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 July 31, 2000 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 94111-4529 (Address of principal executive offices) (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 August 31, 2000 ----- ------------------------------ Common Stock, $.01 par value 16,554,660 URS CORPORATION AND SUBSIDIARIES This Form 10-Q for the third quarter ended July 31, 2000 contains forward-looking statements within the meaning of the securities laws that involve risks and uncertainties. We believe that our expectations are reasonable and are based on reasonable assumptions. However, risks and uncertainties relating to future events could cause actual results to differ materially from our expectations. These risks and uncertainties include our ability to successfully integrate Dames & Moore Group ("D-M"), following the acquisition of D-M in June 1999, the impact on our financial condition caused by the substantial indebtedness incurred in connection with the D-M acquisition, our dependence on government programs and contracts, competitive practices in the industry, possible changes in legislation or governmental regulation or policies, contracting risks, our ability to attract and retain qualified professionals, exposure to potential liability from legal proceedings, and other factors discussed more completely in the attached Management's Discussion and Analysis of Financial Condition and Results of Operations, as well as in our 1999 Form 10-K and in other publicly available reports filed with the Securities and Exchange Commission from time to time. We do not intend nor assume any obligation to update any forward-looking statements. PART I. FINANCIAL INFORMATION: Item 1. Financial Statements Consolidated Balance Sheets July 31, 2000 and October 31, 1999 ....................... 3 Consolidated Statements of Operations Three and nine months ended July 31, 2000 and 1999 ....... 4 Consolidated Statements of Cash Flows Nine months ended July 31, 2000 and 1999 ................. 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ............ 15 Item 3. Quantitative and Qualitative Disclosures About Market Risk .. 21 PART II. OTHER INFORMATION: Item 1. Legal Proceedings ........................................... 22 Item 2. Changes in Securities and Use of Proceeds.................... 22 Item 3. Defaults Upon Senior Securities ............................. 22 Item 4. Submission of Matters to a Vote of Security Holders.......... 22 Item 5. Other Information ........................................... 22 Item 6. Exhibits and Reports on Form 8-K ............................ 22 2 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS URS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except per share data) July 31, 2000 October 31, 1999 ------------- ---------------- (unaudited) ASSETS Current assets: Cash......................................................................... $ 30,572 $ 45,687 Accounts receivable.......................................................... 462,134 477,731 Costs and accrued earnings in excess of billings on contracts in process..... 242,159 228,841 Less receivable allowances................................................... (34,370) (40,611) -------------- -------------- Net accounts receivable................................................ 669,923 665,961 -------------- -------------- Deferred income taxes........................................................ 9,365 10,005 Prepaid expenses and other assets............................................ 24,678 24,111 -------------- -------------- Total current assets.................................................. 734,538 745,764 Property and equipment, net..................................................... 92,801 93,165 Goodwill, net................................................................... 518,301 529,697 Other assets.................................................................... 53,396 68,861 -------------- -------------- $1,399,036 $1,437,487 ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt............................................ $ 42,715 $ 39,423 Accounts payable............................................................. 148,773 130,045 Accrued salaries and wages................................................... 74,792 89,023 Accrued expenses and other................................................... 36,135 57,873 Billings in excess of costs and accrued earnings on contracts in process..... 69,370 70,313 -------------- -------------- Total current liabilities............................................. 371,785 386,677 Long-term debt.................................................................. 612,608 648,957 Deferred income taxes........................................................... 14,695 15,267 Deferred compensation and other................................................. 53,562 76,084 -------------- -------------- Total liabilities..................................................... 1,052,650 1,126,985 -------------- -------------- Commitments and contingencies (Note 4) Mandatory redeemable Series B exchangeable convertible preferred stock, par value $1.00; authorized 150 shares; issued 50 and 48, respectively; liquidation preference $108,919 and $103,333, respectively................................. 108,919 103,333 -------------- -------------- Stockholders' equity: Common shares, par value $.01; authorized 50,000 shares; issued 16,509 and 15,925 shares, respectively................................................. 165 159 Treasury stock............................................................... (287) (287) Additional paid-in capital................................................... 130,118 125,462 Foreign currency translation adjustment...................................... (1,808) 197 Retained earnings since February 21, 1990, date of quasi-reorganization...... 109,279 81,638 -------------- -------------- Total stockholders' equity............................................ 237,467 207,169 -------------- -------------- $1,399,036 $1,437,487 ============== ============== 3 URS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) Three months ended Nine months ended July 31, July 31, ------------------------------- ------------------------------- 2000 1999 2000 1999 ---- ---- ---- ---- (unaudited) (unaudited) Revenues............................................ $ 558,534 $ 428,482 $ 1,606,812 $ 849,758 ----------- ----------- ----------- ----------- Expenses: Direct operating................................ 343,660 255,531 963,045 500,889 Indirect, general and administrative............ 170,930 143,386 526,395 292,123 Interest expense, net........................... 17,163 10,781 54,376 15,495 ----------- ----------- ----------- ----------- 531,753 409,698 1,543,816 808,507 ----------- ----------- ----------- ----------- Income before taxes................................. 26,781 18,784 62,996 41,251 Income tax expense.................................. 12,600 8,400 29,100 18,200 ----------- ----------- ----------- ----------- Net income.......................................... 14,181 10,384 33,896 $ 23,051 Preferred stock dividend............................ 2,143 1,333 6,254 1,333 ----------- ----------- ----------- ----------- Net income available for common stockholders ....... 12,038 9,051 27,642 21,718 Other comprehensive income, net of tax: Foreign currency translation adjustments........ (592) 360 (2,005) 430 ------------ ----------- ----------- ----------- Comprehensive income................................ $ 11,446 $ 9,411 $ 25,637 $ 22,148 ============ =========== =========== =========== Net income per common share: Basic........................................... $ .73 $ .58 $ 1.71 $ 1.41 ============ =========== =========== =========== Diluted......................................... $ .64 $ .53 $ 1.55 $ 1.30 ============ =========== =========== =========== 4 URS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Nine Months Ended July 31, ---------------------------- 2000 1999 ---- ---- (unaudited) Cash flows from operating activities: Net income.............................................................. $ 33,896 $ 23,051 --------- --------- Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation and amortization........................................ 31,722 15,842 Amortization of financing fees....................................... 2,581 320 Receivable allowances................................................ (6,241) 3,992 Changes in current assets and liabilities: Accounts receivable and costs and accrued earnings in excess of billings on contracts in process.................................... 2,279 (42,006) Prepaid expenses and other assets.................................... (567) (5,650) Accounts payable, accrued salaries and wages and accrued expenses.... (17,241) (42,779) Billings in excess of costs and accrued earnings on contracts in process............................................................. (943) (5,739) Deferred income taxes................................................ 68 12,618 Deferred compensation and other...................................... (22,522) 12,448 Other, net........................................................... (9,790) (27,375) --------- --------- Total adjustments............................................... (20,654) (78,329) --------- --------- Net cash provided (used) by operating activities........................ 13,242 (55,278) --------- --------- Cash flows from investing activities: Business acquisition, net of cash acquired.............................. -- (316,167) Proceeds from sale of subsidiary........................................ 20,000 -- Capital expenditures, less equipment purchased through capital leases of $6,336 and $11,651........................................ (13,626) (10,191) --------- --------- Net cash provided (used) by investing activities........................ 6,374 (326,358) --------- --------- Cash flows from financing activities: Proceeds from lines of credit........................................... -- 15,000 Proceeds from issuance of debt.......................................... -- 854,739 Payments on merger fees................................................. -- (18,738) Principal payments on long-term debt, bank borrowings and capital lease obligations, excluding capital lease obligations to purchase equipment of $6,336 and $11,651....................................... (39,393) (589,597) Proceeds from sale of common shares and exercise of stock options....... 4,662 4,941 Proceeds from issuance of preferred stock............................... -- 100,000 Payments on financing fees related to issuance of preferred stock....... -- (1,500) --------- --------- Net cash (used) provided by financing activities....................... (34,731) 364,845 --------- --------- Net decrease in cash....................................................... (15,115) (16,791) Cash at beginning of period................................................ 45,687 36,529 --------- --------- Cash at end of period...................................................... $ 30,572 $ 19,738 ========= ========= Supplemental Information: Interest paid........................................................... $ 55,648 $ 12,180 ========= ========= Taxes paid.............................................................. $ 21,657 $ 15,633 ========= ========= Equipment subject to capital lease obligations.......................... $ 6,336 $ 11,651 ========= ========= Non-cash dividends paid in-kind......................................... $ 5,586 $ 1,333 ========= ========= Net book value of business sold......................................... $ 20,000 $ -- ========= ========= 5 URS CORPORATION AND SUBSIDIARIES NOTE 1. Accounting Policies In the opinion of management, the information furnished reflects all adjustments, consisting only of normal recurring adjustments, which are necessary for a 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, 1999. The results of operations for the three and nine month periods ended July 31, 2000 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 common shares consist of the incremental common shares 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 dilutive potential common shares that were outstanding during the period. Reporting Comprehensive Income The Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"), in the fiscal year ended October 31, 1999. SFAS 130 established new standards for reporting and displaying comprehensive income and its components. Other comprehensive income refers to revenues, expenses, gains, and losses that under generally accepted accounting principles are included in comprehensive income, but are excluded from net earnings as these amounts are recorded directly as an adjustment to stockholders' equity. The Company's comprehensive income is primarily comprised of foreign currency translation adjustments. Adoption of Statements of Financial Accounting Standards In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 established accounting and reporting standards for derivative instruments, including derivative instruments that are embedded in other contracts, and for hedging activities. While SFAS 133 was effective for all fiscal quarters of all fiscal years beginning after June 15, 1999, in July 1999, the FASB issued Statement of Financial Accounting Standards No. 137 "Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of SFAS Statement No. 133" ("SFAS 137"). SFAS 137 deferred the effective date of applying the provisions of SFAS 133 until the first quarter of fiscal years beginning after June 15, 2000. The Company will adopt SFAS 133 in its quarter ending January 31, 2001 and does not expect such adoption to have a material effect on its financial position or results of operations. Reclassifications Certain reclassifications have been made to the 1999 financial statements to conform to the 2000 presentation with no effect on net income as previously reported. 6 NOTE 2. ACQUISITIONS During the year ended October 31, 1999, the Company acquired publicly held Dames & Moore Group ("D-M") for $376.2 million. The acquisition was accounted for by the purchase method of accounting and the excess of fair value of the net assets acquired over the purchase price has been allocated to goodwill and is being amortized over 40 years. The operating results of D-M are included in the Company's results of operations from the date of purchase. During the year ended October 31, 1999, the Company acquired privately-held Thorburn Colquhoun Holdings plc ("T-C") for $13.6 million. The acquisition was accounted for by the purchase method of accounting and the excess of fair value of the net assets acquired over the purchase price has been allocated to goodwill and is being amortized over 30 years. The operating results of T-C are included in the Company's results of operations from the date of purchase. NOTE 3. SALE OF SUBSIDIARY In June 2000, the Company sold its subsidiary, Decision Quest, for $20,000,000 in cash. The proceeds received from the divestiture were used to pay down the Company's senior debt. Results of operations of Decision Quest were not material, and no gain or loss was realized on the sale. NOTE 4. COMMITMENTS AND CONTINGENCIES Currently, the Company has limits of $100 million per loss and $100 million in the annual aggregate for general liability, professional errors and omissions liability, and contractor's pollution liability insurance. 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. It is the Company's intent 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. Various 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, punitive or treble damages are sought, which substantially exceed the Company's insurance coverage. The Company's management does not believe that any of such proceedings will have a material adverse effect on the consolidated financial position and operations of the Company. NOTE 5. SEGMENT AND RELATED INFORMATION In the fiscal year ended October 31, 1999, the Company adopted Statement of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related Information." SFAS 131 established standards for reporting information about operating segments and related disclosures on products, geographic information and major customers. Management has organized the Company by geographic divisions. The geographic divisions are Parent, Domestic and International. The Parent division is comprised of the Parent Company. The Domestic division is comprised of all offices located in the United States. The International division is comprised of all offices in the Americas and in Europe and 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 described in Note 1, Accounting Policies. The Company provides services throughout the world. Services to other countries may be performed within the United States, and generally, revenues are classified within the geographic area where the services were performed. The following table shows summarized financial information 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 July 31, 2000: Parent Domestic International Eliminations Total -------------------- ------ -------- ------------- ------------ ----- Total accounts receivable............... $ (7,814) $ 595,318 $ 84,201 $ (1,782) $ 669,923 Total assets............................ $ 655,821 $ 1,276,759 $ 123,510 $ (657,054) $ 1,399,036 7 For the Three Months Ended July 31, 2000: Parent Domestic International Eliminations Total -------------- ------ -------- ------------- ------------ ----- Revenue ................................ $ -- $ 498,473 $ 62,308 $ (2,247) $ 558,534 Segment operating income (loss)......... $ 11,680 $ 30,873 $ 1,422 $ (31) $ 43,944 For the Nine Months Ended July 31, 2000: Parent Domestic International Eliminations Total -------------- ------ -------- ------------- ------------ ----- Revenue ................................ $ -- $ 1,442,894 $ 177,503 $ (13,585) $ 1,606,812 Segment operating income (loss)......... $ 2,833 $ 110,270 $ 4,269 $ -- $ 117,372 As of October 31, 1999: Parent Domestic International Eliminations Total ----------------------- ------ -------- ------------- ------------ ----- Total accounts receivable............... $ (15,000) $ 592,159 $ 90,818 $ (2,016) $ 665,961 Total assets............................ $ 493,938 $ 1,646,890 $ 130,779 $ (834,120) $ 1,437,487 For the Three Months Ended July 31, 1999: Parent Domestic International Eliminations Total -------------- ------ -------- ------------- ------------ ----- Revenue ................................ $ -- $ 385,457 $ 44,518 $ (1,493) $ 428,482 Segment operating income (loss)......... $ (103) $ 23,704 $ 5,964 $ -- $ 29,565 For the Nine Months Ended July 31, 1999: Parent Domestic International Eliminations Total -------------- ------ -------- ------------- ------------ ----- Revenue ................................ $ -- $ 765,048 $ 87,267 $ (2,557) $ 849,758 Segment operating income (loss)......... $ (1,038) $ 52,109 $ 5,675 $ -- $ 56,746 The Company's reportable segments are measured based upon segment operating income. The next table provides a reconciliation of operating income to consolidated income before income taxes. Three Months Ended Nine Months Ended July 31, July 31, --------------------------- --------------------------- 2000 1999 2000 1999 ---- ---- ---- ---- Segment operating income ........... $ 43,944 $ 29,565 $ 117,372 $ 56,746 Interest expense, net................ 17,163 10,781 54,376 15,495 ---------- ---------- ---------- ---------- Income before taxes.................. $ 26,781 $ 18,784 $ 62,996 $ 41,251 ========== ========== ========== ========== NOTE 6. SUPPLEMENTAL GUARANTOR INFORMATION In June 1999, the Company completed a private placement of $200 million principal amount of its 12 1/4% Senior Subordinated Notes due 2009, which were exchanged in August 1999 for 12 1/4% Senior Subordinated Exchange Notes (the "Notes"). 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 to 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 July 31, 2000 and October 31, 1999, the condensed consolidating statements of operations for the three and nine months ended July 31, 2000 and 1999 and condensed consolidating statements of cash flows for the nine months ended July 31, 2000 and 1999. Investments in subsidiaries are accounted for using the equity method; accordingly, 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. 8 URS CORPORATION CONDENSED CONSOLIDATING BALANCE SHEET (In thousands) (Unaudited) July 31, 2000 ------------------------------------------------------------------------------- Subsidiary Subsidiary Non- Parent Guarantors Guarantors Eliminations Consolidated ------ ---------- ---------- ------------ ------------ ASSETS Current assets: Cash...................................... $ 4,930 $ (349) $ 25,991 $ -- $ 30,572 Accounts receivable, net.................. (7,814) 595,318 84,201 (1,782) 669,923 Deferred income taxes..................... -- 8,156 1,209 -- 9,365 Prepaid expenses and other assets......... 5,815 19,401 (538) -- 24,678 ------------- ------------- -------------- ------------- ------------- Total current assets.................. 2,931 622,526 110,863 (1,782) 734,538 Property and equipment, net................... 454 80,923 11,424 -- 92,801 Goodwill, net................................. 391,601 162,034 -- (35,334) 518,301 Investment in unconsolidated subsidiaries..... 245,127 364,543 1,198 (610,868) -- Inter-company receivable...................... -- 5,458 (4,205) (1,253) -- Other assets.................................. 15,708 41,275 4,230 (7,817) 53,396 ------------- ------------- ------------- -------------- ------------- $ 655,821 $ 1,276,759 $ 123,510 $ (657,054) $ 1,399,036 ============= ============= ============= ============== ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt......... $ 25,792 $ 18,948 $ 10,044 $ (12,069) $ 42,715 Accounts payable.......................... 20,940 122,190 26,154 (20,511) 148,773 Inter-company payable..................... (173,631) 130,350 50,943 (7,662) -- Accrued expenses and other................ 8,616 92,424 10,413 (526) 110,927 Billings in excess of costs and accrued earnings on contracts in process........ -- 61,666 7,704 -- 69,370 ------------- ------------- ------------- ------------- ------------- Total current liabilities............. (118,283) 425,578 105,258 (40,768) 371,785 Long-term debt................................ 596,213 16,230 165 -- 612,608 Other......................................... 22,562 28,698 1,585 15,412 68,257 ------------- ------------- ------------- ------------- ------------- Total liabilities..................... 500,492 470,506 107,008 (25,356) 1,052,650 ------------- ------------- ------------- -------------- ------------- Total stockholders' equity.................... 155,329 806,253 16,502 (631,698) 346,386 ------------- ------------- ------------- -------------- ------------- $ 655,821 $ 1,276,759 $ 123,510 $ (657,054) $ 1,399,036 ============= ============= ============= ============== ============= 9 URS CORPORATION CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (In thousands) (Unaudited) Three Months Ended July 31, 2000 ---------------------------------------------------------------------------- Subsidiary Non- Parent Guarantors Guarantors Eliminations Consolidated ------ ---------- ---------- ----------- ------------ Revenues............................... $ -- $ 498,473 $ 62,308 $ (2,247) $ 558,534 ----------- ----------- ----------- ----------- ------------ Expenses: Direct operating.................... -- 309,606 36,500 (2,446) 343,660 Indirect, general and administrative.................... (11,680) 157,994 24,386 230 170,930 Interest expense, net............... 17,102 (150) 211 -- 17,163 ----------- ------------ ----------- ----------- ------------ 5,422 467,450 61,097 (2,216) 531,753 ----------- ----------- ----------- ----------- ------------ Income (loss) before taxes............. (5,422) 31,023 1,211 (31) 26,781 Income tax expense..................... 11,733 657 210 -- 12,600 ----------- ----------- ----------- ----------- ------------ Net income (loss)...................... (17,155) 30,366 1,001 (31) 14,181 Preferred stock dividend............... 2,143 -- -- -- 2,143 ----------- ----------- ----------- ----------- ------------ Net income (loss) available for common stockholders................. (19,298) 30,366 1,001 (31) 12,038 Other comprehensive income, net of tax: Foreign currency adjustments........ -- -- (592) -- (592) ----------- ----------- ----------- ----------- ------------ Comprehensive income (loss)............ $ (19,298) $ 30,366 $ 409 $ (31) $ 11,446 =========== =========== =========== =========== ============ Nine Months Ended July 31, 2000 ---------------------------------------------------------------------------- Subsidiary Non- Parent Guarantors Guarantors Eliminations Consolidated ------ ---------- ---------- ------------ ------------ Revenues............................... $ -- $ 1,442,894 $ 177,503 $ (13,585) $ 1,606,812 ----------- ----------- ----------- ----------- ------------ Expenses: Direct operating.................... -- 872,884 103,944 (13,783) 963,045 Indirect, general and administrative.................... (2,833) 459,740 69,290 198 526,395 Interest expense, net............... 54,120 (396) 652 -- 54,376 ----------- ----------- ----------- ----------- ------------ 51,287 1,332,228 173,886 (13,585) 1,543,816 ----------- ----------- ----------- ----------- ------------ Income (loss) before taxes............. (51,287) 110,666 3,617 -- 62,996 Income tax expense..................... 27,707 1,101 292 -- 29,100 ----------- ----------- ----------- ----------- ------------ Net income (loss)...................... (78,994) 109,565 3,325 -- 33,896 Preferred stock dividend............... 6,254 -- -- -- 6,254 ----------- ----------- ----------- ----------- ------------ Net income (loss) available for common stockholders................. (85,248) 109,565 3,325 -- 27,642 Other comprehensive income, net of tax: Foreign currency adjustments........ -- -- (2,005) -- (2,005) ----------- ----------- ----------- ----------- ------------ Comprehensive income (loss)............ $ (85,248) $ 109,565 $ 1,320 $ -- $ 25,637 =========== =========== =========== =========== ============ 10 URS CORPORATION CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (In thousands) (Unaudited) Nine Months Ended July 31, 2000 ---------------------------------------------------------------------------- Subsidiary Non- Parent Guarantors Guarantors Eliminations Consolidated ------ ---------- ---------- ------------ ------------ Cash flows from operating activities: Net income (loss)................... $ (78,994) $ 109,565 $ 3,325 $ -- $ 33,896 ----------- ----------- ----------- ----------- ----------- Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation and amortization....... 7,542 22,291 1,889 -- 31,722 Amortization of financing fees ..... 2,581 -- -- -- 2,581 Receivable allowances............... (7,186) 3,936 (2,211) (780) (6,241) Changes in current assets and liabilities: Accounts receivable and costs and accrued earnings in excess of billings on contracts in process.. -- (7,095) 8,828 546 2,279 Prepaid expenses and other assets.. (4,858) 3,744 (930) 1,477 (567) Accounts payable, accrued salaries and wages and accrued expenses.... 105,191 (114,807) 2,050 (9,675) (17,241) Billings in excess of costs and accrued earnings on contracts in process........................... -- (8,703) 3,424 4,336 (943) Deferrals and other, net............ (19,229) (13,351) (3,760) 4,096 (32,244) ----------- ----------- ----------- ----------- ----------- Total adjustments................. 84,041 (113,985) 9,290 -- (20,654) ----------- ----------- ----------- ----------- ----------- Net cash provided (used) by operating activities.............. 5,047 (4,420) 12,615 -- 13,242 ----------- ----------- ----------- ----------- ----------- Cash flows from investing activities: Proceeds from sale of subsidiaries 20,000 -- -- -- 20,000 Capital expenditures............... (98) (11,409) (2,119) -- (13,626) ----------- ----------- ----------- ----------- ----------- Net cash provided (used) by investing activities.............. 19,902 (11,409) (2,119) -- 6,374 ----------- ----------- ----------- ----------- ----------- Cash flows from financing activities: Payment on long-term debt, bank borrowings and capital lease obligations....................... (31,403) (1,548) (6,442) -- (39,393) Proceeds from sale of common shares and exercise of stock options........................... 4,662 -- -- -- 4,662 ----------- ----------- ----------- ----------- ----------- Net cash (used) by financing activities........................ (26,741) (1,548) (6,442) -- (34,731) ----------- ----------- ----------- ----------- ----------- Net increase (decrease) in cash........ (1,792) (17,377) 4,054 -- (15,115) Cash at beginning of period............ 6,722 17,028 21,937 -- 45,687 ----------- ----------- ----------- ----------- ----------- Cash at end of period.................. $ 4,930 $ (349) $ 25,991 $ -- $ 30,572 =========== =========== =========== =========== =========== 11 URS CORPORATION CONDENSED CONSOLIDATING BALANCE SHEET (In thousands) October 31, 1999 ---------------------------------------------------------------------------- Subsidiary Non- Parent Guarantors Guarantors Eliminations Consolidated ------ ---------- ---------- ------------ ------------ ASSETS Current assets: Cash................................ $ 6,722 $ 17,028 $ 21,937 $ -- $ 45,687 Accounts receivable, net............ (15,000) 592,159 90,818 (2,016) 665,961 Deferred income taxes............... -- 8,681 1,324 -- 10,005 Prepaid expenses and other assets............................ 4,640 18,624 847 -- 24,111 ----------- ----------- ----------- ----------- ----------- Total current assets.............. (3,638) 636,492 114,926 (2,016) 745,764 Property and equipment, net............ 445 81,526 11,194 -- 93,165 Goodwill, net.......................... 233,081 322,363 3,633 (29,380) 529,697 Investment in unconsolidated subsidiaries........................ 252,025 554,834 3,231 (810,090) -- Inter-company receivable............... -- 5,460 (4,207) (1,253) -- Other assets........................... 12,025 46,215 2,002 8,619 68,861 ----------- ----------- ----------- ----------- ----------- $ 493,938 $ 1,646,890 $ 130,779 $ (834,120) $ 1,437,487 =========== =========== =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt.............................. $ 18,392 $ 16,514 $ 16,250 $ (11,733) $ 39,423 Accounts payable.................... 27,381 95,277 13,686 (6,299) 130,045 Inter-company payable............... (471,007) 452,321 54,447 (35,761) -- Accrued expenses and other.......... 27,132 68,613 28,185 22,966 146,896 Billings in excess of costs and accrued earnings on contracts in process........................... -- 70,369 4,280 (4,336) 70,313 ----------- ----------- ----------- ----------- ----------- Total current liabilities......... (398,102) 703,094 116,848 (35,163) 386,677 Long-term debt......................... 635,016 13,540 401 -- 648,957 Other.................................. 44,909 75,400 694 (29,652) 91,351 ----------- ----------- ----------- ----------- ----------- Total liabilities................. 281,823 792,034 117,943 (64,815) 1,126,985 Total stockholders' equity............. 212,115 854,856 12,836 (769,305) 310,502 ----------- ----------- ----------- ----------- ----------- $ 493,938 $ 1,646,890 $ 130,779 $ (834,120) $ 1,437,487 =========== =========== =========== =========== =========== 12 URS CORPORATION CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (In thousands) (Unaudited) Three Months Ended July 31, 1999 ---------------------------------------------------------------------------- Subsidiary Non- Parent Guarantors Guarantors Eliminations Consolidated ------ ---------- ---------- ------------ ------------ Revenues............................... $ -- $ 385,457 $ 44,518 $ (1,493) $ 428,482 ----------- ----------- ----------- ----------- ----------- Expenses: Direct operating.................... -- 228,817 28,207 (1,493) 255,531 Indirect, general and administrative.................... 103 132,936 10,347 -- 143,386 Interest expense, net............... 9,603 (292) 1,470 -- 10,781 ----------- ----------- ----------- ----------- ----------- 9,706 361,461 40,024 (1,493) 409,698 ----------- ----------- ----------- ----------- ----------- Income (loss) before taxes............. (9,706) 23,996 4,494 -- 18,784 Income tax expense..................... 6,634 -- 1,766 -- 8,400 ----------- ----------- ----------- ----------- ----------- Net income (loss)...................... (16,340) 23,996 2,728 -- 10,384 Preferred stock dividend............... 1,333 -- -- -- 1,333 ----------- ----------- ----------- ----------- ----------- Net income (loss) available for common stockholders................. (17,673) 23,996 2,728 -- 9,051 Other comprehensive income, net of tax: Foreign currency adjustments........ -- -- 360 -- 360 ----------- ----------- ----------- ----------- ----------- Comprehensive income (loss)............ $ (17,673) $ 23,996 $ 3,088 $ -- $ 9,411 =========== =========== =========== =========== =========== Nine Months Ended July 31, 1999 ---------------------------------------------------------------------------- Subsidiary Non- Parent Guarantors Guarantors Eliminations Consolidated ------ ---------- ---------- ------------ ------------ Revenues............................... $ -- $ 765,048 $ 87,267 $ (2,557) $ 849,758 ----------- ----------- ----------- ----------- ----------- Expenses: Direct operating.................... -- 451,066 52,380 (2,557) 500,889 Indirect, general and administrative.................... 1,038 261,873 29,212 -- 292,123 Interest expense, net............... 13,762 183 1,550 -- 15,495 ----------- ----------- ----------- ----------- ----------- 14,800 713,122 83,142 (2,557) 808,507 ----------- ----------- ----------- ----------- ----------- Income (loss) before taxes............. (14,800) 51,926 4,125 -- 41,251 Income tax expense..................... 16,380 -- 1,820 -- 18,200 ----------- ----------- ----------- ----------- ----------- Net income (loss)...................... (31,180) 51,926 2,305 -- 23,051 Preferred stock dividend............... 1,333 -- -- -- 1,333 ----------- ----------- ----------- ----------- ----------- Net income (loss) available for common stockholders................. (32,513) 51,926 2,305 -- 21,718 Other comprehensive income, net of tax: Foreign currency adjustments........ -- -- 430 -- 430 ----------- ----------- ----------- ----------- ----------- Comprehensive income (loss)............ $ (32,513) $ 51,926 $ 2,735 $ -- $ 22,148 =========== =========== =========== =========== =========== 13 URS CORPORATION CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (In thousands) (Unaudited) Nine Months Ended July 31, 1999 ---------------------------------------------------------------------------- Subsidiary Non- Parent Guarantors Guarantors Eliminations Consolidated ------ ---------- ---------- ------------ ------------ Cash flows from operating activities: Net income (loss)................... $ (31,180) $ 51,926 $ 2,305 $ -- $ 23,051 ----------- ----------- ----------- ----------- ----------- Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation and amortization....... 1,019 13,191 1,632 -- 15,842 Amortization of financing fees...... 320 -- -- -- 320 Receivable allowances............... -- 3,992 -- -- 3,992 Changes in current assets and liabilities: Accounts receivable and costs and accrued earnings in excess of billings on contracts in process.. -- (31,870) 10,014 (20,150) (42,006) Prepaid expenses and other assets............................ (12,177) 22,482 (2,836) (13,119) (5,650) Accounts payable, accrued salaries and wages and accrued expenses.......................... (42,927) (38,890) (2,288) 41,326 (42,779) Billings in excess of costs and accrued earnings on contracts in process........................... -- (447) (3,554) (1,738) (5,739) Deferrals and other, net............ 14,717 (19,084) 8,377 (6,319) (2,309) ----------- ----------- ----------- ----------- ----------- Total adjustments................. (39,048) (50,626) 11,345 -- (78,329) ----------- ----------- ----------- ----------- ----------- Net cash provided (used) by operating activities.......................... (70,228) 1,300 13,650 -- (55,278) ----------- ----------- ----------- ----------- ----------- Cash flows from investing activities: Business acquisition, net of cash acquired.......................... (316,167) -- -- -- (316,167) Capital expenditures................ (115) (7,593) (2,483) -- (10,191) ----------- ----------- ----------- ----------- ----------- Net cash (used) by investing activities........................ (316,282) (7,593) (2,483) -- (326,358) ----------- ----------- ----------- ----------- ----------- Cash flows from financing activities: Proceeds from issuance of debt...... 854,440 -- 299 -- 854,739 Principal payments on long-term debt.............................. (589,597) -- -- -- (589,597) Payments on merger fees............. (18,738) -- -- -- (18,738) Proceeds from lines of credit....... 15,000 -- -- -- 15,000 Proceeds from issuance of preferred stock............................. 100,000 -- -- -- 100,000 Payments on financing fees related to issuance of preferred stock.... (1,500) -- -- -- (1,500) Proceeds from sale of common shares and exercise of stock options..... 4,941 -- -- -- 4,941 ----------- ----------- ----------- ----------- ----------- Net cash provided by financing activities........................ 364,546 -- 299 -- 364,845 ----------- ----------- ----------- ----------- ----------- Net increase (decrease) in cash........ (21,964) (6,293) 11,466 -- (16,791) Cash at beginning of period............ 26,949 6,538 3,042 -- 36,529 ----------- ----------- ----------- ----------- ----------- Cash at end of period.................. $ 4,985 $ 245 $ 14,508 $ -- $ 19,738 =========== =========== =========== =========== =========== 14 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 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, 1999, which was previously filed with the Securities and Exchange Commission. Results of Operations Third quarter ended July 31, 2000 vs. July 31, 1999 Our revenues were $558,534,000 for the quarter ended July 31, 2000, an increase of $130,052,000 or 30%, over the amount reported for the same period last year. The growth in revenue is primarily attributable to the acquisition of D-M in June 1999. Direct operating expenses for the quarter ended July 31, 2000, which consist of direct labor and other direct expenses, including subcontractor costs, increased $88,129,000, a 34% increase over the amount reported for the same period last year. The increase is due to the addition of direct operating expenses of D-M. Indirect, general and administrative expenses for the quarter ended July 31, 2000 increased $27,544,000, or 19%, over the amount reported for the same period last year, as a result of the addition of D-M overhead. Direct, indirect, and general and administrative expenses generally increased at the same rate as revenues. Interest expense increased due to additional indebtedness incurred in connection with the acquisition of D-M and to a lesser extent to increased interest rates. Our earnings before income taxes were $26,781,000 for the third quarter ended July 31, 2000 compared to $18,784,000 for the same period last year. Our effective income tax rates for the quarters ended July 31, 2000 and 1999 were approximately 47% and 45%, respectively. We reported net income of $14,181,000 or $0.64 per share on a diluted basis for the third quarter ended July 31, 2000, compared with $10,384,000, or $0.53 per share for the same period last year. Our backlog at July 31, 2000 was $1,573,000,000, as compared to $1,260,000,000 at October 31, 1999. Nine months ended July 31, 2000 vs. July 31, 1999 Our revenues were $1,606,812,000 for the nine months ended July 31, 2000, an increase of $757,054,000 or 89%, over the amount reported for the same period last year. The growth in revenues is primarily attributable to the acquisition of D-M in June 1999. Direct operating expenses for the nine months ended July 31, 2000, which consists of direct labor and other direct expenses including subcontractor costs, increased $462,156,000, or 92%, over the amount reported in the same period last year. The increase is due to the addition of direct operating expenses of D-M. Indirect, general and administrative expenses were $526,395,000 for the nine months ended July 31, 2000, an increase of $234,272,000 or 80%, over the amount reported for the same period last year as a result of the addition of D-M overhead. Direct, indirect, and general and administrative expenses generally increased at the same rate as revenues. Interest expense increased due to additional indebtedness incurred in connection with the acquisition of D-M and to a lesser extent to increased interest rates. Our earnings before income taxes were $62,996,000 for the nine months ended July 31, 2000 compared to $41,251,000 for the same period last year. Our effective income tax rates for the nine months ended July 31, 2000 and 1999 were approximately 46% and 44% respectively. We reported net income of $33,896,000 or $1.55 per share on a diluted basis for the nine months ended July 31, 2000, compared with $23,051,000 or $1.30 per share for the same period last year. 15 Liquidity and Capital Resources At July 31, 2000, we had working capital of $362,753,000, an increase of $3,666,000 from October 31, 1999. During the nine-month period ended July 31, 2000, we repaid $39,393,000 of our senior long-term debt, bank borrowings and capital lease obligations. 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 from receipts of our subsidiaries. Under certain circumstances, legal and contractual restrictions, as well as financial condition and reporting requirements, of the subsidiaries may limit our ability to obtain cash from the subsidiaries. Our liquidity and capital measurements are set forth below: As of July 31, 2000 ------------------- Working capital................................. $ 362,753,000 Working capital (current) ratio................. 2 to 1 Average days to convert billed accounts receivable to cash............................. 70 Percentage of debt to equity.................... 189% Our cash and cash equivalents amounted to $30,572,000 at July 31, 2000, a decrease of $15,115,000 from October 31, 1999. The decrease is primarily due to cash used for capital expenditures of $13,626,000 and repayment of indebtedness of $39,393,000, offset by proceeds received from sale of subsidiary of $20,000,000 and cash flows generated from operations of $13,242,000. During the nine-month period ended July 31, 2000, cash flow provided by operating activities totaled $13,242,000. We intend to satisfy our working capital needs primarily through internal cash generation. Our primary sources of liquidity will be cash flow from operations and borrowings under the senior collateralized credit facility, if necessary. Our primary uses of cash will be 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. 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 million from establishing 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 Exchange Notes. In addition, we sold 46,082.95 shares of our Series B Preferred Stock to RCBA Strategic Partners, L.P. for an aggregate consideration of $100 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 $450,000,000 and a revolving credit facility in the amount of $100,000,000. The term loan facilities consist of Term Loan A, a $250,000,000 tranche, Term Loan B, a $100,000,000 tranche, and Term Loan C, another $100,000,000 tranche. Principal amounts under Term Loan A became due, commencing on October 31, 1999, in the amount of approximately $3,000,000 per quarter for the following four quarters. Thereafter and through the sixth anniversary of the Funding Date, annual principal payments under Term Loan A range from $25,000,000 to a maximum of $58,000,000 with Term Loan A expiring and the then-outstanding principal amount becoming due and repayable in full on the sixth anniversary of the Funding Date. Principal amounts under Term Loan B became due, commencing on October 31, 1999, in the amount of $1,000,000 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 four equal quarterly installments in year seven. Principal amounts under Term Loan C became due, commencing on October 31, 1999, in the amount of $1,000,000 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 in year eight. 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 16 case plus an applicable margin. The revolving credit facility bears interest at a rate per annum equal to, at our option, either 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 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 interest periods will apply for such periods for both the term loans and the revolving credit facility. At July 31, 2000, our revolving credit facility with the Bank provides for advances up to $100,000,000. Also at July 31, 2000, we had outstanding letters of credit aggregating $37,400,000, which reduced the amount available to us under our revolving credit facility to $62,600,000. The senior collateralized credit facility is governed by affirmative and negative covenants. These covenants include restrictions upon incurring additional debt, paying dividends, or making distributions to our stockholders, repurchasing or retiring capital stock and making subordinated junior debt payments, and require us to submit quarterly compliance certification. 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, a pro-forma EBITDA minimum of $142,000,000 and a maximum leverage ratio of 4.25 to 1.00 for the period ended July 31, 2000. We were fully compliant with these covenants as of July 31, 2000. 12 1/4% Senior Subordinated Exchange 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 July 31, 2000, we owed $200,000,000 on our Notes. The Notes are fully and unconditionally guaranteed on a joint and several basis by certain of our wholly owned subsidiaries. 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. Interest Rate Swap Agreement. We have entered into an interest rate swap agreement with the Bank. This interest rate swap effectively fixes the interest rate on $55,000,000 of our LIBOR-based borrowings at 5.97% plus the applicable margin through January 31, 2001. The actual borrowing cost to us with respect to indebtedness covered by this interest rate swap will depend upon the applicable margin over LIBOR for such indebtedness, which will be determined by the terms of the relevant debt instruments. Currently, it is expected that the contractual margin will range from 2.75% to 3.50%, which will provide for an all-in annual interest rate range from 8.72% to 9.47% on these $55,000,000 of our borrowings. Interest Rate Cap Agreement. We entered into an interest rate cap agreement with the Bank. This agreement caps the interest rate at 7% for $165,800,000 of our LIBOR-based borrowings through July 31, 2002 and is incremental to the interest rate swap agreement stated above. 17 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: We may not be able to integrate D-M successfully and achieve anticipated cost savings and other benefits from the D-M acquisition. We will achieve the efficiencies, cost reductions and other benefits that we expect to result from the D-M acquisition only if we can successfully integrate each company's administrative, finance, technical and marketing organizations, and implement appropriate operations, financial and management systems and controls. The integration of D-M into our operations will involve a number of risks, including: o the possible diversion of our management's attention from other business concerns; o the potential inability to successfully pursue some or all of the anticipated revenue opportunities associated with the D-M acquisition; o the possible loss of D-M's or our key professional employees; o the potential inability to successfully replicate our operating efficiencies in D-M's operations; o insufficient management resources to accomplish the integration; o our increased complexity and diversity compared to our operations prior to the D-M acquisition; o the possible negative reaction of clients to the D-M acquisition; and o unanticipated problems or legal liabilities. The occurrence of any of the above events, as well as any other difficulties which may be encountered in the transition and integration process, could have a material adverse effect on our business, financial condition and results of operations. Our substantial indebtedness could adversely affect our financial condition. We are a highly leveraged company. As of July 31, 2000, we had approximately $655.3 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: o it may limit our ability to borrow money or sell stock for working capital, capital expenditures, debt service requirements or other purposes; o it may limit our flexibility in planning for, or reacting to, changes in our business; o we could be more highly leveraged than some of our competitors, which may place us at a competitive disadvantage; o it may make us more vulnerable to a downturn in our business or the economy; and o a substantial portion of our cash flow from operations could be dedicated to the repayment of our indebtedness and would not be available for other purposes. 18 To service our indebtedness we will 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, a substantial portion of our assets is, 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 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: o incur additional indebtedness or contingent obligations; o pay dividends or make distributions to our stockholders; o repurchase or redeem our stock; o make investments; o grant liens; o make capital expenditures; o enter into transactions with our stockholders and affiliates; o sell assets; and o 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, 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 half 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 half 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 19 continue to be funded even if governments have available financial resources, or that we will continue to win government contracts under these or other programs. 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. 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 must maintain our present responsibility to be eligible 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. 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 an estimate of the costs we will likely incur. To the extent we cannot control overhead, general and administrative and other costs, or 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 1999, including further deferral of congressional reauthorization of CERCLA. The outlook for congressional action on CERCLA legislation in fiscal year 2000 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 which 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. 20 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 will be an important factor in determining our future success. A shortage of qualified technical professionals currently exists 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 will 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. This could adversely affect our business. We are engaged in highly fragmented and very competitive markets in our service areas. We will compete with firms of various sizes, several of which are substantially larger than us and which possess greater technical resources. Furthermore, the engineering and design industry is undergoing consolidation, particularly in the United States. As a result, we will compete against several larger companies that have the ability to offer more diverse services to a wider client base. These competitive forces could have a material adverse effect on our business, financial condition and results of operations. 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 40 countries and derive approximately 10% 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 day-to-day operations. Also, future acquisitions could have an adverse effect on us. 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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK None. 21 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None. 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 Exhibit Number Exhibit ------------- ------- 10.1 Employment Agreement, dated November 19, 1999, between URS Corporation and David C. Nelson. FILED HEREWITH. 27 Financial Data Schedule (electronic filing only) (b) Reports on Form 8-K None. 22 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 September 12, 2000 URS CORPORATION /s/ Kent Ainsworth -------------------------------------------- Kent P. Ainsworth Executive Vice President and Chief Financial Officer (Principal Accounting Officer) 23 INDEX TO EXHIBITS Exhibit Sequentially Number Exhibit Numbered Page - ------ ------- ------------- 10.1 Employment Agreement, dated November 19, 1999, 25 between URS Corporation and David C. Nelson. FILED HEREWITH. 24