EXHIBIT 99.2
SUPPLEMENTAL INFORMATION
Except as otherwise indicated herein or as the context may otherwise
require, (i) the words "we," "our," "ours," "us" and "URS" refer to URS
Corporation and its subsidiaries, (ii) "EG&G businesses" refers collectively to
Carlyle-EG&G Holdings Corp., Lear Siegler Services, Inc. and their respective
subsidiaries, (iii) "EG&G Technical Services" refers to Carlyle-EG&G Holdings
Corp. and its subsidiaries, (iv) "Lear Siegler" refers to Lear Siegler Services,
Inc. and its subsidiaries, (v) "EG&G acquisition" refers to our acquisition of
the EG&G businesses pursuant to the merger agreement dated July 16, 2002, and
(vi) pro forma financial data and information contained herein give effect to
the EG&G acquisition and the related financing.
FORWARD-LOOKING INFORMATION
This supplemental information contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. These
statements address, among other things:
- our ability to consummate the transactions contemplated by the merger
agreement dated July 16, 2002 and integrate the EG&G businesses with our
operations and the costs we expect to incur and the benefits we expect to
realize from the EG&G acquisition;
- our financial performance and the effect that the EG&G acquisition will
have on our financial performance, including our possible or assumed
future results of operations;
- our level of indebtedness after the consummation of the EG&G acquisition
and our ability to service our debt in light of our dependence on our
subsidiaries for funds;
- our business strategy and ability to maximize the value of the EG&G
acquisition from a strategic perspective;
- our ability to continue to generate substantial business revenues from
our government contracts, which may be terminated at the government's
convenience at any time;
- our competitive position on a going forward basis in light of the EG&G
acquisition;
- our ability to comply with the rules and regulations applicable to
government contractors and to successfully complete routine audits and
investigations related thereto;
- our ability to accurately estimate project costs;
- our ability to attract and retain qualified professionals;
- our ability to successfully implement our new enterprise resource program
system without experiencing any significant delays in billing as a result
thereof;
- any potential liability in legal proceedings; and
- our ability to maintain or improve our financial performance in light of
current and future economic conditions.
In some cases, forward-looking statements can be identified by words such
as "may," "will," "expect," "intend," "plan," "anticipate," "estimate,"
"potential," or "continue" or the negatives of these words or other comparable
words. We have based these forward-looking statements on our beliefs and
assumptions as well as information currently available to us. Forward-looking
statements involve known and unknown risks and uncertainties that may cause our
results, levels of activity, performance or achievements or those of our
industry to be materially different from those expressed in or implied by the
forward-looking statements. We urge you to consider carefully the information
set forth under "Risk Factors," which identifies and discusses some of the
important factors that could cause our actual results to differ materially from
those in any forward-looking statements. We do not intend to update any of the
forward-looking statements or the risk factors contained in this supplemental
information to reflect any future events or developments unless required by law.
Industry and market data presented in this supplemental information,
including information relating to the EG&G businesses and our relative positions
in the design and engineering and the federal technical services industries, are
based upon our review of independent industry publications, such as Engineering
News-Record ("ENR") and publications by the Government Electronics Industry
Association ("GEIA") and other publicly available information. Although we
believe that such sources are reliable, we have not verified the information and
cannot assure you that such information is accurate or complete.
1
RISK FACTORS
WE MAY NOT BE ABLE TO INTEGRATE THE EG&G BUSINESSES SUCCESSFULLY OR ACHIEVE
ANTICIPATED COST SAVINGS AND OTHER BENEFITS FROM THE EG&G ACQUISITION.
We will only achieve the efficiencies, cost reductions and other benefits
that we expect to result from the EG&G acquisition if we can successfully close
the EG&G acquisition and integrate the EG&G businesses' administrative, finance,
technical and marketing organizations and implement appropriate operations,
financial and management systems and controls. We may have insufficient
management resources to accomplish the integration, and even if we are able to
integrate the EG&G acquisition successfully, we may not realize any of the $15.0
million in annual cost savings or other benefits that we currently expect to
achieve.
We may not be able to satisfy successfully the conditions to closing the
EG&G acquisition and even if we successfully close the EG&G acquisition, the
integration of the EG&G businesses' operations with our own will involve a
number of risks, including:
- the disruption of our business and the diversion of our management's
attention from other business concerns;
- unanticipated expenses related to integration;
- the potential failure to realize anticipated revenue opportunities
associated with the EG&G acquisition;
- the possible loss of our key professional employees or those of the EG&G
businesses;
- the potential failure to replicate our operating efficiencies in the EG&G
businesses' operations;
- our increased complexity and diversity compared to our operations prior
to the EG&G acquisition;
- the possible negative reaction of clients to the EG&G acquisition; and
- unanticipated problems or legal liabilities.
If we do not succeed in addressing these challenges or any other
difficulties encountered in the transition and integration process, our
business, financial condition and results of operations would be adversely
affected.
OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION
We are a highly leveraged company and our leverage will increase as a
result of the EG&G acquisition and related financings. This level of
indebtedness could have important consequences, including the following:
- it will require us to dedicate a substantial portion of our cash flow
from operations to payments on our indebtedness, thereby reducing the
availability of cash flow to fund working capital, capital expenditures
and other general corporate purposes;
- it will limit our ability to borrow money or sell stock for working
capital, capital expenditures, debt service requirements or other
purposes;
- it will limit our flexibility in planning for, or reacting to, changes in
our business;
- it may place us at a competitive disadvantage if we are more highly
leveraged than some of our competitors;
- it may make us more vulnerable to a further downturn in the economy or
our business; and
- it may restrict us from making strategic acquisitions or exploiting
business opportunities.
TO SERVICE OUR INDEBTEDNESS, WE REQUIRE A SIGNIFICANT AMOUNT OF CASH.
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 may make it more difficult for us to
obtain financing on terms that are acceptable to us or at all. Without such
financing, we could be forced to sell assets to make up for any shortfall in
our payment obligations under unfavorable circumstances.
Our senior secured credit facility and other debt obligations will limit
our ability to sell assets and also restrict the use of proceeds from any such
sale. A substantial portion of our assets are, and may continue to be,
intangible assets. Therefore, we may not be able to sell our assets quickly
enough or for sufficient amounts to enable us to meet our debt obligations.
WE HAVE BEGUN TO EXPERIENCE THE ADVERSE EFFECTS OF THE CURRENT ECONOMIC
DOWNTURN. IF THE CURRENT DOWNTURN CONTINUES, OUR REVENUES COULD DECLINE AND OUR
FINANCIAL CONDITION COULD DETERIORATE.
In response to reduced revenues caused by the current economic downturn,
our clients are likely to cut costs and delay, curtail or cancel projects with
us. Our clients may also demand better pricing terms. In addition, the current
economic downturn may impact our client's creditworthiness and our ability to
collect cash from them to meet our operating needs. We have already begun to
notice a decrease in our margins, and in the future we may see an increase in
the average number of days to convert billed accounts receivable to cash.
Accordingly, if current economic conditions do not improve, our revenues and
profits may suffer and our operating cash may decrease.
2
WE DERIVE A SUBSTANTIAL PORTION 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.
On a pro forma basis, approximately 64% of our revenues for fiscal 2001
would have been derived from local, state and federal government agencies.
Demand for our services will be directly related to the level of government
program spending. The success and further development of our business depend, in
large part, upon the continued funding of government programs and upon our
ability to participate in these government programs. Factors that could
materially adversely affect our government contracting business include:
- changes in and delays or cancellations of government programs,
requirements or appropriations;
- curtailment of the use of government contracting firms;
- changes in the political climate with regard to the funding or operation
of the services we provide;
- relaxation or repeal of environmental laws or regulations;
- the adoption of new laws or regulations affecting our contracting
relationships with local or state governments or the federal government;
- unsatisfactory performance on government contracts by us or one of our
subcontractors, negative government audits or other events that may
impair our relationship with local or state governments or the federal
government;
- disputes with or improper activity by a subcontractor; and
- general economic conditions.
These and other factors could cause government agencies to reduce their
purchases or orders under contracts, to exercise their rights to terminate
contracts or not to exercise contract options for renewals or extensions, any of
which could have a material adverse effect on our financial condition and
operating results.
AS A GOVERNMENT CONTRACTOR, WE ARE SUBJECT TO A NUMBER OF PROCUREMENT RULES AND
REGULATIONS AND OTHER PUBLIC SECTOR LIABILITIES.
We must comply with and are affected by laws and regulations relating to
the formation, administration and performance of government contracts. These
laws and regulations affect how we do business with our clients, and in some
instances, impose added costs on our business. A violation of specific laws and
regulations could result in the imposition of fines and penalties or the
termination of our contracts. Moreover, as a federal government contractor we
must maintain our status as a responsible contractor. Failure to do so could
lead to suspension or debarment making us ineligible for federal government
contracts and potentially for state and local government contracts.
OUR GOVERNMENT CONTRACTS MAY BE TERMINATED AT ANY TIME PRIOR TO THEIR
COMPLETION.
Government clients typically can terminate or modify any of their contracts
with us at their convenience. In addition, some of these government contracts
are subject to renewal or extension annually. If a government client terminates
a contract or fails to renew or extend a contract, our backlog may be reduced or
we may incur a loss, either of which could impair our financial condition and
operating results. A termination due to our unsatisfactory performance could
expose us to liability and have a material adverse effect on our ability to
recompete for future contracts and orders. In cases where we are a
subcontractor, the prime contract under which we are a subcontractor could be
terminated, irrespective of the quality of our services as a subcontractor or
our relationship with the relevant government agency. Our government clients can
also reduce the value of existing contracts, issue modifications to a contract
and control and potentially prohibit the export of our services and associated
materials.
3
TERMINATION OF ALL OR SOME OF OUR BACKLOG OF ORDERS COULD NEGATIVELY AFFECT OUR
REVENUES.
The contracts comprising our backlog estimates may not result in actual
revenue in any particular period. These estimates are based on our experience
under these contracts and similar contracts and may not be accurate. Our
contract backlog consists of the amount billable at a particular point in time
for future services under signed and funded contracts, including the full term
of multi-year government contracts for which funds must be appropriated on an
annual basis. On a pro forma basis, our total backlog as of April 30, 2002 would
have been approximately $4.2 billion, of which approximately 88% requires
renewed annual appropriation by government clients. We may not calculate our
backlog in the same manner as other comparable companies.
OUR BUSINESS COULD BE ADVERSELY AFFECTED BY A NEGATIVE GOVERNMENT AUDIT.
Government agencies such as the United States Defense Contract Audit
Agency, or the DCAA, routinely audit and investigate government contractors.
These agencies review a contractor's performance under its contracts, cost
structure and compliance with applicable laws, regulations and standards. Any
costs found to be improperly allocated to a specific contract will not be
reimbursed, or if already reimbursed, must be refunded. Therefore, an audit
could result in a substantial adjustment to our financial results or statement
of operations.
Moreover, if an audit uncovers improper conduct engaged in by us, the EG&G
businesses or a subcontractor, we may be subject to civil and criminal penalties
and administrative sanctions, including termination of contracts, forfeiture of
profits, suspension of payments, fines and suspension or prohibition from doing
business with the government, any of which could materially and adversely affect
our financial condition. In addition, we could suffer serious reputational harm.
Our compliance program may not prevent future improper conduct.
WE MAY BE UNABLE TO ESTIMATE ACCURATELY OUR COSTS IN PERFORMING SERVICES FOR OUR
CLIENTS. THIS MAY CAUSE US TO HAVE LOW PROFIT MARGINS OR INCUR LOSSES.
We enter into three principal types of contracts with our clients:
cost-plus, fixed-price and time-and-materials. Under cost-plus contracts, which
are subject to a contract ceiling amount, we are reimbursed for allowable costs
and paid a fee, which may be fixed or performance based. If our costs exceed the
contract ceiling or are not allowable under the provisions of the contract or
any applicable regulations, we may not be able to obtain reimbursement for all
such costs. Under fixed-price contracts, we receive a fixed price irrespective
of the actual costs we incur, and consequently, any costs in excess of the fixed
price are absorbed by us. Under time-and-materials contracts, we are paid for
labor at negotiated hourly billing rates and for certain expenses. Profitability
on these types of contracts is driven by billable headcount and control of costs
and overhead. Under each type of contract, if we are unable to control costs we
incur in performing under the contract, our financial condition and operating
results could be materially adversely affected.
WE MAY INCUR SUBSTANTIAL COSTS OF COMPLIANCE WITH, OR LIABILITIES UNDER,
ENVIRONMENTAL LAWS AND REGULATIONS.
A substantial portion of our business involves the planning, design and
program and construction management of pollution control facilities as well as
the assessment and management of remediation activities at hazardous waste or
Superfund sites and military bases. In addition, the EG&G businesses contract
with U.S. governmental entities to destroy hazardous materials including
chemical agents and weapons stockpiles. Federal laws, including the Resource
Conservation and Recovery Act of 1976, as amended, or RCRA, and the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980,
as amended, or CERCLA, as well as various state and local laws strictly regulate
the presence, use, handling, removal, treatment, transportation and disposal of
toxic and hazardous substances and impose liability for environmental
contamination caused by such substances. In addition, so-called "toxic tort"
litigation has increased markedly in recent years as people injured by hazardous
substances seek recovery
4
for personal injuries and/or property damages. Liabilities related to
environmental contamination or human exposure to hazardous substances, or a
failure to comply with applicable regulations, could result in substantial costs
to us, including cleanup costs, fines and civil or criminal sanctions, third
party claims for property damage or personal injury or cessation of remediation
activities. Any of these could have a material adverse effect on our operations
or financial position.
CHANGES IN ENVIRONMENTAL LAWS, REGULATIONS AND PROGRAMS COULD REDUCE DEMAND FOR
OUR ENVIRONMENTAL SERVICES.
Federal and state laws, regulations and programs related to pollution and
environmental protection generate, either directly or indirectly, much of our
environmental business as facility and property owners attempt to comply with or
address liability under environmental laws and regulations. Accordingly, a
relaxation or repeal of these laws and regulations, or changes in governmental
policies regarding the funding, implementation or enforcement of these programs,
could result in a decline in demand for environmental services and may have a
material effect on our business or financial condition.
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, failure to comply with environmental laws and
regulations 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. Some actions involve allegations
that are not insured. If we sustain damages greater than our insurance coverage,
or the damages are not insured, 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 incurred by our clients. The resulting damages could be
substantial.
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 may not 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 operate in highly fragmented and very competitive markets in our service
areas. As a result, we compete with many engineering and consulting firms. Some
of our competitors have achieved substantially more market penetration in
certain of the markets in which we compete. In addition, some of our competitors
have substantially more financial resources and/or financial flexibility.
Furthermore, both the engineering and design and federal technical services
industries are 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.
5
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, on a pro forma basis, we
would have had operations in over 20 countries as of April 30, 2002, and
approximately 7% of our revenues for fiscal 2001 would have been derived from
our foreign subsidiaries. The EG&G businesses do not have any foreign
subsidiaries. However, the EG&G businesses and our domestic subsidiaries engage
in business abroad. International business is subject to a variety of risks,
including:
- greater risk of uncollectible accounts and longer collection cycles;
- currency fluctuations;
- logistical and communications challenges;
- potential adverse changes in laws and regulatory practices, including
export license requirements, trade barriers, tariffs and tax laws;
- changes in labor conditions;
- exposure to liability under the Foreign Corrupt Practices Act; and
- general economic and political conditions in these foreign markets.
These and other risks associated with international operations 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.
We have completed numerous acquisitions, and in implementing our business
strategy, we may continue to do so in the future. We may not be able to
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 NEW ACCOUNTING AND PROJECT
MANAGEMENT SYSTEM.
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. If we
ultimately decide to reject the new system, we will write off the costs incurred
in connection with the transition, which we estimate will be approximately $50
million. Furthermore, the EG&G acquisition may increase the difficulty of
integrating this new accounting and project management system with respect to
the EG&G businesses.
TERRORIST ATTACKS MAY AFFECT OUR ABILITY TO CONDUCT BUSINESS.
Terrorist attacks on the United States present a potential threat to
communication systems, information technology and security, may damage buildings
and their contents and may cause injury to or death of key employees. We may
need to increase security and add other protections against terrorist threats
and we may incur significant costs in doing so. In addition, a terrorist attack
could cause significant structural damage to our facilities, which 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.
6
WE ARE A HOLDING COMPANY AND THEREFORE DEPEND ON OUR SUBSIDIARIES TO SERVICE OUR
DEBT.
We have no direct operations and no significant assets other than the stock
of our subsidiaries. Because we conduct our operations through our operating
subsidiaries, we depend on those entities for dividends and other payments to
generate the funds necessary to meet our financial obligations. Under certain
circumstances, legal and contractual restrictions, as well as the financial
condition and operating requirements of our subsidiaries, may limit our ability
to obtain cash from our subsidiaries. The earnings from, or other available
assets of, these operating subsidiaries may not be sufficient to make
distributions to enable us to pay interest on our debt obligations, when due or
the principal of such debt at maturity.
RESTRICTIVE COVENANTS IN THE TERMS OF OUR INDEBTEDNESS MAY RESTRICT OUR ABILITY
TO PURSUE BUSINESS STRATEGIES.
The terms of our other indebtedness restrict our ability to, among other
things:
- incur additional indebtedness or contingent obligations;
- pay dividends or make distributions to our stockholders;
- repurchase or redeem our stock;
- make investments;
- create liens;
- enter into sale/leaseback transactions;
- 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.
We may also be required to maintain certain financial ratios. We may not be
able to maintain these ratios. In addition, if we fail to obtain stockholder
approval for the conversion of our series D preferred stock into shares of
common stock, our series D preferred stock will convert into series E preferred
stock, which contains covenants that restrict our ability to incur additional
indebtedness and purchase certain
7
assets. The covenants in various debt instruments and, if issued, our series E
preferred stock 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 amount. If the lenders require
immediate repayment on the entire principal amount, we will not be able to repay
these amounts in full, and our inability to meet our debt obligations would have
a material adverse effect on our business, financial condition and results of
operations.
8
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following unaudited pro forma combined financial information is based
on the historical financial statements of URS and the respective historical
financial statements of the EG&G businesses. The unaudited pro forma combined
balance sheet as of April 30, 2002 gives effect to the EG&G acquisition and the
related financing as if they had occurred on April 30, 2002. The unaudited pro
forma combined statements of operations for the six months ended April 30, 2002,
the twelve months ended April 30, 2002, and the year ended October 31, 2001 give
effect to the EG&G acquisition and the related financing as if they had occurred
on November 1, 2000.
Our fiscal year ends on October 31, EG&G Technical Services' fiscal year
ends on the closest Friday to December 31 and Lear Siegler's fiscal year ends on
December 31. To present comparable data for us and for the EG&G businesses, the
unaudited pro forma combined balance sheet as of April 30, 2002 includes
unaudited historical data for us as of April 30, 2002 and unaudited historical
data for the EG&G businesses as of March 31, 2002. The unaudited pro forma
combined statement of operations for the (i) six months ended April 30, 2002
includes unaudited historical data for us for the six months ended April 30,
2002 and unaudited historical data for the EG&G businesses for the six months
ended March 31, 2002, (ii) twelve months ended April 30, 2002 includes unaudited
historical data for us for the twelve months ended April 30, 2002 and unaudited
historical data for the EG&G businesses for the twelve months ended March 31,
2002, and (iii) the year ended October 31, 2001 includes historical data for us
for the year ended October 31, 2001, historical data for EG&G Technical Services
for the year ended December 28, 2001 and historical data for Lear Siegler for
the year ended December 31, 2001.
Accordingly, the results of operations for the EG&G Technical Services for
the period October 1, 2001 through December 28, 2001 and Lear Siegler for the
period October 1, 2001 through December 31, 2001 are reflected in the unaudited
pro forma combined statements of operations for each period presented. The total
revenues of EG&G Technical Services for the three months ended December 28, 2001
and Lear Siegler for the three months ended December 31, 2001 that have been
reflected in the unaudited pro forma combined statements of operations for the
six months ended April 30, 2002, the twelve months ended April 30, 2002 and the
year ended October 31, 2001 are approximately $147.0 million and $97.6 million,
respectively. The total net income (loss) for EG&G Technical Services for the
three months ended December 28, 2001 and Lear Siegler for the three months ended
December 31, 2001 that have been reflected in the unaudited pro forma combined
statements of operations for the six months ended April 30, 2002, the twelve
months ended April 30, 2002 and the year ended October 31, 2001 are
approximately $0.6 million and $(3.6) million, respectively.
The unaudited pro forma combined financial information is presented for
informational purposes only and does not purport to represent what our results
of operations or financial position would actually have been had the EG&G
acquisition and the related financing in fact occurred on the dates specified,
nor do they purport to project our results of operations or financial position
for any future period or at any future date. All pro forma adjustments are based
upon preliminary estimates and assumptions and are subject to revision upon
completion of the EG&G acquisition.
The unaudited pro forma combined financial information presented below does
not give effect to a cost reduction program that we intend to initiate for the
combined company after the EG&G acquisition. We expect to fully implement this
program within twelve months of closing and that, once implemented, it will
reduce annual costs by up to $15 million. We expect to achieve these cost
savings through consolidation of legal, tax and audit expenses, reduction in
insurance costs, improved terms of employee benefit programs, favorable office
consolidation opportunities, improved purchasing leverage and reduced accounting
and information technology systems expenses. We may not achieve these
anticipated cost savings due to a variety of risks, including, without
limitation, (a) higher than expected severance costs related to staff
reductions, (b) higher lease termination payments or lower sublease payments,
(c) costs in excess of reserved amounts in respect of outstanding litigation,
(d) unanticipated increases in corporate overhead and (e) an increase in other
costs of URS and the EG&G businesses on a combined basis. For other risks
related to anticipated cost savings, see "Risk Factors -- We may not be able to
integrate the
9
EG&G businesses successfully or achieve anticipated cost savings and other
benefits from the EG&G acquisition."
We have included unaudited pro forma combined financial information for the
twelve months ended April 30, 2002 because it provides current annual
information for analysis of the EG&G acquisition. The unaudited pro forma
combined financial information should be read in conjunction with the other
information contained under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our financial statements and
the accompanying notes thereto included in our Annual Report on Form 10-K for
the year ended October 31, 2001.
10
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF APRIL 30, 2002
(IN THOUSANDS)
<Table>
<Caption>
AS OF AS OF AS OF
APRIL 30, MARCH 31, APRIL 30,
2002 2002 2002
---------- --------------------- ----------
EG&G
TECHNICAL LEAR
URS SERVICES SIEGLER ADJUSTMENTS PRO FORMA
---------- --------- -------- ----------- ----------
ASSETS
Current assets:
Cash and cash equivalents....... $ 25,077 $ 4,149 $ 109 $ (15,000)(a) $ 14,335
Accounts receivable, net........ 449,924 34,459 39,845 -- 524,228
Costs and accrued earnings in
excess of billings on
contracts in process, net..... 246,592 43,556 21,617 -- 311,765
Prepaid expenses and other...... 32,707 2,547 6,716 (1,590)(b) 40,380
---------- -------- -------- --------- ----------
Total current assets....... 754,300 84,711 68,287 (16,590) 890,708
Property and equipment, net..... 143,297 4,207 3,632 -- 151,136
Goodwill, net................... 501,086 179,904 54,963 (234,867)(c) 923,282
422,196 (c)
Other assets.................... 42,118 20,601 14,418 25,083 (d) 95,660
(6,560)(b)
---------- -------- -------- --------- ----------
Total assets............... $1,440,801 $289,423 $141,300 $ 189,262 $2,060,786
========== ======== ======== ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term
debt.......................... $ 60,456 $ 11,282 $ 500 $ (57,291)(e) $ 49,967
35,020 (f)
Accounts payable................ 105,029 18,206 22,814 (3,260)(b) 142,789
Accrued expenses and other...... 70,605 34,903 37,764 -- 143,272
Billings in excess of costs and
accrued earnings on contracts
in process.................... 86,568 -- -- -- 86,568
---------- -------- -------- --------- ----------
Total current
liabilities.............. 322,658 64,391 61,078 (25,531) 422,596
Long-term debt.................. 560,406 114,094 43,917 (475,439)(e) 929,478
686,500 (f)
Deferred compensation and
other......................... 74,190 5,779 -- -- 79,969
---------- -------- -------- --------- ----------
Total liabilities.......... 957,254 184,264 104,995 185,530 1,432,043
---------- -------- -------- --------- ----------
Convertible preferred stock:
Series B preferred stock(g)... 124,951 -- -- -- 124,951
---------- -------- -------- --------- ----------
Series D preferred stock...... -- -- -- 39,933 (h) 39,933
---------- -------- -------- --------- ----------
Total convertible preferred
stock.................... 124,951 -- -- 39,933 164,884
---------- -------- -------- --------- ----------
Stockholders' equity:
Common stock.................. 188 -- 36 50 (i) 238
(36)(j)
Treasury stock................ (287) -- -- -- (287)
Additional paid-in capital.... 168,472 101,831 36,638 110,103 (i) 278,575
(138,469)(j)
Other comprehensive income
(loss)..................... (6,391) 583 -- (583)(j) (6,391)
Retained earnings............. 196,614 2,745 (369) (2,376)(j) 191,724
(4,890)(b) --
---------- -------- -------- --------- ----------
Total stockholders'
equity................... 358,596 105,159 36,305 (36,201) 463,859
---------- -------- -------- --------- ----------
Total liabilities and
stockholders' equity..... $1,440,801 $289,423 $141,300 $ 189,262 $2,060,786
========== ======== ======== ========= ==========
</Table>
See Notes to Unaudited Pro Forma Combined Balance Sheet
11
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
(a) Reflects sources of cash as part of the financing related to the EG&G
acquisition.
(b) Reflects the write-off of debt issuance costs related to the extinguishment
of our debt in connection with the financing related to the EG&G
acquisition.
<Table>
Current capitalized debt issuance costs..................... $ 1,590
Long-term capitalized debt issuance costs................... 6,560
-------
8,150
Tax effect of the write-off at an assumed statutory rate of
40%....................................................... (3,260)
-------
$ 4,890
=======
</Table>
(c) Reflects the elimination of EG&G Technical Services' and Lear Siegler's
historical goodwill and the aggregate goodwill created by the EG&G
acquisition.
<Table>
Purchase price.............................................. $481,586
Acquisition costs (net of financing fees)................... 17,000
--------
498,586
Less: net assets acquired................................... (76,390)
--------
Excess of acquisition cost over net assets acquired......... $422,196
========
</Table>
We believe that the amounts for tangible assets and liabilities reflected on
EG&G Technical Services' and Lear Siegler's consolidated statement of
financial position approximate the fair market values of such assets and
liabilities and, accordingly, such amounts have not been adjusted in the
accompanying pro forma financial information. As part of the adoption of
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets", we regularly evaluate whether events and circumstances
have occurred that indicate a possible impairment of goodwill. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Critical Accounting Policies."
Our estimate of the purchase price consists of $331,500 of cash and the
issuance of our common stock and our series D preferred stock valued at
$110,153 and $39,933, respectively. Under the merger agreement, the series D
preferred stock includes a variable liquidation preference which will be
calculated at closing and depends upon the average closing price of our
common stock for the 20 trading days preceding the closing date. However, as
a result of voting agreements signed in connection with the EG&G acquisition
and the escalating dividend rate associated with the series D preferred
stock, our estimate of the purchase price, specifically the valuation of the
series D preferred stock, assumes that all of the shares of series D
preferred stock have been converted into shares of our common stock. The
shares of series D preferred stock have been valued on an as-converted basis
at the average closing price of our common stock for the three trading days
ended July 31, 2002, the most recent practicable date for which the
necessary data was available. The average closing stock price of our common
stock for the three trading days ended on July 31, 2002 was $22.22.
We believe that our estimate and underlying assumptions provide our best
estimates of the purchase price at July 31, 2002, but the actual purchase
price at closing is likely to differ. Based on the terms of the merger
agreement, the number of shares of common stock that could be issued upon
conversion may range from 1.3 million to 2.7 million shares. We do not
believe a sensitivity analysis in respect of the valuation of the series D
preferred stock would be useful to investors given the large number of
variables upon which such valuation depends.
(d) Reflects capitalized debt financing fees and expenses aggregating $25,083.
(e) Reflects the repayment of our debt and that of EG&G Technical Services and
Lear Siegler as part of the financing related to the EG&G acquisition.
<Table>
<Caption>
EG&G
TECHNICAL LEAR
URS SERVICES SIEGLER TOTAL
-------- --------- ------- --------
Current.................................... $ 45,509 $ 11,282 $ 500 $ 57,291
Non-current................................ 317,428 114,094 43,917 475,439
-------- -------- ------- --------
$362,937 $125,376 $44,417 $532,730
======== ======== ======= ========
</Table>
(f) Reflects debt incurred as part of the financing related to the EG&G
acquisition.
12
<Table>
Notes....................................................... $250,000
New senior secured credit facility:
Revolving credit facility................................. 21,520
Term loan A............................................... 100,000
Term loan B............................................... 350,000
--------
Total new debt.......................................... 721,520
Less: current portion..................................... (35,020)
--------
Non-current portion....................................... $686,500
========
</Table>
We expect to have generated sufficient cash flow between April 30, 2002 and
the closing to consummate the EG&G acquisition without incurring any
borrowings under the revolving credit facility. Accordingly, we expect the
revolving credit facility to be undrawn at closing. Amounts outstanding
under letters of credit will reduce our availability thereunder.
(g) Represents the aggregate liquidation preference of the 46,083 shares of
series B preferred stock outstanding as of April 30, 2002. On June 9, 2002,
we exercised our right to convert all of the outstanding series B preferred
stock into 5,845,104 shares of our common stock.
(h) Represents the estimated fair market value of the 100,000 shares of series D
preferred stock to be issued in connection with the EG&G acquisition. See
footnote (c).
(i) Represents the estimated fair market value of the 4,957,359 shares of common
stock to be issued in connection with the EG&G acquisition based on the
average closing price of our common stock for the three trading days ended
on July 31, 2002.
(j) Reflects the elimination of EG&G Technical Services' and Lear Siegler's
historical equity.
13
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
SIX MONTHS ENDED APRIL 30, 2002
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<Table>
<Caption>
SIX MONTHS SIX MONTHS
ENDED ENDED
APRIL 30, SIX MONTHS ENDED APRIL 30,
2002 MARCH 31, 2002 2002
---------- ----------------------- ----------
EG&G
TECHNICAL LEAR
URS SERVICES SIEGLER ADJUSTMENTS PRO FORMA
---------- ---------- --------- ----------- ----------
Revenues....................... $1,107,408 $269,891 $190,254 $ -- $1,567,553
---------- -------- -------- ------- ----------
Expenses:
Direct operating............. 663,508 238,897 179,453 -- 1,081,858
Indirect, general and
administrative............ 353,368 17,477 12,664 -- 383,509
Depreciation................. 15,252 643 455 -- 16,350
Amortization of goodwill..... -- 2,545 1,281 (3,826)(a) --
Interest expense, net........ 24,938 4,563 2,511 9,715(b) 41,727
---------- -------- -------- ------- ----------
Total expenses............ 1,057,066 264,125 196,364 5,889 1,523,444
---------- -------- -------- ------- ----------
Income (loss) before taxes and
preferred stock dividend..... 50,342 5,766 (6,110) (5,889) 44,109
Income tax expense (benefit)... 20,140 2,374 (2,345) (2,356)(c) 17,813
---------- -------- -------- ------- ----------
Net income (loss).............. 30,202 3,392 (3,765) (3,533) 26,296
Preferred stock dividend....... 4,884 -- -- --(d) 4,884
---------- -------- -------- ------- ----------
Net income (loss) available for
common stockholders.......... $ 25,318 $ 3,392 $ (3,765) $(3,533) $ 21,412
========== ======== ======== ======= ==========
Net income per common share:
Basic........................ $ 1.37 $ 0.85(e)
========== ==========
Diluted...................... $ 1.16 $ 0.81(e)
========== ==========
Weighted average shares
outstanding:
Basic........................ 18,482 25,237
========== ==========
Diluted...................... 25,895 32,649
========== ==========
</Table>
See Notes to Unaudited Pro Forma Combined Statement of Operations
14
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
TWELVE MONTHS ENDED APRIL 30, 2002
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<Table>
<Caption>
TWELVE
MONTHS TWELVE
ENDED MONTHS
APRIL 30, TWELVE MONTHS ENDED ENDED
2002 MARCH 31, 2002 APRIL 30, 2002
---------- ------------------------- --------------
EG&G
TECHNICAL LEAR
URS SERVICES SIEGLER ADJUSTMENTS PRO FORMA
---------- --------- ------------ ----------- --------------
Revenues....................... $2,365,138 $546,161 $353,956 $ -- $3,265,255
---------- -------- -------- -------- ----------
Expenses:
Direct operating............... 1,432,066 484,623 337,798 -- 2,254,487
Indirect, general and
administrative............... 726,064 33,254 12,283 -- 771,601
Depreciation................... 29,293 1,329 791 -- 31,413
Amortization of goodwill....... 7,825 7,814 3,847 (11,661)(a) 7,825
Interest expense, net.......... 56,002 10,489 4,427 12,536(b) 83,454
---------- -------- -------- -------- ----------
Total expenses............... 2,251,250 537,509 359,146 875 3,148,780
---------- -------- -------- -------- ----------
Income (loss) before taxes and
preferred stock dividend..... 113,888 8,652 (5,190) (875) 116,475
Income tax expense (benefit)... 48,170 3,582 (1,456) (350)(c) 49,946
---------- -------- -------- -------- ----------
Net income (loss).............. 65,718 5,070 (3,734) (525) 66,529
Preferred stock dividend....... 9,664 -- -- --(d) 9,664
---------- -------- -------- -------- ----------
Net income (loss) available for
common stockholders.......... $ 56,054 $ 5,070 $ (3,734) $ (525) $ 56,865
========== ======== ======== ======== ==========
Net income per common share:
Basic........................ $ 3.03 $ 2.25(e)
========== ==========
Diluted...................... $ 2.56 $ 2.05(e)
========== ==========
Weighted average shares
outstanding:
Basic........................ 18,482 25,237
========== ==========
Diluted...................... 25,698 32,452
========== ==========
</Table>
See Notes to Unaudited Pro Forma Combined Statement of Operations
15
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 2001
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<Table>
<Caption>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, DECEMBER 28, DECEMBER 31, OCTOBER 31,
2001 2001 2001 2001
----------- ------------ ------------ -----------
EG&G
TECHNICAL LEAR
URS SERVICES SIEGLER ADJUSTMENTS PRO FORMA
----------- ------------ ------------ ----------- -----------
Revenues................ $2,319,350 $542,530 $335,024 $ -- $3,196,904
---------- -------- -------- -------- ----------
Expenses:
Direct operating...... 1,393,818 481,422 319,615 -- 2,194,855
Indirect, general and
administrative..... 713,648 32,614 11,843 -- 758,105
Depreciation.......... 26,526 1,364 646 -- 28,536
Amortization of
goodwill........... 15,617 10,181 5,129 (15,310)(a) 15,617
Interest expense,
net................ 65,589 12,413 4,585 867(b) 83,454
---------- -------- -------- -------- ----------
Total expenses..... 2,215,198 537,994 341,818 (14,443) 3,080,567
---------- -------- -------- -------- ----------
Income (loss) before
taxes and preferred
stock dividend........ 104,152 4,536 (6,794) 14,443 116,337
Income tax expense
(benefit)............. 46,300 1,900 (1,883) 5,777(c) 52,094
---------- -------- -------- -------- ----------
Net income (loss)....... 57,852 2,636 (4,911) 8,666 64,243
Preferred stock
dividend.............. 9,229 -- -- --(d) 9,229
---------- -------- -------- -------- ----------
Net income (loss)
available for common
stockholders.......... $ 48,623 $ 2,636 $ (4,911) $ 8,666 $ 55,014
========== ======== ======== ======== ==========
Net income per common
share:
Basic................. $ 2.79 $ 2.27(e)
========== ==========
Diluted............... $ 2.41 $ 2.09(e)
========== ==========
Weighted average shares
outstanding:
Basic................. 17,444 24,199
========== ==========
Diluted............... 23,962 30,716
========== ==========
</Table>
See Notes to Unaudited Pro Forma Combined Statement of Operations
16
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(a) Reflects the elimination of goodwill amortization previously recorded by
EG&G Technical Services and Lear Siegler.
<Table>
<Caption>
SIX MONTHS TWELVE MONTHS YEAR
ENDED ENDED ENDED
APRIL 30, APRIL 30, OCTOBER 31,
2002 2002 2001
---------- ------------- -----------
Elimination of EG&G Technical Services' goodwill
amortization expense........................... $(2,545) $ (7,814) $(10,181)
Elimination of Lear Siegler's goodwill
amortization expense........................... (1,281) (3,847) (5,129)
------- -------- --------
$(3,826) $(11,661) $(15,310)
======= ======== ========
</Table>
(b) Reflects estimated incremental interest expense associated with debt
incurred as part of the financing related to the EG&G acquisition and
estimated amortization of debt financing costs.
<Table>
<Caption>
SIX MONTHS TWELVE MONTHS YEAR
ENDED ENDED ENDED
APRIL 30, APRIL 30, OCTOBER 31,
2002 2002 2001
---------- ------------- -----------
Interest expense calculated based on current
rates.......................................... $ 41,727 $ 83,454 $ 83,454
Less: Historical interest expense -- URS......... (24,938) (56,002) (65,589)
Less: Historical interest expense -- EG&G
Technical Services............................. (4,563) (10,489) (12,413)
Less: Historical interest expense -- Lear
Siegler........................................ (2,511) (4,427) (4,585)
-------- -------- --------
Adjustment -- increase in interest
expense........................................ $ 9,715 $ 12,536 $ 867
======== ======== ========
</Table>
<Table>
<Caption>
VARIABLE VARIABLE VARIABLE
INTEREST INTEREST AT INTEREST
RANGE CURRENT/ RANGE
ACTUAL 125 BASIS ACTUAL 125 BASIS
DEBT INSTRUMENT RATE AMOUNT POINTS BELOW RATE POINTS ABOVE
- --------------- ------ -------- ------------ ----------- ------------
EXISTING DEBT TO REMAIN
OUTSTANDING:
Interest expense.................. -- -- $28,564 $28,564 $28,564
NEW DEBT:
Notes............................. 10.5% $250,000 26,250 26,250 26,250
New senior secured credit
facility:
Revolving credit facility....... 6.75% 21,520 1,184 1,453 1,722
Term loan A..................... 4.88% 100,000 3,625 4,875 6,125
Term loan B..................... 5.38% 350,000 14,437 18,812 23,187
Amortization of debt financing
costs........................... -- -- 3,500 3,500 3,500
------- ------- -------
Annual interest expense........... -- -- $77,560 $83,454 $89,348
======= ======= =======
Semi-annual interest expense...... -- -- $38,780 $41,727 $44,674
======= ======= =======
</Table>
We expect to have generated sufficient cash flow between April 30, 2002 and
the closing to consummate the EG&G acquisition without incurring any
borrowings under the revolving credit facility. Accordingly, we expect the
full amount of the revolving credit facility to be undrawn at closing.
Amounts outstanding under letters of credit will reduce our availability
thereunder.
(c) Reflects the tax effect of all adjustments at an assumed statutory tax rate
of 40.0%.
17
(d) No adjustments were made to accrue preferred stock dividends on our series D
preferred stock in the event that our series D preferred stock is not
converted into common stock within 180 days of the closing of the EG&G
acquisition.
(e) Basic net income per share is computed by dividing net income available to
common stockholders by the weighted average number of shares of common stock
outstanding for the period and assuming the issuance of shares of common
stock in connection with the EG&G acquisition occurred at the beginning of
the period presented. Diluted net income per share is computed assuming
conversion or exercise of all convertible securities, option and warrants.
Both basic and diluted net income per share calculations assume the series D
preferred stock has been converted at the beginning of the period presented
into shares of common stock based on the estimated liquidation preference at
July 31, 2002.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We are an engineering services firm with domestic and international clients
that include local, state and federal government agencies and private clients in
a broad array of industries.
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 preparing our 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.
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. At April 30, 2002, we had approximately 4,000
active jobs, none of which represented more than 1% of our total revenues for
the first six months of fiscal 2002. 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 into 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 actual total number of labor hours expended and
total costs incurred. If the actual total 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
19
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.
Substantially all of the EG&G businesses' fixed-price contracts are
fixed-price per unit ("FPPU") contracts, which differ from the firm price type
of fixed-price contracts discussed above. Under FPPU contracts, clients pay a
set fee for each unit provided. The EG&G businesses are generally guaranteed a
minimum number of units at a fixed price. The EG&G businesses' profit margins
under FPPU contracts generally fluctuate with the number of units of service
provided.
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 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 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 2002 effective tax rate has been
reduced to approximately 40%. If amortization expense related to goodwill that
is no longer amortized had been excluded from operating expenses for the quarter
and year-to-date ended April 30, 2002, and if the effective tax rate remained at
45%, diluted earnings per share for the three and six months ended April 30,
2002 would have increased by $0.09 and $0.18, respectively.
We regularly evaluate whether events and circumstances have occurred that
indicate a possible impairment of goodwill. In determining whether there is an
impairment of goodwill, we calculate our estimated fair value 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 of 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.
20
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 clients; 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.
RESULTS OF OPERATIONS
SIX MONTHS ENDED APRIL 30, 2002 VS. APRIL 30, 2001
Consolidated
Our revenues were $1,107.4 million for the six months ended April 30, 2002,
an increase of $45.8 million, or 4.3%, 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 six months ended April 30, 2002, which
consist of direct labor and other direct expenses, including subcontractor
costs, increased $38.2 million, an increase of 6.1% over the amount reported for
the same period last year, due to an increase in the use of subcontractors and
an increase in direct labor and other direct costs as a result of the increase
in revenues. Indirect, general and administrative expenses ("IG&A") for the six
months ended April 30, 2002 increased $7.4 million, or 2.1%, 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 $7.8 million as a result of implementing SFAS 142. Net
interest expense for the six months ended April 30, 2002 decreased $9.6 million
due to repayments of our long-term debt and decreases in interest rates.
Our earnings before income taxes were $50.3 million for the six months
ended April 30, 2002, compared to $40.6 million for the same period last year.
Our effective income tax rates for the six months ended April 30, 2002 and 2001
were approximately 40% and 45%, 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 $30.2 million, or $1.16 per share on a diluted
basis, for the six months ended April 30, 2002, compared with $22.3 million, or
$0.97 per share on a diluted basis, for the same period last year.
Our backlog of signed and funded contracts was $1,679.5 million at April
30, 2002, as compared with $1,684.1 million at October 31, 2001. See "Risk
Factors -- Termination of all or some of our backlog orders could negatively
affect our revenues."
Domestic Segment Including Parent Company
Revenues for the domestic segment were $1,008.0 million for the six months
ended April 30, 2002, an increase of $44.9 million, or 4.7%, 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 six months ended April 30, 2002
increased $40.6 million, a 7.1% increase over the amount reported for the same
period last year, as a result of an increase in the use of subcontractors, and
an increase in direct labor and other direct costs as a result of the increase
in revenues. Domestic IG&A expenses for the six months ended April 30, 2002
increased $4.5 million, or 1.4%, 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 a decrease in amortization expense of $7.8 million
as a
21
result of implementing SFAS 142. Interest expense decreased $9.5 million due to
repayments of our long-term debt and to decreases in interest rates.
International Segment
Revenues for the international segment were $103.7 million for the six
months ended April 30, 2002, an increase of $2.6 million, or 2.6%, from the
amount reported for the same period last year. The increase was mainly due to
decreases in foreign currency exchange rates versus the U.S. dollar.
Foreign direct operating expenses for the six months ended April 30, 2002
decreased $0.6 million, a 1.1% 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 a decrease in the use of subcontractors.
Foreign IG&A expenses for the six months ended April 30, 2002 increased $2.9
million, or 6.5%, from the amount reported for the same period last year,
primarily due to an increase in indirect labor, benefits, contract labor and
consulting services expenses.
FISCAL 2001 COMPARED WITH FISCAL 2000
Consolidated
Our revenues were $2,319.4 million for fiscal 2001, an increase of $113.8
million, or 5.2%, over the amount reported for the same period last year. The
increase is due to increased demand for our services.
Direct operating expenses for fiscal 2001, which consist of direct labor
and other direct expenses, including subcontractor costs, increased $48.8
million, a 3.6% increase over the amount reported for the same period last year
primarily as a result of an increase in the use of subcontractors. IG&A expenses
for fiscal 2001, increased $58.7 million, or 8.4%, from the amount reported for
the same period last year. The increase is primarily due to increases in
marketing and business development expenses, benefits and rental expense. Net
interest expense for fiscal 2001 decreased $6.3 million due to repayments of our
long-term debt and a decrease in interest rates.
Our earnings before income taxes were $104.2 million for fiscal 2001,
compared to $91.6 million for the same period last year. Our effective income
tax rates for fiscal years 2001 and 2000 were approximately 44.5% and 45.5%,
respectively.
We reported net income available to stockholders of $48.6 million, or $2.41
per share on a diluted basis, for fiscal 2001, compared to $41.6 million, or
$2.27 per share on a diluted basis, for the same period last year.
Our backlog of signed and funded contracts was $1,684.1 million at October
31, 2001 and $1,656.5 million at October 31, 2000. The value of our designations
was $939.0 million at October 31, 2001, as compared to $817.0 million at October
31, 2000. See "Risk Factors -- Termination of all or some of our backlog orders
could negatively affect our revenues."
Domestic Segment Including Parent Company
Revenues for the domestic segment were $2,109.2 million for fiscal 2001, an
increase of $119.1 million, or 6.0%, over the amount reported for the same
period last year. The increase is due to increased demand for our services.
Domestic direct operating expenses for fiscal 2001 increased $57.8 million,
a 4.7% increase over the amount reported for the same period last year as a
result of an increase in the use of subcontractors and an increase in other
direct expenses. Domestic IG&A expenses for fiscal 2001 increased $47.9 million,
or 7.9%, from the amount reported for the same period last year, due to
increases in marketing and business development expenses, benefits and rental
expense. Domestic net interest expense, which includes intercompany interest
recorded in fiscal 2001, decreased $10.3 million due to repayments of our
long-term debt and a decrease in interest rates.
22
International Segment
Revenues for the international segment were $217.0 million for fiscal 2001,
a decrease of $18.7 million, or 7.9%, from the amount reported for the same
period last year. The decrease is mainly due to decreases in foreign currency
exchange rates versus the U.S. dollar and a decrease in the demand for our
services in the Asia/Pacific region.
Foreign direct operating expenses for fiscal 2001 decreased $22.4 million,
a 16.1% decrease from the amount reported for the same period last year. The
change is primarily the result of a decrease in foreign currency exchange rates
versus the U.S. dollar, as well as the decrease in the use of subcontractors and
a decrease in other direct expenses. Foreign IG&A expenses for fiscal 2001
increased $10.8 million, or 12.2%, from the amount reported for the same period
last year. Foreign net interest expense increased $4.0 million primarily due to
intercompany interest recorded in fiscal 2001.
FISCAL 2000 COMPARED WITH FISCAL 1999
Consolidated
Our revenues were $2,205.6 million for fiscal 2000, an increase of $787.1
million, or 55.5%, over the amount reported for fiscal 1999. The increase was
due to the acquisition of Dames & Moore in June 1999. In fiscal 2000, the
results of operations of Dames & Moore were included for a full year compared to
five months in fiscal 1999.
Direct operating expenses for fiscal 2000, which consisted of direct labor
and other direct expenses, including subcontractor costs, increased $490.5
million, a 57.4% increase over the amount reported for fiscal 1999. The increase
was primarily due to a full year of direct operating expenses of Dames & Moore
in fiscal 2000 compared to five months in fiscal 1999 and, to a lesser extent,
to increases in subcontractor costs and direct labor costs. IG&A expenses for
fiscal 2000, increased to $233.9 million, or 50.5% from the amount reported for
fiscal 1999. The increase was primarily due to the addition of the Dames & Moore
overhead as well as an increase in business activity. Net interest expense for
fiscal 2000 increased $37.3 million due to increased borrowings incurred in
connection with the acquisition of Dames & Moore in June 1999.
Our earnings before income taxes were $91.6 million for fiscal 2000
compared to $66.3 million for fiscal 1999. Our effective income tax rates for
fiscal years 2000 and 1999 were approximately 45.5% and 45.0%, respectively.
We reported net income available to stockholders of $41.6 million, or $2.27
per share on a diluted basis, for fiscal 2000, compared to $33.2 million, or
$1.98 per share on a diluted basis, for fiscal 1999.
Our backlog of signed and funded contracts at October 31, 2000 was $1,656.5
million, as compared to $1,260.0 million at October 31, 1999. The value of our
designations was approximately $817.0 million at October 31, 2000, as compared
to approximately $775.0 million at October 31, 1999. See "Risk Factors --
Termination of all or some of our backlog orders could negatively affect our
revenues."
Domestic Segment Including Parent Company
Revenues for the domestic segment were $1,990.1 million for fiscal 2000, an
increase of $721.1 million, or 56.8%, over the amount reported for fiscal 1999.
The increase was primarily attributable to the acquisition of Dames & Moore in
June 1999.
Domestic direct operating expenses for fiscal 2000 increased $460.6
million, a 60.2% increase over the amount reported for fiscal 1999. The increase
in direct operating expenses was primarily due to the acquisition of Dames &
Moore in June 1999 and, to a lesser extent, to increases in subcontractor costs
and direct labor costs. Domestic IG&A expenses for fiscal 2000, increased $204.9
million, or 50.8%, from the amount reported for fiscal 1999 as a result of the
addition of the Dames & Moore overhead as well as an increase in business
activity. Domestic net interest expense increased $37.4 million due to increased
borrowings incurred in connection with the acquisition of Dames & Moore in June
1999.
23
International Segment
Revenues for the international segment were $235.7 million for fiscal 2000,
an increase of $81.5 million, or 52.8%, from the amount reported for fiscal
1999. The increase was primarily attributable to the acquisition of Dames &
Moore in June 1999.
Foreign direct operating expenses for fiscal 2000, increased $45.5 million,
a 48.7% increase over the amount reported for fiscal 1999, primarily as a result
of the acquisition of Dames & Moore. Foreign IG&A expenses for fiscal 2000,
increased $29.0 million, or 48.5%, from the amount reported for fiscal 1999.
Foreign net interest expense for fiscal 2000 decreased $0.1 million.
INCOME TAXES
As of October 31, 2001, we had available net operating loss ("NOL")
carryforwards for federal income tax and financial statement purposes of $2.4
million, which will expire in fiscal 2004. Our NOL utilization is limited to
$750,000 per year pursuant to Section 382 of the Internal Revenue Code and is
related to our October 1989 quasi-reorganization. We also have available $21.1
million of foreign NOLs. These NOLs are available only to offset income earned
in foreign jurisdictions and expire at various dates.
We have recorded deferred tax assets and liabilities. The deferred tax
liability decreased primarily because of a change in tax accounting for unbilled
fees and an expiring adjustment due to a change in accounting method. The net
change in the total valuation allowance related to deferred tax assets for
fiscal 2001, was a decrease of $0.3 million due to the utilization of domestic
NOLs and a decrease of $1.3 million due to current and prior year foreign losses
utilized.
24
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity and capital measurements are set forth in the table below on
an actual basis as of the periods indicated and on a pro forma basis as of April
30, 2002:
<Table>
<Caption>
OCTOBER 31, APRIL 30, 2002
----------------------------------- ----------------------
1999 2000 2001 ACTUAL PRO FORMA
--------- --------- --------- --------- ---------
(IN MILLIONS, EXCEPT RATIO AND PERCENTAGE DATA)
Working capital............. $ 366.1 $ 394.6 $ 427.4 $ 431.6 $ 468.1
Working capital ratio....... 1.9 to 1 2.0 to 1 2.1 to 1 2.3 to 1 2.1 to 1
Cash and cash equivalents... $ 45.7 $ 23.7 $ 23.4 $ 25.1 $ 14.3
Percentage of debt to
equity.................... 221.7% 175.8% 142.6% 128.4% 155.8%
</Table>
<Table>
<Caption>
YEAR ENDED OCTOBER 31,
----------------------- SIX MONTHS ENDED
1999 2000 2001 APRIL 30, 2002
----- ----- ----- ----------------
Average days to convert billed accounts
receivables to cash.......................... 75 68 63 73
</Table>
During the six months ended April 30, 2002, we generated $51.8 million from
operations and $12.0 million of proceeds from sales of common stock and
exercises of stock options. We used $27.3 million, net of additional borrowings,
to repay debt and $34.9 million for capital expenditures. During the six months
ended April 30, 2002, we borrowed various amounts under our revolving credit
facility that totaled in the aggregate $42.6 million and repaid the entire
outstanding balance by the end of such period. During fiscal 2001, we generated
$47.1 million from operations, received $3.5 million of proceeds from sales of
subsidiaries and generated $11.8 million of proceeds from sales of common stock
and exercises of stock options. We used $42.9 million to repay debt and $19.8
million for capital expenditures. During fiscal 2001, cash flow provided by
operating activities totaled $47.1 million. We borrowed an aggregate of $105.8
million under our revolving credit facility and paid off the entire outstanding
balance by the end of the fiscal year.
As a professional services organization, our business is not capital
intensive. Capital expenditures historically have been for computer-aided
design, accounting and project management information systems, and
general-purpose computer equipment to accommodate our growth. Capital
expenditures, excluding purchases financed through capital leases, during fiscal
years 1999, 2000, and 2001 were $20.2 million, $15.9 million and $19.8 million,
respectively. Capital expenditures, excluding purchases financed through capital
leases, during the first six months of fiscal 2002 were $34.9 million. We expect
to continue to have capital outlays consistent with our resulting relative
growth.
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 primary sources of liquidity are cash flow from operations and
borrowings under the new senior secured credit facility, if necessary. Our
primary uses of cash are to fund our working capital and capital
25
expenditures and to service our debt. We believe that our existing financial
resources, together with our planned cash flow from operations and the new
senior secured credit facility, will provide sufficient resources to fund our
combined operations and capital expenditure needs for the foreseeable future.
Collections on accounts receivables can impact our operating cash flows.
Management places significant emphasis on collection efforts; however, the
current general economic downturn may impact our client base and as such, may
impact their credit-worthiness and our ability to collect cash from them to meet
our operating needs. In addition, as discussed in more detail below, we are in
the process of designing, testing and installing a company-wide accounting and
project management system known as our Enterprise Resource Program. To the
extent we do not complete the project successfully or we encounter difficulties
in completing the project, we may experience reduced cash flow due to an
inability to issue invoices to our customers and collect cash in a timely
manner. Similar cash flow issues may arise if we encounter difficulties in
integrating the EG&G businesses.
Below is a table containing information regarding our contractual
obligations and commercial commitments.
<Table>
<Caption>
PRINCIPAL PAYMENTS DUE BY PERIOD
----------------------------------------------------------------
LESS THAN
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS AFTER 5 YEARS
- ----------------------- -------- --------- --------- --------- -------------
(IN THOUSANDS)
Long-term debt (principal only):
AS OF APRIL 30, 2002:
12 1/4% senior subordinated notes.... $200,000 $ -- $ -- $ -- $200,000
8 5/8% senior subordinated
debentures......................... 4,970 -- 4,970 -- --
6 1/2% convertible subordinated
debentures......................... 1,774 -- -- -- 1,744
Foreign collateralized borrowings and
notes payables..................... 1,544 1,544 -- -- --
Capital lease obligations............ 49,147 13,379 26,093 9,675 --
Other indebtedness................... 490 96 239 155 --
AS OF THE CLOSING OF THE EG&G
ACQUISITION:
New senior secured credit
facility(1):
Term loan A........................ 100,000 7,500 37,500 55,000 0
Term loan B........................ 350,000 2,625 7,875 7,000 3,325
Notes................................ 250,000 -- -- -- 250,000
</Table>
<Table>
<Caption>
TOTAL REMAINING
COMMITMENT TOTAL COMMITMENT AMOUNT AMOUNT
OTHER COMMITMENTS (EXPIRES 2005) TO LETTERS OF CREDIT DRAWN AVAILABLE
- ----------------- -------------- -------------------- ------ ---------
(IN THOUSANDS)
New revolving credit facility(1)......... $200,000 $41,040 $ -- $158,960
</Table>
- ---------------
(1) The existing senior secured credit facility, including the revolving credit
facility, will be repaid in full, terminated and replaced with a new senior
secured credit facility at the closing of the EG&G acquisition. Accordingly,
the existing senior secured credit facility is not shown in the above table.
NEW FINANCINGS. We intend to privately place up to $250 million of senior
notes, the proceeds of which, together with the proceeds from a proposed $650
million senior secured credit facility will be used to finance the EG&G
acquisition and to refinance certain of our and the EG&G businesses'
indebtedness. 26
12 1/4% SENIOR SUBORDINATED NOTES. Our senior subordinated notes are due
in 2009. Each note bears interest at 12 1/4% per annum. Interest on these notes
is payable semi-annually in May and November. The 12 1/4% senior subordinated
notes will be subordinate to the new senior secured credit facility and the
notes issued in this offering. As of April 30, 2002, we owed $200.0 million on
these notes.
Certain of our wholly owned subsidiaries fully and unconditionally
guarantee the notes on a joint and several basis. We may redeem some or all of
these 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.
8 5/8% SENIOR SUBORDINATED DEBENTURES. Our 8 5/8% debentures are due in
2004. Interest on these notes is payable semiannually in January and July. The
8 5/8% debentures will be subordinate to the senior secured credit facility and
the notes issued in this offering. As of April 30, 2002, we owed approximately
$5.0 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 on these notes 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 will be
subordinate to the new senior secured credit facility and the notes issued in
this offering. As of April 30, 2002, we owed approximately $1.8 million on the
6 1/2% debentures.
OTHER INDEBTEDNESS. In addition to the indebtedness described above, we
have outstanding obligations under capital leases, foreign collateralized
borrowings and note payables, letters of credit obligations and surety bonds,
and we expect to issue 100,000 shares of series D preferred stock to finance a
portion of the EG&G acquisition. We also have obligations under certain
derivative financial instruments. See "Quantitative and Qualitative Disclosures
about Market Risk."
ENTERPRISE RESOURCE PROGRAM (ERP)
During 2001, we commenced a project to consolidate all of our accounting
and project management information systems and transition to a new JD Edwards
ERP system. Following our acquisition of Dames & Moore in 1999, we operated nine
separate ERP systems, which we reduced to four systems by 2001. We plan to
launch initial implementation of the new ERP system on August 1, 2002, at which
time it will
27
initially cover approximately $1 billion of our revenues. We anticipate that the
initial implementation will last between five and seven days, resulting in a
temporary increase in receivables as billings are delayed. Following this
initial implementation, we plan to move the rest of our operations onto the new
system over the next twelve months. We estimate that full implementation of the
new ERP system will reduce average days sales outstanding from the 100s to the
low-90s.
We estimate that the costs of implementing the new ERP system, including
hardware, software licenses, consultants, internal staffing and training costs,
will be approximately $50.0 million. As of April 30, 2002, we had incurred a
total of approximately $37.6 million for this project, with the remaining costs
to be incurred over the next eighteen months. 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 use internally generated cash, or we will draw on our
revolving credit facility as alternative financing for expenditures to be
incurred for this project.
DAMES & MOORE ACQUISITION
In June 1999, we acquired Dames & Moore for cash and debt of $376.2
million.
<Table>
<Caption>
(IN MILLIONS)
-------------
Purchase price of Dames & Moore (net of debt)............... $357.4
Acquisition costs (net of financing fees)................... 18.8
Fair value of assets acquired............................... (148.2)
------
Incremental additional excess purchase price over net assets
acquired.................................................. 228.0
Dames & Moore historical goodwill, net...................... 160.4
------
Aggregate goodwill.......................................... $388.4
======
</Table>
During fiscal 1999, we provided for $37.0 million of costs in connection
with the acquisition of Dames & Moore and our reorganization plans to integrate
Dames & Moore's operations. These costs consist of project claims and cost
over-runs, lease fees, severance and miscellaneous items. These reserves were
substantially utilized during fiscal 2000.
INSURANCE AND SURETY BOND COSTS
As a result of instability in the insurance market, we have experienced
recent increases in our insurance costs. In addition, we are now required to
partially collateralize our surety bonds with standby letters of credit.
SUBSEQUENT EVENTS
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. In October 1999, we
issued 46,083 shares of our series B exchangeable convertible preferred stock to
RCBA in exchange for the shares of series A and series C preferred stock. On
June 9, 2002, we exercised our right to convert the outstanding series B
preferred stock to voting common stock. Under the terms of the series B
preferred stock, we had the option, exercisable at any time on or after June 9,
2002 (the third anniversary of the financing for the Dames & Moore acquisition),
to convert all of the outstanding series B preferred stock to common stock if
the share price of our common stock on the relevant stock exchanges was at least
$29.30 per share for 30 out of the 45 trading days prior to the conversion date.
This requirement was satisfied, and accordingly, our Board of Directors met on
June 9, 2002 and approved the conversion. As a result, all outstanding shares of
the series B preferred stock were converted into 5,845,104 shares of voting
common stock.
28
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We will be exposed to changes in interest rates as a result of borrowings
under our new senior secured credit facility. If market rates averaged 1% more
in the next fiscal year than in current fiscal year, our net of tax interest
expense, after considering the effect of the interest rate hedge agreements
detailed below, would increase by approximately $2.3 million. Conversely, if
market rates averaged 1% less in the next fiscal year than in the current fiscal
year, our net of tax interest expense would decrease by approximately $2.3
million.
In connection with the EG&G acquisition, we may assume the following
interest rate swaps entered into by the EG&G businesses.
- On November 6, 2000, Lear Siegler entered into an interest rate swap.
Currently, the interest rate swap effectively fixes the interest rate on
$20 million of Lear Siegler's LIBOR-based borrowings at 5.93% plus the
applicable margin through November 6, 2002. As of August 1, 2002, the
value of this interest rate swap was $(420,000).
- On October 30, 2001, EG&G Technical Services entered into an interest
rate swap. This interest rate swap effectively fixed the interest rate on
$60 million of EG&G Technical Services' LIBOR based borrowings at 3.65%
plus the applicable margin for the period from November 1, 2001 to
November 1, 2004. As of August 1, 2002, the value of this interest rate
swap was $(1,000,000).
If we decide to assume these interest rate swaps, we may designate these
interest rate swaps as hedges, in accordance with Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which we adopted on November 1, 2000. We may be required to
terminate these interest rate swaps as a result of the EG&G acquisition.
29
BUSINESS
We are the largest U.S. based engineering design services firm. We provide
a comprehensive range of professional planning, design and management services
to local, state and federal government agencies and large private sector clients
through a network of over 110 primary offices in all 50 states and over 20
foreign countries. On July 16, 2002, we entered into an agreement to acquire the
EG&G businesses, a leading provider of operations and maintenance, logistics and
technical services to the Department of Defense and other federal government
agencies. Pro forma for the EG&G acquisition, for the twelve months ended April
30, 2002, our revenues would have been $3.3 billion. Our common stock is listed
on the New York Stock Exchange under the symbol "URS." As of July 31, 2002, we
had a market capitalization of approximately $550 million.
Our business is well-balanced and highly diversified. On a pro forma basis,
approximately 38% of our fiscal 2001 revenues would have been from federal
government entities, approximately 26% from state and local governments and
approximately 36% from private sector clients. Our clients include over 25 U.S.
government agencies, over 300 state and local government agencies and over 1,600
private clients, including over half of the Fortune 500 companies. We currently
have more than 5,000 active contracts, and no single contract would have
accounted for more than 3.3% of our pro forma fiscal 2001 revenues.
SERVICE OFFERINGS AND END MARKET APPLICATIONS
We provide professional services on a cost-plus, time-and-materials or
fixed-price basis. Under the terms of our cost-plus and time-and-materials
contracts, which would have accounted for approximately two-thirds of our pro
forma fiscal 2001 revenues, we bill our clients for the services of our
professional employees on an hourly basis and for reimbursement of our
out-of-pocket expenses. We generally do not enter into fixed-price contracts in
competitive "low-bid" situations. Instead, we usually compete for fixed price
work on the basis of our capabilities and structure these engagements to have a
well-defined scope.
We and the EG&G businesses each have over 50 years of operating experience.
We have historically focused our service offering on the planning and design
stages of a project, and the EG&G businesses have historically focused on
providing ongoing operations and maintenance and logistics management services
at completed facilities under long-term contracts. Following the EG&G
acquisition, we will be able to deliver a comprehensive range of services on a
national and international basis.
30
The table below sets forth the approximate percentage of our pro forma
fiscal 2001 revenues by service offering.
<Table>
<Caption>
% OF PRO FORMA FISCAL
SERVICE 2001 REVENUES SERVICES PROVIDED REPRESENTATIVE CUSTOMERS
- ------- --------------------- ----------------- ------------------------
PLANNING AND DESIGN 60% - Studies, analyses, planning and - State departments of
engineering and architectural transportation, FAA, municipal
design for new facilities, airport and transit authorities and
renovation, maintenance and railroad systems
expansion of existing facilities,
including:
-- Bridges, highways and roads
-- Airports, mass transit systems
and railroads
-- Schools, courthouses,
correctional facilities and other
public use facilities
-- Water and wastewater treatment
facilities
- Assessment and planning for - U.S. Army Corps of Engineers, U.S.
remediation activities at Superfund Air Force, U.S. Navy, U.S.
sites and military bases Environmental Protection Agency and
state environmental agencies
- Environmental assessment, due - Primarily Fortune 500 companies
diligence and permitting at
commercial and industrial
facilities
- Engineering and design studies for - Department of Defense
upgrade and maintenance of military
hardware
- Consulting services on homeland - Office of Homeland Security and
security initiatives Department of Justice
- -- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
- - - - - - - - - - - - - - - - - - - - - -
OPERATIONS AND MAINTENANCE 27% Military
- Management of military ranges and - Department of Defense
facilities, logistics management at
military warehouses, maintenance
and overhaul of aircraft and ground
vehicles on military bases and
pilot training programs
- Operations and maintenance support
for combat systems
- Operations and management support
for U.S. chemical weapons stockpile
and demilitarization of foreign
weapons stockpiles
- Management of environmental
remediation programs at military
bases
Non-military
- Operation of state highway - State departments of transportation
management systems and transit authorities
- Operation of U.S. Customs - U.S. Customs Service
confiscated property disposition
- Primarily Fortune 500 companies and
- Management of environmental U.S. Environmental Protection
remediation programs at commercial Agency
and industrial facilities and
Superfund sites
</Table>
31
<Table>
<Caption>
% OF PRO FORMA FISCAL
SERVICE 2001 REVENUES SERVICES PROVIDED REPRESENTATIVE CUSTOMERS
- ------- --------------------- ----------------- ------------------------
PROGRAM AND CONSTRUCTION 8% - Manage construction process for the - State departments of
MANAGEMENT customer, including bid process transportation, FAA, municipal
management, selection of contractor airport and transit authorities and
and monitoring of project schedule, railroad systems
cost and quality of work
- Primarily Fortune 500 companies
- U.S. Army Corps of Engineers, U.S.
Air Force, U.S. Navy and state
environmental agencies
- -- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
- - - - - - - - - - - - - - - - - - - - - -
CONSTRUCTION 5% - Provide limited construction - State departments of
services transportation, FAA, municipal
airport and transit authorities and
railroad systems
- Primarily Fortune 500 companies
- U.S. Army Corps of Engineers, U.S.
Air Force, U.S. Navy and state
environmental agencies
</Table>
- --------------------------------------------------------------------------------
OUR STRENGTHS
Market Leader with a Broad Range of Services and Capabilities. We are the
largest U.S. based engineering design services firm based on revenues, and,
after the EG&G acquisition, we will be a leading provider of technical services,
including operations and management. We believe that we will be one of the few
companies that can meet our clients' service needs throughout the lifecycle of
their projects and deliver services on a national and international basis. These
capabilities should enable us to maximize revenue per customer and increase our
profits. This expanded range of capabilities will position us to capture
additional market share with clients that seek to enter into omnibus contracts
or master service agreements with us.
Predictable, Recurring Revenue Base. Our diverse mix of over 5,000
engineering design services contracts, the longer-term operations and management
contracts from the EG&G businesses, our low incidence of customer cancellations
and our backlog provide relatively predictable revenues. We have also
established strong client relationships and a proven track record of outstanding
performance that have provided us with a recurring base of revenues. For
example, during fiscal 2001, more than 80% of our pro forma revenues would have
been generated from existing clients. In addition, from January 1, 2000 through
June 30, 2002, the EG&G businesses enjoyed a 91% win rate on recompete bids.
Established Contract Risk Management and Attractive Operating Model. We
have an established risk assessment and management process that includes strict
guidelines regarding the type and scope of our projects and requires management
review and approval for all contracts. Our contract mix is weighted toward
cost-plus and time-and-materials contract types. We generally do not pursue
"low-bid" fixed-price construction contracts, which may create financial risk.
We have a variable cost structure with limited fixed overhead that allows us to
rapidly respond to changes in the demand for our services. Additionally, we have
achieved economies of scale that allow us to increase our revenues without
proportionately increasing our general and administrative expenses.
Experienced, Skilled Workforce. We have an experienced, skilled workforce
of over 16,000 employees and, following the EG&G acquisition, this number will
increase to over 26,000. Prior to joining the EG&G businesses, many employees
developed specialized technical skills while working for the military. In
addition, over 13% of the combined companies' workforce hold security
clearances, enabling them to work on sensitive government projects. We believe
that our highly skilled and specialized work force provides us with a
competitive advantage.
Disciplined Management of Growth. Our senior management team has
successfully grown our business through a highly disciplined acquisition
strategy and careful management of organic growth opportunities. From 1995 to
2001, we successfully acquired and integrated three engineering design
32
services firms. As a result of our disciplined acquisition strategy, from fiscal
1995 to fiscal 2001, we have increased our revenues and EBITDA at compound
annual growth rates of 53.1% and 64.2%, respectively, while improving our EBITDA
margin from 6.0% to 9.1%.
OUR STRATEGY
Pursue Cross Selling Opportunities. We intend to enhance our revenue per
client by marketing and delivering our expanded service offering to existing
clients following the EG&G acquisition. The EG&G acquisition will allow us to
offer the operations and maintenance services of the EG&G businesses to clients
to whom URS has historically provided mostly planning and design services.
Similarly, we will be able to offer URS's planning and design services to
operations and maintenance clients of the EG&G businesses. In addition, we
intend to use URS's existing national delivery platform to market the EG&G
businesses' service offerings to private sector and state and local governments
with whom they have not previously had worked.
Realize Benefits of Increased Breadth of Services. Our comprehensive
service offering will allow us to develop revenue from clients focused on
consolidating their vendor base and to reduce our dependence on alliances with
competitors. The federal government is increasingly using large, omnibus
contracts that require diverse services and resources. Similarly, private sector
clients are increasingly using master service agreements that require a large
breadth of services and resources. The EG&G acquisition will allow us to offer
our federal government and other clients a more complete package of services for
their projects, from conception, planning and design, through construction
management to operations and maintenance.
Capitalize on Increased Federal Government Spending. We believe that the
markets for the services we provide will continue to grow and that we are
well-positioned to capitalize on this growth. Specifically, in the
transportation infrastructure market, we anticipate that the government's 2003
TEA-21 and AIR-21 budgets of $36 billion and $14 billion, respectively, will
drive demand for spending in our core engineering design services business. In
addition, the Bush Administration's amended 2002 military and defense budget of
$329 billion represents an 11% increase over 2001, and the Administration's
proposed 15% increase to $377 billion for 2003 represents the largest annual
percentage increase in more than 20 years. Federal government spending is also
expected to increase as a result of the proposed creation of a cabinet level
Office of Homeland Defense, and we expect that outsourced services will account
for an increasing percentage of homeland defense, military and security
expenditures. We have recently been awarded several homeland defense-related
contracts and believe that our participation in this emerging market will
continue to grow. We also expect that the EG&G businesses' extensive technical
expertise relating to nuclear, chemical and biological weapons will provide us
with a competitive advantage in this market.
Achieve Cost Savings from the EG&G Acquisition. We believe that we will
achieve annual cost savings of up to $15 million within twelve months of closing
the EG&G acquisition through consolidation of legal, tax and audit functions,
reductions in insurance and information technology expenses and other areas. We
have a successful record of integrating acquisitions and achieving cost savings
as evidenced by our disciplined management of growth through three major
acquisitions over the past seven years.
SERVICES
We provide professional services in planning, design, program and
construction management, and operations and maintenance. Each of our offices is
responsible for obtaining local or regional contracts, and multiple offices
often work together to pursue large national or multi-national contracts. We
have the capability to market and perform large multi-disciplinary projects
throughout the world by drawing from our large and diverse network of
professional and technical resources. In addition, after the EG&G acquisition,
we will be a provider of outsourced engineering, technology and operations and
maintenance services.
PLANNING AND DESIGN. Our planning services include conceptual design,
technical and economic feasibility studies, community involvement programs and
archaeological investigations. In many instances, we use the planning process to
develop the blueprint, or overall scheme, for the project. We use planning
33
analyses and reports to identify and evaluate alternatives, estimate usage
levels, determine financial feasibility, assess available technology, ascertain
economic and environmental impacts and recommend optimal courses of action.
Projects can include master planning, land use planning, feasibility studies,
transportation planning, policy development and evaluation, zoning, permitting
and compliance with applicable regulations.
We provide a broad range of design and design-related services.
Representative services include architectural and interior design and civil,
structural, mechanical, electrical, sanitary, environmental, water resources,
geotechnical/underground, dam, mining and seismic engineering design. For each
project, we identify the project requirements and then integrate and coordinate
the various design elements. The result is a set of contract documents that may
include plans, specifications and cost estimates that are used to build a
project. These documents detail design criteria for the contractor to use and
the schedule for construction. Other critical tasks in the design process may
include value analysis and the assessment of construction and maintenance
requirements.
The EG&G businesses provide comprehensive services for the management of
large military programs for naval, ground and airborne platforms. Services
include logistics planning, acquisition management, risk management, weapons
system safety management and subcontractor management.
The EG&G businesses' planning capabilities are used to support homeland
defense and global threat reduction programs. Services include threat scenario
generation, risk analysis, effects analysis, the development of emergency
response strategies and first responder training for the military and other
federal agencies. In addition, the EG&G businesses provide specialized and
classified technology analysis, and technical advisory services and training for
the disposal of weapons of mass destruction.
PROGRAM AND CONSTRUCTION MANAGEMENT. Our program and construction
management services include master scheduling of design and construction phases,
construction and life-cycle cost estimating, cash flow analyses, value
engineering, constructability reviews, environmental and specialized
engineering, bid management and contractor selection. Once construction has
begun, we oversee and coordinate the activities of construction contractors.
This frequently involves acting as the owner's representative for on-site
supervision and inspection of the contractor's work. In this role, our objective
is to monitor a project's schedule, cost and quality.
OPERATIONS AND MAINTENANCE. Our operations and maintenance services
involve the oversight of day-to-day operations and ongoing repair, maintenance
and monitoring services. These services are provided for environmental systems,
such as treatment plants, as well as for transportation facilities.
The EG&G businesses provide management and operations and maintenance
capabilities in support of large military installations and operations. Services
include the management of complex government installations and ranges, including
oversight of all construction, testing and operation of base systems and
processes, operation and maintenance of chemical agent disposal systems,
management of base logistics and transportation and support of high security
environments. Logistics support services involve the management and operation of
government warehousing and distribution centers, as well as government property
and asset management. A range of services is provided for ground and aviation
systems, including maintenance, modification, overhaul and life service
extension services for military vehicles and aircraft. EG&G also provides
comprehensive flight training services for fixed wing and rotary wing aircraft.
Services include courseware development, classroom instruction and simulator
instruction.
CONSTRUCTION. We provide construction services for demolition and
environmental remediation contracts. Contracts are generally on a fixed-price
basis, with a well defined scope of work. We generally do not pursue "low bid"
fixed-price construction contracts, which may create financial risk.
MARKETS
Our strategy is to focus on the infrastructure market, including surface,
air and rail transportation systems, industrial process and facilities projects
and environmental programs involving water/wastewater and hazardous waste
management. The EG&G acquisition will extend our focus to the military platforms
34
support market. We perform our business development and sales activities
primarily through our network of offices around the world. In addition, we
coordinate national and global marketing efforts on large projects and for
multi-national clients on a company-wide basis.
SURFACE TRANSPORTATION. We provide a full range of services for all types
of surface transportation systems and networks, including highways,
interchanges, bridges, tunnels, toll facilities, intelligent transportation
systems, parking facilities and ports and marine structures. Historically, we
have emphasized our services on the design of new transportation systems, but in
recent years we have focused on the rehabilitation of existing systems.
AIR TRANSPORTATION. We provide comprehensive services for the development
of new airports and the modernization and expansion of existing facilities.
Assignments have included terminals, hangars, air cargo buildings, runways,
taxiways, aprons, air traffic control towers and baggage, communications,
security and fueling systems, as well as supporting infrastructure such as
people mover systems, roadways, parking garages and utilities. We have completed
projects at both general aviation and large-hub international airports. We have
played a major role in the expansion and modernization of existing airports as
well as the development of new facilities worldwide. In the growing area of
security systems at airports, we can provide a full range of planning, design,
construction management and operations and management. We have completed over
250 assignments at airports worldwide.
RAIL TRANSPORTATION. We provide services to freight and passenger
railroads and urban mass transit agencies. We have planned, designed and managed
the construction of commuter rail, freight rail, heavy and light rail transit
and high-speed rail systems. Our specialized expertise in transportation
structures, including terminals, stations, parking facilities, bridges, tunnels,
power, signals and communications systems complements these capabilities.
INDUSTRIAL PROCESS. We provide full-service capabilities for industrial
process markets. We provide expertise in facility siting and permitting,
environmental management and pollution control, waste management and remediation
engineering, process engineering and design and property redevelopment.
FACILITIES. We provide design services for new buildings and the
rehabilitation and expansion of existing facilities. The facility design
practice covers a broad range of building types, including facilities for
education, criminal justice, healthcare, commerce, industry, government,
military, transportation, sports and recreation. With the increased interest in
historic preservation, adaptive reuse and seismic safety, a significant portion
of our practice focuses on facility assessments, code and structural evaluations
and renovation projects to maintain aging building infrastructure.
The EG&G businesses provide comprehensive services for the operation and
management of complex government installations, including military bases and
ranges. Logistics support services, which focus on the development of integrated
logistics chains to ensure readiness and rapid response, are provided to a
number of Department of Defense agencies. In addition, the EG&G businesses
provide logistics support services for the management and operation of
warehousing and distribution centers, and government property and asset
management.
WATER/WASTEWATER. We provide services for the planning, design and
construction of all types of water and wastewater facilities to ensure that
water quality is maintained and that there is sufficient water available.
Services include water quality studies, new and expanded water supply, storage,
distribution, and treatment systems, municipal wastewater treatment plants and
sewer systems, watershed and stormwater management and flood control. We also
respond to this market with specialized expertise in the design and seismic
retrofit of earth, rockfill and roller-compacted concrete dams, as well as the
design of reservoirs, impoundments, including mine tailings disposal and large
outfall structures.
HAZARDOUS WASTE MANAGEMENT. We conduct initial site investigations, design
remedial actions for site clean up and provide construction management services
during site clean up. This market involves identifying and developing measures
to dispose of hazardous and toxic waste effectively at contaminated sites. We
also provide air quality monitoring and design modifications required to meet
national and local
35
air quality standards. This work requires specialized knowledge of, and
compliance with, complex regulations, as well as the permitting and approval
processes.
The EG&G businesses provide specialized global threat reduction services
that focus on reducing the proliferation of nuclear, chemical and biological
weapons of mass destruction ("WMD"). The EG&G businesses' services range from
providing technical WMD advisory services and training to the operation and
management of chemical agent disposal facilities.
MILITARY PLATFORMS SUPPORT. The EG&G businesses provide management and
technical consulting and advisory services for Department of Defense agencies.
With uniformed military and Department of Defense civilian personnel levels
declining steadily throughout the '90s, federal agencies are increasingly using
consultants for major acquisition programs for naval, ground and airborne
platforms. Flight and field services, including maintenance, modification and
overhaul services, are provided for military vehicles and aircraft. Similarly,
these services are provided for weapons systems.
The EG&G businesses also provide undergraduate and graduate-level
instruction for pilots of military fixed wing and rotary wing aircraft. The
military faces a significant shortage of instructor pilots with combat
experience and is turning to the private sector to provide these services.
CLIENTS
We provide our services to a broad range of clients, including state, local
and municipal agencies, the federal government and private sector businesses. On
a pro forma basis, we expect to derive approximately 38% of our revenues from
the U.S. Government, 26% of our revenues from state and local agencies and 36%
from private companies. The following table lists certain of our federal
government and state and local government clients and the industries of our
private clients, on a pro forma basis.
<Table>
<Caption>
STATE AND LOCAL PRIVATE SECTOR
FEDERAL GOVERNMENT CLIENTS GOVERNMENT CLIENTS CLIENTS
-------------------------- ------------------ --------------
- - U.S. Army - Departments of - Retail and commercial
- - U.S. Air Force Transportation - Petrochemical
- - U.S. Navy - Water utilities - Food
- - Environmental Protection - Waste water treatment - Telecommunications
Agency agencies - Oil and gas
- - Coast Guard - Environmental protection - Power
- - United States Postal Service agencies - Semiconductor
- - Department of Energy - Schools and colleges - Transportation
- - Department of Justice - Law enforcement - Technology
- - Department of Treasury - Judiciary - Utilities
- - Federal Emergency Management - Hospitals - Mining and forest products
Agency - Airport authorities - Healthcare providers
- - General Services - Rail agencies
Administration
</Table>
On a pro forma basis, our largest clients would have been: the U.S. Army,
which, through seven major commands or acquisition centers, would have accounted
for 13.0% of our pro forma revenues in fiscal 2001; the U.S. Air Force, which,
through nine major commands or centers would have accounted for 11.1% of our pro
forma revenues in fiscal 2001; and the U.S. Navy, which, through six major
commands or acquisition centers, would have accounted for 5.5% of our pro forma
revenues in fiscal 2001.
INTERNATIONAL BUSINESS
Approximately 7% of our fiscal 2001 pro forma revenues would have been
derived from our foreign subsidiaries. The EG&G businesses do not have any
foreign subsidiaries. However, the EG&G businesses and our domestic subsidiaries
engage in business abroad. Our focus is to provide a range of services to local
and national government agencies and private sector businesses, both domestic
and multi-national. The markets we serve are primarily industrial process,
facilities, hazardous waste and surface transportation. We have offices in
Europe, the Asia/Pacific region, Canada and Latin America.
36
CONTRACT PRICING AND TERMS OF ENGAGEMENT
We earn our revenues from cost-plus, fixed-price and time-and-materials
contracts. On a pro forma basis, approximately 36% of our fiscal 2001 revenues
would have been derived from cost-plus, 33% from fixed-price and 31% from
time-and-materials contracts.
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. The
Federal Acquisition Regulation, which is applicable to all federal government
contracts and which is partially incorporated into many local and state agency
contracts, limits 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. In addition, certain
cost-plus contracts provide for an award fee based on performance criteria in
addition to or in lieu of the profit component. Many of the EG&G businesses'
cost-plus contracts have an award fee component. We receive payment and
recognize revenues based on the actual total number of labor hours expended and
total costs incurred. If the actual total 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 Regulation 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. On a pro forma basis, we will have two major
fixed-price contract types:
- Fixed-Price Per Unit ("FPPU"). FPPU contracts account for substantially
all of the EG&G businesses' fixed-price contracts. Under FPPU contracts,
clients pay us a set fee for each unit provided. We are generally
guaranteed a minimum number of units at a fixed price. Our profit margins
generally fluctuate with the number of units of service provided.
However, if the costs per unit exceed our estimates based on the minimum
number of units, our profit margin will decrease and we may realize a
loss on the project.
- Firm Fixed-Price ("FFP"). FPP contracts have historically accounted for
most of our fixed price contracts. Under FFP contracts, our clients agree
to pay us an agreed sum negotiated in advance for the specified scope of
work. 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. If the costs exceed the estimates, our profit margin will
decrease, and we may realize a loss on the project.
Our fixed-price work is generally limited in scope, and we generally do not
pursue fixed-price development or construction contracts. We have a
comprehensive risk management process to ensure that contracts are priced
appropriately and that we are adequately compensated for our work.
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 the difference between negotiated billing rates and actual
labor and overhead costs directly charged or allocated to such contracts.
We currently have over 5,000 active contracts. None of our contracts in
fiscal 2001 accounted for more than 1% of our revenues. At March 31, 2002, the
EG&G businesses had a portfolio of more than 180 active contracts and over 425
active task orders. The largest single contract or task order accounted for
37
approximately 12% of the EG&G businesses' fiscal 2001 revenues. The EG&G
businesses' top five contracts accounted for approximately 36% of their combined
fiscal 2001 revenues. The following table lists information with respect to the
EG&G businesses' top five contracts.
<Table>
<Caption>
REVENUE
CONTRACT NAME CUSTOMER START DATE CONTRACT PRICING TYPE 2001
- ------------- -------- ---------- --------------------- -------
Contract Field Teams................. US Air Force Oct-97 Time-and-materials $104.3
Tooele Chemical Demilitarization
Facility........................... US Army Sep-89 Cost-plus 89.3
Rapid Response to Critical System
Requirements....................... US Army Jul-98 Mixed 70.6
Ft. Rucker........................... US Army Oct-01 Fixed-price 27.5
Tactical Warfare Department.......... US Navy Apr-99 Cost-plus 27.1
------
Total........................... $318.8
======
</Table>
BACKLOG, PROJECT DESIGNATIONS AND INDEFINITE DELIVERY CONTRACTS
BACKLOG. Our contract backlog consists of the amount billable at a
particular point in time for future services under signed and funded contracts,
including the full term of multi-year government contracts for which funds must
be appropriated on an annual basis. We include indefinite delivery contracts,
which are executed contracts requiring the issuance of task orders, in contract
backlog only to the extent the task orders are actually issued and funded. On a
pro forma basis, of the contract backlog of $4.2 billion at April 30, 2002, we
expect to fill approximately 43%, or $1.8 billion, during fiscal 2002.
PROJECT DESIGNATIONS. Customers also have designated us as the recipient
of future contracts. These designations are projects that customers have awarded
to us but for which we do not have signed contracts. We include in designations
task orders under executed indefinite delivery contracts that we expect clients
to issue over the next twelve months. For the EG&G businesses, project
designations have included options on existing contracts. Historically almost
all of the EG&G businesses' options have been converted into some level of
revenues. The total value of our contract designations on a pro forma basis
would have been $3.5 billion at April 30, 2002. Historically, a significant
portion of designations is converted into signed contracts. However, we may not
continue to experience similar conversion rates in the future.
INDEFINITE DELIVERY CONTRACTS. Indefinite delivery contracts are signed
contracts pursuant to which we perform work only when the client issues specific
task orders. Generally these contracts exceed one year and often indicate a
maximum term and potential value. Certain indefinite delivery contracts are for
a definite time period with renewal option periods at the client's discretion.
While we believe that we will continue to get work under these contracts over
their entire term, because of renewals and the necessity for issuance of
individual task orders, we may not continue to perform this work or realize the
potential maximum values under these contracts. However, because of the
increasing frequency with which our government and private sector clients use
this contracting method, we believe the potential value should be disclosed
along with backlog and designations as an indicator of our future business. When
the client notifies us of the scope and pricing of task orders, we add the
estimated value of such task orders to designations. When such task orders are
signed and funded, we put their value into backlog.
38
As of April 30, 2002, on a pro forma basis, our five largest indefinite
delivery contracts would have been as follows:
<Table>
<Caption>
TOTAL ESTIMATED
PERENNIAL ESTIMATED REMAINING
CONTRACT TERM VALUES REVENUE BACKLOG DESIGNATIONS VALUES
- -------- --------- --------- ------- ------- ------------ ---------
(IN MILLIONS)
Department of the Air Force, Remedial
Design............................. 2000-2005 $200 $ 10 $32 $29 $129
General Services Administration
Professional Engineering
Services........................... 1999-2004 150 60 15 -- 75
Federal Emergency Management Agency,
Housing Inspection Support
Services........................... 2001-2000 136 50 22 1 63
U.S. Environmental Protection Agency,
Response Action Contract, Region
9.................................. 1998-2008 120 12 8 -- 100
U.S. Environmental Protection Agency,
Response Action Contract, Region
10................................. 1998-2008 101 41 8 2 50
---- ---- --- --- ----
Total........................... $707 $173 $85 $32 $417
==== ==== === === ====
</Table>
COMPETITION
The engineering and design market is highly fragmented and very
competitive. Based upon rankings published by ENR, the top ten engineering and
design firms accounted for 31% of total industry revenues in 2001 and we were
ranked as the #1 overall domestic engineering and design firm based on 2001
revenues. In each specific market area, we compete with a wide range of
engineering, consulting and design firms. Some of our competitors have achieved
substantially more market penetration in certain of the markets in which we
compete. In addition, some of our competitors have substantially more financial
resources and/or financial flexibility. To our knowledge, no firm currently
dominates any significant portion of our market areas. Competition is based on
quality of service, reputation, expertise, price, local presence and the ability
to provide services globally. We believe that we compete favorably in the market
areas we serve. Our key competitors in the engineering design services industry
are major public and private companies engaged in comparable services and in
related markets, including: Bechtel Group, Inc., Jacobs Engineering Group Inc.,
AECOM Technology Corporation, Fluor Corporation, Earth Tech Inc. (a subsidiary
of Tyco International), CH2M HILL Companies, Ltd., Halliburton KBR (a subsidiary
of Halliburton Company) and Parsons Brinckerhoff Inc.
Through the EG&G acquisition, we will have access to the federal technical
services market, which is also a highly competitive and fragmented market. In
addition, the federal technical services market is changing significantly with
contract consolidations into large "omnibus" contracts requiring prime
contractors to have diverse capabilities. In addition, federal agencies have
increased their emphasis on past performance as a key factor in selecting
contractors. We believe the EG&G businesses have established long-term customer
relationships with federal agencies and have an exemplary reputation based on
high performance on current and past contracts. Accordingly, we believe that the
EG&G businesses are well positioned to compete in the federal technical services
market and that the addition of our diverse capabilities will enhance the EG&G
businesses' competitive position in the federal technical services market. The
EG&G businesses' key competitors in the federal technical services industry are
major public and private companies and their subsidiaries who are prime or
sub-contractors including: Lockheed Martin Corporation, Vertex Aerospace, Inc.,
Anteon International Corporation, DynCorp, Johnson Controls, Inc., Northrop
Grumman Corporation, TRW Inc. and Computer Services Corporation.
REGULATION
Both we and the EG&G businesses engage in a various activities subject to
government regulation, including environmental laws and regulations, general
government procurement laws and regulations and regulations and requirements
imposed by specific government agencies with whom we conduct business.
39
Environmental. A substantial portion of our business involves the
planning, design and program and construction management of pollution control
facilities as well as the assessment and management of remediation activities at
hazardous waste or Superfund sites and military bases. In addition, the EG&G
businesses contract with U.S. governmental entities to destroy hazardous
materials including chemical agents and weapons stockpiles. These activities
require us and the EG&G businesses to manage, handle, remove, treat, transport
and dispose of toxic or hazardous substances.
Some environmental laws, such as the federal Superfund law and similar
state statutes can impose liability for the entire cost of cleanup for
contaminated facilities or sites upon present and former owners and operators as
well as generators, transporters and persons arranging for the treatment or
disposal of such substances. We have been named as a potentially responsible
party at several Superfund sites. In addition, while we strive to handle
hazardous and toxic substances with care and in accordance with safe methods,
the possibility of accidents, leaks, spills and force majeure always exists.
Humans exposed to these materials, including workers or subcontractors engaged
in the transportation and disposal of hazardous materials and persons in
surrounding areas may be injured or sickened, resulting in lawsuits in which we
are found liable and substantial damages could be awarded against us.
Liabilities for contamination or human exposure to hazardous or toxic materials
or a failure to comply with applicable regulations, could result in substantial
costs to us, including cleanup costs, fines and civil or criminal sanctions,
third party claims for property damage or personal injury or cessation of
remediation activities. Any of these could have a material adverse effect on our
operations or financial position.
Certain of the EG&G businesses' operations are covered by Public Law
85-804, which provides for government indemnification against claims and damages
arising out of unusually hazardous activities performed at the request of the
government. However, such indemnification may not be available in the case of
any future claims or liabilities relating to hazardous activities performed by
us or the EG&G businesses.
Government Procurement. The services we and the EG&G businesses provide to
the federal government are subject to the Federal Acquisition Regulation and
other rules and regulations applicable to government contracts. These rules and
regulations, among other things:
- require certification and disclosure of all cost and pricing data in
connection with contract negotiations;
- impose accounting rules that define allowable and unallowable costs and
otherwise govern our right to reimbursement under certain cost-based
government contracts; and
- restrict the use and dissemination of information classified for national
security purposes and the exportation of certain products and technical
data.
In addition, services provided to the Department of Defense are monitored
by the Defense Contract Management Agency and audited by the DCAA. The EG&G
businesses' facilities have permanent on-site government auditors.
Other regulations and requirements. Certain of the services provided by
the EG&G businesses, such as the maintenance, modification, overhaul and service
life-extension of military aircraft, require specialized professional
qualifications and are subject to military specifications and standards. In
addition, in the ordinary course of business, we and members of our professional
staff are subject to a variety of state, local and foreign licensing and permit
requirements. We believe that we are in substantial compliance with these
regulations.
INSURANCE
Currently, we have limits of $125.0 million per loss and $125.0 million
aggregate per year for general liability, professional errors and omissions
liability and contractor's pollution liability insurance. These programs each
have a self-insured claim retention of $1.0 million, $3.0 million and $0.25
million, respectively. With respect to Dames & Moore claims arising from
professional errors and omissions prior
40
to the acquisition, we have 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 we do not continue to maintain these excess policies, we will
have no coverage for claims made after the policies' termination dates even if
the occurrence was during the term of coverage. It is our intent to maintain
these policies; however, we may be unable to maintain existing coverage and,
even if we do, claims may exceed the available amount of insurance. We believe
that our claim reserves combined with our insurance coverage will be adequate
for our present and reasonably foreseeable future operations. We have maintained
insurance without lapse for many years with limits in excess of losses
sustained.
EMPLOYEES
As of April 30, 2002, we had over 16,000 employees in total. After giving
effect to the EG&G acquisition, we will have over 26,000 employees. We employ,
at various times on a temporary or part-time basis, up to several thousand
employees to meet contractual requirements. After giving effect to the EG&G
acquisition, approximately 2,625 of our employees will be covered by
approximately 40 collective bargaining agreements. These agreements are subject
to amendment on various dates ranging from September 2002 to May 2005. We
believe that employee relations are good.
PROPERTIES
We lease office space in 236 offices, branches and project locations
throughout the world. Most of the leases are written for a minimum term of three
years with options for renewal and sublease rights. Our significant lease
agreements expire at various dates through the year 2013. The EG&G businesses
occupy a total of over 94 locations in four countries, including customer
furnished facilities, and lease office space in 46 locations in the United
States. Most of the EG&G businesses' leases are for terms of two to five years.
We believe that our current facilities are sufficient for the operation of our
business and that suitable additional space in various local markets is
available to accommodate any needs that may arise.
LEGAL PROCEEDINGS
On January 18, 2002, the Attorney General of the State of Michigan filed a
civil action against Radian International, L.L.C. ("Radian"), one of our
subsidiaries, entitled Jennifer 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 our acquisition of Radian as part of the Dames & 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 EG&G businesses have been subject to the following legal proceedings:
- BAE Systems has filed a termination for convenience settlement proposal
and is also asserting damages under a business tort theory in respect of
a subcontract Lear Siegler terminated in 2001.
- Lear Siegler is subject to claims relating to the following disputes
arising from its work in Saudi Arabia: (1) claims regarding lease
payments for employee housing; (2) claims relating to reconciliation of a
joint venture; (3) claims relating to agents that allegedly performed on
behalf of Lear Siegler; and (4) outstanding tax matters. A judgment has
been entered against Lear Siegler for approximately $7.8 million on the
lease payments claimed. As a result, Lear Siegler has acted to delay
collection of a $12.1 million receivable from the Royal Saudi Air Force
("RSAF") under a contract for F-5 aircraft maintenance, pending
resolution of the litigation to avoid collection on the judgment against
such receivable. Management of Lear Siegler believes that the RSAF
41
receivable will provide a source of funds to settle the litigation or pay
the judgment. Lear Siegler reserved $7.8 million to cover the judgment as
of December 2001.
In addition, as part of a settlement arising out of the wrongful inflation
of parts prices by a subcontractor hired by Lear Siegler, Lear Siegler pled
guilty to three criminal charges and entered into an administrative agreement
with the U.S. Air Force on March 8, 2000, pursuant to which Lear Siegler
reimbursed the U.S. Air Force for approximately $800,000 of charges.
Various other legal proceedings are pending against us or the EG&G
businesses 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 our insurance coverage. Some actions involve allegations
which are not insured. Based on our previous experience with claims settlement
and the nature of the pending legal proceedings, we do not believe that any of
the legal proceedings are likely to result in a judgment against, or settlement
by, us or the EG&G businesses that would materially exceed our insurance
coverage or have a material adverse effect on our consolidated financial
position or operations.
42