FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended March 26, 1999 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the Transition Period from ______ to ______
COMMISSION FILE NUMBER 1-11075
DAMES & MOORE GROUP
(Exact name of registrant as specified in its charter)
DELAWARE 95-4316617
(State of incorporation) (I.R.S. Employer Identification No.)
911 WILSHIRE BOULEVARD, SUITE 700 90017
LOS ANGELES, CALIFORNIA (Zip Code)
(Address of principal executive offices)
(213) 996-2200
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class: Name of each exchange on which registered:
Common Stock, $0.01 par value New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the registrant's voting stock held by
non-affiliates on May 27, 1999, based on the closing price on the New York Stock
Exchange was $270,923,094. For this purpose, all executive officers and
directors of the registrant were considered affiliates, as were all beneficial
owners of more than 10% of the registrant's common stock. As of May 27, 1999,
18,592,966 shares of the registrant's common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's information statement pursuant to Section 14(f),
which is a part of the registrant's Schedule 14D-9 filing are incorporated by
reference into Part III hereof, which was filed with the Securities and Exchange
Commission on May 11, 1999.
PART I
ITEM 1. BUSINESS
MERGER AGREEMENT
On May 5, 1999, Dames & Moore Group ("the Company") entered into an agreement
and Plan of Merger (the "Merger Agreement") with URS Corporation ("URS") and
Demeter Acquisition Corporation, a wholly-owned subsidiary of URS ("the
Purchaser").
The Merger Agreement provides that Purchaser will make a tender offer to
purchase 100% of the outstanding common stock of the Company. Shares validly
tendered shall be entitled to receive $16.00 in cash. After the tender offer
is complete, subject to approval of a majority of the stockholders of the
Company, Purchaser will be merged with and into the Company, with the
Company as the surviving corporation in the merger, and each outstanding
share of Common Stock, other than shares owned directly or indirectly by
URS, Purchaser or the Company will be converted into the right to receive
$16.00 in cash.
Consummation of the Tender Offer and the merger is subject to certain
conditions as specified in the Merger Agreement.
DEVELOPMENT OF BUSINESS
Dames & Moore Group is the successor to the businesses of Dames & Moore,
Incorporated, a Delaware corporation, and Dames & Moore, a California limited
partnership. Originally organized in 1938, the Dames & Moore partnership
incorporated on March 12, 1992, concurrent with a public offering and sale of
2,500,000 shares of its common stock. The Company's common stock has been
publicly traded since that date and is currently listed on the New York Stock
Exchange. Dames & Moore, Inc. changed its name to Dames & Moore Group in
August 1997 to reflect the expanding nature of the overall company and its
services in becoming a preeminent full-service engineering, consulting and
construction management organization. Dames & Moore, Inc. now exists as one
of the Dames & Moore Group companies, focused on the general engineering and
consulting business.
Since Dames & Moore's incorporation in 1992, the Company has acquired and formed
a number of businesses to expand and diversify its service areas. Significant
acquisitions and activities contributing to this expansion within the last five
years are listed below:
- - Hardcastle & Richards, a company based in Melbourne, Australia providing
design engineering and project management services throughout Australia and
South-East Asia, was acquired in March 1995.
- - O'Brien Kreitzberg, a San Francisco-based company providing project and
construction management, was acquired in March 1995.
- - Walk Haydel, a New Orleans-based company providing project management and
process/chemical engineering, was acquired in April 1995.
- - DecisionQuest, a Torrance, California-based company providing strategic
business communications, trial strategy consulting, graphics, litigation
support and behavioral science services, was acquired in May 1996.
- - BRW, a Minneapolis-based firm, specializing in project planning, design and
construction-phase services for transportation and infrastructure projects,
was acquired in May 1996.
- - Cleveland Wrecking Company (CWC), one of the largest demolition contractors
in the U.S.. The Company, through a series of transactions, gained
operating control in April 1997.
- - LeBron Associates, a San Juan, Puerto Rico-based firm specializing in
transportation, civil, architectural, industrial and environmental
engineering, was acquired in June 1997.
- - SRA Technologies, a Virginia-based company providing research, services and
products for the life sciences industry, was acquired in June 1997.
- - LRE Engineering, Inc., an Atlanta, Georgia-based firm specializing in civil
engineering for infrastructure and transportation projects, was acquired in
March 1998.
- - Signet Testing Laboratories, Inc., a Northern California-based firm
providing materials engineering and testing services and specializing in
structural steel and concrete testing, and inspections, was acquired in
March 1998.
- - Radian International LLC, a Texas-based company, providing process and
chemical engineering, environmental engineering, and remediation
construction, was acquired in July 1998.
- - Aman Environmental Construction, a firm based in Covina, California,
specializing in demolition, environmental remediation and construction,
acquired in April 1993.
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During fiscal year 1999, the Company completed its reorganization to better
reflect the capabilities of the Company as they relate to our clients' needs.
The new organization consisted of four operating divisions, each reporting to
the chief operating officer. These divisions are: general engineering and
consulting, transportation, process and chemical engineering, and construction
services. The wholly-owned subsidiaries are merged into these industry/service
divisions, preserving their separate brand identities only when these provide
market place advantage. Specialty companies are grouped outside the divisional
structure and provide unique capabilities to the firm's clients.
FINANCIAL INFORMATION
Consolidated financial statements for the last three fiscal years are provided
in Item 8 of this Annual Report on Form 10-K.
DESCRIPTION OF BUSINESS
The Dames & Moore Group of companies combines the resources of preeminent
professional service companies and provides world-class solutions for a wide
array of projects both globally and locally. These companies and their
associated subsidiaries provide discrete as well as integrated full-service
capabilities.
Dames & Moore Group's expertise spans a wide range of businesses and industries.
Significant service areas include:
- General Engineering and Consulting Division
- Transportation Division
- Process and Chemical Engineering Division
- Construction Services Division
- Specialty Companies
A brief discussion of each of the above follows:
GENERAL ENGINEERING AND CONSULTING
The general engineering and consulting division of the Group provides
environmental and specialized engineering services to private sector clients and
government agencies through a worldwide network of offices. Demand for
environmental services is influenced by expenditures of private sector clients
and public agencies for site and environmental studies related to the
construction of new facilities, remediation of contaminated sites and
facilities, modernization of upgrading of existing facilities, and engineering
environmental due diligence related to acquisitions, mergers and property
transfers. Specialized services provided by the general engineering and
consulting division include structural and earthquake engineering, geotechnical
engineering, and other services.
During fiscal 1999, a principal factor affecting the demand for these services
was the restraint on environmental spending exercised by both public sector and
private sector clients. Environmental laws, regulations and enforcement policies
remained essentially unchanged during fiscal 1999, and Congress once again
failed to act on reauthorization of the Comprehensive Environmental Response,
compensation and Liability Act of 1980 (Superfund Act). As a result, net
revenues of the Company's general engineering and consulting division remained
essentially unchanged.
The engineering and environmental services of the Group have experienced
little growth over the prior two fiscal years. This is due to market
conditions and regulatory factors discussed above, and to intense competition
for available projects in both the private and public sector. In fiscal 1999,
the net revenues of the general engineering and consulting division
constituted 41.6% of the Group's total net revenues.
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PROCESS AND CHEMICAL ENGINEERING
The process and chemical engineering division provides a range of
multi-disciplinary engineering including process engineering, process testing,
detailed design, process optimization, measurement services, information
management systems, total chemical management and on-site operating support
(outsourcing).
Overall, the division's net revenues in fiscal 1999 increased materially due to
the acquisition of Radian International LLC (Radian). Net revenues from the
process and chemical engineering division accounted for 18.6% of the Group's
total net revenues in fiscal 1999.
The division's major clients are the energy, oil and gas, petroleum refining,
chemical, manufacturing, pulp and paper, and utilities industries and two
federal agencies, the Department of Energy and the Department of Defense. The
effect of the external environment on various parts of the division is not
uniform. While the impact of an uncertain economy may be reflected in clients'
falling revenues, this presents opportunities for the division's value-based
productivity improvements, technology and outsourcing services. The federal
budgets, while declining, still present major opportunities for which newly
combined core services are a good fit. Deregulation of the utilities industry
and the nuclear power industry offer good markets.
TRANSPORTATION
The transportation division is well-grounded in the planning and engineering
capabilities related to surface transportation which include roads, highways,
and transit, with more limited capabilities in aviation, ports and harbors and
freight rail. Its clients are predominantly domestic public agencies. The
transportation division represents 8.7% of the Group's total net revenues in
fiscal 1999.
While transportation infrastructure dollars from all levels of government have
been steadily increasing over the past years, recent federal legislation (TEA
21) authorizes record amounts for the next six years and the current year's
appropriations for infrastructure investment constitute better than a 25%
increase over last year to approximately $33 billion funded primarily through
state and local agencies. Commensurate with the federal funding increase, local
state matching and state budget surpluses will drive increased transportation
spending. On the aviation side, the Federal Aviation Administration projects a
nearly 50% increase in enplanements by 2005, and record amounts of funding from
federal, local and private (airline and private development) sources are
available for aviation-related projects. Ports and harbors and the connecting
cargo hauling freight rails are also an active market.
CONSTRUCTION SERVICES
The construction services division provides four key services to the
construction industry: program, project, and construction management; demolition
services; environmental remediation; and materials testing. The construction
management unit provides services for public sector projects of all sizes and
complexity. In fiscal 1999, the unit successfully expanded its services into the
private sector and integrated Radian's remediation services. The acquisition of
Signet Materials Testing Laboratory added to the division's expertise, greatly
expanding its capabilities in a growing market. During fiscal 1999, the net
revenues for the construction services division were 27.8% of the Group's total
net revenues.
Growth opportunities exist for the various construction services division
practices to leverage one another, and for the division to pursue major projects
involving integrated efforts with other divisions. The division is developing a
full range of value-added construction services and project delivery methods
including design/build, turnkey, construction management at-risk and general
contracting.
SPECIALTY ENGINEERING AND CONSULTING
Speciality engineering and consulting consists primarily of DecisionQuest.
DecisionQuest specializes in support services for corporate clients involved in
litigation. These services include strategy consulting, development of case
themes, juror analysis and selection, preparation of demonstrative graphics, and
witness preparation. Since its acquisition in fiscal 1997, DecisionQuest has
also pursued joint activities with other Group companies and has completed joint
projects for selected clients. DecisionQuest's growth has been enhanced by the
acquisition of several small strategic communications firms. The
4
specialty engineering and consulting division constituted 3.4% of the Group's
total net revenues in fiscal 1999.
DISTRIBUTION
Dames & Moore Group marketing and business development activities take place
through personnel assigned to each of the Company's offices. In addition to
these local efforts, there are marketing activities focused on U.S. Federal
government agencies, as well as a firmwide marketing program targeting
multinational clients. These multinational clients benefit from the Company's
worldwide expertise, its breadth of services, and the coordination and
cross-selling activities of the Dames & Moore Group companies and divisions.
These capabilities, coupled with the Company's broad distribution of global
offices, allow the Company to mobilize quickly and provide timely advice to
clients whose sites and decision makers are located in widely dispersed
geographic areas. The Company's global resources are particularly valuable when
clients find it necessary to react quickly to changing economic conditions,
merger or acquisition opportunities, natural or environmental crises, or
pressures imposed by governmental agencies and/or the public.
The experts at Dames & Moore Group bring vision and value to every state of
project development. We understand our clients' business and help them reach
their goals, design creative solutions, engineer results, reduce risks, manage
construction, control costs, and deliver results.
BACKLOG
As of March 26, 1999, the Company estimates that the backlog of future net
revenues from contracts in existence and authorized funded orders, was
approximately $521M. The entire backlog is expected to be substantially
completed with the next twelve months. There can be no assurance, however, that
some of this work will not be postponed or canceled.
COMPETITION
The Company believes that the principal competitive factors in the areas of
services it offers are reputation, experience, breadth and quality of services
offered, technical proficiency, proximity of offices, consulting fees and total
project costs, and ability to provide clear statements of problems, alternative
solutions and definitive recommendations. The Company is engaged in highly
competitive markets in all of its service areas. Given the expanding demand for
some of the services provided by the Company, it is likely that additional
competitors will emerge. At the same time, consolidation continues to occur in
the environmental business, particularly in the United States due to mergers.
The Company believes that it will retain the ability to compete effectively with
other firms that provide similar services by continuing to offer a broad range
of high-quality consulting and environmental, transportation, and engineering
and construction services through its worldwide network of offices.
REGULATION
The Company's clients and, to a lesser extent, the Company are subject to
environmental laws and regulations. These laws and regulations are directly
related to the demand for many of the services offered by the Company. In
addition, the laws and regulations often subject the Company to stringent
regulation in the conduct of its operations. The principal environmental
legislation affecting the Company and its clients are:
- - National Environment Policy Act of 1969 ("NEPA")
- - Resource Conservation and Recovery Act of 1976 ("RCRA")
- - Comprehensive Environmental Response, Compensation and Liability Act of
1980 ("Superfund")
- - The Superfund Amendments and Reauthorization Act of 1986 ("SARA")
Although the liabilities imposed by the Superfund Act (and other environmental
legislation) are more directly related to the Company's clients, they could
under certain circumstances give rise to liability on the part of the Company as
a result of the Company's efforts in completing clients' assignments that
involve transportation or disposal of contaminated samples or other hazardous
materials belonging to its clients. Liabilities imposed by the Superfund Act can
be joint and several where other parties are involved. In the opinion of
management, it is unlikely that the Company's activities will result in any
liability under either the Superfund Act or other environmental legislation in
an amount which will have a material adverse effect on the Company's results of
operations or financial condition, and management is not aware of any current
activity by the Company which is likely to result in any such liability.
5
In the ordinary course of its business, the Company and members of its
professional staff are subject to a variety of state, local, and foreign
licensing and permit requirements. The Company believes that it is in
substantial compliance with those requirements.
The Company's consulting 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 impact those conditions. If
those judgments and resulting recommendations do not result in the anticipated
consequences, losses to the Company's clients can occur for which the Company
may be liable. In addition, the Company's projects often involve hazardous and
highly regulated materials, the improper characterization, handling, or disposal
of which could constitute violations of Federal, state or local statutes, and
result in criminal fines and penalties.
The Company through a wholly owned subsidiary insures the Company's risks for
professional liability, workers compensation, and general and automobile claims
up to certain policy limits. Claims in excess of these limits are covered by
unrelated insurance carriers. Management believes its self insurance reserves,
combined with its insurance coverage, are adequate for its present operations.
Management has no reason to believe that adequate coverage will not continue to
be available, but there can be no assurance that it will be. There also can be
no assurance that the Company's liabilities will not exceed the policy limits.
However, insurance has been provided without lapse for many years for limits far
in excess of losses sustained.
EMPLOYEES
As of March 26, 1999, the Company had approximately 7,700 employees worldwide.
Approximately 70% perform professional or technical services, while the
remaining 30% perform administrative and support services. The company considers
its relations with its employees to be strong.
INTERNATIONAL BUSINESS
Dames & Moore Group currently derives 12.6% of its net revenues from
international operations. The Company is focused on expanding its clientele and
business operations worldwide. The Company, however, cannot provide any guaranty
of future growth from international operations. Risks inherent in foreign
operations, such as foreign currency fluctuations, exchange controls and changes
in governments resulting in delays and/or canceled projects, contribute to
uncertainty regarding future growth. Dames & Moore Group carefully monitors all
foreign markets in which it is involved to be able to respond quickly to any
changing conditions.
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ITEM 2. PROPERTIES
The Company operates entirely in leased premises. The Company leases 199 office
properties in the United States and 57 office properties in foreign countries.
ITEM 3. LEGAL PROCEEDINGS
The Company in the ordinary course of business is a defendant in various
lawsuits involving claims typically filed against engineering and consulting
professionals, primarily alleging professional errors or omissions. The Company
through a wholly owned subsidiary insures the Company's risks for professional
liability, workers compensation, and general and automobile claims up to certain
policy limits. Claims in excess of these limits are covered by unrelated
insurance carriers. Management makes estimates and assumptions that affect the
reported amount of liability and the disclosure of contingent liabilities. As
claims develop, it is possible that the ultimate results of these claims may
differ from management's estimates. In the opinion of management, based upon
information it presently possesses, the resolution of these claims will not have
a material adverse effect on the Company's consolidated financial position or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders during the
fourth quarter of the fiscal year ended March 26, 1999.
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ITEM S-K 401(b). EXECUTIVE OFFICERS OF THE COMPANY
Set forth below is certain information about the Company's executive officers as
of May 27, 1999. Each executive officer holds office until his or her
resignation or removal by the Board of Directors.
NAME AGE POSITION
- ------------------ ------ ----------------------------------
Arthur C. Darrow 55 Chairman, Chief Executive Officer,
President and Director
Henry Klehn, Jr. 62 Executive Vice President -
Corporate Development
Glenn D. Martin 49 Executive Vice President and
Chief Operating Officer
Mark A. Snell 42 Executive Vice President,
Chief Financial Officer and
Corporate Secretary
Robert M. Perry 67 Executive Vice President -
Corporate Affairs
Leslie S. Puget 44 Corporate Controller
ARTHUR C. DARROW has been employed by the Company since 1973. He has served as a
director since 1994, as Chief Executive Officer and President since 1995, and
has served as Chairman of the Board of Directors since 1998. Between 1993 and
1994, he served as President and Chief Operating Officer; between 1991 and 1993,
as Senior Vice President Western North America Division; and between 1988 and
1991, as the Company's Western Region General Manager and Division Manager -
Western North America. He has bachelor's and master's degrees in geology from
the University of California-Santa Barbara.
HENRY KLEHN, JR. has been employed by the Company since 1960. He has served as
Executive Vice President Corporate Development since 1993. Between 1983 and
1993, he served as Chief Operating Officer and as an Executive Vice President
since 1991. He has a bachelor's degree in geological engineering and a master's
degree in engineering science from the University of California-Berkeley.
GLENN D. MARTIN has been employed by the Company since 1972. He has served as
Executive Vice President and Chief Operating Officer since 1998. Between 1993
and 1998, he served as Senior Vice President and Manager - Central U.S. and
Latin America Division. From 1985 to 1992, he served as the Chicago Office
Managing-Principal-in-Charge and then as the Company's Mid-Continental Region
General Manager. He has a bachelor's degree in geology from the University of
Cincinnati.
MARK A. SNELL has served as Executive Vice President and Chief Financial Officer
of the Company since September 1996. Prior to joining the Company, he served as
Executive Director and Chief Financial Officer at the international law firm of
Latham & Watkins from 1993 to 1996, and as Executive Vice President and Chief
Financial Officer at World Oil Corporation from 1990 to 1993. Mr. Snell, a CPA,
holds a bachelor of science degree from San Diego State University.
ROBERT M. PERRY has been employed by the Company since 1955. He has served as a
director from 1981 to 1998, and as an Executive Vice President since 1991.
Between 1978 and 1995, he served as Chief Financial Officer. He has a bachelor
of science degree in civil engineering from the University of Michigan, and is a
registered professional engineer.
LESLIE S. PUGET has served as Corporate Controller of the Company since 1995.
Prior to a two-year professional sabbatical, she served as Vice President of
Finance for Cushman Realty Corporation from 1985 to 1993 and as Controller from
1982 to 1985. Ms. Puget, a CPA, holds a bachelor of science degree from the
University of Illinois at Urbana-Champaign.
8
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on the New York Stock Exchange under the
symbol DM. As of May 27, 1999, the Company's common stock was held by 352
holders of record. The following table reflects the high and low sales prices
and cash dividends per share for fiscal years 1999 and 1998:
HIGH LOW DIVIDENDS
1999
Fourth quarter $12 15/16 $ 7 15/16 $0.03
Third quarter 12 15/16 9 3/4 0.03
Second quarter 14 7/16 10 1/8 0.03
First quarter 13 5/8 12 1/4 0.03
1998
Fourth quarter $13 1/2 $12 1/8 $0.03
Third quarter 13 3/8 11 15/16 0.03
Second quarter 13 7/8 11 3/4 0.03
First quarter 13 1/4 11 3/8 0.03
The Company has discontinued its policy of paying regular quarterly cash
dividends in anticipation of the merger of the Company and URS Corporation.
On March 29, 1999, the Company issued from its treasury 104,461 shares of its
common stock as part of the contingent consideration due for its acquisition of
the LRE Engineering, Inc. The securities were exempt from registration under
Section 4(2) of the Securities Act of 1933 because they were offered and sold in
a transaction that did not involve a public offering.
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ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data for the Company (in
thousands, except per share amounts):
FISCAL YEAR ENDED
------------------------------------------------------------------
MARCH 26, MARCH 27, MARCH 28, MARCH 29, MARCH 31,
1999 1998 1997 1996 1995
------------ ----------- ------------ ---------- -----------
Earnings data:
Gross revenues $1,029,967 $703,902 $653,378 $556,763 $382,681
Net revenues 639,346 482,504 454,408 396,495 268,969
Earnings from operations 23,926 42,813 36,861 36,901 28,797
Net (loss) earnings (303) 19,330 18,540 22,098 17,879
(Loss) earnings per share - Basic $ (0.02) $ 1.08 $ 0.91 $ 0.99 $ 0.79
(Loss) earnings per share - Diluted (0.02) 1.07 0.91 0.98 0.79
Cash dividends per share 0.12 0.12 0.12 0.12 0.12
Weighted average shares - Basic 18,237 17,890 20,287 22,385 22,500
Weighted average shares - Diluted 18,319 18,048 20,446 22,537 22,586
Financial position data:
Current assets $ 366,506 $228,129 $208,254 $216,191 $155,338
Current liabilities 182,336 98,559 92,837 70,377 59,115
Net working capital 184,170 129,570 115,417 145,814 96,223
Total assets 634,579 386,361 358,282 317,279 224,627
Long-term debt 284,147 132,010 128,542 75,000 2,336
Shareholders' equity 146,920 149,909 131,623 167,947 161,630
Backlog: $ 521,000 $345,000 $290,000 $252,000 $120,000
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (DOLLARS IN THOUSANDS)
From time to time, the Company or its representatives may make forward-looking
statements in this report or elsewhere relating to such matters as anticipated
financial performance, including projections of revenues, expenses, earnings,
liquidity, capital resources or other financial items; business plans,
objectives and prospects; technological developments; Year 2000 readiness; and
similar matters. Forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 frequently are identified by the use of
terms such as "expect", "believe", "estimate", "may", "should", "will" or
similar expressions.
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. In order to comply with the terms of the safe
harbor, the Company notes that a variety of factors could cause the Company's
actual results and experiences to differ materially from the anticipated results
or other expectations expressed in the forward-looking statements made by the
Company or its representatives. The risks and uncertainties that may affect the
operations, performance, development and results of the Company's business
include the following, among other factors: (a) the ability to attract and
retain qualified professional personnel; (b) potential liability for engineering
services; (c) potential liability for consulting services relating to toxic and
hazardous materials and the ability to insure such risks; (d) dependence on
environmental regulation including decreased revenues that may result from a
reduction in laws, regulations and programs related to environmental issues or
from changes in governmental policies regarding the funding, implementation or
enforcement of such laws, regulations and programs; (e) increasing competition
faced by the Company in its service areas; (f) periodic fluctuations in general
business conditions and in demand for the types of services provided by the
Company; and (g) foreign operations which expose the Company to political,
economic and other uncertainties such as fluctuating currency values and
exchange controls of foreign countries.
OPERATIONS AND ACQUISITIONS
Dames & Moore Group (Group or Company) operating results during fiscal 1999 were
affected by increasingly competitive market conditions in its environmental
business sector, by the acquisitions of complementary professional service and
contracting businesses, and by the continued integration of the service
capabilities of companies acquired in previous years. The overall net revenue
base of the Group increased 32.5% in fiscal 1999, primarily attributable to
acquisitions, most noticeably Radian International LLC (Radian) acquired on July
31, 1998.
GENERAL ENGINEERING AND CONSULTING:
The general engineering and consulting division of the Group provides
environmental and specialized engineering services to private sector clients and
government agencies through a worldwide network of offices. Demand for
environmental services is influenced by expenditures of private sector clients
and public agencies for site and environmental studies related to the
construction of new facilities, remediation of contaminated sites and
facilities, modernization and upgrading of existing facilities, and engineering
and environmental due diligence related to acquisitions, mergers and property
transfers. Specialized services provided by the general engineering and
consulting division include structural and earthquake engineering, geotechnical
engineering, and other services.
During fiscal 1999, a principal factor affecting the demand for these services
was the restraint on environmental spending exercised by both public sector and
private sector clients. Environmental laws, regulations and enforcement policies
remained essentially unchanged during fiscal 1999, and Congress once again
failed to act on reauthorization of the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 (Superfund Act). As a result, net
revenues of the company's general engineering and consulting division were
virtually unchanged in 1999.
In fiscal 1999, the net revenues of Dames & Moore Group's general engineering
and consulting services division constituted 41.6% of the Group's total net
revenues, compared with 55.1% of net revenues in fiscal 1998.
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CONSTRUCTION SERVICES:
The construction services division provides four key services to the
construction industry: program, project, and construction management;
demolition services; environmental remediation; and materials testing. The
construction management unit provides services for public sector projects of
all sizes and complexity. In fiscal 1999, the division successfully expanded
its services into the private sector and integrated Radian's remediation
services. The acquisition of Signet Materials Testing Laboratory added to the
division's materials testing expertise, greatly expanding its capabilities in
a growing market.
During fiscal 1999, the net revenues for the construction services division were
27.8% of the Group's total net revenues compared with 19.5% in fiscal 1998.
PROCESS AND CHEMICAL ENGINEERING:
The process and chemical engineering division provides a range of
multi-disciplinary engineering including process engineering, process testing,
detailed design and construction management, process optimization, measurement
services, information management engineered systems, total chemical management,
and on-site operating support (outsourcing).
Overall, the division's net revenues in fiscal 1999 increased materially due to
the acquisition of Radian International.
Net revenues from process and chemical engineering division accounted for 18.6%
of the Group's total net revenues in fiscal 1999, compared with 10.9% in the
preceding year.
TRANSPORTATION:
The transportation division is well-grounded in the planning and engineering
capabilities related to surface transportation which includes roads, highways,
and transit, with more limited but developing capabilities in aviation, ports
and harbors and freight rail. Its clients are predominantly domestic public
agencies.
The transportation division represents 8.7% of the Group's total net revenues in
fiscal 1999, compared with 9.8% in fiscal 1998.
SPECIALTY ENGINEERING AND CONSULTING:
DecisionQuest specializes in support services for corporate clients involved in
litigation. These services include strategy consulting, development of case
themes, juror analysis and selection, preparation of demonstrative graphics, and
witness preparation. Since its acquisition in fiscal 1997, DecisionQuest has
also pursued joint activities with other Group companies and has completed joint
projects for selected clients. DecisionQuest's growth has been enhanced by the
acquisition of several small strategic communications firms.
The specialty engineering and consulting division constituted 3.4% of the
Group's total net revenues in fiscal 1999 compared with 4.8% in fiscal 1998.
ACQUISITIONS:
The companies that have been acquired in recent years provide a wide variety of
engineering and specialized services. The principal acquired companies providing
construction and related services include O'Brien Kreitzberg, Aman Environmental
Construction, Inc., Cleveland Wrecking Company, Signet Testing, and the
remediation division of Radian. Process and chemical engineering consists
primarily of Radian (all divisions except the remediation division which is
included in construction services) and Walk Haydel, transportation consists
primarily of BRW and specialty businesses is comprised primarily of
DecisionQuest.
PURCHASED IN-PROCESS TECHNOLOGY:
Upon the completion of the Radian acquisition on July 31, 1998, the Company
expensed approximately $15,271 representing purchased in-process research and
development technology that had not yet reached technological feasibility. The
technologies included Syngyp, CrystaSulf and GasSorb. The value for each was
determined by using the discounted cash flow valuation approach.
12
The discounted cash flow model forecasts the cash flows expected to be received
through continued operations over a ten-year period. These cash flows are
discounted to their present value and generally are then added to the present
value of the residual value of the tenth projected cash flow, resulting in the
value of the in-process research and development technology. The discount rate
includes the following special risk factors: technology risk, market risk,
growth assumptions and completion risks. The discount rate used ranged between
30% and 35%.
The net cash flows from each project were based on management estimates of
revenue, cost of sales, general and administrative costs, and income taxes.
The Syngyp technology changes the operations of existing flue gas
desulfurization systems that produce a waste sludge, to operations that produce
a marketable gypsum product. This technology was 60% complete on date of
acquisition and has since been completed and is currently being marketed.
CrystalSulf is a program to develop an advanced liquid redox process. The
technology was 64% complete on date of acquisition and is expected to be
completed in fiscal 2000. Management expects to spend up to $3 million to
complete this technology.
GasSorb may be a viable application of pressure swing adsorption. The technology
was 49% complete on date of acquisition and is substantially completed and
marketing is in the planning stages.
OUTLOOK
The proposed acquisition, by URS Corporation (URS), of all the oustanding shares
of the Company's common stock for $16.00 a share will create one of the largest
engineering/consulting firms in the world. This transaction affords the company
an opportunity for growth through expanded services and geographic presence
unlike any other time in its history. The Group's continuing investment in its
strategic growth initiatives, combined with the complementary services offered
by URS and newly acquired companies and the restructuring of ongoing operations,
should produce broader business opportunities in fiscal 2000 and the years
ahead. However, the ultimate demand for the Company's services will be dependent
on a continuation of economic growth in the United States and worldwide, public
and private sector capital investment, enforcement of environmental regulations,
and the Group's ability to meet the competitive demands of the market for
full-service engineering, environmental, transportation, construction
management, and litigation support services.
Dames & Moore Group has a worldwide network of 256 offices located in 33
countries. The company is staffed by over 7,700 employees.
YEAR 2000
General. Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field. These date code
fields will need to accept four digit entries to distinguish 21st century dates
from 20th century dates. Any programs that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in the computer shutting down or performing incorrect computations.
As a result, before December 31, 1999, computer systems and software used by
many companies may need to be upgraded to comply with such "Year 2000" problems.
In certain situations, a Year 2000 problem could adversely impact: (a) the
reliability of the company's internal information management systems, such as
accounting systems, e-mail and desktop computers, (b) the physical operation of
systems used by the Company which have embedded technology, such as elevator and
telephone systems, security systems and other physical office infrastructure, or
(c) the Company's ability to interface with third parties, such as receiving
payments from customers or supplies from vendors on a timely basis. Such issues
could arise from internal Year 2000 problems in software used by the Company or
from external Year 2000 problems encountered by third parties.
State of Readiness. Two of the Company's three core financial and administrative
software systems have been upgraded to be Year 2000 compliant. The Company has
tested these programs for Year 2000 compliance and both systems are currently
operational. The third core system is the financial and administrative software
system of one of the recently acquired subsidiaries, Radian. The Company has
completed the upgrade of this core system and expects to have the system fully
tested and operational by July 1999. All of the Company's core hardware has also
been tested and is Year 2000 compliant.
13
The Company continues to examine infrastructure issues on an office-by-office
basis. The Company continues to update its voice and data communication systems
and expects to complete this process by late fall. In the general course of its
business, the Company also has updated and will continue to update its desktop
software applications. Such updated applications are Year 2000 compliant.
The Company has 256 offices worldwide, virtually all of which are leased. The
Company has not reviewed the Year 2000 readiness of the spaces it leases with
each of its landlords. Such problems may include the malfunctioning of
various building systems, including elevators, security systems, and air
conditioning and heating systems.
During the course of 1999, the Company intends to discuss with its major
customers, suppliers and financial institutions the potential impact the Year
2000 issue will have on their systems, including possible delays in receiving
payments from customers resulting from Year 2000 problems affecting such
customers' accounting and payable systems. The Company also intends to contact
its major vendors to assess their Year 2000 readiness. The possible effects of
the Year 2000 on these parties are beyond the control of the Company.
Costs. To date, the Company had incurred external costs to upgrade its financial
systems of approximately $505, and internal costs of approximately $470, with
respect to addressing Year 2000 issues. Much of this cost arises from the
purchase of new hardware and software, which the Company would have purchased as
part of its regular and routine upgrading of systems. The Company is unable to
estimate additional external costs for addressing Year 2000 issues at this time,
other than it expects to spend approximately $675 to update PBX equipment at its
offices. While the Company does not expect the external and internal costs to be
material, there can be no guarantee that such costs will be immaterial, and
actual results could differ materially from those anticipated.
Risks. The Company does not anticipate that the costs of its Year 2000 issues or
the risks to the Company which might arise from the Year 2000 problem are likely
to be material. The risk associated with the Company's Radian system not being
compliant, is minimal as the system is currently scheduled for a July 1, 1999
completion. If the Company's desktop software applications are not compliant,
employees will not be able to use such applications. If the Company's customers
are not Year 2000 compliant, the Company risks not being paid on time, and if
its suppliers, vendors and internal voice and data systems are not compliant,
the Company risks not being able to service its customers. However, the Company
does not have control over third parties, and as a result, cannot currently
estimate to what extent future operating results may be adversely affected by
the failure of third parties to successfully address their Year 2000 issues.
Problems encountered by the Company's major customers and suppliers arising from
the Year 2000 issue could have a material adverse effect on the Company's
financial condition, liquidity and results of operations. Additionally, the
federal government is a significant customer of the Company. At this time, the
Company cannot predict the impact on its consolidated financial condition,
liquidity and results of operations of the U.S. federal government's Year 2000
readiness. If the federal government is unable to make payments due to its Year
2000 problems, this may have a material impact on the Company's financial
condition, liquidity and results of operations. In addition, if the Company's
plans to address the Year 2000 issue are not successfully or timely implemented,
the Company may need to devote more resources to the process and additional
costs may be incurred, which could have a material adverse effect on the
Company's financial condition, liquidity and results of operations.
Worst Case Scenario. It is not presently possible to describe a reasonably
likely "worst case Year 2000 scenario" without making numerous assumptions. The
Company presently believes that a most likely worst case scenario would make it
necessary for the Company to replace some suppliers or contractors, rearrange
some work plans, or perhaps interrupt some office and field activities. Assuming
this worst case scenario is correct, the Company believes that such
circumstances could have a materially adverse effect on its financial condition
or results of operations.
Contingency Plan. The Company currently does not have contingency plans in place
in the event that it does not complete all of its Year 2000 remediation, some of
its systems are not Year 2000 compliant or some of its major customers and
vendors are not Year 2000 compliant. However, it expects to have completed
sufficient compliance work by the end of the summer and to have sufficient time
to identify those areas for which contingency plans will be necessary, and it
will create those contingency plans as necessary at that time. Any future
contingency plan will be based on its best estimates of numerous factors, which,
in turn, will be derived by relying on numerous assumptions about future events.
However, there can be no assurance that these assumptions or estimates will have
been correctly made, that the Company will have anticipated all relevant factors
or that there will not be increased costs associated with the Company's Year
2000 problems. Additionally, there can be no assurance that any contingency
plans implemented by the Company would be adequate to meet the Company's needs
without materially impacting its operations, that any such plan would be
successful or that the Company's results of operations would not be materially
and adversely affected by the delays and inefficiencies inherent in conducting
operations in an alternative manner.
14
RESULTS OF OPERATIONS
The Company uses a 52-53 week fiscal year ending the last Friday in March. The
fiscal years were comprised of 52 weeks each for 1999, 1998 and 1997.
In performing its services, the Company routinely incurs direct project costs
for services subcontracted to third parties, equipment purchases for its clients
and travel expenses. The Company is generally reimbursed by its clients for a
handling fee plus the direct project costs. In accordance with traditional
practices of the engineering and consulting industry, the Company deducts these
costs from gross revenues to arrive at net revenues. The Company believes net
revenues are a more accurate measure of revenues derived directly from the
Company's services.
1999 INCREASE 1998 INCREASE 1997
---------- -------- ----------- -------- ----------
NET REVENUES $639,346 32.5% $482,504 6.2% $454,408
During fiscal 1999 the growth in net revenues compared with fiscal 1998 was
primarily the result of completed acquisitions.
The growth in net revenues of 6.2%, from fiscal 1997 to fiscal 1998 was a result
of completed acquisitions.
1999 INCREASE 1998 INCREASE 1997
---------- -------- ----------- -------- ----------
SALARIES AND RELATED COSTS $445,594 32.0% $337,474 6.8% $315,896
The increase in salaries and related costs in fiscal 1999 as compared with
fiscal 1998 was primarily a result of acquisitions. Salaries and related costs
for fiscal 1999 represent 69.7% of net revenues.
Salaries and related costs increased by 6.8% in fiscal 1998 as compared with
fiscal 1997 primarily as a result of acquisitions. Salaries and related costs
for fiscal 1998 represent 69.9% of net revenues.
1999 INCREASE 1998 INCREASE 1997
---------- -------- ----------- -------- ----------
GENERAL EXPENSES $123,206 39.4% $ 88,401 2.5% $ 86,275
During fiscal 1999, general expenses increased 39.4% from fiscal 1998.
Acquisitions previously completed represents $33,012 or 37.3% of the increase.
General expenses for fiscal 1999 represent 19.3% of net revenues.
General expenses increased by 2.5% in fiscal 1998 as compared to fiscal 1997.
Acquisitions previously completed represent the entire increase in fiscal 1998.
General expenses for fiscal 1998 represent 18.3% of net revenues.
1999 INCREASE 1998 INCREASE 1997
---------- -------- ----------- -------- ----------
DEPRECIATION AND AMORTIZATION $ 12,840 39.3% $ 9,216 4.3% $ 8,832
The depreciation and amortization increase of 39.3% in fiscal 1999 as compared
with fiscal 1998 was also a result of completed acquisitions. As a percentage of
net revenues, depreciation and amortization represent 2.0% in fiscal 1999.
Depreciation and amortization increased by 4.3% in fiscal 1998 as compared with
fiscal 1997 also as a result of completed acquisitions. As a percentage of net
revenues, depreciation and amortization represent 1.9% in fiscal 1998.
1999 INCREASE 1998 INCREASE 1997
---------- -------- ----------- -------- ----------
AMORTIZATION OF GOODWILL $ 5,504 19.7% $ 4,600 18.2% $ 3,893
Amortization of goodwill increased 19.7% and 9.5% during fiscal years 1999 and
1998, respectively, due to acquisitions. The balance of the increase for fiscal
1998 is due to the write-off of the remaining goodwill of a previously acquired
small business, which has been discontinued, and the capitalization of
additional goodwill related to contingent amounts due on previously acquired
companies.
15
1999 INCREASE 1998 DECREASE 1997
---------- -------- ----------- -------- ----------
ACQUISITION RELATED $ 28,276 100.0% - (100.0%) $ 2,651
RESTRUCTURING & OTHER CHARGES
See Note 18 to the Consolidated Financial Statements.
1999 DECREASE 1998 INCREASE 1997
---------- -------- ----------- -------- ----------
EARNINGS FROM OPERATIONS $ 23,926 (44.1%) $ 42,813 16.1% $ 36,861
The Company's operating margin as a percentage of net revenues was 3.7% for
fiscal 1999, 8.9% for fiscal 1998, and 8.1% for fiscal 1997. The operating
margin for fiscal 1999 was significantly less due primarily to acquisition
related restructuring and other charges of $28,276 (see Note 18 to the
Consolidated Financial Statements). The Company's operating margin as a
percentage of net revenues before these charges was 8.2%.
1999 INCREASE 1998 INCREASE 1997
---------- -------- ----------- -------- ----------
INVESTMENT AND OTHER INCOME $ 1,231 23.5% $ 997 (50.5%) $ 2,014
The 23.5% increase in investment and other income in fiscal 1999 as compared
with fiscal 1998 is due to completed acquisitions which contributed $1,063 of
the increase, or 106.6%. This increase is offset by a decline in earnings from
the Company's joint ventures.
Investment and other income declined in fiscal 1998, as compared with fiscal
1997 due to a reduction of interest income from the interim investment of
long-term borrowings that was awaiting deployment to fund acquisitions and stock
repurchases. In fiscal 1997 the Company acquired the majority interest in a
company which it previously held a minority interest; as a result their
operating results are now a part of earnings from operations.
1999 INCREASE 1998 INCREASE 1997
---------- -------- ----------- -------- ----------
INTEREST EXPENSE $ 18,481 79.6% $ 10,292 39.3% $ 7,386
The Company has utilized long-term debt to fund acquisitions, related business
ventures and purchases of treasury stock. Accordingly, interest expense has
increased. See Liquidity and Capital Resources.
1999 DECREASE 1998 INCREASE 1997
---------- -------- ----------- -------- ----------
INCOME TAXES $ 4,129 (70.9%) $ 14,188 9.6% $ 12,949
Income tax expense as a percentage of earnings before income taxes was 61.9% in
fiscal 1999, 42.3% in fiscal 1998, and 41.1% in fiscal 1997. Amortization of
goodwill resulting from stock acquisitions, which is not deductible for tax
purposes, coupled with fiscal 1999 losses from foreign corporations where a tax
benefit has not been recognized, resulted in a higher income tax rate as a
percentage of earnings.
1999 INCREASE 1998 INCREASE 1997
---------- -------- ----------- -------- ----------
EXTRAORDINARY ITEM $ 2,850 100.0% - - -
See Note 6 to the Consolidated Financial Statements.
1999 DECREASE 1998 INCREASE 1997
---------- -------- ----------- -------- ----------
NET (LOSS) EARNINGS $ (303) 101.6% $19,330 4.3% $ 18,540
The Company's net loss for fiscal 1999 was primarily a result of the acquisition
related restructuring and other charges and extraordinary items previously
discussed. Net earnings as a percentage of net revenues was 4.0% in fiscal 1998
and 4.1% in fiscal 1997.
16
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents total $15,880 at March 26, 1999, compared to $9,493 at
March 27, 1998. The Company's working capital of $184,170 at March 26, 1999 has
grown from $129,570 at March 27, 1998. The primary source of cash during fiscal
1999 consisted of funds from the new credit facilities net of issuance costs and
existing borrowings of $156,652. The primary uses of cash in fiscal 1999
consisted of acquisitions totaling $128,146 and capital expenditures of $18,615.
In fiscal 1999 net cash provided by operating activities totaled $1,903 as
compared to $19,020 for fiscal 1998. The significant change is an increase in
receivables from our construction services, transportation and chemical and
process divisions primarily from increased revenues. Offsetting this use of
funds is growth in accounts payable primarily attributable to the increase in
outside direct costs where the timing of payment is tied to collection of
related receivables. Deferred income taxes represent a significant use from the
prior fiscal year due to compensation related amounts and the acquisition
related restructuring and other charges which are not tax deductible until paid.
Other increases appear to be proportionate with the company's growth in revenues
and/or assets.
Net cash provided by operating activities for fiscal 1998 totaled $19,020 as
compared to $5,780 for fiscal 1997. The most significant factor affecting this
increase is the growth in accounts payable, due to a higher dollar amount for
direct costs of outside services and a correlation of the payment of payables
with the Company's longer receivable collection cycle. Advance payments for
rents, insurance and deposits somewhat offset the increase in operating cash.
Investing activities reflects the Company's acquisition and venture programs.
Acquisitions made by the Company in fiscal 1998 and fiscal 1997 have been
smaller-sized companies than those purchased in fiscal 1999, and accordingly,
required less cash. Fiscal 1999 reflects the Company's purchase of Radian. In
fiscal 1997 the Company's venture programs reflected an investment of $5,100 for
Glencoe Insurance, Ltd., which was sold in fiscal 1998 generating proceeds of
approximately $5,200. Other investments in fiscal 1997 included the purchase of
the bank debt of CWC and funding for DMB.
The funding of the Radian acquisition resulted in the early extinguishment of
the Company's debt and new financing in fiscal 1999. During fiscal 1998 the
Company's bank credit agreements were amended and the termination dates
extended. The amendments also provide more flexibility on limitations on
additional indebtedness, and maintenance of certain financial ratios.
For information regarding the Company's long-term debt and acquisition of
Radian, see Notes 6 and 2 to the Consolidated Financial Statements.
The Company's annual plan for fiscal 2000 includes a budget for capital
expenditures of approximately $17,261.
While the Company anticipates continuing capital requirements to support growth
and diversification of services, management believes cash generated from
operations and existing lines of credit will be sufficient to meet operating
requirements for the foreseeable future. Future acquisition opportunities for
larger businesses may require additional financing.
IMPACT OF INFLATION
The Company's operations have not been and are not expected to be materially
affected by inflation or changing prices in the foreseeable future.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company, as a result of its financing and investment activities and its
worldwide operations, is exposed to market rate exposure from changes in
interest rates, equity markets and foreign currency exchange rates. These
changes may adversely affect the Company's results of operations and financial
position. In the past, the Company has entered into interest rate hedges and
foreign currency contracts to mitigate these market risks. As of March 26, 1999,
it is evaluating its policies and practices for hedging these risks and
therefore has no open hedging transactions or foreign currency contracts.
17
INTEREST RATE MARKET RISK
The Company is exposed to interest rate risk primarily through its short-term
and long-term borrowings which are variable rate instruments. Working capital
and other capital requirements, together with changes in future interest rates,
makes this risk not quantifiable. However, if at March 26, 1999 interest rates
increased 10% (approximately 71 basis points) using the same level of borrowings
at March 26, 1999 there would be a decrease in earnings and cash flow of $1,829.
At March 27, 1998, the Company's borrowings were primarily fixed rate
instruments and the Company also held fixed rate investments in debt securities,
had interest rates increased by 10% (approximately 69 basis points) again using
the same level of borrowing and debt securities at March 27, 1998; there would
be a decrease in the fair value of borrowings and investments in debt securities
of $12,000, and $454 respectively.
EQUITY PRICE MARKET RISK
Investments in debt and equity securities, primarily made to fund its pension
obligations, expose the Company to equity price risk. If prices declined by 10%
using the same portfolio of securities at March 26, 1999, there would be a
decrease in the fair value of investments in securities of $614. Had a similar
10% decline in equity prices occurred at March 27, 1998, again using the same
portfolio of securities at March 27, 1998, there would be a decrease in the fair
value of $103. These equity securities are held for purposes other than trading.
FOREIGN EXCHANGE MARKET RISK
Foreign currency exchange rate changes and in particular a strengthening of the
US dollar, exposes the Company's operations to market risks from: foreign
currency denominated contracts supported by personnel paid in US dollars;
expected contribution of earnings and cash flow from foreign operations; and
foreign borrowings. The Company operates in 33 foreign countries and as a result
its foreign currency risk is not concentrated in one or two countries;
consequently, it is more difficult to mitigate currency risks. However, to
manage this risk, the Company generally staffs contracts or projects utilizing
personnel that will be paid in the same currency as the contract. In addition,
the Company endeavors to contract in US dollars where possible and has utilized
hedging of currency risks on specific projects when feasible. As a result,
quantifying this risk is impractical.
In the event the foreign exchange rate increased by 10% using the same foreign
borrowings at March 26, 1999, there would be an increase in the fair value of
borrowings of $723. Had a similar 10% increase in foreign exchange rate occurred
at March 27, 1998 using the same borrowings at that date, the fair value of
borrowings would have increased by $302.
18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE
-------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
Independent Auditors' Report........................................................................... 20
Consolidated Statements of Financial Position as of
March 26, 1999 and March 27, 1998................................................................... 21
Consolidated Statements of Operations for the Years Ended
March 26, 1999, March 27, 1998 and March 28, 1997................................................... 22
Consolidated Statements of Changes in Shareholders' Equity for the Years Ended
March 26, 1999, March 27, 1998 and March 28, 1997................................................... 23
Consolidated Statements of Cash Flows for the Years Ended
March 26, 1999, March 27, 1998 and March 28, 1997................................................... 24
Notes to Consolidated Financial Statements............................................................. 25-41
Supplementary Financial Information - Selected Quarterly Financial Data (Unaudited) 42
Schedule II -- Valuation and Qualifying Accounts....................................................... 48
All other schedules are omitted because they are not required, are not
applicable or because the information is included in the Company's Consolidated
Financial Statements or the Notes thereto.
19
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Directors
Dames & Moore Group
We have audited the consolidated financial statements of Dames & Moore Group and
subsidiaries as listed in the accompanying index. In connection with our audits
of the consolidated financial statements, we have also audited the financial
statement schedule listed in the accompanying index. These consolidated
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Dames & Moore Group
and subsidiaries as of March 26, 1999 and March 27, 1998 and the results of
their operations and their cash flows for each of the years in the three-year
period ended March 26, 1999 in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
KPMG LLP
Los Angeles, California
May 21, 1999
20
DAMES & MOORE GROUP
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
MARCH 26, MARCH 27,
ASSETS 1999 1998
------------- ------------
Current:
Cash and cash equivalents $ 15,880 $ 9,493
Marketable securities 336 1,031
Accounts receivable, net of allowance for doubtful accounts
of: 1999-$9,526 and 1998-$3,408 193,051 135,298
Billed contract retentions 22,071 10,992
Unbilled 98,256 55,844
--------- ---------
Total accounts receivable 313,378 202,134
Deferred income taxes 10,705 4,303
Prepaid expenses and inventories 14,841 7,310
Other current assets 11,366 3,858
--------- ---------
Total current assets 366,506 228,129
Property and equipment, net 57,518 23,397
Goodwill of acquired businesses, net of accumulated amortization of:
1999-$20,070 and 1998-$12,535 159,918 117,849
Investments in affiliates 10,461 4,868
Other assets 40,176 12,118
--------- ---------
$ 634,579 $ 386,361
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current:
Current portion of long-term debt $ 18,433 $ 9,614
Accounts payable 57,842 31,990
Accrued payroll and employee benefits 38,934 26,364
Current income taxes payable 6,245 6,864
Accrued expenses and other liabilities 60,882 23,727
--------- ---------
Total current liabilities 182,336 98,559
Long-term debt 284,147 132,010
Other long-term liabilities 21,176 5,883
Contingencies
Shareholders' equity:
Preferred stock, $0.01 par value,
shares authorized: 1,000,000
shares issued: none - -
Common stock and capital in excess of $0.01 par value,
shares authorized: 54,000,000
shares issued: 1999-22,781,000; 1998-22,740,000 108,045 107,512
Retained earnings 102,264 104,952
Treasury stock: 1999-4,451,000; 1998-4,573,000 shares (59,373) (61,157)
Accumulated other comprehensive income (3,594) (1,289)
Other shareholders' equity (422) (109)
--------- ---------
Total shareholders' equity 146,920 149,909
--------- ---------
$ 634,579 $ 386,361
--------- ---------
--------- ---------
The accompanying notes are an integral part of the
consolidated financial statements.
21
DAMES & MOORE GROUP
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
MARCH 26, MARCH 27, MARCH 28,
1999 1998 1997
---------- ---------- ----------
Gross revenues $1,029,967 $ 703,902 $ 653,378
Direct costs of outside services 390,621 221,398 198,970
---------- ---------- ----------
Net revenues 639,346 482,504 454,408
---------- ---------- ----------
Operating expenses:
Salaries and related costs 445,594 337,474 315,896
General expenses 123,206 88,401 86,275
Depreciation and amortization 12,840 9,216 8,832
Amortization of goodwill 5,504 4,600 3,893
Acquisition related restructuring & other charges 28,276 - 2,651
---------- ---------- ----------
615,420 439,691 417,547
---------- ---------- ----------
Earnings from operations 23,926 42,813 36,861
Investment and other income 1,231 997 2,014
Interest expense (18,481) (10,292) (7,386)
---------- ---------- ----------
Earnings before income taxes 6,676 33,518 31,489
Income taxes 4,129 14,188 12,949
---------- ---------- ----------
Earnings before extraordinary item $ 2,547 $ 19,330 $ 18,540
Extraordinary item (less applicable income
tax benefit of $1,737) (2,850) - -
---------- ---------- ----------
Net (loss) earnings $ (303) $ 19,330 $ 18,540
---------- ---------- ----------
---------- ---------- ----------
Basic (loss) earnings per share:
Earnings before extraordinary item $ 0.14 $ 1.08 $ 0.91
Extraordinary item (0.16) - -
---------- ---------- ----------
$ (0.02) $ 1.08 $ 0.91
---------- ---------- ----------
---------- ---------- ----------
Weighted average number of shares 18,237 17,890 20,287
---------- ---------- ----------
---------- ---------- ----------
Diluted (loss) earnings per share:
Earnings before extraordinary item $ 0.14 $ 1.07 $ 0.91
Extraordinary item (0.16) - -
---------- ---------- ----------
$ (0.02) $ 1.07 $ 0.91
---------- ---------- ----------
---------- ---------- ----------
Weighted average number of shares 18,319 18,048 20,446
---------- ---------- ----------
---------- ---------- ----------
The accompanying notes are an integral part of the
consolidated financial statements.
22
DAMES & MOORE GROUP
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
- -------------------------------------------------------------------------------
Common Accumulated Compre-
Stock & Other Com- Other hensive
Capital in Retained Treasury prehensive Shareholders' Earnings
Excess of Par Earnings Stock Income Equity (Loss)
------------- -------- --------- ----------- ------------ --------
BALANCES AT MARCH 29, 1996 $106,804 $ 75,295 $(13,859) $ - $ (293) -
Issued pursuant to stock option plan 438 - - - (140) -
Net earnings - 18,540 - - - $ 18,540
Cash dividends, $0.12 per share - (2,366) - - - -
Treasury stock acquired - - (58,675) - - -
Treasury stock issued - (3,490) 9,464 - - -
Amortization of deferred
compensation - - - - 218 -
Change in foreign currency
translation, net of tax-$190 - - - (313) - (313)
-------- -------- --------- ---------- ---------- --------
BALANCES AT MARCH 28, 1997 $107,242 $ 87,979 $(63,070) $ (313) $ (215) $ 18,227
-------- -------- --------- ---------- ---------- --------
--------
Issued pursuant to stock option plan 450 - - - (100) -
Restricted shares repurchased (180) - - - 15 -
Net earnings - 19,330 - - - $ 19,330
Cash dividends, $0.12 per share - (2,168) - - - -
Treasury stock acquired - - (350) - - -
Treasury stock issued - (189) 2,263 - - -
Amortization of deferred
compensation - - - - 191 -
Unrealized gain on securities, net
of tax-$17 - - - 30 - 30
Change in foreign currency
translation, net of tax-$613 - - - (1,006) - (1,006)
-------- -------- --------- ---------- ---------- --------
BALANCES AT MARCH 27, 1998 $107,512 $104,952 $(61,157) $ (1,289) $ (109) $ 18,354
-------- -------- --------- ---------- ---------- --------
--------
Issued pursuant to stock option plan 578 - - - (140) -
Restricted shares repurchased (60) - (14) - 20 -
Net (loss) - (303) - - - $ (303)
Cash dividends, $0.12 per share - (2,203) - - - -
Treasury stock acquired - - (745) - - -
Treasury stock issued 15 (182) 2,543 - (412) -
Amortization of deferred
compensation - - - - 219 -
Unrealized loss on securities, net of
tax-$110 - - - (196) - (196)
Change in foreign currency
translation, net of tax-$641 - - - (1,052) - (1,052)
Minimum pension liability,
net of tax-$678 - - - (1,057) - (1,057)
-------- -------- --------- ---------- ---------- --------
BALANCES AT MARCH 26, 1999 $108,045 $102,264 $(59,373) $ (3,594) $ (422) $ (2,608)
-------- -------- --------- ---------- ---------- --------
-------- -------- --------- ---------- ---------- --------
The accompanying notes are an integral part of the consolidated financial
statements.
23
DAMES & MOORE GROUP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FISCAL YEAR ENDED
---------------------------------------------
MARCH 26, MARCH 27, MARCH 28,
1999 1998 1997
------------- ------------ -----------
Cash flows from operating activities:
Net (loss) earnings $ (303) $ 19,330 $ 18,540
Adjustments to reconcile net (loss) earnings to net cash
provided by operating activities:
Depreciation and amortization 20,789 14,032 12,943
Non-cash special charges 26,976 - -
Losses (earnings) from equity investments 859 252 (80)
Deferred income taxes (7,672) (354) (2,437)
Change in assets and liabilities net of effects
of purchases of businesses:
Marketable securities - 5,984 8,952
Accounts receivable (48,130) (21,725) (24,297)
Prepaid expenses and other assets (13,319) (2,496) 1,285
Income tax receivable (413) 593 121
Accounts payable and accrued expenses 23,116 3,404 (9,247)
------------ ------------ -----------
Net cash provided by operating activities 1,903 19,020 5,780
------------ ------------ -----------
Cash flows from investing activities:
Purchases of businesses, net of cash acquired (128,146) (13,463) (22,118)
Purchases of property and equipment (18,615) (11,958) (9,524)
Investments and other assets (10,188) (3,600) (18,630)
Proceeds from sales of investments and other property 7,354 7,387 -
------------ ------------ -----------
Net cash used in investing activities (149,595) (21,634) (50,272)
------------ ------------ -----------
Cash flows from financing activities:
Repayments on lines of credit (194,561) (21,000) -
Debt issuance costs (3,867) - -
Proceeds from debt instruments 355,080 22,700 62,551
Issuance of common stock 428 364 357
Stock repurchased (798) (515) (58,675)
Dividends (2,203) (2,168) (2,366)
------------ ------------ -----------
Net cash provided (used) by financing activities 154,079 ( 619) 1,867
------------ ------------ -----------
Net increase (decrease) in cash and cash equivalents 6,387 (3,233) (42,625)
Cash and cash equivalents, beginning of year 9,493 12,726 55,351
------------ ------------ -----------
Cash and cash equivalents, end of year $ 15,880 $ 9,493 $ 12,726
------------ ------------ -----------
------------ ------------ -----------
Supplemental disclosures of cash flow information:
Interest paid $ 13,897 $ 9,785 $ 3,263
Income taxes paid 11,276 10,751 14,810
Non cash investing activities-business acquisitions 16,027 5,110 9,879
The accompanying notes are an integral part of the consolidated financial
statements.
24
DAMES & MOORE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION:
The consolidated financial statements include the accounts of all
majority-owned domestic and foreign subsidiaries. Investments in
companies in which Dames & Moore Group (the "Company") does not have
control, but has the ability to exercise significant influence over
operating and financial policies are accounted for by the equity
method. Other investments are accounted for by the cost method. All
significant intercompany transactions and balances have been
eliminated. Certain items in the prior years' financial statements have
been reclassified to be consistent with the 1999 presentation.
USE OF ESTIMATES IN THE PREPARATION OF CONSOLIDATED FINANCIAL
STATEMENTS:
The preparation of the consolidated financial statements, in conformity
with generally accepted accounting principles, requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported
amounts of revenue and expenses during the reporting period. Actual
results may differ from the estimates and assumptions used in preparing
the consolidated financial statements.
CASH AND CASH EQUIVALENTS:
Cash and cash equivalents consist of unrestricted deposits with banks
and highly liquid investments with an original maturity of three months
or less.
MARKETABLE SECURITIES:
Marketable securities consist of equity and debt securities that are
considered either available-for-sale or trading securities as defined
by Statement of Financial Accounting Standard (SFAS) No. 115. Debt
securities with maturity dates beyond a year are classified as Other
Assets. Marketable securities are recorded at fair market value.
Changes in unrealized gains and losses for trading securities are
included in earnings; for available-for-sale securities, they are
charged or credited as a component of accumulated other comprehensive
income, net of tax. A decline in the fair value of an
available-for-sale security below cost that is deemed other than
temporary is charged to earnings. Management determines the appropriate
classifications of investments at the time of purchase and reevaluates
such designations as of each balance sheet date.
DEPRECIATION AND AMORTIZATION:
Property and equipment are depreciated on a straight-line basis over
estimated useful lives ranging from 3 to 10 years and leasehold
improvements are amortized over the lesser of estimated useful lives or
the term of the lease.
GOODWILL OF ACQUIRED BUSINESSES:
The goodwill of acquired businesses represents the difference between
the purchase cost and the fair value of the net assets of acquired
businesses, and is being amortized on a straight-line basis over 3 to
40 years. The Company annually evaluates the realizability of goodwill
based upon undiscounted forecasted operating earnings over the
remaining amortization period for each investment having a significant
goodwill balance. If an impairment in the value of the goodwill were to
occur, the Company would reflect the impairment through a reduction in
the carrying value of the goodwill based upon the estimated fair value
of the investment.
25
DAMES & MOORE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
FOREIGN CURRENCY TRANSLATION:
The functional currencies for the Company's significant foreign
subsidiaries and branches are their respective local currencies. The
assets and liabilities of these entities are translated into U.S.
dollars using exchange rates in effect at period end. Revenue and
expenses are translated at the average rates of exchange prevailing
during the period. The resulting translation adjustments are reported
as a component of accumulated other comprehensive income, net of tax.
In situations where the functional currency is the U.S. dollar,
translation adjustments are included in earnings.
The Company enters into forward foreign currency exchange contracts to
reduce the impact of foreign currency fluctuations on certain project
revenues and costs, and the asset and liability positions of foreign
subsidiaries. The terms of the currency derivatives are generally one
year or less. Commencing in fiscal 1997 the gains or losses from these
contracts are generally also reported as a separate component of
shareholders' equity; previously they were included in earnings.
RECOGNITION OF REVENUE:
The Company recognizes revenue generally at the time services are
performed. On fixed price contracts, revenue is recognized on the basis
of the estimated percentage of completion of services rendered. On cost
reimbursement contracts, revenue is recognized as costs are incurred
and includes applicable fees earned essentially in the proportion that
costs incurred bear to total estimated final costs. Materials and
subcontract costs reimbursed by clients are included in gross revenues.
Anticipated losses are recognized in the period in which the losses are
reasonably determinable. Substantially all unbilled receivables are
expected to be collected within the next 12 months and retentions at
the close of the respective project. Approximately $7,157 of unbilled
receivables and contract retentions not collectible within 12 months
have been classified as other assets.
A major portion of contracts with the United States Government, are
subject to audit and adjustment. Revenue has been recorded in amounts
expected to be realized on final settlement.
INCOME TAXES:
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Tax provisions are recorded at statutory
rates for taxable items included in the consolidated statements of
earnings regardless of the period such items are reported for tax
purposes. Deferred income taxes are recognized for temporary
differences between financial statement and income tax bases of assets
and liabilities for which income tax effects will be realized in future
years.
STOCK-BASED COMPENSATION:
Prior to March 30, 1996, the Company accounted for its stock option
plan in accordance with the provisions of Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. As such, compensation expense would be
recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. On March 30, 1996, the
Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," which permits entities to recognize as expense over the
vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 also allows entities to continue to
apply the provisions of APB Opinion No. 25 and provide pro forma net
income and proforma earning per share disclosures for employee stock
option grants made in fiscal 1996 and future years as if the
fair-value-based method defined in SFAS No. 123 had been applied. The
Company has elected to continue to apply the provisions of APB Opinion
No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
26
DAMES & MOORE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
EARNINGS PER SHARE:
Basic earnings per share is computed by dividing net earnings by the
weighted-average number of common shares outstanding for the period.
Diluted earnings per share adjusts the weighted-average number of
common shares to reflect the potential dilution that could occur if
restricted stock was unrestricted and the assumed exercise of the
dilutive stock options outstanding. This change did not have a material
impact on the computation of the earnings per share data.
COMPREHENSIVE INCOME:
The Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," which establishes new standards for
reporting and display of comprehensive income and its components. Other
comprehensive income refers to revenues, expenses, gains and losses
that under generally accepted accounting principles are included in
comprehensive income but are excluded from net earnings as these
amounts are recorded directly as an adjustment to shareholders' equity.
The Company adopted SFAS No. 130 in fiscal 1999. The Company's other
comprehensive income is primarily comprised of foreign currency
translation adjustments, unrealized gain or loss on securities, and
adjustments made to recognize additional minimum liabilities associated
with the Company's defined benefit pension plans. Reclassifications
related to the components of other comprehensive income were not
significant.
SEGMENT AND RELATED INFORMATION:
In 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information",
which established new standards for reporting information about
operating segments in interim and annual financial statements, in
accordance with the "management approach". The management approach
designates the internal reporting that is used by management for making
operating decisions and assessing performance as the source of the
Company's reportable segments. The Company adopted SFAS No. 131 with
its annual financial statements ending March 26, 1999 which did affect
the disclosure of segment information but did not affect results of
operations or the financial position of the Company.
RECENT ACCOUNTING PRONOUNCEMENTS:
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities,"
which requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and
measure all derivatives at fair value. Implementation of this statement
is effective for fiscal years beginning after June 15, 1999 commencing
with interim periods. The Company is in the process of determining the
impact that the adoption of SFAS No. 133 will have on its financial
position and results of operations.
FISCAL YEAR:
The Company uses a 52-53 week fiscal year ending the last Friday in
March. The fiscal years were comprised of 52 weeks in 1999, 1998 and
1997.
NOTE 2 - ACQUISITIONS:
On July 31, 1998, the Company acquired all of the membership interests
of Radian International LLC ("Radian"), a multinational engineering,
consulting and construction firm. The purchase price of $117 million in
cash is subject to a post-closing adjustment, which is currently under
discussion with the seller. The purchase price in excess of the
27
DAMES & MOORE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
NOTE 2 - ACQUISITIONS: (CONTINUED)
fair value of the net assets acquired, plus estimated office closure
costs and severance costs are classified as goodwill and are being
amortized over 40 years.
The Company also completed thirteen smaller acquisitions during fiscal
1999 for $16,555, one of which included the issuance of 156,991 shares
of the Company's treasury stock. Seven of the acquisitions have
additional future payments contingent on future earnings. The total
purchase cost in excess of fair value of identifiable assets acquired
is classified as goodwill and is being amortized over the period of
expected benefit, which range from 3 to 25 years.
On June 24, 1997, the Company acquired SRA Technologies, Inc., a
professional services company providing specialized clinical laboratory
services, contract research, analysis and management services in the
areas of life sciences, environmental health service studies, and
energy. The purchase price of $8,924 was paid in cash, and no
additional payments are due. The purchase price in excess of the fair
value of the identifiable assets acquired is classified as goodwill and
is being amortized over 30 years.
The Company also completed six smaller acquisitions during fiscal 1998
for $5,740, one of which included the issuance of 163,107 shares of
the Company's treasury stock. Four of the acquisitions have additional
future payments contingent on future earnings. The total purchase cost
in excess of fair value of identifiable assets acquired is classified
as goodwill and is being amortized over the period of expected benefit,
which range from 3 to 20 years.
The following schedule summarizes the unaudited pro forma results of
operations as if the acquisition of Radian had occurred at the
beginning of fiscal 1998. Certain adjustments, such as amortization of
goodwill, increased interest expense and income tax have been
reflected.
1999 1998
---------- ----------
Net revenues $ 693,000 $ 655,042
---------- ----------
---------- ----------
(Loss) earnings before extraordinary item $ (8,560) $ 7,618
---------- ----------
---------- ----------
(Loss) earnings per share before extraordinary item
Basic $ (0.47) $ 0.43
---------- ----------
---------- ----------
Diluted $ (0.47) $ 0.42
---------- ----------
---------- ----------
Net (loss) earnings $ (11,410) $ 7,618
---------- ----------
---------- ----------
(Loss) earnings per share
Basic $ (0.63) $ 0.43
---------- ----------
---------- ----------
Diluted $ (0.63) $ 0.42
---------- ----------
---------- ----------
The pro forma information is intended to show how the acquisitions
might have affected historical results of operations if the
transactions had occurred at an earlier time. The pro forma results are
not necessarily indicative of the periods presented or to be expected
in the future.
All acquisitions have been accounted for as purchases. Results of
operations for all acquisitions have been included in the consolidated
financial statements from the date of the respective acquisition.
NOTE 3 - INVESTMENTS IN DEBT AND EQUITY SECURITIES:
The cost and estimated fair value of equity and debt securities by
classification and major category follow. At March 26, 1999, $5,804 of
debt and equity securities were classified as other assets. At March
27, 1998, $4,536 of the U.S. Government securities have a maturity
greater than 1 year but within 5 years, and are classified as other
assets.
28
DAMES & MOORE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
NOTE 3 - INVESTMENTS IN DEBT AND EQUITY SECURITIES: (CONTINUED)
ESTIMATED
COST FAIR VALUE
-------- ----------
At March 26, 1999:
Available-for-sale:
Debt securities $ 2,126 $ 2,122
Equity securities 4,302 4,018
-------- --------
$ 6,428 $ 6,140
-------- --------
-------- --------
At March 27, 1998:
Available-for-sale:
Securities of the U. S. Government $ 4,502 $ 4,536
Equity securities 1,018 1,031
-------- --------
$ 5,520 $ 5,567
-------- --------
-------- --------
NOTE 4 - INVESTMENTS IN AFFILIATES:
The Company through its subsidiary Dames & Moore Ventures has a 50%
interest in Dames & Moore/Brookhill L.L.C. (DMB) and affiliated
companies. DMB was formed to acquire environmentally impaired
properties and to remediate; to develop, redevelop, or reposition; and
to maintain, operate and lease such properties until their disposition.
DMB acquires an interest in assets by purchasing either a fee interest
or a property-related mortgage note. At March 26, 1999, DMB holds 6
assets. Effective January 1, 1999, DMB agreed to complete the
redevelopment and disposition of existing assets, and to cease the
acquisition of any new assets.
Acquisitions have been financed 75% with senior debt, 20% subordinated
debt and 5% equity from DMB. The senior debt bears interest at London
Interbank Offshore Rate (LIBOR) plus 275 basis points, and requires
monthly payments of principal and interest. Cash flow from the
properties, including sale proceeds will generally be distributed 80%
to the subordinated lender and 20% to DMB, until the subordinated
lender and DMB each receives its loan advances or capital
contributions, and a return on investment of 20% per annum. Thereafter,
cash flow will be distributed 50% to the subordinated lender and DMB.
The borrowings are all due on December 31, 1999, but may be extended
under certain terms and conditions.
The Company accounts for its investment of $1,388 in fiscal 1999 and
$3,144 in fiscal 1998 in DMB under the equity method of accounting.
Condensed financial information follows:
MARCH 26, 1999 MARCH 27, 1998
-------------- --------------
Mortgage notes receivables $ 1,316 $ 4,137
Property 28,877 33,508
Other assets 3,426 17,038
--------- ---------
Total assets $ 33,619 $ 54,683
--------- ---------
--------- ---------
Mortgages payable $ 27,676 $ 41,958
Other liabilities 4,191 6,726
Shareholders' equity 1,752 5,999
--------- ---------
Total liabilities and equity $ 33,619 $ 54,683
--------- ---------
--------- ---------
Company's share of equity $ 1,330 $ 3,000
--------- ---------
--------- ---------
29
DAMES & MOORE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
NOTE 4 - INVESTMENTS IN AFFILIATES: (CONTINUED)
YEAR ENDED YEAR ENDED
MARCH 26, 1999 MARCH 27, 1998
-------------- --------------
Revenues $ 209 $ 18
Costs and expenses (2,280) (1,450)
Net gain on asset dispositions 733 1,061
--------- ---------
Net loss $ (1,338) $ (371)
--------- ---------
--------- ---------
Company's share of net loss (Investment and other income) $ (756) $ (179)
--------- ---------
--------- ---------
Equity investments in other unconsolidated investments amounted to
$9,131 at fiscal 1999 and $1,868 in fiscal 1998.
NOTE 5 - COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS:
1999 1998
--------- ---------
Property and equipment, at cost:
Computer equipment $ 54,713 $ 36,145
Office equipment and furniture 18,064 13,719
Technical and field equipment 27,780 13,482
Leasehold improvements 10,799 5,847
--------- ---------
111,356 69,193
Less accumulated depreciation and amortization 53,838 45,796
--------- ---------
$ 57,518 $ 23,397
--------- ---------
--------- ---------
Other assets:
Notes and other receivables $ 26,705 $ 5,457
Other assets 13,471 6,661
--------- ---------
$ 40,176 $ 12,118
--------- ---------
--------- ---------
Accrued payroll and employee benefits:
Salaries, wages and related taxes $ 21,940 $ 12,901
Accrued vacation 16,377 12,192
Accrued pension costs 617 1,271
--------- ---------
$ 38,934 $ 26,364
--------- ---------
--------- ---------
Accrued expenses and other liabilities:
Accrued insurance costs $ 17,833 $ 6,913
Accrued occupancy 4,413 4,232
Accrued interest 8,700 4,283
Deferred acquisition payments 2,440 1,639
Restructuring and acquisition reserves 10,174 -
Deferred income and client advances 3,435 2,700
Other accrued expenses 3,987 837
Other liabilities 9,900 3,123
--------- ---------
$ 60,882 $ 23,727
--------- ---------
--------- ---------
30
DAMES & MOORE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
NOTE 6 - LONG-TERM DEBT:
Long-term debt consists of the following: 1999 1998
-------- --------
Term loan $265,000 $ -
Revolving lines of credit 37,232 20,015
Other notes payable 348 1,609
Senior Notes:
6.54% Series A notes, due March 29, 2001 - 40,000
6.87% Series B notes, due March 29, 2003 - 30,000
6.92% Series C notes, due September 29, 2003 - 10,000
7.19% Series F notes, due December 16, 2004 - 10,000
7.23% Series G notes, due December 16, 2005 - 10,000
7.20% Series D notes, due March 29, 2006 - 5,000
7.25% Series E notes, due September 29, 2006 - 15,000
-------- --------
302,580 141,624
Current portion of long-term debt 18,433 9,614
-------- --------
$284,147 $132,010
-------- --------
-------- --------
The funding of the Radian acquisition resulted in the early
extinguishment of the Company's Senior Notes and certain bank lines of
credit. Pre-payment obligations and deferred financing costs resulted
in a pretax charge of $4,587; after the tax benefit of $1,737, the
extraordinary charge was $2,850, or ($.16) per share, basic and
diluted.
The Company's amended long-term debt facility includes a term
commitment of $265,000 and a revolving commitment of $75,000. Interest
is charged under several options, including a base rate or at LIBOR,
plus the applicable margin, at the Company's option. Interest is
payable quarterly for base rate borrowings and for LIBOR borrowings the
earlier of the last day of the interest rate period or three months
from the first day of the interest rate period. The effective interest
rate was 6.8% at March 26, 1999. The agreement contains limitations on
additional indebtedness, sales of assets, acquisitions and capital
expenditures, as well as maintenance of certain financial ratios. The
Company was in compliance with all such ratios at March 26, 1999. The
term loan requires quarterly principal payments commencing on June 30,
1999, with $40,000 of the unpaid balance due on June 30, 2004 and the
remaining unpaid balance of $94,500 due in full on December 31, 2004.
The revolving commitment matures on June 30, 2004. Furthermore,
mandatory principal pre-payments or commitment reductions are required
in the event of the occurrence of certain transactions, as defined in
the agreement. As of March 26, 1999, under these lines, the Company had
borrowings of $302,232, and standby letters of credit totaling $14,156
principally for project performance, advance payment guarantees and the
Company's domestic insurance program. The fair value of the Company's
long-term debt approximates carrying value based on current rates
offered to the Company for debt of the same remaining maturities.
Annual maturities of long-term debt over the next five fiscal years are
as follows: 2000 - $18,433; 2001 - $16,147; 2002 - $26,000; 2003 -
$36,000; and 2004 - $41,000.
NOTE 7 - FOREIGN CURRENCY CONTRACTS:
In the past, the Company has entered into foreign exchange forward
contracts, all having maturities of less than one year. The amounts
noted below serve solely as a basis for the calculation of payment
streams to be exchanged. The Company is exposed to credit loss in the
event of nonperformance by counter parties for these contracts. The
Company selects major international banks and financial institutions as
counter parties to manage this credit risk. Transaction gains and
losses including the effect of foreign currency contracts and currency
exchange rate conversion were a gain of $3 in 1999, a loss of $206 in
1998, and a loss of $222 in 1997. The Company did not have any open
foreign currency contracts at March 26, 1999.
31
DAMES & MOORE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
NOTE 7 - FOREIGN CURRENCY CONTRACTS: (CONTINUED)
1998
-------
Australian dollar 1,000
United States dollar 644
NOTE 8 - FAIR VALUES OF FINANCIAL INSTRUMENTS:
The carrying amount of marketable securities is based on quoted market
prices at the reporting date for those investments and as such equal
fair value. The fair value of the Company's long-term debt is estimated
based on current rates offered to the Company for debt of the same
remaining maturities, which approximates carrying value. All other
financial instruments bear relatively short-term maturities, and
accordingly, the carrying amount of these investments approximates fair
value.
NOTE 9 - INCOME TAXES:
Income taxes consist of the following:
1999 1998 1997
-------- -------- -------
U.S. Federal taxes:
Current $ 5,643 $ 9,560 $11,761
Deferred (5,583) (478) (1,736)
-------- -------- -------
60 9,082 10,025
State and local taxes:
Current 1,117 1,706 1,841
Deferred (749) (115) (166)
-------- -------- -------
368 1,591 1,675
Non-U.S. taxes:
Current 4,003 3,541 1,249
Deferred (302) (26) -
-------- -------- -------
3,701 3,515 1,249
-------- -------- -------
$ 4,129 $ 14,188 $12,949
-------- -------- -------
-------- -------- -------
The sources of earnings before income taxes consist of the following:
1999 1998 1997
------- ------- -------
U.S. earnings before income taxes $ 3,937 $27,438 $31,178
Non-U.S. earnings before income taxes 2,739 6,080 311
------- ------- -------
Earnings before income taxes $ 6,676 $33,518 $31,489
------- ------- -------
------- ------- -------
Income taxes differ from amounts computed by applying the statutory
U.S. Federal income tax rate of 35% to earnings before income taxes
as follows:
1999 1998 1997
------- ------- -------
Statutory U.S. Federal income tax $ 2,337 $11,731 $11,021
State income taxes, net of Federal benefit 240 1,034 1,089
Goodwill 682 653 499
Foreign Operations 1,009 538 603
Other (139) 232 (263)
------- ------- -------
Total income taxes $ 4,129 $14,188 $12,949
------- ------- -------
------- ------- -------
32
DAMES & MOORE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
NOTE 9 - INCOME TAXES: (CONTINUED)
Deferred income taxes result from temporary differences in the timing
of the recognition of revenues and expenses for financial statement and
tax return purposes. Management believes that it is more likely than
not, that the results of future operations will generate sufficient
taxable income to realize the deferred tax assets. The significant
components of deferred taxes were as follows:
1999 1998
------- -------
Current deferred net tax assets:
Compensation expense $ 6,174 $ 3,975
Litigation reserve 788 410
Accrued expenses 2,367 171
Allowance for doubtful accounts 1,353 918
Other 529 433
------- -------
Total current deferred tax assets 11,211 5,907
------- -------
Cash to accrual adjustments from acquisitions 60 1,106
Other 446 498
------- -------
Total current deferred tax liabilities 506 1,604
------- -------
Net current deferred tax assets $10,705 $ 4,303
------- -------
------- -------
Non-current deferred net tax liabilities:
Foreign currency translation $ 1,502 836
Foreign tax credits 1,301 -
Other 1,878 735
------- -------
Total noncurrent deferred tax assets 4,681 1,571
------- -------
Depreciation and amortization 3,457 2,481
Other 1,020 569
------- -------
Total noncurrent deferred tax liabilities 4,477 3,050
------- -------
Net noncurrent deferred tax assets (liabilities) $ 204 $(1,479)
------- -------
------- -------
NOTE 10 - LEASE COMMITMENTS:
The Company is obligated under various noncancelable leases for office
facilities, furniture and equipment. Certain leases contain renewal
options, escalation clauses and certain other operating expenses of
the properties. In the normal course of business, leases that expire
are expected to be renewed or replaced by leases for other properties.
The following is a schedule by year of future rental payments required
under operating leases that have initial or remaining noncancelable
lease terms in excess of one year as of March 26, 1999:
FISCAL YEAR(S) TOTAL
-------------- --------
2000 $ 28,890
2001 25,934
2002 18,591
2003 13,871
2004 9,164
Thereafter 11,455
--------
Total minimum lease payments $107,905
--------
--------
33
DAMES & MOORE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
NOTE 10 - LEASE COMMITMENTS: (CONTINUED)
The following schedule shows the composition of total rental
expenses for all operating leases:
1999 1998 1997
------- ------- -------
Total rental expense $32,986 $24,365 $23,617
Less sublease rentals 319 140 324
------- ------- -------
$32,667 $24,225 $23,293
------- ------- -------
------- ------- -------
NOTE 11 - CONTINGENCIES:
The Company in the ordinary course of business is a defendant in
various lawsuits involving claims typically filed against the
engineering and consulting professions, primarily alleging
professional errors or omissions. The Company through a wholly owned
subsidiary insures the Company's risks for professional liability,
workers compensation, and general and automobile claims up to certain
policy limits. Claims in excess of these limits are covered by
unrelated insurance carriers. Management makes estimates and
assumptions that affect the reported amount of liability and the
disclosure of contingent liabilities. As claims develop, it is
possible that the ultimate results of these claims may differ from
management's estimates. In the opinion of management, based upon
information it presently possesses, the resolution of these claims
will not have a material adverse effect on the Company's consolidated
financial position or results of operations.
NOTE 12 - STOCK OPTION PLANS:
Long-Term Incentive Plan
The Company's Amended and Restated 1991 Long-Term Incentive Plan (the
"Plan"), which provides for the granting of stock options and the sale
of restricted stock to officers and key employees of the Company, has
authorized and reserved a total of 2,700,000 shares of common stock
for issuance under this Plan. Stock options granted or restricted
stock sold under the Plan may be granted or sold at a price and for
such terms as determined by the Compensation Committee of the Board of
Directors.
Restricted stock sales are offered to newly elected officers and
existing officers, these shares are subject to restrictions on
transfer and risk of forfeiture until earned by continued employment.
Should employment terminate before ownership vests, shares are
repurchased by the Company at the lesser of the price originally paid
for the stock or its market value on the date of termination. During
the restriction period, holders have the rights of shareholders,
including the right to vote and receive dividends, but cannot transfer
ownership. Restricted stock is generally being issued at 67% of market
value on the date of issuance for newly elected officers and at no
cost to existing officers, the stock vests 3 years after the issue
date. These restricted stock sales give rise to unearned compensation
that is amortized over the vesting period. Through March 26, 1999,
290,863 shares of restricted stock have been issued under the Plan.
1999 1998 1997
------------------ ------------------ -----------------
Restricted stock issued 65,891 23,300 37,751
Weighted-average fair $12.62 $12.88 $11.13
value of restricted stock
granted during the year
34
DAMES & MOORE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
NOTE 12 - STOCK OPTION PLANS: (CONTINUED)
Non-qualified stock options are granted at fair value at the date of
grant and generally vest 25% per year commencing on the first
anniversary after the grant date. Options expire 10 years after the
grant date, and all awards need to be made by May 22, 2005.
1999 1998 1997
----------------------------- ----------------------------- ----------------------------
WEIGHTED AVG WEIGHTED AVG. WEIGHTED AVG.
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
----------- ---------------- ----------- ---------------- ----------- ----------------
Outstanding at beginning 1,593,009 $16.08 1,678,856 $16.09 1,517,823 $16.87
of the year
Granted 286,039 12.45 8,000 12.88 276,554 11.24
Exercised (13,373) 11.85 (6,902) 11.78 (2,737) 12.00
Canceled (85,215) 15.90 (86,945) 16.17 (112,784) 14.83
---------- --------- ----------
Outstanding at the end
of the year 1,780,460 $15.54 1,593,009 $16.08 1,678,856 $16.09
--------- --------- ---------
--------- --------- ---------
Exercisable at year-end 1,255,314 $16.99 1,166,549 $17.69 970,941 $18.58
Weighted-average fair
value of options granted
during the year $ 4.89 $ 5.46 $ 4.40
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following
weighted-average assumptions used for grants in 1999, 1998 and 1997,
respectively: expected volatility of 27.91%, 28.28%, and 27.15%;
risk-free interest rates of 5.53%, 6.81%, and 6.24%; expected lives of
6, 6, and 5.6 years and no dividends.
Directors' Stock Option Plan
The Company's amended and restated 1995 Stock Option Plan for
Non-Employee Directors of the Company (the "Plan") has 100,000 shares
of common stock authorized for issuance under the Plan. Shares of
common stock awarded under this Plan are non-qualified stock options,
are granted at fair value at the date the option is granted, vest and
become exercisable in three equal annual installments commencing on
the first anniversary after the grant date. Options expire 10 years
after the grant date.
1999 1998 1997
----------------------------- ----------------------------- ----------------------------
WEIGHTED AVG WEIGHTED AVG. WEIGHTED AVG.
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
----------- ---------------- ----------- ---------------- ----------- ----------------
Outstanding at beginning of
the year 40,000 $13.20 23,000 $12.97 15,000 $13.63
Granted 10,000 12.63 17,000 13.50 8,000 $11.75
Exercised - - - - -
------ ------ ------
Outstanding at the end of
the year 50,000 $13.08 40,000 $13.20 23,000 $12.97
------ ------ ------
------ ------ ------
Exercisable at year-end 25,995 $13.21 12,664 $13.23 4,998 $13.63
Weighted-average fair value
of options granted during
the year $ 4.91 $ 5.59 $ 4.90
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following
weighted-average assumptions used for grants in 1999, 1998, and 1997,
respectively: expected
35
DAMES & MOORE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
NOTE 12 - STOCK OPTION PLANS: (CONTINUED)
volatility of 27.82%, 28.51%, and 27.97%; risk-free interest rates of
5.4%, 6.3%, and 6.4%; expected lives of 6 years and no dividends.
The following table summarizes both stock option plans' information on
stock options outstanding at March 26, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- --------------------------------
NUMBER WEIGHTED AVG. NUMBER
RANGE OF OUTSTANDING REMAINING WEIGHTED AVG. EXERCISABLE AT WEIGHTED AVG.
EXERCISE PRICES AT 3/26/99 CONTRACTUAL LIFE EXERCISE PRICE 3/26/99 EXERCISE PRICE
--------------- -------------- ---------------- -------------- ------- --------------
$11.13 to $13.63 977,755 7.3 $12.01 428,604 $11.88
$16.65 to $19.50 589,818 4.5 18.96 589,818 18.96
$20.00 to $21.75 262,887 3.0 20.53 262,887 20.53
Pro-Forma Disclosure
The Company continues to apply APB Opinion No. 25 in accounting for
both of its stock-based compensation plans. Accordingly, no
compensation cost has been recognized for the stock option plans.
There was no material difference in the Company's earnings or earnings
per share had the stock option plans determined compensation cost
based on the fair value at the grant dates consistent with the method
of SFAS No. 123.
NOTE 13 - EMPLOYEE RETIREMENT PLANS:
The Company and its domestic subsidiaries have several defined
contribution retirement plans covering substantially all of the
Company's U.S. employees with a minimum service requirement. Depending
upon the plan, eligible employees can invest up to 15% of their
earnings; certain plans will match by an equal amount from the Company
generally up to the first 3% to 4.5% of the employee's contribution.
Employer matching contributions for fiscal years 1999, 1998, and 1997
were $6,641, $2,930 and $3,315 respectively. Profit-sharing
contributions to all plans are currently discretionary. However, prior
to January 1, 1997 the largest of the plans had a profit-sharing
contribution that was computed in accordance with a formula (set forth
in the Plan) to provide for an annual contribution of 6% of pre-tax
earnings, as defined. The contributions for 1999, 1998, and 1997 were
$218, $1,381 and $1,684 respectively.
Certain of the Company's foreign subsidiaries have trusteed retirement
plans covering substantially all of their employees. These pension
plans are not required to report to government agencies pursuant to
ERISA and do not otherwise determine the actuarial value of
accumulated benefits or net assets available for benefits. The
aggregate pension expense for these plans for fiscal years 1999, 1998
and 1997 were $1,711, $1,498, and $1,719 respectively.
The Company, upon acquiring Radian, assumed certain of Radian's
defined benefit pension plans, including several post-retirement
benefit plans. These plans cover a select group of Radian employees
and former employees who will continue to be eligible to participate
in the plans.
The defined benefit plans include a Supplemental Executive Retirement
Plan (SERP) and Salary Continuation Agreement (SCA) which are intended
to supplement retirement benefits provided by other benefit plans upon
the participant's meeting minimum age and years of service
requirements. The plans are unfunded, however, at March 26, 1999, the
Company had designated and deposited $6,309 in a trust account for the
SERP. Radian also has a post-retirement benefit program that provides
certain medical insurance benefits to participants upon meeting
minimum
36
DAMES & MOORE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
NOTE 13 - EMPLOYEE RETIREMENT PLANS: (CONTINUED)
age and years of service requirements, this plan is also unfunded.
The Company recorded an additional minimum liability net of tax of
$1,057 at March 26, 1999 as a component of comprehensive income. This
amount represents the excess of the accumulated benefit obligations
over the fair value of plan assets to the extent possible because the
asset recognized may not exceed the amount of unrecognized prior
service cost.
Management's estimate of accumulated benefits for the SERP and SCA as
of March 26, 1999 were as follows:
Actuarial present value of accumulated benefits:
Vested $10,464
Non-vested 857
-------
Total $11,321
-------
-------
The weighted-average discount rate used for the period was 6.75%.
1999
-------
Change in benefit obligation:
Benefit obligation at August 1, Acquisition $ 9,787
Service Cost 57
Interest cost 451
Amortization of unrecognized service cost 20
-------
Net period cost 528
-------
Actuarial loss 1,814
Benefit payments (808)
-------
Benefit obligation at March 26, 1999 $11,321
-------
-------
The funded status of the plans at March 26, 1999:
Projected benefit obligation $11,321
Plan assets available for benefits -
-------
Deficiency of assets over projected benefit obligations 11,321
Unrecognized actuarial loss 1,814
Unrecognized prior service costs -
-------
Accrued pension liability $ 9,507
-------
-------
The funded status of the post-retirement program at March 26, 1999 is
as follows:
Accumulated post-retirement benefit obligation ("APBO"):
Retirees $ 200
Active plan participants, fully eligible 134
Active plan participants, not yet fully eligible 542
-----
Total APBO $ 876
Unrecognized net loss from past experience different
from that assumed and from changes in assumptions (79)
-----
Accrued post-retirement benefits $ 797
-----
-----
The weighted-average discount rate used in determining the APBO was
6.75% as of December 31, 1998.
37
DAMES & MOORE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
NOTE 14 - SEGMENT AND RELATED INFORMATION:
Management has organized the Company by type of services provided. The
general engineering and consulting division ("GE&C") provides
environmental and specialized engineering services throughout the
world to private sector clients and governmental agencies.
Construction services division ("CSD") provides program, project and
construction management services for public sector projects of all
sizes and complexity. The process and chemical engineering division
("P&CE") provides process engineering and design services to the oil
and gas, petrochemical, pulp and paper industries, and to the federal
government. Transportation service division ("TSD") provides project
planning, design and construction-phase engineering services for the
transportation and infrastructure projects throughout the United
States. Specialty companies ("SC") include other business units which
provide services to both private sector clients and government
agencies.
Accounting policies for each of the reportable segments are the same
as those described in Note 1, Notes to Consolidated Financial
Statements. Management evaluates the performance of its business
segments based on earnings from operations before acquisition-related
restructuring and other charges.
The following table shows summarized financial information on the
Company's reportable segments. Included in the "Other" column are
corporate-related items, results of shared operations, income and
expense items from reportable segments not reported to management, and
eliminations of inter-segment sales which are not significant.
1999: GE&C CSD P&CE TSD SC OTHER TOTAL
---------- ---------- --------- --------- -------- --------- -------------
Net revenues from US Government
agencies and departments $ 36,967 $ 38,027 $ 34,721 $ 275 $ 4,838 $ - $114,828
Other net revenues 228,813 139,563 83,958 55,651 16,961 (428) 524,518
Segment profit (loss) 40,314 10,352 10,638 5,089 (25) (14,166) 52,202
Total assets 182,080 241,663 115,500 38,114 46,851 10,371 634,579
Total accounts receivable 125,932 122,117 32,743 25,259 9,732 (2,405) 313,378
Depreciation and amortization 6,069 6,507 2,482 1,660 1,181 445 18,344
1998: GE&C CSD P&CE TSD SC OTHER TOTAL
---------- ---------- --------- --------- -------- --------- -------------
Net revenues from US Government
agencies and departments $ 35,225 $ 6,559 $ 16,377 $ 791 $ 7,488 $ - $ 66,440
Other net revenues 230,601 87,414 36,060 46,476 15,670 (157) 416,064
Segment profit (loss) 47,666 5,412 1,759 3,793 1,029 (16,846) 42,813
Total assets 162,336 103,291 46,789 31,381 34,857 7,707 386,361
Total accounts receivable 115,205 48,184 11,878 19,114 8,702 (949) 202,134
Depreciation and amortization 6,228 2,639 1,675 1,613 1,130 531 13,816
1997: GE&C CSD P&CE TSD SC OTHER TOTAL
---------- ---------- --------- --------- -------- --------- -------------
Net revenues from US Government
agencies and departments $ 41,931 $ 3,647 $ 16,284 $ 1,321 $ - $ - $ 63,183
Other net revenues 220,253 77,919 36,480 42,937 13,637 (1) 391,225
Segment profit (loss) 39,402 2,628 3,960 3,428 1,372 (11,278) 39,512
Total assets 145,779 88,147 49,042 29,037 28,425 17,852 358,282
Total accounts receivable 100,878 34,843 15,427 17,785 7,576 (797) 175,712
Depreciation and amortization 6,078 2,239 1,560 1,458 869 521 12,725
The next table provides a reconciliation of segment profit to
consolidated earnings before income taxes and extraordinary items.
38
DAMES & MOORE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
NOTE 14 - SEGMENT AND RELATED INFORMATION: (CONTINUED)
MARCH 26, MARCH 27, MARCH 28,
1999 1998 1997
------------ --------- ---------
Segment profit (loss) $ 52,202 $ 42,813 $ 39,512
Acquisition-related restructuring & other charges (28,276) -- (2,651)
Investment & other income 1,231 997 2,014
Interest expense (18,481) (10,292) (7,386)
--------- --------- ---------
Earnings before income taxes $ 6,676 $ 33,518 $ 31,489
--------- --------- ---------
--------- --------- ---------
The company provides services throughout the world. Services to other
countries may be performed within the United States, generally net
revenues are classified within the geographic area where the services
were performed.
Selected geographic information is summarized as follows:
UNITED OTHER
STATES COUNTRIES TOTAL
-------- --------- --------
Net revenues 1999 $558,511 $ 80,835 $639,346
1998 412,751 69,753 482,504
1997 388,671 65,737 454,408
Earnings from
Operations 1999 $ 21,819 $ 2,107 $ 23,926
1998 34,756 8,057 42,813
1997 34,531 2,330 36,861
Identifiable
Assets 1999 $553,398 $ 81,181 $634,579
1998 329,256 57,105 386,361
1997 304,847 53,435 358,282
NOTE 15 - EARNINGS PER SHARE (EPS):
The following is a reconciliation of the weighted average shares
outstanding used for computing basic and diluted EPS.
1999 1998 1997
---------- ---------- ----------
Weighted average shares - Basic EPS 18,237,000 17,890,000 20,287,000
Dilutive securities:
Restricted stock 65,000 127,000 124,000
Stock options 17,000 31,000 35,000
---------- ---------- ----------
Weighted average shares - Diluted EPS 18,319,000 18,048,000 20,446,000
---------- ---------- ----------
---------- ---------- ----------
Stock options to purchase 1,144,000; 941,000; and 965,000 shares of
common stock as of March 26, 1999, March 27, 1998 and March 28, 1997,
respectively, were outstanding but were not included in the
computation of diluted EPS because the stock options' exercise price
was greater than the average market price of the common shares.
39
DAMES & MOORE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- -------------------------------------------------------------------------------
NOTE 16 - STOCK REPURCHASES:
The Company's Board of Directors authorized the Company to purchase up
to 2,500,000 shares of its common stock on the open market. During
fiscal 1999 the Company reacquired 67,000 shares of its common stock.
As of March 26, 1999 the Company had repurchased 1,914,000 shares and
reissued 1,132,000 shares. The Company may continue to purchase
shares on the open market.
NOTE 17 - COMMON AND PREFERRED STOCK:
The Company adopted a Shareholder's Rights Agreement on March 28, 1997
granting, for each outstanding share of common stock, one stock
purchase right ("Right"). Each Right entitles the common stockholder
to purchase, in certain circumstances generally relating to a change
in control of the Company, one two-hundredth of a share of the
Company's Series A Junior Participating Preferred Stock, par value
$0.01 per share (the "Series A Preferred Stock") at the exercise price
of $65 per share, subject to adjustment. Alternatively, the Right
holder may purchase common stock of the Company having a market value
equal to two times the exercise price, or may purchase shares of
common stock of the acquiring corporation having a market value equal
to two times the exercise price.
The Series A Preferred Stock confers to its holders rights as to
dividends, voting and liquidation that are in preference to common
stockholders. The Rights are nonvoting, are not presently exercisable
and currently trade in tandem with the common shares. The Rights may
be redeemed at $0.01 per Right by the Company in accordance with the
Rights Agreement. The Rights will expire on March 28, 2007, unless
earlier exchanged or redeemed.
The Rights Agreement was amended on May 5, 1999 excepting from the
definition of a change in control of the Company, the contemplated
Agreement and Plan of Merger of the Company with URS Corporation and
Demeter Acquisition Corporation.
NOTE 18 - ACQUISITION RESTRUCTURING AND OTHER CHARGES:
During the second quarter of fiscal 1999, the Company took a charge
for purchased in-process research and development technology that had
not reached technological feasibility of $15,271. Additionally, the
Company began consolidation of certain facilities and operations
primarily as a result of the Radian acquisition, resulting in a charge
of $9,213. This charge consisted of $2,699 for lease termination,
$3,635 for severance costs, and $2,879 for unamortized goodwill and
other costs related to the closure of certain business units that were
operating at a loss and were duplicative of Radian's capabilities.
Other charges also included $3,792 for consolidation of certain of the
Company's operational activities and other job related costs.
Approximately $5,892 remains to be expended at March 26, 1999 to
complete the restructuring.
In fiscal 1997 the Company determined it was necessary to restructure
its international operations, and construction and project management
subsidiary. Included in the 1997 restructuring cost are employee
severance and termination costs, costs associated with office
closures, losses on work in progress where there was extensive
employee turnover and losses on other current assets, all of which
impact the Company's working capital. The remaining balance represents
losses on long-term assets.
40
DAMES & MOORE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
NOTE 19 - SUBSEQUENT EVENTS:
On May 5, 1999, the Company entered into an agreement and Plan of
Merger (the "Merger Agreement") with URS Corporation ("URS") and
Demeter Acquisition Corporation, a wholly-owned subsidiary of URS
("the Purchaser").
The Merger Agreement provides that Purchaser will make a tender offer
to purchase 100% of the outstanding common stock of the Company.
Shares validly tendered shall be entitled to receive $16.00 in cash.
After the tender offer is complete, subject to approval of a majority
of the stockholders of the Company, Purchaser will be merged with and
into the Company, with the Company as the surviving corporation in the
merger, and each outstanding share of Common Stock, other than shares
owned directly or indirectly by URS, Purchaser or the Company will be
converted into the right to receive $16.00 in cash.
Consummation of the Tender Offer and the merger is subject to certain
conditions as specified in the Merger Agreement.
41
DAMES & MOORE GROUP
SUPPLEMENTARY FINANCIAL INFORMATION
- -------------------------------------------------------------------------------
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS):
FIRST SECOND THIRD FOURTH
1999: QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
Gross revenues $189,150 $263,606 $287,434 $289,777
Net revenues 128,804 152,987 172,298 185,257
Earnings (loss) from operations 11,063 (14,521) 14,089 13,295
Net earnings (loss) 4,687 (15,139) 5,291 4,858
-------- -------- -------- --------
-------- -------- -------- --------
Earnings (loss) per share - Basic $ 0.26 $ (0.83) $ 0.29 $ 0.27
-------- -------- -------- --------
-------- -------- -------- --------
Earnings (loss) per share - Diluted $ 0.26 $ (0.83) $ 0.29 $ 0.27
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average number of shares - Basic 18,262 18,252 18,218 18,215
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average number of shares - Diluted 18,336 18,252 18,299 18,291
-------- -------- -------- --------
-------- -------- -------- --------
1998:
Gross revenues $171,771 $176,214 $174,974 $180,943
Net revenues 119,785 123,254 118,725 120,740
Earnings from operations 10,556 10,913 11,244 10,100
Net earnings 4,685 5,151 5,153 4,341
-------- -------- -------- --------
-------- -------- -------- --------
Earnings per share - Basic $ 0.26 $ 0.29 $ 0.29 $ 0.24
-------- -------- -------- --------
-------- -------- -------- --------
Earnings per share - Diluted $ 0.26 $ 0.28 $ 0.29 $ 0.24
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average number of shares - Basic 17,890 17,884 18,873 17,914
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average number of shares - Diluted 18,041 18,047 18,031 18,074
-------- -------- -------- --------
-------- -------- -------- --------
42
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT*
ITEM 11. EXECUTIVE COMPENSATION*
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT*
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS*
* Information regarding the Executive Officers of the Company is included in
Part I of this Annual Report on Form 10-K. For other information called for
by Items 10-13, reference is made to the Company's Information Statement
Pursuant to Section 14(f), which is a part of the Company's Schedule 14D-9
filing, which was filed with the Securities and Exchange Commission on May
11, 1999, and which is incorporated herein by reference, except that the
information included under the captions "Report of the Compensation
Committee on Executive Compensation" and "Stock Performance Graph" is not
incorporated herein by reference.
43
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Financial statements and financial statement schedules that are filed as part
of this Annual Report on Form 10-K are listed in Item 8 hereof.
(b) REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K on May 7, 1999 reporting under
Item 5, an Agreement and Plan of Merger of the Company, URS Corporation, and
Demeter Acquisition Corporation. No financial statements were filed.
(c) EXHIBITS
The following exhibits are filed as part of this Annual Report on Form 10-K or
are incorporated by reference herein:
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2.1 Equity Purchase Agreement by and among Dow Environmental Inc.,
TCM Technologies, Inc. and Radian Acquisition Corporation dated
as of June 23, 1998 (incorporated herein by reference to Exhibit
10.2 of the Company's Quarterly Report on Form 10-Q [File No.
1-11075], for the quarter ended June 26, 1998).
2.2 Agreement and Plan of Merger among Dames & Moore Group, URS
Corporation and Demeter Acquisition Corporation dated as of May
5, 1999 (incorporated herein by reference to Exhibit 2.1 of the
Company's Current Report on Form 8-K [File No. 1-11075] filed on
May 7, 1999).
3.1 Restated Certificate of Incorporation of Dames & Moore Group as
Amended (incorporated herein by reference to Exhibit 3(i) of the
Company's Quarterly Report on Form 10-Q [File No. 1-11075] for
the quarter ended September 26, 1997).
3.2 Restated Bylaws of Dames & Moore Group (incorporated herein by
reference to Exhibit 3(ii) of the Company's Quarterly Report on
Form 10-Q [File No. 1-11075], for the quarter ended September 26,
1997).
4.1 Rights Agreement, dated as of March 28, 1997 between Dames &
Moore, Inc. and ChaseMellon Shareholder Services LLC, which
includes the form of Certificate of Designations of Series A
Junior Participating Preferred Stock of Dames & Moore, Inc. as
Exhibit A, the form of Right Certificate as Exhibit B and the
Summary of Share Purchase Rights Plans as Exhibit C.
(Incorporated by reference to Exhibit 4.1 to the Company's
Current Report on Form 8-K filed with the Securities and Exchange
Commission on March 24, 1997 [Commission File No. 1-11075]).
4.2 Amended and Restated Credit Agreement among Dames & Moore Group,
as Borrower, The Several Lenders from Time to Time Parties Hereto
and Canadian Imperial Bank of Commerce, as Administrative Agent,
dated as of October 22, 1998. (Incorporated by reference to
Exhibit 4.1 to the Company's Quarterly Report on Form 10Q [File
No. 1-11075], for the quarter ended December 25, 1998).
4.3 Amendment to Rights Agreement dated as of May 5, 1999 between
Dames & Moore Group and ChaseMellon Shareholder Services.
*10.1 Trust Agreement for the Deferred Compensation Plan dated December
4, 1993 (incorporated herein by reference to Exhibit 10.2 of the
Company's Quarterly Report on Form 10-Q [File No. 1-11075] for
the quarter ended December 24, 1993).
44
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
*10.2 Dames & Moore, Inc. Amended and Restated 1991 Long-Term
Incentive Plan (incorporated herein by reference to Exhibit
10.1 of the Company's Quarterly Report on Form 10-Q [File No.
1-11075] for the quarter ended June 26, 1998).
*10.3 Dames & Moore, Inc. 1995 Stock Option Plan for Non-Employee
Directors (incorporated herein by reference to Exhibit 10.5 of
the Company's Annual Report on Form 10-K [File No. 1-11075] for
the year ended March 28, 1997).
*10.4 Employment Agreement dated April 1, 1997 between Dames & Moore,
Inc. and Arthur C. Darrow (incorporated herein by reference to
Exhibit 10.9 of the Company's Annual Report on Form 10-K [File
No. 1-11075] for the year ended March 28, 1997).
*10.5 Agreement Regarding Severance Payments dated April 1, 1997,
by and between Dames & Moore, Inc. and Mark A. Snell
(incorporated herein by reference to Exhibit 10.10 of the
Company's Annual Report on Form 10-K [File No. 1-11075] for the
year ended March 28, 1997).
10.6 Senior Loan Agreement between DMB/Remediation LLC as Borrower and
PPA Funding Corp., as Senior Lender dated March 11, 1997
(incorporated herein by reference to Exhibit 10.11 of the
Company's Annual Report on Form 10-K [File No. 1-11075] for the
year ended March 28, 1997).
10.7 Greenfields Funding Corp. and DMB/Remediation LLC Subordinated
Loan Agreement dated March 11, 1997 (incorporated herein by
reference to Exhibit 10.12 of the Company's Annual Report on Form
10-K [File No. 1-11075] for the year ended March 28, 1997).
10.8 Revised Exhibit "D" Waterfall to Greenfields Funding Corp. and
DMB/Remediation LLC Subordinated Loan Agreement (incorporated
herein by reference to Exhibit 10.12 of the Company's Annual
Report on Form 10-K [File No. 1-11075] for the year ended March
27, 1998).
*10.9 Dames & Moore Group Deferred Compensation Plan effective May 2,
1998 (incorporated herein by reference to Exhibit 10.13 of the
Company's Annual Report on Form 10-K [File No. 1-11075] for the
year ended March 27, 1998).
*10.10 Amendment to the Deferred Compensation Plan dated May 1, 1999.
21.1 List of Subsidiaries of the Company.
23.1 Consent of KPMG LLP, independent certified public accountants.
27.1 Financial Data Schedule (included only in the electronic filing).
*Management compensation agreement.
Exhibits filed herewith or incorporated by reference herein will be furnished
to shareholders of the Company upon written request and for a fee of $.20 per
page, payable in advance. This fee covers only the Company's reasonable
expenses in furnishing such exhibits. Written requests should be addressed to:
Dames & Moore Group
Investor Relations Department
911 Wilshire Boulevard, Suite 700
Los Angeles, California 90017
45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
DAMES & MOORE GROUP
Date: June 2, 1999 By ARTHUR C. DARROW
-----------------------------
Arthur C. Darrow
President,
Chief Executive Officer and
Chairman of the Board
Date: June 2, 1999 By MARK A. SNELL
-----------------------------
Mark A. Snell
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company and in
the capacities indicated on June 2, 1999.
By ARTHUR C. DARROW
-----------------------------
Arthur C. Darrow
Director
President,
Chief Executive Officer and
Chairman of the Board
(Principal Executive Officer)
By MARK A. SNELL
-----------------------------
Mark A. Snell
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
By LESLIE S. PUGET
-----------------------------
Leslie S. Puget
Corporate Controller
(Principal Accounting Officer)
46
By GEORGE D. LEAL
-----------------------------
George D. Leal, Director
By HARALD PEIPERS
-----------------------------
Harald Peipers, Director
By MICHAEL R. PEEVEY
-----------------------------
Michael R. Peevey, Director
By URSULA BURNS
-----------------------------
Ursula Burns, Director
By ROBERT F. CLARKE
-----------------------------
Robert F. Clarke, Director
By GARY R. KRIEGER
-----------------------------
Gary R. Krieger, Director
By A. EWAN MACDONALD
-----------------------------
A. Ewan Macdonald, Director
By ARTHUR E. WILLIAMS
-----------------------------
Arthur E. Williams, Director
47
DAMES & MOORE GROUP
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
FISCAL YEARS ENDED MARCH 26, 1999, MARCH 27, 1998 AND MARCH 28, 1997
ADDITIONS
----------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS YEAR
----------- ---------- ---------- ---------- ---------- ----------
YEAR ENDED MARCH 26, 1999
Allowance for doubtful accounts $3,408 $1,456 $5,210(1) $(548) $9,526
------ ------ -------- ----- ------
------ ------ -------- ----- ------
YEAR ENDED MARCH 27, 1998
Allowance for doubtful accounts $3,001 $ 915 $ -- $(508) $3,408
------ ------ -------- ----- ------
------ ------ -------- ----- ------
YEAR ENDED MARCH 28, 1997
Allowance for doubtful accounts $1,886 $1,208 $ 465(1) $(558) $3,001
------ ------ -------- ----- ------
------ ------ -------- ----- ------
(1) Amount recorded on books of acquired entities at date of acquisition.
48