URS CORP /NEW/ - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


(Mark one)
x		QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the quarterly period ended January 31, 2003

		OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from to

Commission file number 1-7567

URS CORPORATION

(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation)		94-1381538 (I.R.S. Employer Identification No.)


100 California Street, Suite 500 San Francisco, California (Address of principal executive offices)		94111-4529 (Zip Code)

(415) 774-2700
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes x No o

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class		Outstanding at March 3, 2003

Common Stock, $.01 par value		32,613,083

TABLE OF CONTENTS


PART I FINANCIAL INFORMATION
	ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
		CONSOLIDATED BALANCE SHEETS
		CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
		CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 4. CONTROLS AND PROCEDURES
PART II OTHER INFORMATION
	ITEM 1. LEGAL PROCEEDINGS
	ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
	ITEM 3. DEFAULTS UPON SENIOR SECURITIES
	ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
	ITEM 5. OTHER INFORMATION
	ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
Exhibit 10.1
Exhibit 99.1
Exhibit 99.2

URS CORPORATION AND SUBSIDIARIES

This Form 10-Q for the quarter ended January 31, 2003, contains forward-looking statements, including statements about the continued strength of our business and opportunities for future growth. We believe that our expectations are reasonable and are based on reasonable assumptions. However, such forward-looking statements by their nature involve risks and uncertainties. We caution that a variety of factors, including but not limited to the following, could cause our business and financial results to differ materially from those expressed or implied in forward-looking statements: our ability to successfully integrate Carlyle-EG&G Holdings Corp. and Lear Siegler Services, Inc. (the “EG&G businesses”); our highly leveraged position; our ability to service our debt; deterioration in current economic conditions; our ability to pursue business strategies; our continued dependence on federal, state and local appropriations for infrastructure spending; pricing pressures; changes in the regulatory environment; outcomes of pending and future litigation; our ability to attract and retain qualified professionals; industry competition; changes in international trade, monetary and fiscal policies; our ability to integrate future acquisitions successfully; our ability to successfully integrate our accounting and management information systems; and other factors discussed more fully in Management’s Discussion and Analysis of Financial Condition and Results of Operations and Risk Factors below, as well as in other reports subsequently filed from time to time with the Securities and Exchange Commission. We assume no obligation to update any forward-looking statements.


PART I.	FINANCIAL INFORMATION:
Item 1.	Consolidated Financial Statements
	Consolidated Balance Sheets January 31, 2003 and October 31, 2002	2
	Consolidated Statements of Operations and Comprehensive Income Three months ended January 31, 2003 and 2002	3
	Consolidated Statements of Cash Flows Three months ended January 31, 2003 and 2002	4
	Notes to Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39
Item 4.	Controls and Procedures	39
PART II.	OTHER INFORMATION:
Item 1.	Legal Proceedings	39
Item 2.	Changes in Securities and Use of Proceeds	39
Item 3.	Defaults Upon Senior Securities	39
Item 4.	Submission of Matters to a Vote of Security Holders	39
Item 5.	Other Information	40
Item 6.	Exhibits and Reports on Form 8-K	40

PART I
FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

URS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)


					January 31, 2003			October 31, 2002

					(unaudited)
				ASSETS
Current assets:
		Cash and cash equivalents			$	9,844		$	9,972
		Accounts receivable				569,130			596,275
		Costs and accrued earnings in excess of billings on contracts in process				386,827			374,651
		Less receivable allowances				(30,646	)		(30,710	)

			Net accounts receivable			925,311			940,216

		Deferred income taxes				20,195			17,895
		Prepaid expenses and other assets				22,962			20,248

			Total current assets			978,312			988,331
Property and equipment at cost, net						155,897			156,524
Goodwill, net						1,000,680			1,001,629
Purchased intangible assets, net						13,953			14,500
Other assets						65,954			68,108

					$	2,214,796		$	2,229,092

	LIABILITIES, MANDATORILY REDEEMABLE SECURITIES, AND STOCKHOLDERS’ EQUITY
Current liabilities:
		Current portion of long-term debt			$	32,683		$	30,298
		Accounts payable				166,223			204,389
		Accrued salaries and wages				106,285			101,287
		Accrued expenses and other				123,479			115,545
		Billings in excess of costs and accrued earnings on contracts in process				95,007			92,235

			Total current liabilities			523,677			543,754
Long-term debt						916,946			923,863
Deferred income taxes						41,229			40,629
Deferred compensation and other						37,456			40,261

			Total liabilities			1,519,308			1,548,507

Commitments and contingencies (Note 5)
Mandatorily redeemable Series D senior convertible participating preferred stock, par value $.01; authorized 100 shares; issued and outstanding 0 and 100 shares, respectively; liquidation preference $0 and $46,733, respectively						—			46,733

Mandatorily redeemable Series E senior cumulative convertible participating preferred stock, par value $.01; authorized 100 shares; issued and outstanding 0 and 0 shares, respectively; liquidation preference $0 and $0, respectively						—			—

Stockholders’ equity:
		Common shares, par value $.01; authorized 50,000 shares; issued and outstanding 32,490 and 30,084 shares, respectively				325			301
		Treasury stock, 52 shares at cost				(287	)		(287	)
		Additional paid-in capital				472,043			418,705
		Accumulated other comprehensive loss				(2,807	)		(5,132	)
		Retained earnings				226,214			220,265

			Total stockholders’ equity			695,488			633,852

					$	2,214,796		$	2,229,092

See Notes to Consolidated Financial Statements

URS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(In thousands, except per share data)


			Three Months Ended
			January 31,

			2003		2002

			(unaudited)
Revenues			$	758,033	$	542,998
Direct operating expenses				483,597		330,816

		Gross profit		274,436		212,182

Indirect expenses:
	Indirect, general and administrative			243,246		176,846
	Interest expense, net			21,280		12,616

				264,526		189,462

Income before taxes				9,910		22,720
Income tax expense				3,960		9,430

Net income				5,950		13,290
Preferred stock dividend				—		2,418

Net income available for common stockholders				5,950		10,872
Other comprehensive income (loss):
	Foreign currency translation adjustments			2,325		(2,978	)

Comprehensive income			$	8,275	$	7,894

Net income per common share:
	Basic		$	.18	$	.60

	Diluted		$	.18	$	.52

Weighted-average shares outstanding:
	Basic			32,324		18,264

	Diluted			32,574		25,570

See Notes to Consolidated Financial Statements

URS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)


					Three Months Ended
					January 31,

					2003			2002

					(unaudited)
Cash flows from operating activities:
	Net income				$	5,950		$	13,290

	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization				11,497			7,403
		Amortization of financing fees				1,751			921
		Receivable allowances				(64	)		1,298
		Deferred income taxes				(1,700	)		1,176
		Stock compensation				2,956			518
	Changes in current assets and liabilities, net of business acquired:
		Accounts receivable and costs and accrued earnings in excess of billings on contracts in process				14,969			24,404
		Prepaid expenses and other assets				(2,714	)		793
		Accounts payable, accrued salaries and wages and accrued expenses				(25,234	)		(31,343	)
		Billings in excess of costs and accrued earnings on contracts in process				2,772			(1,696	)
		Deferred compensation and other				(2,805	)		(145	)
		Other, net				3,095			6,148

			Total adjustments			4,523			9,477

				Net cash provided by operating activities		10,473			22,767

Cash flows from investing activities:
		Capital expenditures, less equipment purchased through capital leases of $6,204 and $11,542, respectively				(3,169	)		(17,669	)

				Net cash used by investing activities		(3,169	)		(17,669	)

Cash flows from financing activities:
		Long-term debt principal payments				(4,290	)		(9,209	)
		Long-term debt borrowings				300			—
		Line of credit borrowings				34,741			9,880
		Line of credit principal payments				(37,644	)		(9,880	)
		Capital lease obligations payments				(4,180	)		(3,384	)
		Short-term note borrowings				87			—
		Short-term note payments				(118	)		(1,069	)
		Proceeds from sale of common shares and exercise of stock options				3,672			6,733

				Net cash used by financing activities		(7,432	)		(6,929	)

				Net decrease in cash		(128	)		(1,831	)
Cash and cash equivalents at beginning of period						9,972			23,398

Cash and cash equivalents at end of period					$	9,844		$	21,567

Supplemental Information:
		Interest paid			$	8,102		$	6,124

		Taxes paid			$	1,784		$	8,405

		Equipment acquired with capital lease obligations			$	6,204		$	11,542

		Non-cash dividends paid in-kind			$	—		$	2,402

		Conversion of Series D preferred stock to common stock			$	46,733		$	—

See Notes to Consolidated Financial Statements

URS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. ACCOUNTING POLICIES

Overview

In the opinion of management, the information furnished herein reflects all adjustments, consisting only of normal recurring adjustments, which are necessary for the fair statement of the interim financial information.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted. These condensed financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2002. The results of operations for the three months ended January 31, 2003, are not necessarily indicative of the operating results for the full year.

Income Per Common Share

Basic income per common share is computed by dividing net income available for common stockholders by the weighted-average number of common shares outstanding for the period. Diluted income per share of common stock is computed giving effect to all dilutive potential shares of common stock that were outstanding during the period. Dilutive potential shares of common stock consist of the incremental shares of common stock issuable upon the exercise of stock options and convertible preferred stock. Diluted income per share is computed by dividing net income available for common stockholders plus the preferred stock dividend by the weighted-average common share and dilutive potential common shares that were outstanding during the period. Due to the participation features of the Series D Convertible Participating Preferred Stock (“Series D Preferred Stock”) shares issued in connection with the acquisition of EG&G and the fact that these shares were not convertible until January 28, 2003, these shares are assumed to be a separate class of common stock (equivalent to approximately an additional 2,014,000 weighted-average common shares in the first quarter of fiscal year 2003). Accordingly, income per common share for the first quarter of fiscal year 2003 has been calculated using the two-class method, which is an earnings allocation formula that determines income per common share for each class of common stock. Under the two-class method, approximately $371,000 of net income for the first quarter of fiscal year 2003 is allocable to the Series D Preferred Stock and the remaining amount is allocable to common stockholders. While a proportionate amount of the income otherwise available to common shares is allocable, as described above, to the weighted-average number of Series D Preferred Stock shares outstanding during the first quarter of fiscal year 2003, the presentation below combines the two classes of common stock.

In accordance with the disclosure requirements of Statement of Financial Accounting Standards No. 128 (“SFAS 128”), “Earnings per Share,” a reconciliation of the numerator and denominator of basic and diluted income per common share is provided as follows:

URS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


		Three Months Ended
		January 31

		2003		2002

		(In thousands, except per share data)
Numerator — Basic
	Net income available for common stockholders	$	5,950	$	10,872

Denominator — Basic
	Weighted-average common stock outstanding		32,324		18,264

	Basic income per share	$	.18	$	.60

Numerator — Diluted
	Net income available for common stockholders	$	5,950	$	10,872
	Preferred stock dividend		—		2,418

Net income		$	5,950	$	13,290

Denominator — Diluted
	Weighted-average common stock outstanding		32,324		18,264
Effect of dilutive securities
	Stock options		250		1,732
	Convertible preferred stock		—		5,574

			32,574		25,570

Diluted income per share		$	.18	$	.52

Stock options to purchase 2,899,856 shares of common stock at prices ranging from $17.06 to $33.90 per share and to purchase 79,500 shares of common stock at prices ranging from $27.50 to $28.00 per share were outstanding at January 31, 2003 and 2002, respectively, but were not included in the computation of diluted income per share because the exercise price was greater than the average market value of the shares of common stock. Convertible subordinated debt was not included in the computation of diluted income per share because it would be anti-dilutive.

Adoption of Statements of Financial Accounting Standards

In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146 (“SFAS 146”), “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS 146 replaces Emerging Issues Task Force (“EITF”) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)” in its entirety and addresses the significant issues relating to recognition, measurement and reporting costs associated with an exit or disposal activity, including restructuring activities. Under EITF Issue No. 94-3, a liability is recognized as of the date of an entity’s commitment to an exit plan as well as its measurement and reporting. Pursuant to SFAS 146, a liability is recorded on the date on which the obligation is incurred and should be initially measured at fair value. SFAS 146 is effective for exit or disposal activities initiated after December 31, 2002. As permitted, the Company adopted SFAS 146 early on November 1, 2002 and adoption of SFAS 146 did not significantly impact the Company’s financial statements.

URS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

after December 15, 2002. FIN 45’s provisions for initial recognition and measurement should be applied on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor’s fiscal year-end. The Company did not issue or modify any guarantees during the first quarter of fiscal year 2003. The guarantor’s previous accounting for guarantees that were issued before the date of FIN 45’s initial application may not be revised or restated to reflect the effect of the recognition and measurement provisions of FIN 45. The Company has completed an initial evaluation of its guarantees for disclosures required by FIN 45, which are included in Note 7, and will continue to evaluate whether the Company will be subject to the measurement and accounting provisions of FIN 45, which may impact future disclosures of the company’s fiscal year 2003 financial statements.

In January 2003, the FASB issued Statement of Financial Accounting Standards No. 148 (“SFAS 148”), “Accounting for Stock-Based Compensation – Transition and Disclosure.” SFAS 148 amends FASB Statement No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements of the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS 148 is effective for fiscal years beginning after December 15, 2002. The Company intends to adopt SFAS 148 on November 1, 2003. The Company does not expect to adopt the fair value based method of accounting for stock-based employee compensation and therefore, adoption of SFAS 148 is expected to impact only the future disclosures, not the financial results, of the Company.

In January 2003, the FASB issued Financial Accounting Standards Board Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities.” FIN 46 clarifies the requirements of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” and provides guidance to improve financial reporting for enterprises involved with variable interest entities. FIN 46 requires a variable interest entity to be consolidated by a company, which is subject to majority of the risk of loss or return from the variable interest entity’s activities. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. For the variable interest entities that existed prior to February 1, 2003, the consolidation requirements are effective for financial statements of interim or annual periods that end after June 15, 2003. The Company has completed its initial evaluation and does not believe that it is reasonably possible that adoption of FIN 46 will have a significant impact on the Company’s financial statements and thus no transitional disclosures have been included herein. The Company continues to evaluate its entities, as defined in FIN 46, to determine whether the reporting requirements of FIN 46 will impact the Company’s fiscal year 2003 financial statements.

EITF Consensus Issue No. 00-21 (“Issue 00-21”), “Revenue Arrangements with Multiple Deliverables.” was first discussed at the July 2000 EITF meeting and was issued on February 6, 2002. It addresses the accounting for multiple element revenue arrangements, which involve more than one deliverable or unit of accounting in circumstances, where the delivery of those units takes place in different accounting periods. Issue 00-21 requires disclosures of the accounting policy for revenue recognition of multiple element revenue arrangements and the nature and description of such arrangements. The accounting and reporting requirements will be effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The Company is currently evaluating its contracts to determine whether adoption of Issue 00-21 will have significant impact to the Company’s financial statements.

Reclassifications

Certain reclassifications have been made to the 2002 financial statements and notes to conform to the 2003 presentation with no effect on consolidated net income, equity or cash flows as previously reported.

NOTE 2. ACQUISITION

On August 22, 2002, the Company acquired all of the outstanding common shares of the EG&G businesses, leading providers of operations and maintenance, logistics and technical services to the Department of Defense and other

URS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

federal government agencies, for an aggregate purchase price of $503.6 million (the “EG&G acquisition”). The aggregate purchase price included the issuance of 4,957,359 shares of the Company’s common stock, valued at $112.3 million (based on the price of its common stock on the closing date), issuance of 100,000 shares of the Company’s Series D Preferred Stock, valued at $47.8 million (based on the price of its common stock on the closing date), $176.1 million in cash, estimated direct transaction costs of $11.8 million and the assumption and retirement of $155.6 million of EG&G businesses’ debt. At a special meeting held on January 28, 2003, the Company’s stockholders approved the conversion of all outstanding shares of the Series D Preferred Stock into 2,106,674 shares of voting common stock. In addition, the conversion of Series D Preferred Stock to common stock constituted a change in control as defined under the terms of the Company’s employment arrangements with certain executives resulting in the accelerated vesting of restricted common stock previously granted, which increased general and administrative expense by approximately $2.5 million.

Simultaneously with the closing of the EG&G acquisition, the Company entered into a new senior secured credit facility, which provides for term loan facilities in the aggregate amount of $475 million and a revolving credit facility in the amount of $200 million. In addition, the Company issued $200 million in aggregate principal amount due at maturity of 11 1/2% senior notes due 2009. The Company used the proceeds of these new debt instruments to consummate the EG&G acquisition and to repay and terminate its old senior collateralized credit facility.

Pro Forma Results

The operating results of EG&G businesses have been included in the accompanying consolidated financial statements from the date of acquisition forward. Accordingly, the EG&G businesses’ results of operations for the periods from November 1, 2001 through August 22, 2002 were not included in the Company’s consolidated statements of operations.

The following unaudited pro forma financial information presents the combined results of operations of the Company and the EG&G businesses as if the EG&G acquisition had occurred at November 1, 2001. An adjustment of $1.2 million, net of tax, has been made to the combined results of operations, reflecting amortization of purchased intangibles, as if the EG&G acquisition had occurred at November 1, 2001. The unaudited pro forma financial information is not intended to represent or be indicative of the consolidated results of operations of the Company that would have been reported had the EG&G acquisition been completed as of the dates presented, nor should it be taken as a representation of the future consolidated results of operations of the Company.


		Three Months Ended
		January 31, 2002

		(In thousands, except per share data)
		(unaudited)
Revenues		$	784,694
Operating income		$	39,858
Net income available for common stockholders		$	5,056
Net income per common share:
	Basic	$	.20
	Diluted	$	.15

URS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Finalization of Purchase Price

Certain information necessary to complete the purchase accounting is not yet available, including the completion of actuarial reports associated with the Company’s decision to freeze or terminate the defined benefit pension plan. Purchase accounting will be finalized upon receipt of actuarial studies.

NOTE 3. PROPERTY AND EQUIPMENT

Property and equipment consists of the following:


		January 31,			October 31,
		2003			2002

		(In thousands)
Equipment		$	137,419		$	135,609
Capital leases			88,078			82,269
Furniture and fixtures			27,708			26,875
Leasehold improvements			27,173			26,221
Construction in progress			654			222
Building			254			295

			281,286			271,491
Less: accumulated depreciation and amortization			(125,389	)		(114,967	)

	Property and equipment at cost, net	$	155,897		$	156,524

As of January 31, 2003 and October 31, 2002, the Company capitalized development costs of internal-use software of $53.9 million and $50.1 million, respectively. The Company is amortizing the capitalized software costs using the straight-line method over ten years of estimated useful life.

Property and equipment is depreciated by using the following estimated useful life.


		Estimated Useful Life

Equipment		4 – 10 years
Capital leases		4 – 10 years
Furniture and fixtures		10 years
Leasehold improvements		9 months – 20 years
Building		45 years

Accumulated amortization of capital leases was $31.9 million and $29.3 million at January 31, 2003 and October 31, 2002, respectively. Depreciation and amortization expense of property and equipment for the first quarter ended January 31, 2003 and 2002 was $10.0 million and $7.4 million, respectively.

NOTE 4. DEBT COVENANTS

Effective January 30, 2003, the Company amended its senior secured credit facility to increase the maximum leverage ratio of consolidated total funded debt to consolidated EBITDA for the first, second and third quarters of fiscal year 2003 to 4.50:1, for the fourth quarter of fiscal year 2003 to 4.25:1 and for the first quarter of fiscal year 2004 to 4.00:1. As a result of the amendment, the applicable interest rate margins for all borrowings initially increased by 0.25% through the second quarter of fiscal year 2004, but revert to the original interest rate margins if the Company achieves a leverage ratio of 3.90:1 or less for fiscal year 2003 or 3.75:1 or less for the first quarter of fiscal year 2004. The amendment also provides that interest rate margins for all borrowings will increase an additional 0.25% if the Company’s leverage ratio was greater than 3.70:1 and either Standard & Poor’s or Moody’s were to lower the Company’s credit rating to below BB-

URS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

or Ba3, respectively. As of January 31, 2003, the Company was in compliance with the original and amended leverage ratio financial covenant.

In addition to the leverage ratio covenant discussed above, the senior secured credit facility requires the Company to maintain a minimum current ratio of 1.5:1 and a minimum fixed charge coverage ratio, which varies over the term of the facility from 1.05:1 to 1.20:1. Neither of these two financial covenants were modified by the amendment. The senior secured credit facility also contains customary affirmative and negative covenants including, without limitation, the following material covenants: restrictions on mergers, consolidations, acquisitions, asset sales, dividend payments, stock redemptions or repurchases, repayments of junior indebtedness, transactions with stockholders and affiliates, liens, capital expenditures, capital leases, further agreements restricting the creation of liens (also called a “negative pledge”), sale-leaseback transactions, indebtedness, contingent obligations, investments and joint ventures. The senior secured credit facility also prohibits prepayments of the 11 1/2% senior notes (the “11 1/2% notes”) and amendments to the terms of the 11 1/2% notes.

The indentures governing the 11 1/2% notes and the 12 1/4% senior subordinated notes (the “12 1/4% notes”) contain certain covenants that limit the Company’s ability to incur additional indebtedness, pay dividends or make distributions to the Company’s stockholders, repurchase or redeem capital stock, make investments or other restricted payments, incur liens on its subsidiaries assets, enter into transactions with the Company’s stockholders and affiliates, sell assets and merge or consolidate with other companies. The indentures governing the 11 1/2% and the 12 1/4% notes also contain customary events of default, including payment defaults, cross-defaults, breach of covenants, bankruptcy and insolvency defaults and judgment defaults.

NOTE 5. COMMITMENTS AND CONTINGENCIES

Currently, the Company has limits of $125.0 million per loss and $125.0 million in the aggregate annually for general liability, professional errors and omissions liability and contractor’s pollution liability insurance. These policies include self-insured claim retention amounts of $1.0 million, $3.0 million and $0.25 million, respectively. With respect to various claims against the Dames & Moore Group (which the Company acquired in June 1999) that arose from professional errors and omissions prior to the acquisition, the Company has maintained a self-insured retention of $5.0 million per claim. Excess limits provided for these coverages are on a “claims made” basis, covering only claims actually made during the policy period currently in effect. Thus, if the Company does not continue to maintain these excess policies, the Company will have no coverage for claims made after the termination date even for claims based on events that occurred during the term of coverage. The Company intends to maintain these policies; however, the Company may be unable to maintain existing coverage levels and, even if the Company does, claims may exceed the available amount of insurance. The Company believes that any settlement of existing claims will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows. The Company has maintained insurance without lapse for many years with limits in excess of losses sustained.

On January 18, 2002, the Attorney General of the State of Michigan filed a civil action against Radian International, L.L.C. (“Radian”), one of the Company’s subsidiaries, under the title Jennifer M. Granholm, Attorney General of the State of Michigan, and the Michigan Department of Environmental Quality v. Radian, L.L.C., (Ingham County Michigan Circuit Court). The complaint alleges violations by Radian of the Michigan Hazardous Waste Management Act and the Michigan Air Pollution Control Act and related regulations. The claimed violations arose out of an environmental remediation project undertaken by Radian in 1997 and 1998 (prior to the Company’s acquisition of Radian as part of the Dames & Moore acquisition in 1999) at the Midland, Michigan facility of Dow Chemical Co., during which minor amounts of pollutants may have been released into the air in the course of performing maintenance of a hazardous waste incinerator. The complaint seeks payment of civil penalties, costs, attorney’s fees and other relief against Radian. The Michigan Attorney General’s office has offered to settle the matter for $1.2 million.

URS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Various other legal proceedings are pending against the Company and certain of its subsidiaries alleging, among other things, breaches of contract or negligence in connection with the performance of professional services. In some actions, parties are seeking damages, including punitive or treble damages that substantially exceed the Company’s insurance coverage. Based on the Company’s previous experience with claims settlement and the nature of the pending legal proceedings, however, the Company does not believe that any of the legal proceedings are likely to result in a settlement or judgment against the Company or its subsidiaries, that would materially exceed its insurance coverage or have a material adverse effect on its consolidated financial position, results of operations or cash flows.

NOTE 6. SEGMENT AND RELATED INFORMATION

Management has organized the Company by geographic divisions, consisting of the Parent, Domestic and International divisions. The Parent division is the legal entity comprised of the Parent Company alone. The Domestic division is comprised of all offices located in United States of America. The International division is comprised of all offices in the United Kingdom, Western Europe and the Middle East, the Asia/Pacific region (including Australia, New Zealand, Singapore and Indonesia) and the Americas excluding the U.S. (including Canada, Mexico, and Central and South America).

The Company provides services throughout the world. While services sold to companies in other countries may be performed and recognized within offices located in the U.S., generally, revenues are classified within the geographic area where the services are performed.

All of the Company’s operations share similar economic characteristics, and all of the Company’s business units are managed according to a consistent set of principal metrics and benchmarks determined by management within the Parent division. For example, management plans and controls the rates at which it bills professional and technical staff. Management also sets billable goals for all the Company’s professional and technical staff, and management aggregates all the indirect costs, including indirect labor expenses, labor fringe expenses, facilities costs, insurance and other miscellaneous expenses.

All of the Company’s operations provide planning, design, program and construction management and operations and maintenance services. These services are provided to federal governmental agencies by virtually all of the Company’s business units. Approximately two-thirds of the Company’s operating units provide these services to local and state governmental agencies and to private sector clients. The Company’s services are provided to the Company’s clients through a network of local office, client facilities and specific-job sites.

Services are provided in a similar manner. For example, the use of technology throughout the Company’s operating units is fairly consistent, as the Company employs computer-aided design (CAD) and project management systems for both general use and web-based job-specific applications.

Based on the above similarities, the Company has concluded that its U.S. operations should be aggregated as one reportable segment, and its international operations should be aggregated into another segment. Accounting policies for each of the reportable segments are the same as those of the Company.

The following table shows summarized financial information (in thousands) on the Company’s reportable segments. Included in the “Eliminations” column are elimination of inter-segment sales and elimination of investment in subsidiaries.

URS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


			/---------------------------Segments---------------------------/

As of January 31, 2003:	Parent		Domestic		International		Eliminations			Total

Net accounts receivable	$	—	$	837,469	$	87,842	$	—		$	925,311
Total assets	$	1,721,419	$	1,041,910	$	105,008	$	(653,541	)	$	2,214,796


			/---------------------------Segments---------------------------/

As of October 31, 2002:	Parent		Domestic		International		Eliminations			Total

Net accounts receivable	$	—	$	854,784	$	85,432	$	—		$	940,216
Total assets	$	1,697,939	$	1,068,449	$	103,391	$	(640,687	)	$	2,229,092


				/---------------------------Segments---------------------------/

For the Three Months Ended
January 31, 2003:	Parent			Domestic		International		Eliminations			Total

Revenues	$	—		$	701,828	$	57,002	$	(797	)	$	758,033
Operating income (loss)	$	(10,182	)	$	38,369	$	3,003	$	—		$	31,190


				/---------------------------Segments---------------------------/

For the Three Months Ended
January 31, 2002:	Parent			Domestic		International		Eliminations			Total

Revenues	$	—		$	495,040	$	50,035	$	(2,077	)	$	542,998
Operating income (loss)	$	(5,984	)	$	41,094	$	226	$	—		$	35,336

Operating income is defined as income before income taxes and net interest expense.

NOTE 7. SUPPLEMENTAL GUARANTEE INFORMATION

The following table includes disclosures regarding the Company’s guarantees as of January 31, 2003 in accordance with FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.

Maximum

Potential

Recourse

Approximate

Current

Amount of

Provision and

Guarantees

Terms of
Guarantees

Liability
Recorded

Future
Payments

Assets Held
as Collateral

(In thousands)

As of January 31, 2003:

Guarantee to Joint Venture (1)

Two years

—

4,500

None

(1) As a result of a credit facility agreement between Wachovia Bank, N.A. and EC III, LLC (“EC III”), the Company issued a guaranty to Wachovia Bank, N.A. The Company has a 50% interest in the EC III joint venture. In the event that EC III defaults on the credit facility, the Company is obligated to make payment of any outstanding principal amounts owed under the credit facility up to $4.5 million.

URS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 8. SUPPLEMENTAL GUARANTOR INFORMATION

In June 1999, the Company issued $200 million in aggregate principal amount of its 12 1/4% notes and, in connection with the EG&G acquisition, the Company issued $200 million in aggregate principal amount due at maturity of its 11 1/2% notes in August 2002. At that time, the Company also replaced its existing senior collateralized credit facility with a new $675 million senior secured credit facility.

Substantially all of the Company’s domestic subsidiaries have guaranteed the Company’s obligations under the Company’s senior secured credit facility, the 11 1/2% notes due 2009 and the 12 1/4% notes (collectively, the “Notes”). Each of the subsidiary guarantors has fully and unconditionally guaranteed the Company’s obligations on a joint and several basis.

Substantially all of the Company’s income and cash flows is generated by its subsidiaries. The Company has no operating assets or operations other than its investments in its subsidiaries. As a result, funds necessary to meet the Company’s debt service obligations are provided in large part by distributions or advances from its subsidiaries. Financial conditions and operating requirements of the subsidiary guarantors may limit the Company’s ability to obtain cash from its subsidiaries for the purposes of meeting its debt service obligations, including the payment of principal and interest on the notes and the senior secured credit facility. In addition, although the terms of the Notes and the senior secured credit facility limit the Company’s and the subsidiary guarantors’ ability to place contractual restrictions on the flows of funds to the Company, legal restrictions, including local regulations, and contractual obligations associated with secured loans, such as equipment financings, at the subsidiary level may restrict the subsidiary guarantors’ ability to pay dividends, make loans or other distributions to the Company.

Other restrictions imposed by the Notes and the senior secured credit facility include restrictions on the Company’s and the subsidiary guarantors’ ability to:

• incur additional indebtedness;

• pay dividends and make distributions to the Company’s stockholders;

• repurchase or redeem the Company’s stock;

• repay indebtedness that is junior to the senior secured credit facility or the Notes;

• make investments or other restricted payments;

• create liens securing debt or other encumbrances on the Company’s assets;

• acquire the assets of, or merge or consolidate with, other companies;

• sell or exchange assets;

• make capital expenditures;

URS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

• enter into sale-leaseback transactions; and

• enter into transactions with the Company’s shareholders and affiliates.

The senior secured credit facility also restricts the Company and its subsidiaries from entering into negative pledge agreements.

In addition, if a change of control occurs, each holder of the Notes will have the right to require the Company to repurchase all or part of the holder’s Notes at a price equal to 101% of the principal amount of the Notes, plus any accrued interest to the date of repurchase.

The following information sets forth the condensed consolidating balance sheets of the Company as of January 31, 2003 and October 31, 2002, the condensed consolidating statements of operations for the three months ended January 31, 2003 and 2002, and the condensed consolidating statements of cash flows for the three months ended January 31, 2003 and 2002. The EG&G acquisition was accounted for under the purchase accounting method and the financial position, results of operations and cash flows of EG&G businesses, as a “subsidiary guarantor”, have been included from August 22, 2002. Entries necessary to consolidate the Company and all of its subsidiaries are reflected in the eliminations column. Separate complete financial statements of the Company and its subsidiaries that guarantee the notes would not provide additional material information that would be useful in assessing the financial composition of such subsidiaries.

URS CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEET
(In thousands)
(unaudited)


			As of January 31, 2003

								Subsidiary
						Subsidiary		Non-
			Parent			Guarantors		Guarantors		Eliminations			Consolidated

ASSETS
Current assets:
	Cash and cash equivalents		$	(162	)	$	8,304	$	1,702	$	—		$	9,844
	Accounts receivable, net			—			837,469		87,842		—			925,311
	Prepaid expenses and other assets			24,342			17,675		1,140		—			43,157

		Total current assets		24,180			863,448		90,684		—			978,312
Property and equipment at cost, net				1,727			140,850		13,320		—			155,897
Goodwill, net				1,000,680			—		—		—			1,000,680
Purchased intangible assets, net				13,953			—		—		—			13,953
Investment in subsidiaries				653,541			—		—		(653,541	)		—
Other assets				27,338			37,612		1,004		—			65,954

			$	1,721,419		$	1,041,910	$	105,008	$	(653,541	)	$	2,214,796

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Current portion of long-term debt		$	17,667		$	14,888	$	128	$	—		$	32,683
	Accounts payable			(151	)		153,074		13,300		—			166,223
	Accrued expenses and other			74,903			139,923		14,938		—			229,764
	Billings in excess of costs and accrued earnings on contracts in process			—			85,632		9,375		—			95,007

		Total current liabilities		92,419			393,517		37,741					523,677
Long-term debt				881,056			35,110		780		—			916,946
Other				52,456			25,744		485		—			78,685

		Total liabilities		1,025,931			454,371		39,006		—			1,519,308

Total stockholders’ equity				695,488			587,539		66,002		(653,541	)		695,488

			$	1,721,419		$	1,041,910	$	105,008	$	(653,541	)	$	2,214,796

URS CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEET
(In thousands)


			As of October 31, 2002

								Subsidiary
						Subsidiary		Non-
			Parent			Guarantors		Guarantors		Eliminations			Consolidated

ASSETS
Current assets:
	Cash and cash equivalents		$	(4,000	)	$	11,240	$	2,732	$	—		$	9,972
	Accounts receivable, net			—			854,784		85,432		—			940,216
	Prepaid expenses and other assets			21,516			14,942		1,685		—			38,143

		Total current assets		17,516			880,966		89,849		—			988,331
Property and equipment at cost, net				1,802			142,109		12,613		—			156,524
Goodwill, net				1,001,629			—		—		—			1,001,629
Purchased intangible assets, net				14,500			—		—					14,500
Investment in subsidiaries				640,687			—		—		(640,687	)		—
Other assets				21,805			45,374		929		—			68,108

			$	1,697,939		$	1,068,449	$	103,391	$	(640,687	)	$	2,229,092

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Current portion of long-term debt		$	16,200		$	14,016	$	82	$	—		$	30,298
	Accounts payable			(783	)		189,923		15,249		—			204,389
	Accrued expenses and other			62,387			141,484		12,961		—			216,832
	Billings in excess of costs and accrued earnings on contracts in process			—			83,004		9,231		—			92,235

		Total current liabilities		77,804			428,427		37,523		—			543,754
Long-term debt				889,105			33,780		978		—			923,863
Other				50,445			30,292		153		—			80,890

		Total liabilities	$	1,017,354		$	492,499	$	38,654		—		$	1,548,507

Mandatorily redeemable Series D senior convertible participating preferred stock				46,733			—		—		—			46,733
Total stockholders’ equity				633,852			575,950		64,737		(640,687	)		633,852

			$	1,697,939		$	1,068,449	$	103,391	$	(640,687	)	$	2,229,092

URS CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
(In thousands)
(unaudited)


		Three Months Ended January 31, 2003

							Subsidiary
					Subsidiary		Non-
		Parent			Guarantors		Guarantors		Eliminations			Consolidated

Revenues		$	—		$	701,828	$	57,002	$	(797	)	$	758,033
Direct operating expenses			(1,501	)		455,378		30,517		(797	)		483,597

	Gross profit		1,501			246,450		26,485		—			274,436

Indirect expenses:
	Indirect, general and administrative		11,683			208,081		23,482		—			243,246
	Interest expense, net		20,621			472		187		—			21,280

			32,304			208,553		23,669		—			264,526

Income (loss) before taxes			(30,803	)		37,897		2,816		—			9,910
Income tax expense			3,534			6		420		—			3,960

Income (loss) before equity in net earnings of subsidiaries			(34,337	)		37,891		2,396		—			5,950
Equity in net earnings of subsidiaries			40,287			—		—		(40,287	)		—

Net income (loss)			5,950			37,891		2,396		(40,287	)		5,950
Preferred stock dividend			—			—		—		—			—

Net income (loss) available for common stockholders			5,950			37,891		2,396		(40,287	)		5,950
Other comprehensive income:
	Foreign currency translation adjustment		—			—		2,325		—			2,325

Comprehensive income (loss)		$	5,950		$	37,891	$	4,721	$	(40,287	)	$	8,275

URS CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
(In thousands)
(Unaudited)


		Three Months Ended January 31, 2002

							Subsidiary
					Subsidiary		Non-
		Parent			Guarantors		Guarantors			Eliminations			Consolidated

Revenues		$	—		$	495,040	$	50,035		$	(2,077	)	$	542,998
Direct operating expenses			—			306,666		26,227			(2,077	)		330,816

	Gross profits		—			188,374		23,808			—			212,182

Indirect expenses:
	Indirect, general and administrative		5,984			147,280		23,582			—			176,846
	Interest expense, net		12,088			409		119			—			12,616

			18,072			147,689		23,701			—			189,462

Income (loss) before taxes			(18,072	)		40,685		107			—			22,720
Income tax expense			9,109			56		265			—			9,430

Income (loss) before equity in net earnings of subsidiaries			(27,181	)		40,629		(158	)		—			13,290
Equity in net earnings of subsidiaries			40,471			—		—			(40,471	)		—

Net income (loss)			13,290			40,629		(158	)		(40,471	)		13,290
Preferred stock dividend			2,418			—		—			—			2,418

Net income (loss) available for common stockholders			10,872			40,629		(158	)		(40,471	)		10,872
Other comprehensive loss:
	Foreign currency translation adjustment		—			—		(2,978	)		—			(2,978	)

Comprehensive income (loss)		$	10,872		$	40,629	$	(3,136	)	$	(40,471	)	$	7,894

URS CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(In thousands)
(unaudited)


				Three Months Ended January 31, 2003

										Subsidiary
							Subsidiary			Non-
				Parent			Guarantors			Guarantors			Eliminations			Consolidated

Cash flows from operating activities:
	Net income (loss)			$	5,950		$	37,891		$	2,396		$	(40,287	)	$	5,950

Adjustments to reconcile net income to net cash provided by operating activities:
	Depreciation and amortization				1,617			9,073			807			—			11,497
	Amortization of financing fees				1,751			—			—			—			1,751
	Receivable allowances				—			(307	)		243			—			(64	)
	Deferred income taxes				(1,700	)		—			—			—			(1,700	)
	Stock compensation				2,956			—			—			—			2,956
	Equity in net earnings of subsidiaries				(40,287	)		—			—			40,287			—
Changes in current assets and liabilities, net of business acquired:
	Accounts receivable and costs and accrued earnings in excess of billings on contracts in process				—			17,623			(2,654	)		—			14,969
	Prepaid expenses and other assets				(535	)		(2,724	)		545			—			(2,714	)
	Accounts payable, accrued salaries and wages and accrued expenses				46,428			(67,661	)		(1,101	)		(2,900	)		(25,234	)
	Billings in excess of costs and accrued earnings on contracts in process				—			2,628			144			—			2,772
	Deferred compensation and other, net				(9,019	)		6,153			256			2,900			290

		Total adjustments			1,211			(35,215	)		(1,760	)		40,287			4,523

			Net cash provided by operating activities		7,161			2,676			636			—			10,473

Cash flows from investing activities:
	Capital expenditures				(44	)		(1,665	)		(1,460	)		—			(3,169	)

			Net cash used by investing activities		(44	)		(1,665	)		(1,460	)		—			(3,169	)

Cash flows from financing activities:
	Principal payments on long-term debt, bank borrowings and capital lease obligations				(41,692	)		(4,334	)		(206	)		—			(46,232	)
	Proceeds from notes payable and long-term debt				34,741			387			—			—			35,128
	Proceeds from sale of common shares and exercise of stock options				3,672			—			—			—			3,672

			Net cash used by financing activities		(3,279	)		(3,947	)		(206	)		—			(7,432	)

Net increase (decrease) in cash					3,838			(2,936	)		(1,030	)		—			(128	)
Cash and cash equivalents at beginning of year					(4,000	)		11,240			2,732			—			9,972

Cash and cash equivalents at end of year				$	(162	)	$	8,304		$	1,702		$	—		$	9,844

URS CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(In thousands)
(unaudited)


				Three Months Ended January 31, 2002

										Subsidiary
							Subsidiary			Non-
				Parent			Guarantors			Guarantors			Eliminations			Consolidated

Cash flows from operating activities:
	Net income (loss)			$	13,290		$	40,629		$	(158	)	$	(40,471	)	$	13,290

Adjustments to reconcile net income to net cash provided by operating activities:
	Depreciation and amortization				55			6,661			687			—			7,403
	Amortization of financing fees				921			—			—			—			921
	Receivable allowances				—			(551	)		1,849			—			1,298
	Deferred income taxes				1,176			—			—			—			1,176
	Stock compensation				518			—			—			—			518
	Equity in net earnings of subsidiaries				(40,471	)		—			—			40,471			—
Changes in current assets and liabilities, net of business acquired:
	Accounts receivable and costs and accrued earnings in excess of billings on contracts in process				—			24,267			137			—			24,404
	Prepaid expenses and other assets				1,043			633			(883	)		—			793
	Accounts payable, accrued salaries and wages and accrued expenses				24,057			(56,140	)		(2,393	)		3,133			(31,343	)
	Billings in excess of costs and accrued earnings on contracts in process				—			(2,133	)		437			—			(1,696	)
	Deferred compensation and other, net				1,213			7,962			(39	)		(3,133	)		6,003

		Total adjustments			(11,488	)		(19,301	)		(205	)		40,471			9,477

			Net cash provided (used) by operating activities		1,802			21,328			(363	)		—			22,767

Cash flows from investing activities:
	Capital expenditures				(755	)		(16,390	)		(524	)		—			(17,669	)

			Net cash used by investing activities		(755	)		(16,390	)		(524	)		—			(17,669	)

Cash flows from financing activities:
	Principal payments on long-term debt, bank borrowings and capital lease obligations				(9,200	)		(3,348	)		(1,114	)		—			(13,662	)
	Proceeds from sale of common shares and exercise of stock options				6,733			—			—			—			6,733

			Net cash provided (used) by financing activities		(2,467	)		(3,348	)		(1,114	)		—			(6,929	)

Net increase (decrease) in cash					(1,420	)		1,590			(2,001	)		—			(1,831	)
Cash and cash equivalents at beginning of year					1,699			9,371			12,328			—			23,398

Cash and cash equivalents at end of year				$	279		$	10,961		$	10,327		$	—		$	21,567

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

Our fiscal year ends on October 31. The following discussion contains, in addition to historical information, forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those described here. This Management’s Discussion and Analysis (“MD&A”) should be read in conjunction with the Consolidated Financial Statements and the footnotes for the three months ended January 31, 2003 included elsewhere in this report as well as the MD&A and the Consolidated Financial Statements included in the Annual Report on Form 10-K for the fiscal year ended October 31, 2002, which was previously filed with the Securities and Exchange Commission.

OVERVIEW

We are an engineering services firm with domestic and international clients that include local, state and federal government agencies and private clients in a broad array of industries. We earn revenues from fixed-price, cost-plus and time-and-materials contracts. The principal components of our direct operating costs are labor costs for employees who are directly involved in providing services to clients and subcontractor costs. Other direct operating costs include expenses associated with specific projects including materials and incidental expenditures. Indirect, general and administrative (“IG&A”) expenses include salaries and benefits for management, administrative, marketing and sales personnel, bid and proposal costs, occupancy and related overhead costs.

Substantially all of our cash flow is generated by our subsidiaries. As a result, funds necessary to meet our debt service obligations are provided in large part by distributions or advances from our subsidiaries. Under certain circumstances, legal and contractual restrictions as well as the financial condition and operating requirements of the subsidiaries may limit our ability to obtain cash from the subsidiaries.

On August 22, 2002, we acquired the EG&G businesses, providers of operations and maintenance services to various federal agencies, including NASA and the Departments of Justice, Energy and Transportation and Defense. Services offered by the EG&G businesses include the management of complex government installations and ranges, including oversight of all construction, testing and operation of base systems and processes, operation and maintenance of chemical agent disposal systems, management of base logistics and transportation and support of high security environments. For more information on the EG&G acquisition, please refer to Note 2, “Acquisition” to our Consolidated Financial Statements and Supplementary Data included in the Annual Report and Form 10-K for the fiscal year ended October 31, 2002.

During the past 15 months, our revenues and profit margins were impacted by certain negative trends in our state and local government business and our private sector business. We experienced a decrease in demand for our services provided to the state and local government clients. We believe this decrease in demand was the result of state and local governments deferring projects because of the current economic conditions and the related sharp decline in tax revenues at the state and local levels which are used to fund these projects. With respect to our clients in private sector, particularly with large industrial and petrochemical clients, we faced increased pricing pressures due to the current economic conditions, which have resulted in decreased margins in the first quarter of fiscal year 2003. In contrast, our federal government business remained strong and grew for our first quarter of fiscal year 2003. We believe that the EG&G acquisition will shift our business in the direction of markets that we believe offer good growth potential for the Company.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements and related footnotes. In preparing these financial statements, management has made its best estimates and judgments of certain amounts included in the financial statements, giving consideration to materiality. Historically, our estimates have not materially differed from actual results. Application of these accounting policies, however, involves exercise of judgment and use of assumptions as to future uncertainties. As a result, actual results could differ from these estimates.

Material accounting policies that we believe are the most critical to an investor’s understanding of our financial results and condition and require complex management judgment have been expanded and are discussed below. Information regarding our other accounting policies is included in our Annual Report on Form 10-K for the year ended October 31, 2002.

Revenue Recognition

We earn our revenues from cost-plus, fixed-price and time-and-materials contracts. At January 31, 2003, we had approximately 5,000 active jobs, none of which represented more than 5% of our total revenues for the quarter. If estimated total costs on any contract indicate a loss, we charge the entire estimated loss to operations in the period the loss first becomes known.

Cost-Plus Contracts. We have two major types of cost-plus contracts:

• Cost-Plus Fixed Fee. Under our cost-plus fixed fee contracts, we charge clients negotiated rates based on our direct and indirect costs. In negotiating a cost-plus contract, we estimate all recoverable direct and indirect costs and then add a profit component, which is either a percentage of total recoverable costs or a fixed negotiated fee, to arrive at a total dollar estimate for the project. We receive payment and recognize revenues based on the actual total number of labor hours we expend and total costs we incur. If the actual total number of labor hours we expended is lower than the total number of labor hours we have estimated, our revenues from that project will be lower than we have estimated. If the actual labor hours we expended exceed the initial negotiated amount, we must obtain a contract modification to receive payment and to recognize revenues for such overage.

• Cost-Plus Award Fee. Certain cost-plus contracts provide for an award or penalty fee based on performance criteria in lieu of a fixed fee. We recognize revenues to the extent of costs actually incurred plus a proportionate amount of the fee earned. We take these award fee or penalties on contracts into consideration when estimating sales and profit rates, and we record revenues related to the award fees when there is sufficient information to assess anticipated contract performance. If revenues related to the award or penalty fees are based solely on a single significant event, we generally do not record these fees until the event actually occurs.

Labor costs and subcontractor services are the principal components of our direct costs on cost-plus contracts. Some of these contracts include a provision that the total actual costs plus the fee will not exceed a guaranteed price negotiated with the client.

Federal Acquisition Regulations, which are applicable to all federal government contracts and which are partially incorporated in many local and state agency contracts, limit the recovery of certain specified indirect costs on contracts subject to such regulations. Cost-plus contracts covered by Federal Acquisition Regulations and certain state and local agencies also require an audit of actual costs and provide for upward or downward adjustments if actual recoverable costs differ from billed recoverable costs. In accordance with industry practice, most of our federal government contracts are subject to termination at the discretion of the client. Contracts typically provide for reimbursement of costs incurred and payment of fees earned through the date of such termination.

Fixed-Price Contracts. We have two major types of fixed-price contracts:

• Fixed-Price Per Unit (“FPPU”). Under our FPPU contracts, clients pay us a set fee for each service transaction that we complete. We are generally guaranteed a minimum number of service transactions at a fixed price, but our actual profit margins on any FPPU contract depend on the number of service transactions we ultimately complete. We recognize revenues under FPPU contracts as we complete and bill the related service transactions to our clients. If our costs per service transaction turn out to exceed our estimates, our profit margins will decrease and we may realize a loss on the project.

• Firm Fixed-Price (“FFP”). Our FFP contracts have historically accounted for most of our fixed-price contracts. Under FFP contracts, our clients agree to pay us an agreed sum negotiated in advance for the specified scope of work. We recognize revenues on FFP contracts using the percentage-of-completion method and in performing our calculations we include a proportion of the earnings that we expect to realize on a contract equal to the ratio that costs incurred bear to total estimated costs. We calculate percentage-of-completion on a contract-by-contract basis to arrive at the total estimated revenues recognized under fixed-price contracts. We do not adjust our revenues downward if we incur costs below our original estimated costs. Similarly, we do not recognize additional revenues if we incur costs in excess of estimates required to complete the project, unless there is an approved change of scope in the work to be performed. Accordingly, our profit margins on any FFP contract depend on the accuracy of our estimates and will increase to the extent that our actual costs are below the contracted amounts. Conversely, if our costs exceed these estimates, our profit margins will decrease and we may realize a loss on a project.

Time-and-Materials Contracts. Under our time-and-materials contracts, we negotiate hourly billing rates and charge our clients based on the actual time that we expend on a project. In addition, clients reimburse us for our actual out-of-pocket costs of materials and other direct incidental expenditures that we incur in connection with our performance under the contract. Our profit margins on time-and-materials contracts fluctuate based on actual labor and overhead costs that we directly charge or allocate to contracts compared with negotiated billing rates. We recognize revenues under these contracts based on the actual number of hours we spend on the projects plus any actual out-of-pocket costs of materials and other direct incidental expenditures that we incur on the projects.

Goodwill

In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets.” SFAS 142 supercedes Accounting Principles Board Opinion No. 17 and addresses the financial accounting and reporting standards for goodwill and intangible assets subsequent to their initial recognition. SFAS 142 requires that goodwill be separately disclosed from other intangible assets in the statement of financial position, and that it is no longer amortized. It also requires that goodwill and other intangible assets be tested for impairment at least annually. The provisions of SFAS 142 are effective for fiscal years beginning after December 15, 2001 and must be applied to all goodwill and other intangible assets that are recognized in an entity’s balance sheet at the beginning of that fiscal year. Early application of SFAS 142 is permitted for entities with fiscal years beginning after March 15, 2001, provided that the first interim period financial statements have not been issued previously. We adopted SFAS 142 on November 1, 2001 and ceased to amortize goodwill on that date.

As part of the adoption of SFAS 142, we completed the required initial impairment test and our annual impairment test for fiscal year 2002. These tests resulted in no impairment for fiscal year 2002. The adoption of SFAS 142 removed certain differences between book and tax income.

We regularly evaluate whether events and circumstances have occurred that indicate a possible impairment of goodwill. In determining whether there is an impairment of goodwill, we calculate the estimated fair value of our company considering the average closing sales price of our common stock and projected discounted cash flows as of the date we perform the impairment tests. We allocate a portion of the total fair value to different reporting units based on discounted cash flows. We then compare the resulting fair values by reporting units to their respective net book values, including goodwill. If the net book value of a reporting unit exceeds its fair value, we measure the amount of the impairment loss by

comparing the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. To the extent that the carrying amount of a reporting unit’s goodwill exceeds its implied fair value, we recognize a goodwill impairment loss. We believe the methodology we use in testing impairment of goodwill provides us with a reasonable basis in determining whether an impairment charge should be taken.

Due to the decrease in our average closing stock price, we evaluated goodwill for impairment for the first quarter of fiscal year 2003. In determining whether there is an impairment of goodwill, we took into consideration changes in our business mix and changes in our discounted cash flows, in addition to our average closing stock price. We concluded that there is no impairment of goodwill at January 31, 2003.

Allowance for Uncollectible Accounts Receivable

We reduce our accounts receivable and accrued earnings in excess of billings on contracts in process by an allowance for amounts that may become uncollectible in the future. We base our estimated allowance for uncollectible amounts primarily on management’s evaluation of the financial condition of our clients. Management regularly evaluates the adequacy of the allowance for uncollectible amounts by taking into consideration factors such as:

• the type of client — governmental agencies or private sector client;

• trends in actual and forecasted credit quality of the client, including delinquency and late payment history; and

• current economic conditions that may affect a client’s ability to pay.

Adoption of Statements of Financial Accounting Standards

In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146 (“SFAS 146”), “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS 146 replaces Emerging Issues Task Force (“EITF”) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Include Certain Costs Incurred in a Restructuring)” in its entirety and addresses the significant issues relating to recognition, measurement and reporting costs associated with an exit or disposal activity, including restructuring activities. Under EITF Issue No. 94-3, a liability is recognized as of the date of an entity’s commitment to an exit plan as well as its measurement and reporting. Pursuant to SFAS 146, a liability is recorded on the date on which the obligation is incurred and should be initially measured at fair value. SFAS 146 is effective for exit or disposal activities initiated after December 31, 2002. As permitted, we adopted SFAS 146 early on November 1, 2002 and adoption of SFAS 146 did not significantly impact our financial statements.

In November 2002, the FASB issued Financial Accounting Standards Board Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34.” FIN 45 clarifies the requirements of FASB Statement No. 5, “Accounting for Contingencies,” relating to the guarantor’s accounting for, and disclosure of, the issuance of certain types of guarantees. FIN 45 requires that upon issuance of a guarantee, the entity (i.e., the guarantor) must recognize a liability for the fair value of the obligation it assumes under that guarantee. The disclosure provisions of FIN 45 are effective for financial statements of interim or annual periods that end after December 15, 2002. FIN 45’s provisions for initial recognition and measurement should be applied on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor’s fiscal year-end. We did not issue or modify any guarantees during the first quarter of fiscal year 2003. The guarantor’s previous accounting for guarantees that were issued before the date of FIN 45’s initial application may not be revised or restated to reflect the effect of the recognition and measurement provisions of FIN 45. We have completed an initial evaluation of our guarantees for disclosures required by FIN 45, which are included in Note 7 of our first quarter of fiscal year 2003 financial statements, and will continue to evaluate whether we will be subject to the measurement and accounting provisions of FIN 45, which may impact future disclosures of our fiscal year 2003 financial statements.

In January 2003, the FASB issued Statement of Financial Accounting Standards No. 148 (“SFAS 148”), “Accounting for Stock-Based Compensation – Transition and Disclosure.” SFAS 148 amends FASB Statement No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements of the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS 148 is effective for fiscal years beginning after December 15, 2002. We intend to adopt SFAS 148 on November 1, 2003. We do not expect to adopt the fair value based method of accounting for stock-based employee compensation and therefore, adoption of SFAS 148 is expected to impact only our future disclosures, not our financial results.

In January 2003, the FASB issued Financial Accounting Standards Board Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities.” FIN 46 clarifies the requirements of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” and provides guidance to improve financial reporting for enterprises involved with variable interest entities. FIN 46 requires a variable interest entity to be consolidated by a company, which is subject to majority of the risk of loss or return from the variable interest entity’s activities. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. For the variable interest entities that existed prior to February 1, 2003, the consolidation requirements are effective for financial statements of interim or annual periods that end after June 15, 2003. We have completed our initial evaluation and do not believe that it is reasonably possible that adoption of FIN 46 will have a significant impact on our financial statements and thus no transitional disclosures have been included herein. We continue to evaluate its entities, as defined in FIN 46, to determine whether the reporting requirements of FIN 46 will impact our fiscal year 2003 financial statements.

EITF Consensus Issue No. 00-21 (the “Issue 00-21”), “Revenue Arrangements with Multiple Deliverables.” was first discussed at the July 2000 EITF meeting and was issued on February 6, 2002. It addresses the accounting for multiple element revenue arrangements, which involve more than one deliverable or unit of accounting in circumstances, where the delivery of those units takes place in different accounting periods. Issue 00-21 requires disclosures of the accounting policy for revenue recognition of multiple element revenue arrangements and the nature and description of such arrangements. The accounting and reporting requirements will be effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. We are currently evaluating our contracts to determine whether adoption of Issue 00-21 will have a significant impact to our financial statements.

RESULTS OF OPERATIONS

First quarter ended January 31, 2003 vs. January 31, 2002

Consolidated

Our revenues were $758.0 million for the quarter ended January 31, 2003, an increase of $215.0 million, or 39.6%, over the amount we reported for the same period last year. The increase in revenues was primarily due to the EG&G acquisition, which provided an additional $222.0 million in revenues. This increase was offset by a decrease in revenues from the state and local government sector, as a result of their significant reductions in current spending, as discussed in the “Overview” section above.

Direct operating expenses for the quarter ended January 31, 2003, which consist of direct labor, subcontractor costs, and other direct expenses, increased by $152.8 million, or 46.2% over the amount we reported for the same period last year, primarily as a result of the EG&G acquisition, which increased direct operating expenses by $159.8 million. This increase was offset by a decrease in direct operating expenses resulting from a decreased level of services provided to our state and local government clients.

Our gross profit was $274.4 million for the quarter ended January 31, 2003, an increase of $62.3 million, or 29.3%, over the amount we reported for the same period last year. The increase in gross profit was primarily due to the EG&G acquisition, which provided an additional $62.2 million in gross profit.

Indirect, general and administrative expenses (“IG&A”) for the quarter ended January 31, 2003 increased by $66.4 million, or 37.6%, over the amount we reported for the same period last year. The increase in IG&A expenses was primarily due to the addition of $53.6 million of expenses attributable to the EG&G businesses. The remaining $12.8 million of the total increase in IG&A expenses was due to increases in indirect labor, benefits and rental expense and an increase in depreciation expense as a result of the implementation of our new enterprise resource program. In addition, the conversion of Series D Preferred Stock to common stock constituted a change in control as defined under the terms of our employment arrangements with certain executives resulting in the accelerated vesting of restricted common stock previously granted, which increased benefit expense by approximately $2.5 million. Net interest expense for the quarter ended January 31, 2003 increased by $8.7 million due to the additional indebtedness incurred in connection with the EG&G acquisition.

Our earnings before income taxes were $9.9 million for the quarter ended January 31, 2003, compared to $22.7 million for the same period last year. Our effective income tax rates for the quarters ended January 31, 2003 and 2002 were approximately 40.0% and 41.5%, respectively.

We reported net income available for common stockholders of $6.0 million, or $0.18 per share on a diluted basis, for the quarter ended January 31, 2003, compared with $10.9 million, or $0.52 per share on a diluted basis, for the same period last year.

Our backlog of signed contracts was $2,639.8 million at January 31, 2003, as compared with $2,565.0 million at October 31, 2002.

Domestic Segment Including Parent Company

Revenues for the domestic segment were $701.8 million for the quarter ended January 31, 2003, an increase of $206.8 million, or 41.8%, over the amount we reported for the same period last year. The increase in revenues was primarily due to the EG&G acquisition, which provided an additional $222.0 million in revenues. This increase was offset by a decrease in revenues from our state and local government sector, as a result of their significant reductions in current spending, as discussed in the “Overview” section above.

Domestic direct operating expenses for the quarter ended January 31, 2003 increased $147.2 million, or 48.0% increase over the amount we reported for the same period last year, primarily as a result of the EG&G acquisition, which increased direct operating expenses by $159.8 million. This increase was offset by a decrease in direct operating expenses resulting from a decreased level of services provided to our state and local government clients.

Our gross profit was $248.0 million for the quarter ended January 31, 2003, an increase of $59.6 million, or 31.6%, over the amount we reported for the same period last year. The increase in gross profit was primarily due to the EG&G acquisition, which provided an additional $62.2 million in gross profit. This increase was offset by a decrease in revenue and gross profit from the state and local government sector, as a result of their significant reductions in current spending, as discussed in the “Overview” section above.

IG&A expenses for the quarter ended January 31, 2003 increased $ 66.5 million, or 43.3%, over the amount we reported for the same period last year. The increase in IG&A expenses was primarily due to the addition of $53.6 million of expenses attributable to the EG&G businesses. The remaining $12.9 million of the total increase in IG&A expenses was due to increases in indirect labor, benefits and rental expense and an increase in depreciation expense as a result of the implementation of our new enterprise resource program. In addition, the conversion of Series D Preferred Stock to common stock constituted a change in control as defined under the terms of our employment arrangements with certain executives resulting in the accelerated vesting of restricted common stock previously granted, which increased benefit

expense by approximately $2.5 million. Net interest expense for the quarter ended January 31, 2003 increased by $8.6 million due to the additional indebtedness incurred in connection with the EG&G acquisition.

International Segment

Revenues for the international segment were $57.0 million for the quarter ended January 31, 2003, an increase of $7.0 million, or 13.9%, over the amount we reported for the same period last year. The increase was mainly due to increased demand for our services and the effect of foreign currency exchange fluctuations.

Foreign direct operating expenses for the quarter ended January 31, 2003 increased $4.3 million, or 16.4% increase over the amount we reported for the same period last year, primarily due to increases in revenues and the effect of foreign currency exchange fluctuations. Our gross profit was $26.5 million for the quarter ended January 31, 2003, an increase of $2.7 million, or 11.3%, over the amount we reported for the same period last year. IG&A expenses for the quarter ended January 31, 2003 decreased $0.1 million, or 0.4%, over the amount we reported for the same period last year. The increase in gross profit was primarily due to the decrease in the use of subcontractors and the effect of foreign currency exchange fluctuations.

Liquidity and Capital Resources

Our liquidity and capital resources are set forth in the table below as of the periods indicated:


	January 31, 2003			October 31, 2002

	(in millions except ratio and percentage data)
Working capital	$	454.6		$	444.6
Working capital ratio		1.9			1.8
Cash and cash equivalent	$	9.8		$	10.0
Percentage of debt to equity		136.5	%		140.2	%

During the quarter ended January 31, 2003, we generated $10.5 million of cash from operations and generated $3.7 million of proceeds from sales of common stock and exercises of stock options. During the same period, we used $3.2 million for capital expenditures, repaid $8.2 million, net of additional borrowings, in debt and capital leases, and borrowed $34.7 million and repaid $37.6 million in aggregate amount under our revolving credit line at various times.

As a professional services organization, we are not capital intensive. Capital expenditures historically have been for computer-aided design, accounting and project management information systems, and general-purpose computer equipment to accommodate our growth. Capital expenditures, excluding purchases financed through capital leases, during the first quarter of fiscal years 2003 and 2002 were $3.2 million and $17.7 million, respectively.

Our primary sources of liquidity are cash flows from operations and borrowings under the credit line from our senior secured credit facility, if necessary. Our primary uses of cash are to fund our working capital and capital expenditures and to service our debt. We believe that our primary sources of liquidity will provide sufficient resources to fund our operating and capital expenditure needs for the next 12 months and beyond. We are dependent, however, on the cash flows generated by our subsidiaries and, consequently, on their ability to collect on their respective accounts receivables. Specifically:

• Substantially all of our cash flows are generated by our subsidiaries. As a result, funds necessary to meet our debt service obligations are provided in large part by distributions or advances from our subsidiaries. Under certain circumstances, legal and contractual restrictions as well as the financial condition and reporting requirements of the subsidiaries may limit our ability to obtain cash from the subsidiaries.

• Collections on accounts receivable can impact our operating cash flows. Management places significant emphasis on collection efforts and has assessed the allowance accounts for receivables as of January 31, 2003 and deemed it to be adequate; however, the current economic downturn may impact our clients’ credit-

worthiness and our ability to collect cash from them to meet our operating needs.

In addition, as discussed in more detail below, we are in the process of designing, testing and implementing a new company-wide accounting and project management information system (the “Enterprise Resource Program” or “ERP”). In connection with the implementation of the ERP, we continued to experience a temporary increase in accounts receivable of approximately $30 million as of January 31, 2003.

Below is a table containing information for our contractual obligations and commercial commitments followed by narrative descriptions.


					Principal Payments Due by Period
					(In thousands)

					Less Than						After 5
Long Term Debt (Principal Only):			Total		1 Year		1-3 Years		4-5 Years		Years

As of January 31, 2003:
	Senior secured credit facility credit (1)
		Term loan A	$	121,875	$	14,063	$	46,875	$	60,937	$	—
		Term loan B		349,125		3,500		7,000		89,250		249,375
	11 1/2% senior notes (1)			200,000		—		—		—		200,000
	12 1/4% senior subordinated notes			200,000		—		—		—		200,000
	8 5/8% senior subordinated debentures (1)			6,455		—		6,455		—		—
	6 1/2% senior subordinated debentures (1)			1,798		—		—		—		1,798
	Capital lease obligations			49,871		14,714		25,859		9,298		—
	Other indebtedness			1,523		406		693		424		—

			$	930,647	$	32,683	$	86,889	$	159,902	$	651,173


							Remaining
	Total		Total Committed to		Amount			Amount
Other Commitments	Commitment		Letters Of Credit		Drawn		Available

			(In thousands)
As of January 31, 2003:
Revolving line of credit (2)	$	200,000	$	54,060	$	24,356	$	121,584
Guarantee to Joint Venture (3)	$	4,500		—		—		—
Indemnity agreement to the Joint Venture Partner (4)	$	30,000		—		—		—

(1)		Amounts shown exclude remaining original issue discounts of $4,442, $909 and $23 for the 11 1/2% senior notes, 8 5/8% senior subordinated debentures, and the 6 1/2% convertible subordinated debentures, respectively.

(2)		Reflects the revolving line of credit under the senior secured credit facility and amounts committed to standby letters of credit as of January 31, 2003.

(3)		Amounts guaranteed in favor of Wachovia Bank, N.A. pursuant to the EC III, LLC (a 50%-owned joint venture) credit line facility, in a principal amount not to exceed $4,500.

(4)		An indemnity agreement in relation to bookkeeping services provided to JT3, LLC (a 50%-owned joint venture). The agreement, in favor of Raytheon Company, covers any potential losses and damages, and liabilities associated with lawsuits, in an amount not to exceed $30,000, resulting from misleading financial statements provided as a consequence of our gross negligence, intentional errors or omissions, or intentional misconduct.

Our Senior Secured Credit Facility. Simultaneously with the closing of the EG&G acquisition on August 22, 2002, we entered into a new senior secured credit facility, which provides for two term loan facilities in the aggregate amount of $475 million and a revolving credit facility in the amount of $200 million. The term loan facilities consist of term loan A, a $125 million tranche, and term loan B, a $350 million tranche. As of January 31, 2003, we had borrowed $471 million in principal amount under the term loan facilities, and we had outstanding standby letters of credit

aggregating to $54 million and an outstanding balance drawn on the revolving line of credit of $24 million, which reduced the amount available to us under our revolving credit facility to $122 million.

Principal amounts under term loan A will become due and payable on a quarterly basis beginning January 31, 2003, and thereafter through August 22, 2007. Annual required principal payments under term loan A will range from $14.1 million to a maximum of $32.8 million with term loan A expiring and all remaining outstanding principal amounts becoming due and payable in full on August 22, 2007. Principal amounts under term loan B will become due and payable on a quarterly basis beginning January 31, 2003, in the amount of $3.5 million per year through October 31, 2007, with all remaining outstanding principal amounts becoming due and payable in equal quarterly installments with the final payment due on August 22, 2008. The revolving credit facility expires and is payable in full on August 22, 2007.

All loans outstanding under the senior secured credit facility bear interest at a rate per annum equal to, at our option, either the base rate or LIBOR, in each case plus an “applicable margin.” The applicable margin will adjust according to a performance pricing grid based on our ratio of consolidated total funded debt to consolidated Earnings Before Income Taxes, Depreciation and Amortization (“EBITDA”). For the purposes of the senior secured credit facility, consolidated EBITDA is defined as consolidated net income plus interest, depreciation and amortization expenses, amounts set aside for the payment of taxes, for certain non-cash items and pro forma adjustments related to permitted acquisitions, including the EG&G acquisition. The terms “base rate” and “LIBOR” have meanings customary and appropriate for financings of this type.

Effective January 30, 2003, we amended our senior secured credit facility to increase the maximum leverage ratio of consolidated total funded debt to consolidated EBITDA for the first, second and third quarters of fiscal year 2003 to 4.50:1, for the fourth quarter of fiscal year 2003 to 4.25:1 and for the first quarter of fiscal year 2004 to 4.00:1. As a result of the amendment, the applicable interest rate margins for all borrowings initially increase by 0.25% through the second quarter of fiscal year 2004, but revert to the original interest rate margins if we achieve a leverage ratio of 3.90:1 or less for fiscal year 2003 or 3.75:1 or less for the first quarter of fiscal year 2004. The amendment also provides that the applicable interest rate margins for all borrowings will increase an additional 0.25% if our leverage ratio is greater than 3.70:1 and either Standard & Poor’s or Moody’s were to lower our credit rating to below BB- or Ba3, respectively.

As amended, for both the term loan A and the revolving credit facility, the applicable margin over LIBOR will range between 2.25% and 3.50%. For the term loan B, the corresponding applicable margin over LIBOR will range between 3.25% and 4.00%. As of January 31, 2003, the LIBOR applicable margin was 3.25% for the term loan A and the revolving line of credit and 3.75% for the term loan B.

We are required to prepay the loans under the senior secured credit facility with:

• 100% of the net cash proceeds of all assets disposed of by us and our subsidiaries guaranteeing the senior secured credit facility, net of selling expenses, taxes and prepayments of debt required in connection with the sale of such assets, subject to reinvestment rights within 270 days for asset dispositions in amounts less than $20 million and other limited exceptions;

• 100% of the net cash proceeds from the issuance of debt by us, provided that such percentage shall be reduced to 50% for any fiscal year in which our leverage ratio, measured as of the end of the preceding fiscal year, is less than 2.5 to 1, subject to limited exceptions;

• 50% of the net cash proceeds from the issuance of equity by us or our subsidiaries, subject to limited exceptions; and

• during fiscal year 2003, 100% of excess cash flows (as a result of the amendment), and commencing with fiscal 2004, 75% of excess cash flows, provided that such percentage shall be reduced to 50% for any fiscal year in which, measured as of the end of such fiscal year, our leverage ratio is less than 2.5 to 1.

We, at our option, may prepay the loans under the senior secured credit facility without premium or penalty, subject to reimbursement of the lenders’ prepayment fees in the case of prepayment of LIBOR loans.

Substantially all of our domestic subsidiaries are guarantors of the senior secured credit facility on a joint and several basis. Our and the guaranteeing entities’ obligations are secured by a first priority perfected security interest in existing and after-acquired personal property and material real property, including a pledge of the capital stock of the guaranteeing entities. The equity interests of non-U.S. subsidiaries are not required to be pledged as security; but are, subject to limited exceptions and a negative pledge.

In addition to the leverage coverage ratio discussed above, our senior secured credit facility requires us to maintain a minimum current ratio of 1.5:1, and a minimum fixed charge coverage ratio, which varies over the term of the facility between 1.05:1 and 1.20:1. Neither of these two financial covenants were modified by the amendment. The leverage coverage ratio, as amended, decreases over the term of the facility from a maximum of 4.50:1 to a minimum of 3:1. We are required to submit quarterly compliance certification to the lender under the facility. We were fully compliant with these covenants as of January 31, 2003.

The senior secured credit facility also contains customary affirmative and negative covenants including, without limitation, the following material covenants; restrictions on mergers, consolidations, acquisitions, asset sales, dividend payments, stock redemptions or repurchases, repayments of junior indebtedness, transactions with stockholders and affiliates, liens, capital expenditures, capital leases, further agreements restricting the creation of liens (also called a “negative pledge”), sale-leaseback transactions, indebtedness, contingent obligations, investments and joint ventures.

11 1/2% Senior Notes. Simultaneously with the closing of the EG&G acquisition on August 22, 2002, we issued $200.0 million in aggregate principal amount due at maturity of 11 1/2% Senior Notes due 2009 (the “11 1/2% notes”) for proceeds, net of $4.7 million of original issue discount, of approximately $195.3 million. Interest on the 11 1/2% notes is payable semi-annually in arrears on March 15 and September 15 of each year, commencing on March 15, 2003. The notes are effectively subordinate to our senior secured credit facility and senior to our subordinated indebtedness, including the 12 1/4% notes, the 8 5/8% debentures and the 6 1/2% debentures described below. As of January 31, 2003, all amounts remained outstanding under the 11 1/2% notes.

Substantially all of our domestic subsidiaries fully and unconditionally guarantee the 11 1/2% notes on a joint and several basis. We may redeem any of the 11 1/2% notes beginning on September 15, 2006 at the following redemption prices (expressed as percentages of the principal amount of the 11 1/2% notes so redeemed), if we do so during the 12-month period commencing on September 15 of the years set forth below, plus, in each case, accrued and unpaid interest, if any, to the date of redemption.


Year	Redemption Price

2006		105.750	%
2007		102.875	%
2008		100.000	%

In addition, at any time prior to or on September 15, 2005, we may redeem up to 35% of the principal amount of the 11 1/2% notes then outstanding with the net cash proceeds from the sale of capital stock. The redemption price will be equal to 111.50% of the principal amount of the redeemed 11 1/2% notes.

If we undergo a change of control, we may be required to repurchase the 11 1/2% notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of repurchase. If we sell certain of our assets, we may be required to use the net cash proceeds to repurchase the 11 1/2% notes at 100% of the principal amount plus accrued and unpaid interest to the date of purchase.

The indenture governing the 11 1/2% notes contains certain covenants that limit our ability to incur additional indebtedness, pay dividends or make distributions to our stockholders, repurchase or redeem capital stock, make investments or other restricted payments, incur subordinated indebtedness secured by a lien, enter into transactions with our stockholders and affiliates, sell assets and merge or consolidate with other companies. The indenture governing the

11 1/2% notes also contains customary events of default, including payment defaults, cross-defaults, breach of covenants, bankruptcy and insolvency defaults and judgment defaults.

12 1/4% Senior Subordinated Notes. In June 1999, we issued $200 million in aggregate principal amount of 12 1/4% Senior Subordinated Notes due 2009 (the “12 1/4% notes”), all of which remained outstanding at January 31, 2003. Interest on the 12 1/4% notes is payable semi-annually in arrears on May 1 and November 1 of each year. The 12 1/4% notes are effectively subordinate to our senior secured credit facility and our 11 1/2% notes.

Substantially all of our domestic subsidiaries fully and unconditionally guarantee the 12 1/4% notes on a joint and several basis. We may redeem the 12 1/4% notes, in whole or in part, at any time on or after May 1, 2004 at the following redemption prices (expressed as percentages of the principal amount of the 12 1/4% notes so redeemed), if we do so during the 12-month period commencing on May 1 of the years set forth below, plus, in each case, accrued and unpaid interest, if any, to the date of redemption:


Year	Redemption Price

2004		106.125	%
2005		104.083	%
2006		102.041	%
2007 and thereafter		100.000	%

If we undergo a change of control, we may be required to repurchase the 12 1/4% notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of repurchase. If we sell certain of our assets, we may be required to use the net cash proceeds to repurchase the 12 1/4% notes at 100% of the principal amount plus accrued and unpaid interest to the date of purchase.

The indenture governing the 12 1/4% notes contains certain covenants that limit our ability to incur additional indebtedness, pay dividends or make distributions to our stockholders, repurchase or redeem capital stock, make investments or other restricted payments, incur subordinated indebtedness secured by a lien, enter into transactions with our stockholders and affiliates, sell assets and merge or consolidate with other companies. The indenture governing the 12 1/4% notes also contains customary events of default, including payment defaults, cross-defaults, breach of covenants, bankruptcy and insolvency defaults and judgment defaults.

8 5/8% Senior Subordinated Debentures. Our 8 5/8% debentures are due in 2004. Interest on these debentures is payable semiannually in January and July of each year. Our 8 5/8% debentures are subordinate to our senior secured credit facility and the 11 1/2% notes. As of January 31, 2003, we owed approximately $6.5 million on the 8 5/8% debentures.

6 1/2% Convertible Subordinated Debentures. Our 6 1/2% debentures are due in 2012 and are convertible into shares of common stock at the rate of $206.30 per share. Interest on these debentures is payable semi-annually in February and August of each year. Sinking fund payments calculated to retire 70% of our 6 1/2% debentures prior to maturity began in February 1998. Our 6 1/2% debentures are subordinate to our senior secured credit facility and the 11 1/2% notes. As of January 31, 2003, we owed approximately $1.8 million on the 6 1/2% debentures.

Foreign Credit Lines. We maintain foreign lines of credit which are collateralized by assets of foreign subsidiaries at January 31, 2003. At January 31, 2003 and October 31, 2002, these foreign lines of credit provided for advances up to $3.6 million and $12.5 million, respectively. At January 31, 2003 and October 31, 2002, amounts outstanding under the foreign lines of credit were $0 million.

Capital Leases. As of January 31, 2003, we had approximately $49.9 million in obligations under our capital leases, consisting primarily of leases for office equipment, computer equipment, and furniture.

Other Related-Party Transactions. Mr. Koffel, Mr. Ainsworth, Mr. Rosenstein and certain of our other employees have disposed of shares of our common stock, both in cashless transactions with us and in market transactions, in connection with exercises of stock options, the vesting of restricted stock and the payment of withholding taxes due with respect to such exercises and vesting. Mr. Koffel, Mr. Ainsworth and Mr. Rosenstein, as well as our other named executives, and certain of our officers and employees may continue to dispose of shares of our common stock in this manner and for similar purposes.

In August 2002, the Company issued 100,000 shares of Series D Preferred Stock to Carlyle-EG&G, L.L.C. and EG&G Technical Services Holdings, L.L.C. (both of whom are affiliates of TCG Holdings, L.L.C.) in connection with the EG&G acquisition. The Series D Preferred Stock was subsequently converted (by a vote of the stockholders at a Special Meeting held on January 28, 2003) into a total of 2,106,674 shares of common stock (the “Series D Conversion”). As a result of the Series D Conversion, TCG Holdings, L.L.C. became the beneficial owner of an aggregate of 7,064,033 shares, or approximately 22%, of our outstanding common stock. The Series D Conversion constituted a change of control as defined under the terms of the employment arrangements with certain of our executives, resulting in, among other things, the accelerated vesting of 137,500 shares of restricted common stock previously granted to Mr. Koffel, and 75,000 shares of restricted common stock previously granted to Mr. Ainsworth. In order to satisfy tax withholding obligations arising from the vesting of their restricted stock, Messrs. Koffel and Ainsworth have surrendered 50,381 and 25,000 shares of common stock back to the Company, respectively.

Derivative Financial Instruments. We are exposed to risk of changes in interest rates as a result of borrowings under our credit facility. We periodically enter into interest rate derivatives to protect against this risk. During the first quarter of fiscal year 2003, we did not enter into any interest rate cap agreement due to our current percentage of fixed interest rate debt and to our assessment of the costs/benefits of interest rate hedging given the current low interest rate environment.

Enterprise Resource Program (ERP). During fiscal year 2001, we commenced a project to consolidate all of our accounting and project management information systems and transition to a new JD Edwards ERP system. Following our acquisition of Dames & Moore in 1999, we operated nine separate ERP systems, which were reduced to four systems by the end of fiscal year 2001. A portion of the new ERP system, covering a base of annualized revenues of approximately $1.2 billion, went live in August 2002. As anticipated, the initial implementation resulted in a temporary increase on this base of revenues and we continue to experience an increase in account receivables of approximately $30 million as of fiscal year 2003, as compared to August 2002, due to delays in billings. We plan to move the rest of our operations, with the exception of the operations of the EG&G businesses, onto the new system in fiscal year 2004. We estimate that full implementation of the new ERP system will reduce average days sales outstanding from the 100s to the low 90s.

We estimated the capitalized costs of implementing the new ERP system, including hardware, software licenses, consultants, and internal staffing costs, will be approximately $60.0 million. As of January 31, 2003, we had incurred total capitalized costs of approximately $53.9 million for this project, with the remaining costs to be incurred through fiscal year 2004. We have been financing a substantial portion of these costs through capital lease arrangements with various lenders. If, and to the extent, that financing cannot be obtained through capital leases, we will draw on our revolving line of credit as alternative financing for expenditures to be incurred for this project.

Risk Factors That Could Affect Our Financial Condition and Results of Operations

In addition to the other information included or incorporated by reference in this Form 10-Q, the following factors could affect our actual results:

Failure to integrate EG&G successfully will prevent us from achieving the anticipated cost savings and other benefits on which our decision to consummate the EG&G acquisition was based.

We will only achieve the efficiencies, cost reductions and other benefits that we expect to result from the EG&G acquisition if we can successfully integrate the EG&G businesses’ administrative, finance, technical and marketing organizations and implement appropriate operations, financial and management systems and controls. We may have

insufficient management resources to accomplish the integration, and even if we are able to integrate the EG&G acquisition successfully, we may not realize the level of cost savings and other benefits that we currently expect to achieve.

The integration of the EG&G businesses’ operations with our own will involve a number of risks, including:

• the disruption of our business and the diversion of our management’s attention from other business concerns;

• unanticipated expenses related to integration;

• the potential failure to realize anticipated revenue opportunities associated with the EG&G acquisition;

• the possible loss of our key professional employees or those of the EG&G businesses;

• the potential failure to replicate our operating efficiencies in the EG&G businesses’ operations;

• our increased complexity and diversity compared to our operations prior to the EG&G acquisition;

• the possible negative reaction of clients to the EG&G acquisition; and

• unanticipated problems or legal liabilities.

We have begun to experience the adverse effects of the current economic downturn. If the current downturn continues, our revenues could decline and our financial condition may deteriorate.

In response to reduced revenues caused by the current economic downturn, our clients are likely to cut costs and delay, curtail or cancel projects with us. Our clients may also demand better pricing terms. In addition, the current economic downturn may impact our clients’ creditworthiness and our ability to collect cash from them to meet our operating needs. We have already begun to notice a decrease in our margins, and in the future, we may see an increase in the average number of days to convert billed accounts receivable into cash. Accordingly, if current economic conditions do not improve, our revenues and profits may suffer and our operating cash may decrease.

Our substantial indebtedness could adversely affect our financial condition.

We are a highly leveraged company. As of January 31, 2003, we had approximately $949.6 million of outstanding indebtedness. This level of indebtedness could have a negative impact on us, including the following:

• it may limit our ability to borrow money or sell stock for working capital, capital expenditures, debt service requirements or other purposes;

• it may limit our flexibility in planning for, or reacting to, changes in our business;

• it may place us at a competitive disadvantage if we are more highly leveraged than our competitors;

• it may restrict us from making strategic acquisitions or exploiting business opportunities;

• it may make us more vulnerable to a downturn in our business or the economy; and

• it may require us to dedicate a substantial portion of our cash flows from operations to the repayments of our indebtedness; thereby, reducing the availability of cash flows to fund working capital, capital expenditures, and other general corporate purposes.

We may not be able to generate or borrow enough cash to service our debt.

We rely primarily on our ability to generate cash in the future to service our debt. If we do not generate sufficient cash flows to meet our debt service and working capital requirements, we may need to seek additional financing. If we are unable to obtain financing on terms that are acceptable to us, we could be forced to sell our assets or those of our subsidiaries to make up for any shortfall in our payment obligations under unfavorable circumstances.

Our senior secured credit facility and our obligations under our outstanding notes limit our ability to sell assets and also restrict our use of the proceeds from any such sale. Furthermore, substantial portions of our assets and those of our subsidiaries are, and may continue to be, intangible assets. Therefore, even if forced to do so, we may not be able to sell assets quickly enough or for sufficient amounts to enable us to meet our debt obligations.

Because we are a holding company, we may not be able to service our debt if our subsidiaries do not make sufficient distributions to us.

We have no direct operations and no significant assets other than the stock of our subsidiaries. Because we conduct our operations through our operating subsidiaries, we depend on those entities for dividends and other payments to generate the funds necessary to meet our financial obligations. Under certain circumstances, legal and contractual restrictions, as well as the financial condition and operating requirements of our subsidiaries, may limit our ability to obtain cash from our subsidiaries. The earnings from, or other available assets of, these operating subsidiaries may not be sufficient to make distributions to enable us to pay interest on our debt obligations when due or to pay the principal of such debt at maturity. Our non-guarantor subsidiaries are not obligated to make funds available to us for payments on the notes.

Restrictive covenants in our senior secured credit facility and the indentures relating to our outstanding notes and our other outstanding indebtedness may restrict our ability to pursue business strategies.

Our senior secured credit facility and our indentures relating to our outstanding notes and our other outstanding indebtedness restrict our ability to, among other things:

• incur additional indebtedness;

• pay dividends and make distributions to our stockholders;

• repurchase or redeem our stock;

• repay indebtedness that is junior to our senior secured credit facility or our outstanding indebtedness;

• make investments and other restricted payments;

• create liens securing debt or other encumbrances on our assets;

• enter into sale-leaseback transactions;

• make capital expenditures;

• enter into transactions with our stockholders and affiliates;

• sell or exchange assets; and

• acquire the assets of, or merge or consolidate with, other companies.

Our senior secured credit facility also requires us to maintain certain financial ratios, which we may not be able to do. The covenants in our various debt instruments may impair our ability to finance future operations or capital needs or to engage in other favorable business activities.

If we default on any of our various debt obligations, our lenders could require immediate repayment of the entire principal amount of that outstanding debt. If our lenders require immediate repayment on the entire principal amount, we will not be able to repay them in full, and our inability to meet our debt obligations could result in bankruptcy or otherwise impair our ability to maintain sufficient liquidity to continue our operations.

We derive a substantial portion of our revenues from contracts with government agencies. Any disruption in government funding or in our relationship with those agencies could adversely affect our business with these agencies, and as a result our revenues may suffer.

The demand for our government-related services is generally directly related to the level of government program funding. The success and further development of our business therefore depend, in large part, upon the continued funding of these government programs and upon our ability to participate in these government programs. Factors that could materially affect our government contracting business include:

• changes in and delays or cancellations of government programs, requirements or appropriations;

• curtailment of the use of government contracting firms;

• changes in political climate with regard to the funding or operation of the services we provide;

• budget constraints or policy changes resulting in delay or curtailment of expenditures relating to environmental remediation services;

• the adoption of new laws or regulations affecting our contracting relationships with local or state governments or the federal government;

• unsatisfactory performance on government contracts by us or one of our subcontractors, negative government audits or other events that may impair our relationship with local or state governments or the federal government;

• disputes with or improper activity by a subcontractor; and

• general economic conditions.

These and other factors could cause government agencies to reduce their purchases or orders under contracts, to exercise their rights to terminate contracts or not to exercise contract options for renewals or extensions, any of which could have a material adverse effect on our financial condition and operating results by reducing our revenues from these agencies.

As a government contractor, we are subject to a number of procurement rules and regulations and other public sector liabilities, any deemed violation of which could lead to fines or penalties or a loss of business.

We must comply with and are affected by laws and regulations relating to the formation, administration and performance of government contracts. These laws and regulations affect how we do business with our clients, and in some instances, impose added costs on our business. A violation of specific laws and regulations could result in the imposition of fines and penalties or the termination of our contracts. Moreover, as a federal government contractor, we must maintain our status as a responsible contractor. Failure to do so could lead to suspension or debarment, making us ineligible for federal government contracts and potentially ineligible for state and local government contracts.

Our government contracts may be terminated unexpectedly at any time prior to their completion, which may result in a reduction of our backlog or direct losses on partially completed government projects.

Government clients can terminate or modify any of their contracts with us at their convenience. In addition, many of these government contracts are subject to renewal or extension annually. If a government client terminates a contract or fails to renew or extend a contract, our backlog may be reduced or we may incur a loss, either of which could impair our financial condition and operating results. A termination due to our unsatisfactory performance could expose us to liability and have a material adverse effect on our ability to recompete for future contracts and orders. In cases where we are a subcontractor, the prime contract under which we are a subcontractor could be terminated, irrespective of the quality of our services as a subcontractor or our relationship with the relevant government agency. Our government clients can also reduce the value of existing contracts, issue modifications to a contract and control and potentially prohibit the export of our services and associated materials.

Unexpected terminations of all or some of our backlog of orders could negatively affect our anticipated revenues.

The contracts comprising our backlog estimates may not result in actual revenues in any particular period. These estimates are based on our experience under these contracts and similar contracts and may not be accurate. Our contract backlog consists of the amount billable at a particular point in time for future services under signed contracts, including the full term of multi-year government contracts for which funds must be appropriated on an annual basis.

Our business with government agencies could be adversely affected by a negative government audit.

Government agencies, such as the United States Defense Contract Audit Agency, or the DCAA, routinely audit and investigate government contractors. These agencies review a contractor’s performance under its contracts, cost structure and compliance with applicable laws, regulations and standards. If the agencies determine through these audits or reviews that costs were improperly allocated to specific contracts, they will not reimburse us for these costs, or if we have already been reimbursed, we must refund these costs. Therefore, an audit could result in substantial adjustments to our revenues and costs.

Moreover, if the agencies determine that we or a subcontractor engaged in improper conduct, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines and suspension or prohibition from doing business with the government, any of which could materially affect our financial condition. In addition, we could suffer serious harm to our reputation. Our compliance programs may not prevent improper conduct.

We may be unable to estimate accurately our costs in performing services for our clients. This may cause us to have low profit margins or incur losses.

We enter into three principal types of contracts with our clients: cost-plus, fixed-price and time-and-materials. Under cost-plus contracts, which are subject to a contract ceiling amount, we are reimbursed for allowable costs and fees, which may be fixed or performance-based. If our costs exceed the contract ceiling or are not allowable under the provisions of the contract or any applicable regulations, we may not be able to obtain reimbursement for all such costs. Under fixed-price contracts, we receive a fixed price irrespective of the actual costs we incur, and consequently, any costs in excess of the fixed price are absorbed by us. Under time-and-materials contracts, we are paid for labor at negotiated hourly billing rates and for certain expenses. Profitability on these types of contracts is driven by billable headcount and control of costs and overhead. Under each type of contract, if we are unable to control costs we incur in performing under the contract, our operating margins will decrease and our profitability will be adversely affected.

We may incur substantial costs of compliance with, or liabilities under, environmental laws and regulations.

A substantial portion of our business involves the planning, design and program and construction management of pollution control facilities as well as the assessment and management of remediation activities at hazardous waste sites or military bases. In addition, we contract with U.S. governmental entities to destroy hazardous materials, including chemical agents and weapons stockpiles. Federal laws, including the Resource Conservation and Recovery Act of 1976, as

amended, or RCRA, and the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, or CERCLA, as well as various state and local laws strictly regulate the handling, removal, treatment, transportation and disposal of toxic and hazardous substances and impose liability for environmental contamination caused by such substances. In addition, so-called “toxic tort” litigation has increased markedly in recent years as people injured by hazardous substances seek recovery for personal injuries and/or property damages. Liabilities related to environmental contamination or human exposure to hazardous substances, or a failure to comply with applicable regulations, could result in substantial costs to us, including clean-up costs, fines and civil or criminal sanctions, third party claims for property damage or personal injury or cessation of remediation activities.

Changes in environmental laws, regulations and programs could reduce demand for our environmental services, which could impact our revenues.

Federal and state laws, regulations, and programs related to pollution and environmental protection generate, either directly or indirectly, much of our environmental business. Accordingly, a relaxation or repeal of these laws and regulations, or changes in governmental policies regarding the funding, implementation or enforcement of these programs, could result in a decline in demand for environmental services and may have a material effect on our revenues. The outlook for congressional action on CERCLA legislation in fiscal year 2003 remains unclear.

Our liability for damages due to legal proceedings may be significant. Our insurance may not be adequate to cover this risk.

Various legal proceedings are pending against us and certain of our subsidiaries alleging, among other things, breaches of contract, failure to comply with environmental laws and regulations, or negligence in connection with our performance of professional services. In some actions, parties are seeking damages, including punitive or treble damages that substantially exceed our insurance coverage. Some actions involve allegations that are not insured. If we sustain damages materially exceed our insurance coverage, or the damages are not insured, there could be a material adverse effect on our liquidity, which could hamper our operations.

Our engineering practices, including general engineering and civil engineering services, involve professional judgments about the nature of soil conditions and other physical conditions, including the extent to which toxic and hazardous materials are present, and about the probable effect of procedures to mitigate problems or otherwise affect those conditions. If the judgments and the recommendations based upon those judgments are incorrect, we may be liable for resulting damages incurred by our clients. These resulting damages could be substantial.

Because we rely heavily on qualified technical professionals, a failure to attract and retain key professional personnel could impair our ability to provide services to our clients and otherwise conduct our business efficiently.

The ability to attract, retain and expand our staff of qualified technical professionals is an important factor in determining our future success. A shortage of professionals qualified in certain technical areas exists from time to time in the engineering and design industry. The market for these professionals is competitive, and we may not be successful in our efforts to continue to attract and retain such professionals. In addition, we rely heavily upon the experience and ability of our senior executive staff, and the loss of a significant number of these individuals could impair our ability to provide technical services to our clients and conduct our business effectively.

We may be unable to compete successfully in our industry.

We operate in highly fragmented and very competitive markets in our service areas. As a result, we compete with many engineering and consulting firms. Some of our competitors have achieved substantially more market penetration in certain of the markets in which we compete. In addition, some of our competitors have substantially more financial resources and/or financial flexibility than we do. Furthermore, the engineering and design industry is undergoing consolidation, particularly in the United States. These competitive forces could have a material adverse effect on our business, financial condition and results of operations by reducing our relative share in the markets we serve.

Our international operations are subject to a number of risks that could adversely affect the results from these operations and our overall business.

As a worldwide provider of engineering services, we have operations in over 20 countries and derive approximately 8% of our revenues from international operations for the first quarter ended January 31, 2003. International business is subject to a variety of special risks, including:

• greater risk of uncollectible accounts and longer collection cycles;

• currency fluctuations;

• logistical and communications challenges;

• potential adverse changes in laws and regulatory practices, including export license requirements, trade barriers, tariffs and tax laws;

• changes in labor conditions;

• exposure to liability under the Foreign Corrupt Practices Act; and

• general economic and political conditions in these foreign markets.

These and other risks associated with international operations could have a material adverse effect on the revenues derived from (and the profitability of) our international operations.

If we do not successfully integrate our new accounting and project management systems, our cash flows may be impaired and we may incur further costs to integrate or upgrade our systems.

We are in the process of designing, testing and installing a new company-wide accounting and project management system. In the event we do not complete the project successfully, we may experience reduced cash flows due to an inability to issue invoices to our customers and collect cash in a timely manner. Our current efforts to integrate EG&G’s operations with our own may further complicate implementation of the new system. If we ultimately decide to reject the new system, we will write off the costs incurred in connection with its implementation, which we estimate will be approximately $60 million.

Ownership of our common stock is concentrated among a few of our major stockholders who could act in concert to take actions that favor their own personal interests to the detriment of our interests and those of our other stockholders.

As of January 31, 2003, our officers and directors and their affiliates beneficially owned approximately 29% of the outstanding shares of our common stock. In addition, as a result of the EG&G acquisition and the conversion of our outstanding shares of Series D Preferred Stock into common stock, as of January 31, 2003, TCG Holdings, L.L.C. beneficially owned approximately 22% of the outstanding shares of our common stock. Because of the concentrated ownership of our common stock, these stockholders may be able to influence matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other business combination transactions. This concentration of ownership may also have the effect of delaying, deferring or preventing a change in control.

Negotiations with labor unions and possible work actions could divert management attention and disrupt operations, and new collective bargaining agreements or amendments to agreements could increase our labor costs and operating expenses.

As of January 31, 2003, approximately 8% of our employees were covered by collective bargaining agreements. These agreements are subject to amendments and negotiations on various dates ranging from April 2003 to August 2006. The outcome of any future negotiations relating to union representation or collective bargaining

agreements may not be favorable to us. We may reach agreements in collective bargaining that increase our operating expenses and lower our net income as a result of higher wages or benefits we negotiate. In addition, negotiations with unions could divert management attention and disrupt operations, which may adversely affect our results of operations. If we are unable to negotiate acceptable collective bargaining agreements, we may have to address the threat of union-initiated work actions, including strikes. Depending on the nature of the threat or the type and duration of any work action, these actions could disrupt our operations and adversely affect our operating results.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to changes in interest rates as a result of our borrowings under our new senior secured credit facility. Based on outstanding indebtedness of $471 million under our new senior secured credit facility at January 31, 2003, if market rates averaged 1% more in the next twelve months, our net of tax interest expense would increase by approximately $2.8 million. Conversely, if market rates averaged 1% less over the next twelve months, our net of tax interest expense would decrease by approximately $2.8 million.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures. Our Chief Executive Officer and Chief Financial Officer are responsible for establishing and maintaining “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15d-14(c)) for the Company. Our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures as of a date within 90 days before the filing date of this Quarterly Report on Form 10-Q, have concluded that our disclosure controls and procedures are effective.

(b) Changes in internal controls. In the quarter ended January 31, 2003, we did not make any significant changes in our internal controls or in other factors that could significantly affect these controls.

PART II
OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See Note 5 of the Consolidated Financial Statements.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

See the discussion of the Series D Conversion at Item 4 below.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

In August 2002 we issued 100,000 shares of Series D Senior Convertible Participating Preferred Stock (the “Series D Preferred Stock”) to Carlyle-EG&G, L.L.C. and EG&G Technical Services Holdings, L.L.C. (both of whom are affiliates of TCG Holdings, L.L.C.) in connection with the EG&G acquisition. The aggregate liquidation preference of the Series D Preferred Stock was approximately $46.7 million. Holders of the Series D Preferred Stock had voting rights in

respect of certain corporate actions, including, but not limited to, certain changes to our certificate of incorporation and bylaws, the creation of senior equity securities and certain transactions with respect to the common stock. The holders of the Series D Preferred Stock shared on an as-converted basis in any dividends or distributions that we paid on the common stock.

At a special meeting held on January 28, 2003, our stockholders approved the conversion of all outstanding shares of the Series D Preferred Stock into 2,106,674 shares of voting common stock (the “Series D Conversion”). A total of 24,999,121 votes were cast for, and 98,042 votes were cast against, the Series D Conversion, and there were a total 31,104 abstentions and broker non-votes.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

The following exhibits are filed herewith:


	10.1		First Amendment to the Credit Agreement, dated as of January 30, 2003, by and among URS Corporation, the lenders named therein, Credit Suise First Boston Corporation, as co-lead Arranger and Administrative Agent, and Wells Fargo Bank, National Association, as co-lead Arranger and Syndication Agent. FILED HEREWITH.

	99.1		Certification of the Company’s Chief Executive Officer, Martin M. Koffel, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. FILED HEREWITH.

	99.2		Certification of the Company’s Chief Financial Officer, Kent P. Ainsworth, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. FILED HEREWITH.

(b) Reports on Form 8-K

We filed the following reports on Form 8-K during the quarter ended January 31, 2003:

• Form 8-K/A dated November 5, 2002 to amend the Form 8-K dated September 5, 2002 and to furnish pro forma audited and unaudited consolidated financial information of EG&G Technical Services, Inc. and Subsidiary, and Lear Siegler Services, Inc. and Subsidiaries and unaudited pro forma condensed combined financial information of URS Corporation and its subsidiaries, giving effect to the EG&G acquisition and the related financing as if they had occurred on November 1, 2000.

• Form 8-K dated November 15, 2002 to furnish financial information within the Consolidated Financial Statements as if the Company adopted Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142) at November 1, 1998.

• Form 8-K dated December 23, 2002 to furnish the fourth-quarter and year-end results for the period and year ended October 31, 2002 pursuant to Item 9 of Form 8-K. Such information shall not be deemed to be “filed” for the purpose of Section 18 of the Act (or otherwise subject to the liabilities of that section) and shall not be deemed incorporated by reference into this report on Form 10-Q.

• Form 8-K dated January 28, 2003 to report the approval by our stockholders of the Series D Conversion.

SIGNATURES

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


Dated March 17, 2003		URS CORPORATION
		/s/ Kent P. Ainsworth

		Kent P. Ainsworth
		Executive Vice President and
		Chief Financial Officer
		(Principal Accounting Officer)

CERTIFICATIONS

I, Martin M. Koffel, certify that:

1. I have reviewed this quarterly report on Form 10-Q of URS Corporation;

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;

3. Based on my knowledge, the 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;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)
evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c)
presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a)
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


Date: March 17, 2003		/s/ Martin M. Koffel

		Martin M. Koffel
		Chief Executive Officer

CERTIFICATIONS

I, Kent P. Ainsworth, certify that:


Date: March 17, 2003		/s/ Kent P. Ainsworth

		Kent P. Ainsworth
		Chief Financial Officer


Exhibit No.		Description
10.1		First Amendment to the Credit Agreement, dated as of January 30, 2003, by and among URS Corporation, the lenders named therein, Credit Suise First Boston Corporation, as co-lead Arranger and Administrative Agent, and Wells Fargo Bank, National Association, as co-lead Arranger and Syndication Agent.

99.1		Certification of the Company’s Chief Executive Officer, Martin M. Koffel, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

99.2		Certification of the Company’s Chief Financial Officer, Kent P. Ainsworth, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(1)		As a result of a credit facility agreement between Wachovia Bank, N.A. and EC III, LLC (“EC III”), the Company issued a guaranty to Wachovia Bank, N.A. The Company has a 50% interest in the EC III joint venture. In the event that EC III defaults on the credit facility, the Company is obligated to make payment of any outstanding principal amounts owed under the credit facility up to $4.5 million.

	•		incur additional indebtedness;

	•		pay dividends and make distributions to the Company’s stockholders;

	•		repurchase or redeem the Company’s stock;

	•		repay indebtedness that is junior to the senior secured credit facility or the Notes;

	•		make investments or other restricted payments;

	•		create liens securing debt or other encumbrances on the Company’s assets;

	•		acquire the assets of, or merge or consolidate with, other companies;

	•		sell or exchange assets;

	•		make capital expenditures;

	•		enter into sale-leaseback transactions; and

	•		enter into transactions with the Company’s shareholders and affiliates.

	•		Cost-Plus Fixed Fee. Under our cost-plus fixed fee contracts, we charge clients negotiated rates based on our direct and indirect costs. In negotiating a cost-plus contract, we estimate all recoverable direct and indirect costs and then add a profit component, which is either a percentage of total recoverable costs or a fixed negotiated fee, to arrive at a total dollar estimate for the project. We receive payment and recognize revenues based on the actual total number of labor hours we expend and total costs we incur. If the actual total number of labor hours we expended is lower than the total number of labor hours we have estimated, our revenues from that project will be lower than we have estimated. If the actual labor hours we expended exceed the initial negotiated amount, we must obtain a contract modification to receive payment and to recognize revenues for such overage.

	•		Cost-Plus Award Fee. Certain cost-plus contracts provide for an award or penalty fee based on performance criteria in lieu of a fixed fee. We recognize revenues to the extent of costs actually incurred plus a proportionate amount of the fee earned. We take these award fee or penalties on contracts into consideration when estimating sales and profit rates, and we record revenues related to the award fees when there is sufficient information to assess anticipated contract performance. If revenues related to the award or penalty fees are based solely on a single significant event, we generally do not record these fees until the event actually occurs.

	•		Fixed-Price Per Unit (“FPPU”). Under our FPPU contracts, clients pay us a set fee for each service transaction that we complete. We are generally guaranteed a minimum number of service transactions at a fixed price, but our actual profit margins on any FPPU contract depend on the number of service transactions we ultimately complete. We recognize revenues under FPPU contracts as we complete and bill the related service transactions to our clients. If our costs per service transaction turn out to exceed our estimates, our profit margins will decrease and we may realize a loss on the project.

	•		Firm Fixed-Price (“FFP”). Our FFP contracts have historically accounted for most of our fixed-price contracts. Under FFP contracts, our clients agree to pay us an agreed sum negotiated in advance for the specified scope of work. We recognize revenues on FFP contracts using the percentage-of-completion method and in performing our calculations we include a proportion of the earnings that we expect to realize on a contract equal to the ratio that costs incurred bear to total estimated costs. We calculate percentage-of-completion on a contract-by-contract basis to arrive at the total estimated revenues recognized under fixed-price contracts. We do not adjust our revenues downward if we incur costs below our original estimated costs. Similarly, we do not recognize additional revenues if we incur costs in excess of estimates required to complete the project, unless there is an approved change of scope in the work to be performed. Accordingly, our profit margins on any FFP contract depend on the accuracy of our estimates and will increase to the extent that our actual costs are below the contracted amounts. Conversely, if our costs exceed these estimates, our profit margins will decrease and we may realize a loss on a project.

	•		the type of client — governmental agencies or private sector client;

	•		trends in actual and forecasted credit quality of the client, including delinquency and late payment history; and

	•		current economic conditions that may affect a client’s ability to pay.

	•		Substantially all of our cash flows are generated by our subsidiaries. As a result, funds necessary to meet our debt service obligations are provided in large part by distributions or advances from our subsidiaries. Under certain circumstances, legal and contractual restrictions as well as the financial condition and reporting requirements of the subsidiaries may limit our ability to obtain cash from the subsidiaries.

	•		Collections on accounts receivable can impact our operating cash flows. Management places significant emphasis on collection efforts and has assessed the allowance accounts for receivables as of January 31, 2003 and deemed it to be adequate; however, the current economic downturn may impact our clients’ credit-

	•		100% of the net cash proceeds of all assets disposed of by us and our subsidiaries guaranteeing the senior secured credit facility, net of selling expenses, taxes and prepayments of debt required in connection with the sale of such assets, subject to reinvestment rights within 270 days for asset dispositions in amounts less than $20 million and other limited exceptions;

	•		100% of the net cash proceeds from the issuance of debt by us, provided that such percentage shall be reduced to 50% for any fiscal year in which our leverage ratio, measured as of the end of the preceding fiscal year, is less than 2.5 to 1, subject to limited exceptions;

	•		50% of the net cash proceeds from the issuance of equity by us or our subsidiaries, subject to limited exceptions; and

	•		during fiscal year 2003, 100% of excess cash flows (as a result of the amendment), and commencing with fiscal 2004, 75% of excess cash flows, provided that such percentage shall be reduced to 50% for any fiscal year in which, measured as of the end of such fiscal year, our leverage ratio is less than 2.5 to 1.

	•		the disruption of our business and the diversion of our management’s attention from other business concerns;

	•		unanticipated expenses related to integration;

	•		the potential failure to realize anticipated revenue opportunities associated with the EG&G acquisition;

	•		the possible loss of our key professional employees or those of the EG&G businesses;

	•		the potential failure to replicate our operating efficiencies in the EG&G businesses’ operations;

	•		our increased complexity and diversity compared to our operations prior to the EG&G acquisition;

	•		the possible negative reaction of clients to the EG&G acquisition; and

	•		unanticipated problems or legal liabilities.

	•		it may limit our ability to borrow money or sell stock for working capital, capital expenditures, debt service requirements or other purposes;

	•		it may limit our flexibility in planning for, or reacting to, changes in our business;

	•		it may place us at a competitive disadvantage if we are more highly leveraged than our competitors;

	•		it may restrict us from making strategic acquisitions or exploiting business opportunities;

	•		it may make us more vulnerable to a downturn in our business or the economy; and

	•		it may require us to dedicate a substantial portion of our cash flows from operations to the repayments of our indebtedness; thereby, reducing the availability of cash flows to fund working capital, capital expenditures, and other general corporate purposes.

	•		incur additional indebtedness;

	•		pay dividends and make distributions to our stockholders;

	•		repurchase or redeem our stock;

	•		repay indebtedness that is junior to our senior secured credit facility or our outstanding indebtedness;

	•		make investments and other restricted payments;

	•		create liens securing debt or other encumbrances on our assets;

	•		enter into sale-leaseback transactions;

	•		make capital expenditures;

	•		enter into transactions with our stockholders and affiliates;

	•		sell or exchange assets; and

	•		acquire the assets of, or merge or consolidate with, other companies.

	•		changes in and delays or cancellations of government programs, requirements or appropriations;

	•		curtailment of the use of government contracting firms;

	•		changes in political climate with regard to the funding or operation of the services we provide;

	•		budget constraints or policy changes resulting in delay or curtailment of expenditures relating to environmental remediation services;

	•		the adoption of new laws or regulations affecting our contracting relationships with local or state governments or the federal government;

	•		unsatisfactory performance on government contracts by us or one of our subcontractors, negative government audits or other events that may impair our relationship with local or state governments or the federal government;

	•		disputes with or improper activity by a subcontractor; and

	•		general economic conditions.

	•		greater risk of uncollectible accounts and longer collection cycles;

	•		currency fluctuations;

	•		logistical and communications challenges;

	•		potential adverse changes in laws and regulatory practices, including export license requirements, trade barriers, tariffs and tax laws;

	•		changes in labor conditions;

	•		exposure to liability under the Foreign Corrupt Practices Act; and

	•		general economic and political conditions in these foreign markets.

	•		Form 8-K/A dated November 5, 2002 to amend the Form 8-K dated September 5, 2002 and to furnish pro forma audited and unaudited consolidated financial information of EG&G Technical Services, Inc. and Subsidiary, and Lear Siegler Services, Inc. and Subsidiaries and unaudited pro forma condensed combined financial information of URS Corporation and its subsidiaries, giving effect to the EG&G acquisition and the related financing as if they had occurred on November 1, 2000.

	•		Form 8-K dated November 15, 2002 to furnish financial information within the Consolidated Financial Statements as if the Company adopted Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142) at November 1, 1998.

	•		Form 8-K dated December 23, 2002 to furnish the fourth-quarter and year-end results for the period and year ended October 31, 2002 pursuant to Item 9 of Form 8-K. Such information shall not be deemed to be “filed” for the purpose of Section 18 of the Act (or otherwise subject to the liabilities of that section) and shall not be deemed incorporated by reference into this report on Form 10-Q.

	•		Form 8-K dated January 28, 2003 to report the approval by our stockholders of the Series D Conversion.

1.		I have reviewed this quarterly report on Form 10-Q of URS Corporation;

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;

3.		Based on my knowledge, the 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;

4.		The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

	a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

	b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

	c)	presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

	a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

	b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and