial Statements and Supplementary Data II-9
Item 9. Change in and Disagreements with Accountants on
Accounting and Financial Disclosure II-34
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
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
"anticipate," "believe," "estimate," "expect" "future," "intend," "plan,"
"should" and similar expressions identify such 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 1997, 1996 and 1995 are
references to the Corporation's fiscal years ended November 30, 1997, 1996 and
1995, respectively.
GENERAL
The Corporation is an international provider of (i) engineering and construction
management services to industrial companies, electric utilities and public
agencies, (ii) comprehensive environmental and hazardous substance remediation
services to governmental and private-sector clients, (iii) diverse heavy
construction services for the highway, airport, water resource, railway and
commercial building industries, and (iv) mine planning, engineering and contract
mining services for diverse customers. In providing such services, the
Corporation enters into three basic types of contracts: fixed-price or lump-sum
contracts providing for a single price for the total amount of work to be
performed and unit-price contracts providing for a fixed price for each unit of
work performed, under each of which both risk and anticipated income are the
highest; and cost-type contracts providing for reimbursement of costs plus a fee
under which risk is minimal and anticipated income is earned through the fee.
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. See Note 6.
"Ventures" of Notes to Consolidated Financial Statements in Part II of this
Annual Report on Form 10-K ("Notes to Consolidated Financial Statements").
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"), companies 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"), which Plan was
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confirmed by the Bankruptcy Court on August 26, 1996, and became effective
concurrently with the Merger on September 11, 1996 (the "Effective Date").
On the Effective Date, all of Old MK's senior debt obligations were discharged
and all of Old MK's outstanding common stock was canceled. In exchange thereof,
the following distributions, among others, were made pursuant to the Plan to or
for the benefit of certain creditors and for stockholders of Old MK: (i) $47,930
in cash (including $13,300 of cash of the Corporation); (ii) 24,161,421 newly
issued shares of the Corporation's common stock; (iii) 1,800,000 newly issued
shares of preferred stock of the Corporation entitling the holders thereof to
receive up to $18,000 (subject to adjustment) of certain tax refunds when
received by the Corporation as successor to Old MK; and (iv) warrants
exercisable with a term of six and one-half years which allow holders to
purchase from the Corporation an aggregate of 2,765,000 shares of the
Corporation's common stock at an exercise price of $12.00 per share (subject to
adjustment). See Note 15 "Redeemable Preferred Stock" of Notes to Consolidated
Financial Statements.
The Corporation's executive offices are located at Morrison Knudsen Plaza,
Boise, Idaho 83729, and its telephone number is (208) 386-5000.
PROJECT RISKS
The Corporation's engineering and construction operations are exposed to
significant risks and uncertainties in the performance of fixed-price or unit
price contracts over extended periods of time. Inherent in fixed-price or unit
price contracts is the risk of loss, resulting from uncertainties inherent in
the estimation of contract completion costs, changed conditions during
construction, contract modifications by customers, failure of subcontractors and
joint-venture partners to perform and unforseen events and conditions. The
realization of any such risk could result in losses on a particular contract or
contracts, and could have a material adverse effect on the Corporation's
financial position, results of operations and cash flows.
Because of the size and complexity of major infrastructure and environmental
remediation projects, a relatively small number of projects may provide a
significant percentage of the Corporation's revenues in a given year.
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 United States 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.
See information regarding environmental matters set forth under the captions
"Summitville environmental matters" and "Other environmental matters" in Note 13
"Contingencies and Commitments" of Notes to Consolidated Financial Statements.
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.
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FOREIGN OPERATIONS
(In thousands of dollars)
The Corporation operates outside the United States through foreign and domestic
subsidiaries and with foreign venture partners. Foreign operations are subject
to uncertain political and economic environments, evolving legal and
environmental regulatory climates, potential incompatibility between venture
partners, foreign currency controls and fluctuations, civil disturbances and
labor strikes, as well as other uncertainties.
The Corporation recorded revenue from foreign operations of $202,470 in 1997.
See Note 12. "Geographic and Customer Information" of Notes to Consolidated
Financial Statements.
BACKLOG
(In thousands of dollars)
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, 1997 totaled $3,704,300 compared with backlog of $3,519,700 at
November 30, 1996. Approximately $1,613,200 or 44% of the backlog at November
30, 1997 was comprised of U.S. government contracts which are subject to
termination by the government; $1,148,300 of such contracts has not been funded.
However, the Corporation has not been materially adversely affected by
government contract cancellations or modifications in the past. Terminations for
convenience of the government generally provide for recovery of contract costs
and related earnings. Approximately $1,312,900 or 35% of 1997 year-end backlog
is expected to be recognized as revenue in 1998. There can be no assurance that
contract cancellations or modifications will not reduce the backlog and future
revenues.
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COMPOSITION OF YEAR END BACKLOG
(IN THOUSANDS OF DOLLARS)
YEAR ENDED NOVEMBER 30, 1997 % 1996 %
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Fee-type contracts $2,063,000 56% $2,034,500 58%
Fixed-price and unit-price contracts 1,641,300 44% 1,485,200 42%
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Total backlog $3,704,300 100% $3,519,700 100%
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GOVERNMENT CONTRACTS
Government contracts are a significant part of the Corporation's business. The
Corporation has a number of cost reimbursement contracts with various agencies
of the U.S. government, the allowable costs of which are subject to audit by the
U.S. government. As a result of such audits, U.S. government auditors assert
from time to time that certain costs claimed as reimbursable under government
contracts either were not allowable costs or were not allocable in accordance
with federal government regulations. The resolution of these audits may result
in various sanctions, including repayments of amounts previously paid by the
U.S. government to the Corporation. Some audits have resulted in cost
disallowances and claims for reimbursement by the government. See "Backlog"
above for the relative significance of U.S. government contracts included in
year-end 1997 backlog. See Note 13. "Contingencies and Commitments -- Contract
related matters" of Notes to Consolidated Financial Statements.
COMPETITION
Engineering and construction is a highly competitive business, particularly for
contracts obtained by competitive
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bidding. The Corporation competes based primarily on price, reputation and
reliability with other general and specialty contractors, both foreign and
domestic. Some of the Corporation's competitors may have greater financial and
other resources than the Corporation. 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.
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, 1997, the Corporation employed a total of approximately 8,900
employees -- including 6,200 salaried and project direct-hire craft employees
and 2,700 employees covered by collective bargaining agreements.
ITEM 2. PROPERTIES
(In thousands of dollars)
At November 30, 1997, the Corporation owned more than 4,600 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 Petaluma, California. At November 30,
1997, the Corporation had real estate held for sale in California and Nevada.
The two principal administrative office facilities in Boise, Idaho, and
Cleveland, Ohio, of approximately 143,800 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 rental obligations for the
Boise and Cleveland facilities under these noncancelable leases for each of the
next five years approximate $5,968, $5,968, $6,036, $6,588 and $6,588,
respectively. Additionally, 61,100 square feet at the Boise, Idaho, facility are
being leased under leases expiring in January 1999 and April 1999 with annual
rental obligations of $445 and $168, respectively.
Annual rental payments on real estate and equipment leased by the Corporation
during the year ended November 30, 1997 aggregated $36,575. 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
SECURITIES AND EXCHANGE COMMISSION ("SEC") INVESTIGATION: The Corporation, as
successor to Old MK (Commission File No. 1-8889), is subject to a formal
investigation by the Pacific Regional Office of the SEC regarding the management
and operations of Old MK, primarily its former Transit business, prior to
September 12, 1996. The Corporation continues to provide documents in response
to discovery requests and otherwise cooperate with the Commission's staff in
connection with this investigation.
OTHER: Other 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.
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 1997.
I-4
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
16, 1998, the Corporation had 54,241,507 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 16, 1998 was approximately 1,559 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.
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ITEM 6. SELECTED FINANCIAL DATA
(In thousands except per share data)
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OPERATIONS SUMMARY 1997 1996(a) 1995 1994 1993(b)
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Revenue $1,677,301 $659,100 $228,537 $258,739 $210,184
Gross profit 79,315 33,344 24,113 19,849 20,121
Operating income (loss) 52,827 (8,594) 7,926 1,724 9,702
Net income (loss) 32,031 (4,780) 8,165 657 6,937
Income (loss) per common share .59 (.14) .28 .02 .39
Shares used to compute income (loss) per
common share 54,046 34,821 29,478 29,435 17,815
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FINANCIAL POSITION SUMMARY
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Current assets $ 405,014 $459,249 $ 85,721 $111,184 $118,340
Total assets 770,244 839,637 185,301 182,618 185,761
Current liabilities 299,895 400,604 42,188 47,005 52,538
Stockholders' equity 343,131 312,004 128,951 119,956 120,390
Stockholders' equity per common share 6.33 5.80 4.37 4.08 4.09
Dividends declared per share -- -- -- .05 .05
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(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's results for the period September 12 to November 30, 1996. 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.
(b) On July 12, 1993, the Corporation became the parent company of WCG Holdings,
Inc. ("WCG") and Kasler Corporation ("Kasler") in a transaction accounted for as
a purchase by WCG of Kasler. See Item 1. Business -- "General" in Part I of this
Annual Report on Form 10-K.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
1997 COMPARED TO 1996
THE CONSOLIDATED RESULTS OF OPERATIONS FOR THE QUARTER AND YEAR ENDED NOVEMBER
30, 1996 INCLUDE THE RESULTS OF OLD MK FOR THE PERIOD SEPTEMBER 12 TO NOVEMBER
30, 1996.
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QUARTER ENDED YEAR ENDED
NOVEMBER 30, NOVEMBER 30,
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(In millions) 1997 1996 1997 1996
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Revenue $439.3 $416.7 $1,677.3 $659.1
Gross profit 21.3 19.0 79.3 33.3
General and administrative expenses (6.0) (8.4) (22.9) (22.6)
Impairment loss on long-lived assets -- -- -- (18.2)
Goodwill amortization (.9) (.8) (3.6) (1.2)
Investment income 3.8 1.5 9.1 3.7
Interest expense (.2) (.4) (.9) (1.0)
Other income (expense), net -- .6 (1.1) .6
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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% in
1997 compared to 5.1% for 1996, improving slightly in the fourth quarter of 1997
to 4.8% as compared to the 4.6% for the fourth quarter of 1996.
Due to inherent risks and rewards in fixed-price contracting, the
Corporation's operating margins often differ from expectations and the
Corporation experiences unexpected gains or losses on contracts. Through
geographic, customer and risk diversification, the Corporation strives to offset
the risks inherent in its contracts. 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 fourth quarter and year ended November 30, 1997 decreased $2.4 million and
increased $.3 million, respectively, compared to the comparable periods of 1996.
The Corporation incurred approximately $1 million in expenses related to an
enterprise-wide implementation of new computer information systems for
financial, human resource and payroll systems which is scheduled to be completed
in various stages over a three-year period. Training, reengineering and the
amortization costs related to such implementation are expected to increase
general and administrative expenses by approximately $2 million for each of the
next seven years. The Corporation expects the implementation to ultimately
improve the efficiency and cost of its financial systems.
IMPAIRMENT OF LONG-LIVED ASSETS: In 1996, the Corporation recognized impairment
losses of $18.2 million on certain real property held for sale and operating
assets of a subsidiary held for sale.
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COST IN EXCESS OF NET ASSETS ACQUIRED ("GOODWILL"): Goodwill amortization for
the quarter and year ended November 30, 1997 increased to $.9 million and $3.6
million, respectively, from $.8 million and $1.2 million in the comparable
periods of 1996, respectively, reflecting the $124.1 million of goodwill
recorded in connection with the acquisition of Old MK, which is being amortized
under the straight-line method over 40 years. The Corporation allocated the
purchase price of Old MK to the assets acquired and liabilities assumed,
including preacquisition contingencies, on the basis of estimated fair values at
September 11, 1996. Resolution and revaluation of certain preacquisition
contingencies and the recent tax law change extending the net operating loss
("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 (see Note 9
"Taxes on Income" of Notes to Consolidated Financial Statements). This decrease
was offset by an accrual for preacquisition contingencies of $18.7 million,
primarily for legal proceedings. Goodwill amortization for 1998 is estimated to
be $3.5 million.
INVESTMENT INCOME: Investment income is comprised of (i) earnings from cash
equivalents, securities jointly held with customers as contract retentions and
securities available for sale, and (ii) interest on a note receivable collected
in the fourth quarter of 1997 and U.S. federal income tax refund receivables.
Investment income for the fourth quarter and year ended November 30, 1997
increased $2.3 million and $5.4 million, respectively, from the comparable
periods of 1996, principally due to interest recognized on U.S. federal income
tax refunds and earnings from securities available for sale. A reduction in
investment income from the approximately $4.5 million of interest earned on U.S.
federal income tax refunds recognized in 1997 is expected in 1998 because U.S.
federal income tax refunds of $25 million, including interest, were received in
January 1998. The Corporation will utilize $18 million of the refunds to redeem
the Series A preferred stock on April 15, 1998.
INTEREST EXPENSE: Interest expense for the fourth quarter and year ended
November 30, 1997 decreased $.2 million and $.1 million, respectively, compared
to the comparable periods of 1996. Interest expense for 1997 consists 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 quarter ended November 30,
1997 includes (i) $1.7 million adjustment of the accrued pension benefit
obligation reflecting the ultimate 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 proposed acquisition of
Montana Resources, Inc., a partner in a copper mine in Butte, Montana, for which
the Corporation and the seller were unable to finalize the terms of a definitive
purchase agreement and have terminated negotiations. 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 rates for the fourth quarter and year
ended November 30, 1997 were 48% and 47%, respectively. These effective rates
were 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 reflects recoverable federal income
taxes, net of foreign and state income tax expense.
1996 COMPARED TO 1995
REVENUE AND GROSS PROFIT: Revenue and gross profit for the year ended November
30, 1996 increased significantly, principally due to the acquisition of Old MK.
Gross profit, as a percent of revenue, was 5.1% for 1996 and 10.6% for 1995.
Before the acquisition of Old MK, the Corporation was engaged almost exclusively
in fixed-price work. After the acquisition of Old MK, the Corporation derived
approximately 37% of its revenue from fee-type/cost plus engineering,
construction management and environmental response services which typically
involve less risk and
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therefor receive lower margins than fixed-price work.
At November 30, 1996, backlog of $3,519.7 million was comprised of $2,034.5
million (58%) revenue from fee-type contracts and $1,485.2 million (42%) revenue
from fixed-price contracts and share of revenue from mining ventures. At
November 30, 1995, backlog of $286.3 million included $282.6 million revenue
from fixed-price contracts and $3.7 million revenue from fee-type contracts.
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses for
the year ended November 30, 1996 increased $6.8 million compared to 1995, due
principally to the acquisition of Old MK. In addition, the Corporation recorded
$1.5 million of expenses in the first quarter of 1996 for termination and other
costs related to the reorganization and consolidation of certain corporate
functions from Montana to California and $.9 million of expenses in the fourth
quarter of 1996 related to nonrecurring executive severance pay. As a result of
the acquisition of Old MK, the Corporation expanded its engineering,
construction, mining and environmental response services both domestically and
internationally. The Corporation retained the administrative support functions
of Old MK, and relocated the corporate headquarters to Boise, Idaho.
COST IN EXCESS OF NET ASSETS ACQUIRED ("GOODWILL"): Goodwill amortization for
the year ended November 30, 1996 increased to $1.2 million from $.4 million in
1995, reflecting the $124.1 million of goodwill recorded in connection with the
acquisition of Old MK, which is being amortized under the straight-line method
over 40 years.
OTHER INCOME AND EXPENSE: For the year ended November 30, 1996, investment
income decreased to $3.7 million from $4.1 million in 1995 due to reduced
interest-bearing cash and equivalents and notes receivable. Interest expense for
the year ended November 30, 1996 increased to $1.0 million from $.2 million in
1995, reflecting the cessation of interest capitalization upon completion of
construction in progress in 1995 and an increase in costs and fees associated
with the Corporation's revolving credit facilities in 1996. Other income for the
year ended November 30, 1996 includes $.6 million of gain on adjustment of
insurance premiums paid in prior periods.
INCOME TAXES: The income tax benefit of $.5 million for 1996 reflects estimated
recoverable federal income taxes net of foreign and state income tax expense.
The income tax expense of $4.0 million for 1995 is net of a $1.0 million benefit
arising from a change in prior year estimate.
FINANCIAL CONDITION
The Corporation has three principal sources of near-term liquidity: (i) existing
cash and cash equivalents; (ii) cash generated by its operations, and (iii)
revolving loan borrowings under its credit facility. Management believes the
Corporation's liquidity and capital resources should be sufficient to meet its
reasonably foreseeable working capital, capital expenditure and other
anticipated cash requirements. Cash and equivalents at November 30, 1997 were
$53.2 million, a $4.9 million increase over the prior year-end balance. Working
capital was million at the end of 1997 compared to $58.6 million at the end of
1996.
- -----------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES NOVEMBER 30,
(IN THOUSANDS) 1997 1996
- -----------------------------------------------------------
Cash and cash equivalents
Beginning of period $48,310 $ 30,035
End of period 53,215 48,310
- -----------------------------------------------------------
YEAR ENDED
NOVEMBER 30,
1997 1996
- -----------------------------------------------------------
Net cash provided (used) by:
Operating activities $ 9,290 $ 13,212
Investing activities (7,487) 45,237
Financing activities 3,102 (40,174)
- -----------------------------------------------------------
II-5
Net cash provided from operating activities in 1997 of $9.3 million was
principally generated from income and collections of receivables and unbilled
receivables, net of decreases in accounts payable, subcontracts payable,
billings in excess of cost and estimated earnings, and estimated costs to
complete long-term contracts, and reflects the completion of several major
contracts.
Net cash used for investing activities in 1997 of $7.5 million reflects $19.7
million of property and equipment acquisitions and the net purchase of $8.8
million of securities available for sale in connection with the Corporation's
self-insured risk management program. These uses of cash were partially offset
by proceeds of property and equipment disposals, collections of notes receivable
and other investing activities, principally the proceeds received from the sale
of the Corporation's interest in a foreign bank. Net cash provided by investing
activities in 1996 included $52.6 million of cash acquired in the acquisition of
Old MK.
Cash provided from financing activities in 1997 resulted from the exercise of
stock options. Net cash used for financing activities in 1996 of $40.2 million
included payments on credit agreements and long-term borrowings. The Corporation
had no outstanding debt during 1997.
The Corporation anticipates capital expenditures for major construction
equipment of approximately $30 million during 1998 for normal replacement and to
meet equipment requirements of its expanded backlog.
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. At November
30, 1997, 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, 1997, the cumulative adjustments for translation losses net of
related income tax benefits was $5.5 million. The Corporation realized a pretax
gain on foreign currency exchange transactions of $17 thousand for the year
ended November 30, 1997. 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 13 "Contingencies and Commitments -- Contract related
matters" of Notes to Consolidated Financial Statements, in connection with a
fixed-price contract for the construction of a solvent extraction facility and
treatment of contaminated soil at a Superfund site in Texas, the Texas Natural
Resource Conservation Commission may seek to recover up to $13.6 million of
advances by drawing on an outstanding letter of credit under which the
Corporation would have an obligation to reimburse the issuer for any amounts
drawn.
In January 1998, the Corporation received $25 million of U.S. federal income
tax refunds, including accrued interest. The Corporation will utilize $18
million of the refunds to fully redeem Series A preferred stock on April 15,
1998 to holders of record of shares at the close of business on March 31, 1998.
In addition, in January 1998, the Board of Directors authorized the purchase,
from time to time, of up to 2 million shares of the Corporation's 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.
Such purchases may be made in the open market, through block trades or
otherwise. Subject to market conditions and other factors, such purchases may be
commenced, discontinued and resumed from time to time without prior notice. It
is anticipated that such purchases will be funded from available cash and
equivalents and operating cash flows. Depending upon conditions in the capital
markets and other factors, the Corporation may from time to time consider the
possible issuance of long-term debt or other securities or other capital markets
transactions.
The Corporation may pursue opportunities to complement existing operations
through business combinations and participation in ventures, which may require
additional financing and utilization of the Corporation's capital resources.
II-6
THE YEAR 2000 ISSUE
The Year 2000 issue results from computer programs that do not differentiate
between the year 1900 and the year 2000 because they are written using two
digits rather than four to define the applicable year. If not corrected, many
computer applications could fail or create erroneous results by or at the year
2000. This Year 2000 issue is believed to affect virtually all companies and
organizations, including the Corporation.
The Corporation has not yet fully completed its assessment of compliance
issues for the Corporation's in-house or vendor supplied computer systems, the
computer systems of the Corporation's construction joint ventures and mining
ventures, and the computer systems of other entities with which the Corporation
does business such as subcontractors, suppliers, customers and creditors.
However, the Corporation has begun enterprise-wide implementation of new or
upgraded financial, human resource and payroll systems which are expected to be
Year 2000 compliant upon completion in the year 2000. The implementation will
utilize internal and external resources at a cost of approximately $15 million
over the next three years and is expected to be funded through operating cash
flow. Approximately $13 million of the total cost of this implementation is
expected to be capitalized, with the remaining $2 million of training and
reengineering costs expensed as incurred. The total cost and estimated
completion of the assessment, planning, testing, implementation or modifications
necessary to assure Year 2000 compliance is unknown. It is possible that the
direct or indirect effects of the Year 2000 issue could materially affect future
financial results, or cause reported financial information not to be necessarily
indicative of future operating results or future financial condition.
ENVIRONMENTAL CONTINGENCY
From July 1985 to June 1989, a subsidiary of the Corporation performed certain
contract mining services at the Summitville mine near Del Norte, Colorado. The
United States Environmental Protection Agency (the "EPA") has notified the
Corporation and approximately 20 other parties that each is a potentially
responsible party ("PRP") with regard to hazardous substances generated or
disposed of at the Summitville Mine Superfund Site (the "Site"). The EPA has not
commenced any litigation or other proceedings against the Corporation. The
Corporation has had only preliminary discussions with the EPA but has been
informally advised that the EPA does not consider the Corporation eligible for a
de minimis settlement (the basis for settlement by several PRPs considered to
have contributed less than 3% volume and toxicity of the hazardous substances at
the Site).
According to a report published in August 1996, the EPA estimated that the
total remediation costs incurred and to be incurred at the Site will be
$120,000. The Corporation is not a party to any agreement regarding an
allocation of responsibility, and the EPA has not made an allocation of
responsibility among the PRPs. The Corporation's share, if any, of the
aggregate environmental liability associated with the Site is not presently
determinable and depends upon, among other things, the manner in which liability
may be allocated to or among the Corporation or other PRPs associated with the
Site, the efficacy of any defenses that the Corporation or such other PRPs may
have to any assertion of liability, the willingness and ability of such other
PRPs to discharge such liability as may be allocated to them and the outcome of
any negotiations or settlement discussions between the Corporation and the EPA
and/or such other PRPs. Accordingly, no remediation costs have been accrued at
November 30, 1997. Management believes that the ultimate resolution of this
matter could have a material adverse effect on the Corporation's financial
position and could materially and adversely 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. 129 Disclosure of Information about Capital Structure, No. 130
Reporting Comprehensive Income and No. 131 Disclosures about Segments of an
Enterprise and Related Information. See Note 4 "Recently Issued Accounting
Standards" of Notes to Consolidated Financial Statements for the impact, if any,
that recently issued accounting standards are expected to have on the
Corporation's financial statements when adopted.
II-7
QUARTERLY FINANCIAL DATA
(In thousands except per share data)
- --------------------------------------------------------------------------------
Selected quarterly financial data for the two years ended November 30, 1997 are
presented below. Income (loss) per share is computed separately for each
quarterly and annual period presented.
- --------------------------------------------------------------------------
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 .13 .14 .15 .17
- --------------------------------------------------------------------------
Market price
High $ 10.50 $ 12.75 $ 14.63 $ 13.88
Low 8.63 9.75 11.38 9.75
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
1996 QUARTERS ENDED FEBRUARY 28 MAY 31 AUGUST 31 NOVEMBER 30
- --------------------------------------------------------------------------
Revenue $ 62,006 $ 82,693 $ 97,750 $416,651
Gross profit 3,462 5,796 5,052 19,034
Net income (loss) (788) 1,614 (11,222) 5,616
Income (loss) per share (.03) .06 (.38) .11
- --------------------------------------------------------------------------
Market price
High $ 8.13 $ 11.00 $ 10.88 $ 10.00
Low 5.38 7.88 8.13 8.38
- --------------------------------------------------------------------------
FIRST QUARTER 1996: Includes $1,500 in pre-tax expenses related to the
reorganization and consolidation of corporate functions.
THIRD QUARTER 1996: Includes $18,200 of pre-tax impairment loss on long-lived
assets.
FOURTH QUARTER 1996: Includes the operating results of Old MK for the period
September 12 to November 30, 1996.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
II-8
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
MORRISON KNUDSEN CORPORATION AND SUBSIDIARIES
Consolidated Financial Statements as of November 30, 1997 and 1996, and for
each of the three years in the period ended November 30, 1997
PAGE(S)
Report of Independent Accountants II-10
Report of Independent Auditors II-11
Consolidated Statements of Operations II-12
Consolidated Balance Sheets II-13, II-14
Consolidated Statements of Cash Flows II-15
Consolidated Statements of Stockholders' Equity II-16
Notes to Consolidated Financial Statements II-17 to II-34
II-9
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
Morrison Knudsen Corporation
We have audited the accompanying consolidated balance sheets of Morrison Knudsen
Corporation and subsidiaries (the "Corporation") as of November 30, 1997 and
1996 and the related consolidated statements of operations, stockholders' equity
and cash flows for each of the two years in the period ended November 30, 1997
and the financial statement schedule listed in the Table of Contents at Item 14.
These financial statements and the financial statement schedule are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on the financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Morrison Knudsen
Corporation and subsidiaries as of November 30, 1997 and 1996, and their
consolidated results of operations and cash flows for each of the two years in
the period ended November 30, 1997 in conformity with generally accepted
accounting principles. In addition, in our opinion, the financial statement
schedule referred to above, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
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.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Boise, Idaho
February 2, 1998
II-10
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and the Board of Directors
of Kasler Holding Company
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of Kasler Holding Company and subsidiaries
for the year ended November 30, 1995. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform our 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and the cash flows
of Kasler Holding Company and subsidiaries for the year ended November 30, 1995,
in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Los Angeles, California
January 12, 1996
II-11
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
- --------------------------------------------------------------------------------------------
YEAR ENDED NOVEMBER 30, 1997 1996 1995
- --------------------------------------------------------------------------------------------
Revenue $ 1,677,301 $ 659,100 $ 228,537
Cost of revenue (1,597,986) (625,756) (204,424)
- --------------------------------------------------------------------------------------------
Gross profit 79,315 33,344 24,113
General and administrative expenses (22,910) (22,574) (15,767)
Impairment loss on long-lived assets -- (18,200) --
Goodwill amortization (3,578) (1,164) (420)
- --------------------------------------------------------------------------------------------
Operating income (loss) 52,827 (8,594) 7,926
Investment income 9,075 3,679 4,061
Interest expense (890) (993) (189)
Other income (expense), net (1,116) 634 389
- --------------------------------------------------------------------------------------------
Income (loss) before income taxes 59,896 (5,274) 12,187
Income tax (expense) benefit (27,865) 494 (4,022)
- --------------------------------------------------------------------------------------------
Net income (loss) $ 32,031 $ (4,780) $ 8,165
============================================================================================
Income (loss) per share $.59 $(.14) $.28
- --------------------------------------------------------------------------------------------
Common shares used to compute income (loss) per share 54,046 34,821 29,478
- --------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
II-12
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
- ---------------------------------------------------------------------------------------------------
NOVEMBER 30, 1997 1996
- ---------------------------------------------------------------------------------------------------
ASSETS
- ---------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents $ 53,215 $ 48,310
Accounts receivable, including retentions of $26,970 and $28,348 187,311 222,341
Unbilled receivables 74,514 101,564
Refundable income taxes 14,331 10,806
Current portion of notes receivable -- 3,000
Investments in and advances to construction joint ventures 29,270 24,538
Deferred income taxes 30,173 31,291
Other 16,200 17,399
- ---------------------------------------------------------------------------------------------------
Total current assets 405,014 459,249
- ---------------------------------------------------------------------------------------------------
INVESTMENTS AND OTHER ASSETS
Securities available for sale, at fair value 39,314 30,494
Investments in mining ventures 57,439 56,210
Assets held for sale 13,301 18,853
Cost in excess of net assets acquired, net of accumulated amortization of
$5,755 and $2,177 136,150 140,677
Long-term notes receivable, net of current portion -- 5,087
Deferred income taxes 31,183 31,555
Other 7,594 12,178
- ---------------------------------------------------------------------------------------------------
Total investments and other assets 284,981 295,054
- ---------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, AT COST
Construction equipment 172,154 179,483
Land and improvements 6,993 7,110
Buildings and improvements 6,276 4,924
Equipment and fixtures 53,483 50,526
- ---------------------------------------------------------------------------------------------------
Total property and equipment 238,906 242,043
LESS ACCUMULATED DEPRECIATION (158,657) (156,709)
- ---------------------------------------------------------------------------------------------------
Property and equipment, net 80,249 85,334
- ---------------------------------------------------------------------------------------------------
Total assets $ 770,244 $ 839,637
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
II-13
- ------------------------------------------------------------------------------------------------
NOVEMBER 30, 1997 1996
- ------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable $ 53,448 $ 68,926
Subcontracts payable, including retentions of $20,266 and $27,006 42,513 75,036
Billings in excess of cost and estimated earnings on uncompleted contracts 25,176 49,626
Advances from customers 8,987 11,280
Estimated costs to complete long-term contracts 73,103 100,832
Accrued salaries, wages and benefits 52,618 49,136
Income taxes payable 1,371 8,255
Other accrued liabilities 42,679 37,513
- ------------------------------------------------------------------------------------------------
Total current liabilities 299,895 400,604
- ------------------------------------------------------------------------------------------------
NON-CURRENT LIABILITIES
Postretirement benefit obligation 53,689 53,433
Accrued workers' compensation 34,088 26,061
Pension and deferred compensation liabilities 15,334 20,563
Environmental remediation obligations 6,107 8,972
- ------------------------------------------------------------------------------------------------
Total non-current liabilities 109,218 109,029
- ------------------------------------------------------------------------------------------------
CONTINGENCIES AND COMMITMENTS (Note 13)
- ------------------------------------------------------------------------------------------------
REDEEMABLE PREFERRED STOCK, issued 1,800,000 shares of Series A 18,000 18,000
- ------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred stock, 10,000,000 shares authorized; 1,800,000
redeemable shares of Series A issued and outstanding
Common stock, par value $.01, authorized 100,000,000 shares;
issued 54,299,160 and 53,808,748 shares 543 538
Capital in excess of par value 247,820 242,669
Stock purchase warrants 6,557 6,564
Retained earnings 93,858 61,827
Treasury stock, 57,806 shares, at cost (685) --
Unearned compensation - restricted stock -- (19)
Cumulative translation adjustments, net of income tax benefit (5,512) (154)
Unrealized gain on securities available for sale, net 550 579
- ------------------------------------------------------------------------------------------------
Total stockholders' equity 343,131 312,004
- ------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $770,244 $839,637
================================================================================================
II-14
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
- -------------------------------------------------------------------------------------------------------
YEAR ENDED NOVEMBER 30, 1997 1996 1995
- -------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income (loss) $ 32,031 $ (4,780) $ 8,165
Adjustments to reconcile net income (loss) to cash provided
by operating activities:
Provision for impairment of long-lived assets -- 18,200 --
Depreciation of property and equipment 22,808 11,773 8,477
Amortization of goodwill 3,577 1,164 420
Provision for losses on uncompleted contracts, net (11,516) 5,724 --
Deferred income taxes 20,974 703 --
Equity in net income of mining ventures less dividends received (9,502) (2,636) --
Accrued workers' compensation 6,799 1,966 --
Gain on sale of assets, net (1,602) (694) (1,236)
Other (4,849) (2,860) 204
Changes in other assets and liabilities, net of effects of business
combination:
Receivables and unbilled receivables 63,580 (3,541) 454
Investment in and advances to construction joint ventures (9,388) (9,522) (1,876)
Other assets 1,199 (43) (349)
Accounts payable, accrued salaries, other accrued liabilities,
subcontracts payable and customer advances (65,201) (6,925) (259)
Billings in excess of costs and estimated earnings (24,450) 4,599 (4,143)
Estimated cost to complete long-term contracts (8,054) 3,136 --
Income taxes (7,116) (3,052) 1,291
- -------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 9,290 13,212 11,148
- -------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Property and equipment acquisitions (19,700) (26,172) (22,255)
Property and equipment disposals 6,675 11,013 2,625
Purchase of securities available for sale (22,191) (1,096) --
Sale and maturities of securities available for sale 13,387 -- --
Collection of notes receivable 8,087 7,595 --
Other investing activities 6,255 1,257 (37)
Cash acquired in business combination -- 52,640 --
- -------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities (7,487) 45,237 (19,667)
- -------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Borrowing under credit agreement -- 30,000 --
Repayments under credit agreement -- (63,839) --
Payments of long-term borrowings -- (5,042) (7,562)
Other 3,102 (1,293) (4)
- -------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 3,102 (40,174) (7,566)
- -------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 4,905 18,275 (16,085)
Cash and cash equivalents at beginning of period 48,310 30,035 46,120
- -------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 53,215 $ 48,310 $ 30,035
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
II-15
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, 1994 $294 $ 61,649 $58,442 $(429)
Net income 8,165
Shares issued under stock
award plan 1 485 344
- ------------------------------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
II-16
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 single price for the total amount of work to be
performed and unit-price contracts providing for a fixed price for each unit of
work performed, under each of which both risk and anticipated income are the
highest; and cost-type contracts providing for reimbursement of costs plus a fee
under which risk is minimal and anticipated income is earned through the fee.
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 is
recorded in the accounting period in which the amounts are known and can be
reasonably estimated, including incentive awards, penalties, change orders and
anticipated losses. Such revisions could occur in the near term, and the effects
could be material. Claims for additional revenue are generally recognized at
settlement.
The Corporation has a substantial history of making reasonably dependable
estimates of the extent of progress towards completion, contract revenue and
contract completion costs on its long-term construction contracts. However, due
to uncertainties inherent in the estimation process, it is at least reasonably
possible that actual completion costs may vary from estimates in the near term.
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.
II-17
UNBILLED RECEIVABLES: Unbilled receivables at November 30, 1997 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, 1997 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, 1997 include approximately $11,600 of contract retentions which are
not expected to be collected within one year. At November 30, 1997, accounts
receivable include $5,950 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.
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 significant 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 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 ten years. Depreciation of buildings is provided
on the straight-line method over 10 years, and improvements are amortized over
the shorter of the asset life or lease term. Depreciation of equipment,
principally 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 at least
reasonably possible that actual results may vary from estimates in the near
term.
II-18
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: Income (loss) per share is based on the weighted
average number of outstanding common and equivalent shares outstanding during
the applicable period. 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 1997 presentation.
2. BUSINESS COMBINATION
On September 11, 1996, the Corporation (which was then known as Washington
Construction Group, Inc., and which had formerly been known as Kasler Holding
Company) 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.
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 of $124,115 is being amortized under the straight-line method over 40
years.
- ---------------------------------------------------
PURCHASE PRICE ALLOCATION
- ---------------------------------------------------
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, 1994 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
and 1995 include Old MK's results of operations for the eleven months ended
November 30, 1996 and the year ended December 31, 1995, respectively. 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, 1994 or of future operating results.
II-19
- ------------------------------------------------------------
PRO FORMA RESULTS OF OPERATIONS (UNAUDITED)
PERIOD ENDED NOVEMBER 30, 1996 1995
- ------------------------------------------------------------
Revenue $1,751,389 $1,780,685
Income from continuing operations 22,597 2,491
Income per common share .43 .05
- ------------------------------------------------------------
3. ADOPTION OF ACCOUNTING PRINCIPLE
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 ("SFAS No. 121") which requires that
long-lived assets and certain identifiable intangible assets be reviewed for
impairment which is measured by a comparison of the carrying amount to the fair
value. 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 of
the Highland property.
4. RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued Statement No. 128 Earnings
per Share ("SFAS No. 128"). The Corporation will implement the provisions of
SFAS No. 128 in the quarter ending February 28, 1998. This Statement simplifies
standards for computing and presenting earnings per share (EPS) and makes them
comparable to international EPS standards. SFAS No. 128 requires presentation of
two EPS amounts: Basic EPS, which excludes dilution, and Diluted EPS, which
reflects the potential dilution that could occur if the exercise of options or
warrants or conversion of convertible securities resulted in the issuance of
common stock. Basic and diluted EPS pursuant to the requirements of SFAS No. 128
would be as follows:
- --------------------------------------------------
YEAR ENDED NOVEMBER 30, 1997 1996
- --------------------------------------------------
Basic earnings (loss) per share $ .59 $(.14)
Diluted earnings (loss) per share $ .59 $(.14)
- --------------------------------------------------
II-20
The Financial Accounting Standards Board has issued Statement No. 129
Disclosure of Information about Capital Structure. The Statement continues the
requirements to disclose certain information about an enterprise's capital
structure prescribed by previous accounting standards. The Corporation's current
disclosures are in compliance with the requirements of the Statement.
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. The adoption of SFAS
No. 130 is effective for the Corporation in 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 operation decision
maker and to reconcile the segment information to financial statement amounts.
SFAS No. 131 is effective for the Corporation for the year ending November 30,
1999.
5. SECURITIES AVAILABLE FOR SALE
Securities available for sale are reported at fair value and consisted primarily
of debt securities at November 30, 1997. Gross unrealized gains were $732 and
losses were $182 at November 30, 1997. Unrealized gains and losses, net of
income tax effects, are reported as a component of stockholders' equity.
Securities available for sale are held in a captive insurance subsidiary which
insures workers' compensation risks of the Corporation. Securities available for
sale having a fair value of $6,106 at November 30, 1997 are pledged as
collateral for the Corporation's guarantees of third-party letters of credit.
Maturity, fair value and cost of securities held for sale were as follows:
- -------------------------------------------------
MATURITIES OF SECURITIES FAIR VALUE COST
- -------------------------------------------------
1998 $ 8,317 $ 8,306
1999 - 2000 16,050 15,860
2001 - 2005 14,947 14,598
- -------------------------------------------------
Total at November 30, 1997 $39,314 $38,764
- -------------------------------------------------
- -------------------------------------------------
Total at November 30, 1996 $30,494 $29,915
- -------------------------------------------------
- -------------------------------------------------
6. VENTURES
CONSTRUCTION JOINT VENTURES: The Corporation participates in joint ventures,
generally as sponsor and manager of the projects, which are formed to bid,
negotiate and complete specific projects. The size, scope and duration of joint-
venture projects vary among periods.
- ---------------------------------------------------------------------------------------------------
COMBINED FINANCIAL POSITION OF CONSTRUCTION JOINT VENTURES
NOVEMBER 30, 1997 1996
- ---------------------------------------------------------------------------------------------------
Current assets $ 364,752 $ 247,869
Property and equipment, net 33,223 5,684
Current liabilities (324,092) (216,763)
- ---------------------------------------------------------------------------------------------------
Net assets $ 73,883 $ 36,790
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
COMBINED RESULTS OF OPERATIONS OF CONSTRUCTION JOINT VENTURES
YEAR ENDED NOVEMBER 30, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------
Revenue $ 793,555 $ 246,636 $ 12,729
Cost of revenue (715,492) (229,836) (11,580)
- ---------------------------------------------------------------------------------------------------
Gross profit $ 78,063 $ 16,800 $ 1,149
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
II-21
- --------------------------------------------------------------------------------------------------------------
CORPORATION'S SHARE OF RESULTS OF OPERATIONS OF CONSTRUCTION JOINT VENTURES
YEAR ENDED NOVEMBER 30, 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
Revenue $ 331,940 $103,709 $ 5,327
Cost of revenue (299,701) (95,953) (4,886)
- --------------------------------------------------------------------------------------------------------------
Gross profit $ 32,239 $ 7,756 $ 441
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Combined financial position and results of operations of joint ventures
subsequent to September 11, 1996 reflect merged ownership interests including
operating results of joint ventures acquired as a result of the acquisition of
Old MK.
MINING VENTURES: At November 30, 1997, the Corporation had ownership interests
in two mining ventures, MIBRAG mbH (33%) and Westmoreland Resources, Inc.
("Westmoreland Resources") (20%). On September 30, 1996, the Corporation sold a
4% ownership interest in Westmoreland Resources to Westmoreland Coal Company
("Westmoreland Coal") thereby reducing its ownership interest to 20%. The
Corporation provides contract mining services to these ventures.
- -----------------------------------------------------------------------------------------
COMBINED FINANCIAL POSITION OF MINING VENTURES
NOVEMBER 30, 1997 1996
- -----------------------------------------------------------------------------------------
Current assets $ 302,237 $ 352,586
Non-current assets 117,447 114,835
Property and equipment, net 498,310 509,919
Current liabilities (101,241) (128,435)
Long-term debt (267,026) (259,084)
Other non-current liabilities (365,058) (411,432)
- -----------------------------------------------------------------------------------------
Net assets $ 184,669 $ 178,389
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
COMBINED RESULTS OF OPERATIONS OF MINING VENTURES
YEAR ENDED NOVEMBER 30, 1997 1996
- -----------------------------------------------------------------------------------------
Revenue $ 364,425 $ 102,701
Cost of revenue (331,502) (92,071)
- -----------------------------------------------------------------------------------------
Gross profit $ 32,923 $ 10,630
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
II-22
- -----------------------------------------------------------------------------------------
CORPORATION'S SHARE OF RESULTS OF OPERATIONS OF MINING VENTURES
YEAR ENDED NOVEMBER 30, 1997 1996
- -----------------------------------------------------------------------------------------
Revenue $ 115,412 $ 32,786
Cost of revenue (105,108) (29,385)
- -----------------------------------------------------------------------------------------
Gross profit $ 10,304 $ 3,401
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
On December 23, 1996, Westmoreland Coal and four subsidiaries, including
Westmoreland Resources, filed for protection under Chapter 11 of the United
States Bankruptcy Code. At November 30, 1997, the carrying amount of the
Corporation's ownership interest in Westmoreland Resources was $6,191. The
Corporation cannot presently predict with any certainty to what extent, if any,
the ownership interest in Westmoreland Resources, or the Corporation's contract
mining for Westmoreland Resources, will ultimately be impaired, but any loss is
not expected to have a material adverse effect on the Corporation's financial
position, results of operations or cash flows.
7. ASSETS HELD FOR SALE
At November 30, 1997, assets held for sale are stated at the lower of cost or
fair value less cost of disposal and are comprised of the net assets of a
subsidiary and real estate. The Corporation is unable to predict disposal dates.
Operations of the subsidiary resulted in revenue of $5,300 and $5,400, and net
operating losses of $937 and $1,700 for 1997 and 1996, respectively. During
1997, a 29.5% stock ownership interest in a foreign bank which had a carrying
amount of $5,244 at November 30, 1996 was sold at a loss of $833. In 1996, the
Corporation recognized aggregate impairment losses of $12,100 on assets held for
sale and $6,100 on assets held for use.
8. CREDIT FACILITIES
On October 31, 1996, the Corporation obtained from the Bank of Montreal a five-
year, $200,000 revolving loan and letter of credit facility (the "Facility").
Revolving loan borrowings under the Facility are limited to $125,000. On October
8, 1997, the Facility was extended for an additional year to October 2002.
Annually thereafter, the Facility may be extended by an additional year upon
mutual approval of the bank and the Corporation. In 1996, the Corporation paid a
$1,100 underwriting fee to the bank and is required to pay commitment and
letters of credit fees.
Substantially all of the assets of the Corporation and certain of its material
domestic subsidiaries are pledged as collateral. The Facility covenants require
the maintenance of financial ratios, the most restrictive of which is fixed
charge coverage and minimum levels of net worth and place limitations
principally on additional indebtedness, investments and loan guarantees. At
November 30, 1997, the Corporation had no outstanding borrowings under the
Facility and was in compliance with the covenants. The Corporation is not
restricted from paying dividends unless an event of default exists.
The Facility provides for loans bearing interest, payable quarterly, at the
applicable LIBOR rate or the base rate, as defined, plus an additional margin.
The additional margin ranges from 3/4% to 1 1/8% for the LIBOR rate and zero to
1/4% for the base rate, based on the ratio of earnings before interest, taxes,
depreciation and amortization to the Corporation's funded debt.
II-23
9. TAXES ON INCOME
The components of the U.S. federal, state and foreign income tax expense
(benefit) were as follows:
- ----------------------------------------------------------
YEAR ENDED NOVEMBER 30, 1997 1996 1995
- ----------------------------------------------------------
Currently payable
U.S. federal $(2,699) $ (10) $2,217
State 871 108 723
Foreign 3,535 1,019 --
- ----------------------------------------------------------
Current 1,707 1,117 2,940
- ----------------------------------------------------------
Deferred
U.S. federal 22,585 (1,459) 844
State 3,043 (361) 238
Foreign 530 209 --
- ----------------------------------------------------------
Deferred 26,158 (1,611) 1,082
- ----------------------------------------------------------
Income tax expense (benefit) $27,865 $ (494) $4,022
- ----------------------------------------------------------
- ----------------------------------------------------------
II-24
- -------------------------------------------------------------
DEFERRED TAX ASSETS AND LIABILITIES
NOVEMBER 30, 1997 1996
- -------------------------------------------------------------
Deferred tax assets
Employee benefit plans $ 31,926 $ 35,087
Estimated loss accruals 54,429 66,948
Revenue recognition 2,585 5,659
Alternative minimum tax 14,507 13,902
Joint ventures 3,633 4,293
Self-insurance accruals 31,643 22,963
Loss carryforwards 88,326 83,336
Valuation allowance (111,987) (126,878)
- -------------------------------------------------------------
Total deferred tax assets 115,062 $ 105,310
- -------------------------------------------------------------
Deferred tax liabilities
Depreciation (10,217) (6,587)
Basis difference in affiliates (16,686) (11,016)
Other, net (26,803) (24,861)
- -------------------------------------------------------------
Total deferred tax liabilities (53,706) (42,464)
- -------------------------------------------------------------
Total deferred tax assets, net $ 61,356 $ 62,846
- -------------------------------------------------------------
- -------------------------------------------------------------
At November 30, 1997, the Corporation had consolidated regular tax net
operating loss carryforwards for federal, state and foreign tax purposes of
approximately $220,145, $165,902 and $3,775, respectively, which expire in the
years 2000 through 2012. In addition, the Corporation had federal alternative
minimum tax credits of $14,507 at November 30, 1997 which carry forward
indefinitely. The $111,987 valuation allowance reduces these net operating loss
carryforwards and other deferred tax assets to a level which management believes
will, more likely than not, be realized based on estimated future taxable
income. The net decrease of $14,891 in the valuation allowance at November 30,
1997 resulted from the extension of the federal net operating loss carryforward
period and by changes to the deferred taxes related to the acquisition of Old MK
for preacquisition contingencies. A reduction in the valuation allowance related
to tax assets acquired at September 11, 1996 will result in a reduction of
goodwill. The valuation allowance may be increased based on the occurrence of
future events, and any such increase could be material. Years prior to 1994 are
closed to examination for federal tax purposes. Management believes that
adequate provision has been made for probable tax assessments.
Income tax expense (benefit) differed from income taxes at the U.S. federal
statutory tax rate of 35% as follows:
- ---------------------------------------------------------------------------------------
YEAR ENDED NOVEMBER 30, 1997 1996 1995
- ---------------------------------------------------------------------------------------
Tax expense (benefit) at 35% U.S. federal statutory rate $20,964 $(1,846) $ 4,266
State income tax, net of federal benefit 2,544 (165) 624
Foreign income tax, net of federal benefit 2,642 799 --
Nondeductible expenses (nontaxable income), net 1,643 447 (1,024)
Other 72 271 156
- ---------------------------------------------------------------------------------------
Income tax expense (benefit) $27,865 $ (494) $ 4,022
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
II-25
Nondeductible expenses (nontaxable income), net was comprised principally of
goodwill amortization and in 1995, a benefit from a change in estimate.
Income (loss) before income taxes was comprised of a domestic source income of
$23,290 and foreign source income of $36,606 in 1997, a domestic source loss of
$(11,786) and foreign source income of $6,512 in 1996 and domestic source income
in 1995.
10. BENEFIT PLANS
PENSION PLAN: The Corporation succeeded Old MK as sponsor of a defined benefit
pension plan under which benefits have been frozen and no further benefits have
been accrued since 1991. Management has terminated the plan and is effecting a
settlement of the plan's accumulated benefit obligation through lump-sum cash
payments and the purchase of nonparticipating annuities. Accordingly, the
accumulated benefit obligation at November 30, 1997 reflects estimated ultimate
termination benefits. Pending such settlement, the plan continues to hold
assets, pay benefits and, if required, receive additional employer
contributions.
- --------------------------------------------------------------------------------------------------
FUNDED STATUS OF THE PLAN
NOVEMBER 30, 1997 1996
- --------------------------------------------------------------------------------------------------
Accumulated vested termination benefit obligation $(63,028) $(57,492)
Plan assets at fair value 60,034 54,266
- --------------------------------------------------------------------------------------------------
Accumulated vested termination benefit obligation in excess of plan assets (2,994) (3,226)
Unrecognized net gain (167) (1,635)
- --------------------------------------------------------------------------------------------------
Accrued pension benefit obligation $ (3,161) $ (4,861)
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
At November 30, 1997, approximately 46% of plan assets were invested in fixed-
income (corporate and U.S. government) securities and 54% in cash equivalents.
The discount rate used in determining the actuarial present value of the
accumulated vested termination benefit obligation was 6.15% for anticipated
annuity settlements, 7.09% for anticipated lump-sum payments and 6.11% for
certain grandfathered small-amount cash outs. The expected rate of return on
plan assets was 8%.
MULTIEMPLOYER PENSION PLANS: The Corporation participates in and makes
contributions to numerous construction-industry multiemployer pension plans.
Generally, the plans provide defined benefits to substantially all employees
covered by collective bargaining agreements. The Corporation's cost of the plans
was $16,098 in 1997, $4,972 in 1996 and $2,460 in 1995. Under the Employee
Retirement Income Security Act, a contributor to a multiemployer plan is liable,
upon termination or withdrawal from a plan, for its proportionate share of a
plan's unfunded vested liability. The Corporation currently has no intention of
withdrawing from any of the multiemployer pension plans in which it
participates.
II-26
ACCRUED PENSION LIABILITIES: The Corporation has assumed the pension
liabilities to former employees and former non-employee directors of Old MK as
follows:
- -------------------------------------------------------------------------------------------
STATUS OF THE UNFUNDED PENSION PLANS
NOVEMBER 30, 1997 1996
- -------------------------------------------------------------------------------------------
Accumulated vested benefit obligation, discounted at 7.0% and 7.25% $(14,549) $(14,612)
Unrecognized net loss 960 703
- -------------------------------------------------------------------------------------------
Accrued pension liabilities $(13,589) $(13,909)
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
POSTRETIREMENT HEALTH CARE PLAN: The Corporation succeeded Old MK as sponsor of
an unfunded plan to provide certain health care benefits for employees of Old MK
who retired before July 1, 1993 including their surviving spouses and dependent
children. Employees who retired after July 1, 1993 are not eligible for
postretirement health care benefits. Prior to November 30, 1996, the Corporation
changed its postretirement health care plan to increase retirees' required cash
contributions, effective January 1, 1997, and the effect of such change was
reflected in the accumulated postretirement benefit obligation ("APBO") at
November 30, 1996. The plan was amended in past years, and the Corporation
reserves the right to amend or terminate the postretirement health care benefits
currently provided under the plan and may increase retirees' cash contributions
at any time. The interest expense on the unfunded APBO for the year ended
November 30, 1997 was $3,522 and for the period September 12 to November 30,
1996 was $803.
- -----------------------------------------------------------------
ACCRUED POSTRETIREMENT BENEFIT OBLIGATION
NOVEMBER 30, 1997 1996
- -----------------------------------------------------------------
Accumulated benefit obligation $(43,250) $(50,265)
Unrecognized prior service credit (4,593) (4,976)
Unrecognized actuarial net (gain) loss (5,846) 1,808
- -----------------------------------------------------------------
Accrued postretirement benefit obligation $(53,689) $(53,433)
- -----------------------------------------------------------------
- -----------------------------------------------------------------
The unrecognized prior service credit is being amortized to periodic health
care expense over the 13-year average future expected lifetime of retirees and
their surviving spouses beginning in fiscal 1997.
The APBO was determined using the projected unit credit method and an assumed
discount rate of 7%. In addition, an annual rate increase of 9% in the per
capita cost of health care benefits was assumed, gradually declining to 5% in
the year 2006 and continuing thereafter at that rate over the projected payout
period of the benefits. The health care cost trend rate assumption has a
significant effect on the APBO. For example, a 1% increase in the health care
cost trend rate would increase the APBO of $4,199 at November 30, 1997 and
increase the 1997 expense by approximately $360.
OTHER RETIREMENT PLANS: The Corporation also sponsors a number of defined
contribution retirement plans. Participation in these plans is available to
substantially all salaried employees and to certain groups of hourly
II-27
employees. The Corporation's cash contributions to these plans are based on
either a percentage of employee contributions or on a specified amount per hour
based on the provisions of each plan.
The cost of these plans was $30,846 in 1997, $9,174 in 1996 and $3,090 in 1995.
11. TRANSACTIONS WITH AFFILIATES
The Corporation purchased goods and services from and participated in joint
ventures with affiliates of a principal stockholder and Chairman of the Board of
Directors of the Corporation as follows:
- ---------------------------------------------------------------------
YEAR ENDED NOVEMBER 30, 1997 1996 1995
- ---------------------------------------------------------------------
Capital expenditures $1,444 $1,063 $1,545
Lease and maintenance of corporate aircraft 931 -- --
Parts, rentals, overhauls and repairs 4,565 7,709 5,901
Administrative support services 1,066 1,688 2,446
Revenue recognized from joint ventures 4,798 2,103 1,800
Profit recognition from joint ventures 1,522 393 382
Corporation's investment in joint ventures 1,648 1,080 582
- ---------------------------------------------------------------------
II-28
The Corporation performed construction services, rented equipment and realized
gains on sales of equipment to affiliates of a principal stockholder and
Chairman of the Board of Directors of the Corporation as follows:
- ---------------------------------------------------------------
YEAR ENDED NOVEMBER 30, 1997 1996 1995
- ---------------------------------------------------------------
Construction services $ 29 $4,696 $ 848
Equipment rental -- 346 194
Gain (loss) on sales of equipment, net (63) 466 586
- ---------------------------------------------------------------
The Corporation purchased insurance, surety bonds and financial advisory
services from firms owned by or affiliated with current members of the Board of
Directors of the Corporation as follows:
- ---------------------------------------------------------------------------------------
YEAR ENDED NOVEMBER 30, 1997 1996 1995
- ---------------------------------------------------------------------------------------
Insurance premiums paid $10,614 $11,508 $3,901
Commissions earned 1,280 875 430
Financial advisory services regarding purchase of Old MK -- 992 --
Fair value of stock purchase warrants issued for service in
connection with the purchase of Old MK -- 543 --
Financial advisory services 154 -- --
- ---------------------------------------------------------------------------------------
In January 1998, the Corporation and a brokerage firm owned by a member of the
Board of Directors approved a new agreement for insurance brokering services
supplied to the Corporation effective January 1, 1998 and expiring December 31,
2000, with automatic renewal annually for 12-month terms thereafter, unless
canceled by either party prior to the annual date. Pursuant to the new
agreement, the brokerage firm receives an annual fixed fee of $1,150, which will
be paid in equal quarterly installments with all insurance commissions earned to
be credited 100% against the fee.
Negotiations of the proposed acquisition of an interest in a copper mine
between the Corporation and a principal stockholder and the Chairman of the
Board of Directors were terminated in January, 1998.
II-29
12. GEOGRAPHIC AND CUSTOMER INFORMATION
The Corporation operates in the engineering and construction industry in the
following geographic areas:
- ------------------------------------------------
GEOGRAPHIC DATA
YEAR ENDED NOVEMBER 30, 1997 1996
- ------------------------------------------------
Revenue
United States $1,474,831 $589,930
International 202,470 69,170
- ------------------------------------------------
Total revenue $1,677,301 $659,100
- ------------------------------------------------
- ------------------------------------------------
Operating income (loss)
United States $ 18,260 $(11,787)
International 34,567 3,193
- ------------------------------------------------
Operating income (loss) $ 52,827 $ (8,594)
- ------------------------------------------------
- ------------------------------------------------
Identifiable assets
United States $ 357,424 $405,123
International 111,182 154,083
Corporate assets 301,638 280,431
- ------------------------------------------------
Total assets $ 770,244 $839,637
- ------------------------------------------------
- ------------------------------------------------
Corporate assets include cash and equivalents, refundable income taxes,
deferred tax assets, securities available for sale, assets held for sale and
cost in excess of net assets acquired. Revenue from international operations and
identifiable assets of international operations in 1997 and 1996 was in numerous
geographic areas without significant concentration, and in 1995 was less than
10% of consolidated revenue and assets, respectively.
Ten percent or more of the Corporation's revenues for the three years in the
period ended November 30, 1997 were derived from contracts and subcontracts with
the following customers:
- -----------------------------------------------------------------------
YEAR ENDED NOVEMBER 30, 1997 1996 1995
- -----------------------------------------------------------------------
California Department of Transportation $125,136 $147,598 $109,033
United States Department of Energy 289,288 69,614 2,226
Other U.S. government agencies 71,684 36,439 20,537
- -----------------------------------------------------------------------
13. CONTINGENCIES AND COMMITMENTS
SUMMITVILLE ENVIRONMENTAL MATTERS: From July 1985 to June 1989, a subsidiary of
the Corporation performed certain contract mining services at the Summitville
mine near Del Norte, Colorado. The United States Environmental
II-30
Protection Agency (the "EPA") has notified the Corporation and approximately 20
other parties that each is a potentially responsible party ("PRP") with regard
to hazardous substances generated or disposed of at the Summitville Mine
Superfund Site (the "Site"). The EPA has not commenced any litigation or other
proceedings against the Corporation. The Corporation has had only preliminary
discussions with the EPA but has been informally advised that the EPA does not
consider the Corporation eligible for a de minimis settlement (the basis for
settlement by several PRPs considered to have contributed less than 3% volume
and toxicity of the hazardous substances at the Site).
According to a report published in August 1996, the EPA estimated that the
total remediation costs incurred and to be incurred at the Site will be
$120,000. The Corporation is not a party to any agreement regarding an
allocation of responsibility, and the EPA has not made an allocation of
responsibility among the PRPs. The Corporation's share, if any, of the
aggregate environmental liability associated with the Site is not presently
determinable and depends upon, among other things, the manner in which liability
may be allocated to or among the Corporation or other PRPs associated with the
Site, the efficacy of any defenses that the Corporation or such other PRPs may
have to any assertion of liability, the willingness and ability of such other
PRPs to discharge such liability as may be allocated to them and the outcome of
any negotiations or settlement discussions between the Corporation and the EPA
and/or such other PRPs. Accordingly, no remediation costs have been accrued at
November 30, 1997.
Management believes that the ultimate resolution of this matter could have a
material adverse effect on the Corporation's financial position and could
materially and adversely effect its results of operations and cash flows in one
or more periods.
OTHER ENVIRONMENTAL MATTERS: The Corporation assumed a liability of Old MK of
$4,000 for the estimated costs of monitoring and treatment of ground water
contamination at or adjacent to previously owned rail facilities in Boise,
Idaho. In December 1996, the current owner qualified for assumption of related
monitoring and treatment obligations for such facilities. Accordingly, the
Corporation eliminated the assumed liability associated with the site.
The Corporation has been identified as a PRP and is contingently liable for
remediation liabilities in connection with Old MK's former Transit business. The
Corporation agreed to indemnify the buyer of the Transit business for
remediation costs and has therefore accrued $3,000. While the Corporation's
range of loss cannot be estimated, management believes that the ultimate outcome
of the matter will not have a material adverse effect on the Corporation's
financial position.
The Corporation has assumed an undiscounted liability of Old MK which at
November 30, 1997 was $3,107 for environmental cleanup activities at four other
sites. The Corporation estimates that such costs could range from $1,800 to
$6,800 in the aggregate.
CONTRACT RELATED MATTERS: In 1995, Old MK entered into a fixed-price contract
with the Texas Natural Resource Conservation Commission ("TNRCC") for
construction of a solvent-extraction facility and treatment of contaminated soil
at a Superfund site in Texas. In 1997, the Corporation and the staff of TNRCC
entered into a modified agreement that resolved the contract disputes which had
previously arisen. The modified agreement was not approved by the TNRCC and the
TNRCC notified the Corporation in early February 1998 that it was terminating
its contract with the Corporation. The Corporation anticipates additional
negotiations with the TNRCC over demobilization and claim issues. The TNRCC may
seek to recover up to $13,619 of advances by drawing on an outstanding letter of
credit issued at the request of the Corporation (and under which the Corporation
would have an obligation to reimburse the issuer for any amounts so drawn), and
if the TNRCC does so act the Corporation will assert its claims for additional
revenue for customer-caused delays, changed conditions and other excess costs.
At August 31, 1997, the Corporation provided for the estimated costs to complete
the contract, assuming the letter of credit was not drawn. However, the ultimate
outcome of this matter cannot be determined with certainty.
The Corporation has a number of cost reimbursable contracts with the U.S.
government, the allowable costs of which are subject to adjustments upon audit
and negotiation by various agencies of the U.S. government. Audits and
negotiations of the Corporation's allocation of periodic costs of insurance
programs are complete through 1997, resulting in a $4,300 credit refund by the
Corporation to certain U.S. government contracts over two years. Audits and
negotiations of indirect costs are substantially complete through 1995 without
significant adjustments, and audits of 1996 indirect costs are in progress.
II-31
LETTERS OF CREDIT: In the normal course of business, the Corporation causes
letters of credit to be issued in connection with contract performance
obligations which are not reflected in the balance sheet. The Corporation is
obligated to reimburse the issuer of such letters of credit for any payments
made thereunder. At November 30, 1997, $41,297 in face amount of such letters of
credit were outstanding, including a $13,619 letter of credit issued in
connection with the contract performance obligation to TNRCC discussed above. At
November 30, 1996, $33,669 in face amount of such letters of credit were
outstanding. The Corporation has pledged securities available for sale as
collateral for its reimbursement obligations in respect of $6,106 in face amount
of certain letters of credit at November 30, 1997.
In connection with a 1989 sale of Old MK's ownership interest of a
shipbuilding subsidiary, the Corporation assumed a guarantee of port facility
bonds of $21,000 through 2002. The former subsidiary has collateralized the
bonds with certain assets and have established a sinking fund of $5,027 for the
bonds. No loss on the guarantee is probable and, accordingly, no accrual has
been made by the Corporation.
II-32
EMPLOYMENT AGREEMENTS AND SEVERANCE PAY PLANS: The Corporation has employment
agreements with several key employees which generally provide for salary
continuation and certain benefits in the event of termination of employment
without cause (as defined) following a change of control in the Corporation (as
defined). If all employees subject to such agreements at November 30, 1997 were
to be terminated under circumstances giving rise to such salary continuation and
benefits, the Corporation's aggregate liability would be approximately $4,149.
As a result of the acquisition of Old MK, several employees were terminated,
resulting in cash payments of $407 during 1997 and an accrued liability of $270
at November 30, 1997.
LONG-TERM LEASES: Total rental payments for real estate and equipment under
lease charged to operations in 1997, 1996 and 1995 were $36,575, $11,780 and
$4,514, respectively. Future minimum rental payments under operating leases,
some of which contain renewal or escalation clauses, with remaining
noncancelable terms in excess of one year at November 30, 1997 were as follows:
- ----------------------------------------------------------------------
REAL ESTATE EQUIPMENT TOTAL
- ----------------------------------------------------------------------
YEAR ENDING NOVEMBER 30,
1998 $ 9,984 $ 12,573 $22,557
1999 8,152 7,343 15,495
2000 8,353 1,012 9,365
2001 6,653 282 6,935
2002 6,589 86 6,675
2003 and after 42,366 -- 42,366
- ----------------------------------------------------------------------
Totals $82,097 $21,296 $103,393
- ----------------------------------------------------------------------
- ------------------------------------------------------------------------------
Administrative and engineering facilities in Boise, Idaho, and Cleveland,
Ohio, are leased under long-term, non-cancelable leases expiring in 2003 and
2010, respectively, with aggregate lease obligations of $10,039 and $63,476 for
the Boise facility and Cleveland facility, respectively.
OTHER: The Corporation and certain current and former officers and directors are
named defendants in two legal actions: John B. Blyler and Malcolm J. Corse v.
William J. Agee, et. al., Civil Action No. 97-0332-S-BLW; and Martin Radwell v.
Dennis R. Washington, et. al., Civil Action No. 15934. The complaints allege,
among other things, that the defendants breached certain fiduciary duties.
Additionally, former shareholders (the plaintiffs) of TMS, Inc. ("TMS"), which
was acquired by Old MK in December 1992, filed an action in 1995 alleging they
were induced to enter into an agreement to exchange TMS shares for common stock
of Old MK (the defendant) and also enter into noncompete agreements by the
defendants' allegedly false statements. Although the ultimate outcome of these
matters cannot be predicted with certainty, management believes that the outcome
of these actions, individually or collectively, will not have a material adverse
impact on the Corporation's financial position, results of operations or cash
flows. The Corporation, as successor to Old MK (Commission File No. 1-8889), is
subject to a formal investigation by the Pacific Regional Office of the SEC
regarding the management and operations of Old MK, primarily its former Transit
business, prior to September 12, 1996. The Corporation continues to provide
documents in response to discovery requests and otherwise cooperate with the
Commission's staff in connection with this investigation.
In addition to the foregoing, there are other claims, lawsuits, disputes with
third parties, investigations and administrative proceedings against the
Corporation and its subsidiaries relating to matters in the ordinary course of
its business activities that are not expected to have a material adverse effect
on the Corporation's financial position, results of operations or cash flows.
II-33
14. SUPPLEMENTAL CASH FLOW INFORMATION
- ----------------------------------------------------------------------------------------
YEAR ENDED NOVEMBER 30, 1997 1996 1995
- ----------------------------------------------------------------------------------------
Supplemental cash flow information
Interest paid $ 890 $ 993 $ 189
Income taxes paid 12,796 1,877 3,861
- ----------------------------------------------------------------------------------------
Supplemental noncash investing activities
Property and equipment classified as assets held for sale 25,485
Other current assets classified as assets held for sale 224
Investment in mining ventures adjusted for cumulative
translation adjustments, net of income tax benefit (5,512)
- ----------------------------------------------------------------------------------------
Business combination:
Fair value of assets (15,538) 701,188
Liabilities assumed 15,538 (479,452)
Redeemable preferred stock issued (18,000)
Equity securities issued (186,928)
- ----------------------------------------------------------------------------------------
Total cash paid, including acquisition cost of $3,508 $ -- $ 16,808
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
15. REDEEMABLE PREFERRED STOCK
On September 11, 1996, the Corporation issued 1,800,000 shares of Series A
preferred stock in connection with the acquisition of Old MK. Redemption of the
Series A preferred stock, not to exceed $18,000 in the aggregate, will occur on
April 15, 1998 utilizing federal income tax refunds received by the Corporation
in January 1998. Such refunds are reflected in the Corporation's November 30,
1997 balance sheet.
Holders of Series A preferred stock are entitled to vote together with holders
of common stock as a single class on all matters with respect to which the
holders of common stock are entitled to vote. Each share of Series A preferred
stock has 1/10,000 of a vote. Upon redemption, all Series A preferred stock will
be canceled and all rights of the holders will cease.
16. CAPITAL STOCK, STOCK PURCHASE WARRANTS AND STOCK COMPENSATION PLAN
CAPITAL STOCK: Pursuant to its Certificate of Incorporation, the Corporation has
the authority to issue 100,000,000 shares of common stock and 10,000,000 shares
of preferred stock. Preferred stock may be issued at any time or from time to
time in one or more series with such designations, powers, preferences and
rights, qualifications, limitations or restriction thereof as determined by the
Board of Directors of the Corporation.
STOCK PURCHASE WARRANTS: At November 30, 1997, the Corporation had outstanding
stock purchase warrants to acquire 2,948,239 shares of the Corporation's common
stock at an exercise price of $12.00 per share. Of such warrants 2,760,391
expire in March 2003, and 187,848 expire in September 2001.
II-34
STOCK REPURCHASE PROGRAM: In January 1998, the Board of Directors authorized the
purchase, from time to time, of up to 2 million shares of the Corporation's
common stock and up to 2.760 million of its stock purchase warrants.
STOCK COMPENSATION PLAN: The Corporation has a Stock compensation Plan for
employees and non-employee directors as amended (the "1994 plan") which provides
for grants by the Board of Directors in the form of nonqualified stock options
or incentive stock options ("ISOs") and restricted stock awards. Additional
shares of common stock available each year for grants under the 1994 plan are
equal to 3% of the outstanding shares as of December 1. Grant prices per share
for nonqualified stock options are determined by the Board. Grant prices per
share for ISOs are at the fair market value of the Corporation's common stock at
the date of grant. Stock options extend for and vest over periods of up to ten
years as determined by the Board. The Board may accelerate the vesting period
after award of an option. The number of shares available for grant of ISOs may
not exceed 2,900,000 shares, and no individual shall be granted stock options or
restricted stock awards for more than 5,000,000 shares over any three-year
period.
Non-employee directors may elect to forego receipt in cash of certain fees
earned during any year in return for an option with a grant price equal to 80%
of the fair market value of the Corporation's common stock, a term and vesting
period of up to ten years as determined by the Board. Non-employee directors
elected options for 95,556, 50,461 and 55,386 shares in lieu of fees earned in
1997, 1996 and 1995, respectively.
On April 11, 1997, the Corporation's stockholders adopted the 1997 Stock
Option and Incentive Plan for Non-employee Directors (the "1997 plan") which
provides for grants in the form of nonqualified stock options and restricted
stock awards. Grant prices per share for stock options are at fair market value
at the date of grant. The number of shares available for grant as options and
restricted stock awards is 500,000, of which no more than 100,000 may be awarded
as restricted. Grants of nonqualified stock options and restricted stock awards
to the non-employee directors under the 1997 plan do not preclude grants under
the 1994 plan. Options are subject to terms and conditions determined by the
Board of Directors and have a term not exceeding 10 years from the date of
grant. Option activity under the Corporation's stock plans is summarized as
follows:
- -----------------------------------------------------------------------------------------------------------------
NOVEMBER 30, 1997 NOVEMBER 30, 1996 NOVEMBER 30, 1995
- -----------------------------------------------------------------------------------------------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF OPTIONS OPTION PRICE OF OPTIONS OPTION PRICE OF OPTIONS OPTION PRICE
- ----------------------------------------------------------------------------------------------------------
Outstanding at
beginning of year 1,107,905 6.33 940,986 5.56 641,900 6.01
Granted 1,398,056 10.02 360,461 7.98 340,386 5.25
Canceled (86,756) 8.96 (26,875) 8.14 (41,300) 10.00
Exercised (643,532) 6.30 (166,667) 5.25 -- --
--------- ------ ---------- ----- --------- ------
Outstanding at end
of year 1,775,673 9.12 1,107,905 6.33 940,986 5.56
========= ========== =========
Exercisable at end
of year 370,178 6.41 718,782 6.22 232,770 5.88
Shares available for
grant 1,767,738 -- 1,375,948 -- 1,709,534 --
- ----------------------------------------------------------------------------------------------------------
Shares available for grant includes shares which may be granted as either
stock options or restricted stock awards, as determined by the Board.
II-35
The terms and conditions of restricted stock awards issued to key employees
are determined by the Board. Upon termination of employment, shares that remain
subject to restriction are forfeited. At November 30, 1997, there were 1,530
restricted shares outstanding with restrictions lapsing in January 1998. No
restricted stock awards were made in 1997, 1996 and 1995.
STOCK-BASED COMPENSATION: The Corporation has adopted the disclosure-only
provisions of the Financial Accounting Standards Board Statement No. 123
Accounting for Stock-Based Compensation ("SFAS No. 123") issued in October 1995.
Accordingly, compensation cost has been recorded based on the intrinsic value of
the option only. The Corporation recognized $477 and $702 of compensation cost
in 1997 and 1996, respectively, for stock-based employee compensation awards.
If the Corporation had elected to recognize compensation cost based on the fair
value of the options granted at grant date as prescribed by SFAS No. 123, net
income and earnings per share would have been reduced to the proforma amounts as
follows:
- ------------------------------------------------
NOVEMBER 30, 1997 1996
- ------------------------------------------------
Net income (loss)
As reported $32,031 $(4,780)
Pro forma 30,925 (4,620)
Net income (loss) per share
As reported .59 (.14)
Pro forma .57 (.13)
- ------------------------------------------------
The Black-Scholes option valuation model was used to estimate the fair value
of the options. The assumptions used in such option valuation are highly
subjective, particularly as to stock price volatility of the underlying stock
and can materially affect the fair value estimate. In management's opinion, the
model does not provide a reliable single measure of the fair value of the
employee stock options.
The above pro forma amounts reflect the portion of the estimated fair value of
awards earned in 1997 and 1996 based on the vesting period of the options. The
pro forma effects disclosed above are not likely to be representative of the pro
forma disclosures of future years because SFAS No. 123 is applicable only to
options granted subsequent to November 30, 1995, the effect of which will not be
fully reflected until 1999.
The following assumptions were used in the valuation , and no dividends were
assumed:
- ------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------
Average expected life (years) 5 5
Expected volatility 30.7% 38.0%
Risk-free interest rate 6.4% 6.4%
Weighted average fair value:
Exercise price equal to market price at grant $10.23 $7.98
Exercise price less than market price at grant $ 7.20 --
- ------------------------------------------------------------------
II-36
The following table summarizes information about options outstanding at
November 30, 1997:
- ---------------------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- ----------------------------
Weighted-average
Number Weighted-average remaining Number Weighted-average
Price Range (000's) exercise price contractual life (000's) exercise price
- ---------------------------------------------------------------------------------------------------------------------
Below $7.20 354 $ 5.70 7.3 292 $ 5.88
$7.50 - $9.88 1,214 $ 9.60 8.8 51 $ 7.50
Above $10.00 208 $12.10 8.9 27 $10.00
- ---------------------------------------------------------------------------------------------------------------------
17. FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments at November 30, 1997 have
been determined by the Corporation, using available market information and
valuation methodologies believed to be appropriate. However, judgment is
necessary in interpreting market data to develop the estimates of fair values.
Accordingly, the estimates presented herein are not necessarily indicative of
the amounts that the Corporation could realize in a current market exchange. The
use of different market assumptions and/or estimation methodologies may have a
material effect on the estimated fair value amounts.
The carrying amounts and estimated fair values of certain financial
instruments at November 30, 1997 and 1996 were as follows:
- ----------------------------------------------------------------
NOVEMBER 30, 1997 1996
- ----------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
- ----------------------------------------------------------------
FINANCIAL ASSETS
Customer retentions $26,970 $26,175 $28,348 $27,444
Notes receivable -- -- 8,087 9,101
FINANCIAL LIABILITIES
Subcontract retentions 20,266 19,668 27,006 26,145
Advances from customers 8,987 8,722 11,280 10,920
- ----------------------------------------------------------------
The fair value of other financial instruments comprised of (i) cash and cash
equivalents, accounts receivable excluding customer retentions, unbilled
receivables and accounts and subcontracts payable excluding retentions
approximate cost because of the immediate or short-term maturity of these, (ii)
securities available for sale based on quoted market prices of the securities at
the balance sheet date and (iii) notes receivable, customer retentions,
subcontract retentions and customer advances is estimated by discounting
expected cash flows at rates currently available to the Corporation for
instruments with similar risks and maturities.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
II-37
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by this Item is set forth under the captions
"Directors" and "Executive Officers" in the Corporation's definitive proxy
statement for its annual meeting of stockholders to be filed not later than
March 31, 1998 and incorporated herein by this reference.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by this Item is set forth under the caption "Report
of the Compensation Committee on Executive Compensation for 1997" in the
Corporation's definitive proxy statement for its annual meeting of stockholders
to be filed not later than March 31, 1998, and incorporated herein by this
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by this Item is set forth under the caption "Voting
Securities and Principal Holders Thereof" in the Corporation's definitive proxy
statement for its annual meeting of stockholders to be filed not later than
March 31, 1998, and incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by this Item is set forth under the caption "Certain
Relationships and Related Transactions" in the Corporation's definitive proxy
statement for its annual meeting of stockholders to be filed not later than
March 31, 1998, and incorporated herein by this reference.
III-1
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) Documents filed as a part of this Annual Report on Form 10-K.
PAGE(S)
1. The Consolidated Financial Statements, together with the reports thereon
of Coopers & Lybrand L.L.P. dated February 2, 1998, and KPMG Peat
Marwick LLP dated January 12, 1996 are included in Part II, Item 8 of
this Annual Report on Form 10-K
Report of Independent Accountants II-10
Report of Independent Auditors II-11
Consolidated Statements of Operations for each of
the three years in the period ended November 30, 1997 II-12
Consolidated Balance Sheets at November 30, 1997
and 1996 II-13, II-14
Consolidated Statements of Cash Flows for each of
the three years in the period ended November 30, 1997 II-15
Consolidated Statements of Stockholders' Equity
for each of the three years in the period ended November 30, 1997 II-16
Notes to Consolidated Financial Statements II-17 to II-34
2. Financial Statement Schedule as of November 30, 1997
Part IV of this Annual Report on Form 10-K IV-1
Valuation and Qualifying and Reserve Accounts
Financial statement schedules not listed above are omitted because they
are not required or are not applicable, or the required information is
given in the financial statements including the notes thereto. Captions
and column headings have been omitted where not applicable.
3. Exhibits
The exhibits to this Annual Report on Form 10-K are listed in the Exhibit
Index contained elsewhere in this Annual Report.
(b) Reports on Form 8-K.
The registrant filed a Current Report on Form 8-K dated September 23, 1997
to notify the holders of the Corporation's Series A Preferred stock that
the Corporation had received written notification from the Internal Revenue
Service ("IRS") that refund claims consisting primarily of claims related
to foreign tax credits have received approval by the Joint Committee on
Taxation. The Corporation also reported that it was in the process of
scheduling meetings with the IRS to discuss this situation and to obtain
payment of these refunds. The outcome of those meetings was uncertain and
thus it was not possible to predict when these refunds would be paid by the
IRS.
IV-1
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Corporation has duly caused this Annual Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized on
February 9, 1998.
Morrison Knudsen Corporation
By /s/ R.A. Tinstman
------------------------------------------------------
R. A. Tinstman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual
Report has been signed below on February 9, 1998 by the following persons on
behalf of the Corporation in the capacities indicated.
President and Chief Executive Officer and
Director
/s/ R.A. Tinstman (Principal Executive Officer)
- ---------------------------------
Executive Vice President and Chief
Financial Officer
/s/ A.S. Cleberg (Principal Financial Officer)
- ---------------------------------
Vice President and Controller
/s/ D.L. Brigham (Principal Accounting Officer)
- ---------------------------------
/s/ D.H. Batchelder* Director
- ---------------------------------
/s/ L.R. Judd* Director
- ---------------------------------
/s/ W.C. Langley* Director
- ---------------------------------
/s/ R.S. Miller* Director
- ---------------------------------
/s/ D. Parkinson* Director
- ---------------------------------
/s/ T.W. Payne* Director
- ---------------------------------
/s/ J.D. Roach* Director
- ---------------------------------
/s/ D.R. Washington* Director
- ---------------------------------
* A.S. Cleberg, by signing his name hereto, does hereby sign this Annual Report
on Form 10-K on behalf of each of the above-named officers and directors of
Morrison Knudsen Corporation, pursuant to powers of attorney executed on behalf
of each such officer and director.
*By /s/ A.S. Cleberg
- ---------------------------------
A.S. Cleberg, Attorney-in-fact
MORRISON KNUDSEN CORPORATION
SCHEDULE II. VALUATION AND QUALIFYING AND RESERVE ACCOUNTS
FOR THE YEAR ENDED NOVEMBER 30, 1997
(In thousands)
ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLES DEDUCTED IN THE BALANCE SHEET FROM
ACCOUNTS RECEIVABLE
Balance at Provisions Balance at
Beginning Charged to End of
Year Ended of Year Operations Other Deductions Period
- -------------------------------------------------------------------------------------------
November 30, 1996 $ -- $(275) $(8,210)(1) $ 600 $(7,885)
November 30, 1997 (7,885) (978) -- 4,124 (4,739)
DEFERRED INCOME TAX ASSET VALUATION ALLOWANCE DEDUCTED IN THE BALANCE SHEET
FROM DEFERRED INCOME TAX ASSET
Balance at Provisions Balance at
Beginning Charged to End of
Year Ended of Year Operations Other Deductions Period
- -------------------------------------------------------------------------------------------
November 30, 1996 $ -- $ -- $(126,878)(1) $ -- $(126,878)
November 30, 1997 (126,878) -- (4,797)(2) 19,688(3) (111,987)
ESTIMATED COSTS TO COMPLETE LONG-TERM CONTRACTS REFLECTED IN THE BALANCE SHEET
Balance at Provisions Balance at
Beginning Charged to End of
Year Ended of Year Operations Other Deductions Period
- ----------------------------------------------------------------------------------------------
November 30, 1996 $ (3,184) $(23,283) $(86,450)(1) $ 12,085 $(100,832)
November 30, 1997 (100,832) (56,861) -- 84,590 (73,103)
- ---------------------------------
(1) Assumed in connection with the acquisition of Old MK.
(2) Adjustment due to change in deferred taxes for preacquisition
contingencies.
(3) Adjustment due to extension of federal net operating loss carryforward
period.
EXHIBIT INDEX
COPIES OF EXHIBITS WILL BE SUPPLIED UPON REQUEST. EXHIBITS WILL BE PROVIDED AT
A FEE OF $.25 PER PAGE REQUESTED.
Exhibits marked with an asterisk are filed herewith, the remainder of the
exhibits have heretofore been filed with the Commission and are incorporated by
reference.
EXHIBIT
NUMBER EXHIBITS
2.1 First Amended Plan of Reorganization confirmed on August 26, 1996 under
Chapter 11 of the United States Bankruptcy Code for the District of
Delaware, Case No. 96-1006(PJW) as filed by Morrison Knudsen Corporation
(Commission File No. 1-8889 - "Old MK") prior to its merger on September
11, 1996 with and into Washington Construction Group, Inc. (the
"registrant") with the registrant being the surviving corporation in the
merger and being renamed "Morrison Knudsen Corporation" (filed as Exhibit
2.1 to Old MK's Form 10-Q Quarterly Report for the quarter ended June 30,
1996 and incorporated herein by reference).
2.2 Restructuring and Merger Agreement dated May 28, 1996 by and between the
registrant and Old MK (filed as Exhibit 1 to the registrant's Proxy
Statement dated September 11, 1996 and incorporated herein by reference).
3.1 The registrant's Restated and Amended Certificate of Incorporation,
including all amendments thereto (filed as Exhibit 3.1 to the
registrant's Form 10-Q Quarterly Report for quarter ended August 31, 1996
and incorporated herein by reference).
3.2 The registrant's Restated and Amended Bylaws, including all amendments
thereto (filed as Exhibit 3.2 to the registrant's Form 10-Q Quarterly
Report for quarter ended August 31, 1996 and incorporated herein by
reference).
4.1 Specimen certificate for the registrant's Common Stock (filed as Exhibit
4.1 to the registrant's Form 10-K Annual Report for fiscal year ended
November 30, 1996 and incorporated herein by reference).
4.2 Specimen certificate for the registrant's Warrants to expire on March 11,
2003 (filed as Exhibit 4.2 to the registrant's Form 10-Q Quarterly
Report for quarter ended August 31, 1996 and incorporated herein by
reference).
4.3 Specimen certificate for the registrant's Series A Preferred Stock
(filed as Exhibit 4.3 to the registrant's Form 10-Q Quarterly Report for
quarter ended August 31, 1996 and incorporated herein by reference).
4.4 Warrant Agreement dated September 11, 1996 by and between the registrant
and Norwest Bank Minnesota, N.A. (filed as Exhibit 4.4 to the
registrant's Form 10-Q Quarterly Report for quarter ended August 31, 1996
and incorporated herein by reference).
4.5 Warrant Agreement dated September 11, 1996 among the registrant,
Batchelder & Partners, Inc. and Schroder Wertheim & Co. Incorporated,
including the form of certificate attached thereto as Exhibit A for
certain registrant Warrants to expire on September 11, 2001 (filed as
Exhibit 4.6 to the registrant's Form 10-Q Quarterly Report for quarter
ended August 31, 1996 and incorporated herein by reference).
4.6 Registration Rights Agreement dated September 11, 1996 among the
registrant, Batchelder & Partners, Inc. and Schroder Wertheim & Co.
Incorporated (filed as Exhibit 4.7 to the registrant's Form 10-Q
Quarterly Report for quarter ended August 31, 1996 and incorporated
herein by reference).
10.1 * Credit Agreement dated October 8, 1996 among the registrant, Bank of
Montreal, individually and as Agent, and the Banks which are parties
thereto ("Credit Agreement") (filed as Exhibit 10.2 to the registrant's
Form 10-Q Quarterly Report for quarter ended August 31, 1996 and
incorporated herein by reference), the First Amendment thereto dated
January 31, 1997 (filed as Exhibit 10.1 to the registrant's Form 10-K
Annual Report for fiscal year ended November 30, 1996 and incorporated
herein by reference) and the Second Amendment thereto dated October 6,
1997 (filed herewith).
10.2 * The registrant's engagement agreement with Batchelder & Partners, Inc.
dated August 27, 1997 relating to the possible acquisition by the Company
of Guy F. Atkinson Company of California.
10.3 * The registrant's Professional Services Agreement dated January 19, 1998
with Terry Payne & Co., Inc.
10.4 General and Administrative Services Agreement dated as of August 1, 1993
between the registrant and Washington Corporations (filed as Exhibit 10.3
to the registrant's Form 10-K Annual Report for fiscal year ended
November 30, 1996 and incorporated herein by reference).
10.5 The registrant's Environmental Indemnification Agreement with Washington
Corporations dated July 8, 1993 (filed as Exhibit 10.5 to the
registrant's Form 10-K Annual Report for fiscal year ended November 30,
1996 and incorporated herein by reference).
10.6 * Shareholders Agreement dated December 18, 1993 among Morrison Knudsen BV,
a wholly owned subsidiary of the registrant, Lambique Beheer BV and Ergon
Overseas Holdings Limited.
10.7 Form of Guaranty by Old MK, as Guarantor, in favor of Morgan Guaranty
Trust Company of New York, as Trustee (filed as Exhibit 4.2 to Amendment
No. 1 to Old MK's Form S-3 Registration Statement No. 33-50046 filed on
October 30, 1992 and incorporated herein by reference).
10.8 Form of Indenture of Trust between the City of San Diego and Morgan
Guaranty Trust Company of New York, as Trustee (filed as Exhibit 4.3 to
Amendment No. 1 to Old MK's Form S-3 Registration Statement No. 33-50046
filed on October 30, 1992 and incorporated herein by reference).
10.9 Form of Loan Agreement between the City of San Diego and National Steel
and Shipbuilding Company (filed as Exhibit 4.4 to Amendment No. 1 to Old
MK's Form S-3 Registration Statement No. 33-50046 filed on October 30,
1992 and incorporated herein by reference).
MANAGEMENT CONTRACT OR COMPENSATORY PLAN OR ARRANGEMENT WHICH IS SEPARATELY
IDENTIFIED IN ACCORDANCE WITH ITEM 14(a)(3) OF FORM 10-K.
10.10 The registrant's Amended and Restated Stock Option Plan (filed as
Exhibit 10.10 to the registrant's Form 10-K Annual Report for fiscal
year ended November 30, 1996 and incorporated herein by reference).
10.11 The registrant's 1997 Stock Option and Incentive Plan for Non-Employee
Directors (filed as Exhibit 10.11 to the registrant's Form 10-K Annual
Report for fiscal year ended November 30, 1996 and incorporated herein
by reference).
10.12 * The registrant's Deferred Compensation Plan.
10.13 * A description of the registrant's Cash Bonus Program.
10.14 Old MK's Stock Compensation Plan, as amended (filed as Appendix I to Old
MK's Proxy Statement dated April 4, 1994 and incorporated herein by
reference).
10.15 The registrant's Long-Term Incentive Plan for Corporate Executives
(filed as Exhibit 10.3 to Old MK's Form 10-Q Quarterly Report for
quarter ended March 31, 1994 and incorporated herein by reference.)
10.16 The registrant's Long-Term Incentive Plan for the Mining Group (filed as
Exhibit 10.50 to Old MK's Form 10-K Annual Report for year ended
December 31, 1995 and incorporated herein by reference.)
10.17 The registrant's Key Executive Disability Insurance Plan (filed as
Exhibit 10.12 to Old MK's Form 10-K Annual Report for year ended
December 31, 1992 and incorporated herein by reference.)
10.18 The registrant's Key Executive Life Insurance Plan (filed as Exhibit
10.13 to Old MK's Form 10-K Annual Report for year ended December 31,
1992 and incorporated herein by reference).
10.19 * Form of registrant's Indemnification Agreement (filed as Exhibit 10.20
to the registrant's Form 10-K Annual Report for fiscal year ended
November 30, 1996 and incorporated herein by reference). [A schedule
listing the individuals with whom the registrant has entered into such
agreements is filed herewith]
10.20 The registrant's employment agreement with Robert A. Tinstman dated as
of January 1, 1993, and Amendment thereto dated April 22, 1996 (filed as
Exhibit 10.21 to the registrant's Form 10-K Annual Report for fiscal
year ended November 30, 1996 and incorporated herein by reference).
10.21 The registrant's Nonqualified Stock Option Agreement with Robert A.
Tinstman dated as of January 10, 1997 (filed as Exhibit 10.22 to the
registrant's Form 10-K Annual Report for fiscal year ended November 30,
1996 and incorporated herein by reference).
10.22 * The registrant's Nonqualified Stock Option Agreement with Robert A.
Tinstman dated as of January 14, 1998.
10.23 The registrant's Supplemental Retirement Benefit Agreement with Robert
A. Tinstman dated as of August 3, 1990 (filed as Exhibit 10.23 to the
registrant's Form 10-K Annual Report for fiscal year ended November 30,
1996 and incorporated herein by reference).
10.24 The registrant's employment agreement with Stephen G. Hanks dated as of
January 1, 1993 and Amendments thereto dated as of August 9, 1993 and
April 22, 1996 (filed as Exhibit 10.24 to the registrant's Form 10-K
Annual Report for fiscal year ended November 30, 1996 and incorporated
herein by reference).
10.25 The registrant's Nonqualified Stock Option Agreement with Stephen G.
Hanks dated as of January 10, 1997 (filed as Exhibit 10.25 to the
registrant's Form 10-K Annual Report for fiscal year ended November 30,
1996 and incorporated herein by reference).
10.26 * The registrant's Nonqualified Stock Option Agreement with Stephen G.
Hanks dated as of January 14, 1998.
10.27 The registrant's employment agreement with Thomas H. Zarges dated as of
January 1, 1994 (filed as Exhibit 10.26 to the registrant's Form 10-K
Annual Report for fiscal year ended November 30, 1996 and incorporated
herein by reference).
10.28 The registrant's Nonqualified Stock Option Agreement with Thomas H.
Zarges dated as of January 10, 1997 (filed as Exhibit 10.27 to the
registrant's Form 10-K Annual Report for fiscal year ended November 30,
1996 and incorporated herein by reference).
10.29 * The registrant's Nonqualified Stock Option Agreement with Thomas H.
Zarges dated as of January 14, 1998.
10.30 The registrant's employment agreement with Douglas L. Brigham dated as
of April 26, 1996 (filed as Exhibit 10.28 to the registrant's Form 10-K
Annual Report for fiscal year ended November 30, 1996 and incorporated
herein by reference).
10.31 The registrant's employment agreement with Alvia L. Henderson dated as
of April 26, 1996 (filed as Exhibit 10.29 to the registrant's Form 10-K
Annual Report for fiscal year ended November 30, 1996 and incorporated
herein by reference).
10.32 The registrant's employment agreement with C. Stephen Allred dated as of
April 26, 1996 (filed as Exhibit 10.2 to the registrant's Form 10-Q
Quarterly Report for quarter ended May 31, 1997 and incorporated herein
by reference).
10.33 The registrant's employment agreement with Steven Y. Chi dated as of
April 26, 1996 (filed as Exhibit 10.3 to the registrant's Form 10-Q
Quarterly Report for quarter ended May 31, 1997 and incorporated herein
by reference).
10.34 The registrant's employment agreement with A. S. Cleberg dated as of
April 11, 1997 (filed as Exhibit 10.1 to the registrant's Form 10-Q
Quarterly Report for quarter ended May 31, 1997 and incorporated herein
by reference).
21. * Subsidiaries of the registrant.
23.1 * Consent of Coopers & Lybrand L.L.P.
23.2 * Consent of KPMG Peat Marwick LLP.
24. * Powers of Attorney.
27. * Financial Data Schedule.