UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended July 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Transition Period from __________________ to __________________
Commission file number 1-7567
URS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-1381538
(State or other jurisdiction Identification No.) (I.R.S. Employer of
incorporation)
100 California Street, Suite 500
San Francisco, California 94111-4529
(Address of principal executive offices) (Zip Code)
(415) 774-2700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at August 31, 2000
----- ------------------------------
Common Stock, $.01 par value 16,554,660
<PAGE>
URS CORPORATION AND SUBSIDIARIES
This Form 10-Q for the third quarter ended July 31, 2000 contains
forward-looking statements within the meaning of the securities laws that
involve risks and uncertainties. We believe that our expectations are reasonable
and are based on reasonable assumptions. However, risks and uncertainties
relating to future events could cause actual results to differ materially from
our expectations. These risks and uncertainties include our ability to
successfully integrate Dames & Moore Group ("D-M"), following the acquisition of
D-M in June 1999, the impact on our financial condition caused by the
substantial indebtedness incurred in connection with the D-M acquisition, our
dependence on government programs and contracts, competitive practices in the
industry, possible changes in legislation or governmental regulation or
policies, contracting risks, our ability to attract and retain qualified
professionals, exposure to potential liability from legal proceedings, and other
factors discussed more completely in the attached Management's Discussion and
Analysis of Financial Condition and Results of Operations, as well as in our
1999 Form 10-K and in other publicly available reports filed with the Securities
and Exchange Commission from time to time. We do not intend nor assume any
obligation to update any forward-looking statements.
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets
July 31, 2000 and October 31, 1999 ....................... 3
Consolidated Statements of Operations
Three and nine months ended July 31, 2000 and 1999 ....... 4
Consolidated Statements of Cash Flows
Nine months ended July 31, 2000 and 1999 ................. 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ............ 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk .. 21
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings ........................................... 22
Item 2. Changes in Securities and Use of Proceeds.................... 22
Item 3. Defaults Upon Senior Securities ............................. 22
Item 4. Submission of Matters to a Vote of Security Holders.......... 22
Item 5. Other Information ........................................... 22
Item 6. Exhibits and Reports on Form 8-K ............................ 22
2
<PAGE>
PART I
FINANCIAL INFORMATION
<TABLE>
ITEM 1. FINANCIAL STATEMENTS
URS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
<CAPTION>
July 31, 2000 October 31, 1999
------------- ----------------
(unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash......................................................................... $ 30,572 $ 45,687
Accounts receivable.......................................................... 462,134 477,731
Costs and accrued earnings in excess of billings on contracts in process..... 242,159 228,841
Less receivable allowances................................................... (34,370) (40,611)
-------------- --------------
Net accounts receivable................................................ 669,923 665,961
-------------- --------------
Deferred income taxes........................................................ 9,365 10,005
Prepaid expenses and other assets............................................ 24,678 24,111
-------------- --------------
Total current assets.................................................. 734,538 745,764
Property and equipment, net..................................................... 92,801 93,165
Goodwill, net................................................................... 518,301 529,697
Other assets.................................................................... 53,396 68,861
-------------- --------------
$1,399,036 $1,437,487
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt............................................ $ 42,715 $ 39,423
Accounts payable............................................................. 148,773 130,045
Accrued salaries and wages................................................... 74,792 89,023
Accrued expenses and other................................................... 36,135 57,873
Billings in excess of costs and accrued earnings on contracts in process..... 69,370 70,313
-------------- --------------
Total current liabilities............................................. 371,785 386,677
Long-term debt.................................................................. 612,608 648,957
Deferred income taxes........................................................... 14,695 15,267
Deferred compensation and other................................................. 53,562 76,084
-------------- --------------
Total liabilities..................................................... 1,052,650 1,126,985
-------------- --------------
Commitments and contingencies (Note 4)
Mandatory redeemable Series B exchangeable convertible preferred stock, par
value $1.00; authorized 150 shares; issued 50 and 48, respectively; liquidation
preference $108,919 and $103,333, respectively................................. 108,919 103,333
-------------- --------------
Stockholders' equity:
Common shares, par value $.01; authorized 50,000 shares; issued 16,509 and
15,925 shares, respectively................................................. 165 159
Treasury stock............................................................... (287) (287)
Additional paid-in capital................................................... 130,118 125,462
Foreign currency translation adjustment...................................... (1,808) 197
Retained earnings since February 21, 1990, date of quasi-reorganization...... 109,279 81,638
-------------- --------------
Total stockholders' equity............................................ 237,467 207,169
-------------- --------------
$1,399,036 $1,437,487
============== ==============
</TABLE>
3
<PAGE>
<TABLE>
URS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<CAPTION>
Three months ended Nine months ended
July 31, July 31,
------------------------------- -------------------------------
2000 1999 2000 1999
---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues............................................ $ 558,534 $ 428,482 $ 1,606,812 $ 849,758
----------- ----------- ----------- -----------
Expenses:
Direct operating................................ 343,660 255,531 963,045 500,889
Indirect, general and administrative............ 170,930 143,386 526,395 292,123
Interest expense, net........................... 17,163 10,781 54,376 15,495
----------- ----------- ----------- -----------
531,753 409,698 1,543,816 808,507
----------- ----------- ----------- -----------
Income before taxes................................. 26,781 18,784 62,996 41,251
Income tax expense.................................. 12,600 8,400 29,100 18,200
----------- ----------- ----------- -----------
Net income.......................................... 14,181 10,384 33,896 $ 23,051
Preferred stock dividend............................ 2,143 1,333 6,254 1,333
----------- ----------- ----------- -----------
Net income available for common stockholders ....... 12,038 9,051 27,642 21,718
Other comprehensive income, net of tax:
Foreign currency translation adjustments........ (592) 360 (2,005) 430
------------ ----------- ----------- -----------
Comprehensive income................................ $ 11,446 $ 9,411 $ 25,637 $ 22,148
============ =========== =========== ===========
Net income per common share:
Basic........................................... $ .73 $ .58 $ 1.71 $ 1.41
============ =========== =========== ===========
Diluted......................................... $ .64 $ .53 $ 1.55 $ 1.30
============ =========== =========== ===========
</TABLE>
4
<PAGE>
<TABLE>
URS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<CAPTION>
Nine Months Ended
July 31,
----------------------------
2000 1999
---- ----
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income.............................................................. $ 33,896 $ 23,051
--------- ---------
Adjustments to reconcile net income to net cash provided (used)
by operating activities:
Depreciation and amortization........................................ 31,722 15,842
Amortization of financing fees....................................... 2,581 320
Receivable allowances................................................ (6,241) 3,992
Changes in current assets and liabilities:
Accounts receivable and costs and accrued earnings in excess of
billings on contracts in process.................................... 2,279 (42,006)
Prepaid expenses and other assets.................................... (567) (5,650)
Accounts payable, accrued salaries and wages and accrued expenses.... (17,241) (42,779)
Billings in excess of costs and accrued earnings on contracts in
process............................................................. (943) (5,739)
Deferred income taxes................................................ 68 12,618
Deferred compensation and other...................................... (22,522) 12,448
Other, net........................................................... (9,790) (27,375)
--------- ---------
Total adjustments............................................... (20,654) (78,329)
--------- ---------
Net cash provided (used) by operating activities........................ 13,242 (55,278)
--------- ---------
Cash flows from investing activities:
Business acquisition, net of cash acquired.............................. -- (316,167)
Proceeds from sale of subsidiary........................................ 20,000 --
Capital expenditures, less equipment purchased through capital
leases of $6,336 and $11,651........................................ (13,626) (10,191)
--------- ---------
Net cash provided (used) by investing activities........................ 6,374 (326,358)
--------- ---------
Cash flows from financing activities:
Proceeds from lines of credit........................................... -- 15,000
Proceeds from issuance of debt.......................................... -- 854,739
Payments on merger fees................................................. -- (18,738)
Principal payments on long-term debt, bank borrowings and capital
lease obligations, excluding capital lease obligations to purchase
equipment of $6,336 and $11,651....................................... (39,393) (589,597)
Proceeds from sale of common shares and exercise of stock options....... 4,662 4,941
Proceeds from issuance of preferred stock............................... -- 100,000
Payments on financing fees related to issuance of preferred stock....... -- (1,500)
--------- ---------
Net cash (used) provided by financing activities....................... (34,731) 364,845
--------- ---------
Net decrease in cash....................................................... (15,115) (16,791)
Cash at beginning of period................................................ 45,687 36,529
--------- ---------
Cash at end of period...................................................... $ 30,572 $ 19,738
========= =========
Supplemental Information:
Interest paid........................................................... $ 55,648 $ 12,180
========= =========
Taxes paid.............................................................. $ 21,657 $ 15,633
========= =========
Equipment subject to capital lease obligations.......................... $ 6,336 $ 11,651
========= =========
Non-cash dividends paid in-kind......................................... $ 5,586 $ 1,333
========= =========
Net book value of business sold......................................... $ 20,000 $ --
========= =========
</TABLE>
5
<PAGE>
URS CORPORATION AND SUBSIDIARIES
NOTE 1. Accounting Policies
In the opinion of management, the information furnished reflects all
adjustments, consisting only of normal recurring adjustments, which are
necessary for a fair statement of the interim financial information.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted. These condensed financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1999.
The results of operations for the three and nine month periods ended July 31,
2000 are not necessarily indicative of the operating results for the full year.
Income Per Common Share
Basic income per common share is computed by dividing net income available
to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted income per common share is computed giving
effect to all dilutive potential common shares that were outstanding during the
period. Dilutive potential common shares consist of the incremental common
shares issuable upon the exercise of stock options and conversion of preferred
stock. Diluted income per share is computed by dividing net income available to
common stockholders plus the preferred stock dividend by the weighted average
dilutive potential common shares that were outstanding during the period.
Reporting Comprehensive Income
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS 130"), in the fiscal year ended October
31, 1999. SFAS 130 established new standards for reporting and displaying
comprehensive income and its components. Other comprehensive income refers to
revenues, expenses, gains, and losses that under generally accepted accounting
principles are included in comprehensive income, but are excluded from net
earnings as these amounts are recorded directly as an adjustment to
stockholders' equity. The Company's comprehensive income is primarily comprised
of foreign currency translation adjustments.
Adoption of Statements of Financial Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 established
accounting and reporting standards for derivative instruments, including
derivative instruments that are embedded in other contracts, and for hedging
activities. While SFAS 133 was effective for all fiscal quarters of all fiscal
years beginning after June 15, 1999, in July 1999, the FASB issued Statement of
Financial Accounting Standards No. 137 "Accounting for Derivative Instruments
and Hedging Activities--Deferral of the Effective Date of SFAS Statement No.
133" ("SFAS 137"). SFAS 137 deferred the effective date of applying the
provisions of SFAS 133 until the first quarter of fiscal years beginning after
June 15, 2000. The Company will adopt SFAS 133 in its quarter ending January 31,
2001 and does not expect such adoption to have a material effect on its
financial position or results of operations.
Reclassifications
Certain reclassifications have been made to the 1999 financial statements to
conform to the 2000 presentation with no effect on net income as previously
reported.
6
<PAGE>
NOTE 2. ACQUISITIONS
During the year ended October 31, 1999, the Company acquired publicly held
Dames & Moore Group ("D-M") for $376.2 million. The acquisition was accounted
for by the purchase method of accounting and the excess of fair value of the net
assets acquired over the purchase price has been allocated to goodwill and is
being amortized over 40 years. The operating results of D-M are included in the
Company's results of operations from the date of purchase.
During the year ended October 31, 1999, the Company acquired privately-held
Thorburn Colquhoun Holdings plc ("T-C") for $13.6 million. The acquisition was
accounted for by the purchase method of accounting and the excess of fair value
of the net assets acquired over the purchase price has been allocated to
goodwill and is being amortized over 30 years. The operating results of T-C are
included in the Company's results of operations from the date of purchase.
NOTE 3. SALE OF SUBSIDIARY
In June 2000, the Company sold its subsidiary, Decision Quest, for
$20,000,000 in cash. The proceeds received from the divestiture were used to pay
down the Company's senior debt. Results of operations of Decision Quest were not
material, and no gain or loss was realized on the sale.
NOTE 4. COMMITMENTS AND CONTINGENCIES
Currently, the Company has limits of $100 million per loss and $100 million
in the annual aggregate for general liability, professional errors and omissions
liability, and contractor's pollution liability insurance. Excess limits
provided for these coverages are on a "claims made" basis, covering only claims
actually made during the policy period currently in effect. Thus, if the Company
does not continue to maintain these excess policies, it will have no coverage
for claims made after its termination date even if the occurrence was during the
term of coverage. It is the Company's intent to maintain these policies, but
there can be no assurance that the Company can maintain existing coverages or
that claims will not exceed the available amount of insurance.
Various legal proceedings are pending against the Company or its
subsidiaries alleging, among other things, breaches of contract or negligence in
connection with the performance of professional services. In some actions,
punitive or treble damages are sought, which substantially exceed the Company's
insurance coverage. The Company's management does not believe that any of such
proceedings will have a material adverse effect on the consolidated financial
position and operations of the Company.
NOTE 5. SEGMENT AND RELATED INFORMATION
In the fiscal year ended October 31, 1999, the Company adopted Statement of
Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments
of an Enterprise and Related Information." SFAS 131 established standards for
reporting information about operating segments and related disclosures on
products, geographic information and major customers.
Management has organized the Company by geographic divisions. The geographic
divisions are Parent, Domestic and International. The Parent division is
comprised of the Parent Company. The Domestic division is comprised of all
offices located in the United States. The International division is comprised of
all offices in the Americas and in Europe and Asia/Pacific (e.g., Australia,
Indonesia, Singapore, New Zealand and the Philippines).
Accounting policies for each of the reportable segments are the same as
those described in Note 1, Accounting Policies. The Company provides services
throughout the world. Services to other countries may be performed within the
United States, and generally, revenues are classified within the geographic area
where the services were performed.
<TABLE>
The following table shows summarized financial information on the Company's
reportable segments. Included in the "Eliminations" column are elimination of
inter-segment sales and elimination of investment in subsidiaries.
<CAPTION>
As of July 31, 2000: Parent Domestic International Eliminations Total
-------------------- ------ -------- ------------- ------------ -----
<S> <C> <C> <C> <C> <C>
Total accounts receivable............... $ (7,814) $ 595,318 $ 84,201 $ (1,782) $ 669,923
Total assets............................ $ 655,821 $ 1,276,759 $ 123,510 $ (657,054) $ 1,399,036
7
<PAGE>
For the Three Months Ended
July 31, 2000: Parent Domestic International Eliminations Total
-------------- ------ -------- ------------- ------------ -----
Revenue ................................ $ -- $ 498,473 $ 62,308 $ (2,247) $ 558,534
Segment operating income (loss)......... $ 11,680 $ 30,873 $ 1,422 $ (31) $ 43,944
For the Nine Months Ended
July 31, 2000: Parent Domestic International Eliminations Total
-------------- ------ -------- ------------- ------------ -----
Revenue ................................ $ -- $ 1,442,894 $ 177,503 $ (13,585) $ 1,606,812
Segment operating income (loss)......... $ 2,833 $ 110,270 $ 4,269 $ -- $ 117,372
As of October 31, 1999: Parent Domestic International Eliminations Total
----------------------- ------ -------- ------------- ------------ -----
Total accounts receivable............... $ (15,000) $ 592,159 $ 90,818 $ (2,016) $ 665,961
Total assets............................ $ 493,938 $ 1,646,890 $ 130,779 $ (834,120) $ 1,437,487
For the Three Months Ended
July 31, 1999: Parent Domestic International Eliminations Total
-------------- ------ -------- ------------- ------------ -----
Revenue ................................ $ -- $ 385,457 $ 44,518 $ (1,493) $ 428,482
Segment operating income (loss)......... $ (103) $ 23,704 $ 5,964 $ -- $ 29,565
For the Nine Months Ended
July 31, 1999: Parent Domestic International Eliminations Total
-------------- ------ -------- ------------- ------------ -----
Revenue ................................ $ -- $ 765,048 $ 87,267 $ (2,557) $ 849,758
Segment operating income (loss)......... $ (1,038) $ 52,109 $ 5,675 $ -- $ 56,746
The Company's reportable segments are measured based upon segment operating income.
The next table provides a reconciliation of operating income to consolidated income before income taxes.
Three Months Ended Nine Months Ended
July 31, July 31,
--------------------------- ---------------------------
2000 1999 2000 1999
---- ---- ---- ----
Segment operating income ........... $ 43,944 $ 29,565 $ 117,372 $ 56,746
Interest expense, net................ 17,163 10,781 54,376 15,495
---------- ---------- ---------- ----------
Income before taxes.................. $ 26,781 $ 18,784 $ 62,996 $ 41,251
========== ========== ========== ==========
</TABLE>
NOTE 6. SUPPLEMENTAL GUARANTOR INFORMATION
In June 1999, the Company completed a private placement of $200 million
principal amount of its 12 1/4% Senior Subordinated Notes due 2009, which were
exchanged in August 1999 for 12 1/4% Senior Subordinated Exchange Notes (the
"Notes"). The Notes are fully and unconditionally guaranteed on a joint and
several basis by certain of the Company's wholly owned subsidiaries.
Substantially all of the Company's income and cash flow is generated by its
subsidiaries. The Company has no operating assets or operations other than its
investments in its subsidiaries. As a result, funds necessary to meet the
Company's debt service obligations are provided mainly by distributions to or
advances from its subsidiaries. Under certain circumstances, contractual and
legal restrictions, as well as the financial condition and operating
requirements of the Company's subsidiaries, could limit the Company's ability to
obtain cash from its subsidiaries for the purpose of meeting its debt service
obligations, including the payment of principal and interest on the Notes.
The following information sets forth the condensed consolidating balance
sheets of the Company as of July 31, 2000 and October 31, 1999, the condensed
consolidating statements of operations for the three and nine months ended July
31, 2000 and 1999 and condensed consolidating statements of cash flows for the
nine months ended July 31, 2000 and 1999. Investments in subsidiaries are
accounted for using the equity method; accordingly, entries necessary to
consolidate the Company and all of its subsidiaries are reflected in the
eliminations column. Separate complete financial statements of the Company and
its subsidiaries that guarantee the Notes would not provide additional material
information that would be useful in assessing the financial composition of such
subsidiaries.
8
<PAGE>
<TABLE>
URS CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEET
(In thousands)
(Unaudited)
<CAPTION>
July 31, 2000
-------------------------------------------------------------------------------
Subsidiary
Subsidiary Non-
Parent Guarantors Guarantors Eliminations Consolidated
------ ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash...................................... $ 4,930 $ (349) $ 25,991 $ -- $ 30,572
Accounts receivable, net.................. (7,814) 595,318 84,201 (1,782) 669,923
Deferred income taxes..................... -- 8,156 1,209 -- 9,365
Prepaid expenses and other assets......... 5,815 19,401 (538) -- 24,678
------------- ------------- -------------- ------------- -------------
Total current assets.................. 2,931 622,526 110,863 (1,782) 734,538
Property and equipment, net................... 454 80,923 11,424 -- 92,801
Goodwill, net................................. 391,601 162,034 -- (35,334) 518,301
Investment in unconsolidated subsidiaries..... 245,127 364,543 1,198 (610,868) --
Inter-company receivable...................... -- 5,458 (4,205) (1,253) --
Other assets.................................. 15,708 41,275 4,230 (7,817) 53,396
------------- ------------- ------------- -------------- -------------
$ 655,821 $ 1,276,759 $ 123,510 $ (657,054) $ 1,399,036
============= ============= ============= ============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......... $ 25,792 $ 18,948 $ 10,044 $ (12,069) $ 42,715
Accounts payable.......................... 20,940 122,190 26,154 (20,511) 148,773
Inter-company payable..................... (173,631) 130,350 50,943 (7,662) --
Accrued expenses and other................ 8,616 92,424 10,413 (526) 110,927
Billings in excess of costs and accrued
earnings on contracts in process........ -- 61,666 7,704 -- 69,370
------------- ------------- ------------- ------------- -------------
Total current liabilities............. (118,283) 425,578 105,258 (40,768) 371,785
Long-term debt................................ 596,213 16,230 165 -- 612,608
Other......................................... 22,562 28,698 1,585 15,412 68,257
------------- ------------- ------------- ------------- -------------
Total liabilities..................... 500,492 470,506 107,008 (25,356) 1,052,650
------------- ------------- ------------- -------------- -------------
Total stockholders' equity.................... 155,329 806,253 16,502 (631,698) 346,386
------------- ------------- ------------- -------------- -------------
$ 655,821 $ 1,276,759 $ 123,510 $ (657,054) $ 1,399,036
============= ============= ============= ============== =============
</TABLE>
9
<PAGE>
<TABLE>
URS CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(In thousands)
(Unaudited)
<CAPTION>
Three Months Ended July 31, 2000
----------------------------------------------------------------------------
Subsidiary
Non-
Parent Guarantors Guarantors Eliminations Consolidated
------ ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues............................... $ -- $ 498,473 $ 62,308 $ (2,247) $ 558,534
----------- ----------- ----------- ----------- ------------
Expenses:
Direct operating.................... -- 309,606 36,500 (2,446) 343,660
Indirect, general and
administrative.................... (11,680) 157,994 24,386 230 170,930
Interest expense, net............... 17,102 (150) 211 -- 17,163
----------- ------------ ----------- ----------- ------------
5,422 467,450 61,097 (2,216) 531,753
----------- ----------- ----------- ----------- ------------
Income (loss) before taxes............. (5,422) 31,023 1,211 (31) 26,781
Income tax expense..................... 11,733 657 210 -- 12,600
----------- ----------- ----------- ----------- ------------
Net income (loss)...................... (17,155) 30,366 1,001 (31) 14,181
Preferred stock dividend............... 2,143 -- -- -- 2,143
----------- ----------- ----------- ----------- ------------
Net income (loss) available for
common stockholders................. (19,298) 30,366 1,001 (31) 12,038
Other comprehensive income,
net of tax:
Foreign currency adjustments........ -- -- (592) -- (592)
----------- ----------- ----------- ----------- ------------
Comprehensive income (loss)............ $ (19,298) $ 30,366 $ 409 $ (31) $ 11,446
=========== =========== =========== =========== ============
Nine Months Ended July 31, 2000
----------------------------------------------------------------------------
Subsidiary
Non-
Parent Guarantors Guarantors Eliminations Consolidated
------ ---------- ---------- ------------ ------------
Revenues............................... $ -- $ 1,442,894 $ 177,503 $ (13,585) $ 1,606,812
----------- ----------- ----------- ----------- ------------
Expenses:
Direct operating.................... -- 872,884 103,944 (13,783) 963,045
Indirect, general and
administrative.................... (2,833) 459,740 69,290 198 526,395
Interest expense, net............... 54,120 (396) 652 -- 54,376
----------- ----------- ----------- ----------- ------------
51,287 1,332,228 173,886 (13,585) 1,543,816
----------- ----------- ----------- ----------- ------------
Income (loss) before taxes............. (51,287) 110,666 3,617 -- 62,996
Income tax expense..................... 27,707 1,101 292 -- 29,100
----------- ----------- ----------- ----------- ------------
Net income (loss)...................... (78,994) 109,565 3,325 -- 33,896
Preferred stock dividend............... 6,254 -- -- -- 6,254
----------- ----------- ----------- ----------- ------------
Net income (loss) available for
common stockholders................. (85,248) 109,565 3,325 -- 27,642
Other comprehensive income,
net of tax:
Foreign currency adjustments........ -- -- (2,005) -- (2,005)
----------- ----------- ----------- ----------- ------------
Comprehensive income (loss)............ $ (85,248) $ 109,565 $ 1,320 $ -- $ 25,637
=========== =========== =========== =========== ============
</TABLE>
10
<PAGE>
<TABLE>
URS CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
<CAPTION>
Nine Months Ended July 31, 2000
----------------------------------------------------------------------------
Subsidiary
Non-
Parent Guarantors Guarantors Eliminations Consolidated
------ ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................... $ (78,994) $ 109,565 $ 3,325 $ -- $ 33,896
----------- ----------- ----------- ----------- -----------
Adjustments to reconcile net income
to net cash provided (used) by
operating activities:
Depreciation and amortization....... 7,542 22,291 1,889 -- 31,722
Amortization of financing fees ..... 2,581 -- -- -- 2,581
Receivable allowances............... (7,186) 3,936 (2,211) (780) (6,241)
Changes in current assets and
liabilities:
Accounts receivable and costs and
accrued earnings in excess of
billings on contracts in process.. -- (7,095) 8,828 546 2,279
Prepaid expenses and other assets.. (4,858) 3,744 (930) 1,477 (567)
Accounts payable, accrued salaries
and wages and accrued expenses.... 105,191 (114,807) 2,050 (9,675) (17,241)
Billings in excess of costs and
accrued earnings on contracts in
process........................... -- (8,703) 3,424 4,336 (943)
Deferrals and other, net............ (19,229) (13,351) (3,760) 4,096 (32,244)
----------- ----------- ----------- ----------- -----------
Total adjustments................. 84,041 (113,985) 9,290 -- (20,654)
----------- ----------- ----------- ----------- -----------
Net cash provided (used) by
operating activities.............. 5,047 (4,420) 12,615 -- 13,242
----------- ----------- ----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sale of
subsidiaries 20,000 -- -- -- 20,000
Capital expenditures............... (98) (11,409) (2,119) -- (13,626)
----------- ----------- ----------- ----------- -----------
Net cash provided (used) by
investing activities.............. 19,902 (11,409) (2,119) -- 6,374
----------- ----------- ----------- ----------- -----------
Cash flows from financing activities:
Payment on long-term debt, bank
borrowings and capital lease
obligations....................... (31,403) (1,548) (6,442) -- (39,393)
Proceeds from sale of common
shares and exercise of stock
options........................... 4,662 -- -- -- 4,662
----------- ----------- ----------- ----------- -----------
Net cash (used) by financing
activities........................ (26,741) (1,548) (6,442) -- (34,731)
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash........ (1,792) (17,377) 4,054 -- (15,115)
Cash at beginning of period............ 6,722 17,028 21,937 -- 45,687
----------- ----------- ----------- ----------- -----------
Cash at end of period.................. $ 4,930 $ (349) $ 25,991 $ -- $ 30,572
=========== =========== =========== =========== ===========
</TABLE>
11
<PAGE>
<TABLE>
URS CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEET
(In thousands)
<CAPTION>
October 31, 1999
----------------------------------------------------------------------------
Subsidiary
Non-
Parent Guarantors Guarantors Eliminations Consolidated
------ ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash................................ $ 6,722 $ 17,028 $ 21,937 $ -- $ 45,687
Accounts receivable, net............ (15,000) 592,159 90,818 (2,016) 665,961
Deferred income taxes............... -- 8,681 1,324 -- 10,005
Prepaid expenses and other
assets............................ 4,640 18,624 847 -- 24,111
----------- ----------- ----------- ----------- -----------
Total current assets.............. (3,638) 636,492 114,926 (2,016) 745,764
Property and equipment, net............ 445 81,526 11,194 -- 93,165
Goodwill, net.......................... 233,081 322,363 3,633 (29,380) 529,697
Investment in unconsolidated
subsidiaries........................ 252,025 554,834 3,231 (810,090) --
Inter-company receivable............... -- 5,460 (4,207) (1,253) --
Other assets........................... 12,025 46,215 2,002 8,619 68,861
----------- ----------- ----------- ----------- -----------
$ 493,938 $ 1,646,890 $ 130,779 $ (834,120) $ 1,437,487
=========== =========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term
debt.............................. $ 18,392 $ 16,514 $ 16,250 $ (11,733) $ 39,423
Accounts payable.................... 27,381 95,277 13,686 (6,299) 130,045
Inter-company payable............... (471,007) 452,321 54,447 (35,761) --
Accrued expenses and other.......... 27,132 68,613 28,185 22,966 146,896
Billings in excess of costs and
accrued earnings on contracts in
process........................... -- 70,369 4,280 (4,336) 70,313
----------- ----------- ----------- ----------- -----------
Total current liabilities......... (398,102) 703,094 116,848 (35,163) 386,677
Long-term debt......................... 635,016 13,540 401 -- 648,957
Other.................................. 44,909 75,400 694 (29,652) 91,351
----------- ----------- ----------- ----------- -----------
Total liabilities................. 281,823 792,034 117,943 (64,815) 1,126,985
Total stockholders' equity............. 212,115 854,856 12,836 (769,305) 310,502
----------- ----------- ----------- ----------- -----------
$ 493,938 $ 1,646,890 $ 130,779 $ (834,120) $ 1,437,487
=========== =========== =========== =========== ===========
</TABLE>
12
<PAGE>
<TABLE>
URS CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(In thousands)
(Unaudited)
<CAPTION>
Three Months Ended July 31, 1999
----------------------------------------------------------------------------
Subsidiary
Non-
Parent Guarantors Guarantors Eliminations Consolidated
------ ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues............................... $ -- $ 385,457 $ 44,518 $ (1,493) $ 428,482
----------- ----------- ----------- ----------- -----------
Expenses:
Direct operating.................... -- 228,817 28,207 (1,493) 255,531
Indirect, general and
administrative.................... 103 132,936 10,347 -- 143,386
Interest expense, net............... 9,603 (292) 1,470 -- 10,781
----------- ----------- ----------- ----------- -----------
9,706 361,461 40,024 (1,493) 409,698
----------- ----------- ----------- ----------- -----------
Income (loss) before taxes............. (9,706) 23,996 4,494 -- 18,784
Income tax expense..................... 6,634 -- 1,766 -- 8,400
----------- ----------- ----------- ----------- -----------
Net income (loss)...................... (16,340) 23,996 2,728 -- 10,384
Preferred stock dividend............... 1,333 -- -- -- 1,333
----------- ----------- ----------- ----------- -----------
Net income (loss) available for
common stockholders................. (17,673) 23,996 2,728 -- 9,051
Other comprehensive income,
net of tax:
Foreign currency adjustments........ -- -- 360 -- 360
----------- ----------- ----------- ----------- -----------
Comprehensive income (loss)............ $ (17,673) $ 23,996 $ 3,088 $ -- $ 9,411
=========== =========== =========== =========== ===========
Nine Months Ended July 31, 1999
----------------------------------------------------------------------------
Subsidiary
Non-
Parent Guarantors Guarantors Eliminations Consolidated
------ ---------- ---------- ------------ ------------
Revenues............................... $ -- $ 765,048 $ 87,267 $ (2,557) $ 849,758
----------- ----------- ----------- ----------- -----------
Expenses:
Direct operating.................... -- 451,066 52,380 (2,557) 500,889
Indirect, general and
administrative.................... 1,038 261,873 29,212 -- 292,123
Interest expense, net............... 13,762 183 1,550 -- 15,495
----------- ----------- ----------- ----------- -----------
14,800 713,122 83,142 (2,557) 808,507
----------- ----------- ----------- ----------- -----------
Income (loss) before taxes............. (14,800) 51,926 4,125 -- 41,251
Income tax expense..................... 16,380 -- 1,820 -- 18,200
----------- ----------- ----------- ----------- -----------
Net income (loss)...................... (31,180) 51,926 2,305 -- 23,051
Preferred stock dividend............... 1,333 -- -- -- 1,333
----------- ----------- ----------- ----------- -----------
Net income (loss) available for
common stockholders................. (32,513) 51,926 2,305 -- 21,718
Other comprehensive income,
net of tax:
Foreign currency adjustments........ -- -- 430 -- 430
----------- ----------- ----------- ----------- -----------
Comprehensive income (loss)............ $ (32,513) $ 51,926 $ 2,735 $ -- $ 22,148
=========== =========== =========== =========== ===========
</TABLE>
13
<PAGE>
<TABLE>
URS CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
<CAPTION>
Nine Months Ended July 31, 1999
----------------------------------------------------------------------------
Subsidiary
Non-
Parent Guarantors Guarantors Eliminations Consolidated
------ ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................... $ (31,180) $ 51,926 $ 2,305 $ -- $ 23,051
----------- ----------- ----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided (used) by
operating activities:
Depreciation and amortization....... 1,019 13,191 1,632 -- 15,842
Amortization of financing fees...... 320 -- -- -- 320
Receivable allowances............... -- 3,992 -- -- 3,992
Changes in current assets and
liabilities:
Accounts receivable and costs and
accrued earnings in excess of
billings on contracts in process.. -- (31,870) 10,014 (20,150) (42,006)
Prepaid expenses and other
assets............................ (12,177) 22,482 (2,836) (13,119) (5,650)
Accounts payable, accrued salaries
and wages and accrued
expenses.......................... (42,927) (38,890) (2,288) 41,326 (42,779)
Billings in excess of costs and
accrued earnings on contracts in
process........................... -- (447) (3,554) (1,738) (5,739)
Deferrals and other, net............ 14,717 (19,084) 8,377 (6,319) (2,309)
----------- ----------- ----------- ----------- -----------
Total adjustments................. (39,048) (50,626) 11,345 -- (78,329)
----------- ----------- ----------- ----------- -----------
Net cash provided (used) by operating
activities.......................... (70,228) 1,300 13,650 -- (55,278)
----------- ----------- ----------- ----------- -----------
Cash flows from investing activities:
Business acquisition, net of cash
acquired.......................... (316,167) -- -- -- (316,167)
Capital expenditures................ (115) (7,593) (2,483) -- (10,191)
----------- ----------- ----------- ----------- -----------
Net cash (used) by investing
activities........................ (316,282) (7,593) (2,483) -- (326,358)
----------- ----------- ----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of debt...... 854,440 -- 299 -- 854,739
Principal payments on long-term
debt.............................. (589,597) -- -- -- (589,597)
Payments on merger fees............. (18,738) -- -- -- (18,738)
Proceeds from lines of credit....... 15,000 -- -- -- 15,000
Proceeds from issuance of preferred
stock............................. 100,000 -- -- -- 100,000
Payments on financing fees related
to issuance of preferred stock.... (1,500) -- -- -- (1,500)
Proceeds from sale of common shares
and exercise of stock options..... 4,941 -- -- -- 4,941
----------- ----------- ----------- ----------- -----------
Net cash provided by financing
activities........................ 364,546 -- 299 -- 364,845
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash........ (21,964) (6,293) 11,466 -- (16,791)
Cash at beginning of period............ 26,949 6,538 3,042 -- 36,529
----------- ----------- ----------- ----------- -----------
Cash at end of period.................. $ 4,985 $ 245 $ 14,508 $ -- $ 19,738
=========== =========== =========== =========== ===========
</TABLE>
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
We report the results of our operations on a fiscal year, which ends on
October 31. This Management Discussion and Analysis ("MD&A") should be read in
conjunction with the MD&A and the footnotes to the Consolidated Financial
Statements included in the Annual Report on Form 10-K for the fiscal year ended
October 31, 1999, which was previously filed with the Securities and Exchange
Commission.
Results of Operations
Third quarter ended July 31, 2000 vs. July 31, 1999
Our revenues were $558,534,000 for the quarter ended July 31, 2000, an
increase of $130,052,000 or 30%, over the amount reported for the same period
last year. The growth in revenue is primarily attributable to the acquisition of
D-M in June 1999.
Direct operating expenses for the quarter ended July 31, 2000, which consist
of direct labor and other direct expenses, including subcontractor costs,
increased $88,129,000, a 34% increase over the amount reported for the same
period last year. The increase is due to the addition of direct operating
expenses of D-M. Indirect, general and administrative expenses for the quarter
ended July 31, 2000 increased $27,544,000, or 19%, over the amount reported for
the same period last year, as a result of the addition of D-M overhead. Direct,
indirect, and general and administrative expenses generally increased at the
same rate as revenues. Interest expense increased due to additional indebtedness
incurred in connection with the acquisition of D-M and to a lesser extent to
increased interest rates.
Our earnings before income taxes were $26,781,000 for the third quarter
ended July 31, 2000 compared to $18,784,000 for the same period last year. Our
effective income tax rates for the quarters ended July 31, 2000 and 1999 were
approximately 47% and 45%, respectively.
We reported net income of $14,181,000 or $0.64 per share on a diluted basis
for the third quarter ended July 31, 2000, compared with $10,384,000, or $0.53
per share for the same period last year.
Our backlog at July 31, 2000 was $1,573,000,000, as compared to
$1,260,000,000 at October 31, 1999.
Nine months ended July 31, 2000 vs. July 31, 1999
Our revenues were $1,606,812,000 for the nine months ended July 31, 2000, an
increase of $757,054,000 or 89%, over the amount reported for the same period
last year. The growth in revenues is primarily attributable to the acquisition
of D-M in June 1999.
Direct operating expenses for the nine months ended July 31, 2000, which
consists of direct labor and other direct expenses including subcontractor
costs, increased $462,156,000, or 92%, over the amount reported in the same
period last year. The increase is due to the addition of direct operating
expenses of D-M. Indirect, general and administrative expenses were $526,395,000
for the nine months ended July 31, 2000, an increase of $234,272,000 or 80%,
over the amount reported for the same period last year as a result of the
addition of D-M overhead. Direct, indirect, and general and administrative
expenses generally increased at the same rate as revenues. Interest expense
increased due to additional indebtedness incurred in connection with the
acquisition of D-M and to a lesser extent to increased interest rates.
Our earnings before income taxes were $62,996,000 for the nine months ended
July 31, 2000 compared to $41,251,000 for the same period last year. Our
effective income tax rates for the nine months ended July 31, 2000 and 1999 were
approximately 46% and 44% respectively.
We reported net income of $33,896,000 or $1.55 per share on a diluted basis
for the nine months ended July 31, 2000, compared with $23,051,000 or $1.30 per
share for the same period last year.
15
<PAGE>
Liquidity and Capital Resources
At July 31, 2000, we had working capital of $362,753,000, an increase of
$3,666,000 from October 31, 1999. During the nine-month period ended July 31,
2000, we repaid $39,393,000 of our senior long-term debt, bank borrowings and
capital lease obligations.
Substantially all of our cash flow is generated by our subsidiaries. As a
result, funds necessary to meet our debt service obligations are provided mainly
from receipts of our subsidiaries. Under certain circumstances, legal and
contractual restrictions, as well as financial condition and reporting
requirements, of the subsidiaries may limit our ability to obtain cash from the
subsidiaries.
Our liquidity and capital measurements are set forth below:
As of July 31, 2000
-------------------
Working capital................................. $ 362,753,000
Working capital (current) ratio................. 2 to 1
Average days to convert billed accounts
receivable to cash............................. 70
Percentage of debt to equity.................... 189%
Our cash and cash equivalents amounted to $30,572,000 at July 31, 2000, a
decrease of $15,115,000 from October 31, 1999. The decrease is primarily due to
cash used for capital expenditures of $13,626,000 and repayment of indebtedness
of $39,393,000, offset by proceeds received from sale of subsidiary of
$20,000,000 and cash flows generated from operations of $13,242,000.
During the nine-month period ended July 31, 2000, cash flow provided by
operating activities totaled $13,242,000. We intend to satisfy our working
capital needs primarily through internal cash generation. Our primary sources of
liquidity will be cash flow from operations and borrowings under the senior
collateralized credit facility, if necessary. Our primary uses of cash will be
to fund our working capital and capital expenditures and to service our debt. We
believe that our existing financial resources, together with our planned cash
flow from operations and existing credit facilities, will provide sufficient
resources to fund our combined operations and capital expenditure needs for the
foreseeable future.
During the fiscal year ended October 31,1999, we paid $376.2 million for the
purchase of D-M. To fund this transaction and to refinance outstanding bank
debt, we incurred new borrowings of $650 million from establishing a long-term
senior collateralized credit facility with a syndicate of banks led by Wells
Fargo Bank, N.A. ("the Bank") and from the issuance of 12 1/4% Senior
Subordinated Exchange Notes. In addition, we sold 46,082.95 shares of our Series
B Preferred Stock to RCBA Strategic Partners, L.P. for an aggregate
consideration of $100 million.
Senior Collateralized Credit Facility. The senior collateralized credit
facility was funded on June 9, 1999 ("Funding Date") and provides for three term
loan facilities in the aggregate amount of $450,000,000 and a revolving credit
facility in the amount of $100,000,000. The term loan facilities consist of Term
Loan A, a $250,000,000 tranche, Term Loan B, a $100,000,000 tranche, and Term
Loan C, another $100,000,000 tranche.
Principal amounts under Term Loan A became due, commencing on October 31,
1999, in the amount of approximately $3,000,000 per quarter for the following
four quarters. Thereafter and through the sixth anniversary of the Funding Date,
annual principal payments under Term Loan A range from $25,000,000 to a maximum
of $58,000,000 with Term Loan A expiring and the then-outstanding principal
amount becoming due and repayable in full on the sixth anniversary of the
Funding Date. Principal amounts under Term Loan B became due, commencing on
October 31, 1999, in the amount of $1,000,000 in each year through July 31,
2005, with Term Loan B expiring and the then-outstanding principal amount
becoming due and repayable in full in four equal quarterly installments in year
seven. Principal amounts under Term Loan C became due, commencing on October 31,
1999, in the amount of $1,000,000 in each year through July 31, 2006, with Term
Loan C expiring and the then-outstanding principal amount becoming due and
repayable in full in equal quarterly installments in year eight. The revolving
credit facility expires, and is repayable in full, on June 9, 2005.
The term loans each bear interest at a rate per annum equal to, at our
option, either the Base Rate or LIBOR, in each
16
<PAGE>
case plus an applicable margin. The revolving credit facility bears interest at
a rate per annum equal to, at our option, either the Base Rate, LIBOR or the
Adjusted Sterling Rate, in each case plus an applicable margin. The applicable
margin adjusts according to a performance-pricing grid based on our ratio of
Consolidated Total Funded Debt to Consolidated Earnings Before Income Taxes,
Depreciation and Amortization ("EBITDA"). The "Base Rate" is defined as the
higher of the Bank's Prime Rate and the Federal Funds Rate plus 0.50%. "LIBOR"
is defined as the offered quotation by first class banks in the London interbank
market to the Bank for dollar deposits, as adjusted for reserve requirements.
The "Adjusted Sterling Rate" is defined as the rate per annum displayed by
Reuters at which Sterling is offered to the Bank in the London interbank market
as determined by the British Bankers' Association. We may determine which
interest rate options to use and interest periods will apply for such periods
for both the term loans and the revolving credit facility.
At July 31, 2000, our revolving credit facility with the Bank provides for
advances up to $100,000,000. Also at July 31, 2000, we had outstanding letters
of credit aggregating $37,400,000, which reduced the amount available to us
under our revolving credit facility to $62,600,000.
The senior collateralized credit facility is governed by affirmative and
negative covenants. These covenants include restrictions upon incurring
additional debt, paying dividends, or making distributions to our stockholders,
repurchasing or retiring capital stock and making subordinated junior debt
payments, and require us to submit quarterly compliance certification. The
financial covenants include maintenance of a minimum current ratio of 1.20 to
1.00, a minimum fixed charge coverage ratio of 1.10 to 1.00, a pro-forma EBITDA
minimum of $142,000,000 and a maximum leverage ratio of 4.25 to 1.00 for the
period ended July 31, 2000. We were fully compliant with these covenants as of
July 31, 2000.
12 1/4% Senior Subordinated Exchange Notes. Our Notes are due in 2009. Each
Note bears interest at 12 1/4% per annum. Interest on the Notes is payable
semi-annually on May 1 and November 1 of each year, commencing November 1, 1999.
The Notes are subordinate to the senior collateralized credit facility. As of
July 31, 2000, we owed $200,000,000 on our Notes.
The Notes are fully and unconditionally guaranteed on a joint and several
basis by certain of our wholly owned subsidiaries. We may redeem any of the
Notes beginning May 1, 2004. The initial redemption price is 106.125% of their
principal amount, plus accrued and unpaid interest. The redemption price will
decline each year after 2004 and will be 100% of their principal amount, plus
accrued and unpaid interest beginning on May 1, 2007. In addition, at any time
prior to May 1, 2002, we may redeem up to 35% of the principal amount of the
Notes with net cash proceeds from the sale of capital stock. The redemption
price will be equal to 112.25% of the principal amount of the redeemed Notes.
Interest Rate Swap Agreement. We have entered into an interest rate swap
agreement with the Bank. This interest rate swap effectively fixes the interest
rate on $55,000,000 of our LIBOR-based borrowings at 5.97% plus the applicable
margin through January 31, 2001. The actual borrowing cost to us with respect to
indebtedness covered by this interest rate swap will depend upon the applicable
margin over LIBOR for such indebtedness, which will be determined by the terms
of the relevant debt instruments. Currently, it is expected that the contractual
margin will range from 2.75% to 3.50%, which will provide for an all-in annual
interest rate range from 8.72% to 9.47% on these $55,000,000 of our borrowings.
Interest Rate Cap Agreement. We entered into an interest rate cap agreement
with the Bank. This agreement caps the interest rate at 7% for $165,800,000 of
our LIBOR-based borrowings through July 31, 2002 and is incremental to the
interest rate swap agreement stated above.
17
<PAGE>
Risk Factors That Could Affect Our Financial Condition and Results of Operations
In addition to the other information included or incorporated by reference
in this Form 10-Q, the following factors could affect our actual results:
We may not be able to integrate D-M successfully and achieve anticipated cost
savings and other benefits from the D-M acquisition.
We will achieve the efficiencies, cost reductions and other benefits that we
expect to result from the D-M acquisition only if we can successfully integrate
each company's administrative, finance, technical and marketing organizations,
and implement appropriate operations, financial and management systems and
controls.
The integration of D-M into our operations will involve a number of risks,
including:
o the possible diversion of our management's attention from other business
concerns;
o the potential inability to successfully pursue some or all of the
anticipated revenue opportunities associated with the D-M acquisition;
o the possible loss of D-M's or our key professional employees;
o the potential inability to successfully replicate our operating
efficiencies in D-M's operations;
o insufficient management resources to accomplish the integration;
o our increased complexity and diversity compared to our operations prior
to the D-M acquisition;
o the possible negative reaction of clients to the D-M acquisition; and
o unanticipated problems or legal liabilities.
The occurrence of any of the above events, as well as any other difficulties
which may be encountered in the transition and integration process, could have a
material adverse effect on our business, financial condition and results of
operations.
Our substantial indebtedness could adversely affect our financial condition.
We are a highly leveraged company. As of July 31, 2000, we had approximately
$655.3 million of outstanding indebtedness following consummation of the D-M
acquisition and the related financing plan. This level of indebtedness could
have important consequences, including the following:
o it may limit our ability to borrow money or sell stock for working
capital, capital expenditures, debt service requirements or other
purposes;
o it may limit our flexibility in planning for, or reacting to, changes in
our business;
o we could be more highly leveraged than some of our competitors, which
may place us at a competitive disadvantage;
o it may make us more vulnerable to a downturn in our business or the
economy; and
o a substantial portion of our cash flow from operations could be
dedicated to the repayment of our indebtedness and would not be
available for other purposes.
18
<PAGE>
To service our indebtedness we will require a significant amount of cash. The
ability to generate cash depends on many factors beyond our control.
Our ability to make payments on our indebtedness depends on our ability to
generate cash in the future. If we do not generate sufficient cash flow to meet
our debt service and working capital requirements, we may need to seek
additional financing or sell assets. This need may make it more difficult for us
to obtain financing on terms that are acceptable to us, or at all. Without this
financing, we could be forced to sell assets to make up for any shortfall in our
payment obligations under unfavorable circumstances.
Our senior collateralized credit facility and our obligations under the
Notes limit our ability to sell assets and also restrict the use of proceeds
from any such sale. Moreover, the senior collateralized credit facility is
secured by substantially all of our assets. Furthermore, a substantial portion
of our assets is, and may continue to be, intangible assets. Therefore, we
cannot assure you that our assets could be sold quickly enough or for sufficient
amounts to enable us to meet our debt obligations.
Restrictive covenants in our senior collateralized credit facility and the
indenture relating to the Notes may restrict our ability to pursue business
strategies.
Our senior collateralized credit facility and indenture relating to the
Notes restrict our ability, among other things, to:
o incur additional indebtedness or contingent obligations;
o pay dividends or make distributions to our stockholders;
o repurchase or redeem our stock;
o make investments;
o grant liens;
o make capital expenditures;
o enter into transactions with our stockholders and affiliates;
o sell assets; and
o acquire the assets of, or merge or consolidate with, other companies.
In addition, our senior collateralized credit facility requires us to
maintain certain financial ratios. We may not be able to maintain these ratios.
Additionally, covenants in the senior collateralized credit facility and the
indenture relating to the Notes may impair our ability to finance future
operations or capital needs or to engage in other favorable business activities.
If we default under our various debt obligations, the lenders could require
immediate repayment of the entire principal. If the lenders require immediate
repayment, we will not be able to repay them, and our inability to meet our debt
obligations could have a material adverse effect on our business, financial
condition and results of operations.
We derive approximately half of our revenues from contracts with government
agencies. Any disruption in government funding or in our relationship with those
agencies could adversely affect our business and our ability to meet our debt
obligations.
We derive approximately half of our revenues from local, state and federal
government agencies. The demand for our services will be directly related to the
level of government program funding that is allocated to rebuild and expand the
nation's infrastructure. We believe that the success and further development of
our business depend upon the continued funding of these government programs and
upon our ability to participate in these government programs. We cannot assure
you that governments will have the available resources to fund these programs,
that these programs will
19
<PAGE>
continue to be funded even if governments have available financial resources, or
that we will continue to win government contracts under these or other programs.
Some of these government contracts are subject to renewal or extension
annually, so we cannot assure you of our continued work under these contracts in
the future. Unsuccessful bidders may protest or challenge the award of these
contracts. In addition, government agencies can terminate these contracts at
their convenience. As a result, we may incur costs in connection with the
termination of these contracts. Also, contracts with government agencies are
subject to substantial regulation and an audit of actual costs incurred.
Consequently, there may be a downward adjustment in our revenues if actual
recoverable costs exceed billed recoverable costs.
We must maintain our present responsibility to be eligible to perform
government contracts. From time to time allegations of improper conduct in
connection with government contracting have been made against us and these could
be the subjects of suspension or debarment consideration. We investigate all
such allegations thoroughly and believe that appropriate actions have been taken
in all cases. Additionally, we maintain a compliance program in an effort to
assure that no improper conduct occurs in connection with government
contracting.
We may be unable to estimate accurately our cost in performing services for our
clients. This may cause us to have low profit margins or incur losses.
We submit some proposals on projects based an estimate of the costs we will
likely incur. To the extent we cannot control overhead, general and
administrative and other costs, or underestimate such costs, we may have low
profit margins or may incur losses.
We are subject to risks from changes in environmental legislation, regulation
and governmental policies.
Federal laws, such as the Resource Conservation and Recovery Act of 1976, as
amended, and the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended, ("CERCLA"), and various state and local laws,
strictly regulate the handling, removal, treatment and transportation of toxic
and hazardous substances and impose liability for environmental contamination
caused by such substances. Moreover, so-called "toxic tort" litigation has
increased markedly in recent years as people injured by hazardous substances
seek recovery for personal injuries or property damages. We handle, remove,
treat and transport toxic or hazardous substances. Consequently, we may be
exposed to claims for damages caused by environmental contamination.
Federal and state laws, regulations, and programs related to environmental
issues will generate, either directly or indirectly, much of our environmental
business. Accordingly, a reduction of these laws and regulations, or changes in
governmental policies regarding the funding, implementation or enforcement of
these programs, could have a material effect on our business. Environmental
laws, regulations and enforcement policies remained essentially unchanged during
fiscal year 1999, including further deferral of congressional reauthorization of
CERCLA. The outlook for congressional action on CERCLA legislation in fiscal
year 2000 remains unclear.
Our liability for damages due to legal proceedings may be significant. Our
insurance may not be adequate to cover this risk.
Various legal proceedings are pending against us alleging, among other
things, breaches of contract or negligence in connection with our performance of
professional services. In some actions, punitive or treble damages are sought
which substantially exceed our insurance coverage. If we sustain damages greater
than our insurance coverage, there could be a material adverse effect on our
business, financial condition and results of operations.
Our engineering practices, including general engineering and civil
engineering services, involve professional judgments about the nature of soil
conditions and other physical conditions, including the extent to which toxic
and hazardous materials are present, and about the probable effect of procedures
to mitigate problems or otherwise affect those conditions. If the judgments and
the recommendations based upon those judgments are incorrect, we may be liable
for resulting damages that our clients incur.
20
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The failure to attract and retain key professional personnel could adversely
affect our business.
The ability to attract, retain and expand our staff of qualified technical
professionals will be an important factor in determining our future success. A
shortage of qualified technical professionals currently exists in the
engineering and design industry. The market for these professionals is
competitive, and we cannot assure you that we will be successful in our efforts
to continue to attract and retain such professionals. In addition, we will rely
heavily upon the experience and ability of our senior executive staff and the
loss of a significant number of such individuals could have a material adverse
effect on our business, financial condition and results of operations.
We may be unable to compete successfully in our industry. This could adversely
affect our business.
We are engaged in highly fragmented and very competitive markets in our
service areas. We will compete with firms of various sizes, several of which are
substantially larger than us and which possess greater technical resources.
Furthermore, the engineering and design industry is undergoing consolidation,
particularly in the United States. As a result, we will compete against several
larger companies that have the ability to offer more diverse services to a wider
client base. These competitive forces could have a material adverse effect on
our business, financial condition and results of operations.
Our international operations are subject to a number of risks that could
adversely affect the results from these operations and our overall business.
As a worldwide provider of engineering services, we have operations in over
40 countries and derive approximately 10% of our revenues from international
operations. International business is subject to the customary risks associated
with international transactions, including political risks, local laws and
taxes, the potential imposition of trade or currency exchange restrictions,
tariff increases and difficulties or delays in collecting accounts receivable.
Weak foreign economies and/or a weakening of foreign currencies against the U.S.
dollar could have a material adverse effect on our business, financial condition
and results of operations.
Additional acquisitions may adversely affect our ability to manage our business.
Historically, we have completed numerous acquisitions and, in implementing
our business strategy, we may continue to do so in the future. We cannot assure
you that we will identify, finance and complete additional suitable acquisitions
on acceptable terms. We may not successfully integrate future acquisitions. Any
acquisitions may require substantial attention from our management, which may
limit the amount of time that management can devote to day-to-day operations.
Also, future acquisitions could have an adverse effect on us. Our inability to
find additional attractive acquisition candidates or to effectively manage the
integration of any businesses acquired in the future could adversely affect our
business, financial condition and results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number Exhibit
------------- -------
10.1 Employment Agreement, dated November 19, 1999,
between URS Corporation and David C. Nelson.
FILED HEREWITH.
27 Financial Data Schedule (electronic filing only)
(b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated September 12, 2000 URS CORPORATION
/s/ Kent Ainsworth
--------------------------------------------
Kent P. Ainsworth
Executive Vice President and Chief Financial
Officer (Principal Accounting Officer)
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INDEX TO EXHIBITS
Exhibit Sequentially
Number Exhibit Numbered Page
------ ------- -------------
10.1 Employment Agreement, dated November 19, 1999, 25
between URS Corporation and David C. Nelson.
FILED HEREWITH.
24
