Urs (URS) 10-Q 2002 Q0 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the quarterly period ended January 31, 2002

OR

[   ]  TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the Transition Period from __________________ to __________________

Commission file number 1-7567

URS CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	94-1381538
(State or other jurisdiction Identification No.)	(I.R.S. Employer of incorporation)

100 California Street, Suite 500
San Francisco, California
(Address of principal executive offices)  
94111-4529
(Zip Code)

(415) 774-2700
(Registrant’s telephone number, including area code)

     Indicate by check mark whether the registrant (1) 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 (2) has been subject to such filing requirements for the past 90 days.

Yes [X]   No [   ]

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class	Outstanding at March 1, 2002
Common Stock, $.01 par value		18,726,221

TABLE OF CONTENTS

PART I FINANCIAL INFORMATION
	ITEM 1. FINANCIAL STATEMENTS
		CONSOLIDATED BALANCE SHEETS
		CONSOLIDATED STATEMENTS OF OPERATIONS
		CONSOLIDATED STATEMENTS OF CASH FLOWS
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND                      RESULTS OF OPERATIONS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PART II OTHER INFORMATION
	ITEM 1. LEGAL PROCEEDINGS
	ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
	ITEM 3. DEFAULTS UPON SENIOR SECURITES
	ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
	ITEM 5. OTHER INFORMATION
	ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES

URS CORPORATION AND SUBSIDIARIES

     This Form 10-Q for the quarter ended January 31, 2002, contains forward-looking statements, including statements about the continued strength of our business and opportunities for future growth. We believe that our expectations are reasonable and are based on reasonable assumptions. However, such forward-looking statements by their nature involve risks and uncertainties. We caution that a variety of factors, including but not limited to the following, could cause our business and financial results to differ materially from those expressed or implied in forward-looking statements: our highly leveraged position; our ability to service our debt; our ability to pursue business strategies; our continued dependence on federal, state and local appropriations for infrastructure spending; pricing pressures; changes in the regulatory environment; outcomes of pending and future litigation; our ability to attract and retain qualified professionals; industry competition; changes in international trade, monetary and fiscal policies; our ability to integrate future acquisitions successfully; our ability to successfully integrate our accounting and management information systems; and other factors discussed more fully in the attached Management’s Discussion and Analysis of Financial Condition and Results of Operations, as well as in our Annual Report on Form 10-K for the year ended October 31, 2001, and other reports subsequently filed from time to time with the Securities and Exchange Commission. We assume no obligation to update any forward-looking statements.

PART I.	FINANCIAL INFORMATION:
Item 1.	Financial Statements
	Consolidated Balance Sheets January 31, 2002 and October 31, 2001	3
	Consolidated Statements of Operations Three months ended January 31, 2002 and 2001	4
	Consolidated Statements of Cash Flows Three months ended January 31, 2002 and 2001	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25
PART II.	OTHER INFORMATION:
Item 1.	Legal Proceedings	26
Item 2.	Changes in Securities and Use of Proceeds	26
Item 3.	Defaults Upon Senior Securities	26
Item 4.	Submission of Matters to a Vote of Security Holders	26
Item 5.	Other Information	26
Item 6.	Exhibits and Reports on Form 8-K	26

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PART I
FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

URS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)

			January 31, 2002			October 31, 2001
			(unaudited)
ASSETS
Current assets:
	Cash and cash equivalents		$	21,567		$	23,398
	Accounts receivable			485,263			484,107
	Costs and accrued earnings in excess of billings on contracts in process			264,084			289,644
	Less receivable allowances			(29,870	)		(28,572	)
		Net accounts receivable		719,477			745,179
	Deferred income taxes			9,996			10,296
	Prepaid expenses and other assets			23,214			24,769
		Total current assets		774,254			803,642
Property and equipment, net				128,805			106,997
Goodwill, net				500,440			500,286
Other assets				43,171			52,451
			$	1,446,670		$	1,463,376
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Current portion of long-term debt		$	58,620		$	54,425
	Accounts payable			115,436			135,066
	Accrued salaries and wages			54,974			69,982
	Accrued expenses and other			24,543			21,232
	Billings in excess of costs and accrued earnings on contracts in process			93,824			95,520
		Total current liabilities		347,397			376,225
Long-term debt				570,548			576,704
Deferred income taxes				35,576			34,700
Deferred compensation and other				33,001			33,146
		Total liabilities		986,522			1,020,775
Commitments and contingencies (Note 4)
Mandatorily redeemable Series B exchangeable convertible preferred stock, par value $1.00; authorized 150 shares; issued 56 and 55, respectively; liquidation preference $122,501 and $120,099, respectively				122,501			120,099
Stockholders’ equity:
	Common shares, par value $.01; authorized 50,000 shares; issued 18,560 and 18,198 shares, respectively			185			182
	Treasury stock			(287	)		(287	)
	Additional paid-in capital			162,521			155,273
	Other comprehensive loss			(6,940	)		(3,962	)
	Retained earnings			182,168			171,296
		Total stockholders’ equity		337,647			322,502
			$	1,446,670		$	1,463,376

See Notes to Consolidated Financial Statements

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URS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)

		Three months ended
		January 31,
		2002			2001
		(unaudited)
Revenues		$	542,998		$	515,624
Expenses:
	Direct operating		330,816			305,533
	Indirect, general and administrative		176,846			175,518
	Interest expense, net		12,616			17,618
			520,278			498,669
Income before taxes			22,720			16,955
Income tax expense			9,430			7,500
Net income			13,290			9,455
Preferred stock dividend			2,418			2,214
Net income available for common stockholders			10,872			7,241
Other comprehensive income (loss), net of tax:
	Foreign currency translation adjustments		(2,978	)		121
Comprehensive income		$	7,894		$	7,362
Net income per common share:
	Basic	$	.60		$	.43
	Diluted	$	.52		$	.42
Weighted average shares outstanding:
	Basic		18,264			16,889
	Diluted		25,570			22,673

See Notes to Consolidated Financial Statements

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URS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

				Three Months Ended
				January 31,
				2002			2001
				(unaudited)
Cash flows from operating activities:
	Net income			$	13,290		$	9,455
	Adjustments to reconcile net income to net cash provided (used) by operating activities:
		Depreciation and amortization			7,403			9,919
		Amortization of financing fees			921			898
		Receivable allowances			1,298			(3,308	)
		Stock compensation			518			365
	Effect of changes in current assets and liabilities:
		Accounts receivable and costs and accrued earnings in excess of billings on contracts in process			24,404			8,106
		Income taxes recoverable			—			8,071
		Prepaid expenses and other assets			793			(6,666	)
		Accounts payable, accrued salaries and wages and accrued expenses			(31,343	)		(44,153	)
		Billings in excess of costs and accrued earnings on contracts in process			(1,696	)		6,448
		Deferred income taxes			1,176			(582	)
		Deferred compensation and other			(145	)		(173	)
		Other, net			6,148			(1,814	)
			Total adjustments		9,477			(22,889	)
	Net cash provided (used) by operating activities				22,767			(13,434	)
Cash flows from investing activities:
	Capital expenditures, less equipment purchased through capital leases of $11,542 and $3,386, respectively				(17,669	)		(2,297	)
	Net cash used by investing activities				(17,669	)		(2,297	)
Cash flows from financing activities:
	Principal payments on long-term debt				(9,209	)		—
	Borrowings under the line of credit				9,880			5,000
	Repayments on the line of credit				(9,880	)		—
	Repayments on capital lease obligations				(3,384	)		(2,180	)
	Borrowings under short-term notes				—			75
	Repayments on short-term notes				(1,069	)		(2,129	)
	Proceeds from sale of common shares through Employee Stock Purchase Plan and exercise of stock options				6,733			641
	Net cash (used) provided by financing activities				(6,929	)		1,407
Net decrease in cash					(1,831	)		(14,324	)
Cash and cash equivalents at beginning of period					23,398			23,693
Cash and cash equivalents at end of period				$	21,567		$	9,369
Supplemental Information:
	Interest paid			$	6,124		$	22,978
	Taxes paid			$	8,405		$	3,137
	Equipment acquired subject to capital lease obligations			$	11,542		$	3,386
	Non-cash dividends paid in-kind			$	2,402		$	1,581

See Notes to Consolidated Financial Statements

5

URS CORPORATION AND SUBSIDIARIES

NOTE 1. Accounting Policies

OVERVIEW

     In the opinion of management, the information furnished reflects all adjustments, consisting only of normal recurring adjustments, which are necessary for the fair statement of the interim financial information.

     Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted. These condensed financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2001. The results of operations for the three months ended January 31, 2002 are not necessarily indicative of the operating results for the full year.

Income Per Common Share

     Basic income per common share is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted income per common share is computed giving effect to all dilutive potential common shares that were outstanding during the period. Dilutive potential shares of common stock consist of the incremental shares of common stock issuable upon the exercise of stock options and conversion of preferred stock. Diluted income per share is computed by dividing net income available to common stockholders plus the preferred stock dividend by the weighted-average common shares and dilutive potential common shares that were outstanding during the period.

     In accordance with the disclosure requirement of Statement of Financial Accounting Standards No. 128 (“SFAS 128”), “Earnings per Share,” a reconciliation of the numerator and denominator of basic and diluted income per common share is provided as follows:

		Three months ended
		January 31
		2002		2001
		(In thousands, except
		per share date)
Numerator—Basic
	Net income available for common stockholders	$	10,872	$	7,241
Denominator—Basic
	Weighted-average common stock outstanding		18,264		16,889
	Basic income per share	$	.60	$	.43
Numerator—Diluted
	Net income available for common stockholders	$	10,872	$	7,241
	Preferred stock dividend		2,418		2,214
Net income		$	13,290	$	9,455
Denominator—Diluted
	Weighted-average common stock outstanding		18,264		16,889
Effect of dilutive securities:
	Stock options		1,732		638
	Convertible preferred stock		5,574		5,146
			25,570		22,673
Diluted income per share		$	.52	$	.42

Derivative Financial Instruments

     The Company is exposed to risk of changes in interest rates as a result of borrowings under the senior collateralized credit facility. The Company has entered into interest rate derivatives to protect against the risk. At January 31, 2002, the only derivative instrument held by the Company was an interest rate cap agreement relating to $199.3 million of the Company’s LIBOR bank term loan borrowings. From an economic standpoint, the cap agreement provides the Company with protection against LIBOR interest rate increases above 7%. For accounting purposes, the Company has elected not to designate the cap agreement as a hedge, and in accordance with Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” which the Company adopted on

6

November 1, 2000, changes in the fair market value of the cap agreement are included in indirect, general and administrative expenses in the Consolidated Statements of Operations. The value of the interest rate cap agreement at January 31, 2002 was zero.

Adoption of Statements of Financial Accounting Standards

     In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets.” SFAS 142 supercedes Accounting Principles Board Opinion No. 17 and addresses the financial accounting and reporting standards for goodwill and intangible assets subsequent to their initial recognition. SFAS 142 requires that goodwill be separately disclosed from other intangible assets in the statement of financial position, and no longer be amortized. It also requires that goodwill and other intangible assets be tested for impairment at least annually. The provisions of SFAS 142 are effective for fiscal years beginning after December 15, 2001 and must be applied to all goodwill and other intangible assets that are recognized in an entity’s balance sheet at the beginning of that fiscal year. Early application of SFAS 142 is permitted for entities with fiscal years beginning after March 15, 2001, provided that the first interim period financial statements have not been issued previously. SFAS 142 primarily addresses the accounting for goodwill and intangible assets subsequent to their acquisition. The Company adopted SFAS 142 on November 1, 2001 and ceased to amortize goodwill on that date.

     As part of the adoption of SFAS 142, the Company completed the initial impairment tests during the first quarter of fiscal year 2002, and these tests resulted in no impairment. The adoption of SFAS 142 removed certain differences between book and tax income; therefore, the Company’s estimated fiscal year 2002 effective tax rate has been reduced to approximately 41.5%. If amortization expense related to goodwill that is no longer amortized had been excluded from operating expenses for the quarter ended January 31, 2001, and if the effective tax rate had been 44.5%, diluted earnings per share for the three months ended January 31, 2001 would have increased by $0.09.

     The Company regularly evaluates whether events and circumstances have occurred that indicate a possible impairment of goodwill. In determining whether there is an impairment of goodwill, the Company calculates its estimated fair value using the closing sales price of its common stock as of the date it performs the impairment tests. The Company has two reporting units - domestic and international. A portion of the total fair value is allocated to the international reporting unit based on discounted cash flows. The resulting fair values by reporting unit are then compared to their respective net book values, including goodwill. If the net book value of a reporting unit exceeds its fair value, the Company would measure the amount of impairment loss by comparing the implied fair value of the reporting unit's goodwill with the carrying amount of that goodwill. To the extent that the carrying amount of the reporting unit's goodwill exceeds its implied fair value, a goodwill impairment loss would be recognized. This impairment test will be performed annually and whenever facts and circumstances indicate that there is a possible impairment of goodwill. The Company believes the methodology it uses in testing impairment of goodwill provides a reasonable basis in determining whether an impairment charge should be taken.

     The Company has recorded goodwill in the domestic segment, which includes the parent company. The changes in the carrying amount of goodwill as of October 31, 2001 and January 31, 2002 were as follows:

					Accumulated			Net
		Goodwill			Amortization			Goodwill
					(In thousands)
Balance at October 31, 2000		$	553,806		$	(39,195	)	$	514,611
	Contingent purchase price related to prior acquisitions		1,436			—			1,436
	Goodwill amortization		—			(15,617	)		(15,617	)
	Goodwill written off due to sale of subsidiary		(152	)		8			(144	)
Balance at October 31, 2001			555,090			(54,804	)		500,286
	Contingent purchase price related to prior acquisitions		154			—			154
Balance at January 31, 2002		$	555,244		$	(54,804	)	$	500,440

7

     The following table reflects the adjusted net income and net income per share as if SFAS 142 had been effective as of November 1, 2000:

		Three months ended
		January 31
		2002		2001
		(In thousands, except
		per share data)
Net Income
	Reported net income	$	13,290	$	9,455
	Add: goodwill amortization, net of tax		—		2,162
	Adjusted net income	$	13,290	$	11,617
Basic income per share
	Reported net income	$	.60	$	.43
	Goodwill amortization		—		.13
	Adjusted net income	$	.60	$	.56
Diluted income per share
	Reported net income	$	.52	$	.42
	Goodwill amortization		—		.09
	Adjusted net income	$	.52	$	.51

     In October 2001, FASB issued Statement of Financial Accounting Standards No. 144 (“SFAS 144”), “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS 144 supersedes SFAS 121, and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, “Reporting the Results of Operations – Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions”, for the disposal of a segment of a business (as previously defined in that Opinion). SFAS 144 establishes a single accounting model, based on the framework established in SFAS 121, for long-lived assets to be disposed of by sale and to resolve significant implementation issues related to SFAS 121. The Company intends to adopt SFAS 144 on November 1, 2002. SFAS 144 is not expected to significantly impact the assessment of impairment of long-lived assets by the Company, other than the fact that SFAS 144 removes goodwill from its scope and, therefore, eliminates the requirement of SFAS 121 to allocate goodwill to long-lived assets to be tested for impairment. As indicated above, assessment of impairment of goodwill is required in accordance with the provisions of SFAS 142, which the Company adopted on November 1, 2001.

Reclassifications

     Certain reclassifications have been made to the 2001 financial statements to conform to the 2002 presentation with no effect on consolidated net income, equity or cash flows as previously reported.

NOTE 2. PROPERTY AND EQUIPMENT

     Property and equipment consists of the following:

		January 31,			October 31,
		2002			2001
		(In thousands)
Equipment		$	96,298		$	87,245
Capital leases			61,280			49,695
Furniture and fixtures			25,768			25,375
Leasehold improvements			20,877			20,248
Construction in progress			18,929			11,752
			223,152			194,315
Less: accumulated depreciation and amortization			(94,347	)		(87,318	)
	Net property and equipment	$	128,805		$	106,997

     The Company capitalizes certain costs incurred in the development of software for internal use, including external direct material costs, external service costs, payroll and employee-related costs and interest costs incurred during the period of development.

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NOTE 3. DEBT COVENANTS

     The senior collateralized credit facility is governed by affirmative and negative covenants. These covenants include restrictions on incurring additional debt; paying dividends or making distributions to the Company’s stockholders; making certain investments, including joint ventures; creating contingent obligations; incurring liability in a sales-leaseback transaction; incurring or assuming liens; exceeding limits on consolidated capital expenditures; repurchasing or retiring capital stock; making subordinated junior debt payments; and violating specified financial covenants. The financial covenants include maintenance of a minimum current ratio of 1.20 to 1.00, a minimum fixed charge coverage ratio of 1.10 to 1.00, an EBITDA minimum of $185.0 million and a maximum leverage ratio of 3.25 to 1.00 for the period ended January 31, 2002. Violation of any of the covenants could trigger default. The Company is required to submit quarterly compliance certification to the bank. As of January 31, 2002, the Company is fully compliant with these covenants.

NOTE 4. COMMITMENTS AND CONTINGENCIES

     Currently, the Company has limits of $125.0 million per loss and $125.0 million in the annual aggregate for general liability, professional errors and omissions liability, and contractor’s pollution liability insurance. These programs each have a self-insured claim retention of $0.1 million, $1.0 million and $0.25 million, respectively. With respect to various claims of Dames and Moore Group (“D-M”), an engineering and construction services firm acquired in June 1999, that arose from professional errors and omissions prior to the acquisition, the Company has maintained a self-insured retention of $5.0 million per claim. Excess limits provided for these coverages are on a “claims made” basis, covering only claims actually made during the policy period currently in effect. Thus, if the Company does not continue to maintain these excess policies, it will have no coverage for claims made after its termination date even if the occurrence was during the term of coverage. The Company intends to maintain these policies, but there can be no assurance that the Company can maintain existing coverages or that claims will not exceed the available amount of insurance. The Company believes that any settlement of these claims will not have a material adverse effect on its consolidated financial position and operations.

     On January 18, 2002, the Attorney General of the State of Michigan filed a civil action against Radian International, L.L.C. (“Radian”), a subsidiary of the Company, entitledJennifer M. Granholm, Attorney General of the State of Michigan, and the Michigan Department of Environmental Quality v. Radian, L.L.C.,(Ingham County Michigan Circuit Court). The complaint alleges violations by Radian of the Michigan Hazardous Waste Management Act and the Michigan Air Pollution Control Act and related regulations. The claimed violations arose out of an environmental remediation project undertaken by Radian in 1997 and 1998 (prior to the Company’s acquisition of Radian as part of the Dames and Moore acquisition in 1999) at the Midland, Michigan facility of Dow Chemical Co. during which minor amounts of pollutants may have been released into the air during maintenance of a hazardous waste incinerator. The complaint seeks payment of civil penalties, costs, attorney’s fees and other relief against Radian. The Michigan Attorney General’s office has offered to settle the matter for $1.2 million.

     Various other legal proceedings are pending against the Company or its subsidiaries alleging, among other things, breaches of contract or negligence in connection with the performance of professional services. In some actions, parties are seeking damages, including punitive or treble damages that substantially exceed the Company’s insurance coverage. Based on the Company’s previous experience with claims settlement and the nature of the pending legal proceedings, the Company does not believe that any of the legal proceedings are likely to result in a judgment against, or settlement by the Company, that would materially exceed its insurance coverage or have a material adverse effect on its consolidated financial position or operations.

NOTE 5. SEGMENT AND RELATED INFORMATION

     Management has organized the Company by geographic divisions. The divisions are Parent, Domestic and International. The Parent division comprises the Parent Company. The Domestic division comprises all offices located in the United States of America. The International division comprises all offices in the Americas (e.g., Canada, Mexico, Central and South America), in Europe and in Asia/Pacific (e.g., Australia, Indonesia, Singapore, New Zealand and the Philippines).

     Accounting policies for each of the reportable segments are the same as those of the Company. The Company provides services throughout the world. Services to other countries may be performed within the United States of America, and generally, revenues are classified within the geographic area where the services are performed.

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     The following table shows summarized financial information (in thousands) on the Company’s reportable segments. Included in the “Eliminations” column are elimination of inter-segment sales and elimination of investment in subsidiaries.

As of January 31, 2002:	Parent			Domestic		International		Eliminations			Total
Total accounts receivable	$	—		$	643,293	$	76,184	$	—		$	719,477
Total assets	$	661,705		$	1,593,526	$	114,205	$	(922,766	)	$	1,446,670
As of October 31, 2001:	Parent			Domestic		International		Eliminations			Total
Total accounts receivable	$	—		$	667,009	$	78,170	$	—		$	745,179
Total assets	$	665,015		$	1,574,865	$	116,995	$	(893,499	)	$	1,463,376
For the Three Months Ended
January 31, 2002:	Parent			Domestic		International		Eliminations			Total
Revenue	$	—		$	495,040	$	50,035	$	(2,077	)	$	542,998
Segment operating income (loss)	$	(5,984	)	$	41,094	$	226	$	—		$	35,336
For the Three Months Ended
January 31, 2001:	Parent			Domestic		International		Eliminations			Total
Revenue	$	—		$	466,430	$	50,556	$	(1,362	)	$	515,624
Segment operating income (loss)	$	(4,572	)	$	37,712	$	1,433	$	—		$	34,573

     Operating income is defined as income before income taxes and net interest expense.

NOTE 6. SUPPLEMENTAL GUARANTOR INFORMATION

     In June 1999, the Company completed a private placement of $200.0 million principal amount of its 12 1/4% Senior Subordinated Exchange Notes due in the year 2009, which were exchanged in August 1999 for 12 1/4% Senior Subordinated Notes (the “Notes”) due in the year 2009. The Notes are fully and unconditionally guaranteed on a joint and several basis by certain of the Company’s wholly owned subsidiaries. Substantially all of the Company’s income and cash flow is generated by its subsidiaries. The Company has no operating assets or operations other than its investments in its subsidiaries. As a result, funds necessary to meet the Company’s debt service obligations are provided mainly by distributions or advances from its subsidiaries. Under certain circumstances, contractual and legal restrictions, as well as the financial condition and operating requirements of the Company’s subsidiaries, could limit the Company’s ability to obtain cash from its subsidiaries for the purpose of meeting its debt service obligations, including the payment of principal and interest on the Notes.

     The following information sets forth the condensed consolidating balance sheets of the Company as of January 31, 2002 and October 31, 2001, the condensed consolidating statements of operations for the three months ended January 31, 2002 and 2001, and the condensed consolidating statements of cash flows for the three months ended January 31, 2002 and 2001. Entries necessary to consolidate the Company and all of its subsidiaries are reflected in the eliminations column. Separate complete financial statements of the Company and its subsidiaries that guarantee the Notes would not provide additional material information that would be useful in assessing the financial composition of such subsidiaries.

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URS CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEET
(In thousands)
(Unaudited)

			January 31, 2002
									Subsidiary
						Subsidiary			Non-
			Parent			Guarantors			Guarantors		Eliminations			Consolidated
ASSETS
Current assets:
	Cash and cash equivalents		$	279		$	10,961		$	10,327	$	—		$	21,567
	Accounts receivable, net			—			643,293			76,184		—			719,477
	Prepaid expenses and other assets			14,510			16,783			1,917		—			33,210
		Total current assets		14,789			671,037			88,428		—			774,254
Property and equipment, net				1,520			117,464			9,821		—			128,805
Goodwill, net				385,897			114,543			—		—			500,440
Investment in unconsolidated subsidiaries				247,643			659,881			15,242		(922,766	)		—
Other assets				11,856			30,601			714		—			43,171
			$	661,705		$	1,593,526		$	114,205	$	(922,766	)	$	1,446,670
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Current portion of long-term debt		$	42,697		$	13,194		$	2,729	$	—		$	58,620
	Accounts payable			2,709			100,335			12,392		—			115,436
	Inter-company payable			(4,936	)		(42,498	)		48,580		(1,146	)		—
	Accrued expenses and other			1,412			63,922			14,183		—			79,517
	Billings in excess of costs and accrued earnings on contracts in process			—			82,278			11,546		—			93,824
		Total current liabilities		41,882			217,231			89,430		(1,146	)		347,397
Long-term debt				536,010			34,079			459		—			570,548
Other				41,491			26,613			473		—			68,577
		Total liabilities		619,383			277,923			90,362		(1,146	)		986,522
Mandatorily redeemable Series B exchangeable convertible preferred stock				122,501			—			—		—			122,501
Total stockholders’ equity				(80,179	)		1,315,603			23,843		(921,620	)		337,647
			$	661,705		$	1,593,526		$	114,205	$	(922,766	)	$	1,446,670

11

URS CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(In thousands)
(Unaudited)

		Three Months Ended January 31, 2002
							Subsidiary
					Subsidiary		Non-
		Parent			Guarantors		Guarantors			Eliminations			Consolidated
Revenues		$	—		$	495,040	$	50,035		$	(2,077	)	$	542,998
Expenses:
	Direct operating		—			306,666		26,227			(2,077	)		330,816
	Indirect, general and administrative		5,984			147,280		23,582			—			176,846
	Interest expense, net		12,088			409		119			—			12,616
			18,072			454,355		49,928			(2,077	)		520,278
Income (loss) before taxes			(18,072	)		40,685		107			—			22,720
Income tax expense			9,109			56		265			—			9,430
Net income (loss)			(27,181	)		40,629		(158	)		—			13,290
Preferred stock dividend			2,418			—		—			—			2,418
Net income (loss) available for common stockholders			(29,599	)		40,629		(158	)		—			10,872
Other comprehensive income (loss)			—			—		(2,978	)		—			(2,978	)
Comprehensive income (loss)		$	(29,599	)	$	40,629	$	(3,136	)	$	—		$	7,894

12

URS CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)

				Three Months Ended January 31, 2002
										Subsidiary
				��			Subsidiary			Non-
				Parent			Guarantors			Guarantors			Eliminations			Consolidated
Cash flows from operating activities:
	Net income (loss)			$	(27,181	)	$	40,629		$	(158	)	$	—		$	13,290
Adjustments to reconcile net income to net cash provided (used) by operating activities:
	Depreciation and amortization				55			6,661			687			—			7,403
	Amortization of financing fees				921			—			—			—			921
	Receivable allowances				—			(551	)		1,849			—			1,298
	Stock compensation				518			—			—			—			518
Changes in current assets and liabilities:
	Accounts receivable and costs and accrued earnings in excess of billings on contracts in process				—			24,267			137			—			24,404
	Prepaid expenses and other assets				1,043			633			(883	)		—			793
	Accounts payable, accrued salaries and wages and accrued expenses				24,057			(56,140	)		(2,393	)		3,133			(31,343	)
	Billings in excess of costs and accrued earnings on contracts in process				—			(2,133	)		437			—			(1,696	)
	Deferrals and other, net				2,389			7,962			(39	)		(3,133	)		7,179
			Total adjustments		28,983			(19,301	)		(205	)		—			9,477
		Net cash provided (used) by operating activities			1,802			21,328			(363	)		—			22,767
Cash flows from investing activities:
			Capital expenditures		(755	)		(16,390	)		(524	)		—			(17,669	)
	Net cash used by investing activities				(755	)		(16,390	)		(524	)		—			(17,669	)
Cash flows from financing activities:
	Principal payments on long-term debt, bank borrowings and capital lease obligations				(9,200	)		(3,348	)		(1,114	)		—			(13,662	)
	Proceeds from sale of common shares through Employee Stock Purchase Plan and exercise of stock options				6,733			—			—			—			6,733
	Net cash used by financing activities				(2,467	)		(3,348	)		(1,114	)		—			(6,929	)
Net increase (decrease) in cash					(1,420	)		1,590			(2,001	)		—			(1,831	)
Cash and cash equivalents at beginning of period					1,699			9,371			12,328			—			23,398
Cash and cash equivalents at end of period				$	279		$	10,961		$	10,327		$	—		$	21,567

13

URS CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEET
(In thousands)

			October 31, 2001
									Subsidiary
						Subsidiary			Non-
			Parent			Guarantors			Guarantors		Eliminations			Consolidated
ASSETS
Current assets:
	Cash and cash equivalents		$	1,699		$	9,371		$	12,328	$	—		$	23,398
	Accounts receivable, net			—			667,009			78,170		—			745,179
	Prepaid expenses and other assets			16,615			17,416			1,034		—			35,065
		Total current assets		18,314			693,796			91,532		—			803,642
Property and equipment, net				820			96,193			9,984		—			106,997
Goodwill, net				385,749			114,537			—		—			500,286
Investment in unconsolidated subsidiaries				247,643			631,103			14,753		(893,499	)		—
Other assets				12,489			39,236			726		—			52,451
			$	665,015		$	1,574,865		$	116,995	$	(893,499	)	$	1,463,376
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Current portion of long-term debt		$	39,794		$	10,803		$	3,828	$	—		$	54,425
	Accounts payable			1,012			120,414			13,640		—			135,066
	Inter-company payable			(32,720	)		(13,341	)		47,130		(1,069	)		—
	Accrued expenses and other			6,672			68,945			15,597		—			91,214
	Billings in excess of costs and accrued earnings on contracts in process			—			84,411			11,109		—			95,520
		Total current liabilities		14,758			271,232			91,304		(1,069	)		376,225
Long-term debt				547,954			28,276			474		—			576,704
Other				40,035			27,286			525		—			67,846
		Total liabilities		602,747			326,794			92,303		(1,069	)		1,020,775
Mandatorily redeemable Series B exchangeable convertible preferred stock				120,099			—			—		—			120,099
Total stockholders’ equity				(57,831	)		1,248,071			24,692		(892,430	)		322,502
			$	665,015		$	1,574,865		$	116,995	$	(893,499	)	$	1,463,376

14

URS CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(In thousands)
(Unaudited)

		Three Months Ended January 31, 2001
							Subsidiary
					Subsidiary		Non-
		Parent			Guarantors		Guarantors		Eliminations			Consolidated
Revenues		$	—		$	466,430	$	50,556	$	(1,362	)	$	515,624
Expenses:
	Direct operating		—			276,826		30,069		(1,362	)		305,533
	Indirect, general and administrative		4,572			151,892		19,054		—			175,518
	Interest expense, net		17,131			258		229		—			17,618
			21,703			428,976		49,352		(1,362	)		498,669
Income (loss) before taxes			(21,703	)		37,454		1,204		—			16,955
Income tax expense			7,291			131		78		—			7,500
Net income (loss)			(28,994	)		37,323		1,126		—			9,455
Preferred stock dividend			2,214			—		—		—			2,214
Net income (loss) available for common stockholders			(31,208	)		37,323		1,126		—			7,241
Other comprehensive income (loss)			—			—		121		—			121
Comprehensive income (loss)		$	(31,208	)	$	37,323	$	1,247	$	—		$	7,362

15

URS CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)

					Three Months Ended January 31, 2001
											Subsidiary
								Subsidiary			Non-
					Parent			Guarantors			Guarantors			Eliminations			Consolidated
Cash flows from operating activities:
	Net income (loss)				$	(28,994	)	$	37,323		$	1,126		$	—		$	9,455
Adjustments to reconcile net income to net cash provided (used) by operating activities:
		Depreciation and amortization				2,616			6,597			706			—			9,919
		Amortization of financing fees				898			—			—			—			898
		Receivable allowances				—			(3,579	)		271			—			(3,308	)
		Stock compensation				365			—			—			—			365
Changes in current assets and liabilities:
		Accounts receivable and costs and accrued earnings in excess of billings on contracts in process				—			16,862			(8,756	)		—			8,106
		Prepaid expenses and other assets				6,575			(4,468	)		(702	)		—			1,405
		Accounts payable, accrued salaries and wages and accrued expenses				(17,388	)		(27,183	)		4,747			(4,329	)		(44,153	)
		Billings in excess of costs and accrued earnings on contracts in process				—			6,241			207			—			6,448
		Deferrals and other, net				10,108			(17,816	)		810			4,329			(2,569	)
				Total adjustments		3,174			(23,346	)		(2,717	)		—			(22,889	)
			Net cash (used) provided by operating activities			(25,820	)		13,977			(1,591	)		—			(13,434	)
Cash flows from investing activities:
				Capital expenditures		(166	)		(1,585	)		(546	)		—			(2,297	)
		Net cash used by investing activities				(166	)		(1,585	)		(546	)		—			(2,297	)
Cash flows from financing activities:
		Principal payments on long-term debt, bank borrowings, and capital lease obligations				5,000			(2,497	)		(1,737	)		—			766
		Proceeds from sale of common shares through Employee Stock Purchase Plan and exercise of stock options				641			—			—			—			641
		Net cash provided (used) by financing activities				5,641			(2,497	)		(1,737	)		—			1,407
Net increase (decrease) in cash						(20,345	)		9,895			(3,874	)		—			(14,324	)
Cash and cash equivalents at beginning of period						10,901			(5,820	)		18,612			—			23,693
Cash and cash equivalents at end of period					$	(9,444	)	$	4,075		$	14,738		$	—		$	9,369

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ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     We report the results of our operations on a fiscal year, which ends on October 31. This Management’s Discussion and Analysis (“MD&A”) should be read in conjunction with the MD&A and the footnotes to the Consolidated Financial Statements included in the Annual Report on Form 10-K for the fiscal year ended October 31, 2001, which was previously filed with the Securities and Exchange Commission.

CRITICAL ACCOUNTING POLICIES

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements and related footnotes. In preparing these financial statements, management has made its best estimates and judgments of certain amounts included in the financial statements, giving consideration to materiality. We do not believe there is a great likelihood that materially different amounts would be reported related to the accounting policies described below. However, application of these accounting policies involves exercise of judgment and use of assumptions as to future uncertainties; as a result, actual results could differ from these estimates.

     In accordance with recent Securities and Exchange Commission guidance, those material accounting policies that we believe are the most critical to an investor’s understanding of our financial results and condition and require complex management judgment have been expanded and are discussed below. Information regarding our other accounting policies is included in our Annual Report on Form 10-K for the year ended October 31, 2001.

Revenue Recognition

     We earn our revenues from cost-plus, fixed-price and time-and-materials contracts. Currently, approximately one-third of our revenues is recognized under each of the contract types. We currently have approximately 4,000 active jobs, none of which represents more than 1% of our total revenues for the quarter. If estimated total costs on any contract indicate a loss, the entire estimated loss is charged to operations in the period the loss first becomes known.

     Cost-Plus Contracts. Under cost-plus contracts, we charge clients negotiated rates based on direct and indirect costs. Labor costs and subcontractor services are the principal components of our direct costs. Federal Acquisition Regulations, which are applicable to all Federal government contracts and which are partially incorporated in many local and state agency contracts, limit the recovery of certain specified indirect costs on contracts subject to such regulations. In negotiating a cost-plus contract, we estimate all recoverable direct and indirect costs and then add a profit component, which is either a percentage of total recoverable costs or a fixed negotiated fee, to arrive at a total dollar estimate for the project. We receive payment and recognize revenues based on the total actual number of labor hours expended and total costs incurred. If the total actual number of labor hours is lower than estimated, the revenues from that project will be lower than estimated. If the actual labor hours expended exceed the initial negotiated amount, we must obtain a contract modification to receive payment for such overage. Cost-plus contracts covered by Federal Acquisition Regulations and certain state and local agencies require an audit of actual costs and provide for upward or downward adjustments if actual recoverable costs differ from billed recoverable costs.

     Fixed-Price Contracts.Under our fixed-price contracts, clients pay us an agreed sum negotiated in advance for the specified scope of work. Under fixed-price contracts, we make no revenue adjustments if we over-estimate or under-estimate the costs required to complete the project, unless there is a change of scope in the work to be performed. Accordingly, our profit margin will increase to the extent that costs are below the contracted amounts. The profit margin will decrease and we may realize a loss on the project if the costs exceed the estimates. Revenues on fixed-price contracts are recognized using the percentage-of-completion method and include a proportion of the earnings expected to be realized on a contract in the ratio that costs incurred bear to total estimated costs. The percentage-of -completion is calculated on a contract by contract basis to arrive at the total estimated revenues recognized under fixed-price contracts.

     Time-and-Materials Contracts.Under our time-and-materials contracts, we negotiate hourly billing rates and charge our clients based on actual time expended. In addition, clients reimburse us for the actual out-of-pocket costs of materials and other direct incidental expenditures incurred in connection with performing the contract. Our profit margins on time-and-materials contracts fluctuate based on actual labor and overhead costs directly charged or allocated to contracts compared with negotiated billing rates. Revenues under these contracts are recognized based on the actual

17

number of hours we spend on the projects plus any actual out-of-pocket costs of materials and other direct incidental expenditures incurred on the projects.

Goodwill

     In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets.” SFAS 142 supercedes Accounting Principles Board Opinion No. 17 and addresses the financial accounting and reporting standards for goodwill and intangible assets subsequent to their initial recognition. SFAS 142 requires that goodwill be separately disclosed from other intangible assets in the statement of financial position, and no longer be amortized. It also requires that goodwill and other intangible assets be tested for impairment at least annually. The provisions of SFAS 142 are effective for fiscal years beginning after December 15, 2001 and must be applied to all goodwill and other intangible assets that are recognized in an entity’s balance sheet at the beginning of that fiscal year. Early application of SFAS 142 is permitted for entities with fiscal years beginning after March 15, 2001, provided that the first interim period financial statements have not been issued previously. SFAS 142 primarily addresses the accounting for goodwill and intangible assets subsequent to their acquisition. We adopted SFAS 142 on November 1, 2001 and ceased to amortize goodwill on that date.

     As part of our adoption of SFAS 142, we completed the initial impairment tests during the first quarter of fiscal year 2002, and these tests resulted in no impairment. The adoption of SFAS 142 removed certain differences between book and tax income; therefore, our estimated fiscal year 2002 effective tax rate has been reduced to approximately 41.5%. If amortization expense related to goodwill that is no longer amortized had been excluded from the quarter ended January 31, 2001 operating expenses and if the effective tax rate had been 44.5%, diluted earnings per share for the three months ended January 31, 2001 would have increased by $0.09.

     We regularly evaluate whether events and circumstances have occurred that indicate a possible impairment on goodwill. In determining whether there is an impairment of goodwill, we calculate the estimated fair value of the Company using the closing sales price of our common stock as of the date we perform the impairment tests. We have two reporting units – domestic and international. A portion of the total fair value is allocated to the international reporting unit based on discounted cash flows. The resulting fair values by reporting unit are then compared to their respective net book values, including goodwill. If the net book value of a reporting unit exceeds its fair value, we would measure the amount of the impairment loss by comparing the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. To the extent that the carrying amount of the reporting unit’s goodwill exceeds its implied fair value, a goodwill impairment loss would be recognized. This impairment test will be performed annually and whenever facts and circumstances indicate that there is a possible impairment on goodwill. We believe the methodology we use in testing impairment of goodwill provides us a reasonable basis in determining whether an impairment charge should be taken.

Allowance for Uncollectible Accounts Receivable

     Our accounts receivable and accrued earnings in excess of billings on contracts in process are reduced by an allowance for amounts that may become uncollectible in the future. The estimated allowance for uncollectible amounts is based primarily on management’s evaluation of the financial condition of our clients. Management regularly evaluates the adequacy of the allowance for uncollectible amounts by taking into consideration factors such as the type of customer — governmental agencies or private sector client; trends in actual and forecasted credit quality, including delinquency and late payment history; and current economic conditions that may affect a client’s ability to pay. The use of different estimates or assumptions could produce different provisions for uncollectible accounts receivable.

18

RESULTS OF OPERATIONS

First quarter ended January 31, 2002 vs. January 31, 2001

     Consolidated

     Our revenues were $543.0 million for the quarter ended January 31, 2002, an increase of $27.4 million, or 5.3%, over the amount reported for the same period last year. The increase is due to increased demand for our services.

     Direct operating expenses for the quarter ended January 31, 2002, which consist of direct labor and other direct expenses, including subcontractor costs, increased $25.3 million, an increase of 8.3% over the amount reported for the same period last year, primarily as a result of an increase in the use of subcontractors. Indirect, general and administrative expenses (“IG&A”) for the quarter ended January 31, 2002 increased $1.3 million, or 0.8%, from the amount reported for the same period last year due to an increase in indirect labor, benefits and rental expense, which was partially offset by the decrease in amortization expense of $3.9 million as a result of implementing SFAS 142. Net interest expense for the quarter ended January 31, 2002 decreased $5.0 million due to repayments of our long-term debt and decrease in interest rates.

     Our earnings before income taxes were $22.7 million for the first quarter ended January 31, 2002, compared to $17.0 million for the same period last year. Our effective income tax rates for the quarters ended January 31, 2002 and 2001 were approximately 41.5% and 44%, respectively. The decrease in the effective income tax rate was primarily due to the adoption of SFAS 142, which removed certain differences between book and tax income.

     We reported net income of $13.3 million, or $0.52 per share, on a diluted basis for the first quarter ended January 31, 2002, compared with $9.5 million, or $0.42 per share on a diluted basis, for the same period last year.

     Our backlog of signed and funded contracts was $1,722.9 million at January 31, 2002, as compared with $1,684.1 million at October 31, 2001.

     Domestic Segment Including Parent Company

     Revenues for the domestic segment were $495.0 million for the quarter ended January 31, 2002, an increase of $28.6 million or 6.1%, over the amount reported for the same period last year. The increase was due to increased demand for our services.

     Domestic direct operating expenses for the quarter ended January 31, 2002 increased $29.8 million, a 10.8% increase over the amount reported for the same period last year, as a result of increases in the use of subcontractors. Indirect, general and administrative expenses for the quarter ended January 31, 2002 decreased $3.2 million, or 2.0%, from the amount reported for the same period last year, due to a decrease in amortization expense of $3.9 million as a result of implementing SFAS 142, which was partially offset by an increase in indirect labor, benefits and rental expense during the quarter. Interest expense decreased $4.9 million due to repayments of our long-term debt and a decrease in interest rates.

     International Segment

     Revenues for the international segment were $50.0 million for the quarter ended January 31, 2002, a decrease of $0.5 million, or 1.0%, from the amount reported for the same period last year. The decrease was mainly due to decreases in foreign currency exchange rates versus the U.S. dollar.

     Foreign direct operating expenses for the quarter ended January 31, 2002 decreased $3.8 million, a 12.8% decrease from the amount reported for the same period last year, primarily due to the decrease in foreign currency exchange rates versus the U.S. dollar as well as decreases in the use of subcontractors and in pass-through expenses. Indirect, general and administrative expenses for the quarter ended January 31, 2002 increased $4.5 million, or 23.8%, from the amount reported for the same period last year, primarily due to an increase in indirect labor, benefits and rental expense. Foreign net interest expense for the quarter ended January 31, 2002 decreased $0.1 million.

19

Liquidity and Capital Resources

     At January 31, 2002, we had working capital of $426.9 million, a decrease of $0.6 million from October 31, 2001.

     Substantially all of our cash flow is generated by our subsidiaries. As a result, funds necessary to meet our debt service obligations are provided mainly by receipts from our subsidiaries. Under certain circumstances, legal and contractual restrictions, as well as the financial condition and operating requirements of the subsidiaries, may limit our ability to obtain cash from our subsidiaries.

     Our cash and cash equivalents amounted to $21.6 million at January 31, 2002, a decrease of $1.8 million from October 31, 2001. During the three months ended January 31, 2002, we generated $22.8 million from operations and $6.7 million of proceeds from sales of common stock and exercises of stock options. We used $13.7 million to repay debt and $17.7 million for capital expenditures.

     During the first quarter ended January 31, 2002, we borrowed various amounts under our revolving line of credit that totaled in the aggregate $9.9 million; and we paid off the entire outstanding balance by the end of the quarter. Our primary sources of liquidity are cash flow from operations and borrowings under the senior collateralized credit facility, if necessary. Our primary uses of cash are to fund our working capital and capital expenditures and to service our debt. We believe that our existing financial resources, together with our planned cash flow from operations and existing credit facilities, will provide sufficient resources to fund our combined operations and capital expenditure needs for the foreseeable future.

     Collections on accounts receivable can impact our operating cash flows. Management places significant emphasis on collection efforts; however, current general economic conditions may impact our client base and as such, may impact their credit-worthiness and our ability to collect cash to meet our operating needs. In addition, we are in the process of designing, testing and installing a company-wide accounting and project management system. In the event we do not complete the project successfully, we may experience reduced cash flow due to an inability to issue invoices to our customers and collect cash in a timely manner.

     During the fiscal year ended October 31, 1999, we paid $376.2 million for the purchase of D-M. To fund this transaction and to refinance outstanding bank debt, we incurred new borrowings of $650.0 million from the establishment of a long-term senior collateralized credit facility with a syndicate of banks led by Wells Fargo Bank, N.A. (“the Bank”) and from the issuance of 12 1/4% Senior Subordinated Notes. In addition, we sold 46,083 shares of our Series B Preferred Stock to RCBA Strategic Partners, L.P. for aggregate consideration of $100.0 million.

     Senior Collateralized Credit Facility. The senior collateralized credit facility was funded on June 9, 1999 (“Funding Date”), and provides for three term loan facilities in the aggregate amount of $450.0 million and a revolving credit facility in the amount of $100.0 million. The term loan facilities consist of Term Loan A, a $250.0 million tranche, Term Loan B, a $100.0 million tranche and Term Loan C, another $100.0 million tranche.

     Principal amounts under Term Loan A became due, commencing on October 31, 1999, in the amount of approximately $3.0 million per quarter for the subsequent three quarters. Commencing on October 31, 2000 and through June 9, 2005, annual principal payments under Term Loan A range from $25.0 million up to a maximum of $58.0 million, with Term Loan A expiring and the then-outstanding principal amount becoming due and repayable in full on June 9, 2005. Principal amounts under Term Loan B became due, commencing on October 31, 1999, in the amount of $1.0 million in each year through July 31, 2005, with Term Loan B expiring and the then-outstanding principal amount becoming due and repayable in full in equal quarterly installments beginning on October 31, 2005 and ending on June 9, 2006. Principal amounts under Term Loan C became due, commencing on October 31, 1999, in the amount of $1.0 million in each year through July 31, 2006, with Term Loan C expiring and the then-outstanding principal amount becoming due and repayable in full in equal quarterly installments beginning on October 31, 2006 and ending on June 9, 2007. The revolving credit facility expires and is repayable in full on June 9, 2005.

     The term loans each bear interest at a rate per annum equal to, at our option, either the Base Rate or LIBOR, in each case plus an applicable margin. The revolving credit facility bears interest at a rate per annum equal to, at our option, any of the Base Rate, LIBOR or the Adjusted Sterling Rate, in each case plus an applicable margin. The applicable margin adjusts according to a performance-pricing grid based on our ratio of Consolidated Total Funded Debt to Consolidated Earnings Before Income Taxes, Depreciation and Amortization (“EBITDA”). The “Base Rate” is defined as the higher of the Bank’s Prime Rate and the Federal Funds Rate plus 0.50%. “LIBOR” is defined as the offered quotation by first class banks in the London interbank market to the Bank for dollar deposits, as adjusted for reserve

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requirements. The “Adjusted Sterling Rate” is defined as the rate per annum displayed by Reuters at which Sterling is offered to the Bank in the London interbank market as determined by the British Bankers’ Association. We may determine which interest rate options to use and which interest periods will apply for both the term loans and the revolving credit facility.

     At January 31, 2002, our revolving credit facility with the Bank provided for advances of up to $100.0 million. At January 31, 2002, we had outstanding letters of credit aggregating $31.7 million, which reduced the amount available to us under our revolving credit facility to $68.3 million.

     The senior collateralized credit facility is governed by affirmative and negative covenants. These covenants include restrictions on incurring additional debt; paying dividends or making distributions to our stockholders; making certain investments, including joint ventures; creating contingent obligations; incurring liability in a sales-leaseback transaction; incurring or assuming liens; exceeding limits on consolidated capital expenditures; repurchasing or retiring capital stock; making subordinated junior debt payments; and violating specified financial covenants. The financial covenants include maintenance of a minimum current ratio of 1.20 to 1.00, a minimum fixed charge coverage ratio of 1.10 to 1.00, an EBITDA minimum of $185.0 million and a maximum leverage ratio of 3.25 to 1.00 for the period ended January 31, 2002. Violation of any of the covenants could trigger default. We are required to submit quarterly compliance certification to the bank. As of January 31, 2002, we were fully compliant with these covenants.

     12 1/4% Senior Subordinated Notes. Our notes are due in 2009. Each note bears interest at 12 1/4% per annum. Interest on the notes is payable semi-annually on May 1 and November 1 of each year, commencing November 1, 1999. The notes are subordinate to the senior collateralized credit facility. As of January 31, 2002, we owed $200.0 million on our notes.

     Certain of our wholly owned subsidiaries fully and unconditionally guarantee the notes on a joint and several basis. We may redeem any of the notes beginning May 1, 2004. The initial redemption price is 106.125% of their principal amount, plus accrued and unpaid interest. The redemption price will decline each year after 2004 and will be 100% of their principal amount, plus accrued and unpaid interest beginning on May 1, 2007. In addition, at any time prior to May 1, 2002, we may redeem up to 35% of the principal amount of the notes with net cash proceeds from the sale of capital stock. The redemption price will be equal to 112.25% of the principal amount of the redeemed notes.

     8 5/8% Senior Subordinated Debentures.Our 8 5/8% Debentures are due in 2004. Interest is payable semiannually in January and July. The 8 5/8% Debentures are subordinate to the senior collateralized credit facility. As of January 31, 2002, we owed approximately $6.5 million on the 8 5/8% Debentures.

     6 1/2% Convertible Subordinated Debentures.Our 6 1/2% Debentures are due in 2012 and are convertible into shares of common stock at the rate of $206.30 per share. Interest is payable semi-annually in February and August. Sinking fund payments calculated to retire 70% of the 6 1/2% Debentures prior to maturity began in February 1998. The 6 1/2% Debentures are subordinate to the senior collateralized credit facility. As of January 31, 2002, we owed approximately $1.8 million on the 6 1/2% Debentures.

     Mandatorily Redeemable Series B Exchangeable Convertible Preferred Stock. In June 1999, we issued 46,082.95 shares of our Series A Preferred Stock and 450,000 shares of our Series C Preferred Stock to RCBA Strategic Partners, L.P. for an aggregate consideration of $100.0 million. The proceeds of this issuance were used in connection with the D-M acquisition. We paid a transaction fee of $1.5 million to RCBA Strategic Partners, L.P. in connection with this placement. In October 1999, we issued 46,083 shares of our Series B Exchangeable Convertible Preferred Stock (“Series B Stock”) to RCBA Strategic Partners, L.P. in exchange for the shares of Series A and Series C Preferred Stock.

     There are 3,000,000 shares of preferred stock authorized for issuance with a $1.00 par value. Of these 3,000,000 shares, 150,000 shares have been designated Series B Stock. At January 31, 2002 and October 31, 2001, we had 56,452 and 53,345 shares, respectively, of Series B Stock outstanding. The Series B Stock has a liquidation preference equal to its original purchase price plus certain formulaic adjustments calculated at the time of liquidation. The Series B Stock is senior to the common stock and has voting rights equal to that number of shares of common stock into which it can be converted. Cumulative dividends are payable in-kind in additional shares of Series B Stock each calendar quarter at a dividend rate of 8%. Each share of the Series B Stock may be converted into shares of common stock at the option of the holder at any time (approximately 5,645,000 and 5,335,000 shares in the aggregate as of January 31, 2002 and October 31, 2001, respectively). In addition, we will have the right, on or after June 9, 2002, to convert all, but not less than all, of the outstanding shares of Series B Stock into common stock if the price of our common stock on the relevant stock exchanges reaches certain levels for certain minimum periods of time.

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In June 2011, we are obligated to redeem any outstanding shares of Series B Stock for cash. If we fail to repurchase all of the outstanding shares of Series B Stock, the dividend rate will increase to 12%, and three months after that the rate will increase to 15%.

     Derivative Financial Instruments.We are exposed to risk of changes in interest rates as a result of borrowings under the senior collateralized credit facility. We have entered into interest rate derivatives to protect against this risk. At January 31, 2002, the only derivative instrument we held was an interest rate cap agreement relating to $199.3 million of our LIBOR bank term loan borrowings. From an economic standpoint, the cap agreement provided us with protection against LIBOR interest rate increases above 7%. For accounting purposes, we have elected not to designate the cap agreement as a hedge, and in accordance with Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” which we adopted on November 1, 2000, changes in the fair market value of the cap agreement are included in other expenses in the Consolidated Statements of Operations. The value of the interest rate cap agreement at January 31, 2002 was zero.

     Enterprise Resource Program (ERP).During fiscal year 2001, we commenced a project to consolidate all of our accounting and project management information systems. The costs of implementing this project, including hardware, software licenses, consultants, internal staffing costs and training, are estimated to be approximately $50.0 million, to be incurred over the next two years. As of January 31, 2002, we incurred a total of approximately $29.0 million for this project. We have been financing a substantial portion of these costs through capital lease arrangements with various lenders. If, and to the extent, that financing cannot be obtained through capital leases, we will draw on our line of credit as alternative financing for expenditures to be incurred for this project.

Risk Factors That Could Affect Our Financial Condition and Results of Operations

     In addition to the other information included or incorporated by reference in this Form 10-Q, the following factors could affect our actual results:

Our substantial indebtedness could adversely affect our financial condition.

     We are a highly leveraged company. As of January 31, 2002, we had approximately $629.2 million of outstanding indebtedness following consummation of the D-M acquisition and the related financing plan. This level of indebtedness could have important consequences, including the following:

• it may limit our ability to borrow money or sell stock for working capital, capital expenditures, debt service requirements or other purposes;

• it may limit our flexibility in planning for, or reacting to, changes in our business;

• we could be more highly leveraged than some of our competitors, which may place us at a competitive disadvantage;

• it may make us more vulnerable to a downturn in our business or the economy; and

• a substantial portion of our cash flow from operations is dedicated to the repayment of our indebtedness and would not be available for other purposes.

To service our indebtedness, we require a significant amount of cash. The ability to generate cash depends on many factors beyond our control.

     Our ability to make payments on our indebtedness depends on our ability to generate cash in the future. If we do not generate sufficient cash flow to meet our debt service and working capital requirements, we may need to seek additional financing or sell assets. This need may make it more difficult for us to obtain financing on terms that are acceptable to us, or at all. Without this financing, we could be forced to sell assets to make up for any shortfall in our payment obligations under unfavorable circumstances.

     Our senior collateralized credit facility and our obligations under the notes limit our ability to sell assets and also restrict the use of proceeds from any such sale. Moreover, the senior collateralized credit facility is secured by substantially all of our assets. Furthermore, substantial portions of our assets are, and may continue to be, intangible assets. Therefore, we cannot assure you that our assets could be sold quickly enough or for sufficient amounts to enable

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us to meet our debt obligations.

Restrictive covenants in our senior collateralized credit facility and the indenture relating to the notes may restrict our ability to pursue business strategies.

     Our senior collateralized credit facility and indenture relating to the notes restrict our ability, among other things, to:

• incur additional indebtedness or contingent obligations;

• pay dividends or make distributions to our stockholders;

• repurchase or redeem our stock;

• make investments;

• grant liens;

• make capital expenditures;

• enter into transactions with our stockholders and affiliates;

• sell assets; and

• acquire the assets of, or merge or consolidate with, other companies.

     In addition, our senior collateralized credit facility requires us to maintain certain financial ratios. We may not be able to maintain these ratios. Additionally, covenants in the senior collateralized credit facility and the indenture relating to the notes may impair our ability to finance future operations or capital needs or to engage in other favorable business activities.

     If we default under our various debt obligations, the lenders could require immediate repayment of the entire principal. If the lenders require immediate repayment on the entire principal, we will not be able to repay them, and our inability to meet our debt obligations could have a material adverse effect on our business, financial condition and results of operations.

We derive approximately 60% of our revenues from contracts with government agencies. Any disruption in government funding or in our relationship with those agencies could adversely affect our business and our ability to meet our debt obligations.

     We derive approximately 60% of our revenues from local, state and federal government agencies. The demand for our services will be directly related to the level of government program funding that is allocated to rebuild and expand the nation’s infrastructure. We believe that the success and further development of our business depend upon the continued funding of these government programs and upon our ability to participate in these government programs. We cannot assure you that governments will have the available resources to fund these programs, that these programs will continue to be funded even if governments have available financial resources, or that we will continue to win government contracts.

     Some of these government contracts are subject to renewal or extension annually, so we cannot assure you of our continued work under these contracts in the future. Unsuccessful bidders may protest or challenge the award of these contracts. In addition, government agencies can terminate these contracts at their convenience. As a result, we may incur costs in connection with the termination of these contracts and suffer a loss of business. Also, contracts with government agencies are subject to substantial regulation and an audit of actual costs incurred. Consequently, there may be a downward adjustment in our revenues if actual recoverable costs exceed billed recoverable costs.

     We have a responsibility to maintain our eligibility to perform government contracts. From time to time allegations of improper conduct in connection with government contracting have been made against us, and these could be the subjects of suspension or debarment consideration. We investigate all such allegations thoroughly and believe that appropriate actions have been taken in all cases. Additionally, we maintain a compliance program in an effort to assure that no improper conduct occurs in connection with government contracting.

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We may be unable to estimate accurately our cost in performing services for our clients. This may cause us to have low profit margins or incur losses.

     We submit some proposals on projects based on an estimate of the costs that we will likely incur. To the extent we cannot control overhead, general and administrative and other costs, or if we underestimate such costs, we may have low profit margins or may incur losses.

We are subject to risks from changes in environmental legislation, regulation and governmental policies.

     Federal laws, such as the Resource Conservation and Recovery Act of 1976, as amended, and the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, (“CERCLA”), and various state and local laws, strictly regulate the handling, removal, treatment and transportation of toxic and hazardous substances and impose liability for environmental contamination caused by such substances. Moreover, so-called “toxic tort” litigation has increased markedly in recent years as people injured by hazardous substances seek recovery for personal injuries or property damages. We handle, remove, treat and transport toxic or hazardous substances. Consequently, we may be exposed to claims for damages caused by environmental contamination.

     Federal and state laws, regulations, and programs related to environmental issues will generate, either directly or indirectly, much of our environmental business. Accordingly, a reduction of these laws and regulations, or changes in governmental policies regarding the funding, implementation or enforcement of these programs, could have a material effect on our business. Environmental laws, regulations and enforcement policies remained essentially unchanged during fiscal year 2001 and for the first three months of fiscal year 2002, including further deferral of congressional reauthorization of CERCLA. The outlook for congressional action on CERCLA legislation in fiscal year 2002 remains unclear.

Our liability for damages due to legal proceedings may be significant. Our insurance may not be adequate to cover this risk.

     Various legal proceedings are pending against us alleging, among other things, breaches of contract or negligence in connection with our performance of professional services. In some actions, punitive or treble damages are sought that substantially exceed our insurance coverage. If we sustain damages greater than our insurance coverage, there could be a material adverse effect on our business, financial condition and results of operations.

     Our engineering practices, including general engineering and civil engineering services, involve professional judgments about the nature of soil conditions and other physical conditions, including the extent to which toxic and hazardous materials are present, and about the probable effect of procedures to mitigate problems or otherwise affect those conditions. If the judgments and the recommendations based upon those judgments are incorrect, we may be liable for resulting damages that our clients incur.

The failure to attract and retain key professional personnel could adversely affect our business.

     The ability to attract, retain and expand our staff of qualified technical professionals is an important factor in determining our future success. A shortage of professionals qualified in certain technical areas exists from time to time in the engineering and design industry. The market for these professionals is competitive, and we cannot assure you that we will be successful in our efforts to continue to attract and retain such professionals. In addition, we rely heavily upon the experience and ability of our senior executive staff and the loss of a significant number of such individuals could have a material adverse effect on our business, financial condition and results of operations.

We may be unable to compete successfully in our industry.

     We are engaged in highly fragmented and very competitive markets in our service areas. We compete with firms of various sizes, some of which are substantially larger than us and which possess greater resources. Furthermore, the engineering and design industry is undergoing consolidation, particularly in the United States. These competitive forces could have a material adverse effect on our business, financial condition and results of operations.

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Our international operations are subject to a number of risks that could adversely affect the results from these operations and our overall business.

     As a worldwide provider of engineering services, we have operations in over 30 countries and derive approximately 9% of our revenues from international operations. International business is subject to the customary risks associated with international transactions, including political risks, local laws and taxes, the potential imposition of trade or currency exchange restrictions, tariff increases and difficulties or delays in collecting accounts receivable. Weak foreign economies and/or a weakening of foreign currencies against the U.S. dollar could have a material adverse effect on our business, financial condition and results of operations.

Additional acquisitions may adversely affect our ability to manage our business.

     Historically, we have completed numerous acquisitions and, in implementing our business strategy, we may continue to do so in the future. We cannot assure you that we will identify, finance and complete additional suitable acquisitions on acceptable terms. We may not successfully integrate future acquisitions. Any acquisitions may require substantial attention from our management, which may limit the amount of time that management can devote to daily operations. Our inability to find additional attractive acquisition candidates or to effectively manage the integration of any businesses acquired in the future could adversely affect our business, financial condition and results of operations.

We may not be able to successfully integrate our accounting and project management systems.

     We are in the process of designing, testing and installing a company-wide accounting and project management system. In the event we do not complete the project successfully, we may experience reduced cash flow due to an inability to issue invoices to our customers and collect cash in a timely manner.

External factors may affect our ability to conduct business.

     Recent terrorist attacks on the United States of America present a potential threat to communication systems, information technology and security, damage to buildings and their contents and injury to or death of key employees. We may need to take steps to increase security and add necessary protections against terrorist threats. Although built to structural standards, our facilities are physically vulnerable to a terrorist attack. Significant structural damage to our facilities could cause a disruption of our information systems and loss of financial data and certain customer data, which may affect our ability to conduct business.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     We are exposed to changes in interest rates as a result of our borrowings under our senior collateralized credit facility. If market rates average 1% more in fiscal year 2002 than in fiscal year 2001, our net of tax interest expense, after considering the effect of the interest rate cap agreement, would increase by approximately $2.2 million. Conversely, if market rates average 1% less in fiscal year 2002 than in fiscal year 2001, our net of tax interest expense would decrease by approximately $2.2 million.

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PART II
OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     See Footnote 3 of the Consolidated Financial Statements.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

     None.

ITEM 3. DEFAULTS UPON SENIOR SECURITES

     None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     None.

ITEM 5. OTHER INFORMATION

     None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)	Exhibits
	None.
(b)	Reports on Form 8-K
	None.

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SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated March 14, 2002	URS CORPORATION
	/s/ Kent Ainsworth
	Kent P. Ainsworth Executive Vice President and Chief Financial Officer (Principal Accounting Officer)

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