WASHINGTON GROUP INTERNATIONAL INC - 10-Q Quarterly Report

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarter Ended

At June 1, 2001, 52,468,694 shares of the registrant's $.01 par value common stock were outstanding.

The registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and has been subject to such filing requirements for the past 90 days. Yes o No ý

WASHINGTON GROUP INTERNATIONAL, INC.
(Debtor-in-Possession)
Quarterly Report Form 10-Q for the
Quarter Ended June 1, 2001

WASHINGTON GROUP INTERNATIONAL, INC. (Debtor-in-Possession)
CONSOLIDATED STATEMENTS OF INCOME
QUARTER AND SIX MONTHS ENDED JUNE 1, 2001 AND JUNE 2, 2000
(In thousands except per share data)
(UNAUDITED)

WASHINGTON GROUP INTERNATIONAL, INC. (Debtor-in-Possession)
CONSOLIDATED BALANCE SHEETS
AT JUNE 1, 2001 (UNAUDITED) AND DECEMBER 1, 2000
(In thousands except per share data)

The accompanying notes are an integral part of the consolidated financial statements.

WASHINGTON GROUP INTERNATIONAL, INC. (Debtor-in-Possession)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 1, 2001 AND JUNE 2, 2000
(In thousands)
(UNAUDITED)

The accompanying notes are an integral part of the consolidated financial statements.

WASHINGTON GROUP INTERNATIONAL, INC. (Debtor-in-Possession)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
QUARTER AND SIX MONTHS ENDED JUNE 1, 2001 AND JUNE 2, 2000
(In thousands)
(UNAUDITED)

The accompanying notes are an integral part of the consolidated financial statements.

WASHINGTON GROUP INTERNATIONAL, INC. (Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars except per share data)

The terms "we," "us" and "our" as used in this quarterly report include Washington Group International, Inc. ("WGI") and its consolidated subsidiaries unless otherwise indicated. On May 14, 2001, WGI and several but not all of its subsidiaries filed for Chapter 11 bankruptcy protection. See Note 4, "Reorganization Case and Fresh-start Reporting." The term "Plan of Reorganization" as used in this quarterly report refers to the Second Amended Joint Plan of Reorganization of Washington Group International, Inc., et al., as modified and confirmed by the U.S. Bankruptcy Court for the District of Nevada on December 21, 2001.

We were originally incorporated in Delaware on April 28, 1993 under the name Kasler Holding Company. In April 1996, we changed our name to Washington Construction Group, Inc. On September 11, 1996, we purchased Morrison Knudsen Corporation, which we refer to as "Old MK," and changed our name to Morrison Knudsen Corporation. On September 15, 2000, we changed our name to Washington Group International, Inc.

We are an international provider of a broad range of design, engineering, construction, construction management, facilities and operations management, environmental remediation and mining services to diverse public and private sector clients, including (i) engineering, construction and operations and maintenance services in nuclear and fossil power markets; (ii) diverse engineering and construction and construction management services for the highway and bridge, airport and seaport, dam, tunnel, water resource, railway and commercial building markets; (iii) engineering, design, procurement, construction and construction management services to industrial companies; (iv) contract mining, technical and engineering services for the metals, precious metals, coal, minerals and minerals processes markets; (v) comprehensive nuclear and other environmental and hazardous substance remediation services for governmental and private-sector clients and (vi) weapons and chemical demilitarization programs for governmental and private-sector clients. In providing these services, we enter into three basic types of contracts: fixed-price or lump-sum contracts providing for a fixed price for all work to be performed, fixed-unit-price contracts providing for a fixed price for each unit of work to be performed, and cost-type contracts providing for reimbursement of costs plus a fee. Both anticipated income and economic risk are greater under fixed-price and fixed-unit-price contracts than under cost-type contracts. Engineering, construction management and environmental and hazardous substance remediation contracts are typically awarded pursuant to a cost-type contract.

We participate in construction joint ventures, often as sponsor and manager of projects, that are formed for the sole purpose of bidding, negotiating and completing specific projects. We also participate in two incorporated mining ventures: Westmoreland Resources, Inc., a coal mining company in Montana, and MIBRAG mbH, a company that operates lignite coal mines and power plants in Germany. On March 22, 1999, we and BNFL Nuclear Services, Inc. ("BNFL"), an unrelated entity, acquired the government and environmental services businesses of CBS Corporation (now Viacom, Inc.). We refer to these businesses as the "Westinghouse Businesses." The Westinghouse Businesses currently constitute our Westinghouse Government Services Group ("WGSG"), which is part of our Government operating unit. On July 7, 2000, we purchased from Raytheon Company ("Raytheon") and Raytheon Engineers & Constructors International, Inc. ("RECI") the capital stock of the subsidiaries of RECI, and specified other assets of RECI and we assumed specified liabilities of RECI. The businesses that we purchased provide engineering, design, procurement, construction, operation, maintenance and other services on a worldwide basis. See Note 3, "Acquisition of Raytheon Engineers & Constructors."

The accompanying unaudited interim consolidated financial statements and related notes have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These consolidated financial statements include the accounts of WGI and all of its majority-owned subsidiaries and certain construction joint ventures. Investments in non-consolidated construction joint ventures and mining ventures are accounted for using the equity method. For these non-consolidated construction joint ventures, our proportionate share of revenue, cost of revenue and gross profit (loss) is included in the consolidated statements of operations, and equity in net earnings of our incorporated mining ventures is accounted for on the equity method. All significant intercompany transactions and accounts have been eliminated in consolidation.

These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes contained in our annual report on Form 10-K for the fiscal year ended December 1, 2000. The comparative balance sheet and related disclosures at December 1, 2000 have been derived from the audited balance sheet and consolidated footnotes referred to above.

In our opinion, the accompanying unaudited interim consolidated financial statements reflect all adjustments that are necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented.

The results of operations for the interim periods presented in these unaudited interim consolidated financial statements are not necessarily indicative of results to be expected for the full year, and future operating results may not be comparable to historical operating results as a result of our acquisition of RE&C, as described below, effective July 7, 2000; our filing for protection under Chapter 11 of the U.S. Bankruptcy Code on May 14, 2001; our subsequent emergence therefrom on January 25, 2002; and the implementation of fresh-start reporting on February 1, 2002. See Note 3, "Acquisition of Raytheon Engineers & Constructors" and Note 4, "Reorganization Case and Fresh-start Reporting."

Effective December 1, 1998, we adopted a 52/53 week fiscal year ending on the Friday closest to November 30.

The preparation of our consolidated financial statements in conformity with generally accepted accounting principles necessarily requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet dates and the reported amounts of revenues and costs during the reporting periods. Actual results could differ from those estimates. On an ongoing basis, we review our estimates based on information that is currently available. Changes in facts and circumstances may cause us to revise estimates.

Certain reclassifications have been made to prior period consolidated financial statements to conform to the current period presentation.

On July 7, 2000, pursuant to a stock purchase agreement dated April 14, 2000 (the "Stock Purchase Agreement"), we purchased from Raytheon and RECI (collectively with Raytheon, the "Sellers") the capital stock of the subsidiaries of RECI and specified other assets of RECI, and we assumed specified liabilities of RECI. The businesses that we purchased, hereinafter called "RE&C", provide engineering, design, procurement, construction, operation, maintenance and other services on a worldwide basis. We financed the acquisition by obtaining new senior secured financing facilities (the

"RE&C Financing Facilities") and issuing senior unsecured notes due July 1, 2010 (the "Senior Unsecured Notes"). See Note 7, "Credit Facilities—RE&C Financing Facilities" for a more detailed description of the terms of the RE&C Financing Facilities and Senior Unsecured Notes.

The purchase price paid at the closing of the acquisition on July 7, 2000 was $53,000 in cash and the assumption of net liabilities originally estimated at $450,000. We also incurred acquisition costs of $7,705. The cash portion of the purchase price paid at closing was determined based upon a formula contained in the Stock Purchase Agreement and represented the estimated amount of the Adjusted Non-Current Net Assets and Adjusted Net Working Capital (as the terms are defined in the Stock Purchase Agreement) that we acquired, valued as of April 30, 2000. The amounts of Adjusted Non-Current Net Assets and Adjusted Net Working Capital were subject to post-closing finalization, including an audit by independent accountants, and other adjustments to the price paid at closing. In addition, the Stock Purchase Agreement contained a provision requiring us either to pay the Sellers, or to be paid by the Sellers, the net amount of cash the Sellers either advanced to or withdrew from RE&C between April 30, 2000 and July 7, 2000. After closing, we paid the Sellers $84,400 representing the net amount of cash advanced or paid by the Sellers for the use or benefit of RE&C between April 30, 2000 and July 7, 2000.

The Stock Purchase Agreement provided that the Sellers would retain all non-restricted cash and cash equivalents held by RE&C at the close of business on April 30, 2000 (the "Cut-Off Date Cash Balances"). At closing, for purposes of administrative convenience, RE&C kept all cash held by it ($15,790), and we paid the Sellers an additional $30,800 for the cash balances on April 30, 2000. That amount was subject to post-closing verification by us and adjustment in the event it was not equal to the Cut-Off Date Cash Balances held by RE&C. We subsequently verified the amount and no adjustment was required. In total, we paid net cash of $160,130 for the RE&C acquisition.

RECI retained, among other assets, all of its interest in and rights with respect to some of the existing contracts. In addition, the Stock Purchase Agreement provided that the contracts related to four specified construction projects would be transferred to RECI, and RE&C would enter into subcontracts to perform, on a cost-reimbursed basis, all of RECI's obligations under those contracts. Because the customer consents required to transfer the four contracts to RECI could not be obtained as of closing, we agreed to remain the contract party and continued to be directly obligated to the customers and other third parties under the contracts relating to the four projects. Accordingly, we and the Sellers agreed that the Sellers would provide us with full indemnification with respect to any risks associated with those contracts, which arrangement accomplished the original intent of the Stock Purchase Agreement. Under the Stock Purchase Agreement, we agreed that we would complete the four specified projects for the Sellers' account and the Sellers agreed to reimburse our costs and to share equally with us any positive variance between actual costs and estimated costs. The Sellers also agreed to indemnify us against any losses, claims or liabilities under the contracts relating to such projects, except losses, claims or liabilities resulting from our gross negligence or willful misconduct, against which we would indemnify the Sellers.

The Stock Purchase Agreement did not contain a fixed purchase price at closing for the transaction, but rather, as noted above, provided that the purchase price would be adjusted upward or downward post-closing based on the effect on a formula that would be applied to an audited RE&C April 30, 2000 balance sheet to be prepared by the Sellers and audited by the Sellers' independent accountants. After closing, we extended the delivery date for the final audited RE&C balance sheet for April 30, 2000 to January 14, 2001.

EAC's"). During this process, information came to our attention that raised questions as to whether the Acquisition Date EAC's needed to be adjusted significantly. Our review process involved the analysis of an extensive amount of supporting data, including analysis of numerous, large construction projects in various stages of completion. Based on the information available at the time of the review, the preliminary results of this review indicated that the Acquisition Date EAC's of numerous long-term contracts required substantial adjustment. The adjustments resulted in contract losses or lower than market rate margins. As a result, in our report on Form 10-Q for the quarter ended September 1, 2000, we significantly decreased the carrying value of the net assets acquired and increased the goodwill associated with the transaction. Because many of the contracts we acquired contained either unrecorded losses or lower than market profits, these contracts were adjusted to their estimated fair value at the July 7, 2000 acquisition date in order to allow for a reasonable profit margin for completing the contracts, and a gross margin or normal profit reserve of $233,135 was established and recorded in billings in excess of cost and estimated earnings on uncompleted contracts.

Our review of the RE&C contracts and the purchase price allocation process continued thereafter and, based on the results of that review, we expected that, as a result of the purchase price adjustment process, the purchase price of RE&C would be adjusted downward by a significant amount. Subsequent to the quarter ended September 1, 2000, we completed the review and made additional adjustments to the contracts we had acquired, resulting from a more accurate determination of the actual contract status at the acquisition date.

The establishment of the normal profit reserve and decreases in cost of revenue for the periods indicated are as follows:

Normal profit reserve
July 7, 2000 balance	$	233,135
Cost of revenue (decrease)		(24,525	)

September 1, 2000 balance		208,610
Cost of revenue (decrease)		(25,746	)

December 1, 2000 balance		182,864
Cost of revenue (decrease)		(30,498	)

March 2, 2001 balance		152,366
Adjustments on reformed and rejected contracts (see fourth paragraph below)		(53,376	)
Cost of revenue (decrease)		(22,332	)

June 1, 2001 balance	$	76,658

An audited RE&C April 30, 2000 balance sheet was not delivered by the Sellers, and therefore, on February 27, 2001, we filed a lawsuit against the Sellers seeking specific performance of the purchase price adjustment provisions of the Stock Purchase Agreement. On March 8, 2001, we amended our complaint to also seek money damages for misstatements and omissions allegedly made by the Sellers. Our lawsuit seeking specific performance was successful, and we and the Sellers thereafter commenced an arbitration proceeding to determine the purchase price adjustment. A significant arbitration claim was ultimately filed against the Sellers, as discussed below.

for the three months ended April 2, 2000 and April 4, 1999. In accordance with federal securities law disclosure requirements, we filed on July 13, 2000 those audited and unaudited financial statements and our related unaudited pro forma condensed combined financial statements as of and for the year ended December 3, 1999 and for the quarter ended March 3, 2000 in a current report on Form 8-K. In our current report on Form 8-K filed March 8, 2001, we advised that, for the reasons stated in such report, the foregoing audited and unaudited financial statements of RECI, and our related unaudited pro forma condensed combined financial statements, which were derived therefrom, no longer should be relied upon.

On March 2, 2001, we announced that we faced severe near-term liquidity problems as a result of our acquisition of RE&C. On March 9, 2001, because of those liquidity problems, we suspended work on two large construction projects located in Massachusetts that were part of the acquisition. The Sellers had provided the customer with parent performance guarantees on those two contracts and the guarantees remained in effect after closing. Those performance guarantees required the Sellers to complete the work on the contracts in the event RE&C (owned by us as of July 7, 2000) did not complete them. The contracts were fixed-price in nature and our review of cost estimates indicated that there were substantial unrecognized future costs in excess of future contract revenues that were not reflected in RECI's Acquisition Date EAC's.

Upon our suspension of work, the Sellers undertook performance of those contracts pursuant to the outstanding performance guarantees. We, however, were obligated under the Stock Purchase Agreement to indemnify the Sellers for losses they incurred under those guarantees. The Sellers also assumed obligations under other contracts, primarily in the RE&C power generation construction business unit that resulted in significant additional indemnification obligations by us to the Sellers. As a result of costs it incurred to perform under the parent guarantees, the Sellers filed a claim against us in the bankruptcy process for approximately $940,000. As further discussed below, this claim was ultimately settled without payment to the Sellers in connection with the completion of our Plan of Reorganization. See Note 4, "Reorganization Case and Fresh-start Reporting." Until such settlement, we retained all liabilities related to the contracts, including normal profit reserves, on our balance sheet as accrued liabilities included in liabilities subject to compromise.

On May 14, 2001, because of the severe near-term liquidity problems resulting from our acquisition of RE&C, we filed for protection under Chapter 11 of the U.S. Bankruptcy Code. At various times between May 14, 2001 and November 20, 2001, we "rejected" numerous contracts (construction contracts, leases and others), as that term is used in the legal sense in bankruptcy law. Included in these rejections were numerous contracts that we acquired from the Sellers. Effective August 27, 2001, we also rejected the Stock Purchase Agreement.

During the pendency of the bankruptcy, we continued to negotiate with the Sellers a settlement of our outstanding litigation with respect to the RE&C acquisition. As a result of those negotiations, we reached a settlement regarding all issues and disputes between the parties, which settlement was incorporated into our Plan of Reorganization (the "Raytheon Settlement").

Under the Raytheon Settlement, the Sellers agreed that, with respect to their bankruptcy claim, the Sellers would be considered unpaid, unsecured creditors having rights in the unsecured creditor class, but that, upon completion of our reorganization, they would waive any rights to receive any distributions to be given to unsecured creditors with allowed claims. In exchange, we agreed to dismiss all litigation against the Sellers related to the acquisition, and to discontinue the purchase price adjustment and binding arbitration process. We released all claims based on any act occurring prior to our emergence from bankruptcy protection, including all claims against the Sellers, their affiliates and directors, officers, employees, agents and specified professionals. The Sellers released all claims based on any act occurring prior to our emergence from bankruptcy protection, including any claims related to any contracts or projects not assumed by us during the bankruptcy cases, against us and our

directors, officers, employees, agents and professionals. No cash was exchanged as a result of the settlement.

In addition, under a services agreement entered into as a part of the Raytheon Settlement, the Sellers will direct the process for resolving pre-petition claims asserted against us in the bankruptcy case relating to any contract or project that we rejected and that involved some form of support arrangement from the Sellers. We will assist the Sellers in settling or litigating various claims related to those rejected projects. We will also complete work as requested by the Sellers on those rejected projects, and will be reimbursed on a cost-reimbursable basis. The Sellers may, with respect to the rejected projects described above, pursue or settle any of our claims against project owners, contractors or other third parties and will retain any resulting proceeds, except that for specified projects, recoveries in excess of amounts paid by the Sellers will be returned to us.

While this settlement eliminated our ability to continue to seek to collect our arbitration claim, it was necessary because the Sellers' large unsecured claims in the bankruptcy were substantially impeding our reorganization process. Without this settlement, a successful emergence from Chapter 11 would have been delayed or impossible.

We made adjustments to the preliminary purchase price allocation of the RE&C acquisition price to the net assets acquired that was included in the unaudited quarterly information at September 1, 2000, including the following, as a result of completing our review:

with the remainder recorded as goodwill, on the basis of estimates of fair values after adjustments for the arbitration claim against the Sellers and adjustments charged to operations as follows:

Working capital	$	(958,636	)
Arbitration claim receivable		444,055
Investments and other assets		42,633
Property and equipment		139,868
Pension and post-retirement benefit obligations		(16,427	)
Deferred income taxes		(83,222	)
Other non-current liabilities		(88,351	)
Goodwill		680,210

Total acquisition costs, net of cash acquired of $15,790	$	160,130

As a result of the foregoing events and the substantial negative cash flows of RE&C, we analyzed for impairment the assets acquired in the acquisition of RE&C, including goodwill. Based upon the results of our analysis, we recorded a charge against income during the quarter ended December 1, 2000 for the following impairments of acquired assets:

Goodwill, net of accumulated amortization of $8,727		$	671,483
Indemnification amounts receivable from the Sellers under the Stock Purchase Agreement:
	Billed and unbilled receivables on closed contracts		46,562
	Partial indemnification of loss on government contract		25,115
	Reimbursement for restructuring costs		3,026
	Reimbursement of legal fees		1,305

Impairment of assets		$	747,491

As a result of the acquisition, we incurred significant costs associated with the integration and merger of the two companies. They consisted primarily of incremental costs for legal, accounting, consulting and other fees, including business consulting, promotion and systems integration. For the three and six months ended June 1, 2001, those costs were $12,424 and $18,344, respectively.

On May 14, 2001, because of severe near-term liquidity issues, WGI and several but not all of its direct and indirect domestic subsidiaries (the "Debtors") filed voluntary petitions to reorganize under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the District of Nevada. The various individual bankruptcy cases were administered jointly.

Under Chapter 11, certain claims against a debtor in existence prior to the filing of a petition for relief under the federal bankruptcy laws ("Pre-petition Claims") are stayed while the debtor continues business operations as a debtor-in-possession. Each of the Debtors in this case continued to operate its business and manage its property as a debtor-in-possession during the pendency of the case. Subsequent to the filing date, additional Pre-petition Claims resulted from the rejection of executory contracts, including leases, and from the resolution of claims for contingencies and other disputed amounts. The Pre-petition Claims are reflected in the balance sheets as of dates between May 14, 2001 and February 1, 2002 as "liabilities subject to compromise." Secured claims, primarily representing liens on the Debtors' assets related to the RE&C Financing Facilities, were also stayed during the pendency of the bankruptcy.

The Debtors received approval from the bankruptcy court under first-day orders to pay and did pay specified pre-petition obligations, including employee wages and benefits, foreign vendors, tax obligations and critical vendor obligations.

Our ability to continue as a going-concern during the pendency of the bankruptcy was dependent upon obtaining sufficient debtor-in-possession financing to enable us to continue operations while in bankruptcy, the confirmation of a plan of reorganization by the bankruptcy court and resolution of disputes between the Sellers and us. For a discussion of these disputes, see Note 3, "Acquisition of Raytheon Engineers & Constructors."

As of May 14, 2001, we obtained a Secured Super-Priority Debtor in Possession Revolving Credit Facility (the "DIP Facility") with a commitment of $195,000 that was available to provide both ongoing funding and to support letters of credit. On June 5, 2002, the DIP Facility lenders approved an increase in the total commitment from $195,000 to $220,000. See Note 7, "Credit Facilities—DIP Facility." The DIP Facility was available and utilized as needed throughout the pendency of the bankruptcy, had no outstanding balance at June 1, 2001 and November 30, 2001 and was replaced by a secured $350,000, 30-month revolving credit facility (the "Senior Secured Revolving Credit Facility") entered into on January 25, 2002. For a detailed discussion on the Senior Secured Revolving Credit Facility, see Note 7, "Credit Facilities—Senior Secured Revolving Credit Facility."

On December 21, 2001, the bankruptcy court entered an order confirming our Plan of Reorganization. Substantially all liabilities of the Debtors as of the date of the bankruptcy filing were subject to settlement under our Plan of Reorganization. The order of the bankruptcy court confirming our Plan of Reorganization is the subject of two appeals filed by three of our former unsecured creditors. Those appeals currently are pending in the U.S. District Court for the District of Nevada. None of the appellants sought to stay the implementation of our Plan of Reorganization as part of its appeal. We believe that the outcomes of these proceedings, individually and collectively, will not have a material adverse effect on our business, financial condition, results of operations or cash flows.

The Plan of Reorganization became effective and the Debtors emerged from bankruptcy protection on January 25, 2002 (the "Effective Date"). Our Plan of Reorganization provided for the following upon the Effective Date:

	Number of shares	Strike price per share
Tranche A	3,086	$	28.50
Tranche B	3,527	$	31.74
Tranche C	1,907	$	33.51

	Number of shares	Strike price per share
Tranche A	1,389	$	24.00
Tranche B	882	$	31.74
Tranche C	953	$	33.84

On January 25, 2002, we entered into the Senior Secured Revolving Credit Facility to fund our working capital requirements. The Senior Secured Revolving Credit Facility bears variable interest at 5.5% above LIBOR or 4.5% above the prime rate, at our choice. It is comprised of a $208,350 revolver and a $141,650 credit-linked note. Repayments are made on a pro rata basis between the revolver and the credit-linked note. The credit-linked note can be utilized for letters of credit or funded borrowings as needed. We are required to meet various financial covenants contained in the Senior Secured Revolving Credit Facility.

As a result of our filing for protection under Chapter 11 of the U.S. Bankruptcy Code, the board of directors of Washington International B.V., one of our wholly-owned subsidiaries located in The Hague, the Netherlands ("BV"), determined that BV would have insufficient funds to continue operations in the same manner as it had prior to our bankruptcy filing. The determination was made based on the existing financial condition of BV and the fact that our DIP Facility contained terms that prohibited the additional commitment of our resources for BV operations.

On May 21, 2001, the BV board of directors directed management to consider strategic restructuring alternatives, including the filing of a petition for suspension of payment under Dutch law. On May 29, 2001, the suspension of payment was ordered and a trustee was appointed pursuant to Dutch law. Under the joint management of the trustee and the BV management, all payments to third parties were temporarily postponed while the trustee and management attempted to pursue strategic alternatives, including the sale of the business to various potentially interested parties. From the date of the trustee's appointment through June 21, 2001, the trustee and management gathered facts and attempted to sell the business to several interested parties.

Following discussions with the interested parties, it became clear that a sale of the business was not feasible. On June 21, 2001, the trustee transformed the suspension of payment to a procedure of insolvency and a curator was appointed to take over all management responsibilities and to liquidate the BV estate. The curator has been managing the estate since that date and we have cooperated and will continue to cooperate with the curator to resolve various intercompany issues, including third party intellectual property rights, foreign intercompany loans and other matters.

During the second quarter of 2001, as a result of the insolvency and liquidation of BV, we wrote off $30,652 of assets, $64,517 of liabilities and $1,904 of foreign currency translation losses, resulting in a net gain of $31,961 from the discharge of liabilities.

Washington International, LLC, a Delaware limited liability company and wholly-owned subsidiary of Washington International Holding Limited, a United Kingdom wholly-owned subsidiary of WGI, filed for protection under the U.S. Bankruptcy Code in connection with our Chapter 11 filing. Washington International Holding Limited did not file for bankruptcy protection and, therefore, was not a debtor in our bankruptcy proceedings in the United States. Washington International, LLC conducted business primarily in the United Kingdom. On December 5, 2001, Washington E&C Limited, also a United Kingdom wholly-owned subsidiary of Washington International Holding Limited, purchased specified contracts, constituting the ongoing business of Washington International, LLC, for $250. At that time, Washington International, LLC ceased conducting business, and on February 20, 2002, a "Winding Up" order was made under the insolvency laws of England and Wales against Washington International, LLC. Washington International, LLC is now under the control of a liquidator pursuant to the insolvency laws of England and Wales, and we no longer have any control over its activities. Once the winding up process is complete, Washington International, LLC will be dissolved and will cease to exist. Creditors of Washington International, LLC will not receive any shares of the New Common Stock or stock warrants to be distributed to the unsecured creditors of the Debtors.

Upon adoption of liquidation basis accounting in the quarter ended November 30, 2001, Washington International, LLC had assets of $9,208, liabilities of $12,155 and $364 of foreign currency translation losses, resulting in a net gain of $2,583.

Current liabilities
	Current portion of long-term debt	$	4,000
	Accounts payable and subcontracts payable		185,386
	Billings in excess of cost and estimated earnings on uncompleted contracts		354,121
	Estimated costs to complete long-term contracts		42,813
	Accrued salaries, wages and benefits, including compensated absences		63,241
	Other accrued liabilities		506,276

Total current liabilities			1,155,837

Non-current liabilities
	Long-term debt, less current portion		863,829
	Self-insurance reserves		112,638
	Pension and post-retirement obligations		79,221
	Environmental remediation obligations		3,975
	Other non-current liabilities		12,590

Total non-current liabilities			1,072,253

Total liabilities subject to compromise		$	2,228,090

During the pendency of our bankruptcy proceedings, we ceased accruing interest on our long-term debt. Contractual interest expense not recorded during the three and six months ended June 1, 2001 was $4,712.

As of February 1, 2002, we adopted fresh-start reporting pursuant to the guidance provided by the American Institute of Certified Public Accountants Statement of Position 90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy Code. In connection with the adoption of fresh-start reporting, a new entity has been created for financial reporting purposes. The effective date of our emergence from bankruptcy is considered to be the close of business on February 1, 2002 for financial reporting purposes. In the tables below, the periods presented through February 1, 2002 have been designated "Predecessor Company" and the period ending subsequent to February 1, 2002 has been designated "Successor Company."

Pursuant to this guidance, we used the purchase method of accounting to allocate our reorganization value to our net assets with the excess recorded as goodwill on the basis of estimates of fair values. The reorganization value was determined to be $550,000 as of February 1, 2002.

The reorganization value of $550,000 was developed by an independent financial advisor and was based upon the use of three valuation methodologies as follows:

Different weights were placed on each of these analyses, and judgments were made as to the relative significance of each in determining an indicated enterprise value range. The weighted valuation methodologies resulted in an enterprise value range for the consolidated businesses. The total enterprise value was determined applying valuation metrics against the various risks and opportunities identified to each business segment. Our reorganization value represented the value of the reorganized consolidated entity. This value was viewed as the fair value of our capital, comprising the value of long-term capital investment, including both long-term debt and equity, and the approximate amount a willing buyer would have paid for our net assets immediately after the reorganization was completed.

The calculated reorganization value was based upon a variety of estimates and assumptions about circumstances and events not all of which have taken place to date. These estimates and assumptions are inherently subject to significant economic and competitive uncertainties beyond our control, including but not limited to, our ability to obtain and perform new contracts profitably.

On the Effective Date, we borrowed $40,000 under the Senior Secured Revolving Credit Facility; however, because the borrowings under the Senior Secured Revolving Credit Facility are revolving working capital loans, they were not included as part of the reorganization value. Therefore, the reorganization value of $550,000 represents the value of our stockholders' equity as of the Effective Date. Based on values determined by our financial advisor, we allocated $28,647 of the equity value to the stock purchase warrants and the remainder to the New Common Stock.

The reorganization and the adoption of fresh-start reporting resulted in the following adjustments to our consolidated balance sheet as of February 1, 2002:

On May 14, 2001, all liabilities of the Debtors were reclassified as liabilities subject to compromise. The resolution of liabilities subject to compromise was as follows:

During 2000, as a part of the acquisition of RE&C, we established a restructuring liability of $28,264 for closure and consolidation of office facilities, some of which were already contemplated by the Seller.

(Unaudited)	Quarter ended June 1, 2001			Six months ended June 1, 2001
Accrued liability at beginning of period	$	21,498		$	24,331
Cash expenditures		(2,225	)		(5,058	)

Accrued restructuring liability at end of period	$	19,273		$	19,273

We participate in construction joint ventures, generally as sponsor and manager of the projects, which are formed to bid, negotiate and complete specific projects. The size, scope and duration of joint-venture projects vary among periods.

Combined financial position of construction joint ventures	(Unaudited) June 1, 2001			December 1, 2000
Current assets	$	221,421		$	385,990
Property and equipment, net		10,580			2,961
Current liabilities		(130,628	)		(166,303	)

Net assets	$	101,373		$	222,648

Combined results of operations of construction joint ventures Six months ended	(Unaudited) June 1, 2001			(Unaudited) June 2, 2000
Revenue	$	280,981		$	395,821
Cost of revenue		(267,540	)		(369,786	)

Gross profit	$	13,441		$	26,035

WGI's share of results of operations of construction joint ventures Six months ended	(Unaudited) June 1, 2001			(Unaudited) June 2, 2000
Revenue	$	102,649		$	152,119
Cost of revenue		(98,508	)		(141,984	)

Gross profit	$	4,141		$	10,135

At June 1, 2001, we held ownership interests in two incorporated mining ventures, MIBRAG mbH (50%) and Westmoreland Resources, Inc. ("Westmoreland Resources") (20%) which are accounted for under the equity method. We provide contract mining services to these ventures. Effective March 28, 2001, we increased our ownership interest in MIBRAG mbH from 33% to 50% by purchasing the additional interests for approximately $17,500, which was funded through the reinvestment of dividend distributions from MIBRAG mbH. We are currently in litigation with Westmoreland Resources concerning the contract mining services we provide to it. See Note 8, "Contingencies and Commitments—Other."

Combined financial position of mining ventures	(Unaudited) June 1, 2001			December 1, 2000
Current assets	$	161,111		$	158,094
Non-current assets		137,138			141,152
Property and equipment, net		468,164			487,230
Current liabilities		(56,782	)		(60,259	)
Long-term debt, non-recourse to parent		(249,739	)		(272,096	)
Other non-current liabilities		(235,116	)		(245,275	)

Net assets	$	224,776		$	208,846

Combined results of operations of mining ventures Six months ended	(Unaudited) June 1, 2001			(Unaudited) June 2, 2000
Revenue	$	160,342		$	148,527
Cost of revenue		(143,492	)		(133,636	)

Gross profit	$	16,850		$	14,891

On March 19, 1999, we replaced our existing bank credit facility with new uncollateralized revolving credit facilities providing an aggregate borrowing capacity of $250,000 in order to acquire the Westinghouse Businesses, to provide for general corporate purposes, to support working capital requirements and to support letters of credit and other potential acquisitions. On May 21, 1999, the new credit facilities were increased to $325,000 consisting of a $195,000 five-year facility, which provided for both revolving borrowings and the issuance of letters of credit, and a $130,000 one-year facility, which provided for revolving borrowings. The one-year facility included terms permitting extensions in one-year increments by mutual agreement of the banks and us or converted, at our option, to a term loan having a maturity of one year after the then current expiration of such facility. The facilities' covenants required the maintenance of financial ratios and placed limitations on guarantees, liens, investments, dividends and other matters. At December 3, 1999, $55,000 and $45,000 were outstanding on the one-year and five-year facilities, respectively.

The facilities provided for interest on loans, payable at the conclusion of each interest commitment period not to exceed quarterly, at the applicable LIBOR rate or the base rate, as defined, plus an additional margin. The additional margin ranged from 1.25% to 2.00% for the LIBOR rate and .25% to 1.00% for the base rate, based on the ratio of earnings before interest, taxes, depreciation and amortization to our funded debt. The effective interest rate at December 3, 1999 was 6.98%. On March 19, 1999, we paid $3,700 in underwriting fees to the banks and were required to pay quarterly commitment and letter of credit fees. Commitment fees were based on the unused portion of the facilities. Letter of credit fees were based on a percentage of the letter of credit amount.

On July 7, 2000, in order to finance the acquisition of RE&C, refinance existing revolving credit facilities, fund working capital requirements and pay related fees and expenses, we (i) obtained the RE&C Financing Facilities, providing for an aggregate of $1,000,000 of term loans and revolving borrowing capacity and (ii) issued and sold $300,000 aggregate principal amount of the Senior Unsecured Notes. Our obligations under the RE&C Financing Facilities and the Senior Unsecured Notes were discharged upon our emergence from bankruptcy on January 25, 2002.

On May 14, 2001, we filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code. See Note 4, "Reorganization Case and Fresh-start Reporting." On the same day, we entered into the DIP Facility with some of our subsidiaries as guarantors, for a commitment of $195,000 with the ability to increase the total commitment to $350,000. On June 5, 2001, the DIP Facility lenders approved an increase in the total commitment from $195,000 to $220,000. The DIP Facility was to be used (i) to finance the costs of restructuring and (ii) for ongoing working capital, general corporate purposes and letter of credit issuance. The borrowing rate under the DIP Facility was the prime rate, plus an additional margin of 4.0%. The effective interest rate was 11.0% as of June 2001. The DIP Facility carried other fees, including commitment fees and letter of credit fees, normal and customary for such credit agreements. The credit agreement under which the DIP Facility was made available contained affirmative and negative covenants, reporting covenants and specified events of default typical for a credit agreement governing credit facilities of the size, type and tenor of the DIP Facility.

Among the covenants were those limiting our ability and the ability of some of our subsidiaries to incur debt or liens, provide guarantees, make investments and pay dividends. As of June 1, 2001, we had no outstanding debt and $1,200 of outstanding letters of credit under the DIP Facility. As discussed below, the DIP Facility was replaced by the Senior Secured Revolving Credit Facility on January 25, 2002.

In connection with our emergence from bankruptcy protection on January 25, 2002, we entered into: (i) the Senior Secured Revolving Credit Facility, providing for an aggregate of $350,000 of revolving borrowing and letter of credit capacity, and (ii) exit bonding facilities, providing for an aggregate amount of $500,000 of surety bonds. The Senior Secured Revolving Credit Facility provides for an amount up to $350,000 in the aggregate of loans and other financial accommodations allocated pro rata between two facilities as follows: a Tranche A facility in the amount of $208,350 and a Tranche B facility in the amount of $141,650. The scheduled termination date for the Senior Secured Revolving Credit Facility is thirty months from January 24, 2002, and it may be increased up to a total of $375,000 with the approval of the lenders.

The Senior Secured Revolving Credit Facility was entered into (i) to retire our DIP Facility and to repay any DIP Facility balance (of which there was none); (ii) to replace or backstop approximately $122,000 letters of credit issued under our pre-petition RE&C Financing Facilities; (iii) to replace approximately $32,800 letters of credit issued under the DIP Facility; (iv) to make payments to the pre-petition senior secured lenders and Mitsubishi Heavy Industries pursuant to our Plan of Reorganization; (v) to finance the costs of restructuring; and (vi) for ongoing working capital, general corporate purposes and letter of credit issuance. The initial borrowing rate under the Senior Secured Revolving Credit Facility is the applicable LIBOR, which has a stated floor of 3%, plus an additional margin of 5.5%. Alternatively, we may choose the prime rate, plus an additional margin of 4.5%. As of January 2002, the effective LIBOR- and prime-based rates were 8.5% and 9.25%, respectively. The Senior Secured Revolving Credit Facility carries other fees including commitment fees and letter of credit fees normal and customary for such credit agreements. The Senior Secured Revolving Credit Facility contains affirmative, negative and financial covenants, including minimal net worth, capital expenditures, maintenance of certain financial and operating ratios, and specifies events of default, which are typical for a credit agreement governing credit facilities of the size, type and tenor of the Senior Secured Revolving Credit Facility. Among the covenants are those limiting our ability and the ability of some of our subsidiaries to incur debt or liens, provide guarantees, make investments and pay dividends.

From July 1985 to June 1989, Industrial Constructors Corp. ("ICC"), one of our wholly-owned subsidiaries, performed various contract mining and construction services at the Summitville mine near Del Norte, Colorado. In 1996, the United States and the State of Colorado commenced an action under the Comprehensive Environmental Response, Compensation and Liability Act in the U.S. District Court for the District of Colorado against Mr. Robert Friedland, a potentially responsible party (a "PRP"), to recover the response costs incurred and to be incurred at the Summitville Mine Superfund Site (the "Site"). No other parties were named as defendants in the original complaints in this action. On April 30, 1999, Friedland filed a third-party complaint naming ICC and nine other defendants, alleging that those defendants are jointly and severally liable for the response costs and requesting that the response costs be equitably allocated. In October 1999, the United States and Colorado amended their complaints to add direct claims against ICC and other parties.

On December 22, 2000, the United States and Colorado entered into a Settlement Agreement and Consent Decree wherein Friedland agreed to pay $27,500 in exchange for various promises by the United States and State of Colorado, including dismissal of Friedland from the action filed in 1996.

On January 2, 2001, Colorado filed a new federal action in Colorado, naming five defendants: Sunoco, ARCO, Asarco, Bechtel and A.O. Smith, alleging that these defendants are jointly and severally liable for costs incurred and to be incurred by Colorado at the Site. On January 12, 2001, Colorado amended this complaint by naming WGI, Washington Contractors Group, Inc., another one of our wholly-owned subsidiaries, and Dennis R. Washington, our chairman, as additional defendants. That case was dismissed on September 14, 2001 on the basis that the statute of limitations had expired and the complaint was untimely.

The United States and Colorado have estimated that the total response costs incurred and to be incurred at the Site will approximate $150,000. Prior to our bankruptcy filings, neither we nor Mr. Washington were a party to any agreement regarding allocation of responsibility, and neither the United States nor Colorado had made any formal allocation of responsibility among those defendants.

During the course of our bankruptcy proceedings, we entered into negotiations with the United States, Colorado and Mr. Friedland to settle the issues related to these matters. In December 2001, we entered into settlement agreements with the United States, Colorado and Mr. Friedland. As a result, the United States and Colorado were deemed to have a general unsecured claim against us in the amount of $20,288 in the bankruptcy proceedings and Mr. Friedland obtained a settlement in the amount of $15,000. In connection with the bankruptcy cases, the general unsecured claim of the United States and Colorado was discharged on the Effective Date pursuant to our Plan of Reorganization. Mr. Friedland has been assigned the right to proceed against insurance carriers under specified insurance policies by which we were insured with respect to claims for defense, contribution or indemnity relating to the Site and to the actions brought by the United States and Colorado. Mr. Friedland has agreed to proceed directly against the insurance carriers and will not enforce or seek the payment of the settlement by us. As a result of this settlement, we recorded a liability of $20,288 at December 1, 2000.

We were identified as a PRP and were contingently liable for remediation liabilities in connection with Old MK's former transit business. We were obligated to indemnify the buyer of the transit business for remediation costs and therefore had accrued a $3,000 liability. Our obligations under this indemnification were discharged in our bankruptcy proceedings on the Effective Date of our Plan of Reorganization.

We are responsible for decontaminating and decommissioning a nuclear licensed site owned and operated by EMD. During 2001, one facility underwent decontamination and decommissioning at a total cost of $8,000, of which the U.S. Navy paid 75% and we paid 25%. In April 2002, we presented a claim to the U.S. Navy requesting funding for the decontamination and decommissioning of the remaining site. Although we do not have a commitment from the U.S. Navy to pay for such future costs, we expect that, as in the past, the U.S. Navy will share in responsibility for such costs. At June 1, 2001 and December 1, 2000, we had an accrual of $1,161 for our share of the future decontamination and decommissioning costs at this site.

We have contracts with the U.S. government, the allowable costs of which are subject to adjustments upon audit and negotiation by various agencies of the U.S. government. Audits by the U.S. government and negotiations of indirect costs are substantially complete through 1999. Audits by the U.S. government of 2000 indirect costs are in progress. We are also in the process of preparing cost

impact statements as required under U.S. Cost Accounting Standards for 1999 through 2001, which are subject to audit by the U.S. government and negotiation. We have also prepared and submitted to the government cost impact statements for 1989 through 1995 for which we believe no adjustments are necessary. We believe that the results of the indirect costs audits and negotiations and the cost impact statements will not result in a material change to our financial position, results of operations or cash flows.

In the normal course of business, we cause letters of credit to be issued in connection with contract performance obligations that are not required to be reflected in the balance sheet. We are obligated to reimburse the issuer of such letters of credit for any payments made thereunder. At June 1, 2001, $147,428 in face amount of letters of credit was outstanding. We have pledged cash and cash equivalents as collateral for our reimbursement obligations with respect to $15,410 in face amount of specified letters of credit that were outstanding at June 1, 2001. At June 1, 2001, $130,804 of the outstanding letters of credit were issued under the $500,000 RE&C Financing Facilities and $1,200 of outstanding letters of credit were issued under the DIP Facility described in Note 7, "Credit Facilities." During the quarter ended June 1, 2001, letters of credit in the amount of $171,844 were drawn under the $500,000 RE&C Financing Facilities.

In connection with a 1989 sale of Old MK's ownership interest in a shipbuilding subsidiary, we assumed a guarantee of port facility bonds of $21,000 through 2002. The former subsidiary collateralized the bonds with some of its assets and has established a sinking fund for the bonds. This guarantee was rejected during our bankruptcy process without liability to us.

In May 1998, Leucadia National Corporation filed an action against us and some of our officers and directors in the U.S. District Court for the District of Utah. The complaint alleged fraud in the sale of shares of MK Gold Corporation ("MK Gold") by Old MK to Leucadia and sought rescission of the sale and restitution of $22,500. Leucadia contended that we knew or believed that a non-competition agreement between us and MK Gold was unenforceable and failed to disclose that belief to Leucadia. The non-competition agreement was the subject of separate litigation between MK Gold and WGI. MK Gold was seeking alleged damages of up to $10,000. On January 5, 1999, the two cases were consolidated for trial. In April 2001, we entered into a settlement agreement with Leucadia and MK Gold and, as a result, (i) the litigation was dismissed and the parties granted one another mutual releases; (ii) we paid to MK Gold $1,500; (iii) we issued a promissory note to MK Gold for $10,000 and (iv) we agreed to extend the term of the non-competition agreement through 2006. The cost of the settlement was recognized in 2000. In our bankruptcy proceedings, the non-competition agreement and the extension thereof contained in the settlement agreement were rejected and terminated and amounts due to MK Gold under the promissory note were treated as a general unsecured claim and were discharged on the Effective Date pursuant to our Plan of Reorganization.

Some current and former officers, employees and directors of WGI were named defendants in an action filed by two former participants in the Old MK 401(k) Plan and Employee Stock Ownership Plan in the U.S. District Court for the District of Idaho. The complaint alleges, among other things, that the defendants breached certain fiduciary duties. On July 12, 2000, the court denied plaintiffs' motion to reconsider a prior summary judgment in favor of specified defendants and granted summary judgment with respect to specified other defendants, with the result that WGI and all current and former officers, employees and directors have been dismissed from the action. The court also certified the case as a class action. The remaining defendants in this proceeding are the two plan committees and two companies (to which we had indemnification obligations that were discharged in our bankruptcy proceedings) involved in administration of the plans.

In September 2001, Westmoreland Resources, a mining venture in which we hold a 20% ownership interest and to which we provide contract mining services, asserted claims against us in our bankruptcy proceedings. As a threshold matter, Westmoreland Resources objected to our assumption in the course of our bankruptcy proceedings of the mining contract between us and Westmoreland Resources, and we have reserved the right to reject all pending agreements between Westmoreland Resources and us. In addition, Westmoreland Resources claimed that (i) we had been overpaid under various mining contracts over a six-year period, (ii) we likely would be obligated to reimburse Westmoreland Resources for a portion of past due royalties that may be imposed against Westmoreland Resources by the U.S. government and the Crow Indian Tribe, (iii) we are obligated to pay for repairs to mining equipment (a dragline) owned by Westmoreland Resources and (iv) Westmoreland Resources is entitled to adequate assurances about whether we would be able to perform final reclamation at the end of mining operations on the properties leased by Westmoreland Resources. Westmoreland Resources has also asserted that we are being overpaid by them for contract mining services we currently provide them.

The claim for damage to the dragline was originally filed by Westmoreland Resources in the U.S. District Court for the District of Montana in March 2000 and will be tried in that court. We expect that the other disputes between us and Westmoreland Resources will be resolved as adversary proceedings in the bankruptcy court. Dispositive motions on the issues before the bankruptcy court are to be filed on or before November 15, 2002, and a trial date has been set for January 20, 2003 to resolve those claims. We will not be required to assume or reject the contracts between us and Westmoreland Resources until all adversary proceedings are resolved.

From the spring of 1996 through the spring of 2001, we were the environmental remediation contractor for the U.S. Army Corps of Engineers (the "Corps") with respect to remediation at the Tar Creek Superfund site at a former mining area in northeast Oklahoma. The Corps had contracted with the U.S. Environmental Protection Agency to remove lead contaminated soil in residential areas from more than 2,000 sites and replace it with clean fill material. In February 2000, various federal investigators working with the U.S. Attorney's Office for the Northern District of Oklahoma executed search warrants and seized our local project records. Allegations made at the time included claims that the project had falsified truck load tickets and had claimed compensation for more loads than actually were hauled, or had indicated that full loads had been hauled when partial loads actually were carried, as well as claims that the project had sought compensation for truckers and injured workers who were directed to remain at the job site, but not to work. The criminal investigation that relates to the execution of the search warrants remains pending. Through claims filed in our bankruptcy proceedings and conversations with lawyers from the Civil Division of the U.S. Department of Justice, we have learned that a qui tam lawsuit has been filed against us under the federal False Claims Act by private citizens alleging fraudulent or false claims by us for payments we received in connection with the Tar Creek remediation project. We believe that there was no wrongdoing by us or our employees at this project.

Although the ultimate outcome of the matters discussed in the three preceding paragraphs cannot be predicted with certainty, we believe that the outcome of these actions, individually or collectively, will not have a material adverse impact on our financial position, results of operations or cash flows.

In addition to the foregoing, there are other claims, lawsuits, disputes with third parties, investigations and administrative proceedings against us relating to matters in the ordinary course of our business activities that are not expected to have a material adverse effect on our financial position, results of operations or cash flows.

Our emergence from bankruptcy in January 2002 resulted in the cancellation of all of our then-outstanding stock, stock options and stock purchase warrants and the issuance of new shares of stock, stock purchase warrants and stock options.

At June 1, 2001, we had outstanding stock purchase warrants giving rights to acquire 2,945 shares of our old common stock at an exercise price of $12.00 per share. All such warrants were scheduled to expire in March 2003 and, as described above, were cancelled upon our emergence from bankruptcy in January 2002.

On June 21, 2002, our board of directors adopted a stockholder rights plan under which we will issue one right for each outstanding share of our common stock. The rights expire in 2012 unless they are earlier redeemed, exchanged or amended by the board of directors. The board also adopted a Three-Year Independent Director Evaluation ("TIDE") policy with respect to the plan. Under the TIDE policy, a committee comprised solely of independent directors will review the plan at least once every three years to determine whether to modify the plan in light of all relevant factors.

The rights will initially trade together with our common stock and will not be exercisable until after 10 days from the earlier of a public announcement that a person or group has acquired beneficial ownership of 15% or more, with certain exceptions, of our common stock or the commencement of, or public announcement of an intent to commence, a tender or exchange offer which, if successful, would result in the offeror acquiring 15% or more of our common stock. Once exercisable, each right would separate from the common stock and be separately tradeable.

If a person or group acquires 15% or more, with certain exceptions, of our common stock, or if we are acquired in a merger or other business combination, each right then exercisable would entitle its holder to purchase, at the exercise price of $125 per right, shares of our common stock, or the surviving company's stock if we are not the surviving company, with a market value equal to twice the right's exercise price.

We may redeem the rights for $.01 per right until the rights become exercisable. We also may exchange each right for one share of common stock or an equivalent security until an acquiring person or group owns 50% or more of the outstanding common stock.

The rights are not considered to be common stock equivalents because there is no indication that any event will occur that would cause them to become exercisable.

We operate through five operating units, each of which comprised a separate reportable business segment: Power, Infrastructure & Mining, Industrial/Process, Government and Petroleum & Chemicals. The reportable segments were separately managed, served different markets and customers, and differed in their expertise, technology and resources necessary to perform their services. The presentation of operating unit information for the six months ended June 2, 2000 has been reclassified to conform to the presentation for the six months ended June 1, 2001.

Power provides engineering, construction and operations and maintenance services in both nuclear and fossil power markets for turnkey new power plant construction, plant expansion, retrofit and

modification, decontamination and decommissioning, general planning, siting and licensing and environmental permitting.

Infrastructure & Mining provides diverse engineering and construction and construction management services for highways and bridges, airports and seaports, tunnels and tube tunnels, railroad and transit lines, water storage and transport, water treatment, site development, mine operations and hydroelectric facilities. The operating unit generally performs as a general contractor or as a joint venture partner with other contractors on domestic and international projects.

Industrial/Process provides engineering, design, procurement, construction services and total facilities management for general manufacturing, pharmaceutical and biotechnology, process, metals processing, institutional buildings, food and consumer products, automotive, aerospace, telecommunications and pulp and paper industries.

Government provides a complete range of technical services to the U.S. Departments of Energy and Defense, including operations and management services, environmental and chemical demilitarization services, waste handling and storage and weapons stockpile support. Services provided for commercial clients include design and manufacture of components of nuclear power facilities, safety management services, waste and environmental technology, design and manufacture of radioactive waste containers and licensing.

Petroleum & Chemicals provides technology, engineering, procurement and construction services to the petroleum and chemical industries worldwide. Major markets include commodity-organic chemicals, polymers, Fischer-Tropsch chemistry, fertilizers, oleochemicals, petroleum processing and lube oil processing.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies. We evaluate performance and allocate resources based on segment operating income. Segment operating income is total segment revenue reduced by segment cost of revenue and goodwill amortization related to the acquisition of the Westinghouse Businesses. No other significant goodwill amortization is allocated to the segments. Corporate and other expense consists principally of general and administrative expenses.

Effective December 2, 2000, we adopted FASB Statement No. 133 Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133"). SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded into other contracts and for hedging activities. Under SFAS No. 133, we are required to recognize derivative instruments, including those embedded into other contracts as either assets or liabilities in our consolidated balance sheets and to measure them at fair value.

SFAS No. 133 requires that the gain or loss on a derivative instrument, designated and qualifying as a fair value hedging instrument, as well as the offsetting gain or loss on the hedged item be recognized currently in earnings in the same accounting period. It also provides that the effective portion of the gain or loss on a derivative instrument designated and qualifying as a cash flow hedge be reported as a component of other comprehensive income. That amount would subsequently be reclassified into earnings in the same period or periods in which the hedge forecasted transaction affects earnings. Any remaining gain or loss on the derivative instrument, if any, must be recognized in earnings in the current period.

Our financial risk management philosophy is to ensure that financial exposures created by changes in foreign currency rates, interest rates and commodity prices are minimized. The intent of this philosophy is to minimize the volatility of cash flows and reported earnings which result from financial rather than business related factors, and thus minimize the financial consequences caused by fluctuations in financial and commodity markets.

Currently, we hedge certain foreign currency transactions denominated in the Philippine peso and the Euro to reduce exposure to change in the U.S. dollar / peso and U.S. dollar / Euro exchange rates. Previously, hedge accounting under generally accepted accounting principles allowed us to account for these forward contracts at spot exchange rates with the related market adjustment made to other comprehensive income. SFAS No. 133 eliminates special hedge accounting for such contracts, requiring us to account for the forward contracts at their fair value (that is, based on the forward exchange rate) with all changes in fair value reported currently in earnings. The adoption of SFAS No. 133 during the first quarter of 2001 resulted in an increase in liabilities of $1,901 and a corresponding pre-tax increase to other comprehensive income classified as a cumulative effect of adoption of accounting principle. The foreign currency contracts were terminated during 2001 in connection with our bankruptcy filing, resulting in a recognized loss of $1,396. We plan to continue our practice of hedging our foreign currency contracts because such an approach economically reduces the risks.

During the first quarter of 2001, we entered into an interest rate swap to reduce interest rate risk on our long-term debt obligations. The swap was designated as a cash flow hedge of variable rate debt obligations under SFAS No. 133. The interest rate swap was recorded at fair value with changes in fair value recorded in other comprehensive income. As of the first quarter of 2001, we recorded the fair value of the swap as a liability of $1,826 with a corresponding pre-tax entry to other comprehensive income. The swap was terminated during the second quarter of 2001 in connection with our bankruptcy filing, resulting in a recognized loss of $2,425.

In the ordinary course of business in executing construction, construction management, operations management and mining services, we enter into fixed-price contracts for future purchases of commodities from our suppliers. The nature of the terms and conditions of the contracts are considered normal purchases of inventory and have no financial statement impact under SFAS No. 133.

During the first quarter of 2001, we adopted Securities and Exchange Commission ("SEC") Staff Accounting Bulletin No. 101 ("SAB 101") which summarizes the SEC staff's position on selected revenue recognition issues. The implementation of SAB 101 did not have a significant impact on our results of operations or financial position.

In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement No. 141, Business Combinations ("SFAS No. 141"), and Statement No. 142, Goodwill and Other Intangible Assets ("SFAS No. 142"). SFAS No. 141, which is effective for acquisitions initiated after June 30, 2001, prohibits the use of the pooling-of-interest method for business combinations and establishes the accounting and financial reporting requirements for business combinations accounted for by the purchase method. Adoption of this statement had no effect on our consolidated financial statements. SFAS No. 142 requires that an intangible asset that was or is acquired shall be initially recognized and measured based on its fair value. The statement also provides that goodwill should not be amortized, but shall be tested for impairment annually, or more frequently if circumstances indicate potential impairment, through a comparison of fair value to its carrying amount. SFAS No. 142 became effective for us for our fiscal year beginning December 29, 2001. The adoption of this statement did not have a significant impact on the consolidated financial statements due to our adoption of fresh-start reporting on February 1, 2002. See Note 4, "Reorganization Case and Fresh-start Reporting." Fresh-start reporting revalued all of our assets and liabilities to fair value on that date. At the date of adoption of

the statement, the net book value of goodwill was $174,909 (not including amount included in assets held for sale) and was being amortized at an annual rate of approximately $15 million.

In July 2001, the FASB issued Statement No. 143, Accounting for Asset Retirement Obligations ("SFAS No. 143"). Upon emergence from bankruptcy, we were required to early adopt SFAS No. 143 on February 1, 2002. This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The adoption of this statement did not have a significant impact on our consolidated financial statements.

In August 2001, the FASB issued Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS No. 144"). SFAS No. 144, which replaces SFAS No. 121 and APB No. 30, became effective for us on February 1, 2002. This statement retains the requirements to (i) recognize an impairment loss only if the carrying amount of a long-lived asset is not recoverable from its undiscounted cash flows, and (ii) measure an impairment loss as the difference between the carrying amount and fair value of the asset. This statement removes goodwill from its scope, eliminating the requirement to allocate goodwill to long-lived assets to be tested for impairment. SFAS No. 144 also requires that a long-lived asset to be abandoned, exchanged for a similar productive asset or distributed to owners in a spin-off, be considered held and used until it is disposed of. The accounting model for long-lived assets to be disposed of by sale must be used for all long-lived assets, whether previously held and used or newly acquired. Discontinued operations are no longer measured on a net realizable value basis, and future operating losses are no longer recognized before they occur. SFAS No. 144 also broadens the presentation of discontinued operations in the income statement to include a component of an entity (rather than a segment of a business). A component of an entity comprises operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the remainder of that entity. The adoption of this statement did not have a significant effect on our operating results.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q and other reports and statements filed by Washington Group International, Inc. (formerly Morrison Knudsen Corporation) (the "Corporation") from time to time with the Securities and Exchange Commission (collectively, "SEC Filings") contain or may contain forward-looking statements. When used in SEC Filings, the words "may," "will," "anticipate," "believe," "estimate," "expect," "future," "intend," "plan," "could," "should," "potential" or "continue" or the negative or other variations thereof, as well as other statements regarding matters that are not historical fact, are or may constitute forward-looking statements. In particular, statements relating to the ongoing review of existing contracts acquired in connection with the acquisition of the Raytheon Engineers & Constructors businesses ("RE&C businesses"), the preliminary allocations of purchase price paid in the acquisition, awards of new contracts, estimates of future capital expenditures, expectations with respect to the impact of contingencies, and liquidity are forward-looking statements. Such forward-looking statements are necessarily based on various assumptions and estimates and are inherently subject to various risks and uncertainties including, in addition to any risks and uncertainties disclosed in the text surrounding such statements or elsewhere in the SEC Filings, the future results of the ongoing review of contracts acquired with the RE&C businesses as described herein, the successful integration of the RE&C businesses, risks and uncertainties relating to the possible invalidity of the underlying assumptions and estimates and possible changes or developments in social, economic, business, industry, market, legal and regulatory circumstances and conditions and actions taken or omitted to be taken by third parties, including the Corporation's customers, suppliers, business partners and competitors and legislative, regulatory, judicial and other governmental authorities and officials. Should the Corporation's assumptions or estimates prove to be incorrect, or should one or more of these risks or uncertainties materialize, actual amounts, results, events and circumstances may vary significantly from those reflected in such forward-looking statements.

The deadline to timely file this report was July 16, 2001. On July 16, 2001, we filed a current report on Form 8-K announcing that we did not file this report by the prescribed due date because we needed additional time to prepare the consolidated financial statements and related disclosures required to be included herein.

The acquisition of the RE&C businesses on July 7, 2000 discussed below doubled the size of our revenues and backlog. As a result, we believe the historical information presented in this Quarterly Report on Form 10-Q does not purport to represent what our results of operations, financial position or cash flows would have been for the historical periods presented had we in fact owned the acquired businesses for those periods, and is not indicative of the results of operations, financial position or cash flows we may report in the future.

During the quarter ended June 1, 2001, we experienced a continuing deterioration in liquidity as the projects and obligations we obtained in the acquisition of the RE&C businesses experienced significant cash flow deficits. Between July 7, 2000, when the RE&C transaction closed, through May 14, 2001, when WGI filed its bankruptcy petition, the RE&C projects experienced cash flow deficits of approximately $416.5 million. As a result of this liquidity drain, we had previously announced on March 2, 2001 that we faced severe near-term liquidity problems as a result of our acquisition of the RE&C businesses. On March 9, 2001, because of those liquidity problems, we suspended work on two large construction projects located in Massachusetts that were part of the acquisition, and on May 14, 2001, the Corporation and several but not all of its direct and indirect subsidiaries filed voluntary petitions to reorganize under Chapter 11 of the U.S. Bankruptcy Code in the U.S. District Court for the District of Nevada (Case No. BK-N-01-31627). On December 21, 2001, the bankruptcy court entered an order confirming the Second Amended Joint Plan of Reorganization of Washington Group International, Inc., et. al., as modified (the "Plan of Reorganization"). On January 25, 2002 (the

"Effective Date"), we emerged from bankruptcy protection pursuant to our Plan of Reorganization. Each of these events are discussed in more detail below.

On July 7, 2000, pursuant to a Stock Purchase Agreement, dated as of April 14, 2000 (the "Stock Purchase Agreement"), among Raytheon Company ("Raytheon"), Raytheon Engineers & Constructors International, Inc., a wholly-owned subsidiary of Raytheon ("RECI" and, together with Raytheon, the "Sellers") and us, we purchased from the Sellers the capital stock of the subsidiaries of RECI and specified other assets of RECI and assumed specified liabilities of RECI. The businesses that we purchased provide engineering, design, procurement, construction, operation, maintenance and other services on a worldwide basis. We financed the acquisition by obtaining new senior secured credit facilities (the "RE&C Financing Facilities") and issuing senior unsecured notes due July 1, 2010 (the "Senior Unsecured Notes"). See Note 7, "Credit Facilities—RE&C Financing Facilities and Senior Unsecured Notes" of the Notes to Consolidated Financial Statements in Item 1 of this report for a more detailed description of the RE&C Financing Facilities and the Senior Unsecured Notes.

The purchase price paid at the closing of the acquisition on July 7, 2000 was $53 million in cash and the assumption of net liabilities was originally estimated at $450 million. We also incurred acquisition costs of $7.7 million. The cash portion of the purchase price paid at closing was determined based upon a formula contained in the Stock Purchase Agreement and represented the estimated amount of Adjusted Non-Current Net Assets and Adjusted Net Working Capital (as the terms are defined in the Stock Purchase Agreement) that we acquired, valued as of April 30, 2000. The amounts of Adjusted Non-Current Net Assets and Adjusted Net Working Capital were subject to post-closing finalization, including an audit by independent accountants, and other adjustments to the price paid at closing. In addition, the Stock Purchase Agreement contained a provision requiring us either to pay the Sellers or be paid by the Sellers the net amount of cash the Sellers either advanced to or withdrew from RE&C between April 30, 2000 and July 7, 2000. After closing, we paid the Sellers $84.4 million representing the net amount of cash advanced or paid by the Sellers for the use or benefit of RE&C between April 30, 2000 and July 7, 2000.

The Stock Purchase Agreement provided that the Sellers would retain all non-restricted cash and cash equivalents held by RE&C at the close of business on April 30, 2000 ("Cut-Off Date Cash Balances"). At closing, for purposes of administrative convenience, RE&C kept all cash held by it ($15.8 million), and we paid the Sellers an additional $30.8 million for the cash balances on April 30, 2000. That amount was subject to post-closing verification by us and adjustment in the event it was not equal to the Cut-Off Date Cash Balances held by RE&C. We subsequently verified the amount and no adjustment was required.

RECI retained, among other assets, all of its interest in and rights with respect to some of the existing contracts. In addition, the Stock Purchase Agreement provided that the contracts relating to four specified construction projects would be transferred to RECI, and RE&C would enter into subcontracts to perform, on a cost-reimbursed basis, all of RECI's obligations under those contracts. Because the customer consents required to transfer the four contracts to RECI could not be obtained as of closing, we agreed to remain the contract party and continued to be directly obligated to the customers and other third parties under the contracts relating to the four projects. Accordingly, we and the Sellers agreed that the Sellers would provide us with full indemnification with respect to any risks associated with those contracts, which arrangement accomplished the original intent of the Stock Purchase Agreement. Under the Stock Purchase Agreement, we agreed that we would complete the four specified projects for the Sellers' account and the Sellers agreed to reimburse our costs to do so and to share equally with us any positive variance between actual costs and estimated costs. The Sellers

also agreed to indemnify us against any losses, claims or liabilities under the contracts relating to such projects, except losses, claims or liabilities resulting from our gross negligence or willful misconduct, against which we would indemnify the Sellers.

The Stock Purchase Agreement did not contain a fixed purchase price at closing for the transaction, but rather, as noted above, provided that the purchase price would be adjusted upward or downward post-closing, based on the effect on a formula that would be applied to an audited RE&C April 30, 2000 balance sheet to be prepared by the Sellers and audited by the Sellers' independent accountants. After closing, we extended the delivery date for the final audited RE&C balance sheet from April 30, 2000 to January 14, 2001.

As part of the acquisition of RE&C, we undertook a comprehensive review of existing contracts that we acquired for the purpose of making a preliminary allocation of the acquisition price to the net assets acquired. As part of this review, we evaluated, among other matters, RECI's estimates of the cost at completion of the long-term contracts that were underway as of July 7, 2000 ("Acquisition Date EAC's"). During this process, information came to our attention that raised questions as to whether the Acquisition Date EAC's needed to be adjusted significantly. The review process involved the analysis of an extensive amount of supporting data, including analysis of numerous, large construction projects in various stages of completion. Based on the information available at the time of the review, the preliminary results of this review indicated that the Acquisition Date EAC's of numerous long-term contracts required substantial adjustment. The adjustments resulted in contract losses or lower than market rate margins. As a result, in our report on Form 10-Q for the quarter ended September 1, 2000, we significantly decreased the carrying value of the net assets acquired and increased the goodwill associated with the transaction. Because many of the contracts we acquired contained either unrecorded losses or lower than market rate margins, these contracts were adjusted to their estimated fair value at the July 7, 2000 acquisition date in order to allow for a reasonable profit margin for completing the contracts, and a gross margin or normal profit reserve of $233.1 million was established and recorded in billings in excess of cost and estimated earnings on uncompleted contracts.

Our review of the RE&C contracts and the purchase price allocation process continued thereafter and, based on the results of that review, we expected that as a result of the purchase price adjustment process, the purchase price of RE&C would be adjusted downward by a significant amount. Subsequent to the quarter ended September 1, 2000, we completed the review and made additional adjustments to the contracts we had acquired resulting from a more accurate determination of the actual contract status at the acquisition date.

The normal profit reserve has been reduced as work has been performed on the affected projects. The reduction results in reductions to cost of revenue and corresponding increases in gross profit, but has no effect on cash. The establishment of and decreases in cost of revenue for the periods indicated are as follows:

	Normal profit reserve
	(in millions)
July 7, 2000 balance	$	233.1
Cost of revenue (decrease)		(24.5	)

September 1, 2000 balance		208.6
Cost of revenue (decrease)		(25.7	)

December 1, 2000 balance		182.9
Cost of revenue (decrease)		(30.5	)

March 2, 2001 balance		152.4
Adjustments on reformed and rejected contracts (see discussion below)		(53.4	)
Cost of revenue (decrease)		(22.3	)

June 1, 2001 balance	$	76.7

During the spring of 2000, in connection with the acquisition of RE&C, we received from the Sellers audited RECI financial statements at December 31, 1999 and 1998 and for each of the three years in the period ended December 31, 1999 and unaudited RECI financial statements as of and for the three months ended April 2, 2000 and April 4, 1999. In accordance with federal securities law disclosure requirements, we filed on July 13, 2000 those audited and unaudited financial statements and our related unaudited pro forma condensed combined financial statements as of and for the year ended December 3, 1999 and for the quarter ended March 3, 2000 in a current report on Form 8-K. In our current report on Form 8-K filed March 8, 2001, we advised that, for the reasons stated in such report, the foregoing audited and unaudited financial statements of RECI, and our related unaudited pro forma condensed combined financial statements, which were derived therefrom, no longer should be relied upon.

Upon our suspension of work, the Sellers undertook performance of those contracts pursuant to the outstanding performance guarantees. We, however, were obligated under the Stock Purchase Agreement to indemnify the Sellers for losses they incurred under those guarantees. The Sellers also assumed obligations under other contracts, primarily in the RE&C power generation construction business unit that resulted in significant additional indemnification obligations by us to the Sellers. As a result of costs it incurred to perform under the parent guarantees, the Sellers filed a claim against us in the bankruptcy process for approximately $940 million. As further discussed below under "Reorganization Case and Fresh-start Reporting," this claim was ultimately settled without payment to the Sellers in connection with the completion of our Plan of Reorganization. See Note 4, "Reorganization Case and Fresh-start Reporting" of the Notes to Consolidated Financial Statements in Item 1 of this report. Until such settlement, we retained all liabilities related to the contracts, including normal profit reserves, on our balance sheet as accrued liabilities included in liabilities subject to compromise.

We accounted for the acquisition of RE&C as a purchase business combination. The results of our operations, financial position and cash flows include the operations of RE&C from the July 7, 2000 acquisition date. We made an allocation of the aggregate purchase price to the net assets we acquired, with the remainder recorded as goodwill, on the basis of estimates of fair values after adjustments for the arbitration claim against the Sellers and adjustments charged to operations as follows:

	(In millions)
Working capital	$	(958.6	)
Arbitration claim receivable		444.1
Investments and other assets		42.6
Property and equipment		139.8
Pension and post-retirement benefit obligations		(16.4	)
Deferred income taxes		(83.3	)
Other non-current liabilities		(88.3	)
Goodwill		680.2

Total acquisition costs, net of cash acquired of $15.8	$	160.1

As a result of the foregoing events and the substantial negative cash flows of RE&C, we analyzed for impairment the assets acquired in the acquisition of RE&C, including goodwill. Based upon the

results of our analysis, we recorded a charge against income during the quarter ended December 1, 2000 for the following impairments of acquired assets:

		(In millions)
Goodwill, net of accumulated amortization of $8.7		$	671.5
Indemnification amounts receivable from the Sellers under the Stock Purchase Agreement:
	Billed and unbilled receivables on closed contracts		46.6
	Partial indemnification of loss on government contract		25.1
	Reimbursement for restructuring costs		3.0
	Reimbursement of legal fees		1.3

Impairment of assets		$	747.5

On May 14, 2001, we and several but not all of our direct and indirect subsidiaries filed voluntary petitions to reorganize under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the District of Nevada (Case NO. BK-N-01-31627). The various legal entities that filed for bankruptcy are collectively referred to hereafter as the "Debtors." The individual bankruptcy cases were administered jointly. Each of the Debtors continued to operate its business and manage its property as a debtor-in-possession pursuant to Sections 1107 and 1108 of the U.S. Bankruptcy Code during the pendency of the cases. For a more detailed discussion, see our current report on Form 8-K filed May 29, 2001.

Prior to May 14, 2001, our common stock was listed on the New York Stock Exchange and traded under the ticker symbol "WNG." On May 14, 2001, the exchange suspended trading of our common stock, and on July 6, 2001, our common stock was delisted by the exchange.

Shortly after the commencement of the bankruptcy cases, the committee representing our secured lenders and Dennis R. Washington began negotiations regarding Mr. Washington's continued involvement with us during the bankruptcy cases and after our emergence from bankruptcy protection. The result of these negotiations was an agreement, embodied in our Plan of Reorganization that provided that in exchange for Mr. Washington's agreement to render ongoing services to us and to remain as chairman of our board of directors, Mr. Washington would be granted options to purchase shares of our common stock to be issued in connection with our emergence from bankruptcy protection. For a more detailed discussion, see our current report on Form 8-K filed January 4, 2002.

On December 21, 2001, the bankruptcy court entered an order confirming the Second Amended Joint Plan of Reorganization of Washington Group International, Inc., et. al., as modified. For a more detailed discussion, see our current report on Form 8-K filed January 4, 2002.

On January 25, 2002, the Effective Date, we emerged from bankruptcy protection pursuant to our Plan of Reorganization. We also entered into a secured $350 million, 30-month revolving credit facility to fund our working capital requirements and obtained bonding capacity to take on new projects. Under our Plan of Reorganization, on the Effective Date, all our equity securities existing prior to the Effective Date were canceled and extinguished; we issued an aggregate 25,000,000 shares of our $.01 par value common stock; we issued warrants to purchase an additional aggregate 8,520,424 shares of common stock; we filed an amended and restated certificate of incorporation and adopted amended and restated bylaws; we adopted new stock option plans and granted options under those plans for an aggregate 4,613,000 shares of common stock, including options granted to Dennis R. Washington to purchase an aggregate 3,224,100 shares of common stock; and we entered into various other agreements. Our new common stock currently trades in the over-the-counter market and is quoted on

the NASD Bulletin Board under the ticker symbol "WGII." For a more detailed discussion, see our current report on Form 8-K filed February 8, 2002.

As of February 1, 2002, we adopted fresh-start reporting pursuant to the guidance provided by the American Institute of Certified Public Accountants Statement of Position 90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy Code. In connection with the adoption of fresh-start reporting, a new entity has been created for financial reporting purposes. The effective date of our emergence from bankruptcy protection is considered to be the close of business on February 1, 2002 for financial reporting purposes. The periods presented prior to February 1, 2002 have been designated "Predecessor Company" and the periods ending subsequent to February 1, 2002 has been designated "Successor Company."

These events are discussed in greater detail in Note 3, "Acquisition of Raytheon Engineers & Constructors" and Note 4, "Reorganization Case and Fresh-start Reporting" of the Notes to Consolidated Financial Statements in Item 1 of this report, and are discussed in our annual report on Form 10-K for the fiscal year ended December 1, 2000.

RESULTS OF OPERATIONS
QUARTER AND SIX MONTHS ENDED JUNE 1, 2001 COMPARED TO
THE QUARTER AND SIX MONTHS ENDED JUNE 2, 2000

Revenue for the quarter and six months ended June 1, 2001 was $958.1 million and $1,974.9 million, respectively, an increase of 64% and 68%, respectively, compared to the quarter and six months ended June 2, 2000. The increase in revenue was due to the acquisition of the RE&C businesses on July 7, 2000. The results of operations for RE&C are included in the results of operations in 2001, but are not included in the comparable periods of 2000.

The Power operating unit recognized $157.1 million and $397.5 million of revenue during the quarter and six months ended June 1, 2001, respectively. On March 9, 2001, we suspended work on two large power construction projects located in Massachusetts that were part of the acquisition of the RE&C businesses. Although we were subsequently retained to participate on these two projects, our role during the three months ended June 1, 2001 was significantly diminished. As a result, the Power operating unit's revenue during that period was reduced as well. The Infrastructure operating unit's revenue of $244.9 million and $499.3 million was generated predominantly by a dam and powerhouse project in the Philippines, highway construction projects and a light rail construction project. The Industrial/Process operating unit recognized revenue of $212.1 million and $429.3 million during the quarter and six months ended June 1, 2001 with a telecommunications project being the major contributor. The Government operating unit recognized revenue of $290.2 million and $539.6 million for the quarter and six months ended June 1, 2001, respectively. Chemical demilitarization projects and site management and operation projects for the U.S. Department of Energy were the primary sources of this revenue. The Petroleum & Chemicals operating unit consists solely of projects acquired from the RE&C acquisition. Included in the operating unit was the operations of our Netherlands subsidiary which became insolvent and was placed under control of a trustee on May 29, 2001 and was liquidated June 21, 2001. See Note 4, "Reorganization Case and Fresh-start Reporting—Washington International B.V." of the Notes to Consolidated Financial Statements in Item 1 of this report.

Revenue for the second quarter of 2000 reflected a significant volume of work performed on contracts in the Industrial/Process operating unit, partially offset by a reduction in scope of three remediation contracts in the Government operating unit.

Gross profit for the quarter and six months ended June 1, 2001 was $27.6 million and $71.2 million, respectively. The Power operating unit's second quarter gross profit reflected the effects of the work suspension on two power construction projects described above. Gross profit for the quarter and six months ended June 1, 2001 included $22.3 million and $52.8 million that was generated through recognition of normal profit, mostly in the Power, Infrastructure and Government operating units.

Normal profit is an accounting concept that results from the requirement that an acquiring company record at fair value all contracts, including construction contracts, of an acquiree in process at the date of the acquisition. As such, an asset for favorable contracts or a liability for unfavorable contracts is recorded in purchase accounting. These assets or liabilities are then reduced based on revenue recorded over the remaining contract lives, effectively resulting in the recognition of a reasonable or normal profit margin on contract activity performed by us subsequent to the acquisition. Because of the acquisition of RE&C and the below market profit status of many of the significant acquired contracts, we recorded significant liabilities in purchase accounting. The reduction of these liabilities has a significant impact on our recorded net income, but has no impact on our cash flows.

Gross profit was $37.3 million and $62.5 million for the quarter and six months ended June 2, 2000, reflecting significant performance-based incentives earned in the Government operating unit and good performance on a number of heavy civil, mining and international projects in the Infrastructure & Mining operating unit.

The diversification of our business may cause gross margins to vary between periods due to inherent risks and rewards on fixed-price contracts causing unexpected gains and losses on contracts. Gross margins may also vary between periods due to changes in the mix and timing of contracts executed by us, which contain various risk and profit profiles and are subject to uncertainties inherent in the estimation process.

At June 1, 2001, backlog of $4,396.7 million was comprised of $1,727.4 million (39%) from fee-type contracts and $2,669.3 million (61%) from fixed-price contracts and our share from mining ventures.

General and administrative expense of $15.1 million and $30.7 million for the quarter and six months ended June 1, 2001 increased $9.0 million and $19.2 million from the comparable periods of 2000 primarily due to the addition of administrative costs related to the acquisition of the RE&C businesses.

Amortization of goodwill for the quarter and six months ended June 1, 2001 was $1.9 million and $7.2 million compared to the $4.1 million and $8.3 million for the quarter and six months ended June 2, 2000. The amounts are roughly comparable in spite of the acquisition of the RE&C businesses. As described previously, during the fourth quarter of 2000, we impaired net assets of $747.5 million of those assets acquired in the acquisition of the RE&C businesses, including $671.5 million in goodwill. Thus, the goodwill that continued to be amortized during the quarter and six months ended June 1, 2001 is essentially the remaining balance of the goodwill that existed prior to July 7, 2000.

During the fourth quarter of 2000, we made adjustments reducing goodwill for items that were identified subsequent to the initial purchase price allocation that we believed were additional misstatements, based on additional information that we obtained, but that were not included in the arbitration claim. Cost of revenue included adjustments to estimates at completion on contracts and increases in self-insurance reserves. The impairment of assets was primarily unrecoverable accounts

receivable. These amounts totaled $144.5 million and were charged to operations in the three months ended December 1, 2000.

As a result of the acquisition of RE&C on July 7, 2000, we incurred significant costs associated with the integration and merger of the two companies. The costs were primarily incurred for accounting, legal and financial advisory services. For the quarter and six months ended June 1, 2001, those costs were $12.4 million and $18.3 million. No integration and merger costs were incurred during the quarter and six months ended June 2, 2000.

Investment income for the quarter and six months ended June 1, 2001 increased $2.0 million and $6.3 million over the comparable periods of 2000 as a result of investment income from excess funds derived from the financing of the acquisition of RE&C.

Interest expense includes three components: amortization of fees associated with our lines of credit, fees on letters of credit and interest expense. Interest expense for the quarter and six months ended June 1, 2001 increased $13.6 million and $31.8 million over the comparable periods of 2000, which reflects the increase in borrowings, the increase in borrowing rates and credit line fees related to the acquisition of RE&C. At the date of our bankruptcy filing, we ceased accruing interest expense on our debt subject to compromise. Contractual interest expense not recorded totaled $4.7 million for the quarter and six months ended June 1, 2001.

	Quarter and six months ended June 1, 2001
Professional fees and other expenses related to the bankruptcy proceedings	$	(13.6	)
Impairment of assets of rejected projects		(9.5	)
Net gain from liquidation of insolvent subsidiary		32.0

Total reorganization items	$	8.9

Although formal liquidation procedures related to Washington International B.V., the insolvent Dutch subsidiary, began on June 21, 2001, the fact that our DIP Facility contained terms that prohibited the additional commitment of our resources for the subsidiary's operations made its eventual liquidation inevitable. Therefore, the effect of the liquidation was recognized as of May 29, 2001 when a suspension of payments with respect to Washington International B.V. was ordered under Dutch law.

The effective tax rate for the quarter and six months ended June 1, 2001 was 27.8% compared to 38.7% for the comparable periods of 2000. The primary reason for the decrease in the effective tax rate

for 2001 was the impact of nondeductible expenses, mainly reorganization costs, reducing the tax deductible loss.

Minority interests in the income of consolidated subsidiaries of $3.7 million and $4.5 million, respectively, for the quarter and six months ended June 1, 2001 consist of BNFL's 40% minority interest in the income of WGSG and a 35% minority interest in the income of Safe Sites of Colorado LLC, a subsidiary of WGSG.

Revenue for the quarter and six months ended June 1, 2001 was $157.1 million and $397.5 million and operating income was $2.8 million and $11.5 million, respectively, reflecting significant increases over the results for the comparable periods in 2000. The increases were derived from fixed-price new power generation projects purchased through the acquisition of RE&C.

On March 9, 2001, we suspended work on two large construction projects located in Massachusetts that were a part of the acquisition of the RE&C businesses. Although we were subsequently retained to participate on these two projects, our role during the three months ended June 1, 2001 was significantly diminished. Revenue and operating income between March 2, 2001 and June 1, 2001 reflected the impact of our diminished role. Operating income for the quarter and six months ended June 1, 2001 included the recognition of $10.1 million and $22.5 million of normal profit from certain contracts obtained in the RE&C acquisition.

During the quarter and six months ended June 2, 2000, the Power operating unit recognized revenue of $26.1 million and $41.4 million, respectively, and operating income of $.9 million and $2.0 million, respectively. At that time, the Power operating unit did not include the RE&C power projects described above and, therefore, revenue and gross profit were derived primarily from steam generator replacement projects.

During the second quarter of 2001, new work awards dropped off sharply from the previous quarter reflecting the uncertainty that existed at the time due to the bankruptcy filing. During the second quarter of 2001, $801.0 million of previously recorded backlog was reversed due to the suspension of work on two RE&C power projects in Massachusetts. New work bookings during the quarter and six months ended June 1, 2001 were $41.7 million and $208.8 million, respectively. Backlog at June 1, 2001 was $552.1 million.

During the quarter and six months ended June 1, 2001, the Infrastructure & Mining operating unit recognized $244.9 million and $499.3 million in revenue and $13.6 million and $27.5 million in operating income, respectively. Significant sources of revenue and operating income included a dam and power project in the Philippines, a light rail project in New Jersey, a variety of highway and other heavy construction work, engineering services projects and various mining operations.

Additionally, on March 28, 2001, we purchased an additional 17% of MIBRAG mbH ("MIBRAG"), a coal mine operating in Germany, bringing our total ownership to 50%.

Operating income for the quarter and six months ended June 1, 2001 included recognition of normal profit of $7.2 million and $20.6 million, respectively, related to projects obtained in the RE&C acquisition. The effects of the acquisition of RE&C account for the increase in revenue and operating income in the second quarter and six months of 2001 compared to 2000.

Revenue for the quarter and six months ended June 2, 2000 was $166.9 million and $382.5 million, respectively, and operating income was $15.2 million and $26.2 million, respectively. Revenue and operating income resulted principally from the completion of several major heavy civil highway construction contracts, partially offset by start up costs on new transportation and water resource contracts, a large marine project and two large mining contracts. Revenue during the quarter and six months ended June 2, 2000 did not include revenue from any operations obtained in the RE&C acquisition and reflected only a one-third interest in MIBRAG.

New work bookings during the quarter and six months ended June 1, 2001 were $104.8 million and $304.6 million, respectively. Over $150 million came from additional client funding on our New Jersey light rail project. Backlog at June 1, 2001 was $1,650.1 million.

Revenue for the quarter and six months ended June 1, 2001 was $212.1 million and $429.3 million and operating income (loss) was $(2.5) million and $5.8 million, respectively. Operating income included the recognition of $.2 million and $.8 million, respectively, of normal profit related to projects obtained in the RE&C acquisition. Revenue for the quarter and six months ended June 2, 2000 was $167.4 million and $316.2 million, respectively, and operating income was $4.9 million and $10.4 million, respectively.

Although revenue in 2001 increased relative to the comparable periods in 2000, an operating loss was incurred during the second quarter of 2001 as the U.S. economic downturn began to be felt and the Industrial/Process operating unit experienced excess personnel costs.

New work awards for the quarter and six months ended June 1, 2001 were $167.7 million and $485.5 million, respectively, and included $131.1 million in the telecommunications market, $91.6 million of which was subsequently reversed as a result of client project cancellation. Backlog at June 1, 2001 was $587.7 million.

Revenue for the quarter and six months ended June 1, 2001 was $290.2 million and $539.6 million and operating income was $13.0 million and $23.4 million, respectively. Operating income included the recognition of $2.2 million and $5.2 million, respectively, of normal profit on contracts acquired from RE&C.

The Government operating unit recognized revenue of $223.2 million and $439.2 million during the quarter and six months ended June 2, 2000. Operating income was $10.6 million and $17.7 million during the same periods in 2000. Operating income was also affected by a strike at the Electro-Mechanical Division plant, which ended near the end of the first quarter of 2000. The increase in revenues and operating income during the second quarter of 2001 over the corresponding period in 2000 was caused primarily by additional project revenues and operating income from chemical demilitarization projects obtained in the acquisition of RE&C.

New work awards during the quarter and six months ended June 1, 2001 were $234.7 million and $586.7 million, respectively, and included $103 million in contract renewals at U.S. Department of Energy sites and $52.7 million in new orders at the Electro-Mechanical Division. Backlog at June 1, 2001 was $1,410.0 million.

Revenue for the quarter and six months ended June 1, 2001 was $60.1 million and $115.3 million and operating income was $.1 million and $1.0 million, respectively. Operating income included the recognition of $2.7 million and $3.7 million for the quarter and six months ended June 1, 2001 of normal profit on contracts acquired from RE&C. We had no revenue or operating income from this operating unit except that which was obtained through the acquisition of RE&C. Accordingly, no revenues or operating income were recognized during the quarter and six months ended June 2, 2000 by this operating unit.

On June 21, 2001, our Netherlands subsidiary was liquidated, causing declines in the petroleum and chemicals businesses at that point in time. (See Note 4, "Reorganization Case and Fresh-start Reporting—Washington International B.V." of the Notes to Consolidated Financial Statements in Item 1 of this report.) The quarter and six month period ended June 1, 2001 contains the operations of Washington International B.V. prior to its liquidation. In addition, although formal liquidation procedures related to the insolvent Dutch subsidiary began on June 21, 2001, the fact that our DIP Facility contained terms that prohibited the additional commitment of our resources for the subsidiary's operations made its eventual liquidation inevitable. The effect of the liquidation was recognized as of May 29, 2001 when a suspension of payments with respect to Washington International B.V. was ordered under Dutch law, which suspension irrevocably transferred control to a trustee. A gain on the liquidation of the subsidiary of $32.0 million was recognized as a reorganization item for the quarter ended June 1, 2001.

New work awards during the quarter and six months ended June 1, 2001 were $10.4 million and $25.8 million. In anticipation of the liquidation of our Netherlands subsidiary described above, we reversed $89.8 million in backlog during the second quarter of 2001. Backlog at June 1, 2001 was $196.9 million.

For the quarter and six months ended June 1, 2001, intersegment and other includes goodwill amortization of $1.9 million and $7.2 million and integration and merger costs of $12.4 million and $18.3 million, respectively. Goodwill amortization amounted to $4.1 million and $8.3 million during the quarter and six months ended June 2, 2000, and no integration and merger costs were incurred.

New work, which represents additions to backlog for the period, is presented below:

		Liquidity and capital resources
		June 1, 2001		June 2, 2000
		(in millions)
Cash and cash equivalents
	Beginning of period	$	393.4	$	52.5
	End of period		99.5		48.2

		Six months ended
		June 1, 2001			June 2, 2000
Net cash provided (used) by:
	Operating activities	$	(312.5	)	$	24.8
	Investing activities		28.3			(8.9	)
	Financing activities		(9.8	)		(20.2	)

We have three principal sources of near-term liquidity: (1) cash generated by its operations, (2) existing cash and cash equivalents and (3) borrowings under our credit facilities.

During the six months ended June 1, 2001, we consumed $312.5 million of net cash through our operating activities. As a result of this liquidity drain, on March 2, 2001, we announced that we faced severe near-term liquidity problems as a result of our acquisition of RE&C. On March 9, 2001, because of those liquidity problems, we suspended work on two large construction projects located in Massachusetts that were part of the acquisition, and on May 14, 2001, we and several but not all of our direct and indirect subsidiaries filed voluntary petitions to reorganize under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the District of Nevada (Case No. BK-N-01-31627). On December 21, 2001, the bankruptcy court entered an order confirming our Plan of Reorganization. On January 25, 2002, the Effective Date, we emerged from bankruptcy protection pursuant to our Plan of Reorganization.

On July 7, 2000, in order to finance the acquisition of RE&C, refinance existing revolving credit facilities, fund working capital requirements and pay related fees and expenses, we (i) obtained the RE&C Financing Facilities providing for an aggregate of $1,000,000 of term loans and revolving borrowing capacity and (ii) issued and sold $300,000 aggregate principal amount of the Senior Unsecured Notes. Our obligations under the RE&C Financing Facilities and the Senior Unsecured Notes were discharged upon our emergence from bankruptcy on January 25, 2002.

On May 14, 2001, we filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code. On the same day, we entered into the DIP Facility with some of our subsidiaries as guarantors, for a commitment of $195,000 with the ability to increase the total commitment to $350,000. On June 5, 2001, the DIP Facility lenders approved an increase in the total commitment from $195,000 to $220,000. The DIP Facility was to be used (i) to finance the costs of restructuring and (ii) for ongoing working capital, general corporate purposes and letter of credit issuance. The borrowing rate under the DIP Facility was the prime rate, plus an additional margin of 4.0%. The effective interest rate was 11.0% as of May 2001. The DIP Facility carried other fees, including commitment fees and letter of credit fees, normal and customary for such credit agreements. The credit agreement under which the DIP Facility was made available contained affirmative and negative covenants, reporting covenants and specified events of default typical for a credit agreement governing credit facilities of the size, type and tenor of the DIP Facility. Among the covenants were those limiting our ability and the ability of some of our subsidiaries to incur debt or liens, provide guarantees, make investments and pay dividends. As of January 24, 2002, we had no outstanding debt and $32,800 of outstanding letters of credit under the DIP Facility. As discussed below, the DIP Facility was replaced by the Senior Secured Revolving Credit Facility on January 25, 2002.

expenditures, maintenance of certain financial and operating ratios, and specifies events of default, which are typical for a credit agreement governing credit facilities of the size, type and tenor of the Senior Secured Revolving Credit Facility. Among the covenants are those limiting our ability and the ability of some of our subsidiaries to incur debt or liens, provide guarantees, make investments and pay dividends.

We expect to use cash to, among other things, fund working capital requirements, make capital expenditures and make cure payments pursuant to our Plan of Reorganization.

We believe that, upon emergence from bankruptcy, our cash flow from operations, existing cash and cash equivalents and available borrowings under our revolving credit facility will be sufficient to meet our reasonably foreseeable liquidity needs. We may, from time to time, pursue opportunities to complement existing operations through business combinations and participation in ventures, which may require additional financing and utilization of our capital resources.

We are subject to foreign currency translation and exchange issues, primarily with regard to our mining venture, MIBRAG mbH, in Germany. At June 1, 2001, the cumulative adjustments for translation losses net of related income tax benefits was $21.4 million. We realized a pretax gain (loss) on foreign currency exchange transactions of $(2.9) million and $26 thousand, respectively, for the quarter and six months ended June 1, 2001. We endeavor to enter into contracts with foreign customers with repayment terms in U.S. currency in order to mitigate foreign exchange risk.

Backlog of all uncompleted contracts at June 1, 2001 was $4,396.7 million, compared with $5,659.4 million at December 1, 2000. New work awarded in the quarter and six months ended June 1, 2001 totaled $553.1 million and $1,641.3 million compared with $577.1 million and $1,083.2 million for the quarter and six months ended June 2, 2000.

The United States Environmental Protection Agency and the State of Colorado have filed complaints against a subsidiary of the Corporation and six other parties to recover response costs incurred and to be incurred at the Summitville Mine Superfund Site. See Note 8. "Contingencies and Commitments" of Notes to Consolidated Financial Statements for additional matters.

The Financial Accounting Standards Board ("FASB') issued Statement No. 133 Accounting for Derivative Instruments and Hedging Activities. The SEC issued Staff Accounting Bulletin No. 101 on revenue recognition. See Note 11. "Accounting Standards" of Notes to Consolidated Financial Statements in Item 1 of this report for a discussion of the impact that these standards had on our consolidated financial statements.

In June 2001, the FASB issued two new pronouncements, Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets. In July 2001, the FASB issued Statement No. 143, Accounting for Asset Retirement Obligations. In August 2001, the FASB issued Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. See Note 11. "Accounting Standards" of Notes to Consolidated Financial Statements in Item 1 of this report for a discussion of the impact, if any, that these standards had on our consolidated financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
(In thousands of dollars)

Our exposure to market risk for changes in interest rates relates primarily to our short-term investment portfolio and debt obligations. Our short-term investment portfolio consists primarily of highly liquid instruments with maturities of one month or less. As of June 1, 2001, we had $41 million in short-term investments classified as cash equivalents. Of total cash and cash equivalents at June 1, 2001 of $99 million, $29 million was restricted for use on the operations of our consolidated joint ventures, by projects having contractual cash restrictions and our self-insurance programs.

From time to time, we effect borrowings under bank credit facilities or otherwise for general corporate purposes, including working capital requirements and capital expenditures. Borrowings under our DIP Facility at June 1, 2001, of which there were none, bore interest at the applicable LIBOR or prime rate plus an additional margin and, therefore, were subject to fluctuations in interest rates.

We conduct our business in various regions of the world. Our operations are, therefore, subject to volatility because of currency fluctuations, inflation changes and changes in political and economic conditions in these countries. We are subject to foreign currency translation and exchange issues, primarily with regard to our mining venture, MIBRAG, in Germany. At June 1, 2001, the cumulative adjustments for translation losses net of related income tax benefits were $21.4 million. While we endeavor to enter into contracts with foreign customers with repayment terms in U.S. currency in order to mitigate foreign exchange risk, our revenues and expenses are sometimes denominated in local currencies, and our results of operations may be affected adversely as currency fluctuations affect pricing and operating costs or those of our competitors. We engage from time to time in hedging operations, including forward foreign exchange contracts, to reduce the exposure of our cash flows to fluctuations in foreign currency rates. We do not engage in hedging for speculative investment reasons. We can give no assurances that our hedging operations will eliminate or substantially reduce risks associated with fluctuating currencies.

The information regarding legal proceedings set forth under the caption "Other" in Note 8. "Contingencies and Commitments" of Notes to Condensed Consolidated Financial Statements is incorporated by reference in response to this Item 1.

As a result of the commencement of the bankruptcy cases, we were in default under the agreements and indentures governing our senior debt, including the RE&C Financing Facilities and the Senior Unsecured Notes. However, claims for amounts due under those agreements and indentures were stayed during the bankruptcy cases and discharged upon our emergence from bankruptcy on January 25, 2002.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER OF
WASHINGTON GROUP INTERNATIONAL, INC.
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

1. I have reviewed this quarterly report on Form 10-Q of Washington Group International, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and

3. Based on my knowledge, the consolidated financial statements and other financial information included in this quarterly report fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of and for the periods presented in this quarterly report.

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER OF
WASHINGTON GROUP INTERNATIONAL, INC.
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

1. I have reviewed this quarterly report on Form 10-Q of Washington Group International, Inc.;

Copies of exhibits will be supplied upon request. Exhibits will be provided at a fee of $.25 per page requested.

			PAGE
PART I. FINANCIAL INFORMATION
PART I
Item 1.	Consolidated Financial Statements and Notes Thereto
		Statements of Income for the Quarter and Six Months Ended June 1, 2001 and June 2, 2000	I-1
		Balance Sheets at June 1, 2001 and December 1, 2000	I-2
		Condensed Statements of Cash Flows for the Six Months Ended June 1, 2001 and June 2, 2000	I-3
		Statements of Comprehensive Income (Loss) for the Quarter and Six Months Ended June 1, 2001 and June 2, 2000	I-4
		Notes to Financial Statements	I-5
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		I-31
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		I-47
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings		II-1
Item 3.	Defaults Upon Senior Securities		II-1
Item 6.	Exhibits and Reports on Form 8-K		II-1
SIGNATURES

		Quarter Ended						Six Months Ended
		June 1, 2001			June 2, 2000			June 1, 2001			June 2, 2000
Operating revenue		$	954,107		$	579,786		$	1,969,346		$	1,173,688
Equity in net income of mining ventures			3,953			3,160			5,563			4,703

Total revenue			958,060			582,946			1,974,909			1,178,391
Cost of revenue			(930,463	)		(545,676	)		(1,903,645	)		(1,115,919	)

Gross profit			27,597			37,270			71,264			62,472
General and administrative expenses			(15,129	)		(6,132	)		(30,734	)		(11,497	)
Goodwill amortization			(1,865	)		(4,111	)		(7,206	)		(8,287	)
Integration and merger costs			(12,424	)		—			(18,344	)		—

Operating income (loss)			(1,821	)		27,027			14,980			42,688
Investment income			2,652			646			7,704			1,395
Interest expense(a)			(16,124	)		(2,546	)		(36,728	)		(4,876	)
Other income (expense), net			(2,485	)		574			(5,983	)		617

Income (loss) before reorganization items, income taxes and minority interests			(17,778	)		25,701			(20,027	)		39,824
Reorganization items (Note 4)			8,919			—			8,919			—
Income tax (expense) benefit			2,464			(9,937	)		3,090			(15,416	)
Minority interests in income of consolidated subsidiaries			(3,704	)		(4,094	)		(4,480	)		(3,692	)

Net income (loss)		$	(10,099	)	$	11,670		$	(12,498	)	$	20,716

Income (loss) per share
	Basic	$	(.19	)	$	.22		$	(.24	)	$	.40
	Diluted		(.19	)	$	.22			(.24	)	$	.40

Common shares used to compute income (loss) per share
	Basic		52,469			52,350			52,468			52,350
	Diluted		52,469			52,438			52,468			52,419

	2001			2000
ASSETS
Current assets
Cash and cash equivalents	$	99,476		$	393,433
Securities available for sale, at fair value		—			38,345
Accounts receivable, including retentions of $39,508 and $41,934		518,039			575,545
Unbilled receivables		308,196			257,744
Inventories		38,610			20,575
Refundable income taxes		3,087			3,837
Investments in and advances to construction joint ventures		41,265			55,693
Deferred income taxes		204,035			197,147
Other		62,435			38,956

Total current assets		1,275,143			1,581,275

Investments and other assets
Investments in mining ventures		68,667			66,008
Goodwill, net of accumulated amortization of $36,157 and $28,965		257,889			265,068
Deferred income taxes		414,254			404,414
Other assets		79,507			80,671

Total investments and other assets		820,317			816,161

Property and equipment, at cost
Construction equipment		299,955			306,401
Land and improvements		8,040			8,056
Buildings and improvements		34,829			37,453
Equipment and fixtures		110,052			99,851

Total property and equipment		452,876			451,761
Less accumulated depreciation		(216,663	)		(193,215	)

Property and equipment, net		236,213			258,546

Total assets	$	2,331,673		$	2,655,982

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Current portion of long-term debt	$	—		$	4,516
Accounts payable and subcontracts payable, including retentions of $8,170 and $10,125		121,726			373,080
Billings in excess of cost and estimated earnings on uncompleted contracts		109,603			1,276,846
Estimated costs to complete long-term contracts		36,948			81,595
Accrued salaries, wages and benefits, including compensated absences of $8,725 and $29,208		56,767			126,031
Income taxes payable		729			1,466
Other accrued liabilities		48,264			106,035

Total current liabilities		374,037			1,969,569

Non-current liabilities
Long-term debt		—			692,874
Self-insurance reserves		33,096			176,087
Pension and post-retirement obligations		93,399			175,856
Environmental remediation obligations		4,072			7,983
Other non-current liabilities		871			18,783

Total non-current liabilities		131,438			1,071,583

Liabilities subject to compromise (Note 4)		2,228,090			—

Contingencies and commitments

Minority interests		78,800			79,748

Stockholders' equity (deficit)
Preferred stock, par value $.01, 10,000 shares authorized
Common stock, par value $.01, authorized 100,000 shares; issued 54,486		545			545
Capital in excess of par value		250,118			250,112
Stock purchase warrants		6,550			6,550
Accumulated deficit		(692,178	)		(679,680	)
Treasury stock, 2,019 shares, at cost		(23,192	)		(23,192	)
Accumulated other comprehensive income (loss)		(22,535	)		(19,253	)

Total stockholders' equity (deficit)		(480,692	)		(464,918	)

Total liabilities and stockholders' equity (deficit)	$	2,331,673		$	2,655,982

		2001			2000
Operating activities
Net income (loss)		$	(12,498	)	$	20,716
Reorganization items			8,919			—
Adjustments to reconcile net income (loss) to cash provided (used) by operating activities:
	Cash paid for reorganization items		(11,504	)		—
	Depreciation of property and equipment		35,449			16,237
	Amortization of goodwill		7,206			8,287
	Amortization of prepaid loan fees		2,233			379
	Normal profit		(52,830	)		—
	Deferred income taxes		(14,919	)		9,115
	Minority interest in net income of consolidated subsidiaries		7,330			6,013
	Equity in net income of mining ventures less dividends received		(5,135	)		(3,103	)
	Gain on sale of assets, net		(4,083	)		(93	)
	Cash forfeited on bankruptcy of foreign subsidiary		(7,185	)		—
	Increase in net operating assets and other		(265,462	)		(32,704	)

Net cash provided (used) by operating activities			(312,479	)		24,847

Investing activities
Property and equipment acquisitions			(20,553	)		(19,861	)
Property and equipment disposals			9,746			8,228
Purchases of securities available for sale			(12,224	)		(17,726	)
Sale and maturities of securities available for sale			51,347			17,182
Other investing activities			—			3,304

Net cash provided (used) by investing activities			28,316			(8,873	)

Financing activities
Net repayments on long-term revolving line of credit			(1,516	)		(100	)
Distributions to minority interests			(8,278	)		(20,235	)
Other financing activities			—			107

Net cash used by financing activities			(9,794	)		(20,228	)

Decrease in cash and cash equivalents			(293,957	)		(4,254	)
Cash and cash equivalents at beginning of period			393,433			52,475

Cash and cash equivalents at end of period		$	99,476		$	48,221

Supplemental disclosure of cash flow information:
	Interest paid	$	30,018		$	4,467
	Income tax paid, net		4,837			869

			Quarter Ended						Six Months Ended
			June 1, 2001			June 2, 2000			June 1, 2001			June 2, 2000
Net income (loss)			$	(10,099	)	$	11,670		$	(12,498	)	$	20,716
Other comprehensive income (loss), net of tax:
	Foreign currency translation adjustments			(5,183	)		(1,676	)		(3,317	)		(5,263	)
	Unrealized gains (losses) on marketable securities:
		Unrealized net holding gain (loss)		115			94			474			(176	)
		Less: Reclassification adjustment for net gain realized in net income		(612	)		(109	)		(861	)		(109	)
	Derivatives designated as cash flow hedges:
		Cumulative effect of adoption of accounting principle		—			—			(1,161	)		—
		Loss on settled or terminated contracts		1,059			—			1,583			—

Other comprehensive income (loss), net of tax				(4,621	)		(1,691	)		(3,282	)		(5,548	)

Comprehensive income (loss)			$	(14,720	)	$	9,979		$	(15,780	)	$	15,168

Cost of revenue	$	(140,954	)
Impairment of assets		(4,685	)
Other		1,158

Total	$	(144,481	)

	Quarter and six months ended June 1, 2001
Professional fees and other expenses related to the bankruptcy proceedings	$	(13,504	)
Impairment of assets of rejected projects		(9,538	)
Net gain from liquidation of insolvent subsidiary		31,961

Total reorganization items	$	8,919

	Predecessor Company balance sheet February 1, 2002			Debt discharge			Fresh-start adjustments			Successor Company balance sheet February 1, 2002
Current assets
Cash and cash equivalents	$	147,450		$	(19,249	)(a)	$	—		$	128,201
Accounts receivable		351,316			—			(418	)(h)		350,898
Deferred income taxes		104,828			—			—			104,828
Assets held for sale		154,237			—			33,582	(i)		187,819
Other		310,242			—			(9,578	)(h)		300,664

Total current assets		1,068,073			(19,249	)		23,586			1,072,410

Non-current assets
Investments in mining ventures		88,968			—			(20,268	)(h)		68,700
Goodwill, Predecessor Company		174,909			—			(174,909	)(f)		—
Goodwill, Successor Company		—			—			402,352	(g)		402,352
Deferred income taxes		575,012			(343,539	)(b)		(193,766	)(k)		37,707
Property and equipment, net		161,241			—			(2,589	)(h)		158,652
Other assets		39,156			12,626	(c)		(8,231	)(h)		43,551

Total non-current assets		1,039,286			(330,913	)		2,589			710,962

Total assets	$	2,107,359		$	(350,162	)	$	26,175		$	1,783,372

Current liabilities
Accounts payable and subcontracts payable	$	191,609		$	35,960	(d)	$	69	(h)	$	227,638
Billings in excess of cost and estimated earnings on uncompleted contracts		87,201			170,573	(d)		9,101	(h)		266,875
Estimated costs to complete long-term contracts		75,252			23,887	(d)		(575	)(h)		98,564
Accrued salaries, wages and benefits		88,220			42,256	(d)		—			130,476
Other accrued liabilities		112,314			17,656	(d)		(228	)(h)		129,742
Liabilities held for sale		108,670			—			10,691	(i)		119,361
Income taxes payable		516			—			—			516

Total current liabilities		663,782			290,332			19,058			973,172

Non-current liabilities
Revolving credit facility		—			40,000	(a)		—			40,000
Self-insurance reserves		38,956			7,580	(d)		—			46,536
Pension and post-retirement obligations		32,132			75,633	(d)		(12,122	)(j)		95,643

Total non-current liabilities		71,088			123,213			(12,122	)		182,179

Liabilities subject to compromise		1,880,900			(1,880,900	)(d)		—			—

Minority interests		77,649			—			372	(h)		78,021

Stockholders' equity (deficit)
Common stock		545			250	(d)		(545	)(l)		250
Capital in excess of par value		250,118			521,103	(d)		(250,118	)(l)		521,103
Stock purchase warrants		6,550			28,647	(d)		(6,550	)(l)		28,647
Retained earnings (accumulated deficit)		(799,813	)		567,193	(e)		232,620	(l)		—
Treasury stock		(23,192	)		—			23,192	(l)		—
Accumulated other comprehensive income (loss)		(20,268	)		—			20,268	(l)		—

Total stockholders' equity (deficit)		(586,060	)		1,117,193			18,867			550,000

Total liabilities and stockholders' equity (deficit)	$	2,107,359		$	(350,162	)	$	26,175		$	1,783,372

Resolution of liabilities subject to compromise	Predecessor Company liabilities subject to compromise February 1, 2002		Liabilities compromised (debt discharged)			Cash paid at emergence			Successor Company liabilities not compromised February 1, 2002
Current liabilities
Accounts payable and subcontracts payable	$	63,827	$	(23,367	)	$	(4,500	)	$	35,960
Billings in excess of cost and estimated earnings on uncompleted contracts		181,446		(10,873	)		—			170,573
Estimated costs to complete long-term contracts		27,380		(3,493	)		—			23,887
Accrued salaries, wages and benefits		42,441		(185	)		—			42,256
Other accrued liabilities		489,110		(471,454	)		—			17,656

Total current liabilities		804,204		(509,372	)		(4,500	)		290,332

Non-current liabilities
Long-term debt, including accrued interest		888,899		(868,899	)		(20,000	)		—
Self-insurance reserves		97,036		(89,456	)		—			7,580
Pension and post-retirement obligations		77,781		(2,148	)		—			75,633
Environmental liabilities		3,970		(3,970	)		—			—
Other liabilities		9,010		(9,010	)		—			—

Total non-current liabilities		1,076,696		(973,483	)		(20,000	)		83,213

Total	$	1,880,900	$	(1,482,855	)	$	(24,500	)	$	373,545

	Quarter ended						Six months ended
Revenue	(Unaudited) June 1, 2001			(Unaudited) June 2, 2000			(Unaudited) June 1, 2001			(Unaudited) June 2, 2000
Power	$	157,127		$	26,060		$	397,510		$	41,396
Infrastructure & Mining		244,931			166,941			499,288			382,526
Industrial/Process		212,056			167,353			429,306			316,122
Government		290,220			223,156			539,592			439,213
Petroleum & Chemicals		60,042			—			115,289			—

Total segments		964,376			583,510			1,980,985			1,179,257
Corporate and other		(6,316	)		(564	)		(6,076	)		(866	)

Total consolidated revenues	$	958,060		$	582,946		$	1,974,909		$	1,178,391

		Quarter ended						Six months ended
Operating income (loss)		(Unaudited) June 1, 2001			(Unaudited) June 2, 2000			(Unaudited) June 1, 2001			(Unaudited) June 2, 2000
Gross profit
	Power	$	2,806		$	943		$	11,526		$	1,999
	Infrastructure & Mining		13,636			15,325			27,547			26,424
	Industrial/Process		(2,489	)		4,856			5,834			10,374
	Government		16,382			14,199			30,230			24,906
	Petroleum & Chemicals		62			—			1,020			—
	Corporate and other		(2,800	)		1,947			(4,893	)		(1,231	)

Total gross profit			27,597			37,270			71,264			62,472

Corporate general and administrative expense			(15,129	)		(6,132	)		(30,734	)		(11,497	)

Goodwill amortization
	Power		—			—			—			—
	Infrastructure & Mining		(67	)		(101	)		(135	)		(199	)
	Industrial/Process		(7	)		—			(14	)		—
	Government		(3,417	)		(3,589	)		(6,833	)		(7,246	)
	Petroleum & Chemicals		61			—			—			—
	Corporate and other		1,565			(421	)		(224	)		(842	)

Total goodwill amortization			(1,865	)		(4,111	)		(7,206	)		(8,287	)

Integration and merger costs, corporate			(12,424	)		—			(18,344	)		—
Operating income (loss)
	Power		2,806			943			11,526			1,999
	Infrastructure & Mining		13,569			15,224			27,412			26,225
	Industrial/Process		(2,496	)		4,856			5,820			10,374
	Government		12,965			10,610			23,397			17,660
	Petroleum & Chemicals		123			—			1,020			—
	Corporate and other		(28,788	)		(4,606	)		(54,195	)		(13,570	)

Total operating income (loss)		$	(1,821	)	$	27,027		$	14,980		$	42,688

	(In millions)
Cost of revenue	$	(141.0	)
Impairment of assets		(4.7	)
Other		1.2

Total	$	(144.5	)

	Quarter ended						Six months ended
Revenue Quarter and six months ended	June 1, 2001			June 2, 2000			June 1, 2001			June 2, 2000
Power	$	157.1		$	26.1		$	397.5		$	41.4
Infrastructure & Mining		244.9			166.9			499.3			382.5
Industrial/Process		212.1			167.4			429.3			316.2
Government		290.2			223.2			539.6			439.2
Petroleum & Chemicals		60.1			—			115.3			—
Intersegment and other		(6.3	)		(.6	)		(6.1	)		(.9	)

Total revenue	$	958.1		$	583.0		$	1,974.9		$	1,178.4

	Quarter ended						Six months ended
Operating income (loss) Quarter and six months ended	June 1, 2001			June 2, 2000			June 1, 2001			June 2, 2000
Power	$	2.8		$	.9		$	11.5		$	2.0
Infrastructure & Mining		13.6			15.2			27.5			26.2
Industrial/Process		(2.5	)		4.9			5.8			10.4
Government		13.0			10.6			23.4			17.7
Petroleum & Chemicals		.1			—			1.0			—
Intersegment and other		(13.7	)		1.5			(23.5	)		(2.1	)

Total segment operating income		13.3			33.1			45.7			54.2
General and administrative expense		(15.1	)		(6.1	)		(30.7	)		(11.5	)

Total operating income (loss)	$	(1.8	)	$	27.0		$	15.0		$	42.7

	Quarter ended						Six months ended
Quarter and six months ended	June 1, 2001			June 2, 2000			June 1, 2001			June 2, 2000
	(In millions)
Power	$	41.7		$	43.4		$	208.8		$	45.1
Infrastructure & Mining		104.8			307.7			340.6			447.1
Industrial/Process		167.7			154.5			485.5			403.1
Government		234.7			72.1			586.7			188.8
Petroleum & Chemicals		10.4			—			25.8			—
Other		(6.2	)		(.6	)		(6.1	)		(.9	)

Total new work	$	553.1		$	577.1		$	1,641.3		$	1,083.2

		WASHINGTON GROUP INTERNATIONAL, INC.
		/s/ GEORGE H. JUETTEN George H. Juetten Executive Vice President and Chief Financial Officer, in his respective capacities as such
Date: October 7, 2002

Exhibit Number		Exhibits
10.1		WGI's Retention Agreement with Stephen G. Hanks dated as of March 20, 2001.#*
10.2		Form of WGI's Retention Agreement.#* A schedule listing the Named Executives with whom Washington Group International has entered into such agreements is filed herewith.*
10.3		WGI's letter agreement with Thomas H. Zarges dated as of March 7, 2001.#*
10.4		WGI's letter agreement with David L. Myers dated as of May 8, 2001.#*
99.1	*	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.