-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Gk1/2h8xJ56d5tc03z8e8k3zgCSmjwjFn+yNTLVUZsfE40nT1PS71nAnyGcj4kfD Kv+9dOvU5s8tLqfd/REavg== 0001053949-01-500176.txt : 20010615 0001053949-01-500176.hdr.sgml : 20010615 ACCESSION NUMBER: 0001053949-01-500176 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010430 FILED AS OF DATE: 20010614 FILER: COMPANY DATA: COMPANY CONFORMED NAME: URS CORP /NEW/ CENTRAL INDEX KEY: 0000102379 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-ENGINEERING SERVICES [8711] IRS NUMBER: 941381538 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-07567 FILM NUMBER: 1660700 BUSINESS ADDRESS: STREET 1: 100 CALIFORNIA ST STREET 2: STE 500 CITY: SAN FRANCISCO STATE: CA ZIP: 94111 BUSINESS PHONE: 4157742700 MAIL ADDRESS: STREET 1: 100 CALIFORNIA STREET STREET 2: SUITE 500 CITY: SAN FRANCISCO STATE: CA ZIP: 94111 FORMER COMPANY: FORMER CONFORMED NAME: THORTEC INTERNATIONAL INC DATE OF NAME CHANGE: 19900222 FORMER COMPANY: FORMER CONFORMED NAME: URS CORP /DE/ DATE OF NAME CHANGE: 19871214 10-Q 1 e900603_r1.txt 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 April 30, 2001 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from _____________ to _____________ Commission file number 1-7567 URS CORPORATION (Exact name of registrant as specified in its charter) Delaware 94-1381538 (State or other jurisdiction (I.R.S. Employer of incorporation) Identification No.) 100 California Street, Suite 500 San Francisco, California 94111-4529 (Address of principal executive offices) (Zip Code) (415) 774-2700 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at June 4, 2001 ----- --------------------------- Common Stock, $.01 par value 17,656,741 URS CORPORATION AND SUBSIDIARIES This Form 10-Q for the quarter ended April 30, 2001, 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 highly leveraged position; our ability to service our debt; 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 the attached Management's Discussion and Analysis of Financial Condition and Results of Operations, as well as in our Annual Report on Form 10-K for the year ended October 31, 2000, and 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. Financial Statements Consolidated Balance Sheets April 30, 2001 and October 31, 2000 .......................... 3 Consolidated Statements of Operations Three and six months ended April 30, 2001 and 2000 ........... 4 Consolidated Statements of Cash Flows Six months ended April 30, 2001 and 2000 ..................... 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ................ 15 Item 3. Quantitative and Qualitative Disclosures About Market Risk ...... 22 PART II. OTHER INFORMATION: Item 1. Legal Proceedings ............................................... 23 Item 2. Changes in Securities and Use of Proceeds ....................... 23 Item 3. Defaults Upon Senior Securities ................................. 23 Item 4. Submission of Matters to a Vote of Security Holders ............. 23 Item 5. Other Information ............................................... 23 Item 6. Exhibits and Reports on Form 8-K ................................ 24 2 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS URS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except per share data)
April 30, 2001 October 31, 2000 -------------- ---------------- (unaudited) ASSETS Current assets: Cash......................................................................... $ 9,296 $ 23,693 Accounts receivable.......................................................... 452,182 464,074 Costs and accrued earnings in excess of billings on contracts in process..... 307,082 281,757 Less receivable allowances................................................... (31,634) (36,826) ----------- ----------- Net accounts receivable................................................ 727,630 709,005 ----------- ----------- Income taxes recoverable..................................................... -- 16,668 Deferred income taxes........................................................ 4,926 4,859 Prepaid expenses and other assets............................................ 25,405 22,325 ----------- ----------- Total current assets.................................................. 767,257 776,550 Property and equipment, net..................................................... 94,948 88,661 Goodwill, net................................................................... 508,057 514,611 Other assets.................................................................... 46,384 47,312 ----------- ----------- $ 1,416,646 $ 1,427,134 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt............................................ $ 51,943 $ 45,223 Accounts payable............................................................. 118,535 125,165 Accrued salaries and wages................................................... 56,959 92,212 Accrued expenses and other................................................... 33,604 28,915 Billings in excess of costs and accrued earnings on contracts in process..... 100,699 90,475 ----------- ----------- Total current liabilities............................................. 361,740 381,990 Long-term debt.................................................................. 585,023 603,128 Deferred income taxes........................................................... 32,057 33,157 Deferred compensation and other................................................. 41,688 40,052 ----------- ----------- Total liabilities..................................................... 1,020,508 1,058,327 ----------- ----------- Commitments and contingencies (Note 2) Mandatorily redeemable Series B exchangeable convertible preferred stock, par value $1.00; authorized 150 shares; issued 53 and 51, respectively; liquidation preference $115,435 and $111,013, respectively..... 115,435 111,013 ----------- ----------- Stockholders' equity: Common shares, par value $.01; authorized 50,000 shares; issued 17,505 and 16,834 shares, respectively....................................... 175 168 Treasury stock............................................................... (287) (287) Additional paid-in capital................................................... 143,221 137,389 Other comprehensive income (loss)............................................ (3,229) (2,412) Retained earnings............................................................ 140,823 122,936 ----------- ----------- Total stockholders' equity............................................ 280,703 257,794 ----------- ----------- $ 1,416,646 $ 1,427,134 =========== ===========
See Notes to Consolidated Financial Statements 3 URS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
Three months ended Six months ended April 30, April 30, ------------------------------- ------------------------------- 2001 2000 2001 2000 ---- ---- ---- ---- (unaudited) (unaudited) Revenues........................................... $ 545,996 $ 535,401 $ 1,061,620 $ 1,048,278 ----------- ----------- ----------- ----------- Expenses: Direct operating............................... 319,727 309,209 625,260 619,385 Indirect, general and administrative........... 185,711 186,431 361,229 355,465 Interest expense, net.......................... 16,907 19,230 34,525 37,213 ----------- ----------- ----------- ----------- 522,345 514,870 1,021,014 1,012,063 ----------- ----------- ----------- ----------- Income before taxes................................ 23,651 20,531 40,606 36,215 Income tax expense................................. 10,770 9,450 18,270 16,500 ----------- ----------- ----------- ----------- Net income......................................... 12,881 11,081 22,336 $ 19,715 Preferred stock dividend........................... 2,235 2,059 4,449 4,111 ----------- ----------- ----------- ----------- Net income available for common stockholders.... 10,646 9,022 17,887 15,604 Other comprehensive income (loss).................. (938) (1,496) (817) (1,413) ----------- ----------- ----------- ----------- Comprehensive income............................... $ 9,708 $ 7,526 $ 17,070 $ 14,191 =========== =========== =========== =========== Net income per common share: Basic.......................................... $ .62 $ .56 $ 1.05 $ .97 =========== =========== =========== =========== Diluted........................................ $ .55 $ .51 $ .97 $ .91 =========== =========== =========== =========== Weighted average shares outstanding: Basic.......................................... 17,202 16,052 17,045 15,997 =========== =========== =========== =========== Diluted........................................ 23,621 21,549 23,101 21,724 =========== =========== =========== ===========
See Notes to Consolidated Financial Statements 4 URS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Six Months Ended April 30, ---------------------------- 2001 2000 ---- ---- (unaudited) Cash flows from operating activities: Net income................................................................. $ 22,336 $ 19,715 --------- --------- Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation and amortization........................................... 20,277 21,619 Amortization of financing fees.......................................... 1,789 1,687 Receivable allowances................................................... 2,622 (6,434) Stock compensation...................................................... 906 323 Changes in current assets and liabilities: Accounts receivable and costs and accrued earnings in excess of billings on contracts in process....................................... (13,433) 7,656 Income taxes recoverable................................................ 4,997 -- Prepaid expenses and other assets....................................... (4,605) (579) Accounts payable, accrued salaries and wages and accrued expenses....... (33,364) (31,903) Billings in excess of costs and accrued earnings on contracts in process................................................................ 10,224 (4,012) Deferred income taxes................................................... (1,167) 419 Deferred compensation and other......................................... 1,636 (19,472) Other, net.............................................................. (1,127) 12,108 --------- --------- Total adjustments.................................................. (11,245) (18,588) --------- --------- Net cash provided by operating activities.................................. 11,091 1,127 --------- --------- Cash flows from investing activities: Capital expenditures, less equipment purchased through capital leases of $7,711 and $3,655, respectively.............................. (14,254) (4,838) --------- --------- Net cash (used) by investing activities.................................... (14,254) (4,838) --------- --------- Cash flows from financing activities: Principal payments on long-term debt....................................... (12,082) (7,305) Borrowings under the line of credit........................................ 30,000 -- Repayments on the line of credit........................................... (25,000) -- Repayments on capital lease obligations.................................... (3,600) (1,793) Repayments on short-term notes............................................. (5,485) (4,537) Proceeds from sale of common shares and exercise of stock options.......... 4,933 3,695 --------- --------- Net cash (used) by financing activities................................... (11,234) (9,940) --------- --------- Net decrease in cash.......................................................... (14,397) (13,651) Cash at beginning of period................................................... 23,693 45,687 --------- --------- Cash at end of period......................................................... $ 9,296 $ 32,036 ========= ========= Supplemental Information: Interest paid.............................................................. $ 33,370 $ 32,392 ========= ========= Taxes paid................................................................. $ 18,009 $ 13,321 ========= ========= Equipment acquired subject to capital lease obligations.................... $ 7,711 $ 3,655 ========= ========= Non-cash dividends paid in-kind............................................ $ 4,422 $ 3,456 ========= =========
See Notes to Consolidated Financial Statements 5 URS CORPORATION AND SUBSIDIARIES NOTE 1. Accounting Policies In the opinion of management, the information furnished reflects all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair statement of the interim financial information. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted. These condensed financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 2000. The results of operations for the six months ended April 30, 2001, are not necessarily indicative of the operating results for the full year. Income Per Common Share Basic income per common share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted income per common share is computed giving effect to all dilutive potential common shares that were outstanding during the period. Dilutive potential common shares consist of the incremental common shares issuable upon the exercise of stock options and conversion of preferred stock. Diluted income per share is computed by dividing net income available to common stockholders plus the preferred stock dividend by the weighted average dilutive potential common shares that were outstanding during the period. In accordance with the disclosure requirement of SFAS 128, a reconciliation of the numerator and denominator of basic and diluted income per common share is provided as follows:
Three months ended Six months ended April 30 April 30 --------------------------- --------------------------- 2001 2000 2001 2000 ---- ---- ---- ---- (in thousands, except per share amounts) Numerator--Basic Net income available for common stockholders......... $ 10,646 $ 9,022 $ 17,887 $ 15,604 ========= ========= ========= ========= Denominator--Basic Weighted-average common stock outstanding............ 17,202 16,052 17,045 15,997 ========= ========= ========= ========= Basic income per share............................... $ .62 $ .56 $ 1.05 $ .97 ========= ========= ========= ========= Numerator--Diluted Net income available for common stockholders......... $ 10,646 $ 9,022 $ 17,887 $ 15,604 Preferred stock dividend............................. 2,235 2,059 4,449 4,111 --------- --------- --------- --------- Net income............................................. $ 12,881 $ 11,081 $ 22,336 $ 19,715 ========= ========= ========= ========= Denominator--Diluted Weighted-average common stock outstanding............ 17,202 16,052 17,045 15,997 Effect of dilutive securities: Stock options........................................ 1,168 889 858 1,119 Convertible preferred stock.......................... 5,251 4,608 5,198 4,608 --------- --------- --------- --------- 23,621 21,549 23,101 21,724 ========= ========= ========= ========= Diluted income per share............................... $ .55 $ .51 $ .97 $ .91 ========= ========= ========= =========
Derivative Financial Instruments The Company is exposed to risk of changes in interest rates as a result of borrowings under the senior collateralized credit facility. From time to time, the Company may enter into interest rate derivatives to protect against this risk. At April 30, 2001, the only derivative instrument held by the Company was the interest rate cap agreement. From an economic standpoint, the cap agreement provides the Company with protection against LIBOR interest rate increases above 7%. For accounting purposes, the Company has elected not to designate the cap agreement as a hedge, and accordingly, changes in the fair market value of the cap agreement are included in other expenses in the Consolidated Statements of Operations. The fair market value of the interest rate cap agreement at April 30, 2001, was $7,760 and was included in Prepaid Expenses and Other Assets in the Consolidated Balance Sheets. 6 Reclassifications Certain reclassifications have been made to the 2000 financial statements to conform to the 2001 presentation with no effect on net income, equity or cash flows as previously reported. NOTE 2. COMMITMENTS AND CONTINGENCIES Currently, the Company has limits of $125.0 million per loss and $125.0 million in the annual aggregate for general liability, professional errors and omissions liability, and contractor's pollution liability insurance. These programs each have a self-insured claim retention of $0.1 million, $1.0 million and $0.25 million, respectively. With respect to various claims of Dames and Moore Group ("D-M"), an engineering and construction services firm 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, it will have no coverage for claims made after its termination date even if the occurrence was during the term of coverage. The Company intends to maintain these policies, but there can be no assurance that the Company can maintain existing coverages or that claims will not exceed the available amount of insurance. Various legal proceedings are pending against the Company or its subsidiaries alleging, among other things, breaches of contract or negligence in connection with the performance of professional services. In some actions, 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, the Company does not believe that any of the legal proceedings are likely to result in a judgment against, or settlement by it, that would materially exceed its insurance coverage or have a material adverse effect on its consolidated financial position or operations. NOTE 3. SEGMENT AND RELATED INFORMATION Management has organized the Company by geographic divisions. The geographic divisions are Parent, Domestic and International. The Parent division comprises the Parent Company. The Domestic division comprises all offices located in the United States. The International division comprises all offices in the Americas and in Europe and Asia/Pacific (e.g., Australia, Indonesia, Singapore, New Zealand and the Philippines). Accounting policies for each of the reportable segments are the same as those of the Company. The Company provides services throughout the world. Services to other countries may be performed within the United States, and generally, revenues are classified within the geographic area where the services were performed. The following table shows summarized financial information on the Company's reportable segments. Included in the "Eliminations" column are elimination of inter-segment sales and elimination of investment in subsidiaries.
As of April 30, 2001: Parent Domestic International Eliminations Total --------------------- ------ -------- ------------- ------------ ----- Total accounts receivable............... $ 174 $ 650,150 $ 77,306 $ -- $ 727,630 Total assets............................ $ 657,457 $1,301,389 $ 101,128 $(643,328) $1,416,646 For the Three Months Ended April 30, 2001: Parent Domestic International Eliminations Total --------------- ------ -------- ------------- ------------ ----- Revenue ................................ $ -- $ 496,697 $ 50,519 $ (1,220) $ 545,996 Segment operating income (loss)......... $ (7,288) $ 46,972 $ 874 $ -- $ 40,558 For the Six Months Ended April 30, 2001: Parent Domestic International Eliminations Total --------------- ------ -------- ------------- ------------ ----- Revenue ................................ $ -- $ 963,127 $ 101,075 $ (2,582) $1,061,620 Segment operating income (loss)......... $ (15,498) $ 88,322 $ 2,307 $ -- $ 75,131 As of October 31, 2000: Parent Domestic International Eliminations Total ----------------------- ------ -------- ------------- ------------ ----- Total accounts receivable............... $ (7,814) $ 634,350 $ 82,469 $ -- $ 709,005 Total assets............................ $ 680,824 $1,272,340 $ 116,310 $(642,340) $1,427,134 For the Three Months Ended April 30, 2000: Parent Domestic International Eliminations Total --------------- ------ -------- ------------- ------------ ----- Revenue ................................ $ -- $ 477,403 $ 58,391 $ (393) $ 535,401 Segment operating income (loss)......... $ (6,143) $ 44,688 $ 1,216 $ -- $ 39,761 For the Six Months Ended April 30, 2000: Parent Domestic International Eliminations Total --------------- ------ -------- ------------- ------------ ----- Revenue ................................ $ -- $ 933,627 $ 115,195 $ (544) $1,048,278 Segment operating income (loss)......... $ (11,261) $ 81,221 $ 3,468 $ -- $ 73,428
Operating income is defined as income before income taxes and interest. 7 NOTE 4. SUPPLEMENTAL GUARANTOR INFORMATION In June 1999, the Company completed a private placement of $200 million principal amount of its 12 1/4% Senior Subordinated Exchange Notes due 2009, which were exchanged in August 1999, for 12 1/4% Senior Subordinated Notes (the "Notes"). The Notes are fully and unconditionally guaranteed on a joint and several basis by certain of the Company's wholly owned subsidiaries. Substantially all of the Company's income and cash flow is generated by its subsidiaries. The Company has no operating assets or operations other than its investments in its subsidiaries. As a result, funds necessary to meet the Company's debt service obligations are provided mainly by distributions to or advances from its subsidiaries. Under certain circumstances, contractual and legal restrictions, as well as the financial condition and operating requirements of the Company's subsidiaries, could limit the Company's ability to obtain cash from its subsidiaries for the purpose of meeting its debt service obligations, including the payment of principal and interest on the Notes. The following information sets forth the condensed consolidating balance sheets of the Company as of April 30, 2001 and October 31, 2000, the condensed consolidating statements of operations for the three and six months ended April 30, 2001 and 2000, and the condensed consolidating statements of cash flows for the six months ended April 30, 2001 and 2000. Investments in subsidiaries are accounted for using the equity method; accordingly, entries necessary to consolidate the Company and all of its subsidiaries are reflected in the eliminations column. Separate complete financial statements of the Company and its subsidiaries that guarantee the Notes would not provide additional material information that would be useful in assessing the financial composition of such subsidiaries. 8 URS CORPORATION CONDENSED CONSOLIDATING BALANCE SHEET (In thousands) (Unaudited)
April 30, 2001 --------------------------------------------------------------------------------- Subsidiary Subsidiary Non- Parent Guarantors Guarantors Eliminations Consolidated ------ ---------- ---------- ------------ ------------ ASSETS Current assets: Cash..................................... $ (2,689) $ 901 $ 11,084 $ -- $ 9,296 Accounts receivable, net................. 174 650,150 77,306 -- 727,630 Prepaid expenses and other assets........ 10,223 18,335 1,773 -- 30,331 ---------- ----------- ---------- --------- ----------- Total current assets................. 7,708 669,386 90,163 -- 767,257 Property and equipment, net.................. 636 83,568 10,744 -- 94,948 Goodwill, net................................ 390,555 152,153 182 (34,833) 508,057 Investment in unconsolidated subsidiaries.... 245,127 363,959 (591) (608,495) -- Other assets................................. 13,431 32,323 630 -- 46,384 ---------- ----------- ---------- --------- ----------- $ 657,457 $ 1,301,389 $ 101,128 $(643,328) $ 1,416,646 ========== =========== ========== ========= =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt........ $ 38,989 $ 7,758 $ 5,196 $ -- $ 51,943 Accounts payable......................... (652) 104,392 14,795 -- 118,535 Inter-company payable.................... (102,132) 51,891 54,271 (4,030) -- Accrued expenses and other............... 6,666 67,372 16,525 -- 90,563 Billings in excess of costs and accrued earnings on contracts in process -- 92,135 8,564 -- 100,699 ---------- ----------- ---------- --------- ----------- Total current liabilities............ (57,129) 323,548 99,351 (4,030) 361,740 Long-term debt............................... 568,960 15,603 460 -- 585,023 Other........................................ 36,571 37,147 27 -- 73,745 ---------- ----------- ---------- --------- ----------- Total liabilities.................... 548,402 376,298 99,838 (4,030) 1,020,508 ---------- ----------- ---------- --------- ----------- Mandatorily redeemable Series B exchangeable convertible preferred stock.. 115,435 -- -- -- 115,435 Total stockholders' equity................... (6,380) 925,091 1,290 (639,298) 280,703 ---------- ----------- ---------- --------- ----------- $ 657,457 $ 1,301,389 $ 101,128 $(643,328) $ 1,416,646 ========== =========== ========== ========= ===========
9 URS CORPORATION CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (In thousands) (Unaudited)
Three Months Ended April 30, 2001 -------------------------------------------------------------------------------- Subsidiary Subsidiary Non- Parent Guarantors Guarantors Eliminations Consolidated ------ ---------- ---------- ------------ ------------ Revenues............................... $ -- $ 496,697 $ 50,519 $ (1,220) $ 545,996 ---------- ----------- ---------- --------- --------- Expenses: Direct operating.................... -- 296,465 24,482 (1,220) 319,727 Indirect, general and administrative.................... 7,288 153,260 25,163 -- 185,711 Interest expense, net............... 16,519 249 139 -- 16,907 ---------- ----------- ---------- --------- --------- 23,807 449,974 49,784 (1,220) 522,345 ---------- ----------- ---------- --------- --------- Income (loss) before taxes............. (23,807) 46,723 735 -- 23,651 Income tax expense..................... 9,521 778 471 -- 10,770 ---------- ----------- ---------- --------- --------- Net income (loss)...................... (33,328) 45,945 264 -- 12,881 Preferred stock dividend............... 2,235 -- -- -- 2,235 ---------- ----------- ---------- --------- --------- Net income (loss) available for common stockholders................. (35,563) 45,945 264 -- 10,646 Other comprehensive income (loss).............................. -- -- (938) -- (938) ---------- ----------- ---------- --------- --------- Comprehensive income (loss)............ $ (35,563) $ 45,945 $ (674) $ -- $ 9,708 ========== =========== ========== ========= ========= Six Months Ended April 30, 2001 -------------------------------------------------------------------------------- Subsidiary Subsidiary Non- Parent Guarantors Guarantors Eliminations Consolidated ------ ---------- ---------- ------------ ------------ Revenues............................... $ -- $ 963,127 $ 101,075 $ (2,582) $1,061,620 ---------- ----------- ---------- --------- ---------- Expenses: Direct operating.................... -- 573,291 54,551 (2,582) 625,260 Indirect, general and administrative.................... 15,498 301,514 44,217 -- 361,229 Interest expense, net............... 33,650 507 368 -- 34,525 ---------- ----------- ---------- --------- ---------- 49,148 875,312 99,136 (2,582) 1,021,014 ---------- ----------- ---------- --------- ---------- Income (loss) before taxes............. (49,148) 87,815 1,939 -- 40,606 Income tax expense..................... 16,812 909 549 -- 18,270 ---------- ----------- ---------- --------- ---------- Net income (loss)...................... (65,960) 86,906 1,390 -- 22,336 Preferred stock dividend............... 4,449 -- -- -- 4,449 ---------- ----------- ---------- --------- ---------- Net income (loss) available for common stockholders................. (70,409) 86,906 1,390 -- 17,887 Other comprehensive income (loss).............................. -- -- (817) -- (817) ---------- ----------- ---------- --------- ---------- Comprehensive income (loss)............ $ (70,409) $ 86,906 $ 573 $ -- $ 17,070 ========== =========== =========== ========= ==========
10 URS CORPORATION CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (In thousands) (Unaudited)
Six Months Ended April 30, 2001 -------------------------------------------------------------------------------- Subsidiary Subsidiary Non- Parent Guarantors Guarantors Eliminations Consolidated ------ ---------- ---------- ------------ ------------ Cash flows from operating activities: Net income (loss)......................... $ (65,960) $ 86,906 $ 1,390 $ -- $ 22,336 ---------- ---------- ---------- --------- ---------- Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation and amortization............. 5,234 13,623 1,420 -- 20,277 Amortization of financing fees ........... 1,789 -- -- -- 1,789 Receivable allowances..................... (174) 1,055 1,741 -- 2,622 Stock compensation........................ 906 -- -- -- 906 Changes in current assets and liabilities: Accounts receivable and costs and accrued earnings in excess of billings on contracts in process ....... -- (16,855) 3,422 -- (13,433) Prepaid expenses and other assets........ 3,592 (821) (2,379) -- 392 Accounts payable, accrued salaries and wages and accrued expenses.......... 47,462 (82,727) 502 1,399 (33,364) Billings in excess of costs and accrued earnings on contracts in process................................. -- 7,966 2,258 -- 10,224 Deferrals and other, net.................. (2,733) 14,060 (10,586) (1,399) (658) ---------- ---------- ---------- --------- ---------- Total adjustments....................... 56,076 (63,699) (3,622) -- (11,245) ---------- ---------- ---------- --------- ---------- Net cash provided (used) by operating activities.................... (9,884) 23,207 (2,232) -- 11,091 ---------- ---------- ---------- --------- ---------- Cash flows from investing activities: Capital expenditures...................... (264) (12,861) (1,129) -- (14,254) ---------- ---------- ---------- --------- ---------- Net cash (used) by investing activities.............................. (264) (12,861) (1,129) -- (14,254) ---------- ---------- ---------- --------- ---------- Cash flows from financing activities: Net (decrease) in long-term debt, bank borrowings and capital lease obligations....................... (8,375) (3,625) (4,167) -- (16,167) Proceeds from sale of common shares and exercise of stock options................................. 4,933 -- -- -- 4,933 ---------- ---------- ---------- --------- ---------- Net cash (used) by financing activities.............................. (3,442) (3,625) (4,167) -- (11,234) ---------- ---------- ---------- --------- ---------- Net increase (decrease) in cash.............. (13,590) 6,721 (7,528) -- (14,397) Cash at beginning of period.................. 10,901 (5,820) 18,612 -- 23,693 ---------- ---------- ---------- --------- ---------- Cash at end of period........................ $ (2,689) $ 901 $ 11,084 $ -- $ 9,296 ============== ========== ========== ========= ==========
11 URS CORPORATION CONDENSED CONSOLIDATING BALANCE SHEET (In thousands)
October 31, 2000 ------------------------------------------------------------------------ Subsidiary Subsidiary Non- Parent Guarantors Guarantors Eliminations Consolidated ------ ---------- ---------- ------------ ------------ ASSETS Current assets: Cash.................................... $ 10,901 $ (5,820) $ 18,612 $ -- $ 23,693 Accounts receivable, net................ (7,814) 634,350 82,469 -- 709,005 Prepaid expenses and other assets....... 22,086 21,303 463 -- 43,852 --------- ----------- --------- ---------- ----------- Total current assets................. 25,173 649,833 101,544 -- 776,550 Property and equipment, net.................. 442 77,184 11,035 -- 88,661 Goodwill, net................................ 395,063 154,631 -- (35,083) 514,611 Investment in unconsolidated subsidiaries.... 245,127 361,210 920 (607,257) -- Other assets................................. 15,019 29,482 2,811 -- 47,312 --------- ----------- --------- ---------- ----------- $ 680,824 $ 1,272,340 $ 116,310 $ (642,340) $ 1,427,134 ========= =========== ========= =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt........ $ 28,924 $ 6,576 $ 9,723 $ -- $ 45,223 Accounts payable......................... 15,606 99,214 10,345 -- 125,165 Inter-company payable.................... (174,043) 150,053 36,099 (12,109) -- Accrued expenses and other............... 33,291 55,478 32,358 -- 121,127 Billings in excess of costs and accrued earnings on contracts in process....... -- 84,169 6,306 -- 90,475 --------- ----------- --------- ---------- ----------- Total current liabilities............ (96,222) 395,490 94,831 (12,109) 381,990 Long-term debt................................ 587,136 15,892 100 -- 603,128 Other......................................... 19,902 51,712 1,595 -- 73,209 --------- ----------- --------- ---------- ----------- Total liabilities.................... 510,816 463,094 96,526 (12,109) 1,058,327 Mandatorily redeemable Series B exchangeable convertible preferred stock................ 111,013 -- -- -- 111,013 Total stockholders' equity.................... 58,995 809,246 19,784 (630,231) 257,794 --------- ----------- --------- ----------- ----------- $ 680,824 $ 1,272,340 $ 116,310 $ (642,340) $ 1,427,134 ========= =========== ========= =========== ===========
12 URS CORPORATION CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (In thousands) (Unaudited)
Three Months Ended April 30, 2000 -------------------------------------------------------------------------------- Subsidiary Subsidiary Non- Parent Guarantors Guarantors Eliminations Consolidated ------ ---------- ---------- ------------ ------------ Revenues................................. $ -- $ 477,403 $ 58,391 $ (393) $ 535,401 ---------- ---------- ---------- --------- ---------- Expenses: Direct operating........................ -- 275,330 34,272 (393) 309,209 Indirect, general and administrative........................ 6,143 157,385 22,903 -- 186,431 Interest expense, net................... 19,428 (411) 213 -- 19,230 ---------- ---------- ---------- --------- ---------- 25,571 432,304 57,388 (393) 514,870 ---------- ---------- ---------- --------- ---------- Income (loss) before taxes............... (25,571) 45,099 1,003 -- 20,531 Income tax expense....................... 9,118 283 49 -- 9,450 ---------- ---------- ---------- --------- ---------- Net income (loss)........................ (34,689) 44,816 954 -- 11,081 Preferred stock dividend................. 2,059 -- -- -- 2,059 ---------- ---------- ---------- --------- ---------- Net income (loss) available for common stockholders................... (36,748) 44,816 954 -- 9,022 Other comprehensive income (loss)................................ -- -- (1,496) -- (1,496) ---------- ---------- ---------- --------- ---------- Comprehensive income (loss).............. $ (36,748) $ 44,816 $ (542) $ -- $ 7,526 ========== ========== ========== ========= ========== Six Months Ended April 30, 2000 -------------------------------------------------------------------------------- Subsidiary Subsidiary Non- Parent Guarantors Guarantors Eliminations Consolidated ------ ---------- ---------- ------------ ------------ Revenues................................. $ -- $ 933,627 $ 115,195 $ (544) $1,048,278 ---------- ---------- ---------- --------- ---------- Expenses: Direct operating........................ -- 552,485 67,444 (544) 619,385 Indirect, general and administrative........................ 11,261 299,921 44,283 -- 355,465 Interest expense, net................... 37,018 (246) 441 -- 37,213 ---------- ---------- ---------- --------- ---------- 48,279 852,160 112,168 (544) 1,012,063 ---------- ---------- ---------- --------- ---------- Income (loss) before taxes............... (48,279) 81,467 3,027 -- 36,215 Income tax expense....................... 15,974 444 82 -- 16,500 ---------- ---------- ---------- --------- ---------- Net income (loss)........................ (64,253) 81,023 2,945 -- 19,715 Preferred stock dividend................. 4,111 -- -- -- 4,111 ---------- ---------- ---------- --------- ---------- Net income (loss) available for common stockholders................... (68,364) 81,023 2,945 -- 15,604 Other comprehensive income (loss)................................ -- -- (1,413) -- (1,413) ---------- ---------- ---------- --------- ---------- Comprehensive income (loss).............. $ (68,364) $ 81,023 $ 1,532 $ -- $ 14,191 ========== ========== ========== ========= ==========
13 URS CORPORATION CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (In thousands) (Unaudited)
Six Months Ended April 30, 2000 -------------------------------------------------------------------------------- Subsidiary Subsidiary Non- Parent Guarantors Guarantors Eliminations Consolidated ------ ---------- ---------- ------------ ------------ Cash flows from operating activities: Net income (loss)......................... $ (64,253) $ 81,023 $ 2,945 $ -- $ 19,715 ---------- ----------- ---------- --------- ---------- Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation and amortization............. 5,230 15,207 1,182 -- 21,619 Amortization of financing fees............ 1,687 -- -- -- 1,687 Receivable allowances..................... (7,079) 4,021 (3,376) -- (6,434) Stock compensation........................ 323 -- -- -- 323 Changes in current assets and liabilities: Accounts receivable and costs and accrued earnings in excess of billings on contracts in process........ -- (6,274) 13,930 -- 7,656 Prepaid expenses and other assets......... (1,491) (1,003) 1,915 -- (579) Accounts payable, accrued salaries and wages and accrued expenses.......... 78,982 (119,339) (6,817) 15,271 (31,903) Billings in excess of costs and accrued earnings on contracts in process................................. -- (8,408) 4,396 -- (4,012) Deferrals and other, net.................. (11,548) 18,095 1,779 (15,271) (6,945) ---------- ----------- ---------- --------- ---------- Total adjustments....................... 66,104 (97,701) 13,009 -- (18,588) ---------- ----------- ---------- --------- ---------- Net cash provided (used) by operating activities................................ 1,851 (16,678) 15,954 -- 1,127 ---------- ----------- ---------- --------- ---------- Cash flows from investing activities: Capital expenditures...................... (102) (1,887) (2,849) -- (4,838) ---------- ----------- ---------- --------- ---------- Net cash (used) by investing activities.............................. (102) (1,887) (2,849) -- (4,838) ---------- ----------- ---------- --------- ---------- Cash flows from financing activities: Net increase (decrease) in long-term debt, bank borrowings and capital lease obligations....................... (8,110) 728 (6,253) -- (13,635) Proceeds from sale of common shares and exercise of stock options........... 3,695 -- -- -- 3,695 ---------- ----------- ---------- --------- ---------- Net cash provided (used) by financing activities.................... (4,415) 728 (6,253) -- (9,940) ---------- ----------- ---------- --------- ---------- Net increase (decrease) in cash.............. (2,666) (17,837) 6,852 -- (13,651) Cash at beginning of period.................. 6,722 17,028 21,937 -- 45,687 ---------- ----------- ---------- --------- ---------- Cash at end of period........................ $ 4,056 $ (809) $ 28,789 $ -- $ 32,036 ========== =========== ========== ========= ==========
14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS We report the results of our operations on a fiscal year, which ends on October 31. This Management Discussion and Analysis ("MD&A") should be read in conjunction with the MD&A and the footnotes to the Consolidated Financial Statements included in the Annual Report on Form 10-K for the fiscal year ended October 31, 2000, which was previously filed with the Securities and Exchange Commission. Results of Operations Second quarter ended April 30, 2001 vs. April 30, 2000 Consolidated Our revenues were $546.0 million for the quarter ended April 30, 2001, an increase of $10.6 million or 2.0%, over the amount reported for the same period last year. Direct operating expenses for the quarter ended April 30, 2001, which consist of direct labor and other direct expenses, including subcontractor costs, increased $10.5 million, a 3.4% increase over the amount reported for the same period last year as a result of an increase in the use of subcontractors. Indirect, general and administrative expenses for the quarter ended April 30, 2001, decreased $0.7 million, or 0.4%, from the amount reported for the same period last year. Interest expense decreased $2.3 million due to repayments of our long-term debt and decrease in interest rate. Our earnings before income taxes were $23.7 million for the second quarter ended April 30, 2001, compared to $20.5 million for the same period last year. Our effective income tax rates for the quarters ended April 30, 2001 and 2000 were both approximately 46%. We reported net income of $12.9 million or $0.55 per share on a diluted basis for the second quarter ended April 30, 2001, compared to $11.1 million, or $0.51 per share for the same period last year. Our backlog at April 30, 2001, was $1.6 billion, as compared to $1.7 billion at October 31, 2000. Domestic Segment Including Parent Company Revenues for the domestic segment were $496.7 million for the quarter ended April 30, 2001, an increase of $19.3 million or 4.0%, over the amount reported for the same period last year. The increase is due to increased demand for our services. Domestic direct operating expenses for the quarter ended April 30, 2001 increased $21.1 million, a 7.7% increase over the amount reported for the same period last year as a result of an increase in the use of subcontractors. Indirect, general and administrative expenses for the quarter ended April 30, 2001, decreased $3.0 million, or 1.8%, from the amount reported for the same period last year, due to decrease in marketing and business development expenses during the quarter. Interest expense decreased $2.3 million due to repayments of our long-term debt and decrease in interest rate. International Segment Revenues for the international segment were $50.5 million for the quarter ended April 30, 2001, a decrease of $7.9 million or 13.5%, from the amount reported for the same period last year. The decrease is mainly due to decreases in foreign currency exchange rates versus the U.S. dollar. Foreign direct operating expenses for the quarter ended April 30, 2001 decreased $9.8 million, a 28.6% decrease from the amount reported for the same period last year as a result of the decrease in pass-through expenses. Indirect, general and administrative expenses for the quarter ended April 30, 2001, increased $2.3 million, or 9.9%, over the amount reported for the same period last year. The increase is primarily due to additional staff, increase in insurance premiums and increase in occupancy costs. 15 Six months ended April 30, 2001 vs. April 30, 2000 Consolidated Our revenues were $1.1 billion for the six months ended April 30, 2001, an increase of $13.3 million or 1.3%, over the amount reported for the same period last year. Direct operating expenses for the six months ended April 30, 2001, which consist of direct labor and other direct expenses, including subcontractor costs, increased $5.9 million, a 0.9% increase over the amount reported for the same period last year. Indirect, general and administrative expenses for the six months ended April 30, 2001, increased $5.8 million, or 1.6%, from the amount reported for the same period last year. Interest expense decreased $2.7 million due to repayments of our long-term debt and decrease in interest rate. Our earnings before income taxes were $40.6 million for the six months ended April 30, 2001, compared to $36.2 million for the same period last year. Our effective income tax rates for the six months ended April 30, 2001 and 2000 were approximately 45% and 46%, respectively. We reported net income of $22.3 million or $0.97 per share on a diluted basis for the six months ended April 30, 2001, compared to $19.7 million, or $0.91 per share for the same period last year. Domestic Segment Including Parent Company Revenues for the domestic segment were $963.1 million for the six months ended April 30, 2001, an increase of $29.5 million or 3.2%, over the amount reported for the same period last year. The increase is due to increased demand for our services. Domestic direct operating expenses for the six months ended April 30, 2001 increased $20.8 million, a 3.8% increase over the amount reported for the same period last year as a result of an increase in the use of subcontractors. Indirect, general and administrative expenses for the six months ended April 30, 2001, increased $5.8 million, or 1.9%, from the amount reported for the same period last year, due to increase in marketing expenses. Interest expense decreased $2.6 million due to repayments of our long-term debt and decrease in interest rate. International Segment Revenues for the international segment were $101.1 million for the six months ended April 30, 2001, a decrease of $14.1 million or 12.3%, from the amount reported for the same period last year. The decrease is mainly due to decreases in foreign currency exchange rates versus the U.S. dollar. Foreign direct operating expenses for the six months ended April 30, 2001, decreased $12.9 million, a 19.1% decrease from the amount reported for the same period last year as a result of the decrease in pass-through expenses. Indirect, general and administrative expenses for the six months ended April 30, 2001, decreased $.07 million, or 0.1%, over the amount reported for the same period last year. Liquidity and Capital Resources At April 30, 2001, we had working capital of $405.5 million, an increase of $11.0 million from October 31, 2000. Substantially all of our cash flow is generated by our subsidiaries. As a result, funds necessary to meet our debt service obligations are provided mainly by receipts 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 our subsidiaries. 16 Our liquidity and capital measurements are set forth below: As of As of April 30, 2001 October 31, 2001 -------------- ---------------- Working capital............................ $ 405,517,000 $ 394,560,000 Working capital (current) ratio............ 2 to 1 2 to 1 Average days to convert billed accounts receivable to cash........................ 72 68 Percentage of debt to equity............... 161% 176% Our cash and cash equivalents amounted to $9.3 million at April 30, 2001, a decrease of $14.4 million from October 31, 2000, primarily as a result of $16.2 million in net repayment of debt, and $14.3 million in payment for capital expenditures, offset by $11.1 million generated from operations and $4.9 million of proceeds generated from sale of common stock and exercise of stock options. During the second quarter ended April 30, 2001, we borrowed $30.0 million and repaid $25.0 million under our revolving line of credit. Our primary sources of liquidity will be cash flow from operations and borrowings under the senior collateralized credit facility, if necessary. Our primary uses of cash will be to fund our working capital and capital expenditures and to service our debt. We believe that our existing financial resources, together with our planned cash flow from operations and existing credit facilities, will provide sufficient resources to fund our combined operations and capital expenditure needs for the foreseeable future. During the fiscal year ended October 31, 1999, we paid $376.2 million for the purchase of D-M. To fund this transaction and to refinance outstanding bank debt, we incurred new borrowings of $650 million from establishing a long-term senior collateralized credit facility with a syndicate of banks led by Wells Fargo Bank, N.A. ("the Bank") and from the issuance of 12 1/4% Senior Subordinated Exchange Notes subsequently exchanged for 12 1/4% Senior Subordinated Notes. In addition, we sold 46,083 shares of our Series B Preferred Stock to RCBA Strategic Partners, L.P. for an aggregate consideration of $100 million. Senior Collateralized Credit Facility. The senior collateralized credit facility was funded on June 9, 1999 ("Funding Date"), and provides for three term loan facilities in the aggregate amount of $450 million and a revolving credit facility in the amount of $100 million. The term loan facilities consist of Term Loan A, a $250 million tranche, Term Loan B, a $100 million tranche and Term Loan C, another $100 million tranche. Principal amounts under Term Loan A became due, commencing on October 31, 1999, in the amount of approximately $3 million per quarter for the following four quarters. Thereafter and through June 9, 2005, annual principal payments under Term Loan A range from $25 million to a maximum of $58 million with Term Loan A expiring and the then-outstanding principal amount becoming due and repayable in full on June 9, 2005. Principal amounts under Term Loan B became due, commencing on October 31, 1999, in the amount of $1 million in each year through July 31, 2005, with Term Loan B expiring and the then-outstanding principal amount becoming due and repayable in full in four equal quarterly installments in 2006. Principal amounts under Term Loan C became due, commencing on October 31, 1999, in the amount of $1 million in each year through July 31, 2006, with Term Loan C expiring and the then-outstanding principal amount becoming due and repayable in full in equal quarterly installments in 2007. The revolving credit facility expires, and is repayable in full, on June 9, 2005. The term loans each bear interest at a rate per annum equal to, at our option, either the Base Rate or LIBOR, in each case plus an applicable margin. The revolving credit facility bears interest at a rate per annum equal to, at our option, either the Base Rate, LIBOR or the Adjusted Sterling Rate, in each case plus an applicable margin. The applicable margin adjusts according to a performance-pricing grid based on our ratio of Consolidated Total Funded Debt to Consolidated Earnings Before Income Taxes, Depreciation and Amortization ("EBITDA"). The "Base Rate" is defined as the higher of the Bank's Prime Rate and the Federal Funds Rate plus 0.50%. "LIBOR" is defined as the offered quotation by first class banks in the London interbank market to the Bank for dollar deposits, as adjusted for reserve requirements. The "Adjusted Sterling Rate" is defined as the rate per annum displayed by Reuters at which Sterling is offered to the Bank in the London interbank market as determined by the British Bankers' Association. We may determine which interest rate options to use and interest periods will apply for such periods for both the term loans and the revolving credit facility. 17 At April 30, 2001, our revolving credit facility with the Bank provides for advances up to $100 million, of which $5.0 million was outstanding. Also at April 30, 2001, we had outstanding letters of credit aggregating $22.9 million, which reduced the amount available to us under our revolving credit facility to $72.1 million. The senior collateralized credit facility is governed by affirmative and negative covenants. These covenants include restrictions on incurring additional debt, paying dividends or making distributions to our stockholders, repurchasing or retiring capital stock and making subordinated junior debt payments. We are required to submit quarterly compliance certification. The financial covenants include maintenance of a minimum current ratio of 1.20 to 1.00, a minimum fixed charge coverage ratio of 1.10 to 1.00, an EBITDA minimum of $160 million and a maximum leverage ratio of 4.00 to 1.00 for the period ended April 30, 2001. We were fully compliant with these covenants as of April 30, 2001. 12 1/4% Senior Subordinated Notes. Our notes are due in 2009. Each note bears interest at 12 1/4% per annum. Interest on the notes is payable semi-annually on May 1 and November 1 of each year, commencing November 1, 1999. The notes are subordinate to the senior collateralized credit facility. As of April 30, 2001, we owed $200.0 million on our notes. Certain of our wholly owned subsidiaries fully and unconditionally guarantee the notes on a joint and several basis. We may redeem any of the notes beginning May 1, 2004. The initial redemption price is 106.125% of their principal amount, plus accrued and unpaid interest. The redemption price will decline each year after 2004 and will be 100% of their principal amount, plus accrued and unpaid interest beginning on May 1, 2007. In addition, at any time prior to May 1, 2002, we may redeem up to 35% of the principal amount of the notes with net cash proceeds from the sale of capital stock. The redemption price will be equal to 112.25% of the principal amount of the redeemed notes. Interest Rate Swap Agreement. We entered into an interest rate swap agreement with the Bank. This interest rate swap effectively fixed the interest rate on $48.8 million of our LIBOR-based borrowings at 5.97% plus the applicable margin. This interest rate swap expired on November 30, 2000. Interest Rate Cap Agreement. We entered into an interest rate cap agreement with the Bank. This agreement caps the interest rate at 7% for $211.0 million of our LIBOR-based borrowings through July 31, 2002. From an economic standpoint, the cap agreement provides us with protection against LIBOR interest rate increases above 7%. For accounting purposes, we have elected not to designate the cap agreement as a hedge, and accordingly, changes in the fair market value of the cap agreement are included in other expenses in the Consolidated Statements of Operations. The fair market value of the interest rate cap agreement at April 30, 2001, was $7,760 and was included in Prepaid Expenses and Other Assets in the Consolidated Balance Sheets. Enterprise Resource Program (ERP). During the current year, we commenced a project to consolidate all of our accounting and project management information systems. The costs of implementing this project, including software, consulting and hardware costs, are estimated to be approximately $30 million, to be incurred over the next two years. As of April 30, 2001, we incurred a total of approximately $5 million for this project. We plan to finance most of the implementation costs through capital lease arrangements with various vendors. If and to the extent that financing cannot be obtained through capital leases, we will draw on our line of credit as alternative financing for expenditures to be incurred for this project. 18 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: Our substantial indebtedness could adversely affect our financial condition. We are a highly leveraged company. As of April 30, 2001, we had approximately $637.0 million of outstanding indebtedness following consummation of the D-M acquisition and the related financing plan. This level of indebtedness could have important consequences, including the following: o it may limit our ability to borrow money or sell stock for working capital, capital expenditures, debt service requirements or other purposes; o it may limit our flexibility in planning for, or reacting to, changes in our business; o we could be more highly leveraged than some of our competitors, which may place us at a competitive disadvantage; o it may make us more vulnerable to a downturn in our business or the economy; and o a substantial portion of our cash flow from operations could be dedicated to the repayment of our indebtedness and would not be available for other purposes. To service our indebtedness, we will require a significant amount of cash. The ability to generate cash depends on many factors beyond our control. Our ability to make payments on our indebtedness depends on our ability to generate cash in the future. If we do not generate sufficient cash flow to meet our debt service and working capital requirements, we may need to seek additional financing or sell assets. This need may make it more difficult for us to obtain financing on terms that are acceptable to us, or at all. Without this financing, we could be forced to sell assets to make up for any shortfall in our payment obligations under unfavorable circumstances. Our senior collateralized credit facility and our obligations under the notes limit our ability to sell assets and also restrict the use of proceeds from any such sale. Moreover, the senior collateralized credit facility is secured by substantially all of our assets. Furthermore, substantial portions of our assets are, and may continue to be, intangible assets. Therefore, we cannot assure you that our assets could be sold quickly enough or for sufficient amounts to enable us to meet our debt obligations. Restrictive covenants in our senior collateralized credit facility and the indenture relating to the notes may restrict our ability to pursue business strategies. Our senior collateralized credit facility and indenture relating to the notes restrict our ability, among other things, to: o incur additional indebtedness or contingent obligations; o pay dividends or make distributions to our stockholders; o repurchase or redeem our stock; o make investments; o grant liens; o make capital expenditures; o enter into transactions with our stockholders and affiliates; 19 o sell assets; and o acquire the assets of, or merge or consolidate with, other companies. In addition, our senior collateralized credit facility requires us to maintain certain financial ratios. We may not be able to maintain these ratios. Additionally, covenants in the senior collateralized credit facility and the indenture relating to the notes may impair our ability to finance future operations or capital needs or to engage in other favorable business activities. If we default under our various debt obligations, the lenders could require immediate repayment of the entire principal. If the lenders require immediate repayment, we will not be able to repay them, and our inability to meet our debt obligations could have a material adverse effect on our business, financial condition and results of operations. We derive approximately 60% of our revenues from contracts with government agencies. Any disruption in government funding or in our relationship with those agencies could adversely affect our business and our ability to meet our debt obligations. We derive approximately 60% of our revenues from local, state and federal government agencies. The demand for our services will be directly related to the level of government program funding that is allocated to rebuild and expand the nation's infrastructure. We believe that the success and further development of our business depend upon the continued funding of these government programs and upon our ability to participate in these government programs. We cannot assure you that governments will have the available resources to fund these programs, that these programs will continue to be funded even if governments have available financial resources, or that we will continue to win government contracts under these or other programs. Some of these government contracts are subject to renewal or extension annually, so we cannot assure you of our continued work under these contracts in the future. Unsuccessful bidders may protest or challenge the award of these contracts. In addition, government agencies can terminate these contracts at their convenience. As a result, we may incur costs in connection with the termination of these contracts. Also, contracts with government agencies are subject to substantial regulation and an audit of actual costs incurred. Consequently, there may be a downward adjustment in our revenues if actual recoverable costs exceed billed recoverable costs. We have a responsibility to maintain our eligibility to perform government contracts. From time to time allegations of improper conduct in connection with government contracting have been made against us, and these could be the subjects of suspension or debarment consideration. We investigate all such allegations thoroughly and believe that appropriate actions have been taken in all cases. Additionally, we maintain a compliance program in an effort to assure that no improper conduct occurs in connection with government contracting. We may be unable to estimate accurately our cost in performing services for our clients. This may cause us to have low profit margins or incur losses. We submit some proposals on projects based on an estimate of the costs we will likely incur. To the extent we cannot control overhead, general and administrative and other costs, or if we underestimate such costs, we may have low profit margins or may incur losses. We are subject to risks from changes in environmental legislation, regulation and governmental policies. Federal laws, such as the Resource Conservation and Recovery Act of 1976, as amended, and the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, ("CERCLA"), and various state and local laws, strictly regulate the handling, removal, treatment and transportation of toxic and hazardous substances and impose liability for environmental contamination caused by such substances. Moreover, so-called "toxic tort" litigation has increased markedly in recent years as people injured by hazardous substances seek recovery for personal injuries or property damages. We handle, remove, treat and transport toxic or hazardous substances. Consequently, we may be exposed to claims for damages caused by environmental contamination. 20 Federal and state laws, regulations, and programs related to environmental issues will generate, either directly or indirectly, much of our environmental business. Accordingly, a reduction of these laws and regulations, or changes in governmental policies regarding the funding, implementation or enforcement of these programs, could have a material effect on our business. Environmental laws, regulations and enforcement policies remained essentially unchanged during fiscal year 2000, including further deferral of congressional reauthorization of CERCLA. The outlook for congressional action on CERCLA legislation in fiscal year 2001 remains unclear. Our liability for damages due to legal proceedings may be significant. Our insurance may not be adequate to cover this risk. Various legal proceedings are pending against us alleging, among other things, breaches of contract or negligence in connection with our performance of professional services. In some actions, punitive or treble damages are sought that substantially exceed our insurance coverage. If we sustain damages greater than our insurance coverage, there could be a material adverse effect on our business, financial condition and results of operations. Our engineering practices, including general engineering and civil engineering services, involve professional judgments about the nature of soil conditions and other physical conditions, including the extent to which toxic and hazardous materials are present, and about the probable effect of procedures to mitigate problems or otherwise affect those conditions. If the judgments and the recommendations based upon those judgments are incorrect, we may be liable for resulting damages that our clients incur. The failure to attract and retain key professional personnel could adversely affect our business. The ability to attract, retain and expand our staff of qualified technical professionals will be an important factor in determining our future success. A shortage of qualified technical professionals currently exists in the engineering and design industry. The market for these professionals is competitive, and we cannot assure you that we will be successful in our efforts to continue to attract and retain such professionals. In addition, we will rely heavily upon the experience and ability of our senior executive staff and the loss of a significant number of such individuals could have a material adverse effect on our business, financial condition and results of operations. We may be unable to compete successfully in our industry. We are engaged in highly fragmented and very competitive markets in our service areas. We will compete with firms of various sizes, several of which are substantially larger than us and which possess greater technical resources. Furthermore, the engineering and design industry is undergoing consolidation, particularly in the United States. As a result, we will compete against several larger companies that have the ability to offer more diverse services to a wider client base. These competitive forces could have a material adverse effect on our business, financial condition and results of operations. Our international operations are subject to a number of risks that could adversely affect the results from these operations and our overall business. As a worldwide provider of engineering services, we have operations in over 30 countries and derive approximately 10% of our revenues from international operations. International business is subject to the customary risks associated with international transactions, including political risks, local laws and taxes, the potential imposition of trade or currency exchange restrictions, tariff increases and difficulties or delays in collecting accounts receivable. Weak foreign economies and/or a weakening of foreign currencies against the U.S. dollar could have a material adverse effect on our business, financial condition and results of operations. Additional acquisitions may adversely affect our ability to manage our business. Historically, we have completed numerous acquisitions and, in implementing our business strategy, we may continue to do so in the future. We cannot assure you that we will identify, finance and complete additional suitable acquisitions on acceptable terms. We may not successfully integrate future acquisitions. Any acquisitions may require substantial attention from our management, which may limit the amount of time that management can devote to daily operations. Our inability to find additional attractive acquisition candidates or to effectively manage the integration of any businesses acquired in the future could adversely affect our business, financial condition and results of operations. 21 Our ability to successfully integrate our accounting and project management systems. We are in the process of designing, testing and installing a company-wide accounting and project management system. In the event we do not complete the project successfully, we may experience reduced cash flow due to an inability to issue invoices to our customers and collect cash in a timely manner. 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 senior collateralized credit facility. If market rates average 1% more in fiscal year 2001 than in fiscal year 2000, our net of tax interest expense, after considering the effect of the interest rate cap agreement, would increase by approximately $1.6 million. Conversely, if market rates average 1% less in fiscal year 2001 than in fiscal year 2000, our net of tax interest expense would decrease by approximately $2.2 million. The final interest rate settlement for our interest rate swap agreement had been determined prior to the close of fiscal year 2000. Therefore, changes in interest rates did not impact our then-existing interest rate swap agreement, which expired on November 30, 2000. 22 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None. ITEM 3. DEFAULTS UPON SENIOR SECURITES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At our annual meeting of stockholders held on March 20, 2001, the following proposals were adopted by the margins indicated: 1. To elect a Board of Directors to hold office until the next annual meeting of stockholders and until their successors are elected and qualified, or until their earlier death or resignation. Number of Shares --------------------------- For Withheld --- -------- Richard C. Blum 11,366,264 2,487,974 Admiral S. Robert Foley, Jr., USN (Ret.) 13,757,882 96,356 Marie L. Knowles 13,764,421 89,817 Martin M. Koffel 12,685,425 1,168,813 Richard B. Madden 13,764,550 89,688 Armen Der Marderosian 13,735,587 118,651 Jean-Yves Perez 13,741,362 112,876 Richard Q. Praeger 13,762,328 91,910 Irwin L. Rosenstein 13,711,610 142,628 William D. Walsh 13,764,878 89,360 No stockholders abstained from voting in this election of directors and there were no broker non-votes. 2. To ratify the selection of PricewaterhouseCoopers L.L.P. as the Company's independent auditors for the fiscal year 2001. Number of Shares ---------------- For 13,816,882 Against 27,370 Abstain 9,986 ITEM 5. OTHER INFORMATION None. 23 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit Number Exhibit -------------- ------- 10.1 URS Corporation 1999 Equity Incentive Plan Restricted Stock Award Agreement, dated as of April 25, 2001, between Martin M. Koffel and URS Corporation. FILED HEREWITH. 10.2 Form of URS Corporation 1999 Equity Incentive Plan Nonstatutory Stock Option Agreement, by and between each of Martin M. Koffel, Kent P. Ainsworth, Joseph Masters and Irwin L. Rosenstein and URS Corporation reflecting grants dated as of April 25, 2001. FILED HEREWITH. (b) Reports on Form 8-K None. 24 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 June 14, 2001 URS CORPORATION /s/ Kent Ainsworth ---------------------------------------- Kent P. Ainsworth Executive Vice President and Chief Financial Officer (Principal Accounting Officer) 25 Sequentially Exhibit Numbered Number Exhibit Page - ------- ---------------------------------------------------------- ------------ 10.1 URS Corporation 1999 Equity Incentive Plan Restricted Stock Award Agreement, dated as of April 25, 2001, between Martin M. Koffel and URS Corporation. FILED 27 HEREWITH. 10.2 Form of URS Corporation 1999 Equity Incentive Plan Nonstatutory Stock Option Agreement, by and between each of Martin M. Koffel, Kent P. Ainsworth, Joseph Masters and Irwin L.Rosenstein and URS Corporation reflecting grants dated as of April 25, 2001. FILED HEREWITH. 32 EX-10.1 2 e900603_ex10-1.txt 1999 RESTRICTED STOCK AWARD AGREEMENT Exhibit 10.1 URS CORPORATION 1999 EQUITY INCENTIVE PLAN RESTRICTED STOCK AWARD AGREEMENT Pursuant to the Restricted Stock Award Grant Notice ("Grant Notice") and this Restricted Stock Award Agreement (collectively, the "Award") and in consideration of your past services, URS Corporation (the "Company") has awarded you a restricted stock award under its 1999 Equity Incentive Plan (the "Plan") for the number of shares of the Company's Common Stock subject to the Award indicated in the Grant Notice. Except where indicated otherwise, defined terms not explicitly defined in this Restricted Stock Award Agreement but defined in the Plan shall have the same definitions as in the Plan. The details of your Award are as follows: 1. VESTING. Subject to the limitations contained herein and the provisions contained in the employment agreement that you entered into with the Company on December 16, 1991, as amended from time to time (the "Employment Agreement"), and subject to acceleration under certain circumstances set forth below, your Award shall vest as provided in the Grant Notice. The shares subject to your Award will be held by the Company until your interest in such shares vests. As each portion of your interest in the shares vests, the Company shall issue you a stock certificate covering such vested shares. 2. NUMBER OF SHARES. The number of shares subject to your Award may be adjusted from time to time for Capitalization Adjustments, as provided in the Plan. 3. PAYMENT. This Award was granted in consideration of your past services to the Company. You will not be required to make any payment to the Company with respect to your receipt of the Award or the vesting thereof. 4. SECURITIES LAW COMPLIANCE. You will not be issued any shares under your Award unless the shares are either (a) then registered under the Securities Act or (b) the Company has determined that such issuance would be exempt from the registration requirements of the Securities Act. Your Award must also comply with other applicable laws and regulations governing the Award, and you will not receive such shares if the Company determines that such receipt would not be in material compliance with such laws and regulations. 5. TRANSFER RESTRICTIONS. Prior to the time that they have vested, you may not transfer, pledge, sell or otherwise dispose of the shares subject to the Award. For example, you may not use shares subject to the Award that have not vested as security for a loan. In addition, you may not transfer, pledge, sell or otherwise dispose of the shares subject to the Award that have vested at any time when applicable securities laws or Company policies would prohibit such a transfer. This restriction on the transfer of vested shares will lapse upon your termination of Continuous Service. 27 6. TERMINATION OF CONTINUOUS SERVICE. (a) Except as may be provided in your Employment Agreement (subject, however, to Section 8 hereof), in the event your Continuous Service terminates for reasons other than your death or Disability (as that term is defined in your Employment Agreement), you will be credited with the vesting that has accrued under your Award as of the date of your termination of Continuous Service. Except as may be provided in your Employment Agreement (subject, however, to Section 8 hereof), you will accrue no additional vesting of your Award following your termination of Continuous Service. To the extent your Award is not vested on the date of your termination, it shall automatically lapse on such date. (b) In the event your Continuous Service terminates due to your death, the Award automatically shall become vested in full as of the date of your death and your rights under the Award shall pass by will or the laws of descent and distribution. (c) In the event your Continuous Service terminates due to your Disability (as that term is defined in your Employment Agreement), the Award automatically shall become vested in full as of the date of your termination of Continuous Service. 7. ATTAINMENT OF AGE 65. In the event that you attain age sixty-five (65) prior to the date on which your Continuous Service terminates, the Award automatically shall become vested in full as of your sixty-fifth (65th) birthday. 8. CHANGE IN CONTROL. In the event of a Change in Control (as defined below) prior to the date on which your Continuous Service terminates, the Award automatically shall become vested in full as of the effective date of the Change in Control. For purposes of the Award, "Change in Control" means that one of the following events has occurred after the Date of Grant: (a) A change in control of the Company required to be reported pursuant to Item 6(e) of Schedule 14A of Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act"); (b) A change in the composition of the Company's Board of Directors (the "Board"), as a result of which fewer than two-thirds of the incumbent directors were either (A) directors of the Company twenty-four (24) months prior to such change or (B) elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the directors who were directors of the Company twenty-four (24) months prior to such change and who were still in office at the time of the election or nomination; or (c) Any person is or becomes the beneficial owner of securities of the Company representing twenty percent (20%) or more of the Company's Base Capital Stock. Notwithstanding the preceding clause: (i) the beneficial ownership by a person of twenty percent (20%) or more, but less than a majority, of the Base Capital Stock shall not constitute a Change in Control if such beneficial ownership was acquired in the ordinary 28 course of such person's business and not with the purpose or effect of changing or influencing the control of the Company and if such person is eligible to file a short-form statement on Schedule 13G under Rule 13d-1 under the Exchange Act with respect to such beneficial ownership; (ii) the beneficial ownership by a person of twenty percent (20%) or more of the Base Capital Stock directly as a result of a reduction in the aggregate number of outstanding shares of Base Capital Stock shall not constitute a Change in Control unless and until, subsequent to such reduction, such person increases in any manner such person's beneficial ownership of Base Capital Stock; and (iii) the beneficial ownership by the RCBA Group of twenty percent (20%) or more of the Base Capital Stock shall not constitute a Change in Control unless and until either (a) the RCBA Group is or becomes the beneficial owner of twenty percent (20%) or more of the Base Capital Stock, excluding from the numerator for purposes of such calculation the RCBA Preferred Investment Shares, (b) the RCBA Group is or becomes the beneficial owner of more than fifty percent (50%) of the Base Capital Stock, including in the numerator for purposes of such calculation the RCBA Preferred Investment Shares, or (c) a third person not affiliated with the RCBA Group as of the date of this Agreement directly or indirectly acquires control of the RCBA Group. For purposes of this clause (c): (1) "Base Capital Stock" means the combined voting power of the Company's then outstanding securities ordinarily (and apart from rights accruing under special circumstances) having the right to vote at elections of directors; (2) "Beneficial owner," "beneficial ownership" and "person" have the meanings as such terms are used in Sections 13(d) and 14(d) of the Exchange Act; (3) "RCBA Group" means Richard C. Blum & Associates, Inc. ("RCBA") and any person "affiliated" with RCBA (within the meaning of the Exchange Act); and (4) "RCBA Preferred Investment Shares" means (i) shares of the Company's Series B Preferred Stock, (ii) additional shares of Series B Preferred Stock issued in payment of dividends on the Series B Preferred Stock, (iii) shares of the Company's Common Stock issued upon the conversion of the Series B Preferred Stock in accordance with its terms, and (iv) shares of other securities of the Company issued in exchange for the Series B Preferred Stock in accordance with its terms. The definitions of "Change in Control" contained in the Plan and in your Employment Agreement shall have no application to the Award. 29 9. RESTRICTIVE LEGENDS. The shares issued under your Award shall be endorsed with appropriate legends determined by the Company. 10. RIGHTS AS A STOCKHOLDER. You shall exercise all rights and privileges of a stockholder of the Company with respect to the shares subject to your Award. You shall be deemed to be the holder of the shares for purposes of receiving any dividends which may be paid with respect to such shares and for purposes of exercising any voting rights relating to such shares, even if some or all of such shares have not yet vested. 11. AWARD NOT A SERVICE CONTRACT. Your Award is not an employment or service contract, and nothing in your Award shall be deemed to (i) alter the terms of your Employment Agreement or (ii) create in any way whatsoever any obligation on your part to continue in the employ of the Company or any affiliate thereof, or on the part of the Company or any affiliate thereof to continue your employment or service. In addition, nothing in your Award shall obligate the Company or any affiliate thereof, their respective stockholders, boards of directors, officers or employees to continue any relationship that you might have as a director or consultant for the Company or any affiliate thereof. 12. WITHHOLDING OBLIGATIONS. (a) At the time your Award is made, or at any time thereafter as requested by the Company, you hereby authorize withholding from payroll and any other amounts payable to you, and otherwise agree to make adequate provision for any sums required to satisfy the federal, state, local and foreign tax withholding obligations of the Company or any affiliate thereof, if any, which arise in connection with your Award. Such withholding obligations may be satisfied by your relinquishment of your right to receive a portion of the shares otherwise issuable to you pursuant to the Award; provided, however, that you shall not be authorized to relinquish your right to shares with a fair market value in excess of the amount required to satisfy the minimum amount of tax required to be withheld by law. (b) Unless the tax withholding obligations of the Company and/or any affiliate thereof are satisfied, the Company shall have no obligation to issue a certificate for such shares or release such shares from any escrow provided for herein. 13. TAX CONSEQUENCES. The acquisition and vesting of the shares may have adverse tax consequences to you that may be mitigated by filing an election under Section 83(b) of the Code. Such election must be filed within thirty (30) days after the date of the grant of your Award. YOU ACKNOWLEDGE THAT IT IS YOUR OWN RESPONSIBILITY, AND NOT THE COMPANY'S, TO FILE A TIMELY ELECTION UNDER CODE SECTION 83(B), EVEN IF YOU REQUEST THE COMPANY TO MAKE THE FILING ON YOUR BEHALF. 14. NOTICES. Any notices provided for in your Award or the Plan shall be given in writing and shall be deemed effectively given upon receipt or, in the case of notices delivered by the Company to you, five (5) days after deposit in the United States mail, postage prepaid, addressed to you at the last address you provided to the Company. 30 15. MISCELLANEOUS. (a) The rights and obligations of the Company under your Award shall be transferable to any one or more persons or entities, and all covenants and agreements hereunder shall inure to the benefit of, and be enforceable by the Company's successors and assigns. Your rights and obligations under your Award may only be assigned with the prior written consent of the Company. (b) You agree upon request to execute any further documents or instruments necessary or desirable in the sole determination of the Company to carry out the purposes or intent of your Award. (c) You acknowledge and agree that you have reviewed your Award in its entirety, have had an opportunity to obtain the advice of counsel prior to executing and accepting your Award and fully understand all provisions of your Award. 16. GOVERNING PLAN DOCUMENT. Your Award is subject to all the provisions of the Plan, the provisions of which are hereby made a part of your Award, and is further subject to all interpretations, amendments, rules and regulations which may from time to time be promulgated and adopted pursuant to the Plan. In the event of any conflict between the provisions of your Award and those of the Plan, the provisions of the Plan shall control. 31 EX-10.2 3 e900603_ex10-2.txt 1999 NONSTATUTORY STOCK OPTION AGREEMENT Exhibit 10.2 URS CORPORATION 1999 EQUITY INCENTIVE PLAN NONSTATUTORY STOCK OPTION AGREEMENT Pursuant to your Stock Option Grant Notice ("Grant Notice") and this Stock Option Agreement, URS Corporation (the "Company") has granted you an option under its 1999 Equity Incentive Plan (the "Plan") to purchase the number of shares of the Company's Common Stock indicated in your Grant Notice at the exercise price indicated in your Grant Notice. Defined terms not explicitly defined in this Stock Option Agreement but defined in the Plan shall have the same definitions as in the Plan. The details of your option are as follows: 1. VESTING. Subject to the limitations contained herein, your option will vest as provided in your Grant Notice, provided that vesting will cease upon the termination of your Continuous Service. Notwithstanding the foregoing, your option shall become vested and exercisable in its entirety in the event that a Change in Control (as defined below) occurs with respect to the Company prior to the termination of your Continuous Service. For purposes of this Paragraph 1 only, "Change in Control" shall mean the occurrence of any of the following events after the Date of Grant: (a) A change in control of the Company required to be reported pursuant to Item 6(e) of Schedule 14A of Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act"); (b) A change in the composition of the Company's Board of Directors (the "Board"), as a result of which fewer than two-thirds of the incumbent directors were either (A) directors of the Company twenty-four (24) months prior to such change or (B) elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the directors who were directors of the Company twenty-four (24) months prior to such change and who were still in office at the time of the election or nomination; or (c) Any person is or becomes the beneficial owner of securities of the Company representing twenty percent (20%) or more of the Company's Base Capital Stock. Notwithstanding the preceding clause: (i) the beneficial ownership by a person of twenty percent (20%) or more, but less than a majority, of the Base Capital Stock shall not constitute a Change in Control if such beneficial ownership was acquired in the ordinary course of such person's business and not with the purpose or effect of changing or influencing the control of the Company and if such person is eligible to file a short-form statement on Schedule 13G under Rule 13d-1 under the Exchange Act with respect to such beneficial ownership; 32 (ii) the beneficial ownership by a person of twenty percent (20%) or more of the Base Capital Stock directly as a result of a reduction in the aggregate number of outstanding shares of Base Capital Stock shall not constitute a Change in Control unless and until, subsequent to such reduction, such person increases in any manner such person's beneficial ownership of Base Capital Stock; and (iii) the beneficial ownership by the RCBA Group of twenty percent (20%) or more of the Base Capital Stock shall not constitute a Change in Control unless and until either (a) the RCBA Group is or becomes the beneficial owner of twenty percent (20%) or more of the Base Capital Stock, excluding from the numerator for purposes of such calculation the RCBA Preferred Investment Shares, (b) the RCBA Group is or becomes the beneficial owner of more than fifty percent (50%) of the Base Capital Stock, including in the numerator for purposes of such calculation the RCBA Preferred Investment Shares, or (c) a third person not affiliated with the RCBA Group as of the date of this Agreement directly or indirectly acquires control of the RCBA Group. For purposes of this clause (c): a. "Base Capital Stock" means the combined voting power of the Company's then outstanding securities ordinarily (and apart from rights accruing under special circumstances) having the right to vote at elections of directors; b. "Beneficial owner," "beneficial ownership" and "person" have the meanings as such terms are used in Sections 13(d) and 14(d) of the Exchange Act; c. "RCBA Group" means Richard C. Blum & Associates, Inc. ("RCBA") and any person "affiliated" with RCBA (within the meaning of the Exchange Act); and d. "RCBA Preferred Investment Shares" means (i) shares of the Company's Series B Preferred Stock, (ii) additional shares of Series B Preferred Stock issued in payment of dividends on the Series B Preferred Stock, (iii) shares of the Company's Common Stock issued upon the conversion of the Series B Preferred Stock in accordance with its terms, and (iv) shares of other securities of the Company issued in exchange for the Series B Preferred Stock in accordance with its terms. The definition of "Change in Control" contained in the Plan shall have no application to the Award. 2. NUMBER OF SHARES AND EXERCISE PRICE. The number of shares of Common Stock subject to your option and your exercise price per share referenced in your Grant Notice may be adjusted from time to time for Capitalization Adjustments, as provided in the Plan. 3. METHOD OF PAYMENT. Payment of the exercise price is due in full upon exercise of all or any part of your option. You may elect to make payment of the exercise price in cash or by check or in any other manner permitted by your Grant Notice, which may include one or more of the following: 33 (a) In the Company's sole discretion at the time your option is exercised and provided that at the time of exercise the Common Stock is publicly traded and quoted regularly in The Wall Street Journal, pursuant to a same day sale program developed under Regulation T as promulgated by the Federal Reserve Board that, prior to the issuance of Common Stock, results in either the receipt of cash (or check) by the Company or the receipt of irrevocable instructions to pay the aggregate exercise price to the Company from the sales proceeds. (b) Provided that at the time of exercise the Common Stock is publicly traded and quoted regularly in The Wall Street Journal, by delivery of already-owned shares of Common Stock either that you have held for the period required to avoid a charge to the Company's reported earnings (generally six months) or that you did not acquire, directly or indirectly from the Company, that are owned free and clear of any liens, claims, encumbrances or security interests, and that are valued at Fair Market Value on the date of exercise. "Delivery" for these purposes, in the sole discretion of the Company at the time you exercise your option, shall include delivery to the Company of your attestation of ownership of such shares of Common Stock in a form approved by the Company. Notwithstanding the foregoing, you may not exercise your option by tender to the Company of Common Stock to the extent such tender would violate the provisions of any law, regulation or agreement restricting the redemption of the Company's stock. 4. MINIMUM EXERCISE. You may not exercise your option for less than one hundred (100) shares of Common Stock at any one time, except that it may be exercised for all of the Common Stock remaining subject to the option if fewer than one hundred (100) shares remain. You may exercise your option only for whole shares of Common Stock. 5. SECURITIES LAW COMPLIANCE. Notwithstanding anything to the contrary contained herein, you may not exercise your option unless the shares of Common Stock issuable upon such exercise are then registered under the Securities Act or, if such shares of Common Stock are not then so registered, the Company has determined that such exercise and issuance would be exempt from the registration requirements of the Securities Act. The exercise of your option must also comply with other applicable laws and regulations governing your option, and you may not exercise your option if the Company determines that such exercise would not be in material compliance with such laws and regulations. 6. TERM. You may not exercise your option before the commencement of its term or after its term expires. The term of your option commences on the Date of Grant and expires upon the earliest of the following: (a) three (3) months after the termination of your Continuous Service for any reason other than your retirement from the Company on or after the date you attain age 65, Disability or death, provided that if during any part of such three- (3-) month period you may not exercise your option solely because of the condition set forth in the preceding paragraph relating to "Securities Law Compliance," your option shall not expire until the earlier of the Expiration Date or until it shall have been exercisable for an aggregate period of three (3) months after the termination of your Continuous Service; 34 (b) three (3) years after your retirement from the Company, if such retirement occurs on or after the date you attain age 65; (c) twelve (12) months after the termination of your Continuous Service due to your Disability; (d) twelve (12) months after your death if you die either during your Continuous Service or within three (3) months after your Continuous Service terminates for any reason other than your retirement from the Company on or after the date you attain age 65; (e) the Expiration Date indicated in your Grant Notice; or (f) the day before the tenth (10th) anniversary of the Date of Grant. 7. EXERCISE. (a) You may exercise the vested portion of your option during its term by delivering a Notice of Exercise (in a form designated by the Company) together with the exercise price to the Secretary of the Company, or to such other person as the Company may designate, during regular business hours, together with such additional documents as the Company may then require. (b) By exercising your option you agree that, as a condition to any exercise of your option, the Company may require you to enter into an arrangement providing for the payment by you to the Company of any tax withholding obligation of the Company arising by reason of (1) the exercise of your option or (2) the disposition of shares of Common Stock acquired upon such exercise. 8. TRANSFERABILITY. Your option is not transferable, except by will or by the laws of descent and distribution, and is exercisable during your life only by you. Notwithstanding the foregoing, by delivering written notice to the Company, in a form satisfactory to the Company, you may designate a third party who, in the event of your death, shall thereafter be entitled to exercise your option. 9. OPTION NOT A SERVICE CONTRACT. Your option is not an employment or service contract, and nothing in your option shall be deemed to create in any way whatsoever any obligation on your part to continue in the employ of the Company or an Affiliate, or of the Company or an Affiliate to continue your employment. In addition, nothing in your option shall obligate the Company or an Affiliate, their respective shareholders, Boards of Directors, Officers or Employees to continue any relationship that you might have as a Director or Consultant for the Company or an Affiliate. 10. WITHHOLDING OBLIGATIONS. (a) At the time you exercise your option, in whole or in part, or at any time thereafter as requested by the Company, you hereby authorize withholding from payroll and any other amounts payable to you, and otherwise agree to make adequate provision for (including by means of a "cashless exercise" pursuant to a program developed under Regulation T as 35 promulgated by the Federal Reserve Board to the extent permitted by the Company), any sums required to satisfy the federal, state, local and foreign tax withholding obligations of the Company or an Affiliate, if any, which arise in connection with your option. (b) Upon your request and subject to approval by the Company, in its sole discretion, and compliance with any applicable conditions or restrictions of law, the Company may withhold from fully vested shares of Common Stock otherwise issuable to you upon the exercise of your option a number of whole shares of Common Stock having a Fair Market Value, determined by the Company as of the date of exercise, that satisfies federal, state, local and foreign tax obligations of the Company and you; provided that the Company shall not withhold shares of Common Stock at rates in excess of the minimum statutory withholding rates imposed upon the Company for federal and state tax purposes if such withholding would result in a charge to the Company's earnings for accounting purposes. Any adverse consequences to you arising in connection with such share withholding procedure shall be your sole responsibility. (c) You may not exercise your option unless the tax withholding obligations of the Company and/or any Affiliate are satisfied. Accordingly, you may not be able to exercise your option when desired even though your option is vested, and the Company shall have no obligation to issue a certificate for such shares of Common Stock or release such shares of Common Stock from any escrow provided for herein. 11. NOTICES. Any notices provided for in your option or the Plan shall be given in writing and shall be deemed effectively given upon receipt or, in the case of notices delivered by mail by the Company to you, five (5) days after deposit in the United States mail, postage prepaid, addressed to you at the last address you provided to the Company. 12. GOVERNING PLAN DOCUMENT. Your option is subject to all the provisions of the Plan, the provisions of which are hereby made a part of your option, and is further subject to all interpretations, amendments, rules and regulations which may from time to time be promulgated and adopted pursuant to the Plan. In the event of any conflict between the provisions of your option and those of the Plan, the provisions of the Plan shall control. 36 -----END PRIVACY-ENHANCED MESSAGE-----