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AS FILED ON AUGUST 23, 1999.
Registration Statement No. 333-74427
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
Under The Securities Act of 1933
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CH2M Hill Companies, Ltd.
(Exact name of registrant as specified in its charter)
Oregon 8711 93-0549963
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification Number)
incorporation or Classification Code
organization) Number)
6060 South Willow Drive,
Greenwood Village, CO 80111-5142
(303) 771-0900
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
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Samuel H. Iapalucci
CH2M HILL Companies, Ltd.
6060 South Willow Drive
Greenwood Village, CO 80111-5142
(303) 771-0900
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copy to:
Francis R. Wheeler, Esq.
Mashenka Lundberg, Esq.
Holme Roberts & Owen LLP
1700 Lincoln Street
Denver, CO 80203
(303) 861-7000
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective and from time
to time thereafter.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until this Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and will be amended and +
+completed. A registration statement relating to the common stock has been +
+filed with the Securities and Exchange Commission and we may not sell these +
+securities until the registration statement becomes effective. This +
+prospectus is not an offer to sell these securities and it is not soliciting +
+an offer to buy these securities in any jurisdiction where the offer or sale +
+is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS Subject to Completion, Dated August 23, 1999
[LOGO OF CH2M HILL APPEARS HERE]
23,865,730 Shares of Common Stock
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CH2M HILL Companies, Ltd. and its shareholders are offering up to 23,865,730
shares of common stock, including:
. Up to 2,000,000 shares that CH2M HILL may offer to its employees directly
or through its internal market
. Up to 2,000,000 shares that CH2M HILL may offer to its employees through
our employee benefit plans
. Up to 1,408,490 shares that officers and directors may offer through the
internal market
. Up to 16,457,240 shares that other shareholders may offer through the
internal market
. Up to 2,000,000 shares that our employee benefit plans may offer through
the internal market
This offering of common stock is designed to allow trading of the common
stock among CH2M HILL employees, directors, consultants and employee benefit
plans up to four times each year on the internal market. No exchange will list
the common stock. For more details on how the internal market will function,
see "Internal Market Information" beginning on page 6.
All of the shares being offered for sale by this prospectus will be sold
through the internal market at the price set by the Board of Directors from
time to time. Effective for the year 1999, the price for the common stock is
$4.31 per share.
-----------
Investing in the common stock involves risks. See "Risk Factors" beginning on
page 3.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
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Prospectus dated , 1999
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TABLE OF CONTENTS
<TABLE>
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PAGE
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 3
Securities Offered by this Prospectus.................................... 6
Internal Market Information.............................................. 6
Use of Proceeds.......................................................... 13
Dividend Policy.......................................................... 13
Dilution................................................................. 13
Selected Financial Data.................................................. 14
Business................................................................. 15
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 22
Employee Benefit Plans and Direct Stock Purchases........................ 33
Management............................................................... 55
Executive Compensation................................................... 57
Security Ownership of Certain Beneficial Owners and Management........... 59
Related Transaction...................................................... 60
Policy Related to Affiliated Transactions................................ 60
Securities Offered by the Current Shareholders........................... 61
Description of Capital Stock............................................. 62
Shares Eligible for Future Sale.......................................... 66
Validity of Common Stock................................................. 66
Experts.................................................................. 66
Available Information.................................................... 67
Index to Consolidated Financial Statements............................... F-1
</TABLE>
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ii
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
Before investing in the common stock, you should read the entire prospectus
carefully, including the "Risk Factors" section and the financial statements
and the notes to those statements. The information in this prospectus,
including number of shares and share prices, has been adjusted to reflect the
conversion of each outstanding share of Class A preferred stock into one share
of common stock and a ten-for-one stock split of the common stock.
General
CH2M HILL, an Oregon corporation founded in 1946, provides engineering,
consulting, design, construction, procurement, operations, maintenance, and
project management services to our clients in the public and private sectors.
We provide services to our domestic and foreign clients through three operating
segments:
. Environmental, Energy and Infrastructure
. Water
. Industrial
For the year ended December 31, 1998, CH2M HILL had gross revenues of
approximately $935 million.
Environmental, Energy and Infrastructure consists of two businesses:
Environmental, Nuclear, Energy & Systems and Transportation. The Environmental,
Nuclear, Energy & Systems business provides integrated environmental and waste
management consulting and engineering services, and performs design and build,
remediation, construction and implementation of infrastructure and
telecommunications systems for a variety of public and private clients. The
Transportation business provides planning, siting, permitting, design, program
and construction management, transportation management and consulting services
for aviation, ports, highways, bridges and transit systems.
Water consists of two businesses: Water & Wastewater and Operations &
Maintenance. The Water & Wastewater business focuses on the planning, design,
construction and implementation of water supply systems and wastewater
treatment facilities. The Operations & Maintenance business provides services
to water and wastewater operators, including startup, performance testing,
facility operations, maintenance and management.
Industrial provides design, construction, specialized precision
manufacturing support and facility services to high-technology manufacturing
companies, food and beverage processing businesses and fine chemical and
pharmaceutical manufacturers.
Business Strategy
CH2M HILL is seeking to grow through increasing market share in each of our
operating segments both domestically and internationally. The key elements of
our strategy include:
. Increasing the number and the dollar value of our contracts
. Expanding and diversifying our client base
. Increasing the number of large, longer-term projects with the potential
for higher profit margins
. Encouraging ownership in our common stock across a greater proportion of
our workforce
Expansion of Common Stock Ownership
Historically, our key employee policy has restricted ownership of common
stock to persons known as "key employees," and to employee benefit trusts.
Employees were selected for key employee status by existing key employees on
the basis of various objective and subjective criteria. To expand our ownership
base beyond "key employees," the Board of Directors decided to establish a new
ownership program as a replacement for the key employee policy. The main goals
of the new program are:
. Establishing an internal market to enable shareholders to buy and sell
common stock
1
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. Expanding the opportunity for common stock ownership to include all
eligible employees, directors and consultants
. Adopting new and amending existing employee benefit plans to encourage
employees to invest in common stock
Operation of the Internal Market
Through the internal market, any eligible shareholder may offer shares of
common stock for sale to eligible buyers up to four times each year on pre-
determined trade dates. Our 401(k) plan, employee stock plan, stock option
plan, payroll deduction stock purchase plan and trusts holding common stock for
the benefit of the employees may also participate in these trades. Shares will
be bought and sold through the internal market at a price determined by the
Board of Directors that is intended to represent fair market value. The stock
price is determined by the Board of Directors based upon our after-tax profits,
otherwise referred to as net income, and shareholders' equity as well as a
subjective analysis of market factors the Board of Directors considers
relevant. CH2M HILL may purchase or sell shares of common stock on the internal
market on any trade date to balance the supply and demand for common stock
between sellers and buyers, but we will not be obligated to do so.
Principal Executive Offices
Our principal executive offices are located at 6060 South Willow Drive,
Greenwood Village, Colorado 80111-5142. Our telephone number is (303) 771-0900.
2
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RISK FACTORS
You should carefully consider the following factors and other information
contained in this prospectus before deciding to invest in our common stock.
Government Contracts Present Risks of Termination for Convenience, Adjustment
of Payments Received, Restrictions on Ability to Compete for Government Work
and Funding Constraints
In 1998, we derived approximately 63% of our total revenues from contracts
with federal, state, local and foreign government agencies. In addition, we own
equity interests in joint ventures with revenues attributable primarily or
entirely to contracts with governmental clients. The following risks are
inherent in government contracts:
. Because federal law and some state laws permit government agencies to
terminate a contract for convenience, our governmental clients may
terminate or decide not to renew our contracts with little or no prior
notice.
. Federal governmental clients may audit contract payments we receive for
several years after these payments are made. Based on these audits, the
clients may adjust or demand repayment of payments we previously
received. Audits have been completed on our federal contracts through
December 31, 1994 and are continuing for subsequent periods. None of the
audits performed to date on our federal contracts have resulted in any
significant adjustments to our financial statements. We believe, on the
basis of the information that we currently have about the ongoing audits,
that the ongoing audits will not result in material adjustments to our
financial statements. However, we cannot be sure that an audit in the
future will not result in a material adjustment to our financial
statements.
. Federal government contract regulations provide that any company
convicted of a crime or indicted on a violation of statutes related to
federal contracting may lose its right to receive future contract awards
or extensions. To our knowledge, we are not currently subject to any
investigation that may affect our ability to compete for federal
government work.
. Our ability to earn revenues from our existing and future government
projects will depend upon the availability of funding from various
federal, state, local and foreign government agencies and private sector
clients. We cannot control whether those clients will fund or continue
funding our outstanding projects.
Our ability to secure new government contracts and our revenues from
existing government contracts could be adversely affected by any one or a
combination of the factors listed above. In addition, if Kaiser-Hill Company,
LLC, a joint venture in which we own a 50% equity interest, fails to extend its
contract with the Department of Energy, this failure could adversely affect our
operating income.
We Could Sustain Losses on Our Fixed Price Contracts If Our Costs Exceed the
Fixed Price
Under "fixed price" contracts, we estimate the costs of the project and
agree to deliver the project for a definite, predetermined payment regardless
of our actual costs incurred over the life of the project. Many fixed price
contracts involve large industrial facilities and public infrastructure
projects and present the risk that our costs to complete a project may exceed
the fixed price agreed to with the client. The fixed payments negotiated for
such projects may not cover our actual costs and desired profit margins for
such projects. If our actual costs for a fixed price project are higher than we
expect, our profit margins on the project will be reduced or we could suffer a
loss on the affected project.
A Reduction in the Scope of Environmental Regulations or Changes in Government
Policies Could Adversely Affect Our Revenues
A substantial portion of our business is generated either directly or
indirectly as a result of federal, state, local and foreign laws and
regulations related to environmental matters.
3
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Changes in environmental regulations could affect our business more
significantly than they would affect some other engineering firms. Accordingly,
a reduction in the number or scope of these laws and regulations, or changes in
government policies regarding the funding, implementation or enforcement of
such laws and regulations, could significantly reduce the size of one of our
most important markets and limit our opportunities for growth or reduce our
revenues below their current levels. In addition, any significant effort by
government agencies to reduce the role of private contractors in regulatory
programs, including environmental compliance projects, could have the same
adverse effects.
Our Environmental Remediation Work May Expose Us to Environmental Liability
We could become subject to liabilities or fines for our environmental
activities. The assessment, analysis, remediation, handling, management, and
disposal of hazardous substances compose a significant portion of our business
and involve significant risks, including the possibility of property damages,
personal injuries, fines and penalties and other regulatory action. Civil and
criminal liabilities and liabilities to clients and third parties for
environmental violations and damages can be very large. Although we have never
been subject to any significant fines relating to environmental matters, it is
possible that we could be subject to substantial fines or liabilities in the
future. In that case, the fines could reduce our net income, or cause a loss,
and other penalties could adversely affect our ability to compete for new
business in the future.
Our Projects May Result in Liability for Faulty Engineering Services
Because our projects are often large and can affect many people, our
failure to make judgments and recommendations in accordance with applicable
professional standards could result in disproportionately large damages and,
perhaps, punitive damages. Our engineering practices involve professional
judgments regarding the planning, design, development, construction, operation
and management of industrial facilities and public infrastructure projects.
Although we have adopted a range of insurance, risk management and avoidance
programs designed to reduce potential liabilities, there can be no assurance
that such programs will protect us fully from all risks and liabilities.
Absence of a Public Market May Prevent You from Selling Your Stock and Cause
You to Lose All or Part of Your Investment
There is no public market for our common stock. While we intend the
internal market to provide liquidity to shareholders, there can be no assurance
that there will be enough orders to purchase shares to permit shareholders to
resell their shares on the internal market, or that a regular trading market
will develop or be sustained in the future. The price in effect on any trade
date may not be attractive enough to both buyers and sellers to result in a
balanced market because the price will be fixed in advance by the Board of
Directors, using their judgment of the fair market value of the common stock,
and not by actual market trading activity. Moreover, although CH2M HILL may
enter the internal market as a buyer of common stock if there are more sell
orders than buy orders, we have no obligation to engage in internal market
transactions and will not guarantee market liquidity. Consequently,
insufficient buyer demand could cause sell orders to be prorated, or could
prevent the internal market from opening on any particular trade date.
Insufficient buyer demand could cause shareholders to suffer a total loss of
investment or substantial delay in their ability to sell their common stock. No
assurance can be given that shareholders desiring to sell all or a portion of
their shares of common stock will be able to do so. Accordingly, the purchase
of common stock is suitable for you only if you have limited need for liquidity
in your investment.
Investors in the Offering Will Experience Immediate and Substantial Dilution
The initial offering price per share of common stock exceeds CH2M HILL's
net tangible book value per share. Accordingly, the purchasers of shares sold
in the offering will experience immediate and substantial dilution. At the
stock price in effect for 1999 of $4.31 per share, based on our net tangible
book value per share of $2.60 as of December 31, 1998, new investors will
experience immediate dilution of $1.52 per share, or 35.3%.
4
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Transfer Restrictions on the Common Stock Could Prevent You from Selling Your
Stock and Cause You to Lose All or Part of Your Investment
The transfer restrictions applicable to the common stock could cause you to
lose all or part of your investment. Since all of the shares of common stock
will be subject to transfer restrictions, you will generally only be able to
sell your stock on one of the four trade dates for the internal market in each
year. Unlike shares that are actively traded in the public markets, you may not
be able to sell at a particular time even though you would like to. The stock
price could decline between the time you want to sell and the time you become
able to sell.
The Offering Price Is Determined by the Board of Directors' Judgment of Fair
Market Value and Not by Market Trading Activity
The offering price is, and subsequent offering prices at each trade date
will be, established by the Board of Directors approximately 30 days before the
trade date. In establishing the price, the Board will take into consideration
the factors which are described in the section of this prospectus called
"Internal Market Information." However, since the Board of Directors will set
the offering price in advance of the trade date, market trading activity on any
given trade date can not affect the price on that trade date. This is a risk to
you because our stock price will not change to reflect supply of and demand for
shares on a given trade date as it would in a public market. You may not be
able to sell shares or you may have to sell your shares at a price that is
lower than the price that would prevail if the internal market price could
change on a given trade date to reflect supply and demand. Our Board of
Directors intends the formula to result in offering prices for the common stock
that represent fair market value. The formula is subject to change at the
discretion of the Board of Directors.
The Limited Market and Transfer Restrictions on the Common Stock Will Likely
Have Anti-Takeover Effects
Only CH2M HILL employees, directors, consultants and employee benefit plans
may own CH2M HILL common stock and participate in the internal market. In
addition, we have imposed significant restrictions on the transfer of our
common stock other than through sales on the internal market. These limitations
make it extremely difficult for a potential acquirer who does not have the
prior consent of our Board of Directors to acquire control of our company,
regardless of the price per share the acquirer were willing to pay and whether
or not shareholders were willing to sell at that price. As a result, it is
unlikely that a hostile bidder would try to take control of our company.
Actual Results May Differ From Results Discussed in Forward-Looking Statements
This prospectus contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ significantly from the results
discussed in the forward-looking statements. Factors that might cause such
differences include, but are not limited to:
. the continuance of and funding for certain governmental regulation and
enforcement programs which create demand for our services
. our ability to attract, finance and perform large, longer-term projects
. our ability to insure against or otherwise cover the liability risks
inherent in our business, including environmental liabilities and
professional engineering liabilities
. our ability to manage the risks inherent in the government contracting
business
. our ability to manage the costs associated with our fixed-price contracts
. our ability to attract and retain professional personnel
. general economic conditions
5
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SECURITIES OFFERED BY THIS PROSPECTUS
The shares of common stock offered by CH2M HILL may be offered to present
and future employees, including executive officers, directors and consultants,
of CH2M HILL through the internal market or through the employee benefit plans
listed below and summarized in the section of this Prospectus called "Employee
Benefit Plans."
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CH2M HILL EMPLOYEE BENEFIT PLANS
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. Retirement and Tax-Deferred Savings Plan (401(k) Plan)
. Employee Stock Plan
. Stock Option Plan
. Stock Purchase Plan
. Pre-Tax and After-Tax Deferred Compensation Plans
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This offering of common stock is not intended to raise capital for CH2M
HILL. CH2M HILL will offer common stock to its employees through bonuses,
through the various employee benefit plans and, if necessary, in case of an
over-subscribed market, as described in the section called "Internal Market
Information."
Officers, including officers who are also directors, may sell up to an
aggregate of 1,408,490 shares of common stock through the internal market.
Other employees of CH2M HILL may sell up to an aggregate of 16,457,240 shares
of common stock on the internal market. We do not know whether these officers
and other employees will offer or sell some, none or all of such shares. The
shares offered by officers and other employees may include shares they hold
directly and also shares they hold indirectly through the employee benefit
plans summarized below. The officers and other employees will not be treated
more favorably than other shareholders participating on the internal market.
Pursuant to our Restated Bylaws, all shares of common stock are subject to
CH2M HILL's repurchase right, right of first refusal and other restrictions on
transferability.
INTERNAL MARKET INFORMATION
General
This section contains a summary of the material provisions of:
. Our key employee policy
. The transition from the key employee policy to the internal market
. How the internal market will work
We encourage you to read the entire key employee policy and the internal market
rules, which are attached as exhibits to the registration statement filed with
the Securities and Exchange Commission.
Until this offering, our principal policy on stock ownership has been our
key employee policy, which restricted ownership of the common stock to persons
referred to as "key employees."
As of July 31, 1999, approximately 1,000 key employees held common stock. To
expand our ownership base beyond key employees, the Board of Directors decided
to establish a new ownership program as a replacement for the key employee
policy. The main goals of the new program are:
. Establishing an internal market to enable shareholders to buy and sell
common stock
. Expanding the opportunity for common stock ownership to include all
eligible employees, directors and consultants
. Adopting new and amending existing employee benefit plans to encourage
employees to invest in common stock
6
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Our Existing Shareholders Received Common Stock Under Key Employee Policy
Under the key employee policy, existing key employees voted to select new
key employees recommended by the Board of Directors. To earn the recommendation
of the Board of Directors to become a key employee, an employee generally had
to work for CH2M HILL for four or more years, receive consistent high job
performance evaluations and be deemed critical to the success of CH2M HILL.
Designation as a key employee qualified an individual to receive bonuses in the
form of stock and cash. Each year we granted bonuses expressed in dollar
amounts, but paid in shares of common stock and cash, to selected key employees
based on job performance and position. Upon a key employee's termination or
retirement, we repurchased his or her shares at a price calculated according to
a formula established annually by the Board of Directors.
Under the old formula, the market value of a share of common stock was
equal to the sum of present book value ("PBV") and the present going concern
value ("PGCV") divided by the number of outstanding shares of stock ("CS").
Old Formula Price = (PBV + PGCV)/CS
"PBV" was the total audited book value of CH2M HILL at the end of the most
recent fiscal year, prior to giving effect to the issuance of bonuses for the
most recent fiscal year. Nonrecurring or unusual transactions could be excluded
from the calculation at the discretion of the Board of Directors.
"PGCV" was 1.5 times the previous five fiscal year rolling average of net
income. Net income was defined as the net income on an accrual basis according
to our audited financial statements, after the deduction of all costs but
before the deduction of bonuses and income taxes. Nonrecurring or unusual
transactions could be excluded from the calculation at the discretion of the
Board of Directors.
As of July 31, 1999, approximately 1,000 key employees and the employee
benefit plan trusts held 30,044,020 shares of common stock.
4.69% = Executive officers and employee directors
1,408,490 shares
54.75% = Other key employees, 16,450,840 shares
40.56% = Employee benefit plan trusts, 12,187,430 shares
Transition from the Key Employee Policy to the Internal Market
In connection with establishing a new ownership program, on November 6,
1998, the Board of Directors terminated the key employee policy and established
the internal market, effective on the date that the contingencies described
below are satisfied, and adopted the 1999 Stock Option Plan. Our shareholders
approved these actions of the Board of Directors during the key employee vote
on December 18, 1998. The Board of Directors will approve the final terms of
all of the other benefit plans before any common stock is sold under this
prospectus.
These actions by the Board of Directors, however, remain subject to the
effectiveness of the registration statement and to the rules and regulations of
the Securities and Exchange Commission and the securities commissions of a
sufficient number of states so that the internal market can function
efficiently, as determined by the Board of Directors in its discretion. The
Board of Directors intends to review the status of these contingencies at its
November 1999 meeting and determine at that time whether to proceed with the
internal market offering. Once these contingencies have been satisfied, the old
formula will no longer be in effect and the key employee policy will not govern
new transactions in the common stock. The conversion of the Class A preferred
stock and the ten-for-one split of the common stock would then be given effect
prior to the first trade date.
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How the Internal Market Works
The internal market will permit shareholders, eligible employees and the
benefit plans to buy and sell shares of common stock up to four times each year
on predetermined trade dates.
Authorized Buyers. All sales of common stock on the internal market will be
restricted to the following authorized buyers:
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Authorized Buyers of Common Stock
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. Employees, directors and consultants of CH2M HILL
. Trustees of the 401(k) Plan
. Trustees of the Employee Stock
Plan
. Trustees of the Deferred Compensation Plans
. Administrator of the Payroll Deduction Stock Purchase Plan
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Limitations on the number of shares which an individual may purchase may be
imposed when there are more buy orders than sell orders for a particular trade
date.
Broker. We established and will manage the internal market through a
broker, initially Buck Investment Services, Inc., which will act upon
instructions from the buyers and sellers. Buck Investment Services, Inc. is not
affiliated with CH2M HILL. Individual stock ownership account records will be
maintained by the broker. Subsequent to determination of the applicable stock
price for use on the next trade date, and at approximately fifteen days prior
to such trade date, we will advise all employees and directors as to the new
stock price and the next trade date, inquiring whether such individuals wish to
purchase or sell shares on the internal market and advising them on how to
deliver written buy and sell orders approximately five days prior to such trade
date.
CH2M HILL May Purchase Shares if Market is Under-Subscribed. CH2M HILL may,
but is not obligated to, purchase shares of common stock on the internal market
on any trade date at the price in effect on that trade date, but only to the
extent that the number of shares offered for sale by shareholders exceeds the
number of shares sought to be purchased by authorized buyers. CH2M HILL will
consider a variety of factors including, but not limited to, CH2M HILL's cash
position, financial performance and number of shares outstanding in making the
determination of whether to participate in an under-subscribed market.
If the aggregate number of shares offered for sale on the internal market
on any trade date is greater than the number of shares sought to be purchased,
shareholder offers to sell will be accepted as follows:
. If enough orders to buy are received to purchase all the shares offered
by each seller selling fewer than 500 shares and at least 500 shares from
each other seller, then all sell orders will be accepted up to the first
500 shares and the portion of any sell orders exceeding 500 shares will
be accepted on a pro-rata basis.
. If not enough orders to buy are received to purchase all the shares
offered by each seller selling fewer than 500 shares and at least 500
shares from each other seller, then the purchase orders will be allocated
equally to each seller.
CH2M HILL May Sell Shares if Market is Over-Subscribed. To the extent that
the aggregate number of shares sought to be purchased exceeds the aggregate
number of shares offered for sale, CH2M HILL may, but is not obligated to, sell
treasury shares or authorized but unissued shares of common stock on the
internal market on any trade date at the price in effect on that trade date to
satisfy purchase demands. CH2M HILL will consider a variety of factors
including, but not limited to, CH2M HILL's cash position, financial performance
and number of shares outstanding in making the determination of whether to
participate in an over-subscribed market.
If the aggregate purchase orders exceed the number of shares available for
sale, the following prospective purchasers will have priority, in the order
listed:
. Administrator of the Payroll Deduction Stock Purchase Plan
8
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. Trustees of the 401(k) Plan
. Trustees of the Employee Stock Plan
. Individual employees and directors on a pro rata basis which includes
purchases through the pre-tax and after-tax deferred compensation plans
Sellers Pay Sales Commission. All sellers on the internal market, other
than CH2M HILL and the employee benefit plans, will pay the broker, initially
Buck Investment Services, Inc., a commission equal to 2% of the proceeds from
such sales. No commission is paid by buyers on the internal market.
Stock Price Determined by Board of Directors. The Board of Directors will
determine the price, which is intended to be the fair market value, of the
shares of common stock on each trade date pursuant to the formula and valuation
process described below. The price per share of common stock is as follows:
Share Price = [(7.8 x M x P) + (SE)]/CS
In order to determine the fair market value of the stock in the absence of
a public trading market, the Board of Directors felt it appropriate to develop
a formula to use as a tool to determine a price that would be within a fair
market value range. In determining the fair market value stock price, the Board
believes that the use of a formula incorporating a going concern component
(i.e., net income, which we call profit after tax) and a book value component
(i.e., total shareholders' equity) is important. The Board of Directors
believes that the process CH2M HILL has developed reflects modern equity
valuation techniques and is based on those factors that are generally used in
the valuation of equity securities.
The constant 7.8 is a multiple necessary for the stock price derived by the
new formula to approximate our historical estimate of the fair market value of
the common stock as derived by the old formula. The 7.8 constant is the factor
required to derive a fair market value stock price using an "M" factor of 1.0
at the beginning of the internal market.
"M" is the market factor, which is subjectively determined in the sole
discretion of the Board of Directors. In determining the market factor, the
Board of Directors will take into account factors the directors consider to be
relevant in determining the fair market value of the common stock, including:
. the market for publicly traded equity securities of companies comparable
to CH2M HILL
. the merger and acquisition market for companies comparable to CH2M HILL
. the prospects for CH2M HILL's future performance
. general economic conditions
. general capital market conditions
. other factors the Board of Directors deems appropriate
CH2M HILL believes that starting the internal market program with a market
factor equal to 1.0 will make it easier for shareholders to understand future
changes, if any, to the market factor.
In setting the market factor, The Board of Directors may take into account
the company appraisal information obtained by the trustees of the benefit
plans. The existence of an over-subscribed or under-subscribed market on any
given trade date will not affect the stock price on that trade date. However,
the Board of Directors, when determining the stock price for a future trade
date, may take into account the fact that there have been under-subscribed or
over-subscribed markets on prior trade dates.
The Board has not assigned predetermined weights to the various factors it
may consider in determining the market factor. A market factor greater than one
would increase the price per share and a market factor less than one would
decrease the price per share.
In its discretion, the Board of Directors may change, from time to time,
the market factor component of the formula price. The Board of Directors could
change the market factor, for example, following a change in general market
9
<PAGE>
conditions that either increased or decreased stock market equity values
generally, if the Board of Directors felt that the market change were
appropriately applicable to the common stock as well. The Board of Directors
will not make any other change in the method of determining the price per share
of common stock unless in the good faith exercise of its fiduciary duties and,
if appropriate, after consultation with its professional advisors, the Board of
Directors determines that the method for determining the price per share of
common stock no longer results in a stock price that reasonably reflects the
fair market value of CH2M HILL on a per share basis.
"P" is profit after tax, otherwise referred to as net income, for the four
fiscal quarters immediately preceding the trade date. Nonrecurring or unusual
transactions could be excluded from the calculation at the discretion of the
Board of Directors. Nonrecurring or unusual transactions are unforeseen
developments that the market would not generally take into account in valuing
an equity security. A change in accounting rules, for example, could increase
or decrease net income without changing the fair market value of the common
stock. Similarly, such a change could fail to have an immediate impact on the
value of the common stock, but still have an impact on the value of the common
stock over time. As a result, the Board of Directors feels that in order to
determine the fair market value of the common stock, it needs the ability to
review unusual events that affect net income.
"SE" is total shareholders' equity, which includes intangible items, as set
forth on CH2M HILL's most recently available quarterly or annual financial
statements. Nonrecurring or unusual transactions could be excluded from the
calculation at the discretion of the Board of Directors.
"CS" is the weighted average number of shares of common stock outstanding
during the four fiscal quarters immediately preceding the trade date,
calculated on a fully diluted basis. By "fully diluted" we mean that the
calculations are made as if all outstanding options to purchase common stock
had been exercised and as if other "dilutive" securities were converted into
shares of common stock.
Under the new formula, and as demonstrated by the following calculation,
the price per share of common stock would have been $4.30 per share based on a
market factor of 1.0 on January 1, 1999. As of December 31, 1998, we had
cumulative profit after tax (P) of $5,812,000 and total shareholders' equity of
$75,132,000.
[(7.8X1.0X$5,812,000)+($75,132,000)]
------------------------------=$4.30
28,025,490
Under the old formula, the price for the common stock for 1999 is $4.31, as
determined by our Board of Directors.
Following a determination by our Board of Directors at their November 1999
meeting to put the internal market into effect, commencing in the first quarter
of 2000, the stock price will be reviewed by the Board of Directors up to four
times each year. This review will be made in conjunction with Board of
Directors meetings, currently scheduled for February, May, August and November.
The Board of Directors believes that the valuation process described above will
result in a stock price that will reasonably reflect the fair market value of
CH2M HILL on a per share basis.
10
<PAGE>
Quarterly Trade Timeline
<TABLE>
<CAPTION>
Trade Date Set Confirmations
Fiscal Quarter Board of and Buy/Sell Buy/Sell Orders and Checks
Ends Directors Meets Orders Solicited Due to Broker TRADE DATE Mailed
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
Approximately Approximately Approximately Approximately Buy/Sell Approximately
75 Days 30 Days 15 Days 5 Days Before Orders 5 Days After
Before Trade Before Trade Before Trade Trade Date Effective Trade Date
Date Date Date
</TABLE>
We intend to publish the current stock price and upcoming trade date prior
to each trade date to all participants in the internal market through internal
communications, including bulletins, electronic mail communications or mailed
reports. Trade dates are expected to occur approximately 75 days after the end
of each fiscal quarter.
We will also distribute our audited annual financial statements to all
shareholders, as well as other employees, and to participants in the internal
market through the employee benefit plans. Such information will be distributed
at the same time as our annual reports, proxy information and solicitations are
distributed for voting instructions from shareholders and participants in the
employee benefit plans each year.
Price Range of Common Stock
Because the common stock has not been publicly traded, there has not been
any historical market-determined price. However, the Board of Directors has
periodically determined the price of the common stock for purposes of awards of
common stock made pursuant to the key employee policy.
The price per share figures shown below for 1989 through 1999 are the stock
prices established by the Board of Directors pursuant to the old formula for
purposes of transactions under the key employee policy and employee benefit
plans. There can be no assurance that the common stock will, in the future,
provide returns comparable to historical returns.
The stock prices have been adjusted to reflect the ten-for-one stock split
that will be implemented in conjunction with the implementation of the internal
market.
Because of the change from the old formula to the new formula for
determining the price, the historical prices for the common stock are not
directly comparable to the stock prices that will be determined under the new
formula. Since the determination of the price includes market analyses that are
applied by the Board at the time of making its determinations, we do not know
what the historical prices for the common stock would have been under the new
formula.
11
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------
Price Per
Share % Increase
Date (Old Formula) (Decrease)
- ----------------------------------------------
<S> <C> <C>
1989 $2.05 --%
1990 2.25 9.8
1991 2.52 12.0
1992 2.77 9.9
1993 2.99 7.9
1994 2.95 (1.3) [line graph appears here]
1995 3.07 4.1
1996 3.31 7.8
1997 3.59 8.5
1998 3.82 6.4
1999 4.31 12.8
- ----------------------------------------------
</TABLE>
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USE OF PROCEEDS
The shares of common stock which may be offered by CH2M HILL are
principally being offered to permit the acquisition of shares by the employee
benefit plans as described herein and to permit CH2M HILL to offer shares of
common stock on the internal market if necessary because there are more buy
orders than sell orders on a trade date. We do not intend or expect this
offering to raise significant capital. Any net proceeds received by CH2M HILL
from the sale of the common stock offered, after paying expenses of the
offering, will be added to our general funds and used for working capital and
general corporate purposes. It is anticipated that the majority of the sales of
common stock on the internal market will be made by shareholders and the
employee benefit plans. All shareholders other than CH2M HILL and the employee
benefit plans will pay a commission equal to 2% of the proceeds of the sale of
any shares of common stock. The commission will be used by the broker to defray
the costs of establishing and maintaining the internal market.
DIVIDEND POLICY
We do not currently anticipate paying any cash dividends on the common
stock and intend to retain any future earnings to finance the growth and
development of our business.
DILUTION
The tangible book value of CH2M HILL on December 31, 1998 was $72,946,000
or $2.60 per share. Tangible book value per share represents the amount of
total tangible assets less total liabilities, divided by the shares of common
stock then outstanding. Total common stock outstanding at December 31, 1998 was
28,025,940 shares. As the following table demonstrates, after giving effect to
the sale of 4,000,000 shares of common stock by CH2M HILL in the offering at a
price per share of common stock of $4.31, and after deducting anticipated
expenses that had not been paid as of December 31, 1998, the pro forma book
value of the common stock on December 31, 1998 would have been $89,363,921 or
$2.79 per share, representing an immediate dilution of $1.52 per share to new
investors purchasing shares of common stock at the price per share of common
stock. "Dilution per share" represents the difference between the price per
share to be paid by new investors for shares issued in this offering and the
net pro forma book value per share as of December 31, 1998.
<TABLE>
<S> <C> <C>
Price per share of common stock..................................... $4.31
Net tangible book value per share before the offering............. $2.60
Increase per share attributable to new investors.................. 0.19
-----
Pro forma net tangible book value per share after the offering...... 2.79
-----
Dilution per share to new investors................................. $1.52
=====
</TABLE>
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SELECTED FINANCIAL DATA
The following table presents selected historical financial data derived
from the Consolidated Financial Statements of CH2M HILL, which have been
reported on by Arthur Andersen LLP, independent public accountants, for each of
the last five years. During the periods presented, CH2M HILL paid no cash
dividends on its common stock. The following information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and
related notes thereto, included elsewhere in this prospectus.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Six Months Ended
Year Ended December 31, June 30,
(dollars in thousands
except per share data) 1994 1995 1996 1997 1998 1998 1999
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues................ $676,205 $804,614 $937,198 $917,578 $935,030 $452,120 $579,533
Operating income........ 10,030 12,699 13,444 13,946 14,802 7,926 11,234
Net income.............. 3,255 5,371 4,709 4,716 5,812 3,151 5,416
Net income per common
and preferred share
(basic and diluted)..... 0.11 0.19 0.17 0.17 0.21 0.11 0.19
Balance Sheet Data:
Total assets............ 224,541 304,136 309,364 311,117 298,325 297,069 356,105
Long-term debt including
current maturities..... 33,270 44,576 39,987 34,414 27,388 30,027 22,769
Total temporary
shareholder's equity... 49,753 56,171 58,130 62,303 75,132 67,409 87,130
- --------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
BUSINESS
Overview
CH2M HILL is a project delivery firm founded in 1946. We provide
engineering, consulting, design, construction, procurement, operations and
maintenance, and program and project management services to clients in the
private and public sector in the United States and abroad.
We are an employee-owned Oregon corporation with approximately 7,000
employees working in 65 offices throughout the United States and 33 offices
abroad.
Business Strategy
Our business strategy is to grow domestically and internationally through
increasing market share in each of our operating segments. The key elements of
this strategy are:
. Increasing the number and the dollar value of our contracts
. Expanding and diversifying our client base by attracting new private and
public sector clients and developing a diversified mix of projects
. Increasing the number of large, longer-term projects with the potential
for higher profit margins
. Encouraging ownership in our common stock across a greater proportion of
our workforce
Operating Segments
We provide services to our clients through three operating segments:
. Environmental, Energy and Infrastructure
. Water
. Industrial
Environmental, Energy and Infrastructure
Our Environmental, Energy and Infrastructure ("EE&I") operating segment
consists of two businesses: Environmental, Nuclear, Energy & Systems ("ENE&S")
and Transportation. These two businesses are described below.
EE&I's business strategy is to grow by increasing market share in each of
its two businesses, expanding its client base and obtaining large, longer-term
projects with the potential for higher profit margins. While maintaining its
focus on its traditional services, EE&I is expanding its expertise into related
industries such as telecommunications, and into related business concepts such
as "sustainable development." Sustainable development is a design approach
used, for example, in power plant design. Sustainable development addresses
environmental issues throughout the life of a project, from design and
construction to decommissioning. Sustainable development seeks to minimize
total environmental impact.
ENE&S. ENE&S provides integrated environmental and waste management
consulting and engineering services, and performs design and build,
remediation, construction and implementation of infrastructure and
telecommunications systems for a variety of public and private clients.
1. Environmental. Our Environmental group provides environmental consulting
for remedial construction projects, ecological and natural resource damage
assessments, strategic environmental management and permitting services,
environmental liability management services, site investigations, remedial
design, implementation and construction services, treatment systems for
hazardous, toxic and radioactive waste contaminated properties, and sustainable
development planning, design and construction services.
Representative Environmental projects include:
. Environmental consulting, engineering and remedial activities for the
U.S. Air Force Center for Environmental Excellence
. Remediation of contaminated sites on Naval and Marine Corps
installations in 26 domestic states and several foreign countries
. Program management and remedial design of a refinery for a large oil
company
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<PAGE>
. Environmental impact studies for a number of proposed industrial projects
and municipal programs on behalf of the Beijing city government in China
2. Nuclear. Our Nuclear group provides program management, integration,
engineering, construction and operations and maintenance services for the U.S.
Department of Energy and commercial nuclear power plants. We manage
decommissioning and closure of weapons production facilities and design nuclear
waste treatment and handling facilities in the United States, Western, Central
and Eastern Europe and the former Soviet Union.
Representative Nuclear projects include:
. Management and integration of decontamination, decommissioning, and
closure of the nuclear weapons production facility at Rocky Flats in
Golden, Colorado, on behalf of the U.S. Department of Energy
. Engineering, design and technical services to support decontamination,
decommissioning and remedial activities at the Department of Energy
Hanford Reservation in Richland, Washington
3. Energy. Our Energy group provides full lifecycle energy services for
power projects around the world. The Energy group's services range from design
to decommissioning, including consulting, engineering, design, construction,
operations and maintenance services.
Representative Energy projects include:
. Expert consulting on utility deregulation
. The design and construction of gas turbine energy systems
. The design and construction of energy efficiency upgrades
. Development of generation services in renewable energy
. Carbon and other greenhouse gasses management projects
4. Systems. For the communications industry, our Systems group provides
program management, planning, design, and construction management of local and
regional fiber optic and hybrid fiber/coaxial systems for voice, video and data
communications. In other markets, our Systems group develops and implements
environmental management information systems, and total energy management and
information technology systems. It provides military base operation services
for government agencies, and other outsourcing services for industrial and
government clients.
Representative Systems projects include:
. Program management, design and construction management of voice, video
and data networks for a large European telecommunications company in
Europe
. Design, implementation and on-going maintenance of a worldwide
environmental management information system in Detroit, Michigan
. Program management for the upgrade of a hybrid fiber/coaxial network for
voice, video and high-speed data services in several domestic cities
Transportation. Transportation provides planning, siting, permitting,
design, program and construction management, intermodal transportation planning
and consulting services for aviation, ports, highways, bridges and transit
systems.
Representative Transportation projects include:
. Master planning and program management for a large international airport
in the U.S., including terminal, financial and airport environmental
planning
. Developing lighting control systems for another large international
airport in the U.S., including touch-screen controls, runway incursion
protection and automatic safety measures
. Designing and providing project management and engineering services for
the expansion of a container shipping terminal in the Eastern U.S.,
including berths, wharf and cranes
. Seismic retrofit design of seven bridges along an interstate highway in
California
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<PAGE>
. Design of the Eastern Transportation Corridor for the Orange County,
California transportation authority including 27 miles of highway and 58
bridges
Water
Our Water operating segment consists of two businesses: Water & Wastewater
and Operations & Maintenance.
The business strategy of the Water operating segment is to grow through
increasing market share in each of its businesses, both domestically and
internationally, to diversify its client base, and to pursue larger projects.
We seek to attract new clients by leveraging our reputation for providing
quality services, and by taking advantage of the current trends for
outsourcing operations and maintenance activities to specialized service
providers.
Water & Wastewater. Our Water & Wastewater business focuses on the
planning, design, construction and implementation of water supply systems and
wastewater treatment facilities.
Representative Water & Wastewater projects include:
. Design of a water treatment plant and transmission pipelines in Las
Vegas, Nevada
. Design, construction and commissioning of a wastewater treatment facility
in Manakau, New Zealand
. Program management for design and construction of a deep tunnel sewage
project in the Republic of Singapore
. Design, construction and commissioning of a water treatment plant in
Halifax, Nova Scotia
Operations & Maintenance. Our Operations & Maintenance business provides
water, wastewater and public works operations and maintenance services to
water and wastewater facility operators, including startup and performance
testing, consulting, facility operations, on-going maintenance and management.
The facility management services include water and wastewater treatment,
collection, and distribution, equipment and process maintenance, and site
grounds maintenance.
Representative Operations & Maintenance projects include:
. Operations and maintenance of a water reclamation center in Fairfield,
California
. Operations of the wastewater facilities in Hoboken, New Jersey
. Operations of the wastewater plant for a large brewery in Jacarei, Brazil
Industrial
Our Industrial operating segment provides design, construction, specialized
precision manufacturing support and facility services support to high-
technology manufacturing companies, food and beverage processing businesses,
and fine chemical and pharmaceutical manufacturers.
The business strategy of the Industrial operating segment is to diversify
its client base beyond the microelectronics industry, capitalizing on a strong
professional reputation in project delivery of complex manufacturing
facilities and leadership in the area of single-source design, engineering and
construction of industrial manufacturing facilities.
The Industrial operating segment built its reputation primarily in the
microelectronics industry, where it provides a single source for a broad range
of integrated design and construction services. The Industrial segment's
clients typically require design and installation services for complex systems
that comprise many of their facilities, including clean rooms, ultrapure water
and wastewater treatment systems, chemical and gas systems, and production
tools.
Representative Industrial projects include:
. Design and construction services for the development of multiple domestic
and foreign production facilities for a large microelectronics
manufacturer
. Design and construction services for a soy sauce production facility in
California for a Japanese manufacturer
. Complete engineering and construction services for an ultrapure water
system for
17
<PAGE>
a multi-national pharmaceutical manufacturer
. Continuous facility engineering, maintenance and operations support
services for several microelectronics manufacturers under multi-year
contracts
Clients
Our clients include:
. Corporations in the energy, transportation, chemical, steel, aluminum,
mining, forest products, electronics, food, pharmaceuticals and
manufacturing industries in the United States and abroad
. The U.S. Agency for International Development, U.S. Department of
Defense, U.S. Department of Energy and U.S. Environmental Protection
Agency
. A variety of state and local government agencies in the United States and
abroad
Kaiser-Hill
In 1995, through Kaiser-Hill, we won the U.S. Department of Energy's
Performance Based Integrating Management Contract for the Rocky Flats Closure
Project in Golden, Colorado. Kaiser-Hill is a joint venture with ICF Kaiser
International, Inc. in which we hold a 50 percent interest. Rocky Flats is a
former U.S. Department of Energy nuclear weapons production facility. Under the
five-year contract, Kaiser-Hill oversees plutonium stabilization and storage,
environmental restoration, waste management, decontamination and
decommissioning, site safety and security, and construction activities of
subcontractor companies.
Under the performance-based contract signed by Kaiser-Hill, a concept that
was developed in the U.S. Department of Energy's 1994 Contract Reform
Initiative, 85% of Kaiser-Hill's fees are based on performance, while only 15%
are fixed. Kaiser-Hill's contract commits it to dealing with urgent risks
first. Achievement of measurable results in the following "urgent risk" areas
determines Kaiser-Hill's incentive fee: stabilize plutonium and plutonium
residues for specific time frames; consolidate plutonium in a single building;
and clean up and remove all high-risk "hot spot" contamination. The Rocky Flats
contract is scheduled to expire in June 2000. On July 30, 1999, the U.S.
Department of Energy announced that it will begin negotiations with Kaiser-Hill
on a contract extension through ultimate site closure scheduled for 2006. We
expect contract negotiations to be complete by the end of 1999.
Backlog
At December 31, 1998, our backlog was approximately $1,337 million,
compared to a backlog of approximately $966 million at December 31, 1997. We
define backlog as contracted task orders less previously recognized revenue on
such task orders. U.S. government agencies operate under annual fiscal
appropriations by Congress and fund various federal contracts only on an
incremental basis. The same is true of many state, local and foreign contracts.
Our ability to earn revenues from our backlog depends on the availability of
funding for various U.S., state, local and foreign government agencies.
Government Contracting
Overall, we received 16% of our revenues in 1998 from U.S. federal
government contracts. Typically, a federal contract has an initial term of one
year combined with two, three, or four one-year renewal periods, exercisable at
the discretion of the federal government. The government is not obligated to
exercise its option to renew a federal contract. At the expiration of the term
of a federal contract, the contract in its entirety is resubmitted for
competitive bids by all interested service providers. The government's failure
to renew, or the early termination of, any significant portion of our federal
contracts would adversely affect our business and prospects.
Contracts with the federal government and its prime contractors usually
contain standard provisions for termination at the convenience of the
government or such prime contractors. Upon such a termination, we are generally
entitled to recover costs incurred, settlement expenses and profit on work
completed prior to termination. Our federal contracts do not provide for
renegotiation of profits. Terminations of federal contracts may occur, and such
terminations could adversely affect our business and prospects.
18
<PAGE>
Federal contract payments we receive in excess of allowable direct and
indirect costs are subject to adjustment and repayment after audit by
government auditors. The U.S. government has completed audits on our incurred
contract costs through December 31, 1994, and audits are continuing for
subsequent periods.
As a U.S. government contractor, we are subject to federal regulations
under which our right to receive future awards of new federal contracts, or
extensions of existing federal contracts, may be unilaterally suspended or
barred if CH2M HILL is convicted of a crime or indicted based on allegations of
a violation of specific federal statutes. Suspensions, even if temporary, can
result in the loss of valuable contract awards for which we would otherwise be
eligible. While suspension and debarment actions may be limited to that
division or subsidiary of a company engaged in the improper activity,
government agencies have authority to impose debarment and suspension on
affiliated entities that were not involved in the improper activity. Any
suspension or debarment action against us or any of our affiliates could have a
material adverse impact upon our business and prospects.
Many similar regulations are also applicable to our contracts with state,
local and foreign governments.
Our Environmental Activities and Potential Liabilities
A substantial portion of our business has been generated either directly or
indirectly as a result of federal, state, local and foreign laws and programs
related to protection of the environment. Our environmental activities are
conducted in the context of a rapidly developing and changing statutory and
regulatory framework. Such activities are subject to regulation by a number of
federal agencies, including the U.S. Environmental Protection Agency ("EPA"),
the U.S. Nuclear Regulatory Commission and the U.S. Occupational Safety and
Health Administration, as well as similar state, local and foreign regulatory
agencies.
Several federal statutes govern our environmental activities. The
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA")
established the "superfund" program to clean up hazardous waste sites, and
provides for penalties and punitive damages for noncompliance with EPA orders.
CERCLA may impose strict liability (joint and several as well as individual) on
hazardous substance waste owners, operators, disposal arrangers, transporters
and disposal facility owners and operators (collectively, "Potentially
Responsible Parties" or "PRPs"). Liabilities under CERCLA may include payment
of the costs of removal or remedial action, for other necessary response costs,
for damages for injury, destruction or loss of natural resources, and for the
cost of health effects studies.
Although the liabilities imposed by environmental legislation are generally
intended to remedy and prohibit pollution by industrial companies, we could
face liability under environmental laws in some circumstances. Increasingly,
there are efforts to expand the reach of CERCLA to make environmental
contractors responsible for cleanup costs by claiming that environmental
contractors are owners or operators of hazardous waste facilities or that they
arranged for treatment, transportation, or disposal of hazardous substances.
Should we be held responsible under CERCLA for damages caused while performing
services or otherwise, CH2M HILL could be forced to bear such liability by
itself, if contribution or indemnification is not available from other parties.
The Resources Conservation and Recovery Act ("RCRA") governs hazardous
waste generation, treatment, transportation, storage, and disposal. RCRA, or
similar EPA-approved state programs, govern waste-handling activities involving
wastes classified as "hazardous." Substantial fees and penalties may be imposed
under RCRA and similar state statutes for any violation.
In addition to civil and criminal liabilities under environmental laws, we
could face liabilities to clients and other private parties for property
damage, personal injury and other claims. Such claims could arise in a number
of ways, including:
. An accidental release of pollutants during our performance of services
19
<PAGE>
. The inability of one of our remedial plans to contain or correct an
ongoing seepage or release of pollutants
. The inadvertent exacerbation by us of an existing contamination problem
. Reliance by others on reports or recommendations we prepare that turn
out to be incorrect
In the environmental field, personal injury claims may arise in connection
with our work while it is being done or long after completion of the project.
In addition, claimants may assert that we should be strictly liable for
performing environmental remediation services -- that is, liable for damages
even though our services may have been performed using reasonable care -- on
the grounds that such services involve "abnormally dangerous activities."
Our Contractual Obligations and Potential Liabilities
We operate under a number of different types of contracts with our private
and public sector clients, including cost reimbursement contracts, time-and-
materials contracts, and fixed price contracts. The most common type is the
fixed price contract, which accounted for 36.1% of our revenues in 1998. Under
fixed price contracts, we are paid a predetermined amount for all services
provided as determined at the project's inception. Under time-and-materials
contracts, we are paid at a specified fixed hourly rate for direct labor hours
worked. Under cost reimbursement contracts, our costs are reimbursed, often
with a negotiated cost ceiling and also with an incentive fee to provide
inducement for effective project management. We assume the greatest financial
risk on fixed price contracts because we assume the risk of performing those
contracts at the stipulated prices regardless of actual costs incurred. We
also incur some financial risks under time-and-materials contracts because we
contract to complete the work at negotiated hourly rates. The failure to
accurately estimate ultimate costs or to control costs during performance of
the work could result in losses or reduced anticipated profits.
When we perform services for our clients, we can become liable for breach
of contract, personal injury, property damage, and negligence. Such claims
could include improper or negligent performance or design, failure to meet
specifications, and breaches of express or implied warranties. Because our
projects are typically large enough to affect the lives of many people, the
damages available to a client or third parties are potentially large and could
include punitive and consequential damages. For example, our transportation
projects and manufacturing facility projects involve services and products
that affect not only our client, but also the many end users of those services
and products. In addition, our clients often require us to be responsible for
liabilities through contractual indemnities. Such provisions typically require
us to assume liabilities for damage or personal injury to the client, third
parties and their property, and also for fines and penalties.
We seek to protect CH2M HILL from potential liabilities by obtaining
indemnification where possible from our private sector clients. Under most of
our private sector contracts, we have been successful in obtaining such
indemnification, but such indemnification generally is not available if we
fail to satisfy specified standards of care in performing our services or if
the indemnifying party has insufficient assets to cover the liability.
We also try to obtain available indemnities from our public sector clients.
For example, some of our clients, including some U.S. government agencies, are
Potentially Responsible Parties under CERCLA. Under our contracts with these
clients, we usually try to seek contribution from the client for liability
imposed on us in connection with our work at these clients' CERCLA sites. In
addition, when we perform superfund related work for our U.S. government
clients, CERCLA generally permits us to limit our potential liabilities.
However, the EPA recently has significantly narrowed the circumstances under
which it will indemnify contractors against liabilities incurred in connection
with CERCLA projects. There are also proposals both in Congress and at various
regulatory agencies to further restrict indemnification of contractors from
third-party claims. In connection with services at the Rocky Flats closure
project, Kaiser-Hill is indemnified by its U.S. government client against
liability claims
20
<PAGE>
arising out of contractual activities involving a nuclear incident.
International Operations Pose Risks and Complexities
We routinely conduct operations outside of the United States. Overall, we
derived approximately $57 million or 6.1% of our service revenues in 1998 from
such operations. International operations entail additional business risks and
complexities such as foreign currency exchange fluctuations, different taxation
methods, restrictions on financial and business practices and political
instability. Our international clients include both private sector firms and
foreign government agencies in more than 20 countries, with significant
projects in Egypt, Spain, Singapore, and New Zealand.
Our Industry Is Highly Competitive
The market for the design, consulting, engineering and construction
services that we offer is highly competitive. We compete with many other
design, consulting, engineering and construction firms, including large
multinational firms having substantially greater financial, management, and
marketing resources. Other competitors are small firms with lower cost
structures enabling them to offer lower prices for particular services. We also
compete with government agencies, including our own clients, that can utilize
their internal resources to perform services that we might otherwise perform.
Most contracts between public sector clients and our EE&I and Industrial
operating segments are awarded through a competitive bidding process that
places no limit on the number or type of potential service providers. The
process usually begins with a government agency request for proposal that
delineates the size and scope of the proposed contract. The government agency
evaluates the proposals on the basis of technical merit and cost. For the Water
operating segment, most contracts are awarded through qualification selection
processes that vary among projects.
In both the private and public sectors, acting either as a prime contractor
or as a subcontractor, we may join with other firms that we otherwise compete
with to form a team to compete for a single contract. Because a team can often
offer stronger combined qualifications than any firm standing alone, these
teaming arrangements can be very important to the success of a particular
contract competition or proposal. Consequently, we maintain a network of
relationships with other companies to form teams that compete for particular
contracts and projects.
Conflicts of Interest May Limit Opportunities
Many of our clients and potential clients are concerned about actual or
possible conflicts of interest in retaining professional services consultants.
Governmental agencies and some private sector clients have contracting policies
that may, from time to time, prevent us from seeking or performing contracts
for other clients if there is a conflict of interest. We have, on occasion,
declined to bid on particular projects because of actual or perceived conflicts
of interest, and we are likely to continue encountering such conflicts of
interest in the future.
Our Properties are Leased
Our corporate headquarters, a 131,000 square foot facility, is located at
6060 South Willow Drive, Greenwood Village, Colorado 80111. We lease all of our
significant facilities, including our corporate headquarters and 65 domestic
and 33 foreign office locations, under many separate leases. We believe that
comparable facilities are available for lease and therefore that the loss of
any such leases would not have a material adverse impact on our operations. We
believe that our facilities are adequate for the present needs of our business.
We Are Not Involved in any Material Lawsuits
CH2M HILL is party to various legal actions arising in the normal course of
its business, some of which involve claims of substantial sums. Damages
assessed in connection with and the cost of defending any such actions could be
substantial. CH2M HILL's management believes that the levels of insurance
coverage are generally adequate to cover CH2M HILL's liabilities, if any, with
regard to such claims. CH2M HILL generally accrues amounts for retentions and
deductibles based on advice from legal counsel when it is probable that a loss
will be incurred and such loss is estimable. Gain contingencies or recoveries
are rare and are usually recorded when the cash is collected.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis explains our general financial
condition, changes in financial condition and results of operations for CH2M
HILL as a whole and each of our operating segments including:
. Factors affecting our business
. Our revenues and profits for the six-month period ended June 30, 1999 and
for the years ended December 31, 1998, 1997, and 1996
. Where our revenues and profits came from
. Why those revenues and profits were different from year to year
. Where our cash came from and how it was used
. How all of this affects our overall financial condition
The following discussion contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. Our actual
results may differ significantly from the results discussed in the forward-
looking statements.
As you read this section, you should also refer to our consolidated
financial statements and the accompanying notes. These consolidated financial
statements provide additional information regarding our financial activities
and condition.
This analysis may be important to you in making decisions about your
investments in CH2M HILL.
Introduction
The engineering and construction industry has been undergoing substantial
change as public and private clients privatize and outsource many of the
services that were formerly provided internally. Numerous mergers and
acquisitions in the industry have resulted in a group of larger firms that
offer a full complement of single-source services including studies, designs,
construction, operations, and in some instances, facility ownership. Included
in the current trend is the movement towards longer-term contracts for the
expanded array of services, e.g., 5 to 20 year contracts for facility
operations. These larger, longer contracts require us to have substantially
greater financial capital to remain competitive.
We believe we provide our clients with innovative project delivery using
cost effective approaches and advanced technologies. We continuously monitor
acquisition and investment opportunities that will expand our portfolio of
services, add value to the projects undertaken for clients, or enhance capital
strength. We believe that we are well positioned geographically, technically
and financially to compete worldwide in the markets we have elected to pursue
and clients we serve.
Results of Operations for the Six-Month Period Ended June 30, 1999 Compared to
the Six-Month Period Ended June 30, 1998
Revenues for the six-month period ending June 30, 1999 were $576.0 million
compared to $450.1 million for the same period in 1998. The increase of $125.9
million or 28.0% is comprised of significant improvements in the Environmental,
Energy & Infrastructure ("EE&I") segment of $56.3 million, the Water segment of
$46.8 million, and the Industrial segment of $22.8 million.
Pre-tax profit for the six-month period ended June 30, 1999 was $10.8
million compared to $7.8 million in the same period of 1998. The increase of
$3.0 million was comprised of an increase in the EE&I segment of $2.7 million
in addition to an improvement in the Water segment of $4.6 million, offset by a
decline in the Industrial segment of $3.7 million. Corporate expenses increased
by $0.6 million.
Environmental, Energy and Infrastructure
Revenues in the EE&I segment for the six-month period ended June 30, 1999
were $240.4 million compared to $184.1 million for the same period in 1998.
This increase of $56.3 million was
22
<PAGE>
primarily attributable to growth of $13.2 million in the telecommunications
markets, growth of $16.4 million in the construction services market, and
$20.3 million in the transportation markets. The growth in revenues from
construction services is indicative of our commitment to diversify our
business. Construction services revenues generated in the six-month period
ended June 30, 1999 were primarily from remedial action contracts with the U.S.
Navy. The increase in the transportation markets is primarily the result of the
Transportation Equity Act for the 21st Century (TEA-21) which was adopted by
Congress in 1998. TEA-21 provides federal funding to the various states for
transportation infrastructure improvement projects including construction-
related projects for highways, highway safety, and transit for the six-year
period from 1998 to 2003.
Pre-tax profit for the EE&I segment was $7.6 million for the six-month pe-
riod ended June 30, 1999 compared to $4.9 million in the same period of 1998.
Profit as a percent of revenue for the same period in 1999 was 3.2% compared to
2.7% for 1998. The increase in pre-tax profit of $2.7 million was primarily
generated by increased project margins of $2.5 million from the telecommuni-
cations markets offset by an increase in indirect costs of $2.9 million primar-
ily due to business development activities necessary for growth. The remaining
increase of $3.1 million was achieved in the construction management and trans-
portation markets.
Water
The Water segment reported revenues of $210.8 million for the six-month
period ended June 30, 1999 compared to revenues of $164.0 million in the same
period of 1998. This increase of $46.8 million was due to significant growth in
several market areas. In general, the Water segment is capitalizing on prior
business development efforts, especially in the design/build markets, and
obtaining new business from existing clients as a result of the strong domestic
economy. Revenues from design/build projects increased by $15.8 million, as a
result of our ongoing efforts to provide a full array of services to our
customers. Revenues from operations and maintenance services increased by $8.5
million due to the addition of new infrastructure support contracts, primarily
with municipalities. Services from other domestic water operations increased by
$22.7 million in the same period. These increases were offset by decreases in
international revenues due to the completion of projects.
The Water segment reported $6.4 million of pre-tax profit in the first six
months of 1999 compared to $1.8 million of pre-tax profit for the same period
of 1998. Pre-tax profit as a percent of revenues was 3.0% for the six month
period ended June 30, 1999 compared to 1.1% in the same period of 1998. The
increase in profit is primarily due to the increase in the volume of new
services contracts, as we have been able to leverage our costs and increase
efficiencies. Although we realized an increase in revenues from the
design/build markets, we also increased direct costs due to the pass-through of
construction costs. We also increased indirect costs in order to establish our
internal infrastructure to support the long-term opportunities expected in the
design/build markets.
Industrial
The Industrial segment reported revenues of $124.8 million for the six
month period ended June 30, 1999, of which $83.5 million was generated from the
microelectronics industry. The revenues for the same period of 1998 were $102.0
million, of which $70.5 million was generated from the microelectronics
industry. The increase of $22.8 million was comprised of a $13.0 million
increase in revenues from the microelectronics industry and an increase in
revenues of $9.8 million from other industries, including food,
biopharmaceutical, fine chemical and facility services. The mix of the revenues
between construction costs versus services for engineering and construction
management also changed significantly from 1999 versus 1998. The construction
cost component of revenues increased from $22.3 million, which was 21.9% of
1998 year-to-date revenues, to $80.3 million, which was 64.3% of 1999 year-to-
date revenues. This increase in construction revenues of $58.0 million offset
the decrease in revenues from services of $79.8 million in 1998 to $44.5
million in 1999. The construction revenue increase was due to two construction
projects that were started in first quarter 1999.
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<PAGE>
The Industrial segment reported virtually no pre-tax profit through the
six-month period ended June 30, 1999 versus $3.7 million in the first six
months of 1998. Profit as a percent of revenues for 1998 was 3.6%. The most
significant factor causing the profit decline was the decrease in volume of
services sold during the first six months of 1999. In addition to the impact of
reduced volume, reduced project margins and flat overhead costs also reduced
profitability. Direct project costs, as a percentage of revenues, increased
19.0% in 1999 versus 1998. This increase in direct project costs is the pass-
through of construction related costs directly associated with the increase in
construction revenues. This results in a decline in project margins due
primarily to the change in mix of revenues where the construction revenue
component increased considerably over the services revenue component during the
first six months of 1999. With the exception of indirect labor costs, all other
overhead, general and administrative costs remained approximately the same
percentage of the services portion of revenues in 1999 as in 1998. Indirect
labor expenses, which are made up of salaries and benefits of all
administrative personnel plus salaries and benefits of technical personnel for
hours not working on billable client services, increased. Indirect labor costs
increased, as a percent of the services portion of gross revenues, 4.9% from
1999 versus 1998. This increase is due to the significant decline in the number
and size of projects performed for the microelectronics industry.
<TABLE>
<CAPTION>
----------------------------------------------------------------------
1998 1997 1996
----------------------------------------------------------------------
Pre-Tax Pre-Tax Pre-Tax
(in millions) Revenues Profit Revenues Profit Revenues Profit
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Environmental,
Energy and
Infrastructure $386.1 41% $ 9.3 $360.2 39% $ 5.8 $389.6 42% $ 7.2
Water 362.8 39% 7.2 309.9 34% 5.0 289.3 31% 2.2
Industrial 186.1 20% 3.6 247.5 27% 7.2 258.3 27% 8.2
Corporate - - (5.7) - - (6.0) - - (5.6)
----------------------------------------------------------------------
Total $935.0 100% $14.4 $917.6 100% $12.0 $937.2 100% $12.0
----------------------------------------------------------------------
</TABLE>
1998 Results of Operations Compared to 1997
Revenues for 1998 were $935.0 million compared to $917.6 million in 1997.
The increase of $17.4 million or 1.9% is comprised of significant improvements
in the EE&I segment of $25.9 million and the Water segment of $52.9 million.
These gains were reduced by the decrease of $61.4 million in the Industrial
segment revenues.
Pre-tax profit for 1998 was $14.4 million compared to $12.0 million in
1997. The increase of $2.4 million or 20.0% was primarily due to volume
increases in the EE&I and Water segments as well as a reduction in corporate
expenses. Contracts in the EE&I and Water segments generally have a lower
margin than the contracts in the Industrial segment, but increases in the
volume of contracts offset any decline generated by the Industrial segment.
Bad debt expense was $57,000 in 1996, $1.4 million in 1997, and $5.2
million in 1998, which also impacts pre-tax profit. The increases in 1997 and
1998 relate to specific projects in the EE&I and Water segments that needed to
be reserved for due to the uncertainty of collection. At December 31, 1997, the
outstanding receivables related to these projects were $2.2 million of unbilled
and $1.2 million of billed. No amounts were outstanding at December 31, 1998.
The entire outstanding receivable balances were reserved for as the projects
were halted due to poor economic conditions in Latin America. Currently, future
collection of these receivables is not probable.
The loss on the sale of assets in 1998 of $1.7 million also negatively
impacted pre-tax profit. This loss related to assets that were sold in closing
two of our offices.
24
<PAGE>
Environmental, Energy and Infrastructure
Revenues in the EE&I segment increased $25.9 million or 7.2% to $386.1
million in 1998, compared to $360.2 million in 1997. EE&I revenues accounted
for 39.0% of our total operating revenues in 1997 and 41.0% in 1998. During
1998 we benefited from the business development efforts undertaken in 1997. We
reported a full year of revenues in 1998 for public sector hazardous waste
remediation contracts awarded in 1997 by the Department of Defense and the
Department of Energy. Revenue growth from the Department of Defense was strong
in part due to legislation requiring military base closure and remediation. The
initial assessment phases are complete and the environmental remediation and
clean-up phases have begun.
The telecommunications markets, both domestically and internationally, also
attributed to the increase in revenues in 1998. We obtained several major
clients in this market providing program management oversight, site development
and construction management services to install or upgrade cable and wireless
networks and related infrastructure. With the technological advances in
wireless telecommunications, the ability to communicate rapidly via voice,
data, and video have become a necessity for business enterprises and
individuals around the world. We believe this market will provide continued
revenue growth in future years.
Although the private sector of the environmental and infrastructure market
slowed in 1997, we realized some recovery from this sector in 1998. We
attribute this growth to the strong domestic economy, which is affording
larger, multinational corporations the opportunity to improve their
environmental performance and sustainability.
The transportation market also contributed to the increase in revenues in
1998. We have benefited from the growth generated by the Intermodal Surface
Transportation Efficiency Act (ISTEA) adopted by Congress in 1991, which caused
significant increases in federal funding to the states for transportation
projects. We believe that we are also well positioned in the market to benefit
from the TEA-21 legislation.
The EE&I segment reported higher pre-tax profit in 1998, increasing from
$5.8 million in 1997 to $9.3 million in 1998, an increase of 60.3%. Profit as a
percent of revenues was 2.4% in 1998 compared to 1.7% in 1997. The growth in
the telecommunications markets contributed $2.8 million in profit while the
remaining net increase of $0.7 million was attained by successful cost
containment efforts. The demand for services is high in the telecommunications
market, which can return higher gross margins than the public and private
sector environmental and infrastructure contracts.
During 1998, cost containment measures enacted in prior years reduced
overhead costs as administrative functions have been consolidated to enable us
to manage our resources more effectively.
Water
Water segment revenues were $362.8 million in 1998 versus $309.9 million in
1997, an increase of $52.9 million or 17.1%. Approximately 30% of the increase
came from new contracts, with terms up to 15 years, in the utility plant
operations market for public and private clients. The balance of the increase
came from contract activities in water and wastewater infrastructure facility
improvement programs principally in the United States. The demand for the Water
segment's services continues to be strong as water and wastewater treatment
infrastructure improvement projects are undertaken by municipalities and other
utility authorities across the United States and abroad. The desire by
municipalities to preserve the environment and provide clean water creates a
demand for services we offer.
Profitability in the Water segment increased from $5.0 million in 1997 to
$7.2 million in 1998, an increase of 44.0%. Profit as a percent of revenues was
2.0% in 1998 compared to 1.6% in 1997. Profitability continues to improve as we
continue to win significant new contracts as reflected by the increase in
revenues mentioned above. Additionally, the Water segment reported an increase
of $1.0 million in profit due to lower business development expenditures. From
year to year, we achieved increasing margins by focusing on improvements in
project delivery and effective
25
<PAGE>
cost management, even though competition in this industry is increasing as a
result of rapid consolidation. We believe that our future success in the Water
segment is dependent on continuing improvements in our project delivery
performance and our ability to win significant new contracts.
Industrial
The Industrial segment's revenues for 1998 were $186.1 million, of which
$141.4 million or 76.0% was generated from the microelectronics industry. The
Industrial segment's revenues for 1997 were $247.5 million, of which $222.8
million or 90.0% was generated from the microelectronics industry. Total
revenues from the Industrial segment declined $61.4 million from 1997 to 1998
due to declines in the microelectronics industry offset by an increase in
revenues from other industries including, food, biopharmaceutical, fine
chemical, and facility services. The microelectronics industry began to reduce
capital spending in 1997 which has continued into 1999, resulting in a sharp
decline in purchases of engineering and construction services by our
microelectronics clients. In order to reduce its dependence on the
microelectronics industry, the industrial segment has reallocated some of its
workforce to focus on diversifying into other industries mentioned above.
Pre-tax profit in the Industrial segment was $3.6 million in 1998 versus
$7.2 million in 1997. Profit as a percent of revenues was 2.0% in 1998 compared
to 2.9% in 1997. The decrease in the total volume of services sold during 1998
to the microelectronics industry caused this profit decline. In addition to the
impact of reduced volume, direct project costs as well as overhead expenses
affected profitability. Direct project costs, as a percentage of revenues,
decreased 2.0% in 1998 versus 1997, slightly improving gross margins. Indirect
labor costs, included in overhead expenses, as a percentage of gross revenues,
increased 4.0% from 1997 to 1998 because of the significant decline in revenue
during 1998.
1997 Results of Operations Compared to 1996
Revenues for 1997 were $917.6 million compared to $937.2 million in 1996.
The decrease of $19.6 million or 2.1% resulted from a decline in the EE&I
segment revenues of $29.4 million and a decline in the Industrial segment
revenues of $10.8 million which were partially offset by improvements in Water
segment revenues of $20.6 million. Pre-tax profit remained unchanged overall.
Environmental, Energy and Infrastructure
Revenues for the EE&I segment were $360.2 million in 1997 versus $389.6
million in 1996, a decrease of $29.4 million or 7.5%. Included in revenues were
equity in earnings of investees accounted for by the equity method of $5.4
million in 1996 and $7.9 million in 1997.
The decrease in revenues from 1996 to 1997 was caused by the completion of
a significant transportation project and the decline in the private sector
environmental market. This decrease was offset by other gains in the
transportation sector and in the federal sector environmental market.
Excluding the revenues from the major project we completed, we actually
reported revenue growth in the transportation markets in the United States.
This revenue growth has been generated from the ISTEA bill that was passed in
1991, which provided significant increases in the level of federal funding for
transportation infrastructure projects across the nation.
The federal sector environmental market showed strong gains in 1997,
contributing 15% of total revenues versus 11.0% in 1996. Earlier marketing
efforts and favorable legislative developments resulted in significant project
wins from the Department of Defense.
The EE&I segment reported lower pre-tax profit in 1997 versus 1996 of $1.4
million. Profit as a percent of revenues was 1.7% in 1997 compared to 1.9% in
1996. The decrease in pre-tax profit from 1996 to 1997 is entirely due to the
completion of a significant transportation project in 1997, which was not
replaced by another project of comparable size. Although this project was
completed, we made a strategic decision to retain the workforce and incur a
temporary reduction in profits in anticipation of growth to be generated from
TEA-21. We also experienced an increase in general and administrative expenses
due to geographic expansion in 1997.
26
<PAGE>
Water
Water segment revenues were $309.9 million for 1997 versus $289.3 million
for 1996, an increase of $20.6 million or 7.1%. A significant portion of the
revenue increase was attributable to the utility plant operations market for
public and private clients. We continued to win substantial contracts that are
for longer terms and will contribute to revenues in future years. The balance
of the increase was attributable to contract activities in the water and
wastewater infrastructure facility improvement programs principally in the
United States.
The Water segment reported pre-tax profit of $5.0 million in 1997 compared
to $2.2 million in 1996, an increase of $2.8 million. Profit as a percent of
revenues was 1.6% in 1997 compared to 0.8% in 1996. The increase in pre-tax
profit resulted from an increase in revenues as mentioned above, as well as a
$2.1 million reduction in indirect costs due to increased efficiencies in our
design functions. During 1996, the water segment incurred more business
development costs to ensure steady growth in a market that is growing rapidly.
During 1997, these marketing efforts paid off as we added significant new
contracts while leveraging our cost structure and maintaining stable margins.
Industrial
The Industrial segment's revenues for 1997 were $247.5 million, of which
90.0% was attributable to the microelectronics industry. The Industrial
segment's revenues for 1996 were $258.3 million, of which 97.0% was
attributable to the microelectronics industry. Total segment revenues declined
$10.8 million from 1996 to 1997. This decline was due to a $27.8 million
decrease in revenues from the microelectronics industry that was partially
offset by an increase in revenues of $17.0 million from other industries
including, food, biopharmaceutical, fine chemical, and facility services
markets. The microelectronics industry fostered significant growth for the
Industrial segment in past years by providing several very sizable projects
during 1995 and 1996. These large projects were substantially complete by mid-
1997 at which time the microelectronics industry entered into a period of
reevaluation of its capital expenditure plans, ultimately leading to a decline
in procurement of engineering and construction services during 1997.
Pre-tax profit in the Industrial segment was $7.2 million in 1997 versus
$8.2 million in 1996, a decline of $1.0 million or 12.2%. Profit as a percent
of revenues was 2.9% in 1997 compared to 3.2% in 1996. The decline in profit
was due primarily to the decrease in volume of services sold during 1997 to the
microelectronics industry. Direct project costs, as a percentage of revenues,
decreased 2.0% in 1997 versus 1996, slightly improving gross margins and
improving profitability. Total overhead costs, as a percentage of gross
revenues, increased 2.0% in 1997 versus 1996 offsetting the decrease in direct
project costs as a percentage of revenues.
Joint Ventures
We routinely enter into joint venture arrangements in order to service the
needs of our clients. Such arrangements are customary in the engineering and
construction industry and generally are established to manage a specific
project. Our largest joint venture is Kaiser-Hill Company, LLC ("Kaiser-Hill"),
a joint venture in which we own a 50% interest. This joint venture is
attributable to our EE&I operating segment. The earnings from this joint
venture are reported as equity in earnings of investees accounted for under the
equity method, along with other joint ventures that are individually
insignificant.
For the six month period ended June 30, 1999, we reported equity in
earnings of investees accounted for under the equity method of $3.5 million
compared to $2.0 million in the same period of 1998. The earnings from the
Kaiser-Hill joint venture for the same period of 1999 were $2.8 million
compared to $2.7 million for 1998. Under the Performance Based Management
contract, as discussed below, fees are earned based upon specific negotiated
performance incentives which are heavily weighted to the U.S. Government's
fiscal year end of September 30. Due to the timing of specific work scopes and
the completion of these activities, earnings may not be comparable from period
to period.
Equity in earnings of investees accounted for by the equity method
generated $8.4 million of
27
<PAGE>
revenues in 1998 compared to $8.7 million in 1997, a majority of which comes
from Kaiser-Hill. For 1998, the $8.4 million of revenues represents 56.7% of
operating income and 144.53% of net income. For 1997, the $8.7 million of
revenues represents 62.6% of operating income and 184.99% of net income.
Although Kaiser-Hill achieved the negotiated performance measures for 1998 in
the performance based contract, the revenues from the contract for 1998 were
expected to be lower than in 1997 due to the fee structure in this contract.
This was due to the types of tasks required to be performed in 1998 to
decommission the site and the corresponding fee levels negotiated based on the
difficulty and risks of those tasks. No one specific task was material to the
fee structure in this contract year over year. Our contract expires on June 30,
2000. On July 30, 1999, the Department of Energy announced that it will begin
negotiations with Kaiser-Hill on a contract extension through ultimate site
closure scheduled for 2006. We expect contract negotiations to be complete by
the end of 1999.
Equity in earnings of investees accounted for by the equity method
generated $8.7 million of revenues in 1997 compared to $5.3 million of revenues
in 1996. For 1997, the $8.7 million of revenues represents 62.6% of operating
income and 184.99% of net income. For 1996, the $5.3 million of revenues
represents 39.2% of operating income and 112.04% of net income. These revenues
are primarily generated from Kaiser-Hill. 1997 was the second full year on the
contract and Kaiser-Hill's performance in meeting certain measurable targets
was better than in 1996. At the end of 1995 and throughout the first half of
1996, Kaiser-Hill focused on the transition from the former contractor and
performed less of the plutonium stabilization and cleanup activities. Kaiser-
Hill has a Performance Based Management Contract, which means that, except for
a small base fee, the fees on this contract are dependent on Kaiser-Hill's
performance.
Corporate Expenses
Corporate expenses for the six-month period ended June 30, 1999 were $3.2
million compared to $2.6 million for the same period of 1998. The increase of
$0.6 million is related to costs incurred for the registration of our stock
with the Securities and Exchange Commission.
Corporate expenses for the years ended December 31, 1996, 1997, and 1998 were
$5.6 million, $6.0 million, and $5.7 million, respectively. These costs
represent centralized management costs that are not allocable to individual
operating segments and primarily include expenses associated with
administrative compliance functions such as legal, treasury, accounting, tax,
and general business development efforts. The fluctuations from year to year
are generally dependent on the business development efforts undertaken as other
administrative costs historically remained constant.
Income Taxes
The income tax provision for the six month period ended June 30, 1998 was
$4.6 million, or an effective tax rate of 59.6%, compared to $5.4 million, or
an effective tax rate of 49.9%, for the same period of 1999. The decrease in
the effective tax rate is primarily due to the reduction of non-deductible
foreign net operating losses as we have been able to improve the financial
performance of our international operations. Our effective tax rate continues
to be higher than the U.S. statutory income tax rate of 35.0% due to disallowed
portions of meals and entertainment expenses and non-deductible foreign net
operating losses.
Our income tax provisions for the last several years were as follows:
<TABLE>
<CAPTION>
Income Tax Effective
Year Provision Tax Rate
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
1998 $ 8,571 59.6%
1997 $ 7,295 60.7%
1996 $ 7,291 60.8%
</TABLE>
The effective tax rates are higher than the statutory tax rates since we
cannot deduct all foreign net operating losses on our U.S. income tax return.
We are also disallowed a tax deduction for portions of meals and entertainment
expenses that are considered necessary to conduct our business.
28
<PAGE>
Liquidity and Capital Resources
Cash Flows From Operating Activities
For the six month period ended June 30, 1998, operations provided $1.3
million of cash compared to $15.9 million of cash for the same period in 1999.
During the first six months of 1999, our receivables and payables increased due
to the pass-through of revenues and expenses related to new, large construction
projects. Offsetting this net increase was the reduction of accrued incentive
compensation and the settlement of accrued liabilities.
Operations generated $38.9 million of cash flows in 1997 and used $4.4
million in 1998. The decrease of $43.3 million from 1997 to 1998 was
attributable to the following working capital changes:
. revenue growth provided a corresponding increase in accounts receivable
. prepaids increased as we contributed cash to our largest pension plan to
maintain its funded status
. billings in excess of revenues decreased due to a reduction in advance
payments on contracts formerly realized in the Industrial operating
segment
In 1996 and 1997, operations generated $32.4 million and $38.9 million of
cash flows. The increase of $6.5 million from 1996 to 1997 was primarily
attributable to the change in working capital. Accounts receivable decreased
primarily due to the decline in revenues.
Cash Flows from Investing Activities
Our business does not require significant capital expenditures. The capital
expenditures are generally for purchases of office equipment and leasehold
improvements. We spent $4.9 million in 1996, $2.6 million in 1997, and $4.7
million in 1998 on such expenditures. The decline in capital spending from 1996
to 1997 was largely due to a revamping of our procurement practices from
purchasing computer related assets to leasing such assets under favorable
operating lease terms. We have now established a formal operating lease program
under which most of our computing and related equipment is procured on an
ongoing basis. The increase in capital expenditures from 1997 to 1998 reflects
leasehold improvements for large regional office moves for which the leases had
expired.
Cash Flows from Financing Activities
For the six-month period ended June 30, 1998, we used $6.2 million of cash
in financing activities compared to $6.3 million of cash during the same period
of 1999. During the six-month period of 1999 we borrowed $32.0 million against
our line of credit to fund operations and paid off such amount prior to June
30, 1999.
In June 1999, we entered into a new credit facility for a $100.0 million
revolving line of credit maturing June 2002, which may be extended for an
additional one-year period, and the maximum amount of credit available may be
increased by $25.0 million, under certain conditions. The facility may be used
for general corporate purposes and permitted acquisitions. At the option of
CH2M HILL, the facility bears interest at a rate equal to either the London
Inter-Bank Offering Rate for interest periods of 1, 2, 3 or 6 months, plus
applicable margins ranging from 1.0% to 2.0%, the lender's prime rate, or the
sum of 0.5% plus the federal fund rate, if greater than the lender's prime
rate. Borrowings under the credit agreement are available on a revolving basis
through the final maturity date, subject to any mandatory commitment reductions
and applicable conditions of borrowing. The credit facility is secured by a
guaranty from each direct and indirect wholly-owned subsidiary of CH2M HILL
whose gross revenues account for greater than 5% of the consolidated annual
revenues of CH2M HILL. The credit agreement contains usual and customary
representations and warranties, and affirmative and negative covenants and
financial covenants for credit facilities of like size, type and purpose.
At December 31, 1998, under our unsecured loan agreement, we had an
outstanding term loan for $6.0 million, of which $4.0 million will be paid in
1999. The interest rate on the loan is 7.1% and payments are made quarterly.
We also have a wholly-owned subsidiary that has an unsecured credit
facility of $9.5 million with interest payable on borrowings at prime rate. The
29
<PAGE>
subsidiary has not used its facility for over three years.
We also had $22.5 million in 1997 and $20.6 million in 1998, in notes
payable to over 300 former shareholders in varying amounts over the next ten
years.
Derivatives and Financial Instruments
We occasionally enter into forward contracts to hedge foreign currency
risks and not for speculative purposes. At December 31, 1997 and 1998, there
were no significant forward contracts outstanding. Generally, we do not have
derivative type instruments.
New Accounting Standards Not Yet Adopted
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," establishes fair value
accounting and reporting standards for derivative instruments and hedging
activities. The effective date of SFAS No. 133 was deferred until January 1,
2001 by the issuance of SFAS No. 137. We will adopt SFAS No. 133 in the first
quarter of 2001. We are currently assessing the effect of adoption, if any, on
our financial position, results of operations, and cash flows.
Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities," requires costs of start-up activities, including organization
costs, to be expensed as incurred. We adopted this statement effective January
1, 1999, which did not have an impact on earnings.
Year 2000 Compliance
General. The upcoming turn of the century poses many challenges to
companies worldwide that rely on computers and/or programmed control devices to
operate their businesses or are suppliers or providers of time-sensitive
software or automated technology devices. The problems stem from the practice
of software writers, software vendors and equipment suppliers of using only two
digits to designate calendar year (e.g., 98 versus 1998) in automated
applications. That practice does not provide for proper recognition of the Year
2000 because computers and other automated equipment may interpret the two-
digit date "00" as, for example, 1900, rather than 2000. Consequently,
computers and other automated systems may cease operation or operate
incorrectly. This effect is commonly referred to as the "year 2000 problem."
Several years ago, we recognized that the year 2000 problem could have a
significant adverse impact on our operations. We have, therefore, been actively
working to mitigate potential impacts on our internal operations as well as
working with our vendors and clients to identify and remediate potential year
2000 problems. Since 1997, we have been evaluating and taking steps to remedy
year 2000 problems in the following major areas of information technology and
other systems:
. Software: internal software and operating systems, including
financial/management software, communications systems, facilities
controls, design and other technical software
. Hardware: desktop computers and network servers
. Communications: local area networks, wide area networks and
telecommunications systems
. Non-Information Technology Systems: power plant operating and control
systems and facilities
Readiness. In order to assess our readiness, we identified four major
phases of our year 2000 compliance program. They are as follows:
1. Inventory Phase.
. Identify functions that rely on computer systems that accept, create or
manipulate calendar-related data
. Survey all significant vendors and facilities owners
. Identify all computer and communications hardware and software
2. Assessment Phase.
. Prioritize systems and functions that are critical to all lines of
business, including management and human resource
30
<PAGE>
information systems, facilities, procurement, project delivery and billing
systems
. Prioritize functions performed by each system and the level of
susceptibility to date-sensitive information
3. Remediation Phase.
. Make necessary repairs, replacements or implement contingency plans for
the most critical systems
. Install third party application software upgrades
4. Testing/Implementation Phase.
. Test systems to verify they are year 2000 compliant
. Place compliant systems into production
The following chart demonstrates our progress over time by phase for each
major area identified:
[CHART APPEARS HERE]
External Vendors. We have contacted supply and service vendors with whom we
have material business to confirm the year 2000 compliance of their
applications, services and products that we rely on for operations.
Approximately 75% of major vendors responded by the end of 1998 and second
requests for compliance confirmation either have been sent or are in the
process of being sent to those that did not respond or that provided
inadequate responses. This portion of the evaluation is scheduled was
completed in June 1999 although vendors continue to update us with
information. Mission critical vendors such as our primary bank and payroll
services and landlords have responded adequately on the year 2000 compliance
issue in their services or products.
Clients of CH2M HILL. Because we are a service organization providing
design and operating services for a wide range of clients, we have actively
notified clients during the last half of 1998 of the need to be aware of
potential year 2000 problems in their operations. While we do not generally
provide year 2000 problem identification and remediation services to our
clients, we have suggested in the notifications that the clients recognize
that problems could exist and an identification/ remediation program in their
operations should be undertaken immediately if not already done. We also made
available to each client a list of year 2000 service firms via direct personal
delivery or reference to a worldwide web site we established for this purpose.
Follow-up client reminders are being done in instances where we operate
facilities on behalf of clients that have not confirmed to us that they have
undertaken or completed compliance verification activities.
31
<PAGE>
Worst Case Year 2000 Scenarios. The worst case scenario that could affect
our business is the failure of electric power and communications. We are
dependent on data and voice communication for delivery of our services, and on
electric power to conduct operations. Each of our regional offices and project
sites is vulnerable to business disruption from a local loss of power or
telecommunications. The most sensitive areas are our payroll system and our
water and wastewater treatment systems. We have contacted our critical
infrastructure suppliers regarding their preparedness and they have asserted to
us that they are year 2000 compliant. Although it does not appear that a
failure of electric power is likely based on assertions made to us, we have
developed the following contingency plans:
. Mobilize teams to our two communication hubs and data centers to
constantly monitor critical infrastructure components as the date rolls
over. This means having staff on-site during the entire holiday period
and for as long afterwards as proves necessary to respond to needs on a
priority basis
. Adjust payroll and accounting system schedules to complete processing
prior to December 31, 1999 for the last pay period of the year
. Install a redundant link (with another supplier) to the Internet for
enhanced messaging protection
. Install a diesel auxiliary power source at our main location in Denver,
Colorado that can support the data center and telephone system for a
minimum of 36 hours
With respect to the water and wastewater treatment facilities that we
operate in accordance with contractual service agreements, some of these
facilities have back up generators or duplicate power sources. If the power
supply is severed, the water treatment plants could not pump water and
customers would be without water for a period of time. As a contingency plan,
we are encouraging clients to fill above-ground water towers prior to December
31, 1999, and assisting in the preparation of water conservation plans.
It is also possible that the water and wastewater treatment plants will have
power but the computerized control systems fail. This could cause "automatic"
equipment to turn on or off and otherwise act in a manner that upsets the
chemical, mechanical, and biologic processes in the plants. To mitigate this
event, all facilities will be manned on December 31, 1999, and operated in a
manual mode if necessary.
Cost Estimates for Compliance Efforts. The total estimated costs for our
year 2000 remediation efforts was between $3.5 to $4.0 million as of December
31, 1998, of which we had spent approximately $3.0 million as of June 30, 1999.
Of the total estimated cost, approximately $1.75 to $2.0 million represents the
effort to migrate our current systems to year 2000 compliant versions. All
costs of year 2000 activities have been, and will in the future be, charged to
current operations as the costs are incurred.
32
<PAGE>
EMPLOYEE BENEFIT PLANS AND DIRECT STOCK PURCHASES
CH2M HILL maintains a number of plans that provide benefits to employees of
CH2M HILL and its affiliates. Under some of these plans, employees of CH2M HILL
and most of our affiliates may acquire common stock or beneficial interests in
common stock held in trusts. Employees may also purchase stock directly in the
internal market. The material provisions of the plans are summarized below in
general terms. We encourage you to read the plan documents, which will be made
available to you on request and which have been attached as exhibits to the
registration statement filed with the Securities and Exchange Commission.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
Plans at a Glance How Plan Works CH2M HILL Contribution
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Stock Purchase Stock Purchase Plan Payroll withholding (1%- In 2000, 10% of purchase
(Direct Ownership) 10% of compensation) to price; thereafter as
purchase common stock determined by the Board of
with after-tax dollars Directors
--------------------------------------------------------------------------------------
Pre-Approved Direct Purchase 5,000 shares or None
Stock Purchase less on any trade date
--------------------------------------------------------------------------------------
Direct Stock Purchase Request approval from None
through offer cycle Stock Purchase Committee
to purchase over 5,000
shares
- ------------------------------------------------------------------------------------------------------
Retirement Plans 401(k) Plan Invest pre-tax for Match determined by each
(Beneficial retirement via payroll member employer limited to a
Ownership) withholding percentage of compensation
or a specified dollar amount
Meet eligibility Defined contribution
requirements determined by each member
employer, subject to Board
approval and limitations set
forth in the plan
--------------------------------------------------------------------------------------
Employee Stock Plan CH2M HILL funded 100%
retirement plan invested
in common stock
--------------------------------------------------------------------------------------
Deferred Compensation Deferral of compensation For payroll deductions into
Plans to be paid at a later the pre-tax deferred
date in shares of common compensation plan, in 2000,
stock 10% of purchase price;
thereafter as determined by
the Board of Directors
- ------------------------------------------------------------------------------------------------------
Stock Incentives Stock Bonus Grant of shares with no Full value of shares awarded
(Direct Ownership) vesting restrictions by CH2M HILL
--------------------------------------------------------------------------------------
Stock Options Right to purchase shares Right to appreciation on
within 5 years at the option shares over the
stock price on the option period
grant date, subject to 3-
year vesting
</TABLE>
33
<PAGE>
Retirement and Tax-Deferred Savings Plan
The Retirement and Tax-Deferred Savings Plan, a 401(k) plan, is a profit
sharing plan that includes a cash or deferred arrangement that is intended to
qualify under Sections 401(a) and 401(k) of the Internal Revenue Code. This
means that contributions to the 401(k) plan receive favorable federal income
tax treatment.
Employees Eligible to Participate in the 401(k) Plan
All of our employees are eligible to participate in the 401(k) plan,
except:
. Leased employees
. Temporary employees
. Employees of affiliates that have not adopted the 401(k) plan
As of January 1, 1999, none of CH2M HILL's foreign affiliates have adopted
the 401(k) plan. Some, but not all, domestic affiliates of CH2M HILL have
adopted the 401(k) plan but have not adopted the provisions of the 401(k) plan
relating to defined contributions or matching contributions. CH2M HILL and its
affiliates that have adopted the 401(k) plan are referred to in this
description as member employers.
Timing of Participation in the 401(k) Plan
Each eligible employee can participate in the 401(k) plan with respect to
employee contributions and matching contributions, if applicable, beginning on:
. The first date of hire, or
. The first day of the first full pay period that begins on or after the
employee's date of hire
Each eligible employee begins to participate in the 401(k) plan with
respect to defined contributions (if applicable), as of the first day of the
first month that begins on or after the eligible employee completes a twelve-
month period of service during which the employee is credited with at least
1,000 hours of service.
Contributions to the 401(k) Plan
Employee Contributions. The 401(k) plan allows a participant to elect to
defer a portion of the participant's compensation for a calendar year, subject
to limits, and to have that deferred amount contributed to the participant's
employee contribution account in the 401(k) plan.
Matching Contributions. Each Member Employer may, but is not required to,
make matching contributions each calendar quarter. Matching contributions may
be made in an amount that is based on a percentage of the employee's
contributions for the calendar quarter up to 3% of the employee's compensation,
or limited to a specified dollar amount per employee. Matching contributions to
the 401(k) plan may be made in cash or common stock.
Defined Contributions. Each member employer may, but is not required to,
make defined contributions to the 401(k) plan on behalf of that member
employer's employees. The amount of each member employer's annual defined
contribution, if any, is determined by the Board of Directors of CH2M HILL.
Each member employer's defined contributions to the 401(k) plan are
allocated to the defined contribution accounts of eligible employees of that
member employer. A participant in the 401(k) plan is eligible to receive a
defined contribution for a calendar year if any of the following apply:
. The participant completed 1,000 hours of service during the calendar year
and was employed by the member employer at the end of the calendar year
. The participant retired during the calendar year at or after age 65 or
age 55 if the participant has at least five years of service
. The participant died during the calendar year
. The participant became permanently disabled during the calendar year
Each eligible participant receives a proportionate share of the member
employer's defined contribution for the calendar year. Each eligible
participant's proportionate share is determined by dividing that participant's
eligible compensation for the calendar year by the total eligible compensation
for the calendar year of all eligible participants. Eligible compensation is an
34
<PAGE>
employee's basic hourly wage, times the number of regular hours worked during
the year. Eligible compensation for 1999 is limited to $160,000 under Section
401(a)(17) of the Internal Revenue Code.
Rollover Contributions. Participants or potential participants may transfer
a rollover contribution from another qualified retirement plan to the 401(k)
plan.
Investment of Contributions to the 401(k) Plan
Matching contributions to the 401(k) plan, other than matching
contributions made by Operations Management International, Inc., are invested
in common stock.
Defined contributions to the 401(k) plan are initially invested in an
investment alternative selected by the trustees until direction is provided by
the participant. Participants in the 401(k) plan may direct the investment of
contributions that are allocated to their accounts, other than matching
contributions made by CH2M HILL and invested in CH2M HILL stock, among various
investment alternatives selected by the trustees of the 401(k) plan.
As of January 1, 2000, the investment alternatives offered by the trustees
will be as follows:
Fidelity Retirement Government Money Market Portfolio
CH2M HILL Fixed Income Fund
Fidelity Balanced Fund
Fidelity Equity-Income Fund
Spartan U.S. Equity Index Fund
Fidelity Magellan Fund
Fidelity Growth Company Fund
PIMCO Mid Cap Growth Fund
Janus Worldwide Fund
Company Stock Fund (invested in common stock of CH2M HILL)
The following tables summarize, as of the dates indicated, the investment
performance of each of the investment funds for the last three years, except
for the Company Stock Fund, which did not exist during the last three years.
The summary is based on an initial investment of $100 in each investment fund
as of December 31, 1996. Past performance is not a guarantee of future results.
The funds may, therefore, perform worse or better in the future than they
performed in the past.
Fidelity Retirement Government Money Market Portfolio
<TABLE>
<CAPTION>
Percent
Increase
Valuation as of Unit Value for Year
--------------- ---------- --------
<S> <C> <C>
December 31, 1996........................................ $100.00 --
December 31, 1997........................................ $105.38 5.38%
December 31, 1998........................................ $110.96 5.30%
CH2M HILL Fixed Income Fund
<CAPTION>
Percent
Increase
Valuation as of Unit Value for Year
--------------- ---------- --------
<S> <C> <C>
December 31, 1996........................................ $100.00 --
December 31, 1997........................................ $106.13 6.13%
December 31, 1998........................................ $112.62 6.12%
</TABLE>
35
<PAGE>
Fidelity Balanced Fund
<TABLE>
<CAPTION>
Percent
Increase
Valuation as of Unit Value for Year
--------------- ---------- --------
<S> <C> <C>
December 31, 1996........................................ $100.00 --
December 31, 1997........................................ $123.45 23.45%
December 31, 1998........................................ $148.41 20.22%
Fidelity Equity-Income Fund
<CAPTION>
Percent
Increase
Valuation as of Unit Value for Year
--------------- ---------- --------
<S> <C> <C>
December 31, 1996........................................ $100.00 --
December 31, 1997........................................ $129.98 29.98%
December 31, 1998........................................ $146.26 12.53%
Spartan U.S. Equity Index Fund
<CAPTION>
Percent
Increase
Valuation as of Unit Value for Year
--------------- ---------- --------
<S> <C> <C>
December 31, 1996........................................ $100.00 --
December 31, 1997........................................ $133.04 33.04%
December 31, 1998........................................ $170.93 28.48%
Fidelity Magellan Fund
<CAPTION>
Percent
Increase
Valuation as of Unit Value for Year
--------------- ---------- --------
<S> <C> <C>
December 31, 1996........................................ $100.00 --
December 31, 1997........................................ $122.79 22.79%
December 31, 1998........................................ $164.08 33.63%
Fidelity Growth Company Fund
<CAPTION>
Percent
Increase
Valuation as of Unit Value for Year
--------------- ---------- --------
<S> <C> <C>
December 31, 1996........................................ $100.00 --
December 31, 1997........................................ $118.91 18.91%
December 31, 1998........................................ $151.29 27.23%
PIMCO Mid Cap Growth Fund
<CAPTION>
Percent
Increase
Valuation as of Unit Value for Year
--------------- ---------- --------
<S> <C> <C>
December 31, 1996........................................ $100.00 --
December 31, 1997........................................ $133.87 33.87%
December 31, 1998........................................ $144.33 7.81%
Janus Worldwide Fund
<CAPTION>
Percent
Increase
Valuation as of Unit Value for Year
--------------- ---------- --------
<S> <C> <C>
December 31, 1996........................................ $100.00 --
December 31, 1997........................................ $120.51 20.51%
December 31, 1998........................................ $151.69 25.87%
</TABLE>
36
<PAGE>
Except for investments in the Company Stock Fund, participants may transfer
amounts among the investment alternatives in accordance with rules established
by the trustees.
Amounts invested in the Company Stock Fund, other than matching
contributions, which are always invested in common stock, may be transferred
into other investment alternatives only as of a trade date. If a participant
wishes to transfer amounts invested in the Company Stock Fund into another
investment alternative as of a trade date, the trustees will direct the sale in
the internal market of an appropriate number of shares of common stock held in
the Company Stock Fund on that trade date. If only a portion of the common
stock offered for sale by the 401(k) plan in the internal market is sold, only
that portion of the participant's investment in the Company Stock Fund will be
transferred into the other investment alternatives. The remaining portion of
the participant's investment in the Company Stock Fund will remain in the
Company Stock Fund. Thus, a participant's ability to transfer amounts out of
the Company Stock Fund may be restricted. A participant considering an
investment in the Company Stock Fund should read this entire Prospectus,
particularly the sections entitled "Risk Factors" and "Internal Market
Information."
Amounts invested in investment alternatives other than the Company Stock
Fund may not ordinarily be transferred into the Company Stock Fund. However,
the trustees may from time to time permit the transfer of amounts held in other
investment alternatives into the Company Stock Fund, subject to any
restrictions and conditions that the trustees deem to be appropriate.
It is the current intent of the trustees to keep all amounts allocated to
the Company Stock Fund invested in common stock, except for cash reserves for
distributions and expenses.
Vesting in Accounts in the 401(k) Plan
Each participant in the 401(k) plan is, at all times, 100% vested in
amounts allocated to the participant's rollover contribution account and
employee contribution account.
Amounts allocated to a participant's defined contribution account and
matching contribution account are subject to the following vesting schedule:
<TABLE>
<CAPTION>
Completed Amount Vested
Years of Amount Vested (Non-OMI
Service (OMI Employees) Employees)
<S> <C> <C>
1 20% 0%
- -------------------------------------------
2 40% 20%
- -------------------------------------------
3 60% 40%
- -------------------------------------------
4 80% 60%
- -------------------------------------------
5 100% 80%
- -------------------------------------------
6 100% 100%
</TABLE>
A participant's defined contribution account and matching contribution
account become fully vested if the participant is still employed by CH2M HILL
or an affiliate and any of the following occurs:
. The participant reaches age 65 or age 55 if the participant has at least
five years of service
. The participant becomes permanently disabled
. The participant dies
Loans from the 401(k) Plan
Loans from the 401(k) plan are available to any participant who is an
active employee of CH2M HILL or an affiliate. The total amount of a loan to a
participant from the 401(k) plan may not exceed $50,000. This $50,000 limit is
reduced by the participant's highest outstanding loan balance during the twelve
months before the date on which a loan is obtained. The total amount of a loan
to a participant in the 401(k) plan is further limited to 50% of the
participant's vested interest in the participant's accounts in the 401(k) plan.
The loan may not exceed the combined amount in the participant's employee
contribution account and rollover contribution account. The minimum loan amount
is $1,000. A participant may only have one loan outstanding at any time.
A loan must be repaid within five years, unless the loan is used to acquire
the principal residence of the participant, in which case the term of the loan
may be up to 25 years. Loan payments must be repaid through payroll deductions.
Loans are secured by up to 50% of the participant's vested account balance in
the 401(k) plan. Loans bear interest at the interest rates in effect at the
CH2M HILL Federal Credit Union at the time the loan is granted.
37
<PAGE>
Distributions and Withdrawals from the 401(k) Plan
If a participant in the 401(k) plan terminates employment with us and if
the value of the vested portion of the participant's account in the 401(k) plan
does not exceed $5,000, the vested portion of the participant's account in the
401(k) plan will be distributed to the participant in a lump sum cash payment
as soon as reasonably practicable.
If a participant in the 401(k) plan terminates employment with us and if
the value of the vested portion of the participant's account in the 401(k) plan
is greater than $5,000, the participant may request an immediate distribution
or may elect to defer distribution until a later date. If distribution is
deferred, the participant's account will remain invested in accordance with the
401(k) plan until the participant requests distribution. In any case,
distribution from the 401(k) plan must begin when the participant reaches age
70 1/2.
A participant who has reached age 59 1/2 may request a distribution of the
participant's employee contribution account or the participant's rollover
account even if the participant has not terminated employment with CH2M HILL
and its affiliates.
When a participant requests a distribution from the 401(k) plan, the
distribution will be made in cash in a lump sum as soon as reasonably
practicable. If the participant's account in the 401(k) plan includes common
stock, the portion of the participant's account invested in common stock will
be distributed in cash as soon as reasonably practicable after the common stock
is sold on the internal market or to CH2M HILL. CH2M HILL intends to purchase
from the 401(k) plan on each trade date sufficient common stock to permit
distributions to all participants whose requests for distributions are pending.
On some trade dates, however, CH2M HILL may not purchase from the 401(k) plan
sufficient common stock to permit distributions to all participants whose
requests for distributions are pending. In that case, distribution of some or
all of the portion of a participant's account invested in common stock may be
delayed until a subsequent trade date.
If a participant dies while employed by CH2M HILL or an affiliate,
distribution of the participant's account in the 401(k) plan will be made to
the participant's spouse or, if the participant's spouse has given proper
consent or if the participant has no spouse, to the beneficiary designated by
the participant. A surviving spouse of a deceased participant may delay
distribution of the participant's account in the 401(k) plan for up to five
years from the date of death. A distribution from the account will be made in
accordance with the procedures described in the previous paragraph.
The 401(k) plan permits a participant to obtain a hardship withdrawal from
the participant's employee contribution account or rollover contribution
account if there is an immediate and heavy financial need which may not
reasonably be met by the participant's other resources. The amount of a
hardship withdrawal may not exceed the amount required to meet the immediate
financial need, including any taxes or penalties resulting from the withdrawal,
and may be subject to various other limitations.
Employee Stock Plan
The employee stock plan was originally adopted in 1977 as an employee stock
ownership plan, or ESOP. In 1983 the ESOP was converted into a profit sharing
plan designed to invest up to 100% of its assets in stock of CH2M HILL. The
employee stock plan is a profit sharing plan that is intended to qualify under
Section 401(a) of the Internal Revenue Code. This means that contributions to
the employee stock plan receive favorable federal income tax treatment.
Employees Eligible to Participate in the Employee Stock Plan
All of our employees are eligible to participate in the employee stock
plan, except:
. Leased employees
. Temporary employees
. Employees of affiliates that have not adopted the Employee Stock Plan
As of January 1, 1999, none of CH2M HILL's foreign affiliates have adopted
the Employee Stock Plan. CH2M HILL and each affiliate that has adopted the
employee stock plan are referred to as member employers.
38
<PAGE>
Each eligible employee begins to participate in the employee stock plan
after completing a twelve-month period of service with a Member Employer during
which the eligible employee is credited with at least 1,000 hours of service.
Contributions to the Employee Stock Plan
For each calendar year, each Member Employer may, but is not required to,
make a contribution to the employee stock plan. The amount of each Member
Employer's contribution to the employee stock plan, if any, for a calendar year
is determined by the Board of Directors of CH2M HILL. For the calendar year
ended December 31, 1998, member employers contributed a total of $3.5 million
to the employee stock plan. Employees are not permitted to make contributions
to the employee stock plan.
Each member employer's contribution to the employee stock plan for a
calendar year is allocated to the accounts of eligible employees of that member
employer who are participants in the employee stock plan.
Each eligible participant receives a proportionate share of the member
employer's contribution for the calendar year. Each eligible participant's
proportionate share is determined by dividing that participant's eligible
compensation for the calendar year by the total eligible compensation for the
calendar year of all participants.
Eligible compensation is an employee's basic hourly wage, times the number
of regular hours worked during the year. Eligible compensation for 1999 is
limited to $160,000 under Section 401(a)(17) of the Internal Revenue Code.
Forfeitures, if any, of the nonvested portion of accounts of terminated
participants are allocated to the accounts of remaining eligible participants.
Investment of the Assets of the Employee Stock Plan
The employee stock plan is authorized to invest up to 100% of its assets in
common stock. Cash contributions to the employee stock plan will be used to
purchase common stock through the internal market on the next trade date, to
the extent that common stock is available for purchase on that trade date. If
common stock is not available for purchase on that trade date, cash
contributions will be held until common stock is available for purchase.
It is the intent of CH2M HILL that, to the maximum extent possible, all of
the assets of the employee stock plan will be invested in common stock at all
times. Any cash in the employee stock plan will be invested in an investment
vehicle selected by the trustees.
Vesting of Accounts in the Employee Stock Plan
Amounts contained in a participant's account in the employee stock plan are
subject to the following vesting schedule:
<TABLE>
<CAPTION>
Completed Years of
Service Amount Vested
- ------------------------------------------------------------------------------
<S> <C>
2 20%
- ------------------------------------------------------------------------------
3 40%
- ------------------------------------------------------------------------------
4 60%
- ------------------------------------------------------------------------------
5 80%
- ------------------------------------------------------------------------------
6 100%
</TABLE>
A participant also becomes fully vested if the participant is still
employed by CH2M HILL or an affiliate when the participant:
. Reaches age 65 or age 55 if the participant has at least five years of
service
. Becomes permanently disabled
. Dies
Loans from the Employee Stock Plan
Loans are not available to a participant from the employee stock plan.
Distributions from the Employee Stock Plan
If a participant's employment with us terminates and the vested portion of
the participant's account in the employee stock plan does not exceed $5,000,
the vested portion of the participant's account will be distributed to the
participant in a lump sum cash payment as soon as practicable after the next
trade date. If a
39
<PAGE>
participant's employment with us terminates and the vested portion of the
participant's account in the employee stock plan is greater than $5,000, the
participant may request a distribution or may elect to defer distribution of
the account until a later date. If distribution is deferred, the participant's
account will remain invested in common stock until the participant requests
distribution.
If a participant dies while employed by us, distribution of the
participant's account in the Employee Stock Plan will be made to the
participant's surviving spouse or, if the participant's surviving spouse has
given proper consent or if the participant has no surviving spouse, to the
beneficiary designated by the participant. Distributions to a surviving spouse,
or a beneficiary will be made in the same manner.
CH2M HILL intends to purchase from the Employee Stock Plan at each trade
date sufficient common stock to permit distribution covering all pending
requests for distributions. On some trade dates, CH2M HILL may not purchase
from the Employee Stock Plan sufficient common stock to permit distribution
covering all pending distribution requests. In that case, distribution of a
participant's account from the Employee Stock Plan may be delayed to a
subsequent trade date.
General Provisions of the 401(k) Plan and the Employee Stock Plan
The following is a summary of the material provisions of the 401(k) plan
and the employee stock plan:
Contribution Limitations
The maximum contribution for any calendar year which CH2M HILL or its
affiliates may make to the 401(k) plan and the employee stock plan together for
the benefit of a participant, including employee contributions to the 401(k)
plan, plus forfeitures, may not exceed the lesser of $30,000 or 25% of the
participant's compensation for the calendar year. The $30,000 limit will be
adjusted for cost of living in accordance with rules of the Secretary of the
Treasury.
Administration
The 401(k) plan and the employee stock plan are administered by the
trustees. The trustees have the power to supervise each plan's operations,
including the power and authority to do all of the following:
. Allocate fiduciary responsibilities among the fiduciaries of each of the
plans
. Designate agents to carry out responsibilities relating to each of the
plans
. Employ legal, actuarial, accounting, and other assistance as the trustees
may deem appropriate in carrying out the terms of each of the plans
. Establish rules and regulations for the administration of each of the
plans
. Administer, interpret, construe and apply the plans and determine
questions relating to eligibility, the amount of any participant's
service and the amount of benefits to which any participant or
beneficiary is entitled
. Determine the manner in which each of the plans' assets are disbursed
Pass-Through Voting and Tendering of Common Stock
Each participant in the 401(k) plan and the employee stock plan has the
right to instruct the trustees on a confidential basis how to vote the
participant's interest in common stock held in the plans. The trustees will
vote all allocated shares held in the plans as to which no voting instructions
are received, together with all unallocated shares held in each of the plans,
in the same proportion, on a plan-by-plan basis, as the allocated shares for
which voting instructions have been received are voted. The trustees are
required to notify participants of their pass-through voting rights prior to
each meeting of shareholders.
In the event of a tender or exchange offer for the common stock, each
participant in the 401(k) plan and the employee stock plan has the right to
instruct the trustees on a confidential basis whether or not to tender or
exchange the participant's proportionate interest in common stock held in the
plans. The trustees will not
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tender or exchange any allocated shares unless instructions are received from
participants. Shares held in the plans which have not yet been allocated to the
accounts of participants will be tendered or exchanged by the trustees, on a
plan-by-plan basis, in the same proportion as the allocated shares held in each
plan are tendered or exchanged.
The trustees' duties with respect to voting and tendering of common stock
are governed by the fiduciary provisions of the Employee Retirement Income
Security Act of 1974 ("ERISA"). These fiduciary provisions of ERISA may
require, in limited circumstances, that the trustees override the votes, or
decisions whether or not to tender, of participants with respect to common
stock and to determine, in the trustees' best judgment, how to vote the shares
or whether or not to tender the shares.
Trustees of the 401(k) Plan and the Employee Stock Plan
The current trustees of the 401(k) plan and the employee stock plan are
Fred K. Berry, Samuel H. Iapalucci, Stan Vinson, Sharon Schlechter, and Cliff
Thompson, all of whom are officers of the Company or its affiliates.
Generally, the trustees have all the rights afforded a trustee under
applicable law. Subject to limitations in the plans, the trustees' rights
include, but are not limited to, the right to:
. Invest and reinvest the funds held in the plans' trusts in any investment
of any kind
. Retain or sell the securities and other property held in the plans'
trusts
. Consent or participate in any reorganization or merger in regard to any
corporation whose securities are held in the plans' trusts
-- In the case of the common stock, such rights are subject to the
participants' pass-through voting rights and right to instruct the
trustees in the event of a tender or exchange offer
. Exercise all the rights of the holder of any security held in the plans'
trusts, including the right to vote such securities
-- In the case of the common stock, such rights are subject to the
participants' pass-through voting rights
. Vote proxies and exercise any other similar rights of ownership
. Lend to participants in the plans such amounts as may be permitted under
the plans
The trustees receive no compensation from the plans for their service as
trustees of the plans. Expenses incurred in the establishment, administration
and operation of the plans are paid by the respective plans unless CH2M HILL
elects to pay such expenses.
Administrative Services
CH2M HILL has entered into an agreement with Fidelity Institutional
Retirement Services Company to provide recordkeeping and other administrative
services to the 401(k) plan and the employee stock plan. Fidelity's fees for
these services are paid by each of the plans.
Account Statements
Each participant is furnished with a quarterly statement of the
participant's account in the 401(k) plan and with an annual statement of the
participant's account in the employee stock plan.
Amendment and Termination
CH2M HILL has reserved the right to amend each of the plans at any time,
for any reason and without prior notice, except that no such amendment may have
the effect of:
. Generally causing any assets of the plans' trusts to be used for or
diverted to any purpose other than providing benefits to participants and
their beneficiaries and defraying expenses of the plans, except as
permitted by applicable law
. Depriving any participant or beneficiary, on a retroactive basis, of any
benefit to which they would otherwise be entitled had the participant's
employment with us terminated immediately prior to the amendment
. Increasing the liabilities or responsibilities of the trustees without
their written consent
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CH2M HILL has also retained the right to terminate either of the plans at
any time and for any reason. In addition, CH2M HILL may discontinue
contributions to the plans, but any such discontinuation does not automatically
terminate the plans as to funds and assets then held by the trustees.
ERISA
The 401(k) plan and the employee stock plan are both subject to ERISA,
including reporting and disclosure obligations, fiduciary standards and
prohibited transaction rules. Since the plans are individual account plans
under ERISA, they are not subject to the jurisdiction of the Pension Benefit
Guaranty Corporation under Title IV of ERISA and none of the plans' benefits
are guaranteed by the Pension Benefit Guaranty Corporation.
Federal Income Tax Consequences
The following paragraphs summarize the material federal income tax
consequences of participating in the 401(k) plan and the employee stock plan.
This summary is intended to be general and is not intended to address every
federal income tax issue that may arise from participation in the plans. This
summary does not address state or local tax issues, which may be significant.
Each participant in the plans should consider obtaining professional tax advice
with respect to the plans' tax impact on that participant.
Each of the plans is intended to qualify under Section 401(a) of the
Internal Revenue Code. Qualification under Section 401(a) of the Internal
Revenue Code generally produces the following federal income tax results with
respect to contributions, income and earnings, and distributions and loans
from, the plans.
Contributions to the 401(k) Plan and the Employee Stock Plan. A participant
will not be subject to federal income tax on CH2M HILL contributions to the
plans at the time those contributions are made.
A participant in the 401(k) plan who makes employee contributions will
exclude the amount of those employee contributions from the participant's gross
income.
Neither the participant nor CH2M HILL will be subject to federal employment
taxes on CH2M HILL contributions to the Plans. Employee contributions to the
401(k) plan will be subject to federal employment taxes.
The plans will not be subject to federal income tax on contributions made
to the plans by CH2M HILL.
Subject to limits contained in each of the plans, CH2M HILL will be able to
deduct the amounts that it contributes to the plans, including amounts
contributed to the 401(k) plan as employee contributions. The amount of CH2M
HILL's deduction will generally be equal to the amount of the contributions.
Income and Appreciation of the 401(k) Plan and the Employee Stock Plan.
Participants will not be subject to federal income tax on income or
appreciation in their accounts in the plans until distributions are made or
deemed to be made to the participant.
The plans will not be subject to federal income tax on their income or
appreciation, except to the extent that the plans realize unrelated business
taxable income.
Distributions from the 401(k) Plan and the Employee Stock
Plan. Distributions from the plans will be subject to federal income tax under
complex rules that apply generally to distributions from all tax-qualified
retirement plans.
In general, a distribution from either of the plans will be taxable in the
year of receipt as ordinary income unless the recipient is eligible for and
elects to make a qualifying "rollover" to an individual retirement account or
to another qualified plan.
An early distribution from the plans will result in an additional 10% tax
on the taxable portion of the distribution. Early distributions are all
distributions made before the participant has reached age 59 1/2 unless:
. The participant is permanently disabled
. The distribution is made after termination of employment due to the death
of the participant
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. The distribution is made after termination of employment to a participant
who terminated employment during or after the calendar year the
participant attained the age of 55
Exceptions from the 10% additional tax apply to distributions that are
rolled over to an individual retirement account or to another qualified plan
and to distributions that are used for deductible medical expenses.
A participant, or the participant's spouse in the event of the
participant's death, who receives a distribution from the plans, other than
mandatory distributions after age 70 1/2, and wishes to defer immediate tax on
the distribution, may transfer or "rollover" all or part of the distribution to
an individual retirement account. The participant may rollover the distribution
to another qualified retirement plan. To be effective, the rollover must be
completed within 60 days of receipt of the distribution. Alternatively, the
participant or spouse may request a direct transfer from the plans to an
individual retirement account or, in the case of the participant, to another
qualified retirement plan.
A participant or a participant's spouse who does not arrange a direct
transfer to an individual retirement account or to another qualified plan will
be subject to federal income tax withholding at a rate of 20% of the
distribution, even if the participant or spouse later makes a rollover.
A participant or the participant's spouse who makes a valid rollover to an
individual retirement account or to another qualified plan will defer payment
of federal income tax until such time as such participant or spouse actually
begins to receive distributions from the individual retirement account or other
qualified plan.
Loans from the 401(k) Plan. A loan from the 401(k) plan is generally not
considered to be a distribution and is not subject to federal income tax when
made. Interest paid by the participant on a loan from the 401(k) plan will
generally not be deductible.
1999 Stock Option Plan
The Board adopted the 1999 Stock Option Plan on November 6, 1998. The stock
option plan is not subject to ERISA. The shareholders of CH2M HILL approved the
stock option plan on December 18, 1998. The stock option plan was effective as
of January 1, 1999.
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What is an Option?
- --------------------------------------------------------------------------------
A stock option is a contract between CH2M HILL and you, which allows you to buy
common stock at a price set when you receive the option, even if the value of
the stock has changed by the time you exercise the option. When you exercise
stock options, you are simply buying shares of common stock.
Shares issued when an option is exercised will be subject to the same transfer
restrictions as other shares of common stock.
- --------------------------------------------------------------------------------
Administration of the Stock Option Plan
The stock option plan is administered by the Ownership and Incentive
Compensation Committee ("O&IC Committee"). The O&IC Committee is appointed by
the Board of Directors. The O&IC Committee consists of two or more members of
the Board of Directors and other individuals appointed by the Board of
Directors.
The following individuals are the current members of the O&IC Committee:
Ralph R. Peterson, Philip G. Hall, Susan D. King, Donald S. Evans, Kenneth F.
Durant, Joseph A. Ahearn, Michael D. Kennedy, Michael Y. Marcussen, Steve
Guttenplan, James J. Ferris, Jill T. Shapiro Sideman, Cliff Thompson and Craig
T. Zeien.
The O&IC Committee decides which of our eligible participants, who are
employees, directors and consultants of CH2M HILL will be granted options to
buy common stock under the stock option plan. The O&IC Committee also
determines all of the terms and conditions of each stock option granted under
the stock option plan, such as:
. The manner in which the stock option may be exercised
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. Whether there are conditions that must be met before the stock option may
be exercised
. The exercise price that must be paid in order to buy common stock upon
exercise of each stock option
. When the stock option becomes vested and may be exercised
. Whether or under what circumstances the optionee will receive interests
in the pre-tax or after-tax deferred compensation trusts in lieu of
common stock upon exercise of the stock option
We intend to grant stock options at the fair market value of the common
stock on the day that a stock option is granted, which is the price for the
common stock in effect at the time of the grant. In any case, the exercise
price cannot be less than 90% of the fair market value of the common stock on
the day that the stock option is granted. Although the Stock Option Plan
permits the issuance of both "incentive" and "nonqualified" stock options, the
O&IC Committee does not intend to issue incentive stock options, and no
incentive stock options will be granted unless we first provide appropriate
disclosure to potential recipients.
The O&IC Committee is not required to provide the same terms and conditions
in each stock option agreement. Stock options granted to different participants
or at different times may contain different terms and conditions, including
different exercise prices.
Limits on Stock Options Granted Under the Stock Option Plan
Under the stock option plan, the O&IC Committee may grant cancellable stock
options for up to 8,000,000 shares of common stock, subject to adjustments. As
of July 31, 1999, 2,506,045 stock options had been issued under the stock
option plan.
Stock Options May Be Restricted
The O&IC Committee may provide in the grant of a stock option that the
exercise of the stock option is restricted or conditional. For example, the
O&IC Committee may provide in the grant of a stock option that the stock option
cannot be exercised unless the optionee agrees to sell the common stock
acquired as a result of the exercise in the internal market on the next trade
date or agrees to transfer the common stock acquired to a deferred compensation
trust.
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What is Vesting?
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A participant who receives options usually has to "earn" them over time by
staying with CH2M HILL.
We expect that most options will be vested ("earned") over three years:
. 25% vested one year from the date of grant
. 25% more vested two years from the date of grant
. The remaining 50% vested three years from the date of grant
You may not exercise an option until it is vested.
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Exercise of Stock Options
If the O&IC Committee grants a stock option to a participant, the
participant may exercise the stock option after all conditions described in the
stock option agreement, including vesting, have been met and before the stock
option expires.
The participant may exercise a stock option by following the procedures for
exercise described in the stock option agreement. These procedures will include
providing written notice of exercise to CH2M HILL, paying the exercise price,
and paying any amount required for federal, state, or local income tax
withholding as a result of the employee's exercise of the stock option as
described below. The procedures may also include other requirements imposed by
the O&IC Committee from time to time.
Payment for Common Stock Bought Pursuant to the Exercise of a Stock Option
Granted Under the Stock Option Plan
Payment for shares of common stock bought pursuant to the exercise of a
stock option may be made in cash or a personal check payable to CH2M HILL.
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Unless the O&IC Committee provides otherwise, payment for stock option
exercises may also be made by surrendering to CH2M HILL shares of common stock
already owned by the participant and held for more than six months. The O&IC
Committee may also permit payment to be made by transferring interests in the
pre-tax or after-tax deferred compensation trust representing shares of common
stock held for more than six months. If the participant uses shares of common
stock (or interests in a deferred compensation trust) that the participant
already owns as payment for the exercise of a stock option, then the number of
shares given to the participant upon exercise will be the difference between
the number of shares bought through the stock option exercise and the number of
shares already owned by the participant.
Examples of Option Exercises
Assumptions:
. Participant was granted 100 options at an exercise price of $10 per share
. Participant exercises 100 options with an exercise price of $10 per share
when the price per share of common stock is $20 per share
. Participant already owns 200 shares of common stock
. Combined federal, state and FICA tax rate is 42%
Stock for Stock Transaction: Cash Transaction:
<TABLE>
<S> <C>
1. Number of Options to be
Exercised 100
2. Option Exercise Price $ 10
3. Cost to Participant (1 x 2) $1,000
4. Current Stock Price $ 20
5. Value of Options Exercised
(1 x 4) $2,000
6. Gain (5 - 3) $1,000
7. Applicable Tax (6 x 42%) $ 420
8. Total Amount owed by
Participant to CH2M HILL
(3 + 7) $1,420
9. Number of Shares to be
Tendered to CH2M HILL as
Payment for Option Exercise
(8/4) 71
</TABLE>
<TABLE>
<S> <C>
1. Number of Options to be Exercised 100
2. Option Exercise Price $ 10
3. Cost to Participant (1 x 2) $1,000
4. Current Stock Price $ 20
5. Value of Options Exercised (1 x 4) $2,000
6. Gain (5 - 3) $1,000
7. Applicable Tax (6 x 42%) $ 420
8. Total Amount Owed by Participant to
CH2M Hill (3 + 7) $1,420
9. Cash to be Paid by Participant as
Payment for Option Exercise $1,420
</TABLE>
The shares exchanged in a stock-for-stock transaction are treated as a "Like
Kind" exchange which does not trigger the recognition of capital gains. The
shares exchanged carry their original tax basis and acquisition date. Newly
acquired shares have a basis equal to the fair market value at the time of
exercise. The shares sold to pay taxes represent new shares acquired through
the exercise of the option and would therefore not trigger any capital gains.
Payment may also be made in a combination of cash, a personal check, and
shares of common stock, unless the O&IC Committee provides that payment by
shares of common stock will not be allowed. If shares of common stock owned by
the participant are used to pay all or part of the purchase price, the value
assigned to each share will be equal to the price of the common stock on the
date of exercise of the stock option.
Expiration of Stock Options Granted Under the Stock Option Plan
A stock option granted to a participant may not be exercised after the
stock option expires. A stock option expires on the expiration date set forth
in the stock option agreement. The O&IC Committee generally intends to grant
stock options that expire five years after the date on which the stock options
are granted.
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Regardless of the date stated in the stock option agreement, a stock option
granted under the stock option plan and not previously exercised will terminate
when the participant terminates employment with us, unless the stock option
agreement provides that the stock option may be exercised after termination of
employment.
The O&IC Committee generally intends to permit the exercise of a stock
option granted under the stock option plan within thirty days after termination
of employment with us for any reason other than for cause. If a participant
terminates employment with us due to disability or death, the O&IC Committee
generally intends to permit the stock option to be exercised within one year
after the date on which the participant's employment terminates due to the
disability or death.
A participant may work for an affiliate of CH2M HILL that becomes
ineligible to participate in the stock option plan. For example, an affiliate
may become ineligible to participate because CH2M HILL's interest in the
affiliate is sold. In that case, stock options held by the participant will
become immediately exercisable, but the participant will be considered to
terminate employment with us on the day that the affiliate becomes ineligible
to participate in the stock option plan. Therefore, the participant will be
able to exercise the stock options only if and to the extent that the stock
option agreement permits the participant to exercise the stock options on
termination of employment.
Amendment and Termination of the Stock Option Plan
The Board of Directors may amend or terminate the stock option plan at any
time. Any amendment or termination of the stock option plan will not change the
terms of any stock option agreement already in place at the time of such
amendment or termination unless the participant agrees to such change. The
following changes may not be made by the Board without shareholder approval:
. Increasing the number of shares of common stock available under the stock
option plan
. Reducing the minimum price at which stock options may be granted under
the stock option plan
. Changing the class of participants who may be granted stock options under
the stock option plan
The stock option plan will terminate on December 31, 2008. No stock options
will be granted under the stock option plan after that date. Any stock option
agreement already in place on December 31, 2008, will remain in effect until
the stock options covered by that stock option agreement are exercised or
expire.
Corporate Reorganization, Sale of Assets, or Change in Control
If CH2M HILL experiences a stock split, a stock dividend, a
recapitalization, or a similar transaction that changes the number of
outstanding shares of common stock without receipt of payment by CH2M HILL, the
O&IC Committee will adjust the number of shares of common stock that may be
bought under outstanding stock options and the exercise price that must be paid
to buy shares of common stock under outstanding stock options, in order to
reflect the change in the common stock.
If a change in control of CH2M HILL occurs, then all outstanding stock
options granted under the stock option plan may be exercised immediately, even
if the conditions on exercise stated in the stock option agreement have not
been met. A change in control of CH2M HILL occurs when one person or a group of
persons, other than an employee benefit plan, acting jointly, acquires at least
50% of the common stock, or when CH2M HILL agrees to a merger in which CH2M
HILL is not the surviving company, or when CH2M HILL disposes of more than 50%
of its assets, measured by the value of the assets. The O&IC Committee will
determine whether a change in control of CH2M HILL has occurred.
For example, if CH2M HILL experiences a merger, liquidation,
reorganization, or similar transaction in which CH2M HILL is not the surviving
corporation, the O&IC Committee will either:
. Convert outstanding stock options into comparable options to buy stock in
the surviving corporation; or
. Require that outstanding stock options be exercised within a specific
period of time
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before the effective date of the transaction or be forfeited.
In connection with the transaction, if there is not a change in control of
CH2M HILL, the O&IC Committee may, but is not required to, provide that any
outstanding stock options granted under the stock option plan may be exercised
immediately, even if the conditions on exercise stated in the stock option
agreement have not been met.
Federal, State, and Local Income Tax Withholding
The federal income tax consequences of the grant and exercise of stock
options under the stock option plan are described below. Sometimes the exercise
of a stock option or the sale of shares of common stock bought through the
exercise of a stock option may produce compensation income to a participant. In
that case, your employer may be required to withhold federal, state, and local
income taxes with respect to the amount of compensation income you recognized,
as though that amount was paid to you by your employer. Your employer may
satisfy this withholding obligation by withholding the required amount from
other amounts, such as other compensation or wages, your employer paid to you.
Alternatively, your employer may require you to pay the amount necessary to
satisfy the withholding obligation. The payment of the amount necessary to
satisfy the withholding obligation may be a prerequisite to the exercise of a
stock option granted under the stock option plan.
Are Options Taxable?
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No. For tax purposes, options are not treated as having monetary value when
they are granted to employees. Thus, they do not have an impact on your taxes
when granted. After you exercise an option, however, the difference between the
exercise price and the formula price in effect at that time is taxed as
ordinary income.
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Federal Income Tax Consequences of Stock Options Granted Under the Stock Option
Plan
This summary of the material federal income tax consequences of the grant
and exercise of stock options under the stock option plan does not address
every federal income tax issue that may arise and does not address foreign,
state or local tax issues, which may be significant.
This summary does not address the tax consequences for incentive stock
options because the O&IC Committee does not intend to grant incentive stock
options.
Each holder of stock options granted under the stock option plan should
consider obtaining professional tax advice with respect to the tax impact of
their stock options.
Exercise of Nonqualified Stock Options With Cash. Generally, an individual
will not be taxed when a stock option is granted. Instead, at the time the
individual exercises a stock option, the individual will recognize ordinary
income for federal income tax purposes. The amount of ordinary income
recognized by the individual will be equal to the excess of the fair market
value of the common stock at the time of exercise over the exercise price. CH2M
HILL generally will be entitled to a federal income tax deduction at that time
and in the same amount that the individual realizes as ordinary income.
If common stock bought through the exercise of a stock option is later sold
or exchanged, then the difference between the sale price and the fair market
value of the common stock on the date of exercise will be recognized as gain or
loss to the seller. If the common stock is a capital asset in the seller's
hands, the gain or loss on the sale will be long-term or short-term capital
gain or loss, depending on whether the holding period for the common stock at
the time of sale is more than 12 months or 12 months or less, respectively.
When an individual exercises a stock option into interests in a deferred
compensation trust, the individual does not recognize any gain or loss as a
result of the exercise of the stock option. However, when the interests in a
deferred compensation trust which were obtained through the exercise of stock
options are surrendered for stock, that event will be taxed as ordinary income
in an amount equal to the fair market value of the stock delivered to the
individual less the exercise price previously paid by the individual. If those
shares of common stock are then sold, the
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<PAGE>
difference between the sale price and the fair market value of the stock when
initially delivered to the individual will be recognized as either long-term or
short-term capital gain or loss to the seller, depending on how long the
individual has held the common stock.
Exercise of Nonqualified Stock Options With Shares of Common Stock. If
payment of the exercise price under a stock option is made by surrendering
previously owned shares of common stock, the following rules apply:
. No gain or loss will be recognized as a result of the tendering of shares
in exchange for an equal number of shares available through the exercise
of nonqualified stock options
. Any additional shares received will be taxed as ordinary income in an
amount equal to the fair market value of the shares at the time of
exercise
Exercise of Nonqualified Stock Options With Interests in a Deferred
Compensation Trust. If payment of the exercise price under a stock option is
made by surrendering previously owned interests in a deferred compensation
trust, the following rules apply:
. No gain or loss will be recognized as a result of the exercise of
nonqualified stock options into interests in a deferred compensation trust
. The interests in the deferred compensation trust surrendered by the
individual to pay the exercise price will be taxed as ordinary income
. When the interests in a deferred compensation trust which were obtained
through the exercise of stock options are exchanged for stock, that event
will be taxed as ordinary income in an amount equal to the fair market value
of the stock delivered to the individual less the exercise price previously
paid by the individual though the surrender of previously owned interests in
the deferred compensation trust.
1999 Payroll Deduction Stock Purchase Plan
We have recently established the stock purchase plan for the benefit of our
employees and employees of certain of our affiliates. The stock purchase plan
provides for the purchase of common stock through payroll deductions by
participating employees. The stock purchase plan is intended to qualify under
Section 423 of the Internal Revenue Code. Under the stock purchase plan, the
O&IC Committee may decide to let employees begin payroll deductions for
purchases of common stock as early as October 1, 1999. However, no common stock
will be purchased under the stock purchase plan until after January 1, 2000.
The stock purchase plan is not subject to ERISA.
Administration of the Stock Purchase Plan
The stock purchase plan is administered by the O&IC Committee, which is the
same committee that administers the stock option plan, described above.
The O&IC Committee decides which affiliates of CH2M HILL will be eligible
to participate in the stock purchase plan. The O&IC Committee also decides
whether employees must meet eligibility requirements in order to participate in
the stock purchase plan.
The O&IC Committee may adopt rules for the administration of the stock
purchase plan. The O&IC Committee interprets the stock purchase plan. The O&IC
Committee's decisions on any questions that arise under the stock purchase plan
are binding on all persons, including CH2M HILL and any employee who
participates in the stock purchase plan.
Employees Eligible to Participate in the Stock Purchase Plan
Generally, all employees of CH2M HILL and any participating affiliate may
participate in the stock purchase plan. The O&IC Committee decides which
affiliates of CH2M HILL may participate in the stock purchase plan.
The O&IC Committee intends to exclude employees who normally work less than
20 hours per week and employees who normally work five or fewer months in a
year from participating in the stock purchase plan.
Any employee who owns five percent or more of CH2M HILL or of any
subsidiary of CH2M HILL is excluded from participating in the stock purchase
plan.
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An employee who terminates employment with CH2M HILL and all participating
affiliates is no longer eligible to participate in the stock purchase plan. For
this purpose, termination of employment includes death, disability, retirement,
transfer to an affiliate that is not eligible to participate in the stock
purchase plan, or any other termination of employment. If an employee becomes
ineligible to continue participating in the stock purchase plan, any amount
held in the employee's stock purchase account will be distributed to the
employee.
Participating in the Stock Purchase Plan
In order to participate in the stock purchase plan, an employee must
deliver a written payroll deduction authorization form to the plan
administrator of the stock purchase plan. The payroll deduction authorization
form will tell the eligible employee's employer to withhold a specific
percentage of the eligible employee's pay to be used to buy common stock under
the stock purchase plan. The payroll deduction authorization form must provide
for the deduction of at least 1% of the employee's pay, but no more than 10% of
the employee's pay, in a whole number percentage. The employee may change the
specified percentage at any time. However, an employee cannot purchase more
than $25,000 of common stock under the stock purchase plan in any calendar
year.
Purchases of Common Stock Under the Stock Purchase Plan
No shares of common stock will be bought under the stock purchase plan
until after January 1, 2000, even though the O&IC Committee may decide to allow
employees to have amounts deducted from their paychecks and contributed to
their stock purchase accounts during the last quarter of 1999. Beginning in
2000, CH2M HILL will use the amount in the employee's stock purchase account to
buy common stock for the employee on each trade date.
Each year, the Board of Directors will decide what percentage of the
purchase price of common stock CH2M HILL will contribute toward the purchase of
common stock under the stock purchase plan during that year. CH2M HILL's
percentage may be as low as 0% or as high as 15%. As of January 1, 2000, CH2M
HILL's percentage will be 10%. We will not actually contribute any amount to
the employee's payroll deduction stock purchase account. Instead, we will add
the contribution percentage to the amount in the employee's stock purchase
account and use the combined amount to purchase common stock on each trade
date. We will either buy the common stock on each trade date in the internal
market, if available, or we will issue new shares of common stock.
Reservation of Common Stock for Purchase Under the Stock Purchase Plan
CH2M HILL has reserved 1,000,000 shares of common stock to be sold under
the stock purchase plan. This is in addition to any shares of common stock
bought in the internal market under the stock purchase plan. The number of
shares of common stock reserved for sale under the stock purchase plan can be
changed by the O&IC Committee to reflect any stock split, stock dividend,
recapitalization, or similar transaction that CH2M HILL may experience.
Distribution of Common Stock Bought Through the Stock Purchase Plan
When shares of common stock are bought through the stock purchase plan,
they will initially be held by CH2M HILL in the name of the employee. Before
the next vote of shareholders, the shares of common stock bought through the
stock purchase plan will be distributed to the employee. The employee may
petition the O&IC Committee for an earlier distribution of the shares.
Restrictions on Common Stock Bought Through the Stock Purchase Plan
All shares of common stock bought through the stock purchase plan will be
subject to the restrictions on common stock contained in CH2M HILL's Restated
Bylaws. Those restrictions are described below, in the section of this
Prospectus called "Description of Capital Stock."
An employee is not permitted to purchase common stock under the stock
purchase plan if doing so would cause the employee to own more shares of common
stock than the employee is permitted to own under CH2M HILL's Restated Bylaws.
49
<PAGE>
Amendment and Termination of the Stock Purchase Plan
The Board of Directors of CH2M HILL may amend or terminate the stock
purchase plan at any time. However, the Board of Directors may not increase the
number of shares of common stock reserved for sale under the stock purchase
plan unless the shareholders of CH2M HILL also approve that change.
Unless previously terminated by CH2M HILL, the stock purchase plan will
terminate on December 31, 2008.
Federal, State, and Local Income Tax Withholding
The federal income tax consequences of purchasing common stock under the
stock purchase plan are described below. Sometimes the sale of shares of common
stock bought through the stock purchase plan may produce compensation income to
an employee. In that case, the employee's employer may be required to withhold
federal, state, and local income tax with respect to the amount of compensation
income recognized by the employee, as though that amount was paid to the
employee by the employer as wages. The employer may satisfy this withholding
obligation by withholding the required amount from other amounts, such as other
compensation or wages, paid by the employer to the employee or by having CH2M
HILL withhold the required amount from any amount that CH2M HILL may owe the
employee upon a re-purchase of the shares of common stock.
Federal Income Tax Consequences of Purchases of Common Stock Under the Stock
Purchase Plan
The following paragraphs summarize the material federal income tax
consequences of participation in the stock purchase plan. This summary is
intended to be general and is not intended to address every federal income tax
issue that may arise from participation in the stock purchase plan. This
summary does not address foreign, state or local tax issues, which may be
significant. Each participant in the stock purchase plan should consider
obtaining professional tax advice with respect to the tax impact on that
participant of participation in the stock purchase plan.
Federal Income Tax Consequences for the Participant. With respect to most
of the participating affiliates, the stock purchase plan is intended to qualify
as an employee stock purchase plan under Section 423 of the Internal Revenue
Code. This means that, with respect to purchases of common stock under the
stock purchase plan by employees of those affiliates:
. The participant will not recognize income for federal income tax purposes
when the participant buys shares of common stock under the stock purchase
plan.
. The participant will recognize ordinary income when the participant
disposes of the common stock bought under the stock purchase plan. For
this purpose, a participant is considered to dispose of common stock
bought under the stock purchase plan when the participant transfers title
to the common stock in any manner, including by sale, exchange, or gift,
except that a participant is not considered to dispose of common stock
bought under the stock purchase plan when the participant transfers the
common stock to a spouse or into joint ownership if the participant is
one of the joint owners.
. The amount of ordinary income recognized by the participant when the
participant disposes of shares of common stock bought under the stock
purchase plan depends on whether the participant held the shares for at
least two years before disposing of them. If the participant held the
shares for at least two years after the date on which the shares were
bought for the participant's account under the stock purchase plan, the
participant will recognize ordinary income when the shares are sold or
otherwise disposed of. The amount of the ordinary income is equal to the
smaller of:
(i) the amount by which the fair market value on the purchase date
exceeded the amount paid for the shares, or
(ii) the amount by which the fair market value on the date of
disposition exceeds the amount paid for the shares.
50
<PAGE>
If the participant dies while owning shares of common stock bought under
the stock purchase plan, ordinary income is recognized in the year of
death in the amount described in the previous sentence.
. If the participant disposes of shares of common stock bought under the
stock purchase plan before the two year holding period expires, the
participant will recognize ordinary income at the time of the
disposition. The amount of the ordinary income recognized by the
participant will be the amount by which the fair market value of the
shares on the purchase date exceeded the amount paid for the shares, even
if the disposition is by gift or is at a loss.
. If the common stock is a capital asset in the hands of the participant,
additional gain on the disposition of the shares of common stock, if any,
will be short-term or long-term capital gain depending on whether the
participant held the shares of common stock for 12 months or less, or for
more than 12 months, respectively.
In the cases discussed above, other than in the case of the participant's
death, the amount of ordinary income recognized by the participant is added to
the purchase price paid by the participant in order to determine the amount of
gain or loss from the disposition of the shares.
With respect to the portion of the stock purchase plan that is not intended
to be qualified as an employee stock purchase plan under Section 423 of the
Internal Revenue Code, a participant purchasing shares will recognize
compensation income at the time of the purchase of shares of common stock under
the stock purchase plan. The amount of this compensation income will be the
amount by which the fair market value of the shares on the purchase date
exceeds the amount of the purchase price paid by the participant.
Tax Consequences for CH2M HILL. CH2M HILL will not be entitled to a
deduction at any time with respect to shares sold under the portion of the
stock purchase plan that is intended to qualify as an employee stock purchase
plan under Section 423 of the Internal Revenue Code, if the participant buying
the shares does not dispose of the shares before the two-year holding period
expires. If the participant disposes of the shares prior to the expiration of
the two-year holding period, CH2M HILL is allowed a federal income tax
deduction that is equal to the amount of ordinary income recognized by the
participant.
Pre-Tax and After-Tax Deferred Compensation Plans
CH2M HILL will adopt, in connection with this offering, The CH2M HILL
Companies, Ltd. Pre-Tax Deferred Compensation Plan and the CH2M HILL Companies,
Ltd. After-Tax Deferred Compensation Plan, referred to in this description as
the deferred compensation plans. In connection with the deferred compensation
plans, CH2M HILL will establish the CH2M HILL Companies, Ltd. Pre-Tax Deferred
Compensation Trust and the CH2M HILL Companies, Ltd. After-Tax Deferred
Compensation Trust, referred to in this description as the deferred
compensation trusts. Neither deferred compensation plan is subject to ERISA.
Two deferred compensation plans will be established to separately handle
pre-tax contributions in one plan and after-tax contributions in the other
plan. In effect, the pre-tax plan will hold contributions made through deferred
compensation and deferred bonus payments. CH2M HILL intends to administer
deferred compensation by participants in the pre-tax plan under the same terms
and conditions as the stock purchase plan. In contrast, the after-tax plan will
hold contributions made directly by employees eligible to participate. All of
the terms of the pre-tax plan and the after-tax plan are generally the same,
however the tax treatment of distributions from the pre-tax plan and the after-
tax plan will be different.
Employees who are eligible to participate in the deferred compensation plan
may elect to invest by making after-tax contributions to the after-tax deferred
compensation plan. An employee who is eligible to participate in the pre-tax
deferred compensation plan may elect to defer a portion of his or her
compensation by entering into a deferred compensation agreement and by filing
an annual election to defer compensation in
51
<PAGE>
accordance with that agreement. In addition, CH2M HILL or its affiliates may
provide that bonuses to employees who are eligible to participate in the pre-
tax deferred compensation plan will be deferred in accordance with the
provisions of the plan.
Administration of the Deferred Compensation Plans
CH2M HILL will appoint a committee called the deferred compensation
committee that will administer the deferred compensation plans. The deferred
compensation committee will designate the affiliates of CH2M HILL whose
employees are eligible to participate in the deferred compensation plans.
The Deferred Compensation Trusts
The deferred compensation trusts are irrevocable trusts established by CH2M
HILL. The Trustee will be named at a later date. Copies of the agreements
establishing the deferred compensation trusts will be available from the
deferred compensation committee.
Contributions to the Deferred Compensation Trusts
Under the agreement between CH2M HILL and the Trustee, the Trustee will
receive and hold common stock contributed to the deferred compensation trusts
by CH2M HILL. When an eligible employee elects under the pre-tax deferred
compensation plan to defer compensation, we will use the compensation that
would have been paid to the employee to purchase common stock, and will
contribute that common stock to the pre-tax deferred compensation trust. We may
also contribute common stock to the pre-tax deferred compensation trust as
bonuses on behalf of eligible employees.
When an eligible employee elects to make voluntary contributions to the
after-tax deferred compensation plan, we will use the cash contribution to
purchase common stock and contribute the common stock to the after-tax deferred
compensation trust.
Each contribution to the deferred compensation trusts will be allocated to
an account in the name of the employee on behalf of whom the contribution is
made. However, the employee will not have a direct ownership interest in the
shares of common stock held in the deferred compensation trusts.
Nature of the Deferred Compensation Trusts
All assets of the deferred compensation trusts will be held by the Trustee
for the benefit of the participants in the deferred compensation plans and for
the benefit of the general creditors of CH2M HILL in the event CH2M HILL
becomes insolvent. CH2M HILL is considered to be insolvent if it is unable to
pay its debts as they become due or if it is the subject of a bankruptcy
proceeding. If CH2M HILL becomes insolvent, the assets of the deferred
compensation trusts will be available to pay the debts of CH2M HILL. In that
case, a participant in the deferred compensation plans will not have any
priority rights with respect to the assets of the deferred compensation trusts
or with respect to any other assets of CH2M HILL. Rather, in the event of
insolvency, a participant in the deferred compensation plans will have only a
claim against CH2M HILL for the amount of compensation previously deferred and
the amount of any after-tax contribution made by the participant. This claim
will be treated like any other claim of a general unsecured creditor of CH2M
HILL. The assets of the deferred compensation trusts are not guaranteed or
insured by any party, including CH2M HILL.
Voting of Common Stock Held in the Deferred Compensation Trusts
Shares of common stock held in the deferred compensation trusts will be
voted by the Trustee, not by the participants in the deferred compensation
plans. The Trustee will vote the shares of common stock held in the deferred
compensation trusts in accordance with instructions given to the Trustee by the
deferred compensation committee.
Dividends on Common Stock Held in the Deferred Compensation Trusts
Cash dividends, if any, paid with respect to shares of common stock held in
the deferred compensation trusts will be returned to CH2M HILL and will not be
held in the deferred
52
<PAGE>
compensation trusts or made available to participants in the deferred
compensation plans. Other dividends, if any, paid with respect to shares of
common stock held in the deferred compensation trusts will be credited to the
account in the deferred compensation trusts in which the shares of common stock
are held.
Distributions from the Deferred Compensation Trusts
The common stock held in the deferred compensation trusts in the name of a
participant in the deferred compensation plans will be distributed to the
participant when a distribution event under the deferred compensation plans
occurs. The following events are distribution events under each deferred
compensation plan:
. The termination of the participant's affiliation with us, as defined in
the Restated Bylaws.
. The death of the participant. In this case, the distribution will be made
to the beneficiary of the participant, as designated on a form signed by
the participant and filed with the deferred compensation committee before
the death of the participant. If the participant does not file a signed
designation of beneficiary with the deferred compensation committee
before the participant's death, the distribution will be made to the
participant's estate.
. A change in the participant's employment status that makes the
participant ineligible to participate in the deferred compensation plans.
. A request by the participant to exercise the participant's interest in
the deferred compensation trusts. In this case a distribution will be
made only if:
(i) the deferred compensation committee approves the participant's
request, and
(ii) the common stock held in the deferred compensation trusts in the
name of the participant can be sold in the internal market on the
next trade date.
. The termination of the deferred compensation plans. This will occur no
later than January 2, 2008. CH2M HILL, in its discretion, may terminate
the deferred compensation plans before that date.
. The date specified by the participant at the date of election to
participate in the deferred compensation plans.
Distributions from the deferred compensation trusts will be made in the
form of common stock. Shares of common stock distributed to a participant from
the deferred compensation trusts will be subject to the restrictions on
ownership of common stock set forth in our Restated Bylaws.
Removal or Resignation of Trustee
CH2M HILL may remove the Trustee of the deferred compensation trusts at any
time and for any reason, upon thirty days' notice to the Trustee. The Trustee
may resign at any time and for any reason, upon thirty days' notice to CH2M
HILL. If the Trustee is removed or resigns, CH2M HILL will appoint a new
Trustee.
Amendment of the Deferred Compensation Trusts
CH2M HILL and the Trustee may amend either deferred compensation trust at
any time by executing a written amendment to the corresponding deferred
compensation trust agreement.
Federal Income Tax Consequences
We have designed the deferred compensation trusts to be grantor trusts
under the federal income tax laws. This means that CH2M HILL's contribution of
common stock to the pre-tax deferred compensation trust should not cause a
participant in the pre-tax deferred compensation plan to recognize income at
the time of the contribution. Instead, the participant will recognize
compensation income when an amount is distributed or made available to the
participant from the pre-tax deferred compensation trust. The assets of both
deferred compensation trusts will be treated as assets of CH2M HILL for federal
income tax purposes.
53
<PAGE>
In contrast, participants in the after-tax deferred compensation trust will
recognize compensation equal to the difference between the amount they
contributed and the value of cash or other property when it is distributed or
made available from the after-tax deferred compensation trust.
This treatment of participants in the deferred compensation plans for
federal income tax purposes is based on private letter rulings issued by the
Internal Revenue Service. The deferred compensation plans and the deferred
compensation trusts are not identical to the arrangements involved in those
private letter rulings, however, and a private letter ruling is binding on the
Internal Revenue Service only with respect to the specific taxpayer to whom the
private letter ruling is issued. We do not plan to seek a private letter ruling
on the federal income tax consequences of participation in the deferred
compensation plans. Therefore, while we believe that the federal income tax
consequences of participation in the deferred compensation plans should be as
described above, there is no definite assurance that this will in fact be the
case. If the federal income tax consequences of participation in the deferred
compensation plans are ultimately determined to be different from those
described above, participants in the deferred compensation plans may be liable
for additional income taxes, interest, and penalties for tax years during which
they participate in the deferred compensation plans.
This description summarizes the material federal income tax consequences of
participation in the deferred compensation plans, but is not intended to be a
complete discussion of all federal income tax or other tax consequences of
participation in the deferred compensation plans. Each participant in the
deferred compensation plans should consider discussing the federal, state, and
local tax consequences of participation in the deferred compensation plans with
that participant's tax advisors.
54
<PAGE>
MANAGEMENT
Directors and Executive Officers
The current directors and executive officers of CH2M HILL are:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Philip G. Hall.......... 57 Chairman of the Board of Directors and Senior Vice President
Joseph A. Ahearn........ 62 Director and Senior Vice President
Kenneth F. Durant....... 61 Director and Senior Vice President
Donald S. Evans......... 49 Director and Senior Vice President
James J. Ferris......... 56 Director and Senior Vice President
Craig T. Zeien.......... 53 Director and Senior Vice President
Jerry D. Geist.......... 65 Director
Michael D. Kennedy...... 50 Director
Susan D. King........... 43 Director
Michael Y. Marcussen.... 47 Director
Jill T. Shapiro 59 Director
Sideman................
Barry L. Williams....... 54 Director
Ralph R. Peterson....... 53 President and Chief Executive Officer
Samuel H. Iapalucci..... 47 Senior Vice President, Chief Financial Officer and Secretary
</TABLE>
Philip G. Hall has served as Chairman of the Board of Directors of CH2M
HILL since 1992, and as a director since 1987. Mr. Hall has served as Senior
Vice President of CH2M Hill, Inc. since 1995, and as its Southwest Regional
Manager since 1997.
Joseph A. Ahearn has served as a director of CH2M HILL since 1996, and as a
Senior Vice President since 1995. Mr. Ahearn has served as President of the
Transportation business of CH2M Hill, Inc. since 1996 and served as Eastern
Region Manager of CH2M Hill, Inc. from 1994 until 1996.
Kenneth F. Durant has served as a director of CH2M HILL since 1995 and as a
Senior Vice President since 1997. Mr. Durant has served as the President of
Industrial Design Corporation, a subsidiary of CH2M HILL, since its formation
in 1985.
Donald S. Evans has served as a director of CH2M HILL since 1997 and as a
Senior Vice President since 1997. Mr. Evans has served as the President of the
Water business and the Operations and Maintenance business since 1985.
James J. Ferris has served as a director of CH2M HILL since 1998, and as
its Senior Vice President since 1995. Dr. Ferris has served as President of the
Energy, Environment and Systems business since 1995 and President of CH2M Hill
Constructors, Inc. since 1994. He served as President and Chief Executive
Officer of Ebasco Environmental from 1989 until 1994. Dr. Ferris also serves as
a director of Kaiser-Hill.
Craig T. Zeien has served as a Senior Vice President of CH2M HILL since
1995 and was elected as a director in 1999. Mr. Zeien has served as President
of Regional Operations since 1994, and as President of CH2M Hill International,
Ltd. since 1995. From 1991 to 1994, Mr. Zeien served as Director of Technology
for CH2M Hill, Inc.
Jerry D. Geist has served as a director of CH2M HILL since 1989. Mr. Geist
has been Chairman of Santa Fe Center Enterprises, Inc. since 1990 and President
and Chief Executive Officer of Howard International Utilities/Projects since
1990. He serves on the Board of Directors of the Davis Family of Mutual Funds.
Michael D. Kennedy has served as a director of CH2M HILL since 1998, and
has served as the Northwest Regional Manager of CH2M Hill, Inc. since 1993. Mr.
Kennedy served as the Portland Regional Manager of CH2M Hill, Inc. from 1987
until 1992 and the Western Regional Business Development Director from 1992
until 1993.
55
<PAGE>
Susan D. King has served as a director of CH2M HILL since 1997. Ms. King
has served as the Chief Financial Officer of Industrial Design Corporation
since 1993, and as its Secretary and Treasurer since 1995.
Michael Y. Marcussen has served as a director of CH2M HILL since 1998. Mr.
Marcussen has served as the European Manager for CH2M Hill IDC Ltd., Dublin,
Ireland since 1977 and has been an employee of Industrial Design Corporation
since 1993.
Jill T. Shapiro Sideman was elected as a director in 1999 and has served as
a Vice President and Client Service Manager of CH2M Hill, Inc. since 1993.
Barry L. Williams has served as a director of CH2M HILL since April 1995.
He has been President of Williams Pacific Ventures, Inc., a consulting firm,
since 1987. Mr. Williams has served as Senior Mediator for JAMS/Endispute since
1993 and a visiting lecturer for the Haas
Graduate School of Business, University of California since 1993. Mr. Williams
has acted as a general partner of WDG, a California limited partnership, since
1987 and a general partner of Oakland Coliseum Joint Venture since 1998. He
also serves on the board of directors of Pacific Gas & Electronic Company,
Northwestern Mutual Life Insurance Company, Newhall Land & Farming Company,
Simpson Manufacturing Company, USA Group, Inc., CompUSA Inc., R. H. Donnelley,
and several not-for-profit organizations.
Ralph R. Peterson has served as President and Chief Executive Officer of
CH2M HILL since 1991. Mr. Peterson also serves as a director of Kaiser-Hill.
Samuel H. Iapalucci has served as Senior Vice President, Chief Financial
Officer and Secretary of CH2M HILL since 1994. Mr. Iapalucci served as Vice
President and Chief Financial Officer for OHM Corporation, an engineering and
construction company, from 1991 to 1994.
56
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth information regarding annual incentive
compensation for the chief executive officer and the other four most highly
compensated executive officers of CH2M HILL.
Summary Compensation Table(1)
<TABLE>
<CAPTION>
Annual Compensation
-----------------------
(a) (b) (c) (d) (i)
All other
Name and principal position Year Salary(2) Bonus(2) compensation(3)
--------------------------- ---- --------- -------- ---------------
<S> <C> <C> <C> <C>
Ralph R. Peterson....................... 1998 $451,060 $344,802 $29,430
President & Chief Executive Officer 1997 438,437 293,631 36,877
1996 396,076 326,374 8,985
Kenneth F. Durant....................... 1998 273,000 281,465 7,885
Senior Vice President 1997 260,000 384,046 12,354
1996 230,000 391,440 14,242
Philip G. Hall.......................... 1998 316,786 128,157 8,112
Senior Vice President 1997 299,120 175,687 29,285
1996 295,479 201,300 11,122
Samuel H. Iapalucci..................... 1998 308,389 190,404 7,147
Senior Vice President, Chief Financial 1997 275,520 148,162 71,880
Officer & Secretary 1996 267,681 131,793 3,442
Donald S. Evans......................... 1998 305,654 148,860 6,874
Senior Vice President 1997 278,640 95,538 6,621
1996 254,099 114,761 1,690
</TABLE>
- --------
(1) Certain columns have been omitted because they are not applicable.
(2) Amounts shown include compensation earned by executive officers, whether
paid during or after such year, or deferred at the election of those
officers.
(3) Amounts shown for 1998 include:
<TABLE>
<CAPTION>
Group Term Life
and Split-
Employee Defined dollar Life
Stock 401(k) Contribution Insurance
Plan Plan Pension Plan Premiums
-------- ------ ------------ ---------------
<S> <C> <C> <C> <C>
Ralph R. Peterson............... $2,041 $1,296 $2,400 $3,615
Kenneth F. Durant............... 4,177 -- 3,200 508
Philip G. Hall.................. 2,041 1,296 2,400 2,375
Samuel H. Iapalucci............. 2,041 1,296 2,400 1,410
Donald S. Evans................. 1,610 1,296 2,400 1,568
</TABLE>
CH2M HILL has not entered into employment agreements with its executive
officers who serve at the pleasure of CH2M HILL's board of directors.
Therefore, since compensation for executive officers is comprised of salary,
bonus and other incentive compensation, some of which are based on year-end
performance results, CH2M HILL does not know the aggregate amount of
compensation that will be paid to its executive officers in the current fiscal
year.
1999 Long-Term Incentives
The following table sets forth information regarding Long-Term Incentive
Plan opportunities that were granted to the chief executive officer and the
other four most highly compensated executive officers of CH2M HILL. This long-
term incentive plan was established effective January 1, 1999 and will be paid
out on or after the 3 year award period ending December 31, 2001. There are no
payouts in years 1999 and 2000. The payment of the awards will be 60% in common
stock, valued at the date of payment, and 40% cash. The criteria for payout is
based on specific long-term goals of earnings growth and strategic imperatives
for CH2M HILL as well as individual goals.
57
<PAGE>
Long-Term Incentive Plan Awards in 1999(1)(2)
<TABLE>
<CAPTION>
Estimated future payouts
under non-stock price-based
plans
-----------------------------
(a) (c) (d) (e) (f)
Period
Until
Name Payout Threshold Target Maximum
---- ------- --------- -------- ----------
<S> <C> <C> <C> <C>
Ralph R. Peterson..................... 3 years $0 $542,400 $1,084,800
Kenneth F. Durant..................... 3 years $0 $168,000 $ 336,000
Philip G. Hall........................ 3 years $0 $183,000 $ 366,000
Samuel H. Iapalucci................... 3 years $0 $174,000 $ 348,000
Donald S. Evans....................... 3 years $0 $171,600 $ 343,200
</TABLE>
- --------
(1) Certain columns have been omitted because they are not applicable.
(2) The Target amounts for the first two years of the Long-Term Incentive Plan
are adjusted to reflect 1.5 times what the Target will be when it begins
the payouts in year 3 and thereafter. For example, beginning in year 3 the
Target and Maximum amounts for the named executives will be the following
beginning in 2001:
<TABLE>
<CAPTION>
Name Threshold Target Maximum
---- --------- -------- --------
<S> <C> <C> <C>
Ralph R. Peterson............................... $0 $361,600 $723,200
Kenneth F. Durant............................... $0 $112,000 $224,000
Philip G. Hall.................................. $0 $122,000 $244,000
Samuel H. Iapalucci............................. $0 $116,000 $232,000
Donald S. Evans................................. $0 $114,400 $228,800
</TABLE>
Stock Options Granted
During 1999, the named executive officers were granted the following stock
options at $4.31 per share of common stock, vesting 25% on February 12, 2000,
25% more on February 12, 2001 and the remaining 50% on February 12, 2002. These
stock options represent 3.9% of the total stock options granted of 2,434,840,
of which the remaining stock options were granted to other employees of CH2M
HILL.
<TABLE>
<S> <C>
Ralph R. Peterson............... 28,350
Kenneth F. Durant............... --
Philip G. Hall.................. 17,780
Samuel H. Iapalucci............. 24,750
Donald S. Evans................. 24,750
</TABLE>
Retirement Plans
Messrs. Peterson and Hall are participants in the CH2M HILL Pension Plan.
Benefits under the CH2M HILL Pension Plan are equal to 1% of 1987-1991 average
base compensation (up to $150,000) multiplied by years of credited service
prior to 1992 plus 1% of each year's base compensation (up to $150,000) for
each year of credited service from January 1, 1992 through December 31, 1993.
Plan benefits were frozen as of December 31, 1993. The estimated annual
benefits payable at the earliest age when a participant may retire with an
unreduced benefit (age 65) are $37,849 to Mr. Peterson, and $34,955 to Mr.
Hall.
Mr. Durant is a participant in the CH2M HILL Pension Plan with respect to
credited service prior to February 25, 1985 and he is a participant in the CH2M
HILL Industrial Design Corporation Pension Plan with respect to credited
service from February 25, 1985 through January 31, 1994. The benefits under the
CH2M HILL Industrial Design Corporation Pension Plan are equal to 1.3% of each
year's base compensation (up to the legal limit) for each year of credited
service from February 25, 1985 through January 31, 1994. Plan benefits were
frozen as of January 31, 1994. The estimated annual benefits payable to Mr.
Durant at the earliest age when a participant may retire with an unreduced
benefit (age 65) are $15,718 from the CH2M HILL Pension Plan and $13,101 from
the CH2M HILL Industrial Design Corporation Pension Plan, or a total of
$28,819.
Mr. Evans is a participant in the CH2M HILL Pension Plan with respect to
credited service prior to May 1, 1986 and he is a participant in the OMI
Retirement Plan with respect to credited service from May 1, 1986 through
December 31, 1995.
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The normal retirement benefits under the OMI Retirement Plan are equal to 1.5%
of average compensation (up to the IRS limit) for the first 20 years of
credited service plus 0.5% of average compensation (up to the IRS limit) for
years of service in excess of 20. Mr. Evans' benefit under the OMI plan was
frozen as of December 31, 1995 upon his transfer from employment covered by the
plan. The estimated annual benefits payable to Mr. Evans at the earliest age
when a participant may retire with an unreduced benefit (age 65) are $12,771
from the CH2M HILL Pension Plan and $23,521 from the OMI Retirement Plan, or a
total of $36,292.
Mr. Iapalucci is not a participant in a CH2M HILL Pension Plan.
Board of Directors
The Restated Bylaws provide that the Board of Directors shall consist of at
least nine and no more than thirteen directors and shall be subject to change
pursuant to resolutions of the Board of Directors. The current number of
directors is eleven. The Restated Bylaws provide that the directors shall be
elected to three-year staggered terms by dividing the directors into three
classes as equal in number as possible. At each annual meeting the same number
of directors shall be elected for a three-year term as the number whose term
expires. Each director shall serve until his respective successor is elected
and qualified. A decrease in the number of directors shall not shorten the term
of any incumbent director.
Compensation of Directors
Non-employee directors of CH2M HILL receive an annual retainer fee of
$15,000 as directors and $4,000 for each committee on which they serve as the
chairman. CH2M HILL also pays non-employee directors a meeting fee of $1,000
for attendance at each Board of Directors meeting and $1,000 per day for
attendance at committee meetings. Directors are reimbursed for expenses
incurred in connection with attendance at meetings and other CH2M HILL
functions. Non-employee directors are eligible to receive a discretionary cash
bonus each year which for 1998 was $12,000.
Directors and Officers Liability Insurance
CH2M HILL pays the premium for insurance in respect of claims against its
directors and officers and in respect of losses for which CH2M HILL may be
required or permitted by law to indemnify such directors and officers. The
directors to be insured are the directors named herein and all directors of
CH2M HILL's subsidiaries. The officers to be insured are all officers and
assistant officers of CH2M HILL and its subsidiaries. CH2M HILL does not expect
to allocate or segregate the premium with regard to specific subsidiaries or
individual directors and officers.
Compensation Committee Interlocks and Insider Participation
The members of CH2M HILL's Compensation Committee of the Board of
Directors are Joseph A. Ahearn, Kenneth F. Durant, Donald S. Evans, James F.
Ferris, Jerry D. Geist and Barry L. Williams. All members of the Compensation
Committee except Jerry D. Geist and Barry L. Williams are officers of CH2M
HILL.
SECURITY OWNERSHIP OF CERTAIN SHAREHOLDERS AND MANAGEMENT
The following tables set forth information regarding the ownership of all
classes of CH2M HILL's securities as of July 31, 1999, by (a) any person or
group known to have ownership of more than five percent of the common stock or
Class A preferred stock and (b) beneficial ownership by directors and executive
officers individually and as a group.
Security Ownership of Certain Shareholders
The following table presents information as of July 31, 1999, concerning
the only known shareholder who owns five percent or more of common stock.
<TABLE>
<CAPTION>
Number of
Shares Percent of
Naemand Address of Shareholder Title of Class Held Class
- ------------------------------- -------------- ---------- ----------
<S> <C> <C> <C>
Trustees of the CH2M HILL Employee Common 10,948,830(1) 36.4%
Stock Plan........................
6060 S. Willow Dr.
Greenwood Village, CO
80111
</TABLE>
- --------
(1) Common shares are held of record by the Trustees for the accounts of
participants in the Employee Stock Plan and will be voted in accordance
with instructions received from participants. Shares as to which no
instructions are received will be voted in the same proportions.
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<PAGE>
Security Ownership of Directors and Executive Officers
The following table sets forth information as of July 31, 1999 as to the
beneficial ownership of CH2M HILL's equity securities by each director, the
most highly compensated executive officers and by all directors and executive
officers as a group. None of the individuals listed below owns more than one
percent of the outstanding shares of CH2M HILL. As a group, all directors and
executive officers own less than five percent of the outstanding shares of CH2M
HILL.
<TABLE>
<CAPTION>
Total
Common Common Common
Stock Stock Stock
Name of Beneficial Owner Held Directly Held Indirectly(1) Held
------------------------ ------------- ------------------ ---------
<S> <C> <C> <C>
Joseph A. Ahearn................... 34,220 2,848 37,068
Kenneth F. Durant.................. 250,000 24,915 274,915
Donald S. Evans.................... 180,240 13,381 193,621
James J. Ferris.................... 56,720 2,506 59,226
Jerry D. Geist..................... -- -- --
Philip G. Hall..................... 250,000 31,573 281,573
Samuel H. Iapalucci................ 50,590 2,381 52,971
Michael D. Kennedy................. 68,480 17,141 85,621
Susan D. King...................... 63,500 5,286 68,786
Michael Y. Marcussen............... 13,420 -- 13,420
Ralph R. Peterson.................. 250,000 29,873 279,873
Jill T. Shapiro Sideman............ 13,470 4,990 18,460
Barry L. Williams.................. -- -- --
Craig T. Zeien..................... 177,850 23,175 201,025
All directors and executive
officers as a group (14 people)... 1,408,490 158,069 1,566,559
</TABLE>
- --------
(1) Includes common stock held through the Employee Stock Plan and the 401(k)
Plan. Shares are vested, except for shares held indirectly by Mr. Ferris
and Mr. Iapalucci, who indirectly hold 501 and 952 unvested shares,
respectively.
RELATED TRANSACTION
We own a 40% interest in Dan Engineering A/S, a Dutch company. The
aggregate purchase price of our interest in Dan Engineering was $255,000.
Michael Y. Marcussen, who is one of our directors, owns 40% of Dan Engineering.
Dan Engineering was founded in 1985 by Mr. Marcussen and a partner and
specializes in the design, construction and operation of non-ferrous metal
smelting equipment and plants, particularly tin and lead smelters.
POLICY RELATING TO AFFILIATED TRANSACTIONS
CH2M HILL has adopted the following policy relating to affiliated
transactions:
CH2M HILL will make or enter into all future material affiliated
transactions and loans, if any, on terms that are no less favorable to CH2M
HILL than those that can be obtained from unaffiliated third parties. A
majority of CH2M HILL's independent directors who do not have an interest in
the transactions and who have had access, at CH2M HILL's expense, to legal
counsel will approve all future material affiliated transactions, loans and
forgiveness of loans, if any.
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<PAGE>
SECURITIES OFFERED BY THE CURRENT SHAREHOLDERS
The current shareholders may sell up to an aggregate of 17,859,330 shares
of common stock. While we are registering all of the shares held by our current
shareholders, including all the shares currently held by our directors and
executive officers, we do not know whether they intend to sell any of their
common stock, but they may sell some, none or all of their shares.
We surveyed our significant shareholders informally on the number of shares
they actually expect to sell. These surveys indicate that current shareholders
intend to sell fewer than 10% of their shares in the next 12 months.
Based on its stock transfer records, CH2M HILL will provide specific
information upon request, regarding the selling shareholders who are not
individually named at a particular point in time, in connection with a legal
proceeding filed under the Securities Act of 1933.
We are also registering up to 2,000,000 shares of common stock that may be
sold by our employee benefit plans through the internal market.
The following table sets forth, as of July 31, 1999, the number of shares
of common stock owned by the current CH2M HILL shareholders, excluding shares
allocated to them under the employee benefit plans, with all directors and
executive officers and all shareholders who own 0.5% or more of common stock
individually identified. The table does not reflect the sale of any shares of
common stock being offered by CH2M HILL. All of the shares are owned of record.
<TABLE>
<CAPTION>
Percent of Number
Number of Ownership Of Shares
Name of Beneficial Owner Shares Owned Before Offering Registered(1)
------------------------ ------------ --------------- -------------
<S> <C> <C> <C>
Joseph A. Ahearn.................... 34,220 * 34,220
Kenneth F. Durant................... 250,000 * 250,000
Donald S. Evans..................... 180,240 * 180,240
James J. Ferris..................... 56,720 * 56,720
Philip G. Hall...................... 250,000 * 250,000
Samuel H. Iapalucci................. 50,590 * 50,590
Michael D. Kennedy.................. 68,480 * 68,480
Susan D. King....................... 63,500 * 63,500
Michael Y. Marcussen................ 13,420 * 13,420
Ralph R. Peterson................... 250,000 * 250,000
Jill T. Shapiro Sideman............. 13,470 * 13,470
Craig T. Zeien...................... 177,850 * 177,850
All directors and executive officers
as a group (12 people)............. 1,408,490 4.69 1,408,490
John W. Filbert..................... 250,000 * 250,000
E. Wayne Hanson..................... 238,660 * 238,660
Jerry D. Boyle...................... 226,380 * 226,380
Richard S. Reid..................... 214,760 * 214,760
Cliff G. Thompson................... 210,080 * 210,080
Robert L. Chapman................... 209,660 * 209,660
David R. Evans...................... 186,410 * 186,410
William F. Toole.................... 169,700 * 169,700
John W. Lee, Jr..................... 167,840 * 167,840
Roger R. Bissell.................... 166,350 * 166,350
J. Michael Angelea.................. 164,320 * 164,320
Jay A. Mackie....................... 150,920 * 150,920
All shareholders (other than
directors and executive officers)
who own 0.5% or more of common
stock as a group (12 people)....... 2,355,080 7.84 2,355,080
All other current shareholders...... 14,102,160 46.94 14,102,160
</TABLE>
- --------
* Less than one percent.
(1) The shares of common stock registered by the current shareholders represent
the maximum number of shares that they may sell. Based on the currently
available information, these shareholders intend to sell significantly less
than this maximum number of shares.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
The following is a summary of the material provisions of CH2M HILL's
Restated Articles of Incorporation and Restated Bylaws regarding CH2M HILL's
capital stock. You may find more detailed information by reading the Restated
Articles of Incorporation and the Restated Bylaws, copies of which are filed as
exhibits to the registration statement filed with the Securities and Exchange
Commission. The Restated Articles of Incorporation and Restated Bylaws will
take effect prior to the first trade date in the internal market if the Board
of Directors determines to give effect to the internal market at the Board's
November 1999 meeting.
CH2M HILL is authorized to issue 150,000,000 shares of capital stock, of
which 100,000,000 shares are common stock, par value $.01 per share, and
50,000,000 shares are Class A preferred stock, par value $.02 per share. As of
July 31, 1999, 1,789,382 shares of common stock and 1,215,020 shares of Class A
preferred stock were outstanding and held of record by approximately 1,000 key
employees and the employee benefit plan trusts.
As noted in the Prospectus Summary, the information in this prospectus has
been adjusted to reflect the conversion of each outstanding share of Class A
preferred stock into one share of common stock and a ten-for-one stock split of
the common stock, which will occur prior to the first trade date in the year
2000, if the Board of Directors determines to give effect to the internal
market at its November 1999 meeting. If the Class A preferred stock had been
converted into common stock and the ten-for-one stock split had been completed
on July 31, 1999, there would have been 30,044,020 shares of common stock and
no Class A preferred stock outstanding on that date.
Common Stock
General. Holders of common stock are entitled to one vote per share on all
matters submitted to the shareholders of CH2M HILL. Each share of common stock
is equal in respect of voting rights, liquidation rights and rights to
dividends and to distributions. Shareholders of CH2M HILL do not and will not
have any preferred or preemptive rights to subscribe for, purchase or receive
additional shares of any class of capital stock of CH2M HILL, or any securities
convertible into or exchangeable for such shares.
Restrictions on Common Stock. All the shares of common stock presently
outstanding are, and all shares of common stock offered hereby will be, subject
to restrictions set forth in the Restated Bylaws:
1. Right of Repurchase upon Termination of Employment or Affiliation. All
shares of common stock are subject to CH2M HILL's right of repurchase upon the
termination of the shareholder's employment or affiliation with CH2M HILL. Such
right of repurchase will also be applicable to all shares of common stock which
such person has the right to acquire after his or her termination of employment
or affiliation pursuant to any of CH2M HILL's employee benefit plans or
pursuant to any option or other contractual right to acquire shares of common
stock which was outstanding at the date of such termination of employment or
affiliation. Such right of repurchase will not be applicable to shares of
common stock held by an employee benefit plan or any other retirement or
pension plan adopted by CH2M HILL or any of its subsidiaries which pursuant to
applicable law or by its terms does not provide for CH2M HILL's right to
repurchase shares issued thereunder upon termination of employment or
affiliation.
CH2M HILL's right of repurchase is exercised by mailing a written notice to
such holder within 60 days following termination of employment or affiliation.
If CH2M HILL repurchases the shares, the price will be the price per share:
. in effect on the date of such termination of employment or affiliation,
in the case of shares owned by the holder at that date and shares
issuable to the holder after that date pursuant to any option or other
contractual right to acquire shares of common stock which were
outstanding at that date; or
. in effect on the date such shares are distributed to the holder, in the
case of shares distributable to the holder after his or her termination
of employment or affiliation pursuant to any of CH2M HILL's employee
benefit plans.
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<PAGE>
CH2M HILL will, in the event it exercises its right of repurchase upon
termination of employment or affiliation, pay for such shares in cash or
promissory notes.
CH2M HILL and any holder of shares may agree to extend the time period of
CH2M HILL's right to repurchase such holder's shares or to alter the payment
terms.
2. Right of First Refusal. If a holder of common stock desires to sell any
of his or her shares to a third party other than in the internal market, such
holder must first give notice to the Secretary of CH2M HILL including:
. A signed statement indicating that such holder desires to sell his or her
shares of common stock and that he or she has received a bona fide offer
to purchase such shares
. A statement signed by the intended purchaser containing:
(i) the intended purchaser's full name, address and taxpayer
identification number
(ii) the number of shares to be purchased
(iii) the price per share to be paid
(iv) the other terms under which the purchase is intended to be made
(v) a representation that the offer, under the terms specified, is bona
fide; and
. If the purchase price is payable in cash, in whole or in part, a copy of
a certified check, cashier's check or money order payable to such holder
from the purchaser in the amount of the purchase price to be paid in cash
CH2M HILL then has the right, exercisable within 14 days, to purchase all
of the shares specified in the notice at the offer price and upon the same
terms as set forth in the notice. In the event CH2M HILL does not exercise such
right, the holder may sell the shares specified in the notice within 30 days
thereafter to the person specified in the notice at the price and upon the
terms and conditions set forth therein. The holder may not sell such shares to
any other person or at any different price or on any different terms without
first re-offering the shares to CH2M HILL.
If circumstances occur which would permit CH2M HILL to exercise its right
of repurchase upon termination of employment or affiliation and its right of
first refusal, then CH2M HILL may, in its sole discretion, elect which of these
rights it will exercise.
3. Other Transfers. Except for sales in the internal market or pursuant to
the repurchase right or right of first refusal procedure described above, no
holder of common stock may sell, assign, pledge, transfer or otherwise dispose
of or encumber any shares of common stock without the prior written approval of
CH2M HILL. Any attempt to do so without such prior approval will be null and
void. If any transfer of CH2M HILL's shares is not a sale by an employee,
director or consultant, or is by a person who acquired such shares other than
by purchase, directly or indirectly, from an employee, director or consultant,
CH2M HILL may condition its approval of such transfer upon the transferee's
agreement to hold such shares subject to CH2M HILL's right to repurchase such
shares upon the termination of employment or affiliation of the employee,
director or consultant.
4. Ownership Limit. The Restated Bylaws provide that no person may own more
than 350,000 shares of common stock, excluding such person's beneficial
interest in common stock held indirectly by an employee benefit trust.
Class A Preferred Stock
Holders of Class A preferred stock have no voting rights with respect to
matters submitted to the shareholders of CH2M HILL, except as required by law.
Upon the liquidation, dissolution, or winding up of CH2M HILL, whether
voluntary or involuntary, each holder of Class A preferred stock would be
entitled to be paid $.02 per share prior to any distributions to holders of
common stock. Rights granted to the holders of Class A preferred stock can only
be amended by a majority of the holders of common stock and a majority of the
holders of Class A preferred stock, each voting as a separate class. The Board
of Directors may elect at any time to convert each outstanding share of Class A
preferred stock into one share of common stock, without the prior consent of
the holders of either the Class A preferred stock or common stock.
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<PAGE>
Limitation of Liability and Indemnification
Under the Oregon Business Corporation Act (the "Act"), a corporation may
provide for the limitation of liability of directors and indemnification of
directors and officers under some circumstances. CH2M HILL's Restated Articles
of Incorporation provide that directors are not personally liable to the
corporation or its shareholders for monetary damages for conduct as a director,
except for any act or omission for which the elimination of liability is not
permitted under the Act. Section 60.047(2)(d) of the Act sets forth the
following actions for which limitation of liability is not permitted,
including;
. any breach of a director's duty of loyalty to the corporation or its
shareholders
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of the law
. any unlawful distributions to shareholders; or
. any transaction from which the director received an improper or illegal
personal benefit.
The Restated Bylaws allow CH2M HILL to indemnify any person who is or was a
party, or is threatened to be made a party, to any civil, administrative, or
criminal proceeding by reason of the fact that the person is or was a director
or officer of CH2M HILL or any of its subsidiaries, or is or was serving at
CH2M HILL's request as a director, officer, partner, agent, or employee of
another corporation or entity. The indemnification may include expenses,
including attorneys' fees, judgments, fines, and amounts paid in settlement,
actually and reasonably incurred by that person. Under the Section 60.391(1) of
the Act, indemnification is available if:
. the person acted in good faith
. the person reasonably believed the conduct was in the corporation's best
interests, or at least was not opposed to its best interests; and
. in the case of a criminal proceeding, the person had no reasonable cause
to believe the conduct was unlawful.
In addition, a person who is wholly successful, on the merits or otherwise,
in the defense of a proceeding in which the person was a party because the
person was a director, is entitled to indemnification for expenses actually and
reasonably incurred by the person in connection with the proceeding.
Commission Position on Indemnification
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act"), may be permitted to directors,
officers and controlling persons of CH2M HILL pursuant to provisions described
above, or otherwise, CH2M HILL has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities is asserted
by such director, officer or controlling person in connection with the
securities being registered, CH2M HILL will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
Anti-Takeover Provisions -- Legislation
The Act provides that corporate directors, when evaluating a proposed
tender or exchange offer, merger, acquisition, or similar proposal, "may, in
determining what they believe to be in the best interests of the corporation,
give due consideration to the social, legal, and economic effects on employees,
clients, and suppliers of the corporation and on the communities and
geographical areas in which the corporation and its subsidiaries operate, the
economy of the state and nation, the long-term as well as short-term interests
of the corporation and its shareholders, including the possibility that these
interests may be best served by the continued independence of the corporation
and other relevant factors." Consequently, when evaluating a proposal for the
merger, consolidation, or sale of CH2M HILL, the Board of Directors may
consider the interests of groups or constituents other than CH2M HILL's
shareholders. Such consideration may cause the Board of Directors to reject an
acquisition proposal for reasons other than the price being offered.
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<PAGE>
CH2M HILL is also subject to the Oregon Business Combination Act (the
"OBCA"). The OBCA generally provides that if a person (an "Interested
Shareholder") acquires voting stock of an Oregon corporation in a transaction
resulting in such person owning 15% or more of the total voting stock of such
corporation, then the corporation and the Interested Shareholder may not engage
in business combination transactions for three years following the date of such
acquisition. "Business combination transactions" include:
. a merger or plan of share exchange
. any sale, lease, mortgage, or other disposition of corporate assets where
the assets have an aggregate market value of 10% or more of the aggregate
market value of the corporation's assets or outstanding capital stock;
and
. certain transactions that result in the issuance of capital stock of, or
loans by, the corporation to the Interested Shareholder.
These restrictions do not apply if:
. the Interested Shareholder, as a result of the acquisition, owns at least
85% of the outstanding voting stock of the corporation, excluding shares
owned by directors who are also officers, and certain employee benefit
plans
. prior to the completion of the acquisition the Board of Directors
approves either the business combination transaction or the acquisition
. after the completion of the acquisition the Board of Directors and the
holders of at least two-thirds of the outstanding voting stock of the
corporation, excluding shares owned by the Interested Shareholder,
approve the business combination transaction
A corporation may provide in its Articles of Incorporation or bylaws that
the OBCA does not apply to its shares. CH2M HILL has not adopted such a
provision and does not presently plan to do so.
In addition, the Oregon Control Share Act (the "OCSA") also applies to CH2M
HILL. The OCSA provides that a person or persons who acquire no less than 20%
of the voting shares of a corporation in a "control share acquisition," lose
the right to vote the shares unless such voting rights are restored through a
majority vote of the remaining shareholders. A person (the "Acquiring Person")
who acquires voting stock of an Oregon corporation in a transaction which
results in such Acquiring Person holding more than 20%, 33%, or 50% of the
total voting power of the corporation (a "Control Share Acquisition") cannot
vote such shares ("Control Shares") unless voting rights are accorded to the
Control Shares by the holders of a majority of the outstanding voting shares,
excluding such Control Shares and shares held by insiders. The vote is required
at the time an Acquiring Person's holdings exceed 20% of the total voting power
of a company, and again at the time the Acquiring Person's holdings exceed 33%
and 50%, respectively. "Acquiring Person" is broadly defined to include persons
acting as a group. The Acquiring Person may, but is not required to, submit to
CH2M HILL an "Acquiring Person Statement" setting forth information about the
Acquiring Person and its plans with respect to CH2M HILL. The Acquiring Person
Statement may also request that CH2M HILL call a special meeting of
shareholders to determine whether the Control Shares will be allowed to retain
voting rights. If the Acquiring Person does not request a special meeting of
shareholders, the issue of voting rights of Control Shares will be considered
at the next annual meeting or special meeting of shareholders that is held more
than 60 days after the date of the Control Share Acquisition. If the Acquiring
Person's Control Shares are accorded voting rights and represent a majority of
all voting power, shareholders who vote against restoring such voting rights
are entitled to the appraised "fair value" of their shares, which may not be
less than the highest price paid per share by the Acquiring Person for the
Control Shares.
The OCSA and the OBCA effectively encourage any potential acquirer to
negotiate with CH2M HILL's Board of Directors, and discourage potential
acquirers unwilling to comply with their provisions. A corporation may provide
in its Articles of Incorporation or bylaws that these laws shall not apply to
its shares. CH2M HILL has not adopted such provisions and does not currently
intend to do so. These laws may make CH2M
65
<PAGE>
HILL less attractive for takeover, and shareholders, therefore, may not benefit
from a rise in the price of the common stock that could result from a takeover.
Anti-Takeover Provisions -- Restated Articles of Incorporation and Restated
Bylaws
In addition to the laws discussed above, CH2M HILL's Restated Articles of
Incorporation and Restated Bylaws contain provisions that could make the
acquisition of CH2M HILL through a tender offer, proxy contest, or merger
difficult for a potential suitor opposed by the Board of Directors. These
provisions are:
. The restriction on the sale of common stock outside of the internal
market
. CH2M HILL's right to repurchase shares of common stock upon the holder's
termination of employment with CH2M HILL
. CH2M HILL's right of first refusal on shares of common stock, except for
shares sold in the internal market
. CH2M HILL's right to refuse to allow the transfer of shares of common
stock to proposed transferees, except for shares sold in the internal
market or pursuant to the right of first refusal
. The Restated Bylaws' prohibition on any shareholder owning more than
350,000 shares of the common stock
. The existence of staggered terms for directors of CH2M HILL
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, CH2M HILL will have outstanding up to
34,044,020 shares of common stock. Of these shares, the maximum 23,865,730
shares sold in the offering will be freely tradable in the internal market
without restriction or further registration under the Securities Act except for
any shares purchased by an "affiliate" of CH2M HILL, as defined in Rule 144
under the Securities Act. The remaining 10,178,290 shares of common stock are
held by our employee benefit plan trusts and may be sold in the internal market
either under Rule 144, subject to volume or holding period limitations, or
pursuant to a future registration statement declared effective under the
Securities Act.
As of July 31, 1999, 2,506,045 options to purchase common stock were
outstanding. A total of 8,000,000 shares of common stock are currently
available for future grants of options.
VALIDITY OF COMMON STOCK
The validity of the common stock offered hereby will be passed upon for
CH2M HILL by Holme Roberts & Owen LLP.
EXPERTS
The financial statements and schedules included in this prospectus and
elsewhere in this registration statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
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AVAILABLE INFORMATION
CH2M HILL has filed with the Securities and Exchange Commission (the
"Commission") a registration statement (which term shall include any amendments
thereto) on Form S-1 under the Securities Act, with respect to the common stock
offered hereby. This prospectus, which constitutes a part of the registration
statement, does not contain all of the information set forth in the
registration statement, certain items of which are contained in exhibits to the
registration statement as permitted by the rules and regulations of the
Commission. For further information with respect to CH2M HILL and the common
stock offered hereby, reference is made to the registration statement,
including the exhibits thereto, and the financial statements and notes and
schedules filed as a part thereof. Statements made in this prospectus
concerning the contents of any document referred to herein are not necessarily
complete. With respect to each such document filed with the Commission as an
exhibit to the registration statement, reference is made to the exhibit for a
more complete description of the matter involved, and each such statement shall
be deemed qualified in its entirety by such reference.
The registration statement, including the exhibits thereto, and the
financial statements and notes and schedules filed as a part thereof, as well
as such reports and other information filed with the Commission, may be read
and copied at the SEC's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Information on the operation of the Public Reference
Room may be obtained by calling the Commission at 1-800-SEC-0330. The
Commission maintains a Web site at http://www.sec.gov that contains reports,
proxy and information statements and other information regarding issuers that
file electronically with the Commission.
As a result of the offering, CH2M HILL will become subject to the
information and reporting requirements of the Exchange Act, and will file
periodic reports, proxy statements and other information with the Commission.
CH2M HILL intends to furnish to its shareholders annual reports containing
audited financial statements and quarterly reports containing unaudited
financial information for the first three quarters of each fiscal year.
67
<PAGE>
CH2M HILL COMPANIES, LTD.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants--Arthur Andersen LLP............. F-2
Independent Auditor's Report--KPMG LLP.................................... F-3
Consolidated Financial Statements:
Audited Consolidated Balance Sheets at December 31, 1997 and 1998 and
Unaudited Consolidated Balance Sheet at June 30, 1999.................. F-4
Audited Consolidated Statements of Income for the Years Ended December
31, 1996, 1997 and 1998 and Unaudited Consolidated Statements of Income
for the Six-Month Periods Ended June 30, 1998 and 1999................. F-5
Audited Consolidated Statements of Temporary Shareholders' Equity for
the Years Ended December 31, 1996, 1997 and 1998....................... F-6
Audited Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1997 and 1998 and Unaudited Consolidated Statements
of Cash Flows for the Six-Month Periods Ended June 30, 1998 and 1999... F-7
Notes to Consolidated Financial Statements.............................. F-8
Financial Statement Schedules:
Report of Independent Public Accountants--Arthur Andersen LLP........... F-31
Schedule II--Valuation and Qualifying Accounts.......................... F-32
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To CH2M HILL Companies, Ltd.:
We have audited the accompanying consolidated balance sheets of CH2M HILL
Companies, Ltd. (an Oregon corporation) and subsidiaries as of December 31,
1997 and 1998 and the related consolidated statements of income, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1998. These financial statements are the responsibility of CH2M HILL's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial statements of
CH2M HILL Industrial Design Corporation, which statements reflect total assets
and total revenues of 15 percent and 28 percent in 1996, 17 percent and 27
percent in 1997, and 8 percent and 20 percent in 1998, respectively, of the
related consolidated totals. Those statements were audited by other auditors
whose report has been furnished to us and our opinion, insofar as it relates to
the amounts included for this entity, is based solely on the report of the
other auditors.
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 and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material
respects, the financial position of CH2M HILL Companies, Ltd. and subsidiaries
as of December 31, 1997 and 1998, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
February 12, 1999.
F-2
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
CH2M HILL INDUSTRIAL DESIGN
CORPORATION:
We have audited the consolidated balance sheets of CH2M HILL INDUSTRIAL
DESIGN CORPORATION AND SUBSIDIARIES as of December 31, 1998 and 1997, and the
related consolidated statements of income and retained earnings, comprehensive
income, and cash flows for each of the years in the three-year period ended
December 31, 1998 (not presented separately herein). These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements 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 CH2M HILL
INDUSTRIAL DESIGN CORPORATION AND SUBSIDIARIES as of December 31, 1998 and
1997, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1998 in conformity with
generally accepted accounting principles.
KPMG LLP
Portland, Oregon
January 22, 1999
F-3
<PAGE>
CH2M HILL COMPANIES, LTD.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
Pro Forma
December 31, December 31, June 30, June 30,
1997 1998 1999 1999
------------ ------------ ----------- -----------
(Unaudited) (Unaudited)
(Note 1)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash & cash equivalents...... $ 38,327 $ 16,595 $ 23,918
Receivables, net--
Client accounts............. 141,830 136,882 156,052
Unbilled revenue............ 78,265 87,635 112,876
Other....................... 3,923 4,567 8,351
Prepaid expenses & other..... 6,957 8,059 8,004
-------- -------- --------
Total current assets........ 269,302 253,738 309,201
-------- -------- --------
Property, plant & equipment,
at cost
Land........................ 229 229 229
Building & land
improvements............... 2,848 2,845 2,845
Furniture, fixtures &
equipment.................. 40,645 31,466 29,492
Leasehold improvements...... 7,880 7,522 7,683
-------- -------- --------
51,602 42,062 40,249
Less: Accumulated
depreciation and
amortization............... (35,385) (28,072) (26,346)
-------- -------- --------
Net property, plant &
equipment.................. 16,217 13,990 13,903
-------- -------- --------
Other assets, net............ 25,598 30,056 32,460
Deferred income taxes........ -- 541 541
-------- -------- --------
Total assets................ $311,117 $298,325 $356,105
======== ======== ========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities:
Current portion of long-term
debt........................ $ 5,296 $ 4,512 $ 4,366
Current portion of notes
payable to former
shareholders................ 4,414 4,527 4,080
Accounts payable............. 34,468 29,187 71,064
Billings in excess of
revenues.................... 43,782 30,556 47,377
Accrued incentive
compensation................ 19,768 18,065 7,610
Employee related
liabilities................. 35,595 42,013 49,172
Other accrued liabilities.... 22,792 27,725 16,598
Current deferred income
taxes....................... 20,789 23,855 27,950
-------- -------- --------
Total current liabilities... 186,904 180,440 228,217
Deferred income taxes........ 511 -- --
Other long-term liabilities.. 36,695 24,404 26,435
Long-term debt............... 6,665 2,286 250
Notes payable to former
shareholders................ 18,039 16,063 14,073
-------- -------- --------
Total liabilities........... 248,814 223,193 268,975
-------- -------- --------
Commitments and contingencies
(Notes 3, 6 and 13)
Temporary shareholders'
equity:
Preferred stock, Class A $.02
par value, 50,000,000 shares
authorized; 9,911,710,
11,068,580 and 12,150,150
issued and outstanding at
December 31, 1997 and 1998
and June 30, 1999,
respectively; redeemable for
$52,343, at June 30, 1999... 198 221 243
Common stock, $.01 par value,
100,000,000 shares
authorized; 17,347,000,
16,957,360 and 17,896,610
issued and outstanding at
December 31, 1997 and 1998
and June 30, 1999,
respectively; redeemable for
$77,099 at June 30, 1999.... 174 170 179
Additional paid-in capital... 15,022 20,283 27,544
Retained earnings............ 50,336 56,148 61,564
Accumulated other
comprehensive loss.......... (3,427) (1,690) (2,400)
Permanent shareholders'
equity:
Common stock, 30,046,760
issued and outstanding
pro forma................... -- -- -- $ 422
Additional paid-in capital,
pro forma................... -- -- -- 27,544
Retained earnings, pro
forma....................... -- -- -- 61,564
Accumulated other
comprehensive loss, pro
forma....................... -- -- -- (2,400)
-------- -------- -------- -------
Total shareholders'
equity..................... -- -- -- $87,130
-------- -------- -------- =======
Total liabilities and
shareholders' equity..... $311,117 $298,325 $356,105
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
CH2M HILL COMPANIES, LTD.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except per share)
<TABLE>
<CAPTION>
Six-Month Six-Month
Period Period
Ended Ended
December 31, December 31, December 31, June 30, June 30,
1996 1997 1998 1998 1999
------------ ------------ ------------ ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Gross revenue........... $ 931,922 $ 908,854 $ 926,630 $ 450,083 $ 576,063
Equity in earnings of
joint ventures and
affiliated companies... 5,276 8,724 8,400 2,037 3,470
---------- ---------- ---------- ---------- ----------
Total revenues........ 937,198 917,578 935,030 452,120 579,533
Operating expenses:
Direct cost of
services and
overhead............. (643,365) (617,356) (629,468) (302,881) (417,559)
General and
administrative....... (280,389) (286,276) (290,760) (141,313) (150,740)
---------- ---------- ---------- ---------- ----------
Operating income.... 13,444 13,946 14,802 7,926 11,234
Other income (expense):
Interest income....... 1,200 570 1,735 960 445
Interest expense...... (2,644) (2,505) (2,154) (1,087) (869)
---------- ---------- ---------- ---------- ----------
Income before provision
for income taxes....... 12,000 12,011 14,383 7,799 10,810
Provision for income
taxes.................. (7,291) (7,295) (8,571) (4,648) (5,394)
---------- ---------- ---------- ---------- ----------
Net income.............. $ 4,709 $ 4,716 $ 5,812 $ 3,151 $ 5,416
========== ========== ========== ========== ==========
Net income per common
and preferred share:
Basic and Diluted....... $ 0.17 $ 0.17 $ 0.21 $ 0.11 $ 0.19
Weighted average number
of common and preferred
shares:
Basic and Diluted....... 27,698,970 27,688,780 28,330,940 28,279,130 28,906,580
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
CH2M HILL COMPANIES, LTD.
CONSOLIDATED STATEMENTS OF TEMPORARY SHAREHOLDERS' EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
Class A Total Class A Accumulated
Preferred Stock Common Stock Preferred and Additional Other
------------------ ------------------ Common Paid-in Comprehensive Retained Comprehensive
Shares Amount Shares Amount Shares Capital Income Earnings Loss
---------- ------ ---------- ------ ------------- ---------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, December
31, 1995.......... 7,800,100 $156 20,000,200 $200 27,800,300 $ 15,948 $ -- $40,911 $(1,044)
Shares issued in
connection with
stock based
compensation and
employee benefit
plans............. 953,750 19 1,240,700 12 2,194,450 7,343 -- -- --
Shares purchased
and retired....... (11,840) -- (3,028,450) (30) (3,040,290) (10,009) -- -- --
Comprehensive
income:
Net income........ -- -- -- -- -- -- 4,709 4,709 --
Other
comprehensive
loss:
Foreign currency
translation
adjustments..... -- -- -- -- -- -- (85) -- (85)
-------
Comprehensive
income......... -- -- -- -- -- -- 4,624 -- --
---------- ---- ---------- ---- ---------- -------- ======= ------- -------
Balances, December
31, 1996.......... 8,742,010 175 18,212,450 182 26,954,460 13,282 45,620 (1,129)
Shares issued in
connection with
stock based
compensation and
employee benefit
plans............. 1,210,540 24 1,218,390 12 2,428,930 9,151 -- -- --
Shares purchased
and retired....... (40,840) (1) (2,083,840) (20) (2,124,680) (7,411) -- -- --
Comprehensive
income:
Net income........ -- -- -- -- -- -- 4,716 4,716 --
Other
comprehensive
loss:
Foreign currency
translation
adjustments..... -- -- -- -- -- -- (2,298) -- (2,298)
-------
Comprehensive
income......... -- -- -- -- -- -- 2,418 -- --
---------- ---- ---------- ---- ---------- -------- ======= ------- -------
Balances, December
31, 1997.......... 9,911,710 198 17,347,000 174 27,258,710 15,022 50,336 (3,427)
Shares issued in
connection with
stock based
compensation and
employee benefit
plans............. 1,203,830 24 1,341,720 13 2,545,550 11,693 -- -- --
Shares purchased
and retired....... (46,960) (1) (1,731,360) (17) (1,778,320) (6,432) -- -- --
Comprehensive
income:
Net income........ -- -- -- -- -- -- 5,812 5,812 --
Other
comprehensive
income:
Foreign currency
translation
adjustments..... -- -- -- -- -- -- 1,737 -- 1,737
-------
Comprehensive
income......... -- -- -- -- -- -- $ 7,549 -- --
---------- ---- ---------- ---- ---------- -------- ======= ------- -------
Balances, December
31, 1998.......... 11,068,580 $221 16,957,360 $170 28,025,940 $ 20,283 $56,148 $(1,690)
========== ==== ========== ==== ========== ======== ======= =======
<CAPTION>
Total
Temporary
Shareholders'
Equity
-------------
<S> <C>
Balances, December
31, 1995.......... $ 56,171
Shares issued in
connection with
stock based
compensation and
employee benefit
plans............. 7,374
Shares purchased
and retired....... (10,039)
Comprehensive
income:
Net income........ 4,709
Other
comprehensive
loss:
Foreign currency
translation
adjustments..... (85)
Comprehensive
income......... --
-------------
Balances, December
31, 1996.......... 58,130
Shares issued in
connection with
stock based
compensation and
employee benefit
plans............. 9,187
Shares purchased
and retired....... (7,432)
Comprehensive
income:
Net income........ 4,716
Other
comprehensive
loss:
Foreign currency
translation
adjustments..... (2,298)
Comprehensive
income......... --
-------------
Balances, December
31, 1997.......... 62,303
Shares issued in
connection with
stock based
compensation and
employee benefit
plans............. 11,730
Shares purchased
and retired....... (6,450)
Comprehensive
income:
Net income........ 5,812
Other
comprehensive
income:
Foreign currency
translation
adjustments..... 1,737
Comprehensive
income......... --
-------------
Balances, December
31, 1998.......... $ 75,132
=============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
CH2M HILL COMPANIES, LTD.
Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
Six-Month Six-Month
Period Ended Period Ended
December 31, December 31, December 31, June 30, June 30,
1996 1997 1998 1998 1999
------------ ------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income.............. $ 4,709 $ 4,716 $ 5,812
Adjustments to reconcile
net income to net cash
provided by (used in)
operating activities--
Depreciation and
amortization.......... 9,518 9,605 8,558
Stock issued in
connection with stock
based compensation and
employee benefit
plans................. 7,628 8,520 10,725
Bad debt expense....... 57 1,441 5,224
Deferred income taxes
and other............. 4,698 829 2,983
Loss on sale of
assets................ 159 217 1,727
Change in--
Receivables............ 1,454 10,288 (7,336)
Prepaid expenses and
other................. (2,862) (1,713) (9,327)
Accounts payable....... (6,694) (10,479) (5,373)
Billings in excess of
revenues.............. 7,005 12,990 (13,226)
Other current
liabilities........... 6,752 2,448 (4,143)
-------- -------- --------
Net cash provided by
(used in) operating
activities............. 32,424 38,862 (4,376) $ 1,325 $15,918
-------- -------- -------- ------- -------
Cash flows from
investing activities:
Proceeds from the sale
of assets.............. 646 75 372 31 336
Capital expenditures.... (4,908) (2,612) (4,723) (1,468) (2,454)
Other investing
activities............. (2,583) (898) -- -- --
-------- -------- -------- ------- -------
Net cash used in
investing activities... (6,845) (3,435) (4,351) (1,437) (2,118)
-------- -------- -------- ------- -------
Cash flows from
financing activities:
Borrowing on long-term
debt................... 132 843 111 91 71
Borrowing on line of
credit................. -- -- -- -- 32,000
Principal payments on
notes payable to former
shareholders........... (4,420) (4,968) (4,966) (3,651) (3,662)
Principal payments on
long-term debt......... (6,148) (5,652) (5,274) (2,618) (2,253)
Principal payments on
line of credit......... -- -- -- -- (32,000)
Purchases and
retirements of stock... (3,610) (2,561) (2,342) -- (413)
-------- -------- -------- ------- -------
Net cash used in
financing activities... (14,046) (12,338) (12,471) (6,178) (6,257)
-------- -------- -------- ------- -------
Cash effect of
cumulative translation
adjustment............. (17) (437) (534) (247) (220)
-------- -------- -------- ------- -------
Increase (decrease) in
cash and cash
equivalents............ 11,516 22,652 (21,732) (6,537) 7,323
Cash and cash
equivalents, beginning
of period.............. 4,159 15,675 38,327 38,327 16,595
-------- -------- -------- ------- -------
Cash and cash
equivalents, end of
period................. $ 15,675 $ 38,327 $ 16,595 $31,790 $23,918
======== ======== ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
CH2M HILL COMPANIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(1) Summary of Business and Significant Accounting Policies
CH2M HILL Companies, Ltd. and its wholly owned subsidiaries is a
multinational infrastructure and environmental services firm. CH2M HILL's
predominant line of business is providing engineering services related to
water, environmental, transportation, infrastructure and management services.
CH2M HILL also provides facility design and construction management services
to the electronics, food processing and biopharmaceutical related industries
and provides utility system operations and maintenance services primarily for
water and wastewater treatment facilities.
CH2M HILL provides the above services for clients in private industry,
federal government agencies, as well as state, municipal and local government
entities. A substantial portion of professional fees arises from projects that
are funded directly or indirectly by governmental entities.
Unaudited Interim Financial Statements
The consolidated interim financial statements included with the annual
financial statements herein have been prepared by CH2M HILL pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures relating to the interim periods normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations, although CH2M HILL believes that the disclosures
included herein are adequate to make the information presented not misleading.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements of the interim period contain all
adjustments necessary to present fairly the financial position of CH2M HILL as
of June 30, 1999 and the results of operations and cash flows for the periods
presented. All such adjustments are of a normal recurring nature. The results
of operations for the six-month period ended June 30, 1999 are not necessarily
indicative of the results that may be achieved for a full fiscal year and
cannot be used to indicate financial performance for the entire year.
Unaudited Pro Forma Information
On November 6, 1998, the Board of Directors approved a new ownership
program for CH2M HILL and certain resolutions that were subsequently ratified
by a vote of the shareholders on December 18, 1998. Such resolutions included,
but were not limited to, the adoption of the 1999 Stock Option Plan and the
adoption of the Restated Bylaws and the Restated Articles of Incorporation
which provide for the:
. termination of the existing Key Employee Policy and Agreement,
. authorization to convert all outstanding Class A preferred stock into
shares of common stock on a one-for-one basis,
. increase in the authorized shares of common stock to 100,000,000, par
value $.01 per share, and Class A preferred stock to 50,000,000, par
value $.02 per share,
. authorization of a ten-for-one stock split on CH2M HILL's common stock
and Class A preferred stock, and,
. imposition of certain restrictions on the stock including, but not
limited to, the right but not the obligation to repurchase shares upon
termination of employment or affiliation, the right of first refusal,
and ownership limits.
The effective date of the above resolutions will be decided at the
discretion of the Board of Directors based on its evaluation of the
effectiveness of the stock registration process, which includes an effective
registration statement on Form S-1 filed with the Securities and Exchange
Commission and the state Blue Sky commissions.
F-8
<PAGE>
CH2M HILL COMPANIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Dollars in thousands)
Common and preferred stock amounts, equivalent share amounts and per share
amounts have been adjusted retroactively to give effect to the stock split. The
conversion of outstanding Class A preferred stock to common stock has been
reflected in the unaudited pro forma balance sheet at June 30, 1999.
Preferred and common stock that is currently redeemable has been reflected
as temporary shareholders' equity in the consolidated balance sheets at
December 31, 1997 and 1998 and June 30, 1999. The pro forma unaudited balance
sheet at June 30, 1999 reflects the reclassification of the preferred and
common stock from temporary shareholders' equity to permanent shareholders'
equity. Once CH2M HILL's new ownership program is deemed effective, as
discussed above, the mandatory redemption feature of the stock will no longer
apply.
Principles of Consolidation
The consolidated financial statements include the accounts of CH2M HILL and
all of its wholly owned subsidiaries after elimination of all intercompany
accounts and transactions. Investments in affiliates which are 50 percent or
less owned are reported using the equity method. Certain 1996 and 1997 amounts
have been reclassified to conform with the current year presentation.
Currency Translation
All assets and liabilities of CH2M HILL's foreign subsidiaries are
translated into U.S. dollars at the period-end exchange rate. Revenues and
expenses are translated at the average exchange rate for the year. Translation
gains and losses are reflected in shareholders' equity as part of accumulated
other comprehensive loss. Deferred taxes are not provided on the translation
gains and losses. Gains and losses on foreign currency transactions are not
significant.
Accounting for Revenue
CH2M HILL operates under a number of different types of contracts including
cost reimbursement contracts, time-and-materials contracts and fixed price
contracts. These contracts typically have specified limits on the amount that
may be earned by CH2M HILL. Revenue for these contracts is recognized primarily
on a percentage-of-completion basis by relating the actual cost of work
performed to date to the current estimated total cost of each contract.
Unbilled revenue represents the excess of contract revenue recognized over
billings to date. Billings in excess of revenues represent the excess of
amounts billed over revenue recognized. Losses on contracts in process are
recognized in their entirety when the loss becomes evident and the amount of
loss can be reasonably estimated.
The federal government accounted for 16.4% and 15.8% of our net receivables
in 1997 and 1998, respectively. Receivables are stated at net realizable
values, reflecting reserves of $2,977 and $8,201 in 1997 and 1998,
respectively.
F-9
<PAGE>
CH2M HILL COMPANIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Dollars in thousands)
Cash and Cash Equivalents
CH2M HILL maintains a cash management system which provides for cash in the
bank sufficient to pay checks as they are submitted for payment and invests
cash in excess of this amount in interest bearing short-term investments such
as certificates of deposit, commercial paper and repurchase agreements. These
investments are invested with original short-term maturities of less than
three months and are considered cash equivalents in the consolidated balance
sheets and statements of cash flows.
<TABLE>
<CAPTION>
1996 1997 1998
------ ------- -------
<S> <C> <C> <C>
Cash paid for interest............................... $2,716 $ 2,431 $ 1,777
====== ======= =======
Cash paid for income taxes........................... $8,916 $11,869 $16,352
====== ======= =======
</TABLE>
The following noncash transactions have been excluded from the accompanying
statements of cash flows:
. Stock purchases for debt of $6,683, $4,204 and $3,103 in 1996, 1997 and
1998, respectively
. Decrease of an additional minimum pension liability and related asset at
December 31, 1996, 1997 and 1998, of $1,464, $2,122 and $198,
respectively
Property, Plant and Equipment
All additions, including betterments to existing facilities, are recorded
at cost. Maintenance and repairs are charged to expense as incurred. When
assets are retired or otherwise disposed of, the cost of the assets and the
related accumulated depreciation are removed from the accounts. Any gain or
loss on retirements is reflected in income in the year of disposition.
Depreciation for owned property is based on the estimated useful lives of
the assets using both straight-line and accelerated methods for financial
statement purposes. Useful lives for buildings and land improvements range
from 15 to 30 years with an average life of 25 years. Leasehold improvements
are depreciated over the remaining term of the associated lease. Useful lives
on other assets range from two to ten years with an average of approximately
five years.
Other Assets
Other Assets includes capitalized software costs and goodwill which are
amortized on a straight-line basis over five to seven years. The historical
cost of these assets at December 31, 1997 and 1998 totaled $17,116 and
$14,789, respectively. The amortization reflected in the statements of income
and the statements of cash flows totaled $1,439 in 1996, $2,195 in 1997 and
$2,778 in 1998.
Other Accrued Liabilities
Other accrued liabilities include amounts accrued for the payment of
various types of taxes, including income, property, sales and use, and value
added taxes. It also includes amounts accrued for professional liability
settlements that have not yet been paid and amounts accrued for general
business expenses.
Other Long-Term Liabilities
Other long-term liabilities include amounts accrued for post-retirement
medical benefits, pension obligations, professional liabilities and deferred
compensation benefits.
F-10
<PAGE>
CH2M HILL COMPANIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Dollars in thousands)
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable,
accounts payable and accrued liabilities approximate fair value due to the
short-term maturities of these assets and liabilities. The interest rates on
CH2M HILL's bank borrowings are adjusted regularly to reflect current market
rates. Accordingly, the carrying amount of CH2M HILL's short-term and long-term
borrowings also approximate fair value. At December 31, 1997 and 1998, the fair
value of CH2M HILL's notes payable to former shareholders was $20,579 and
$19,237, respectively, based on a discount rate that is estimated using the
rates currently offered for debt with similar remaining maturities.
Pervasiveness of Estimates
The preparation of 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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Asset Impairment
CH2M HILL reviews its assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Assets which are held and used in operations would be impaired if
the undiscounted future cash flows related to the asset did not exceed the net
book value.
New Accounting Standards
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income". SFAS No.
130 requires that all changes in equity, other than transactions with owners,
be reported as comprehensive income in the financial statements. Other
comprehensive income items include foreign currency translation adjustments and
minimum pension liability adjustments. CH2M HILL has adopted SFAS No. 130
during fiscal 1998.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," establishes standards for reporting information about operating
segments. It also establishes standards for enterprise-wide disclosures related
to geographic areas and major customers. CH2M HILL has adopted SFAS No. 131
during fiscal 1998.
SFAS No. 132, "Employers Disclosure About Pensions and Other Postretirement
Benefits, an Amendment of FASB Statements No. 87, 88 and 106," revises
employers' disclosures about pension and other postretirement benefit plans. It
does not change the measurement or recognition of these plans. CH2M HILL has
adopted SFAS No. 132 during fiscal 1998.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," establishes fair value accounting and reporting standards for
derivative instruments and hedging activities. The effective date of SFAS No.
133 was deferred until January 1, 2001 by the issuance of SFAS No. 137. CH2M
HILL will adopt SFAS No. 133 in the first quarter of fiscal 2001. CH2M HILL is
currently assessing the effect of adoption, if any, on its financial position,
results of operations, and cash flows.
Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-Up
Activities," requires costs of start-up activities, including organization
costs, to be expensed as incurred. CH2M HILL adopted SOP 98-5 effective January
1, 1999. Such adoption did not have an impact on earnings.
F-11
<PAGE>
CH2M HILL COMPANIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Dollars in thousands)
(2) Segment Information
CH2M HILL operates in three reportable segments that offer different
services to different customer bases. They are managed separately because each
business requires different business and marketing strategies. Environmental,
Energy, and Infrastructure (EE&I) includes management, consulting, design,
construction, procurement, and operations and maintenance services to the
environmental, nuclear, energy, systems, and transportation industries. Water
focuses on the planning, design and implementation of water supply systems and
wastewater treatment facilities as well as providing operations and maintenance
services to water and wastewater facility operators. Industrial provides
design, construction, specialized manufacturing support and sustained facility
services support to high-technology manufacturing companies, food and beverage
processing businesses, and fine chemical and pharmaceutical manufacturers.
CH2M HILL evaluates performance based on several factors, of which the
primary financial measure is profit before tax. The accounting policies of the
segments are the same as those described in the summary of significant
accounting policies. Intersegment sales are accounted for at fair value as if
the sales were to third parties. Other includes the elimination of intersegment
sales and unallocable corporate expenses.
Certain financial information relating to the years ended December 31,
1996, 1997 and 1998 for each segment is provided below:
<TABLE>
<CAPTION>
Financial
Statement
Year Ended December 31, 1996 EE&I Water Industrial Other Balances
- ---------------------------- -------- -------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C>
Revenues from external
customers.................. $384,244 $289,342 $258,336 $ -- $931,922
Intersegment sales.......... 29,026 22,241 1,316 (52,583) --
Equity in earnings of
investees accounted for by
the equity method.......... 5,386 -- (110) -- 5,276
Depreciation and
amortization............... 4,605 3,429 1,484 -- 9,518
Interest income............. 349 361 490 -- 1,200
Interest expense............ 1,090 411 1,143 -- 2,644
Segment profit.............. 7,192 2,236 8,248 (5,676) 12,000
Segment assets.............. 155,332 102,420 51,612 -- 309,364
<CAPTION>
Financial
Statement
Year Ended December 31, 1997 EE&I Water Industrial Other Balances
- ---------------------------- -------- -------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C>
Revenues from external
customers.................. $352,343 $310,014 $246,497 $ -- $908,854
Intersegment sales.......... 16,025 22,764 1,088 (39,877) --
Equity in earnings of
investees accounted for by
the equity method.......... 7,886 (144) 982 -- 8,724
Depreciation and
amortization............... 4,729 2,684 2,192 -- 9,605
Interest income............. 159 159 252 -- 570
Interest expense............ 804 736 965 -- 2,505
Segment profit.............. 5,853 5,011 7,174 (6,027) 12,011
Segment assets.............. 136,119 113,725 61,273 -- 311,117
</TABLE>
F-12
<PAGE>
CH2M HILL COMPANIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
Financial
Statement
Year Ended December 31, 1998 EE&I Water Industrial Other Balances
---------------------------- -------- -------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C>
Revenues from external
customers.................... $378,276 $362,668 $185,686 $ -- $926,630
Intersegment sales............ 21,301 18,586 1,342 (41,229) --
Equity in earnings of
investees accounted for by
the equity method............ 7,785 124 491 -- 8,400
Depreciation and
amortization................. 4,034 3,423 1,101 -- 8,558
Interest income............... 582 720 433 -- 1,735
Interest expense.............. 928 677 549 -- 2,154
Segment profit................ 9,259 7,230 3,648 (5,754) 14,383
Segment assets................ 142,124 128,967 27,234 -- 298,325
</TABLE>
CH2M HILL derived approximately 11% in 1996, 15% in 1997 and 16% in 1998,
of its total revenues from contracts with federal government agencies.
Revenues are attributed to the country in which the services are performed.
Although CH2M HILL provides services in numerous countries, no single country
outside of the United States accounted for a significant portion of the total
consolidated revenues.
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
United States..................................... $853,687 $803,844 $877,794
International..................................... 83,511 113,734 57,236
-------- -------- --------
Total............................................. $937,198 $917,578 $935,030
======== ======== ========
</TABLE>
Certain financial information relating to the six month periods ended June
30, 1998 and 1999 for each segment is provided below:
<TABLE>
<CAPTION>
Financial
Six-Month Period Ended June Statement
30, 1998 EE&I Water Industrial Other Balances
--------------------------- -------- -------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C>
Revenues from external
customers.................... $184,062 $164,042 $101,979 $ -- $450,083
Intersegment sales............ 13,178 4,773 233 (18,184) --
Equity in earnings of
investees accounted for by
the equity method............ 2,044 (146) 139 -- 2,037
Segment profit................ 4,924 1,789 3,656 (2,570) 7,799
<CAPTION>
Financial
Six-Month Period Ended June Statement
30, 1999 EE&I Water Industrial Other Balances
--------------------------- -------- -------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C>
Revenues from external
customers.................... $240,403 $210,835 $124,825 $ -- $576,063
Intersegment sales............ 15,694 4,830 1,647 (22,171) --
Equity in earnings of
investees accounted for by
the equity method............ 2,615 870 (15) -- 3,470
Segment profit................ 7,608 6,403 43 (3,244) 10,810
</TABLE>
F-13
<PAGE>
CH2M HILL COMPANIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Dollars in thousands)
(3) Lines Of Credit
CH2M HILL has an unsecured revolving credit agreement with a maximum
borrowing capacity of $85,000, which expires December 31, 1999. Interest
accrues on outstanding borrowings at variable rates, which as of December 31,
1997 and 1998, ranged from 6.0% to 8.5%, and from 5.4% to 7.8%, respectively,
based on maturity and a liabilities to earnings ratio. At December 31, 1997 and
1998, no amounts were outstanding under this line. Subsequent to yearend, CH2M
HILL renegotiated this line of credit. See Note 14.
The agreement requires CH2M HILL to maintain, among other restrictions,
prescribed liabilities to earnings, tangible net worth, working capital, and
fixed cost coverage ratios.
The agreement allows CH2M HILL to issue letters of credit to back various
trade activities and insurance policies. Issued letters of credit are reserved
against the borrowing base of the line of credit. As of December 31, 1997 and
1998, there were $4,735 and $5,125 issued and outstanding letters of credit,
respectively.
A subsidiary of CH2M HILL has a commitment for a line of credit for general
corporate purposes. The agreement is unsecured, and provides for aggregate
borrowings of $9,500, at an annual interest rate of prime (8.5% and 7.8% at
December 31, 1997 and 1998, respectively). No amounts were outstanding on the
line at December 31, 1997 and 1998.
(4) Notes Payable to Former Shareholders
CH2M HILL issues interest-bearing notes to former shareholders for the
purchase price of stock redeemed by CH2M HILL. The total amount outstanding for
notes payable to former shareholders at December 31, 1997 and 1998 was $22,453
and $20,590, respectively. The interest on the notes is adjusted annually (on
the anniversary dates of the notes) based upon the U.S. Federal Reserve
Discount Rate on the first business day of each calendar year. At January 1,
1997 and 1998 the interest rate of the notes was 3.8%. The notes are unsecured,
and payable in varying annual installments through 2008.
Future minimum principal payments on notes payable to former shareholders
are as follows:
<TABLE>
<CAPTION>
Year Ending
-----------
<S> <C>
1999........................................................... $ 4,527
2000........................................................... 3,745
2001........................................................... 3,502
2002........................................................... 3,054
2003........................................................... 2,019
Thereafter...................................................... 3,743
-------
$20,590
=======
</TABLE>
(5) Long-Term Debt
Long-term debt consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1998
------- ------
<S> <C> <C>
Note payable to bank, 7.1%, payable in quarterly installments
through 2000.................................................. $10,000 $6,000
Other notes payable, various rates between 5.0% and 7.8%,
payable through 2000.......................................... 1,961 798
------- ------
Total long-term debt......................................... 11,961 6,798
Less: current portion of long-term debt........................ 5,296 4,512
------- ------
$ 6,665 $2,286
======= ======
</TABLE>
F-14
<PAGE>
CH2M HILL COMPANIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Dollars in thousands)
Future minimum principal payments on long-term debt are as follows:
<TABLE>
<CAPTION>
Year Ending
-----------
<S> <C>
1999............................................................ $4,512
2000............................................................ 2,286
------
$6,798
======
</TABLE>
(6) Operating Lease Obligations
CH2M HILL has entered into certain noncancelable leases, which are being
accounted for as operating leases.
At December 31, 1998, future minimum operating lease payments are as
follows:
<TABLE>
<CAPTION>
Year Ending
-----------
<S> <C>
1999.......................................................... $ 28,325
2000.......................................................... 25,767
2001.......................................................... 20,659
2002.......................................................... 17,166
2003.......................................................... 12,214
Thereafter..................................................... 41,748
--------
$145,879
========
</TABLE>
Total lease and rental expense charged to operations was $42,534, $40,561
and $41,475 during 1996, 1997 and 1998, respectively.
Certain of CH2M HILL's operating leases contain provisions for a specific
rent free period. In accordance with generally accepted accounting principles,
CH2M HILL accrues rental expense during the rent free period based on total
expected rent payments to be made over the life of the related lease. The
excess of expense over actual cash payments to date is shown in the
accompanying balance sheets in other long-term liabilities. The cash payments
expected to exceed rental expense in the next year are included in other
accrued liabilities.
(7) Shareholders' Equity
The bylaws and key employee agreements of CH2M HILL currently restrict
ownership of CH2M HILL's Class A preferred and common stock to active
employees and further provide that the following applies to such stock:
. Upon death, withdrawal, legal incapacity, retirement or discharge, a
shareholder's shares must be sold back to CH2M HILL.
. Upon death, legal incapacity or retirement, the purchase price is
determined by a formula calculated as of December 31 of each year, based
on the net book value of CH2M HILL and a multiple of the average of the
past five years' earnings.
. The purchase price of stock from employees withdrawing to compete or who
are discharged is the greater of the net book value of the shares or the
price of the shares at acquisition by the employee.
. The purchase price of stock returned to CH2M HILL generally becomes
interest-bearing debt to be paid over a ten-year period. Subject to
Board of Directors approval, the payout period can be shortened upon
occurrence of certain criteria.
F-15
<PAGE>
CH2M HILL COMPANIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Dollars in thousands)
As discussed in Note 1, CH2M HILL and the shareholders have approved
changes to the features of its stock that will take affect once certain
contingencies have been removed.
(8) Income Taxes
CH2M HILL accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." SFAS No. 109 uses an asset and liability
approach that requires the recognition of deferred tax assets and liabilities
for the expected future tax effects of events that have been recognized in the
financial statements or tax returns. In estimating future tax consequences,
CH2M HILL generally considers all expected future events other than enactment
of changes in the tax laws or rates.
Income (loss) from continuing operations before income taxes includes the
following:
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
U.S. income....................................... $17,124 $13,703 $14,461
Foreign loss...................................... (5,124) (1,692) (78)
------- ------- -------
Net income before taxes........................... $12,000 $12,011 $14,383
======= ======= =======
</TABLE>
The provision for income taxes for the years ended December 31 is comprised
of the following:
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- ------
<S> <C> <C> <C>
Current income tax expense:
Federal............................................ $10,171 $ 9,343 $4,195
Foreign............................................ 949 1,224 1,458
State & local...................................... 2,191 2,012 903
------- ------- ------
Total current taxes................................ 13,311 12,579 6,556
Deferred income tax (benefit) expense.............. (6,020) (5,284) 2,015
------- ------- ------
Total tax expense.................................. $ 7,291 $ 7,295 $8,571
======= ======= ======
</TABLE>
The reconciliation of income tax computed at the U.S. federal statutory tax
rate to CH2M HILL's effective income tax rate for the years ended December 31
were as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Pretax income................................... $12,000 $12,011 $14,383
Federal statutory rate.......................... 35% 35% 35%
------- ------- -------
Expected tax expense............................ 4,200 4,204 5,034
Reconciling items:
State income taxes.............................. 1,479 1,358 610
Disallowance of meals and entertainment
expenses....................................... 1,667 1,589 1,665
Foreign operating losses........................ 396 630 991
Other........................................... (451) (486) 271
------- ------- -------
Provision for income taxes...................... $ 7,291 $ 7,295 $ 8,571
======= ======= =======
</TABLE>
F-16
<PAGE>
CH2M HILL COMPANIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Dollars in thousands)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31 were as
follows:
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Deferred tax assets:
Foreign net operating losses............................. $ 2,934 $ 2,800
Depreciation and amortization............................ -- 1,133
Investments in affiliates................................ 2,980 4,413
------- -------
Total deferred tax assets................................ 5,914 8,346
Valuation allowance...................................... (2,934) (2,800)
------- -------
Net deferred tax assets.................................. 2,980 5,546
------- -------
Deferred tax liabilities:
Deferred recognition of net income until collection or
payment occurs.......................................... 22,838 28,860
Depreciation and amortization............................ 1,442 --
------- -------
Total deferred tax liabilities........................... 24,280 28,860
------- -------
Net deferred tax liability............................... $21,300 $23,314
======= =======
</TABLE>
A valuation allowance is required to be established for those deferred tax
assets that it is more likely than not that they will not be realized based
upon certain estimated circumstances. The above valuation allowances relate to
foreign net operating losses of $7,500 and $9,000 for the years ended December
31, 1997 and 1998, respectively, which will require taxable income within the
applicable foreign subsidiary in order for the deferred tax asset to be
realized. The foreign net operating losses generally may be carried forward
indefinitely.
At December 31, 1998, CH2M HILL has no material tax carryforwards.
Undistributed earnings of CH2M HILL's foreign subsidiaries amounted to
approximately $4,200 at December 31, 1998. Those earnings are considered to be
indefinitely reinvested and accordingly, no provision for U.S. federal and
state income taxes or foreign withholding taxes has been made. Upon
distribution of those earnings, CH2M HILL would be subject to U.S. income taxes
(subject to a reduction for foreign tax credits) and withholding taxes payable
to the various foreign countries. Determination of the amount of unrecognized
deferred U.S. income tax liability is not practicable; however, unrecognized
foreign tax credit carryovers would be available to reduce some portion of the
U.S. tax liabilities.
(9) Earnings Per Share
The computation of basic income per share is based on the weighted average
number of common and preferred shares outstanding during the year. The
outstanding preferred shares are included in the basic income per share
calculation since the preferred shares do not have any preferences over common
shares, other than in liquidation, and CH2M HILL anticipates conversion to
common shares on a one-for-one basis. Diluted income per share is based on the
weighted average number of common and preferred shares outstanding during the
year and, to the extent dilutive, common stock equivalents consisting of stock
options, stock awards subject to restrictions and stock appreciation rights. At
December 31, 1996, 1997 and 1998 and June 30, 1999, CH2M HILL did not have
dilutive securities outstanding.
F-17
<PAGE>
CH2M HILL COMPANIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Dollars in thousands)
(10) Employee Incentive and Benefit Plans
Stock Based Compensation Plans
The Financial Accounting Standards Board has issued SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS No. 123 requires that stock-
based compensation plans be accounted for based on the fair value based method
of accounting. CH2M HILL continues to measure compensation cost using the
intrinsic value based method of accounting prescribed by Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," as permitted
by SFAS No. 123. CH2M HILL has three stock-based compensation plans as
described below. Had compensation cost been determined in accordance with SFAS
No. 123, CH2M HILL's net income and earnings per share for 1996, 1997 and 1998
would not have changed.
Incentive Plan
CH2M HILL, at the discretion of the Board of Directors, provides stock
bonuses to certain designated key employees of CH2M HILL. Expenses under this
program amounted to $4,365, $4,784 and $5,550 in 1996, 1997 and 1998,
respectively.
Employee Stock Plan
CH2M HILL has a profit sharing plan ("ESP") for all eligible employees and
has established an Employee Stock Plan and Trust to administer the ESP.
Contributions to the ESP are made to the Trust as determined by the Board of
Directors. Contributions to the ESP were $2,650, $2,804, and $3,513 in 1996,
1997 and 1998, respectively. The contributions are to be made primarily through
the issuance of Class A preferred stock.
Retirement and Tax-Deferred Savings Plan (the "401(k) Plan")
CH2M HILL has a 40l(k) Plan that provides for company matching
contributions, which range from 0.5% to 2.0% of eligible employees' base pay.
Contributions for 1996, 1997 and 1998 were $1,493, $1,589 and $1,996,
respectively, and vest equally over a five year period, beginning with the
employees' second year of service. The contributions were made primarily
through the issuance of Class A preferred stock.
Defined Contribution Savings Plan
CH2M HILL has a defined contribution plan that provides for contributions
generally equal to 1.5% of eligible employees' base pay. These contributions
vest equally over a five-year period, beginning with the employees' second year
of service. For the years ended December 31, 1996, 1997 and 1998, CH2M HILL
recorded $5,591, $6,045 and $5,084 in expense, respectively. Contributions are
made in cash.
(11) Other Employee Benefits
Pension and Other Postretirement Benefits
CH2M HILL has several noncontributory defined benefit pension plans, of
which one remains active. Benefits are based on years of service and
compensation during the span of employment. Funding for these plans is provided
through contributions based on recommendations from the plans' independent
F-18
<PAGE>
CH2M HILL COMPANIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Dollars in thousands)
actuary. Plan assets consist primarily of common stock, corporate debt
instruments and U.S. government securities.
CH2M HILL sponsors a medical benefit plan for retired employees of three
subsidiaries. The plan is contributory, with retiree premiums based on service
at retirement. The benefits contain limitations and a cap on future cost
increases. CH2M HILL continues to fund postretirement medical benefits on a
pay-as-you-go basis.
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
-------------------- -----------------
1997 1998 1997 1998
--------- --------- ------- --------
<S> <C> <C> <C> <C>
Plan Assets in Excess of Benefit
Obligations:
Benefit obligation at December 31.... $ (49,858) $ (59,054)
Fair value of plan assets at December
31.................................. 52,856 59,808
--------- ---------
Funded status........................ $ 2,998 $ 754
========= =========
Benefit Obligations in Excess of Plan
Assets:
Benefit obligation at December 31.... $ (10,558) $ (14,759) $(8,932) $(11,680)
Fair value of plan assets at December
31.................................. 9,015 10,566 -- --
--------- --------- ------- --------
Unfunded status...................... $ (1,543) $ (4,193) $(8,932) $(11,680)
========= ========= ======= ========
Prepaid (accrued) benefit cost
recognized in the balance sheet..... $ 1,958 $ 8,155 $(4,728) $ (6,104)
Weighted-average assumptions at
December 31:
Discount rate........................ 7.00-8.25% 6.75-7.20% 8.25% 7.20%
Expected return on plan assets....... 8.00-9.00% 8.00-9.00% -- --
</TABLE>
For measurement purposes, an 11.14% annual rate of increase in the per
capita cost of covered health care benefits was assumed for 1999. The rate was
assumed to decrease gradually to 5.45% for 2010 and remain at that level
thereafter.
<TABLE>
<CAPTION>
Pension Other
Benefits Benefits
-------------- --------------
1997 1998 1997 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net periodic benefit cost.................... $2,245 $ 674 $1,365 $1,633
Employer contributions....................... 3,498 8,593 -- --
Participant contributions.................... -- -- 258 257
Benefit payments............................. (2,426) (1,996) (545) (514)
</TABLE>
(12) Investments In Unconsolidated Affiliates
CH2M HILL has investments in affiliated companies that are 50% or less
owned, which are accounted for under the equity method. These investments
consist primarily of a 50% ownership interest in Kaiser-Hill Company, LLC and
MK/IDC (PSI), which are domestic organizations, a 49% ownership interest in
CH2M Gore and Storrie Limited, a 50% ownership interest in CH2M HILL BECA, Ltd.
and TDC International of Israel, which are foreign organizations. As of
December 31, 1997 and 1998, the total investments in these material
unconsolidated affiliates were approximately $3,000 and $2,629, respectively,
and are included in other assets in the accompanying consolidated balance
sheets. As of December 31, 1997 and 1998, CH2M HILL received distributions from
Kaiser-Hill Company, LLC of $13,950 and $8,335, respectively.
F-19
<PAGE>
CH2M HILL COMPANIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Dollars in thousands)
Summarized financial information for these affiliates is as follows:
<TABLE>
<CAPTION>
December 31,
1997 1998
-------- --------
<S> <C> <C>
Financial Position:
Current assets............................................... $113,150 $148,784
Noncurrent assets............................................ 4,910 9,339
-------- --------
$118,060 $158,123
======== ========
Current liabilities.......................................... $102,012 $139,561
Noncurrent liabilities....................................... 9,647 7,041
Shareholders' equity......................................... 6,401 11,521
-------- --------
$118,060 $158,123
======== ========
</TABLE>
<TABLE>
<CAPTION>
Six-Month Period Ended
Year Ended December 31, June 30,
----------------------------- -----------------------
1996 1997 1998 1998 1999
---------- -------- -------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Results of Operations:
Revenues................ $1,354,337 $874,534 $873,524 $379,499 $321,033
Direct costs............ 1,169,601 698,600 681,091 304,533 239,176
---------- -------- -------- -------- --------
Gross margin............ 184,736 175,934 192,433 74,966 81,857
General and
administrative
expenses............... 174,105 158,822 174,790 69,497 75,107
---------- -------- -------- -------- --------
Operating income........ 10,631 17,112 17,643 5,469 6,750
Other income (expense).. (14) 483 348 105 49
---------- -------- -------- -------- --------
Net income.............. $ 10,617 $ 17,595 $ 17,991 $ 5,574 $ 6,799
========== ======== ======== ======== ========
</TABLE>
(13) CONTINGENCIES
General
CH2M HILL is party to various legal actions arising in the normal course of
its business, some of which involve claims of substantial sums. Damages
assessed in connection with and the cost of defending any such actions could be
substantial. CH2M HILL's management believes that the levels of insurance
coverage are generally adequate to cover CH2M HILL's liabilities, if any, with
regard to such claims. CH2M HILL generally accrues amounts for retentions and
deductibles based on advice from legal counsel when it is probable that a loss
will be incurred and such loss is estimable. Gain contingencies or recoveries
are rare and are usually recorded when the cash is collected.
The amounts accrued at December 31, 1997 and 1998 related to probable
claims were $13,365 and $13,981, respectively, the majority of which was paid
out subsequent to December 31, 1998. Management believes that the amounts
accrued are adequate to cover the claims that have been identified by our legal
counsel as probable of loss. The amounts expensed for probable claims was
$3,900, $6,000 and $2,100 for 1996, 1997 and 1998, respectively. CH2M HILL
believes that should our loss exposure exceed the amount accrued, the final
settlement of these claims, individually or in the aggregate, will not have a
material adverse effect on our operations, cash flows or financial condition.
F-20
<PAGE>
CH2M HILL COMPANIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Dollars in thousands)
Guarantor
CH2M HILL has an equity investment in an affiliate. The affiliate has a
facility which allows it to borrow up to $5,000. The facility is comprised of a
$3,000 line of credit and a $2,000 term loan. As of December 31, 1997, the
outstanding balance on the term loan was $2,000, which was paid off during
1998. No amounts were outstanding under the line of credit as of December 31,
1997 and 1998. The facility is guaranteed by CH2M HILL.
CH2M HILL has guaranteed a $6,000 credit facility between a subsidiary and
a joint venture partner. The facility is secured by assets of the joint venture
and is used for general project purposes. CH2M HILL has joint and several
liability with the joint partner for the full amount. At December 31, 1998,
$2,400 was outstanding on the credit facility which bears interest at varying
rates, as defined, and ranged from 6.6% to 7.8%.
Performance Bonds
In the normal course of business, CH2M HILL purchases performance bonds to
comply with client mandated contractual obligations. At December 31, 1997 and
1998, the performance bonds purchased were $55,000.
(14) Events Occurring Subsequent to Opinion Date (Unaudited)
Effective June 18, 1999, CH2M HILL negotiated a new line of credit
facility. Under the amended terms, CH2M HILL has a maximum borrowing capacity
of $100,000 with an option to increase to $125,000, which expires June 18,
2002. Interest accrues on outstanding borrowings at variable rates, which as of
June 30, 1999 ranged from 5.3% to 7.8%, based on maturity and a liabilities to
earnings ratio. Additionally, a commitment fee is payable based on the
Company's liabilities to earnings ratio.
Through July 1999, CH2M HILL granted 2,506,045 stock options at an
estimated fair market value of $4.31 per share. These options vest 25% in
February 2000, 25% more in February 2001 and the remaining 50% in February
2002.
F-21
<PAGE>
Kaiser-Hill Company, LLC
and Subsidiary
Consolidated Financial Statements
as of June 30,1999 (unaudited), December 31, 1998 and 1997 and for the six
months ended June 30, 1999 and 1998 (unaudited) and each of the three years in
the period ended December 31, 1998 together with Report of Independent
Accountants
F-22
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Members of
Kaiser-Hill Company, LLC:
We have audited the accompanying consolidated balance sheets of Kaiser-Hill
Company, LLC (a Colorado limited liability company) (the "Company") and
subsidiary as of December 31, 1998 and 1997, and the related consolidated
statements of income, members' equity and cash flows for each of the three
years in the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements 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 consolidated financial position
of Kaiser-Hill Company, LLC and subsidiary as of December 31, 1998 and 1997,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
January 22, 1999.
F-23
<PAGE>
KAISER-HILL COMPANY, LLC AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(amounts in thousands of dollars)
<TABLE>
<CAPTION>
December 31,
June 30, ----------------
1999 1998 1997
----------- -------- -------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 7,901 $ 3,644 $10,182
Contract receivables.............................. 122,692 124,352 87,389
Receivable from Member............................ -- 396 --
-------- -------- -------
Total current assets.............................. 130,593 128,392 97,571
Financing and organization costs, net of
accumulated amortization of $894, $2,578 and
$1,791, respectively............................. 110 1,004 1,791
-------- -------- -------
$130,703 $129,396 $99,362
======== ======== =======
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Accounts payable and payable to subcontractors.... $105,940 $114,988 $78,391
Accrued vacation.................................. 8,129 7,627 7,794
Accrued salaries and employee benefits............ 8,804 5,039 8,351
Payable to Members................................ 1,230 742 2,656
-------- -------- -------
Total current liabilities......................... 124,103 128,396 97,192
Contingencies (Note 6)
Members' equity................................... 6,600 1,000 2,170
-------- -------- -------
$130,703 $129,396 $99,362
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-24
<PAGE>
KAISER-HILL COMPANY, LLC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(amounts in thousands of dollars)
<TABLE>
<CAPTION>
For the six
months ended For the years ended
June 30, December 31,
----------------------- -------------------------------
1999 1998 1998 1997 1996
----------- ----------- --------- --------- ---------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Gross revenue........... $ 332,620 $ 288,728 $ 636,190 $ 584,739 $ 543,756
Subcontractor costs and
direct material costs.. (259,060) (221,144) (464,692) (421,800) (376,000)
--------- --------- --------- --------- ---------
Service revenue......... 73,560 67,584 171,498 162,939 167,756
Direct cost of service
and overhead........... (67,250) (62,385) (156,072) (145,708) (155,995)
--------- --------- --------- --------- ---------
Operating income........ 6,310 5,199 15,426 17,231 11,761
Other income (expense):
Interest income......... 255 197 295 661 539
Interest expense........ (126) (96) (221) (128) (134)
--------- --------- --------- --------- ---------
Income before cumulative
effect of a change in
accounting principle... 6,439 5,300 15,500 17,764 12,166
Cumulative effect of a
change in accounting
principle (Note 7)..... (839) -- -- -- --
--------- --------- --------- --------- ---------
Net income.............. $ 5,600 $ 5,300 $ 15,500 $ 17,764 $ 12,166
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-25
<PAGE>
KAISER-HILL COMPANY, LLC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY
for the years ended December 31, 1998 and 1997
(amounts in thousands of dollars)
<TABLE>
<CAPTION>
ICF Kaiser CH2M Hill
Government Constructors,
Programs, Inc. Inc. Total
-------------- ------------- --------
<S> <C> <C> <C>
Members' equity, December 31, 1995...... $ 2,142 $ 2,498 $ 4,640
Net income.............................. 6,083 6,083 12,166
Distributions........................... (2,072) (2,428) (4,500)
-------- -------- --------
Members' equity, December 31, 1996...... 6,153 6,153 12,306
Net income.............................. 8,882 8,882 17,764
Distributions........................... (13,950) (13,950) (27,900)
-------- -------- --------
Members' equity, December 31, 1997...... 1,085 1,085 2,170
Net income.............................. 7,750 7,750 15,500
Distributions........................... (8,335) (8,335) (16,670)
-------- -------- --------
Members' equity, December 31, 1998...... $ 500 $ 500 $ 1,000
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-26
<PAGE>
KAISER-HILL COMPANY, LLC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands of dollars)
<TABLE>
<CAPTION>
For the six months For the years ended
ended June 30, December 31,
----------------------- ----------------------------
1999 1998 1998 1997 1996
----------- ----------- -------- -------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income............... $ 15,500 $ 17,764 $ 12,166
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Amortization............ 787 627 764
Changes in assets and
liabilities:
Increase in contract
receivables............ (36,963) (12,402) (703)
Increase in receivable
from Member............ (396) -- --
Decrease in prepaid
expenses and other
current assets......... -- -- 2,017
Increase in accounts
payable and payable to
subcontractors......... 36,597 18,987 15,899
Increase (decrease) in
accrued salaries and
employee benefits...... (3,479) 627 (8,315)
Increase (decrease) in
payable to Members..... (1,914) 511 2,145
-------- -------- --------
Net cash provided by
operating activities.... $ 209 $(12,854) 10,132 26,114 23,973
------ -------- -------- -------- --------
Cash flows from financing
activities:
Distributions to
Members................. -- (1,000) (16,670) (27,900) (4,500)
Repayment of operating
expenses and
organization costs paid
by Members.............. -- -- -- -- (8,512)
------ -------- -------- -------- --------
Net cash used in
financing activities.... -- (1,000) (16,670) (27,900) (13,012)
------ -------- -------- -------- --------
Net increase (decrease)
in cash and cash
equivalents............. 209 (13,854) (6,538) (1,786) 10,961
Cash and cash
equivalents, beginning
of year................. 7,692 14,768 10,182 11,968 1,007
------ -------- -------- -------- --------
Cash and cash
equivalents, end of
year.................... $7,901 $ 914 $ 3,644 $ 10,182 $ 11,968
====== ======== ======== ======== ========
Supplemental cash flow
information:
Cash paid for interest... $ 126 $ 96 $ 221 $ 128 $ 134
====== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-27
<PAGE>
KAISER-HILL COMPANY, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
Kaiser-Hill Company, LLC (the "Company") was formed on October 24, 1994.
The principal business of the Company is to procure, execute, deliver, and
perform under a five-year contract, commencing July 1, 1995, with the
Department of Energy ("DOE") to manage the programs and operate the DOE
facilities at Rocky Flats Environmental Technology Site ("RFETS") in Golden,
Colorado ("DOE contract"). The mission of the RFETS is directed toward cleanup,
deactivation, and preparation for decontamination and disposition of these DOE
facilities.
The Company's contract will expire on June 30, 2000. The DOE is currently
considering its options which could include an extension of the Company's
contract or re-bid under a competitive process. While the Company believes that
its relationship with the DOE is good, the outcome will not be finalized until
after the release of these financial statements.
At December 31, 1998, the Company employed 1,439 hourly workers and 321
salaried workers. Approximately 93% of the hourly employees are represented by
United Steel Works of America (the "Union") under a collective bargaining
agreement which expires on October 3, 2001.
The Company maintains its cash accounts primarily with banks located in
Colorado, New York and North Carolina. The total cash balances are insured by
the FDIC up to $100,000 per bank. The Company had cash balances on deposit with
one Colorado bank in eight accounts at December 31, 1998 and 1997.
The Company is a limited liability company owned equally by ICF Kaiser
Government Programs, Inc., a wholly owned subsidiary of ICF Kaiser
International, Inc. ("ICF Kaiser"), and CH2M Hill Constructors, Inc., an
indirect wholly owned subsidiary of CH2M Hill Companies, Ltd. ("CH2M Hill")
(collectively, the "Members"). Net profits and/or losses are allocated equally
to the Members, except for the 1994 bid and proposal costs which were allocated
to the Members based upon the actual amount incurred by such Members.
Distributions of Company earnings are allocated equally to the Members, except
for the 1996 distribution which adjusted the Members' equity balances for the
1994 bid and proposal costs.
2. Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the wholly owned subsidiary
of the Company, Kaiser-Hill Funding Company, LLC. All intercompany accounts and
transactions have been eliminated in the consolidated financial statements.
Unaudited Interim Financial Statements
The consolidated interim financial statements included with the annual
financial statements herein have been prepared by the Company pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures relating to the interim period normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures included herein
are adequate to make the information presented not misleading. In the opinion
of management, the accompanying unaudited condensed consolidated financial
statements of the interim period contain all adjustments necessary to present
fairly the financial position of the Company as of June 30, 1999 and the
results of operations and cash flows for the periods presented. All such
adjustments are of a normal recurring nature. The results of operations for the
six months ended June 30, 1999 are not necessarily indicative of the results
that may be achieved for a full fiscal year and cannot be used to indicate
financial performance for the entire year.
F-28
<PAGE>
KAISER-HILL COMPANY, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Revenue Recognition
Revenue is recognized using the percentage of completion method whereby
revenue is accrued in an amount equal to cost plus management's best estimate
of base fee, performance based incentive fees and cost reduction proposal fees
to be received.
Statements of Cash Flows
For purposes of the statements of cash flows, the Company considers cash in
checking and short-term investments with original maturities of three months or
less to be cash and cash equivalents.
Organization Costs and New Accounting Policy
Organization costs are nonreimbursable costs, including legal, consulting,
financing and pre-transition costs incurred by the Company prior to the
commencement of the DOE contract, recorded at historical cost and amortized on
a straight line basis over five years. Amortization expense was $787,000,
$627,000 and $764,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5 ("SOP 98-5"), Reporting on the Costs of
Start-Up Activities, which states that costs of start-up activities, including
organization costs, should be expensed as incurred. This statement is effective
for fiscal years beginning after December 15, 1998, and the initial adoption of
SOP 98-5 should be reported as a cumulative effect of a change in accounting
principle. Management believes that the Company's adoption of this new
accounting policy will result in costs of $839,000 to be written off in 1999.
Income Taxes
The financial statements do not include a provision for income taxes
because the Company is treated as a partnership for income tax purposes and
does not incur federal or state income taxes. Instead, its earnings and losses
are included in the Members' separate income tax returns.
Use of Estimates
The preparation of 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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. Related Party Transactions
In 1998 and 1997, the Members were subcontracted by the Company to perform
certain tasks under the DOE contract. The "Payable to Members" in the
accompanying balance sheets as of December 31, 1998 and 1997 consists of
$742,000 and $1,742,000, respectively, to ICF Kaiser and $-0- and $914,000,
respectively, to CH2M Hill for these subcontracted tasks. These payables are
non-interest bearing. The "Receivable from Member" in the accompanying balance
sheet as of December 31, 1998 consists of $396,000 due from CH2M Hill relating
to advance payment of general and administrative expenses, less operating
payables.
In addition, costs incurred related to work performed by ICF Kaiser and
CH2M Hill, the majority of which are reimbursable and billed under the DOE
contract in 1998 were approximately $3,600,000 and
F-29
<PAGE>
KAISER-HILL COMPANY, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
$960,000, respectively, in 1997 were approximately $2,600,000 and $1,100,000,
respectively, and in 1996 were approximately $1,300,000 and $1,000,000,
respectively.
4. Contract Receivables and Receivables Purchase Facility Agreement
Contract receivables as of December 31, 1998 and 1997 represent unbilled
receivables due under the DOE contract. Unbilled receivables result from
revenue that has been earned by the Company but not billed to the DOE as of the
end of the period. The unbilled receivables can be invoiced at contractually
defined intervals and milestones. Management anticipates that the unbilled
receivables will be billed and collected in less than one year.
The Company's trade receivables result primarily from its long-term
contract with the DOE. As a consequence, management believes that credit risk
is minimal.
Through its wholly owned subsidiary, Kaiser-Hill Funding Company, LLC, the
Company has available at a financial institution a receivables purchase
facility agreement which provides temporary financing for the payment of the
Company's costs incurred under the DOE contract. This financing is utilized
throughout the year for periods of less than one month as, under the terms of
the DOE contract, the DOE must pay the Company's invoices within three days of
receipt. Contract receivables are collateral for the financed amount. The
maximum funding level for this agreement is $50,000,000, of which approximately
$50,000,000 and $27,000,000 were the unused portions at December 31, 1998 and
1997, respectively.
5. Contingencies
The Company's reimbursable costs are subject to audit in the ordinary
course of business by various U.S. Government agencies. The Company is not
presently aware of any significant costs which have been, or may be, disallowed
by any of these agencies.
6. Employee Benefit Plans
In accordance with the DOE contract, the Company sponsors several benefit
plans covering substantially all employees who meet length of service
requirements. These plans include the following defined benefit pension plans:
The Rocky Flats Multiple Employer Salaried Retirement Plan and the Kaiser-Hill
Retirement Plan for Hourly Production and Maintenance Employees. The Company
also sponsors the following defined contribution plans: Kaiser-Hill Company,
LLC Savings Plan for Hourly Employees, which includes no Company matching; and
Rocky Flats Multiple Employer Salaried Thrift Plan, which includes Company
matching. The Company contribution amounts for the Savings Plan/Thrift Plan
were approximately $413,000, $482,000 and $615,000 for 1998, 1997 and 1996,
respectively. No amounts were contributed to the Retirement Plans during 1998
and 1997 because the Plans were overfunded. In 1996, contributions of
$6,917,000 were made to the retirement plans.
The Company administers these benefit plans with benefits equivalent to the
RFETS contractor benefit plans maintained by the contractor that preceded the
Company at RFETS. Under the DOE contract, the Company recognizes the cost of
benefit plans when paid, and such costs are reimbursed by the DOE. Any excess
pension plan assets or unfunded pension plan liability which may currently
exist or is remaining at the end of the DOE contract is the responsibility of
the DOE.
7. Subsequent Events (unaudited)
Effective January 1, 1999, the Company adopted SOP 98-5 resulting in a
cumulative effect of a change in accounting principle of $839,000 included in
the accompanying consolidated statement of income for the six months ended June
30, 1999.
On July 30, 1999, the U.S. Department of Energy announced that it will
begin negotiations with Kaiser-Hill on a contract extension through ultimate
site closure scheduled for 2006.
F-30
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTS
To CH2M HILL Companies, Ltd.:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of CH2M HILL Companies, Ltd. and
subsidiaries included in this registration statement and have issued our report
thereon dated February 12, 1999. Our audit was made for the purpose of forming
an opinion on the basic financial statements taken as a whole. The schedule
referred to in the index is the responsibility of the Company's management and
is presented for purposes of complying with the Securities and Exchange
Commission rules and is not part of the basic financial statements. The
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Denver, Colorado,
February 12, 1999
F-31
<PAGE>
CH2M HILL COMPANIES, LTD.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(Dollars in thousands)
<TABLE>
<CAPTION>
Additions
----------------
Balance at Charged Charged Balance at
Beginning to to Other End of
Description of Period Expense Accounts Deductions Period
----------- ---------- ------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts receivable:
Year ended December 31,
1996..................... $1,593 $ 57 $-- $114 $1,536
Year ended December 31,
1997..................... $1,536 $1,441 $-- $-- $2,977
Year ended December 31,
1998..................... $2,977 $5,224 $-- $-- $8,201
</TABLE>
F-32
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
23,865,730 Shares
CH2M HILL Companies, Ltd.
Common Stock
[LOGO OF CH2M HILL APPEARS HERE]
--------
PROSPECTUS
--------
, 1999
Prospective investors may rely only on the information contained in this
prospectus. CH2M HILL has not authorized anyone to provide prospective
investors with information different from that contained in this prospectus.
This prospectus is not an offer to sell nor is it seeking an offer to buy these
securities in any jurisdiction where the offer or sale is not permitted. The
information contained in this prospectus is correct only as of the date of this
prospectus, regardless of the time of delivery of this prospectus or any sale
of these securities.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
Estimated expenses payable by CH2M HILL in connection with the sale of the
common stock offered hereby are as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............ $ 29,029
Blue Sky fees and expenses..................................... 75,000
Legal fees and expenses........................................ 575,000
Accounting fees and expenses................................... 275,000
Directors' and Officers' liability insurance premium........... 110,000
Printing and engraving expenses................................ 100,000
Miscellaneous.................................................. 200,000
----------
Total........................................................ $1,364,029
==========
</TABLE>
Item 14. Indemnification of Directors and Officers
Under the Oregon Business Corporation Act (the "Act"), a corporation's
Articles of Incorporation may provide for the limitation of liability of
directors and indemnification of directors and officers under some
circumstances. In accordance with Oregon law, CH2M HILL's Restated Articles of
Incorporation provide that directors are not personally liable to the
corporation or its shareholders for monetary damages for conduct as a director,
except for any act or omission for which the elimination of liability is not
permitted under the Act. Section 60.047(2)(d) of the Act sets forth the
following actions for which limitation of liability is not permitted, including
(i) any breach of a director's duty of loyalty to the corporation or its
shareholders; (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of the law; (iii) any unlawful
distributions to shareholders; or (iv) any transaction from which the director
received an improper or illegal personal benefit.
CH2M HILL's Restated Bylaws allow it to indemnify any person who is or was
a party, or is threatened to be made a party, to any civil, administrative, or
criminal proceeding by reason of the fact that the person is or was a director
or officer of CH2M HILL or any of its subsidiaries, or is or was serving at
CH2M HILL's request as a director, officer, partner, agent, or employee of
another corporation or entity. The indemnification may include expenses,
including attorneys' fees, judgments, fines, and amounts paid in settlement,
actually and reasonably incurred by that person. Under the Section 60.391(1) of
the Act, indemnification is available if (i) the person acted in good faith;
(ii) the person reasonably believed the conduct was in the corporation's best
interests, or at least was not opposed to its best interests; and (iii) in the
case of a criminal proceeding, the person had no reasonable cause to believe
the conduct was unlawful. In addition, a person who is wholly successful, on
the merits or otherwise, in the defense of a proceeding in which the person was
a party because the person was a director, is entitled to indemnification for
expenses actually and reasonably incurred by the person in connection with the
proceeding.
CH2M HILL intends to purchase and pay the premium for insurance in respect
of claims against its directors and officers and in respect of losses for which
CH2M HILL may be required or permitted by law to indemnify such directors and
officers. The directors to be insured are the directors named herein and all
directors of CH2M HILL's subsidiaries. The officers to be insured are all
officers and assistant officers of CH2M HILL and its subsidiaries. CH2M HILL
does not expect to allocate or segregate the premium with regard to specific
subsidiaries or individual directors and officers.
II-1
<PAGE>
Item 15. Recent Sales of Unregistered Securities
As of December 31, 1997, CH2M HILL sold 783 shares of common stock to
Robert G. Card for $28,081.11 and 300 shares of common stock to Nancy R. Tuor
for $10,758.00. As of December 31, 1998, CH2M HILL sold 1,318 shares of common
stock to Robert G. Card for $50,373.96 and 184 shares of common stock to Nancy
R. Tuor for $7,032.48. Mr. Card and Ms. Tuor are former employees of CH2M HILL
who were key employee shareholders when employed by CH2M HILL and who currently
work for its affiliate, Kaiser-Hill Company, LLC. The issuance of such shares
was exempt from registration under Section 4(2) of the Securities Act of 1933,
as amended, as a transaction by the issuer not involving a public offering.
In the fiscal years ended December 31, 1996, 1997 and 1998, CH2M HILL
issued 2,194,450, 2,428,930, and 2,545,550 shares of common stock and class A
preferred stock, respectively, as bonuses to its employees for no
consideration. The issuances of these shares were exempt from registration
under the Securities Act of 1933, as amended, since there was no sale of the
securities.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits. The following is a list of exhibits to this Registration
Statement:
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
+3.1 Form of Restated Articles of Incorporation of CH2M HILL Companies,
Ltd.
+3.2 Form of Restated Bylaws of CH2M HILL Companies, Ltd.
+5.1 Opinion of Holme Roberts & Owen LLP with respect to legality of
securities being registered
+5.2 Opinion of Holland & Hart LLP with respect to compliance with
ERISA for the CH2M HILL Retirement and Tax-Deferred Savings Plan
+5.3 Opinion of Holland & Hart LLP with respect to compliance with
ERISA for the CH2M HILL Employee Stock Plan.
+10.1 Form of CH2M HILL Retirement and Tax-Deferred Savings Plan
+10.2 Form of CH2M HILL Employee Stock Plan
+10.3 CH2M HILL Companies, Ltd. 1999 Stock Option Plan
+10.4 Form of CH2M HILL Companies, Ltd. 1999 Payroll Deduction Stock
Purchase Plan
+10.5 Form of CH2M HILL Companies, Ltd. Pre-Tax Deferred Compensation
Plan
+10.6 Form of Trust Under CH2M HILL Companies, Ltd. Pre-Tax Deferred
Compensation Plan
+10.7 Form of CH2M HILL Companies, Ltd. After-Tax Deferred Compensation
Plan
+10.8 Form of Trust Under CH2M HIll Companies, Ltd. After-Tax Deferred
Compensation Plan
+10.9 Form of Contract with Buck Investment Services, Inc.
10.10 Contract (#DE-AC3495RF00825) between Kaiser-Hill Company, LLC, a
subsidiary of the Corporation, and the U.S. Department of Energy
dated as of April 4, 1995, along with Modifications 1 to 81 to
Contract #DE-AC3495RF00825 (Modifications 41, 72 and 78 not
received).(1)
+10.11 $100,000,000 Senior Unsecured Revolving Credit Agreement dated as
of June 18, 1999, Wells Fargo Bank, National Association, as
Agent.
+21 Subsidiaries of CH2M HILL Companies, Ltd.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
*23.1 Consent of Arthur Andersen LLP
*23.2 Consent of KPMG LLP
+23.3 Consent of Holme Roberts & Owen LLP (included in Exhibit 5.1)
+23.4 Consent of Holland & Hart LLP (included in Exhibit 5.2 and Exhibit
5.3)
+24 Powers of Attorney (included on signature page)
+27 Financial Data Schedule
+99.1 Form of Internal Market Rules
+99.2 Key Employee Policy
</TABLE>
- -------
+Previously filed.
*Filed herewith.
(1) Incorporated by reference from ICF Kaiser International Inc.'s (i)
Form 10-K for the fiscal year ended February 28, 1995 filed on March 29, 1996
(SEC file no. 1-12248); (ii) registration statement on Form S-1 filed on
November 27, 1996 (SEC file no. 333-16937); (iii) Form 10-K for the fiscal
year ended December 31, 1996 filed on March 25, 1997 (SEC file no. 1-12248);
and (iv) Form 10-K for the fiscal year ended December 31, 1997 filed on March
31, 1998 (SEC file no. 1-12248).
(b) Financial Statement Schedules.
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission have been included in
the prospectus, are not required under the related instructions, are
inapplicable and therefore have been omitted, or the information required by
the applicable schedule is included in the notes to the consolidated financial
statements.
Item 17. Undertakings
The undersigned hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously enclosed in the registration statement or any
material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof;
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering.
II-3
<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that any claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
For purposes of determining any liability under the Securities Act of 1933,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City and County of Denver, State
of Colorado, on the 23th day of August, 1999.
CH2M HILL Companies, Ltd.
/s/ Ralph R. Peterson
By: ____________________________________
Ralph R. Peterson
President and Chief Executive
Officer
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated. Each person whose signature appears below
does hereby make, constitute and appoint each of Philip G. Hall and Samuel H.
Iapalucci as such person's true and lawful attorney-in-fact and agent, with
full power of substitution, resubstitution and revocation to execute, deliver
and file with the Securities and Exchange Commission, for and on such person's
behalf, and in any and all capacities, a Registration Statement on Form S-1,
any and all amendments (including post-effective amendments) thereto and any
abbreviated registration statement in connection with this Registration
Statement pursuant to Rule 462(b) under the Securities Act of 1933, with all
exhibits thereto and other documents in connection therewith, granting unto
said attorneys-in-fact and agents full power and authority to do and perform
each and every act and thing requisite and necessary to be done as fully to all
intents and purposes as such person might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact and agent or such
person's substitute or substitutes may lawfully do or cause to be done by
virtue hereof.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Ralph R. Peterson President and Chief August 23, 1999
______________________________________ Executive Officer
Ralph R. Peterson (Principal Executive
Officer)
* Chairman of the Board of August 23, 1999
______________________________________ Directors and Senior Vice
Philip G. Hall President
/s/ Samuel H. Iapalucci Chief Financial Officer August 23, 1999
______________________________________ (Principal Financial and
Samuel H. Iapalucci Principal Accounting
Officer)
* Director August 23, 1999
______________________________________
Joseph A. Ahearn
* Director August 23, 1999
______________________________________
Kenneth F. Durant
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Director August 23, 1999
______________________________________
Donald S. Evans
* Director August 23, 1999
______________________________________
James J. Ferris
* Director August 23, 1999
______________________________________
Jerry D. Geist
* Director August 23, 1999
______________________________________
Michael D. Kennedy
* Director August 23, 1999
______________________________________
Susan D. King
* Director August 23, 1999
______________________________________
Michael Y. Marcussen
* Director August 23, 1999
______________________________________
Barry L. Williams
By: /s/ Samuel H. Iapalucci
______________________________________
Samuel H. Iapalucci, as attorney-in-
fact
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
+3.1 Form of Restated Articles of Incorporation of CH2M HILL Companies,
Ltd.
+3.2 Form of Restated Bylaws of CH2M HILL Companies, Ltd.
+5.1 Opinion of Holme Roberts & Owen LLP with respect to legality of
securities being registered
+5.2 Opinion of Holland & Hart LLP with respect to compliance with ERISA
for the CH2M HILL Retirement and Tax-Deferred Savings Plan
+5.3 Opinion of Holland & Hart LLP with respect to compliance with ERISA
for the CH2M HILL Employee Stock Plan
+10.1 Form of CH2M HILL Retirement and Tax-Deferred Savings Plan
+10.2 Form of CH2M HILL Employee Stock Plan
+10.3 CH2M HILL Companies, Ltd. 1999 Stock Option Plan
+10.4 Form of CH2M HILL Companies, Ltd. 1999 Payroll Deduction Stock
Purchase Plan
+10.5 Form of CH2M HILL Companies, Ltd. Pre-Tax Deferred Compensation Plan
+10.6 Form of Trust Under CH2M HILL Companies, Ltd. Pre-Tax Deferred
Compensation Plan
+10.7 Form of CH2M HILL Companies, Ltd. After-Tax Deferred Compensation Plan
+10.8 Form of Trust Under CH2M HILL Companies, Ltd. After-Tax Deferred
Compensation Plan
+10.9 Form of Contract with Buck Investment Services, Inc.
10.10 Contract (#DE-AC3495RF00825) between Kaiser-Hill Company, LLC, a
subsidiary of the Corporation, and the U.S. Department of Energy dated
as of April 4, 1995, along with Modifications 1 to 81 to Contract #DE-
AC3495RF00825 (Modifications 41, 72 and 78 not received).(1)
+10.11 $100,000,000 Senior Unsecured Revolving Credit Agreement dated as of
June 18, 1999, Wells Fargo Bank, National Association, as Agent.
+21 Subsidiaries of CH2M HILL Companies, Ltd.
*23.1 Consent of Arthur Andersen LLP
*23.2 Consent of KPMG LLP
+23.3 Consent of Holme Roberts & Owen LLP (included in Exhibit 5.1)
+23.4 Consent of Holland & Hart LLP (included in Exhibit 5.2 and Exhibit
5.3)
+24 Powers of Attorney (included on signature page)
+27 Financial Data Schedule
+99.1 Form of Internal Market Rules
+99.2 Key Employee Policy
</TABLE>
- --------
+Previously filed.
*Filed herewith.
(1) Incorporated by reference from ICF Kaiser International Inc.'s (i) Form 10-
K for the fiscal year ended February 28, 1995 filed on March 29, 1996 (SEC
file no. 1-12248); (ii) registration statement on Form S-1 filed on
November 27, 1996 (SEC file no. 333-16937); (iii) Form 10-K for the fiscal
year ended December 31, 1996 filed on March 25, 1997 (SEC file no. 1-
12248); and (iv) Form 10-K for the fiscal year ended December 31, 1997
filed on March 31, 1998 (SEC file no. 1-12248).
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our firm) included in or made as part of this
registration statement.
ARTHUR ANDERSEN LLP
Denver, Colorado,
August 20, 1999.
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the inclusion of our report dated January 22, 1999 on the
consolidated balance sheets of CH2M HILL INDUSTRIAL DESIGN CORPORATION AND
SUBSIDIARIES as of December 31, 1998 and 1997, and related consolidated
statements of income and retained earnings, comprehensive income, and cash
flows for each of the years in the three year period ended December 31, 1998.
KPMG LLP
Portland, Oregon
August 18, 1999
