ITEM 1. BUSINESS
Unless otherwise indicated, the terms "we," "us" and "our" refer to Washington Group International, Inc. ("WGI") and its consolidated subsidiaries, and references to 2001 are references to our fiscal year ended November 30, 2001. References to 2000 are references to our fiscal year ended December 1, 2000; references to 1999 are references to our fiscal year ended December 3, 1999.
Except as otherwise indicated, the information in this report is presented as of and for the periods ended November 30, 2001 and does not reflect our reorganization, which occurred after our fiscal year ended November 30, 2001, or the impact of our reorganization. Thus, although much of the information in this report is stated in the present tense, unless otherwise indicated, that information is not or may not be representative of our current business, properties, legal proceedings or financial position. Because of the material impact of the reorganization on our business and financial statements, the information in this report is of limited relevance and does not include, except by reference to our subsequent filings with the Securities and Exchange Commission under the Securities Exchange Act of 1934 that are identified in this report, the information that is required for an
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understanding of our current business, financial condition, prospects and outlook. Accordingly, this report should be read in conjunction with the various reports we have filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934 since November 30, 2001 and, in particular, our quarterly report on Form 10-Q for the quarter ended March 29, 2002, which is being filed contemporaneously with this report.
Our principal executive offices are located at 720 Park Boulevard, Boise, Idaho 83712. Our telephone number is (208) 386-5000. Our website address is http://www.wgint.com. The information on our website is not incorporated into, and is not part of, this report.
GENERAL
We are an international provider of a broad range of design, engineering, construction, construction management, facilities and operations management, environmental remediation and mining services. We offer our various services separately or as part of an integrated package throughout the life cycle of a customer's project:
o In providing engineering and design services, we are involved in the conceptualization and planning stages of projects that are part of our customers' overall capital programs. We develop the physical designs and determine the technical specifications. We also devise project configurations to maximize both construction and operating efficiency.
o As a contractor, we are responsible for the construction and completion of each contract in accordance with its specifications and contracting terms (primarily schedule and total cost). In this capacity, we often manage the procurement of materials, subcontractors and craft labor. Depending on the project, we may function as the primary contractor or as a subcontractor to another firm.
o On some projects, we function as a construction manager, engaged by the customer to oversee another contractor's compliance with design specifications and contracting terms.
o Under operations and maintenance contracts, we provide repair, renovation, predictive and preventive services to customer facilities worldwide. We also offer other "light" facility services, such as cleaning and groundskeeping. In addition, we provide inventory and product logistics for manufacturing plants, information technology support, equipment servicing and tooling changeover support.
On some projects, particularly those of significant size and requiring specialized technology or know-how, we partner with other firms, both to increase our opportunity to win the contract and to manage development and execution risk. Partners may include specialized process engineering firms, other contractors or equipment manufacturers. These partnerships may be structured as joint ventures or consortia, with each participating firm having an economic interest relative to the scope of its work.
We enter into three basic types of contracts with our customers:
o Under a "fixed-price" contract, we provide the customer a total project or per-unit cost, subject to project circumstances and changes in scope. We commonly refer to contracts under which the total project cost is determined up front as "lump-sum" contracts. Plant and facility construction projects are typically awarded on a lump-sum basis. We follow strict guidelines in bidding for and entering into fixed-price contracts.
o Under a "fixed-unit-price" contract, the customer pays us for labor, overhead, equipment rentals or other costs at fixed rates as each unit of work is performed. Large infrastructure projects are typically awarded on a fixed-price per-unit basis.
o Under a "cost-type" contract, a customer reimburses us for the costs that we incur (primarily materials, labor, overhead and subcontractor services), plus a predetermined fee. The fee portion of the contract may
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equal a percentage of the costs incurred or may be based on the achievement of specific performance incentives. The fee portion may also be subject to a maximum. Engineering, construction management and environmental and hazardous substance remediation contracts, including most of our work for U.S. government customers, are typically awarded pursuant to a cost-type contract.
Many fixed-price contracts require the contractor to provide a surety bond to its customer. This general industry practice provides indemnification to the customer if the contractor fails to perform its obligations. Surety companies consider factors such as capitalization, available working capital, past performance and management expertise to determine the amount of bonds they are willing to issue to a particular engineering and construction firm.
BACKGROUND
We were originally incorporated in Delaware on April 28, 1993 under the name Kasler Holding Company. In April 1996, we changed our name to Washington Construction Group, Inc. On September 11, 1996, we purchased Morrison Knudsen Corporation, which we refer to as "Old MK," and changed our name to Morrison Knudsen Corporation. On September 15, 2000, we changed our name to Washington Group International, Inc.
Our purchase of Old MK was structured as a merger with and into us and was an integral part of the reorganization of Old MK under a plan of reorganization that Old MK filed in the U.S. Bankruptcy Court for the District of Delaware. We have no remaining obligations under that plan of reorganization.
On March 22, 1999, we and BNFL Nuclear Services, Inc. ("BNFL") acquired the government and environmental services businesses of CBS Corporation (now Viacom, Inc.). We refer to these businesses as the "Westinghouse Businesses." The Westinghouse Businesses currently constitute our Westinghouse Government Services Group ("WGSG"), which is a part of our Government operating unit.
THE RAYTHEON TRANSACTION
On July 7, 2000, pursuant to a stock purchase agreement dated April 14, 2000 (the "Stock Purchase Agreement"), we purchased from the Sellers the capital stock of the subsidiaries of RECI and specified other assets of RECI, and we assumed specified liabilities of RECI. The businesses that we purchased provide engineering, design, procurement, construction, operation, maintenance and other services on a worldwide basis. We financed the acquisition by obtaining new senior secured credit facilities (the "RE&C Financing Facilities") and issuing senior unsecured notes due July 1, 2010 (the "Senior Unsecured Notes"). See Note 8, "Credit Facilities - RE&C Financing Facilities" and "Credit Facilities -Senior Unsecured Notes" of the Notes to Consolidated Financial Statements in Item 8 of this report for a more detailed description of the RE&C Financing Facilities and the Senior Unsecured Notes.
The purchase price paid at the closing of the acquisition on July 7, 2000 was $53 million in cash and the assumption of net liabilities originally estimated at $450 million. We also incurred acquisition costs of $7.7 million. The cash portion of the purchase price paid at closing was determined based upon a formula contained in the Stock Purchase Agreement and represented the estimated amount of the Adjusted Non-Current Net Assets and Adjusted Net Working Capital (as the terms are defined in the Stock Purchase Agreement) that we acquired, valued as of April 30, 2000. The amounts of Adjusted Non-Current Net Assets and Adjusted Net Working Capital were subject to post-closing finalization, including an audit by independent accountants, and other adjustments to the price paid at closing. In addition, the Stock Purchase Agreement contained a provision requiring us to either pay the Sellers or to be paid by the Sellers, the net amount of cash the Sellers either advanced to or withdrew from RE&C between April 30, 2000 and July 7, 2000. After closing, we paid the Sellers $84.4 million representing the net amount of cash advanced or paid by the Sellers for the use or benefit of RE&C between April 30, 2000 and July 7, 2000.
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The Stock Purchase Agreement provided that the Sellers would retain all non-restricted cash and cash equivalents held by RE&C at the close of business on April 30, 2000 ("Cut-Off Date Cash Balances"). At closing, for purposes of administrative convenience, RE&C kept all cash held by it ($15.8 million), and we paid the Sellers an additional $30.8 million for the cash balances on April 30, 2000. That amount was subject to post-closing verification by us and adjustment in the event it was not equal to the Cut-Off Date Cash Balances held by RE&C. We subsequently verified the amount and no adjustment was required.
RECI retained, among other assets, all of its interest in and rights with respect to some of the existing contracts. In addition, the Stock Purchase Agreement provided that the contracts related to four specified construction projects would be transferred to RECI, and RE&C would enter into subcontracts to perform, on a cost-reimbursed basis, all of RECI's obligations under the contracts. Because the customer consents required to transfer the four contracts to RECI could not be obtained as of closing, we agreed to remain the contract party and continued to be directly obligated to the customers and other third parties under the contracts relating to the four projects. Accordingly, we and the Sellers agreed that the Sellers would provide us with full indemnification with respect to any risks associated with those contracts, which arrangement accomplished the original intent of the Stock Purchase Agreement. Under the Stock Purchase Agreement, we agreed that we would complete the four specified projects for the Sellers' account and the Sellers agreed to reimburse our costs to do so and to share equally with us any positive variance between actual costs and estimated costs. The Sellers also agreed to indemnify us against any losses, claims or liabilities under the contracts relating to such projects, except losses, claims or liabilities resulting from our gross negligence or willful misconduct, against which we would indemnify the Sellers.
The Stock Purchase Agreement did not contain a fixed purchase price at closing for the transaction, but rather, as noted above, provided that the purchase price would be adjusted upward or downward post-closing, based on the effect on a formula that would be applied to an audited RE&C April 30, 2000 balance sheet to be prepared by the Sellers and audited by the Sellers' independent accountants. After closing, we extended the delivery date for the final audited RE&C balance sheet for April 30, 2000 to January 14, 2001.
As part of the acquisition of RE&C, we undertook a comprehensive review of existing contracts that were acquired for the purpose of making a preliminary allocation of the acquisition price to the net assets acquired. As part of this review, we evaluated, among other matters, RECI's estimates of the cost at completion of the long-term contracts that were underway as of July 7, 2000 ("Acquisition Date EAC's"). During this process information came to our attention that raised questions as to whether the Acquisition Date EAC's needed to be adjusted significantly. Our review process involved the analysis of an extensive amount of supporting data, including analysis of numerous, large construction projects in various stages of completion. Based on the information available at the time of the review, the preliminary results of this review indicated that the Acquisition Date EAC's of numerous long-term contracts required substantial adjustment. The adjustments resulted in contract losses or lower than market rate margins. As a result, in our report on Form 10-Q for the quarter ended September 1, 2000, we significantly decreased the carrying value of the net assets acquired and increased the goodwill associated with the transaction. Because many of the contracts we acquired contained either unrecorded losses or lower than market rate margins, these contracts were adjusted to their estimated fair value at the July 7, 2000 acquisition date in order to allow for a reasonable profit margin for completing the contracts, and a gross margin or normal profit reserve of $233.1 million was established and recorded in billings in excess of cost and estimated earnings on uncompleted contracts.
Our review of the RE&C contracts and the purchase price allocation process continued thereafter, and, based on the results of that review, we expected that, as a result of the purchase price adjustment process, the purchase price of RE&C would be adjusted downward by a significant amount. Subsequent to the quarter ended September 1, 2000, we completed the review and made additional adjustments to the contracts we had acquired, resulting from a more accurate determination of the actual contract status at the acquisition date.
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The normal profit reserve has been reduced as work has been performed on the affected projects. The reduction results in reductions to cost of revenue and corresponding increases in gross profit, but has no effect on cash. The establishment of and decreases in cost of revenue for the periods indicated are as follows:
An audited RE&C April 30, 2000 balance sheet was not delivered by Sellers, and therefore, on February 27, 2001, we filed a lawsuit against the Sellers seeking specific performance of the purchase price adjustment provisions of the Stock Purchase Agreement. On March 8, 2001, we amended our complaint to also seek money damages for misstatements and omissions allegedly made by the Sellers. Our lawsuit seeking specific performance was successful, and we and the Sellers thereafter commenced arbitration proceedings before an independent accountant approved by the court to determine the purchase price adjustment. A significant arbitration claim was ultimately filed against the Sellers, as discussed below.
During the spring of 2000, in connection with the acquisition of RE&C, we received from the Sellers audited RECI financial statements at December 31, 1999 and 1998 and for each of the three years in the period ended December 31, 1999 and unaudited RECI financial statements as of and for the three months ended April 2, 2000 and April 4, 1999. In accordance with federal securities law disclosure requirements, we filed on July 13, 2000 those audited and unaudited financial statements and our related unaudited pro forma condensed combined financial statements as of and for the year ended December 3, 1999 and for the quarter ended March 3, 2000 in a current report on Form 8-K. In our current report on Form 8-K filed March 8, 2001, we advised that, for the reasons stated in such report, the foregoing audited and unaudited financial statements of RECI, and our related unaudited pro forma condensed combined financial statements, which were derived therefrom, no longer should be relied upon.
On March 2, 2001 we announced that we faced severe near-term liquidity problems as a result of our acquisition of RE&C. On March 9, 2001, because of those liquidity problems, we suspended work on two large construction projects located in Massachusetts that were part of the acquisition. The Sellers had provided the customer with parent performance guarantees on those two contracts, and the guarantees remained in effect after closing. Those performance guarantees required the Sellers to complete the work on the contracts in the event RE&C (owned by us as of July 7, 2000) did not complete them. The contracts were fixed-price in nature and our review of cost estimates indicated that there were substantial unrecognized future costs in excess of future contract revenues that were not reflected in RECI's Acquisition Date EAC's.
Upon our suspension of work, the Sellers undertook performance of those contracts pursuant to the outstanding performance guarantees. We, however, were obligated under the Stock Purchase Agreement to indemnify the Sellers for losses they incurred under those guarantees. The Sellers also assumed obligations under other contracts, primarily in the RE&C power generation construction business unit, which resulted in significant additional indemnification obligations by us to the Sellers. As a result of costs they incurred to perform under the parent guarantees, the Sellers filed a claim against us in the bankruptcy process for approximately $940 million. As further discussed below, this claim was ultimately settled without payment to the Sellers in connection with the completion of our Plan of Reorganization. See Note 4, "Reorganization Case and Fresh-start Reporting" of the Notes to Consolidated Financial Statements in Item 8 of this report. Until such settlement, we retained all
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liabilities related to these contracts, including normal profit reserves, on our balance sheet as accrued liabilities included in liabilities subject to compromise.
On May 14, 2001, because of the severe near-term liquidity problems resulting from our acquisition of RE&C, we filed for protection under Chapter 11 of the U.S. Bankruptcy Code. At various times between May 14, 2001 and November 20, 2001, we "rejected" numerous contracts (construction contracts, leases and others), as that term is used in the legal sense in bankruptcy law. Included in these rejections were numerous contracts that we acquired from the Sellers. Effective August 27, 2001, we also rejected the Stock Purchase Agreement.
During the pendency of the bankruptcy, we continued to negotiate with the Sellers a settlement of our outstanding litigation with respect to the RE&C acquisition. As a result of those negotiations, we entered into the Raytheon Settlement.
Under the Raytheon Settlement, the Sellers agreed that, with respect to their bankruptcy claim, the Sellers would be considered unpaid, unsecured creditors having rights in the unsecured creditor class, but that, upon completion of our Plan of Reorganization, they would waive any rights to receive any distributions to be given to unsecured creditors with allowed claims. In exchange, we agreed to dismiss all litigation against the Sellers related to the acquisition and to discontinue the purchase price adjustment and binding arbitration process. We released all claims based on any act occurring prior to the Effective Date of the Plan of Reorganization, including all claims against the Sellers, their affiliates and their directors, officers, employees, agents and specified professionals. The Sellers released all claims based on any act occurring prior to the Effective Date of our Plan of Reorganization, including any claims related to any contracts or projects not assumed by us during the bankruptcy cases, against us and our directors, officers, employees, agents and professionals. No cash was exchanged as a result of this settlement.
In addition, under a services agreement that is a part of the Raytheon Settlement, the Sellers will direct the process for resolving pre-petition claims asserted against us in the bankruptcy case relating to any contract or project that was rejected by us and that involved some form of support arrangement from the Sellers. We will assist the Sellers in settling or litigating various claims related to those rejected projects. We will also complete work as requested by the Sellers on those rejected projects, and will be reimbursed on a cost-reimbursable contracting basis. The Sellers may, with respect to the rejected projects described above, pursue or settle any of our claims against project owners, contractors or other third parties and will retain any resulting proceeds, except that for specified projects, recoveries in excess of amounts paid by the Sellers will be returned to us.
While this settlement eliminated our ability to continue to seek to collect our arbitration claim, it was necessary because the Sellers' large unsecured claims in the bankruptcy were substantially impeding our Plan of Reorganization process. Without this settlement, a successful emergence from Chapter 11 would have been delayed or impossible.
We have made adjustments to the preliminary purchase price allocation of the RE&C acquisition price to the net assets acquired that was included in the unaudited quarterly information at September 1, 2000, including the following, as a result of completing our review:
o We have made adjustments for amounts that were recorded as part of and subsequent to the initial preliminary purchase price allocation, as a result of additional information we obtained that supported that some of the July 7, 2000 balances were materially misstated based on generally accepted accounting principles and were, therefore, included in our purchase price adjustment arbitration claim against the Sellers. In the lawsuits and purchase price adjustment arbitration claim referred to above, we asserted that the Sellers should have recorded these as adjustments in the RE&C financial statements prior to the acquisition. The adjustments primarily relate to provisions for anticipated losses on fixed-price contracts that were not recorded in the RE&C financial statements prior to the acquisition. We recorded these amounts as a $444.1 million arbitration claim receivable from the Sellers. However, as noted above, under the terms of the Raytheon Settlement we subsequently agreed to dismiss all litigation against the
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Sellers related to the acquisition and to discontinue the purchase price adjustment and binding arbitration process. Therefore, we wrote off the receivable from the Sellers as an asset impairment during the fourth quarter of 2000.
o Also, we have made adjustments for items that were identified subsequent to the initial purchase price allocation that we believed were additional misstatements, based on additional information that we obtained, but that were not included in the arbitration claim. Cost of revenue included adjustments to estimates at completion on contracts and increases in self-insurance reserves. The impairment of assets was primarily unrecoverable accounts receivable. These amounts totaled $144.5 million and were charged to operations in the fourth quarter of 2000 as follows:
Because we cannot determine the final impact of the matters discussed above on the pre-acquisition RE&C financial statements or the pro forma adjustments that would be appropriate for the years ended December 1, 2000 and December 3, 1999, unaudited pro forma consolidated results of operations as if the acquisition of RE&C had taken place on December 1, 1998 have not been presented.
We have accounted for the acquisition of the RE&C as a purchase business combination. The results of our operations, financial position and cash flows include the operations of RE&C on a consolidated basis from the July 7, 2000 acquisition date. We have made an allocation of the aggregate purchase price to the net assets we acquired, with the remainder recorded as goodwill, on the basis of estimates of fair values after adjustments for the arbitration claim against the Sellers and adjustments charged to operations, as follows:
Of the 23 major RE&C projects that had significant contract adjustments discussed above, 7 are now complete and 5 were eliminated in the insolvency proceedings of Washington International B.V. See Note 4, "Reorganization Case and Fresh-start Reporting - Washington International B.V." of the Notes to Consolidated Financial Statements in Item 8 of this report. Of the remaining projects, 6 have undergone reformation of the contracts to terms and conditions that permitted us to continue working on the original project and 5 are continuing under the original terms and conditions. Most of the projects will be completed by the end of 2002, and the remaining projects in 2003.
As a result of the foregoing events and the substantial negative cash flows of RE&C, we analyzed for impairment the assets acquired in the acquisition of RE&C, including goodwill. Based upon the results of our analysis, we have taken a charge against income during the quarter ended December 1, 2000 for the following impairments of acquired assets:
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OPERATING UNITS
During the fiscal quarter ended September 1, 2000, we reorganized our business to operate through five operating units, each of which comprises a separate reportable business segment: Power, Infrastructure & Mining, Industrial/Process, Government and Petroleum & Chemicals.
POWER
Our Power operating unit provides engineering, construction, and operations and maintenance services in both the fossil and nuclear power markets. Its customers include utilities, industrial co-generators, independent power producers, and governments that generate power in a wide variety of ways, including coal-, oil- and gas-fired power plants, combustion turbine and combined cycle generation, nuclear power generation, hydroelectric generation and waste-to-energy generation. The operating unit provides a range of services that include:
o general engineering and design; o power generation planning; o siting and licensing; o environmental permitting and engineering; o plant construction, expansion, refurbishment, retrofit and modification, including the construction of new power plants, distribution and transmission systems and energy storage facilities, the installation of flue-gas cleaning systems in coal-fired power plants and the replacement of steam generators in nuclear power plants; o decontamination and decommissioning of nuclear power plants; and o operations and maintenance, including renewal and repair, supply and logistics management and maintenance and modification services at several nuclear power plants.
INFRASTRUCTURE & MINING
Our Infrastructure & Mining operating unit provides diverse engineering and construction and construction management services for highways and bridges, airports and seaports, tunnels and tube tunnels, railroad and transit lines, water storage and transport, water treatment, site development, mine operations and hydroelectric facilities. It also provides contract mining, engineering and other technical services to the international fossil fuel and mineral markets. The operating unit generally performs as a general contractor or as a joint venture partner with other contractors on domestic and international projects.
Infrastructure & Mining serves both private and public sector customers through four major divisions:
o HEAVY CIVIL: This division provides services both as a general contractor and in a design-build capacity. Heavy Civil primarily targets domestic heavy infrastructure projects in the transportation, marine and water resources markets, including highways, bridges, tunnels, railroad and commuter rail systems, airport and seaport facilities, dams, wastewater treatment facilities and pipelines. It also provides site development at mine, industrial, various commercial and recreational sites.
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o INTERNATIONAL CONSTRUCTION: This division constructs heavy infrastructure projects, with a current focus on water resource, wastewater management and telecommunications projects in the Middle East and various other regions of the world.
o INFRASTRUCTURE PROGRAMS: This division provides civil design and project-management services throughout the United States. Infrastructure Programs specializes in the engineering, design and construction/program management of highway, bridge, railroad, airport and water resource infrastructure projects.
o MINING: This division provides contract mining services internationally to the fossil fuel and industrial mineral markets. Mining also offers a full range of technical and engineering services, including resource evaluation, geologic modeling, mine planning and development, environmental permitting, equipment selection, and remediation. Mining holds ownership interests in two mining ventures: MIBRAG mbH (33% at December 1, 2000 and increased to 50% effective March 28, 2001) and Westmoreland Resources, Inc. (20%). See Note 6, "Ventures" of the Notes to Consolidated Financial Statements in Item 8 of this report.
INDUSTRIAL/PROCESS
The Industrial/Process operating unit provides services in each stage of a project's life cycle, including engineering, design, procurement, construction and total facilities management. Industrial/Process' total facilities management services include inventory and supply chain management, shutdown and turnaround management and other maintenance, operations and logistics management services. Industrial/Process serves companies in the following markets:
o general manufacturing; o pharmaceutical and biotechnology; o institutional buildings; o food and consumer products; o automotive; o aerospace; o telecommunications; o pulp and paper markets; o process; and o metals processing.
GOVERNMENT
Our Government operating unit provides products and services primarily to U.S. government customers in the national defense, nonproliferation, environmental cleanup, nuclear waste management and hazardous material stabilization markets. Its services span the entire life cycle of its customers' needs - from design, construction and operation of facilities through their eventual decontamination, decommissioning and final environmental remediation. Through its Electro-Mechanical Division, the operating unit designs and manufactures pumps, valves, generators and propulsion units for the U.S. Navy's nuclear-powered fleet. Almost all of this operating unit's revenues are from contracts with the federal government, with the Department of Defense and the Department of Energy accounting for about 71% of its revenues.
The Government operating unit also provides products and services to commercial clients, including:
o the design and manufacture of components for nuclear power facilities; o the design and manufacture of engineered canisters to ship and store spent nuclear fuel; and
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o safety planning, integrated safety management consulting, facility operation, hazardous material management and licensing.
PETROLEUM & CHEMICALS
The Petroleum & Chemicals operating unit provides a wide range of services to petroleum and chemical markets worldwide, including the commodity-organic chemicals, polymers, Fischer-Tropsch chemistry, fertilizers, oleochemicals, petroleum processing, lube oil processing and natural gas processing markets. The operating unit offers engineering, procurement, construction and operations and maintenance services for diverse projects, including upstream petroleum processing and refining plants, natural gas processing plants, plants that convert coal to synthetic fuels, underground gas storage facilities and plants that produce a wide array of products ranging from industrial commodities to specialty chemicals. Petroleum & Chemicals also develops and licenses technology used in the production of petrochemicals. The operating unit provides technology for the ethylbenzene, styrene, cumene, phosphoric acid, paraxylene and purified terephthalic acid markets, among others.
For financial information about our operating units and additional disclosures, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Operating Segment Results" in Item 7 of this report and Note 12, "Operating Segment, Geographic and Customer Information" of the Notes to Consolidated Financial Statements in Item 8 of this report.
GOVERNMENT CONTRACTS AND BACKLOG
Government contracts are a significant part of our business. For example, the U.S. government accounted for 24% of our consolidated operating revenues in 2001. Allowable costs under U.S. government contracts are subject to audit by the government. To the extent that these audits result in determinations that costs claimed as reimbursable are not allowable costs or were not allocated in accordance with federal regulations, we could be required to reimburse the government for amounts previously received. We also have a number of U.S. government contracts which extend beyond one year and for which government funding has not yet been approved. All U.S. government contracts and some foreign contracts are subject to unilateral termination at the option of the customer.
Backlog represents the total value of all awarded contracts that have not been completed and will be recognized as revenues over the life of the project or over the construction period. Backlog includes our proportionate share of construction joint venture contracts and the uncompleted portions of mining service contracts and ventures for the next five years. Backlog for government contracts includes only two years' worth of the portions of such contracts that are currently funded or which we are highly confident will be funded.
Backlog at November 30, 2001 totaled $3.5 billion compared with December 1, 2000 backlog of $5.7 billion. Approximately $1.1 billion of the backlog at November 30, 2001 was comprised of U.S. government contracts that are subject to termination by the government, $463 million of which had not been funded. Terminations for the convenience of the government generally provide for recovery of contract costs and related earnings.
Although backlog reflects business that we consider to be firm, cancellations or scope adjustments may occur. We have adjusted backlog to reflect project cancellations, deferrals and revisions in scope and cost, both upward and downward known at the reporting date; however, future contract cancellations or modifications may reduce backlog and future revenues.
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During 2001, we reversed previously recorded backlog of $1,020.6 million. This reversal was principally due to the suspension of work on two large construction projects located in Massachusetts that were part of the RE&C acquisition. See Note 3, "Acquisitions - Acquisition of Raytheon Engineers & Constructors" of the Notes to Consolidated Financial Statements in Item 8 of this report.
COMPETITION
We are engaged in highly competitive businesses in which customer contracts are typically awarded through competitive bidding processes. We compete based primarily on price, reputation and reliability with other general and specialty contractors, both foreign and domestic. Success or failure in our lines of business is, in large measure, based upon the ability to compete successfully for contracts and to provide the engineering, planning, procurement, management and project financing skills required to complete them in a timely and cost-efficient manner. We compete with other general and specialty contractors, both foreign and domestic, including large international contractors and small local contractors. Some competitors have greater financial and other resources than we do, which in some instances, could give them a competitive advantage over us.
EMPLOYEES
Our total worldwide employment varies widely with the volume, type and scope of operations under way at any given time. At November 30, 2001, we employed over 34,000 employees. Approximately 22% of the employees are covered either by one of our regional collective bargaining agreements, which expire between June 2001 and September 2006, or by a project specific collective bargaining agreement, each of which expires upon completion of the relevant project.
RAW MATERIALS
We can purchase much of the raw materials and components necessary to operate our businesses from numerous sources. We do not foresee any unavailability of raw materials or components that would have a material adverse effect on our businesses in the foreseeable future.
ENVIRONMENTAL MATTERS
Our environmental and hazardous substance remediation and contract mining services involve risks of liability under federal, state and local environmental laws and regulations, including the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"). We perform environmental remediation at Superfund sites as a response action contractor for the Environmental Protection Agency and, in such capacity, are exempt from liability under any federal law, including CERCLA, unless our conduct is negligent. Moreover, we may be entitled to indemnification from agencies of the United States against liability arising out of the negligent performance of work in such capacity.
We are subject to risks of liability under federal, state and local environmental laws and regulations, as well as common law. These laws and regulations and the risk of attendant litigation can cause significant delays to a project and add significantly to its cost. Violations of these laws and regulations could subject us to civil and criminal penalties and other liabilities, including liabilities for property damage, costs of investigation and cleanup of hazardous or toxic substances on property currently or previously owned by us or arising out of our current and past remediation, waste management and contract mining activities.
For additional information regarding environmental matters, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Environmental Contingency" in Item 7 of this report and Note 13, "Contingencies and Commitments - Summitville environmental matters" and "Contingencies and Commitments - Other environmental matters" of the Notes to Consolidated Financial Statements in Item 8 of this report.
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RISK FACTORS
We are subject to a number of risks, including those enumerated below. Any or all of these risks could have a material adverse effect on our business, financial condition, results of operations and cash flows and on the market price of our securities. See also "Note Regarding Forward-looking Information."
THE DOCUMENTS GOVERNING OUR INDEBTEDNESS RESTRICT OUR ABILITY AND THE ABILITY OF SOME OF OUR SUBSIDIARIES TO ENGAGE IN SOME BUSINESS TRANSACTIONS.
In connection with our emergence from bankruptcy protection, we entered into exit financing facilities (the "Senior Secured Revolving Credit Facility") providing for an aggregate of $350 million of revolving borrowing and letter of credit capacity. The credit agreement governing the Senior Secured Revolving Credit Facility restricts our ability and the ability of some of our subsidiaries to, among other things:
o incur or guarantee additional indebtedness;
o declare or pay dividends on, redeem or repurchase capital stock;
o restrict the payment of dividends or other distributions or the ability to transfer assets or make loans between us and some of our subsidiaries;
o make investments;
o incur or permit to exist liens;
o enter into transactions with affiliates;
o make material changes in the nature or conduct of our business;
o merge or consolidate with, acquire substantially all of the stock or assets of other companies;
o transfer, sell assets; and
o engage in sale-leaseback transactions.
The Senior Secured Revolving Credit Facility also contains other covenants that are typical for credit facilities of this size, type and tenor, such as requirements that we meet specified financial ratios and financial condition tests. Our ability to make additional borrowings under the Senior Secured Revolving Credit Facility otherwise depends upon satisfaction of these covenants. Our ability to meet these covenants and requirements may be affected by events beyond our control.
Our failure to comply with obligations under the Senior Secured Revolving Credit Facility could result in an event of default under the facility. A default, if not cured or waived, could permit acceleration of our indebtedness. We cannot be certain that we will be able to remedy any default. If our indebtedness is accelerated, we cannot be certain that we will have funds available to pay the accelerated indebtedness or that we will have the ability to refinance the accelerated indebtedness on terms favorable to us or at all.
WE ARE ENGAGED IN HIGHLY COMPETITIVE BUSINESSES AND MUST TYPICALLY BID AGAINST COMPETITORS TO OBTAIN ENGINEERING, CONSTRUCTION AND SERVICE CONTRACTS.
We are engaged in highly competitive businesses in which customer contracts are typically awarded through competitive bidding processes. We compete with other general and specialty contractors, both foreign and
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domestic, including large international contractors and small local contractors. Some competitors have greater financial and other resources than we do that, in some instances, could give them a competitive advantage over us.
STRIKES, WORK STOPPAGES AND THE LIKE, AS WELL AS RESULTING INCREASES IN OPERATING COSTS WOULD HAVE A NEGATIVE IMPACT ON OUR OPERATIONS AND RESULTS.
We are party to several regional collective bargaining agreements which expire between June 2001 and September 2006, and several project-specific collective bargaining agreements, each of which expires upon completion of the relevant project. Our inability to negotiate acceptable collective bargaining agreements with any of the unions could result in strikes, work stoppages or increased operating costs as a result of higher union wages or benefits. If the unionized workers engage in a strike or other work stoppage, or other employees become unionized, we could experience a significant disruption of our operations and ongoing higher labor costs, which could adversely affect our businesses, financial position or results of operations. See "Employees" in Part I of this report.
OUR SUCCESS DEPENDS ON ATTRACTING AND RETAINING QUALIFIED PERSONNEL IN A COMPETITIVE ENVIRONMENT.
We are dependent upon our ability to attract and retain highly qualified managerial, technical and business development personnel. Competition for key personnel is intense. We cannot be certain that we will retain our key managerial, technical and business development personnel or that we will attract or assimilate key personnel in the future.
ECONOMIC DOWNTURNS AND REDUCTIONS IN GOVERNMENT FUNDING COULD HAVE A NEGATIVE IMPACT ON OUR BUSINESSES.
Demand for the services offered by us has been, and is expected to continue to be, subject to significant fluctuations due to a variety of factors beyond our control, including economic conditions. During economic downturns, the ability of both private and governmental entities to make expenditures may decline significantly. We cannot be certain that economic or political conditions generally will be favorable or that there will not be significant fluctuations adversely affecting the industry as a whole or key markets targeted by us. In addition, our operations are in part dependent upon government funding. Significant changes in the level of government funding of these projects could have an unfavorable impact on our operating results.
OUR FIXED-PRICE CONTRACTS SUBJECT US TO THE RISK OF INCREASED PROJECT COST.
Our fixed-price contracts involve risks relating to our inability to receive additional compensation in the event the costs of performing those contracts proves to be greater than anticipated. Our cost of performing the contracts may be greater than anticipated due to uncertainties inherent in estimating contract completion costs, contract modifications by customers resulting in claims, failure of subcontractors and joint venture partners to perform and other unforeseen events and conditions. Approximately 58% or $2,046.6 million of our backlog is fixed-price or fixed-unit-price contracts. Any one or more of these risks could result in reduced profits or increased losses on a particular contract or contracts.
THE U.S. GOVERNMENT CAN AUDIT AND DISALLOW CLAIMS FOR COMPENSATION UNDER OUR GOVERNMENT CONTRACTS, AND CAN TERMINATE THOSE CONTRACTS WITHOUT CAUSE.
Government contracts, primarily with the U.S. Departments of Energy and Defense, are, and are expected to be, a significant part of our business. The U.S. government accounted for approximately 24% of our consolidated revenues in 2001. Allowable costs under government contracts are subject to audit by the U.S. government. To the extent that these audits result in determinations that costs claimed as reimbursable are not allowable costs or were not allocated in accordance with federal government regulations, we could be required to reimburse the U.S. government for amounts previously received. If we were to lose and not replace our revenues generated by one or more of the U.S. government contracts, our businesses, financial condition, results of operations and cash flows could be adversely affected.
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We have a number of contracts and subcontracts with agencies of the U.S. government, principally for environmental remediation and restoration work, which extend beyond one year and for which government funding has not yet been approved. We cannot be certain that funding will be approved. All contracts with agencies of the U.S. government and some commercial and foreign contracts are subject to unilateral termination at the option of the customer. In the event of a termination, we would not receive projected revenues or profits associated with the terminated portion of those contracts.
OUR BUSINESSES INVOLVE MANY PROJECT-RELATED AND CONTRACT-RELATED RISKS.
Our businesses are subject to a variety of project-related risks, including changes in political and other circumstances, particularly since contracts for major projects are performed over extended periods of time. These risks include the failure of applicable governing authorities to take necessary actions, opposition by third parties to particular projects and the failure to obtain adequate financing for particular projects. Due to these factors, losses on a particular contract or contracts could occur, and we could experience significant changes in operating results on a quarterly or annual basis.
We also may be adversely affected by various risks and hazards, including industrial accidents, labor disputes, geological conditions, environmental hazards, weather and other natural phenomena such as earthquakes and floods.
OUR INTERNATIONAL OPERATIONS INVOLVE SPECIAL RISKS.
We pursue project opportunities internationally through foreign and domestic subsidiaries as well as through agreements with foreign joint venture partners. Our international operations accounted for 15.8% of our revenues in 2001. Our foreign operations are subject to special risks, including:
o unstable political, economic, financial and market conditions;
o potential incompatibility with foreign joint venture partners;
o foreign currency controls and fluctuations;
o trade restrictions;
o restrictions on repatriating foreign profits back to the United States;
o increases in taxes;
o civil disturbances; and
o changes in labor conditions, labor strikes and difficulties in staffing and managing international operations.
Events outside of our control may limit or disrupt operations, restrict the movement of funds, result in the deprivation of contract rights, increase foreign taxation or limit repatriation of earnings. In addition, in some cases, applicable law and joint venture or other agreements may provide that each joint venture partner is jointly and severally liable for all liabilities of the venture.
WE COULD BE SUBJECT TO LIABILITY UNDER ENVIRONMENTAL LAWS.
We are subject to a variety of environmental laws and regulations governing, among other things, discharges to air and water, the handling, storage and disposal of hazardous or solid waste materials and the remediation of
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contamination associated with releases of hazardous substances. These laws and regulations and the risk of attendant litigation can cause significant delays to a project and add significantly to its cost. Violations of these environmental laws and regulations could subject us and our management to civil and criminal penalties and other liabilities. These laws and regulations may become more stringent, or be more stringently enforced, in the future.
Various federal, state and local environmental laws and regulations, as well as common law, may impose liability for property damage and costs of investigation and cleanup of hazardous or toxic substances on property currently or previously owned by us or arising out of our waste management activities. These laws may impose responsibility and liability without regard to knowledge of or causation of the presence of the contaminants. The liability under these laws is joint and several. We have potential liabilities associated with our past waste management and contract mining activities and with our current and prior ownership of various properties. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Contingencies and Commitments."
OUR STOCKHOLDER RIGHTS PLAN, OUR ORGANIZATIONAL DOCUMENTS, SOME OF OUR AGREEMENTS AND PROVISIONS OF DELAWARE LAW COULD INHIBIT A CHANGE IN CONTROL.
We are subject to various restrictions and other requirements that may have the effect of delaying, deterring or preventing a change in control of us, such as:
o our stockholder rights plan;
o provisions in our certificate of incorporation and bylaws;
o some of our agreements, including the disbursing agreement that we entered into in connection with our emergence from bankruptcy; and
o once it applies to us, Section 203 of the Delaware General Corporation law.
On June 21, 2002, our board of directors approved a stockholder rights plan. Under this plan, each share of our common stock is accompanied by a right that entitles the holder of that share, upon the occurrence of specified events that may be intended to effect a change in control, to purchase either additional shares of our common stock or shares of an acquiring company's common stock at a price equal to one-half of the current market price of the relevant shares.
A number of provisions in our certificate of incorporation and bylaws also may make a change in control more difficult, including, among others, provisions relating to a classified board of directors, removal of directors only for cause, the elimination of our stockholders' ability to fill vacancies on the board of directors and to call special meetings and supermajority stockholder amendments. In addition, our certificate of incorporation authorizes the issuance of up to 100 million shares of our common stock and 10 million shares of our preferred stock. Our board of directors has the power to determine the price and terms under which additional capital stock may be issued and to fix the terms of preferred stock. Existing shareholders will not have preemptive rights with respect to any of those shares.
On the Effective Date, we issued 5,000,000 shares of our common stock to a disbursing agent for the benefit of unsecured creditors in our bankruptcy. As of June 19, 2002, an initial distribution of 461,505 shares of our common stock was made to various unsecured creditors. Pending the distribution of the remaining shares to the unsecured creditors, the disbursing agreement requires the disbursing agent to vote the shares held by the disbursing agent as recommended by our board of directors, unless the reorganization plan committee established in connection with our bankruptcy directs it to vote the shares in proportion to the votes cast and abstentions claimed by all other stockholders eligible to vote on the particular matter.
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Section 203 of the Delaware General Corporation Law, which generally limits the ability of major stockholders to engage in specified transactions with us that may be intended to effect a change in control, is not currently applicable to us. It will become applicable to us as soon as our common stock is listed on a national securities exchange or authorized for quotation on Nasdaq or we have more than 2,000 stockholders.
THE SIGNIFICANT DEMANDS ON OUR CASH RESOURCES COULD AFFECT OUR ABILITY TO ACHIEVE OUR BUSINESS PLAN.
We have substantial demands on our cash resources in addition to operating expenses and interest expense, principally capital expenditures. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Financial Condition and Liquidity."
Our ability to fund working capital requirements will depend upon our future operating performance which, in turn, will be affected by prevailing economic conditions and financial, business and other factors, many of which are beyond our control. If we are unable to fund our businesses, we will be forced to adopt an alternative strategy that may include:
o reducing or delaying capital expenditures;
o limiting our growth;
o seeking additional debt financing or equity capital;
o selling assets; or
o restructuring or refinancing our indebtedness.
We cannot assure you that any of these strategies could be effected on favorable terms or at all. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition and Liquidity."
THERE IS NO ORGANIZED TRADING MARKET FOR OUR COMMON STOCK.
At present, our common stock is not eligible to be listed on a national stock exchange or quoted on a national quotation system. As a result, there is no organized trading market for our common stock. We intend to apply for the listing or quotation of our common stock on a national stock exchange or national quotation system as soon as possible after all of the relevant listing requirements are met. However, we can give no assurance that we will be successful in having our common stock listed on an exchange or quoted on a quotation system. In the event that we are unable to cause any of our common stock to be so listed or quoted, the liquidity of our common stock would be materially impaired and holders of our common stock may be forced to bear the economic risk of their investment for an indefinite period of time.
WE MAY BE SUBJECT TO ADDITIONAL RISKS ASSOCIATED WITH OUR RECENT EMERGENCE FROM BANKRUPTCY.
Our recent emergence from bankruptcy does not assure our continued success, and the effect, if any, which the bankruptcy may have on our future operations cannot be accurately predicted or quantified. We are engaged in highly competitive businesses in which customer contracts are typically awarded through competitive bidding processes, and winning new work and new customers is vital to our success. In addition, on some projects, particularly those of significant size and requiring specialized technology or know-how, we partner with other companies, both to increase our opportunity to win the contract and to manage development and execution risk. For some projects, if we cannot find a suitable partner on satisfactory terms, we will not be able to pursue the project on our own. The adverse publicity of our recent bankruptcy could impair our ability to attract new customers, win new work from existing customers and establish partnerships and joint ventures with other
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companies on favorable terms. Any of these circumstances would adversely affect our ability to compete and could have a material adverse effect on our businesses, financial condition, results of operations and cash flows.
WE MAY BE UNABLE TO OBTAIN ADEQUATE BONDING TO BID ON NEW WORK.
In line with industry practice, we are often required to provide performance and surety bonds to customers under fixed-price contracts. These bonds indemnify the customer should we fail to perform our obligations under the contract. If a bond is required for a particular project and we are unable to obtain an appropriate bond, we cannot pursue that project. We have an existing bonding facility with an aggregate capacity of $500 million, but the issuance of bonds under that facility is at the surety's sole discretion. Moreover, due to events that affect the insurance and bonding markets generally, bonding may be more difficult to obtain in the future or may only be available at significant additional cost. There can be no assurance that bonds will continue to be available on reasonable terms. Our inability to obtain adequate bonding and, as a result, to bid on new work could have a material adverse effect on our businesses, financial condition, results of operations and cash flows.
ITEM 2.
ITEM 2. PROPERTIES
We do not own significant real property for operations other than certain land and improvements in Highland and Petaluma, California and Cheswick, Pennsylvania. Our principal administrative office facilities located in Boise, Idaho, Cleveland, Ohio, Aiken, South Carolina, Denver, Colorado and Princeton, New Jersey, are leased under long-term, noncancelable leases expiring in 2003, 2010, 2011, 2005 and 2013, respectively. At November 30, 2001, we owned more than 7,300 units of heavy and light mobile construction, environmental remediation and contract mining equipment. We consider our construction, environmental remediation and mining equipment and leased administrative and engineering facilities to be well maintained and suitable for our current operations.
As of November 30, 2001, our principal facilities were as follows:
* Operating unit: 1 - Industrial Process 2 - Government Services 3 - Infrastructure & Mining 4 - Power 5 - Petroleum & Chemicals 6 - Corporate
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
We are a defendant in various lawsuits resulting from allegations that third parties sustained injuries and damage from the inhalation of asbestos fibers contained in materials used in construction projects. In addition, based on proofs of claims filed with the court during the pendency of our bankruptcy proceedings, we are aware of other potential asbestos claims against us. We believe that we have substantial third party insurance coverage for a significant portion of these existing and potential claims and remaining amounts will not have an adverse material impact on our financial position, results of operations or cash flows.
While we expect that additional asbestos claims will be filed against us in the future, we have no basis for estimating the number of claims or individual or cumulative settlement amounts and, accordingly, no provision has been made for future claims. We believe, however, that the outcome of these actions, individually and collectively, will not have a material adverse impact on our financial position, results of operations or cash flows.
We also incorporate by reference the information regarding legal proceedings set forth under the caption "Other" in Note 13, "Contingencies and Commitments" of the Notes to Consolidated Financial Statements in Item 8 of this report.
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ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We submitted no matters to a vote of our stockholders during the fourth quarter of 2001.
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PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Prior to May 14, 2001, our common stock traded on the New York Stock Exchange under the ticker symbol "WNG." On May 14, 2001, the New York Stock Exchange suspended trading of our common stock and on July 6, 2001, our common stock was delisted by the New York Stock Exchange. Upon such delisting, our common stock traded in the over-the-counter market, as reported by the Pink Sheets(R) quotation service, under the ticker symbol "WNGXQ." At the close of business on November 30, 2001, we had 52,468,900 shares of common stock issued and outstanding.
The following table sets forth the high and low prices per share of our common stock for each quarterly period within 2000 and 2001:
- ---------------------- (1) Unless otherwise indicated, all prices are the New York Stock Exchange composite high and low sales prices per share of our common stock. (2) The high price is the New York Stock Exchange composite high sales price per share of our common stock, and the low price is the low over-the-counter closing bid price per share of our common stock, as reported buy the Pink Sheets(R) quotation service. (3) The high and low prices are the high and low over-the-counter closing bid prices per share of our common stock, as reported by the Pink Sheets(R) quotation service. The over-the-counter quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
HOLDERS
The number of record holders of our voting common stock at November 30, 2001 was approximately 1,321. This number does not include beneficial owners of our common stock held in the name of a nominee.
DIVIDENDS
We have not paid a cash dividend since the first quarter of fiscal 1994. Our credit facilities place restrictions on dividend payments. For a more detailed discussion, see Note 8, "Credit Facilities" of the Notes to Consolidated Financial Statements in Item 8 of this report.
RECENT SALES OF UNREGISTERED EQUITY SECURITIES
We did not sell any unregistered equity securities during 2001.
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ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA (IN MILLIONS, EXCEPT PER SHARE DATA)
(a) On July 7, 2000, we acquired RE&C from the Sellers in a transaction accounted for as a purchase. See Items 1 and 7 of this report and Note 3, "Acquisitions - Acquisition of Raytheon Engineers & Constructors" of the Notes to Consolidated Financial Statements in Item 8 of this report.
(b) On March 22, 1999, we acquired a majority economic interest in the government and environmental services businesses of CBS Corporation (now Viacom, Inc.) in a transaction accounted for as a purchase. See Item 1 of this report and Note 3, "Acquisitions - Acquisition of Westinghouse Businesses" of the Notes to Consolidated Financial Statements in Item 8 of this report.
(c) Gross profit (loss) during the year ended December 1, 2000 includes the impact of adjustments of $141.0 million to the preliminary allocation of the RE&C purchase price to the net assets acquired for items that we believe were additional misstatements, based on additional information we obtained, but that were not included in the arbitration claim, including adjustments to estimates at completion on contracts and increases in self-insurance reserves. See Note 3, "Acquisitions - Acquisition of Raytheon Engineers & Constructors" of the Notes to Consolidated Financial Statements in Item 8 of this report.
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ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
CONSOLIDATED OPERATIONS
OVERVIEW
The acquisition of RE&C on July 7, 2000 significantly increased our size in terms of revenues and backlog. As a result, the historical information presented in this Form 10-K does not purport to represent what our results of operations, financial position or cash flows would have been for the historical periods presented had we in fact owned RE&C for those periods, and is not indicative of the results of operations, financial position or cash flows we may report in the future.
WGI is a global engineering and construction company serving clients through five operating units: Power, Infrastructure & Mining, Industrial/Process, Government and Petroleum & Chemicals. See "Business - --Operating Units" in Item 1 of this report for a thorough description of the segments.
We are subject to numerous factors that impact our ability to win new work. The Power segment is dependent on the domestic demand for new power generating facilities and the modification of existing power facilities. Infrastructure & Mining is impacted by the availability of public sector funding for transportation projects and availability of bonding. The Industrial/Process segment is impacted in general by the growth prospects in the U.S. economy and more directly by the capital spending plans of its large customer base. The Government unit is almost entirely dependent on the spending levels of the U.S. government, in particular, the Departments of Energy and Defense. Petroleum & Chemicals is affected by the capital spending of oil and gas companies and chemical producers.
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During 2001, numerous factors impacted our results of operations, but the largest factor was our dispute with the Sellers surrounding the RE&C acquisition that led to our bankruptcy filing on May 14, 2001. See Note 4, "Reorganization Case and Fresh-start Reporting" of the Notes to Consolidated Financial Statements in Item 8 of this report. The bankruptcy adversely impacted our ability to win new contracts. However, it also enabled us to relieve ourselves of significant liabilities in the form of debt, warranty obligations, lease obligations, and obligations on contracts acquired from the Sellers.
The following are our most significant accounting terms and policies:
NEW WORK BOOKINGS represent the monetary value of a contract entered into with clients that are binding on both parties and reflect the revenue expected to be recognized from that contract.
BACKLOG represents the total accumulation of new work bookings less the amount of revenue recognized to-date on contracts at a specific point in time; therefore, it comprises the total value of awarded contracts that are not complete and the revenue that is expected to be reflected over the remaining life of the projects in process. Backlog is the key predictor of future earnings potential. Although backlog reflects business that is considered to be firm, cancellations or scope adjustments may occur. We have adjusted backlog to reflect project cancellations, deferrals and revisions in scope and cost, both upward and downward known at the reporting date; however, future contract cancellations or modifications may reduce backlog and future revenues. We have a significant number of clients that consistently extend or add to the scope of existing contracts. We do not include any estimate of this ongoing work in backlog.
There are three unique aspects of our approach to new work bookings and backlog:
o GOVERNMENT CONTRACTS--Most of our government contracts cover several years. However, they are subject to annual appropriations by Congress. To account for the risk that future amounts may not be appropriated, we only include the most immediate two years of forecast revenue in our backlog. Therefore, as time passes and appropriations occur, additional new work bookings are recorded on existing government contracts.
o MINING CONTRACTS--Mining contracts are entered into for varying periods of time up to the life of the resource. For new work bookings and backlog purposes, we limit the amount recorded to five years. Similarly to government contracts, as time passes, we recognize additional new work bookings as commitments for that future work are firmed up.
o The amount of new work and related backlog recognized depends on whether the contract or project is determined to be an "at-risk" or "agency" relationship between the client and us. Determination of the relationship is based on characteristics of the contract or the relationship with the client. For "at-risk" relationships, the expected gross revenue is included in new work and backlog, while in relationships where we act as an agent for our client, only the expected net fee revenue is included in new work and backlog.
REVENUE RECOGNITION is generally measured on the "percentage-of-completion" method for construction-type contracts, on the "units performed" method for fixed-unit-price contracts, and as work is performed and award and other fees are earned for cost-type and operation and maintenance type contracts. There are various means of determining revenue under the percentage-of-completion method. Most of our fixed-price contracts use a cost-to-cost approach, where revenue is earned in proportion to costs incurred divided by total expected costs to be incurred. However, if a project includes significant materials or equipment costs, we require that the percentage-of-completion method be based on labor hours, labor dollars or some other appropriate approximation of physical completion rather than on a strict percentage of costs incurred. Also, we generally do not recognize any profit on fixed-price contracts until the project is at least 20% complete.
With respect to award fees associated with U.S. government contracts, we recognize an estimated award fee based on historical performance until the client has confirmed the final award fee at year-end. This approach can
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result in significant amounts of profit recognition in the fourth quarter on projects in our Government operating unit. Performance-based incentive fees are recognized when actually awarded by the client.
Revenue recognition for construction and engineering contracts also depends on whether the contract or project is determined to be an "at risk" or an "agency" relationship between the client and us. Determination of the relationship is based on characteristics of the contract or the relationship with the client. For "at risk" relationships, the gross revenue and the costs of goods, services, payroll, benefits, non-income tax, and other costs are recognized in the income statement. For "agency" relationships, where we act as an agent for our client, only fee revenue is recognized, meaning that direct project costs and the related reimbursement from the client have been netted.
JOINT VENTURES AND EQUITY INVESTMENTS are utilized when certain contracts are executed jointly through partnerships and joint ventures with unrelated third parties.
o JOINT VENTURES--Much of our work on large construction projects is performed through joint ventures with one or more partners. The accounting treatment depends on our ownership percentage of the joint venture. For those where our ownership exceeds 50% or we control the joint venture by contract terms or other means, the assets, liabilities and results of operations of the joint venture are fully consolidated in our financial statements and the minority interests of third parties are separately deducted in our financial statements. For those where the ownership is 50% or less, we report our pro rata portion of revenue and costs but the balance sheet reflects only our net percentage investment in the project.
o PARTIALLY-OWNED SUBSIDIARY COMPANIES--Again, the accounting treatment depends on our ownership percentage of the subsidiary company. For those where the ownership exceeds 50%, the assets, liabilities and results of operations of the subsidiary company are fully consolidated in our financial statements and the minority interests of third parties are separately deducted in our financial statements. However, where the ownership is 50% or less, we reflect our proportion of the net income in the results of operations as equity in earnings of mining ventures and our investment on the balance sheet as our net percentage investment in the subsidiary company.
NORMAL PROFIT is an accounting concept that results from the requirement that an acquiring company record at fair value all contracts, including construction contracts, of an acquiree in process at the date of the acquisition. As such, an asset for favorable contracts or a liability for unfavorable contracts is recorded in purchase accounting. These assets or liabilities are then reduced based on revenues recorded over the remaining contract lives effectively resulting in the recognition of a reasonable or normal profit margin on contract activity performed by us subsequent to the acquisition. Because of the acquisition of RE&C and the below market profit status of many of the significant acquired contracts, we recorded significant liabilities in purchase accounting. The reduction of these liabilities has a significant impact on our recorded net income but has no impact on our cash flows.
CHANGE ORDERS AND CLAIMS are common on construction contracts when changes occur once contract performance is underway. These changes are to be documented and terms agreed with the client before the work is performed. Also, costs may be incurred in addition to amounts originally estimated under the assumption that the customer will agree to pay for such additional costs. Change orders are included in total estimated contract revenue when it is probable that the change order will result in a bona fide addition to contract value and can be reliably estimated. If it is probable that the change order will result in the contract price exceeding the related costs incurred, that the excess over cost can be reliably estimated and if realization is assured beyond a reasonable doubt, the original contract price is adjusted to the probable revised contract amount as the costs are recognized. Claims are included in total estimated contract revenue, only to the extent that contract costs related to the claim have been incurred, when it is probable that the claim will result in a bona fide addition to contract value and can be reliably estimated. No profit is recognized on claims until final settlement occurs. This can lead to a situation where losses are recognized when costs are incurred before client agreement is obtained and subsequent income recognized when signed agreements are negotiated.
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ACCOUNTS RECEIVABLE generally carry the same meaning as in any other business and represent amounts billed to clients that have not been paid. One unusual item is client retention. On large fixed-price construction contracts, contract provisions may allow the client to withhold from 5% to 10% of invoices until the project is completed, which may be several months or years. Retention is recorded as a receivable and is separately disclosed in the financial statements.
UNBILLED RECEIVABLES is comprised of costs incurred on projects, together with any profit recognized on projects using the percentage-of-completion method, and represents work performed but pursuant to contract terms we are either not yet able to bill the client, or the invoice was not recorded before the accounting period cut-off occurred.
BILLINGS IN EXCESS OF COST AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS represents amounts actually billed to clients, and perhaps collected, in excess of costs and profits incurred on the project and as such, is reflected as a liability. Also, in specified business segments, we are able to negotiate substantial advance payments as a contract condition. Those advance payments are reflected in billings in excess of cost and estimated earnings on uncompleted contracts.
ESTIMATE AT COMPLETION is a financial forecast of a project that indicates the best current estimate of total revenues and profits at the point in time when the project is completed. If a project estimate at completion indicates that a project will incur a loss, a provision for the entire loss on the contract is recognized at that time.
ESTIMATED COSTS TO COMPLETE LONG-TERM CONTRACTS is comprised of provisions for losses on contracts, reclamation reserves on mining contracts and reserves for punch-list costs, demobilization and warranty costs on contracts that have achieved substantial completion and reserves for audit and contract closing adjustments on U.S. government contracts.
GENERAL AND ADMINISTRATIVE EXPENSES include executive salaries and corporate headquarters functions such as legal services, human resources, and finance and accounting.
SELF-INSURANCE RESERVES represent reserves established through a program under which we determine the extent to which we self-insure certain business risks. We carry substantial premium-paid, traditional insurance for our various business risks, however, we do self-insure the lower level deductibles for workers' compensation and general and auto liability. Most of this is handled through Broadway Insurance Company, a wholly-owned captive Bermuda insurance subsidiary. As such, we carry self-insurance reserves on our balance sheet that are reviewed annually by an independent actuary. The current portion of the self-insurance reserves is included in other accrued liabilities.
MINORITY INTEREST reflects the equity investment by third parties in certain subsidiary companies and joint ventures that we have consolidated in our financial statements.
GOVERNMENT CONTRACT COSTS are incurred under certain of our contracts, primarily in the Government operating unit. We have contracts with the U.S. government that contain provisions requiring compliance with the U.S. Federal Acquisition Regulation and U.S. Cost Accounting Standards. The allowable costs we charge to those contracts are subject to adjustments upon audit and negotiation by various agencies of the U.S. government. Audits and negotiations of indirect costs are substantially complete through 1999. Audits of 2000 indirect costs are in progress. We are also in the process of preparing cost impact statements as required under the U.S. Cost Accounting Standards for 1999 through 2001, which are subject to audit and negotiation. We have also prepared and submitted to the U.S. government cost impact statements for 1989 through 1995 for which we believe no adjustments are necessary. We believe that the results of the indirect cost audits and negotiations and the cost impact statements will not result in a material change to our financial position, results of operations or cash flows.
PENSION AND POST-RETIREMENT BENEFIT PLANS include certain plans for which we assumed sponsorship through the Westinghouse Businesses acquisition, including contributory defined benefit pension plans that cover
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employees of WGSG. We make actuarially computed contributions as necessary to adequately fund benefits for these plans. We are also the sponsors of an unfunded plan to provide health care benefits for employees of WGSG who retired before July 1, 1993, including their surviving spouses and dependent children. We also provide benefits under company-sponsored retiree health care and life insurance plans for substantially all employees of WGSG. We also provide benefits under company-sponsored retiree health care to approximately 260 retired employees and provide a life insurance plan for substantially all retirees of RE&C. The retiree health care plans require retiree contributions and contain other cost sharing features. The retiree life insurance plan provides basic coverage on a noncontributory basis.
2001 COMPARED TO 2000
REVENUE AND GROSS PROFIT
Revenue for the year ended November 30, 2001 increased 31% from the year ended December 1, 2000 to $4,059.5. The increase was due to the inclusion of a full year's revenue of RE&C operations compared to five months in 2000.
Cost of revenue for the year ended December 1, 2000 includes $141 million in charges for items related to the acquisition of RE&C that were identified subsequent to the initial purchase price allocation based on additional information we obtained, but that were not included in the arbitration claim. See Note 3, "Acquisitions - Acquisition of Raytheon Engineers & Constructors," of the Notes to Consolidated Financial Statements in Item 8 of this report. These amounts are comprised of the following:
Exclusive of the $141.0 million in charges discussed above, gross profit increased $56.2 million from $59.4 million in 2000 to $115.6 million in 2001. The increase was attributable to the recognition of normal profit on contracts from the RE&C acquisition of $87.2 million in 2001 compared to $50.2 million in 2000 as a result of a full year of revenue on projects to which the normal profit relates. The recognition of normal profit has no impact on our cash flows. In addition, gross profit for 2000 included a $20.3 million provision related to the Summitville environmental matter. Operating unit overhead included in cost of revenue increased 19.5% from 2001 compared to 2000 due to the inclusion of a full year of indirect costs associated with the RE&C business in 2001 compared to five months of comparable indirect costs in 2000. Operating unit overhead was initially structured to support a $5 billion revenue organization envisioned at the time of the RE&C acquisition. During the last half of 2001, steps were taken to reduce operating overhead to support lower expected future revenue. Our gross profit (loss) as a percent of revenue was 2.4% and 2.8% for the quarter and year ended November 30, 2001, respectively, and (18.6)% and (2.6)% for the comparable periods of 2000.
Our gross margins often vary between periods due to inherent risks and rewards on fixed-price contracts causing unexpected gains and losses on contracts. Gross margins may also vary between periods due to changes in the mix and timing of contracts executed by us, which contain various risk and profit profiles and are subject to uncertainties inherent in the estimation process.
At November 30, 2001, backlog of $3,547.5 million was comprised of $1,500.9 million (42%) of revenue from cost-type contracts and $2,046.6 million (58%) of revenue from fixed-price and fixed-unit-price contracts and our share of revenue from mining ventures. During 2001, we reversed previously recorded backlog of $1,020.6 million. This reversal was principally due to the suspension of work in two large construction projects located in Massachusetts that were part of the RE&C acquisition. See Note 3, "Acquisitions - Acquisition of Raytheon Engineers & Constructors" of the Notes to Consolidated Financial Statements in Item 8 of this report.
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GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the quarter and year ended November 30, 2001 increased $.4 million and $19.1 million compared to 2000. The increase relates to a full year of general and administrative costs associated with the acquisition of RE&C. Certain actions taken during 2001 should reduce general and administrative expenses in 2002 by $12 to $16 million.
GOODWILL AMORTIZATION
For the year ended November 30, 2001, goodwill amortization decreased $10.6 million as compared to 2000, to $14.6 million. The decrease in goodwill was principally due to the impairment, in the fourth quarter of 2000, of goodwill related to the acquisition of RE&C.
In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141 BUSINESS COMBINATIONS and No. 142 GOODWILL AND OTHER INTANGIBLE ASSETS. These statements will be effective for our fiscal year 2002. Under the new rules, goodwill will no longer be amortized, but will be subject to annual impairment tests.
INTEGRATION AND MERGER COSTS
As a result of the acquisition of RE&C on July 7, 2000, we incurred significant costs associated with the integration and merger of the two companies. For the quarter and year ended November 30, 2001, those costs were $1.2 million and $18.8 million, respectively, versus $5.2 million and $15.3 million for the comparable periods in 2000. In 2001 and 2000, the costs were primarily incurred for accounting, legal and financial advisory fees.
IMPAIRMENT OF ACQUIRED ASSETS
During the fourth quarter of 2000, we recognized asset impairment losses of $444.1 million and $747.5 million for our inability to collect our purchase price adjustment from the Sellers and for impairment of goodwill and other assets acquired as a part of the RE&C transaction, respectively. There were no such charges in 2001.
RESTRUCTURING COSTS
During the fourth quarter of 2001, we initiated restructuring actions to improve operational effectiveness and efficiency and reduce expenses worldwide relative to employment levels and excess facilities resulting from the proposed plan of reorganization during the pendency of our bankruptcy. Restructuring costs for the year include a pre-tax charge for termination benefits of $2.4 million for employees notified as of November 30, 2001, an impairment charge of $4.1 million for nonrecoverable asset values and enhanced pension benefits of $.5 million. The severance costs represent expected reductions in work force for 687 employees representing management, professional, administrative and operational overhead. Actual reductions in work force are 538 through November 30, 2001. In December 2001 and during the quarter ended March 29, 2002, additional restructuring charges were accrued of $6.6 million for 657 additional employee terminations and facility closure costs of $19.7 million.
INVESTMENT INCOME
Investment income for the quarter and year ended November 30, 2001 decreased $4.3 million and $1.7 million, respectively, from the comparable periods in 2000 due to a significant decrease in cash balances.
INTEREST EXPENSE
Interest expense includes three components: amortization of fees associated with our lines of credit, fees on letters of credit, and interest expense. Interest expense for the quarter ended November 30, 2001 decreased $11.0
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million over the comparable period of 2000 due to a cessation of accrual of interest expense at the date of our bankruptcy filing. Had we continued to accrue interest expense, we would have recognized an additional $20.9 million and $48.2 million during the quarter and year ended November 30, 2001, respectively. Had we recognized all contractual interest expense during 2001, interest expense would have exceeded amounts recognized during 2000 due to the impact of a full year of interest expense and fees on the debt and credit line fees related to the acquisition of RE&C.
OTHER INCOME (EXPENSE), NET
Other income (expense) was $(4.0) million and $(10.5) million, respectively, for the quarter and year ended November 30, 2001 compared to $(6.6) million for the quarter and $(5.3) million, respectively, for the comparable period in 2000. Other income (expense) for the fourth quarter of 2000 included $(6.2) million related to the MK Gold Corporation litigation settlement. Other income (expense) for the fourth quarter of 2001 included $(3.5) million for costs associated with our office destroyed in the World Trade Center terrorist attacks. See Note 13, "Contingencies and Commitments - Other" of the Notes to Consolidated Financial Statements in Item 8 of this report for a description of the MK Gold litigation settlement.
REORGANIZATION ITEMS
As a result of bankruptcy, we incurred charges of $91.1 million associated with the process of filing a plan of reorganization, offset by a net gain from liquidation of insolvent foreign subsidiaries of $34.5 million. The costs incurred included accounting, legal and financial advisory fees of $54.7 million and charges for asset impairment of assets of rejected contracts of $36.4 million. See Note 4, "Reorganization and Fresh-start Reporting" of the Notes to Consolidated Financial Statements in Item 8 of this report.
INCOME TAX EXPENSE
The effective tax rate for the quarter and year ended November 30, 2001 was 27.8% compared to 38.6% for the comparable periods of 2000. The primary reason for the decrease in the effective tax rate for 2001 was the impact of nondeductible expenses, mainly reorganization costs, reducing the tax deductible loss. This accounted for a 11.4% reduction in the effective tax rate.
Cash tax payments for 2002 and later years are anticipated to be substantially less than the related tax liability reported in the financial statements. The NOL carryover for federal and state income taxes will be substantially utilized after 2002 as a result of the cancellation of debt income in the bankruptcy restructuring. However, the recognition of loss reserves and deferred deductions and the amortization of goodwill for tax reporting purposes will cause the taxable income reported on future federal and state tax returns to be substantially less than pre-tax income reported on the financial statements. Goodwill, for tax purposes, has a remaining life of 13.5 years at the beginning of 2002, and annual amortization is expected to be at least $40 million.
MINORITY INTERESTS
Minority interests in the income of consolidated subsidiaries for the quarter and year ended November 30, 2001 increased to $6.6 million and $15.5 million, respectively, compared to $2.9 million and $9.4 million for the comparable periods of 2000 due to increases in income from WGSG in 2001. Minority interests consist of the 40% minority interest of BNFL in the income of WGSG and a 35% minority interest in the income of Safe Sites of Colorado, LLC, a subsidiary of WGSG.
2000 COMPARED TO 1999
REVENUE AND GROSS PROFIT
Revenue for the year ended December 1, 2000 increased 35% to $3,103.9 million compared to $2,304.4 million for the comparable period in 1999. The increase is due to the inclusion of the post-acquisition results of
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RE&C, acquired on July 7, 2000, and a full-year of results the Westinghouse Businesses, acquired on March 22, 1999. Revenue for the quarter ended December 1, 2000 increased 53% or $358.7 million over the comparable period in 1999, also due to the consolidation of results of RE&C.
Cost of revenue for the year ended December 1, 2000 includes $141 million in charges for items related to the acquisition of RE&C that were identified subsequent to the initial purchase price allocation based on additional information we obtained, but that were not included in the arbitration claim. See Note 3, "Acquisitions - Acquisition of Raytheon Engineers & Constructors," of the Notes to Consolidated Financial Statements in Item 8 of this report. These amounts are comprised of the following:
Exclusive of the $141.0 million in charges discussed above, gross profit for the year ended December 1, 2000 decreased 52% to $59.4 million from the previous year primarily due to incremental losses of $47.3 million on five large fixed-price contracts acquired in the RE&C acquisition. These losses resulted from events that arose after the acquisition. In addition, our Infrastructure & Mining operating unit recognized approximately $12.1 million in losses on seven domestic projects and a $4.9 million loss on an international water distribution project. Our Government operating unit recognized a $10.2 million loss on an environmental remediation project. Lastly, a $20.3 million reserve was established for the settlement of the Summitville environmental matters. See Note 13, "Contingencies and Commitments - Summitville environmental matters" of the Notes to Consolidated Financial Statements in Item 8 of this report. Our gross profit for the quarter and year ended December 1, 2000 included $25.7 and $50.2 million, respectively, for the recognition of normal profit on contracts related to the acquisition of RE&C. The recognition of normal profit had no impact on our cash flows. There was no normal profit in 1999.
Substantially all of the above noted losses and provisions were recorded in the quarter ended December 1, 2000, causing the $90 million decline from the gross profit recognized in the previous year's fourth quarter.
Our gross margins often vary between periods due to inherent risks and rewards of fixed-price contracts causing unexpected gains and losses on contracts. Gross margins may also vary between periods due to changes in the mix and timing of contracts executed by us, which contain various risk and profit profiles and are subject to uncertainties inherent in the estimation process. During 2000, these profit margin fluctuations were over shadowed by the impact of losses recognized on projects obtained in the acquisition of RE&C.
At December 1, 2000, backlog of $5,659.4 million was comprised of $1,365.7 million (24%) of revenue from cost-type contracts and $4,293.7 million (76%) of revenue from fixed-price and fixed-unit-price contracts and the uncompleted portions of mining service contracts and ventures. During 2001, we reversed previously recorded backlog of $1,020.6 million. This reversal was principally due to the suspension of work on two large construction projects located in Massachusetts that were part of the RE&C acquisition. See Note 3, "Acquisitions - Acquisition of Raytheon Engineers & Constructors" of the Notes to Consolidated Financial Statements in Item 8 of this report.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the quarter and year ended December 1, 2000 increased $6.6 million and $11.8 million, respectively, compared to 1999. The increase for the quarter and year is due to the general and administrative costs supporting RE&C businesses.
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GOODWILL AMORTIZATION
Amortization of goodwill for the year ended December 1, 2000 increased $12.6 million over the comparable period of 1999. The increase is due to the full year of amortization (over a period of 20 years) of goodwill arising from the acquisition of the Westinghouse Businesses, which amortization began on March 22, 1999, the date of the acquisition, and the amortization of goodwill of $8.7 million arising from the acquisition of RE&C, which amortization began on July 7, 2000, the date of the acquisition. The annual amortization of the Westinghouse goodwill is currently estimated at $13.7 million through 2001. See "Impairment of acquired assets" below for the impairment of goodwill associated with the RE&C acquisition.
In connection with the acquisition of Old MK, we allocated the purchase price of Old MK to the assets and liabilities assumed, including preacquisition contingencies, on the basis of estimated fair values at September 11, 1996. During the fourth quarter of 2000, we reevaluated the likelihood of the future realization of the tax benefits of NOL carryforwards relating to Old MK and concluded, based on available evidence, including the utilization of NOL's upon emergence from bankruptcy in 2002, that it was more likely than not that the tax benefits previously reserved would be realized. This conclusion resulted in a $44.3 million increase in deferred tax assets and a corresponding decrease in recorded goodwill at December 1, 2000.
INTEGRATION AND MERGER COSTS
As a result of the acquisition of RE&C on July 7, 2000, we incurred significant costs associated with the integration and merger of the two companies. During the quarter and year ended December 1, 2000, those costs were $5.2 million and $15.3 million, respectively. They consisted primarily of legal, accounting, consulting and other fees. There were no such costs in 1999.
IMPAIRMENT OF ACQUIRED ASSETS
During the fourth quarter of 2000, we recognized asset impairment losses of $444.1 million and $747.5 million for our inability to collect our purchase price adjustment from the Sellers and for impairment of goodwill and other assets acquired as a part of the RE&C transaction, respectively. There were no such costs in 1999.
INVESTMENT INCOME
Investment income for the quarter and year ended December 1, 2000 increased $4.4 million and $7.5 million, respectively, as a result of investment income from excess funds derived from the financing for the acquisition of RE&C.
INTEREST EXPENSE
Interest expense includes three components: amortization of fees associated with our lines of credit, fees on letters of credit, and interest expense. Interest expense for the quarter and year ended December 1, 2000 increased $17.8 million and $30.8 million, respectively, over the comparable period of 1999, which reflects the increase in borrowings, the increase in borrowing rates, and credit line fees related to the acquisition of RE&C.
OTHER INCOME (EXPENSE), NET
Other income (expense) was $(6.6) million and $(5.3) million, respectively, for the quarter and year ended December 1, 2000 compared to $(.7) million and $9.7 million, respectively, for the comparable periods in 1999. Other income (expense) for the quarter and year ended December 1, 2000 includes a charge of $6.2 million related to the settlement of the MK Gold Corporation litigation. Other income of $9.7 million for the year ended December 3, 1999 included $8.7 million of gain from the sale of two non-core subsidiaries.
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INCOME TAX EXPENSE (BENEFIT)
The effective tax rate for the quarter and year ended December 1, 2000 was a 38.6% benefit compared to a 37% expense in the comparable periods of 1999. State taxes, including the impact of adjusting prior year's state tax attributes for current year changes in apportionment factors, account for 4.1% of the 2000 effective tax rate. Foreign taxes, net of federal benefit, reflect both the value of the benefit from foreign net operating losses and the expense of current foreign tax liability in those jurisdictions where net income was reported. A valuation allowance was established in 2000 against the benefit for foreign net operating losses incurred that year to reflect the expected future utilization of those losses on a more likely than not basis.
MINORITY INTERESTS
Minority interests in the income of consolidated subsidiaries for the quarter and year ended December 1, 2000 increased to $2.9 million and $9.4 million, respectively, compared to $2.5 million and $8.8 million, respectively, for the comparable periods of 1999 due to an increase in income from the Westinghouse Businesses, which were acquired on March 22, 1999. Minority interests consist of the 40% minority interest of BNFL in the income of WGSG and a 35% minority interest in the income of Safe Sites of Colorado, LLC, a subsidiary of WGSG.
OPERATING UNIT RESULTS (IN MILLIONS)
Operating income (loss) for the operating units was as follows:
For purposes of the following comparison, we have excluded the $141 million charge for changes to estimates at completion on acquired contracts, which has been discussed previously, from our 2000 operating unit income (loss) amounts.
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2001 COMPARED TO 2000
POWER
Revenue for 2001 was $839.4 million, an increase of 74.6% compared to 2000 due principally to a full year of revenues from the acquisition of RE&C. Approximately $437.1 million of revenue is related to four projects acquired from the Sellers which were originally fixed-price contracts, but which were converted during 2001 to cost-reimbursable contracts. The Sellers remain responsible for the performance of the contracts and as such continues to fund the construction of the projects. We are retained on a cost-reimbursable basis and continue to provide construction management services on the projects.
Operating income (loss) for 2001 was a loss of $8.3 million compared to income of $4.3 million in 2000. Operating income included recognition of normal profit of $26.4 million in 2001 compared to $21.3 million in 2000. However, upon conversion of the four projects referred to above to cost-reimbursable contracts, the recognition of normal profit was eliminated and the related reserve reclassified to accrued liabilities until the settlement with the Sellers. Only fee income was recognized for the balance of the year. Normal profit on these fixed-price contracts was substantially higher than fees earned on the cost-reimbursable contracts. During 2001, the Power operating unit recognized losses of $11.4 related to the completion of a significant international project which came with the RE&C acquisition and recognized cost overruns of $9.0 on a domestic nuclear facility. In 2000, the operating unit recognized losses of $24.3 million related to the completion and start-up of two power generation projects, one in the United States and one in the United Kingdom. Also, operating unit overhead was $11.9 higher in 2001 than in 2000 reflecting the inclusion of a full year of expenses for the acquired RE&C businesses. However, during the year, the level of these expenses was reduced and the overhead costs for 2002 will be lower.
New work booked for 2001 was $571.2 million compared to $251.0 million in 2000. Backlog at November 30, 2001 was $472.6 million, a decrease of $1,069.2 compared to December 1, 2000. During the first quarter of 2001, we reversed previously recorded backlog of $801 million due to suspension of work on two large construction projects in Massachusetts that were part of the RE&C acquisition. See Note 3, "Acquisitions - Acquisition of Raytheon Engineers & Constructors" of the Notes to Consolidated Financial Statements in Item 8 of this report.
INFRASTRUCTURE & MINING
During the third quarter of 2001, we completed the acquisition of an additional 17% of MIBRAG mbH for approximately $17.5 million, increasing its ownership to 50%. We financed the acquisition through dividends from MIBRAG mbH.
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Revenue for 2001 was $1,050.5 million, an increase of $239.5 million compared to 2000 due principally to the acquisition of RE&C, in particular a large hydroelectric dam in the Philippines and a large rail project in New Jersey.
Operating income for 2001 increased $31.4 million to $52.0 million compared to 2000. Operating profit for 2001 included recognition of normal profit of $42.2 million, primarily on the hydroelectric dam and light rail projects referred to above, compared to $15.3 million during 2000. Operating income for 2000 included a $20.3 million provision to settle the Summitville environmental matter. See Note 13, "Contingencies and Commitments - Summitville environmental matters" of the Notes to Consolidated Financial Statements in Item 8 of this report. Both years' operating income were impacted by the recognition of losses on fixed-price contracts totaling $17.0 million in 2000 and $25.0 million in 2001.
New work booked for 2001 was $602.3 million compared to $1,249.3 million in 2000. Backlog at November 30, 2001 was $1,360.6 million, a decrease of $486.4 million compared to December 1, 2000.
INDUSTRIAL/PROCESS
Revenue for 2001 was $776.4 million, an increase of $48.3 million compared to 2000. Revenue increased as a result of a full year of activity from the acquisition of RE&C and the addition of a large telecom project.
Operating income (loss) for 2001 was a loss of $15.1 million compared to income of $6.4 million in 2000 due to excess personnel costs as new work declined during the year, provisions related to uncollectable receivables on certain contracts, restructuring charges incurred to adjust the size of the operating unit to reflect lower levels of activity expected in 2002 and higher overhead costs reflecting a full year of activity from the acquisition of RE&C.
New work booked for 2001 was $741.5 million compared to $723.9 million in 2000. Backlog at November 30, 2001 was $405.0 million, a decrease of $126.5 million compared to December 1, 2000.
GOVERNMENT
Revenue for 2001 was $1,180.6 million, an increase of $182.8 million compared to 2000 due principally to a full year of activity from the acquisition of RE&C.
Operating income for 2001 was $83.8 million, an increase of $66.6 million compared to 2000 due principally to: (i) increased earnings and higher award fees on certain projects and (ii) reductions in the cost estimates of two large projects as a result of conversion from fixed-price to cost-reimbursable. The same project recorded significant cost overruns during 2000. Our operating income was increased $10.5 million and $9.1 million in 2001 and 2000, respectively, by the recognition of normal profit related to certain fixed-price contracts from the acquisition of RE&C. The operating income rate for 2001 was 7.1% compared to 1.7% in 2000.
New work booked for 2001 was $1,018.7 million compared to $405.2 million in 2000. Backlog at November 30, 2001 was $1,200.9 million, a decrease of $162.0 million compared to December 1, 2000.
PETROLEUM & CHEMICALS
Revenue for 2001 was $218.4 million, an increase of $127.9 million compared to 2000, due principally to the incorporation in 2001 of a full year of results for RE&C, while 2000 only reflected results from the date of the acquisition of RE&C on July 7, 2000.
Operating income for 2001 was a loss of $11.21 million compared to a loss of $5.6 million in 2000. Recognition of normal profit was $7.4 million in 2001 and $4.1 million in 2000. A large international project acquired as part of RE&C experienced significant completion and operational start-up issues and a provision of $9.1 million was recorded in 2001 to cover additional costs on the project.
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New work booked for 2001 was $40.4 million compared to $29.3 million in 2000. Backlog at November 30, 2001 was $108.4 million, a decrease of $267.9 million compared to December 1, 2000. Of the decrease, $89.8 million was attributable to a reduction of backlog caused by the bankruptcy of our subsidiary in The Hague. See Note 4, "Reorganization Case and Fresh-start Reporting - Washington International B.V." of the Notes to Consolidated Financial Statements in Item 8 of this report.
INTERSEGMENT, IMPAIRMENT AND OTHER
Intersegment, impairment and other for 2001 consisted primarily of integration and merger costs of $18.9 million and corporate restructuring charges of $3.7 million. For 2000, this amount consisted principally of the impairment of arbitration claim ($444.1 million), the impairment of acquired assets ($747.5 million), integration and merger costs ($15.2 million) and amortization of goodwill associated with the acquisition of Old MK ($10.1 million).
2000 COMPARED TO 1999
POWER
Revenue for 2000 was $480.7 million, an increase of $431.5 million compared to 1999 due principally to the acquisition of RE&C.
Operating income for 2000 was $4.3 million, an increase of $2.2 million over the prior year due to an increased volume of work related to the acquisition of RE&C. Operating income in 2000 included $21.3 million of normal profit related to certain fixed-price contracts from the acquisition of RE&C on July 7, 2000. The Power operating unit recognized losses of $24.3 million in 2000 related to problems that arose in connection with the completion and operational start-up of two large power generation facilities, one in the United States and one in the United Kingdom. There was no normal profit in 1999. The operating income rate for 2000 was .9% compared to 4.3% in 1999.
New work booked for 2000 was $251.0 million compared to $164.9 million in 1999. Backlog at December 1, 2000 was $1,541.8 million, an increase of $1,286.1 million compared to December 3, 1999 primarily due to $1,515.9 million of backlog acquired in the RE&C acquisition. During 2001, we reversed previously recorded backlog of $801.0 million. This reversal was principally due to the suspension of work on two large construction projects located in Massachusetts that were part of the RE&C acquisition. See Note 3, "Acquisitions - Acquisition of Raytheon Engineers & Constructors" of the Notes to Consolidated Financial Statements in Item 8 of this report.
INFRASTRUCTURE & MINING
Revenue for 2000 was $811.0 million, an increase of $40.1 million compared to 1999 due principally to the acquisition of RE&C.
Operating income for 2000 was $20.6 million, a decrease of $25.1 million compared to 1999 due principally to the recognition of $12.1 million of losses related to cost overruns on domestic infrastructure and heavy civil projects, a $4.9 million loss from an international project and $20.3 million to establish a reserve related to the Summitville environmental matters. See Note 13, "Contingencies and Commitments - Summitville environmental matters" of the Notes to Consolidated Financial Statements in Item 8 of this report. Operating income in 2000 included approximately $15.3 million of normal profit related to certain fixed-price contracts from the acquisition of RE&C on July 7, 2000. There was no normal profit in 1999. The operating income rate for 2000 was 2.5% compared to 5.9% in 1999.
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New work booked for 2000 was $1,249.3 million compared to $898.6 million in 1999. Backlog at December 1, 2000 was $1,847.0 million, an increase of $835.3 million, including $396.6 million of backlog acquired in the RE&C acquisition, compared to December 3, 1999.
INDUSTRIAL/PROCESS
Revenue for 2000 was $728.1 million, an increase of $129.35 million compared to 1999 due principally to the acquisition of RE&C.
Operating income for 2000 was $6.4 million, a decrease of $5.0 million compared to 1999. The decrease was caused primarily by write-offs of acquired accounts receivable and increased insurance costs. Operating income in 2000 was increased $.4 million by the recognition of normal profit related to certain fixed-price contracts from the acquisition of RE&C on July 7, 2000. There was no normal profit in 1999. The operating income rate for 2000 was ...8% compared to 1.9% in 1999.
New work booked for 2000 was $723.9 million compared to $562.7 million in 1999. Backlog at December 1, 2000 was $531.5 million, an increase of $94.4 million, including $98.6 million of backlog acquired in the RE&C acquisition, compared to December 3, 1999.
GOVERNMENT
Revenue for 2000 was $997.8 million, an increase of $110.5 million compared to 1999 due principally to the inclusion of a full year of Westinghouse operations and the acquisition of RE&C.
Operating income for 2000 was $17.2 million, a decrease of $36.3 million compared to 1999 due principally to the recognition of cost overruns on a large fixed-price contract acquired in the RE&C acquisition for a private sector client and on a large environmental remediation project. Most of the overruns were ultimately resolved favorably during 2001 through contract renegotiation, resulting in additional profit recognition. Operating income in 2000 included $9.1 million of normal profit related to certain fixed-price contracts from the acquisition of RE&C on July 7, 2000. There was no normal profit in 1999. The operating income rate for 2000 was $1.7% compared to 6.0% in 1999.
New work booked for 2000 was $405.2 million compared to $701.2 million in 1999. Backlog at December 1, 2000 was $1,362.9 million, an increase of $247.7 million, including $840.2 million of backlog acquired in the RE&C acquisition, compared to December 3, 1999.
PETROLEUM & CHEMICALS
We had no revenue or operating income from this segment except that which we acquired in the purchase of RE&C. Revenue for 2000 was $90.5 million. Operating income (loss) for 2000 was $(5.6) million. Operating income in 2000 was negatively impacted by operating losses generated by one of our wholly-owned subsidiaries operating in The Hague, the Netherlands. Operating income in 2000 included $4.1 million of normal profit related to certain fixed-price contracts from the acquisition of RE&C on July 7, 2000. The operating income rate for 2000 was (6.2)%.
New work booked for 2000 was $29.3 million. Backlog at December 1, 2000 was $376.3 million, virtually all of which came with the RE&C acquisition.
INTERSEGMENT, IMPAIRMENTS AND OTHER
Intersegment, impairments and other for 2000 consisted primarily of the impairment of arbitration claim $(444.1) million and the impairment of acquired assets $(747.5) million, integration and merger costs ($15.3 million) and amortization of goodwill associated with the acquisition of Old MK. For 1999, this amount consisted
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of the results of operations of Broadway Insurance Company, a wholly-owned captive Bermuda insurance subsidiary, and amortization of goodwill associated with the acquisition of Old MK.
OPERATING UNIT NEW WORK
New work for each operating unit is presented below:
FINANCIAL CONDITION AND LIQUIDITY
Cash and cash equivalents decreased $265 million from $393 million at December 1, 2000 to $128 million at November 30, 2001. During 2001, the primary reductions in cash were for working capital needs during the pendency of bankruptcy and fees to secure our DIP Facility. At November 30, 2001 and December 1, 2000, cash and cash equivalents included amounts totaling $57.7 million and $19.0 million, respectively, that was restricted for use on the normal operations of our consolidated construction joint ventures, by projects having contractual cash restrictions and our self-insurance programs. For more information on our financing activities, see the comments below and Note 8, "Credit Facilities" of the Notes to Consolidated Financial Statements in Item 8 of this report.
We received authorization in January 1998 to repurchase, in open market transactions, block trades or otherwise, up to 2 million shares of outstanding common stock and up to 2.765 million of warrants to purchase common stock. As of June 1999, all 2 million shares of common stock had been repurchased. In July 1999, we received authorization to repurchase an additional 2 million shares of our outstanding common stock. As of November 30, 2001, we had not repurchased any shares under the new authorization.
On March 19, 1999, we replaced our existing bank credit facility with new uncollateralized revolving credit facilities providing an aggregate borrowing capacity of $250 million in order to acquire the Westinghouse Businesses, to provide for general corporate purposes, to support working capital requirements and to support letters of credit and other potential acquisitions. On May 21, 1999, the new credit facilities were increased to $325 million consisting of a $195 million five-year facility, which provided for both revolving borrowings and the issuance of letters of credit, and a $130 million one-year facility, which provided for revolving borrowings. The one-year facility included terms permitting extensions in one-year increments by mutual agreement of the banks
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and us or converted, at our option, to a term loan having a maturity of one year after the then current expiration of such facility. The facilities' covenants required the maintenance of financial ratios, and placed limitations on guarantees, liens, investments, dividends and other matters. At December 3, 1999, $55 million and $45 million were outstanding on the one-year and five-year facilities, respectively.
The facilities provided for interest on loans, payable at the conclusion of each interest commitment period not to exceed quarterly, at the applicable LIBOR rate or the base rate, as defined, plus an additional margin. The additional margin ranged from 1.25% to 2.00% for the LIBOR rate and .25% to 1.00% for the base rate, based on the ratio of earnings before interest, taxes, depreciation and amortization to our funded debt. The effective interest rate at December 3, 1999 was 6.98%. On March 19, 1999, we paid $3.7 million in underwriting fees to the banks and were required to pay quarterly commitment and letter of credit fees. Commitment fees were based on the unused portion of the facilities. Letter of credit fees were based on a percentage of the letter of credit amount.
On July 7, 2000, in order to finance the acquisition of RE&C, refinance existing revolving credit facilities, fund working capital requirements and pay related fees and expenses, we (i) obtained the RE&C Financing Facilities providing for an aggregate of $1 billion of term loans and revolving borrowing capacity consisting of a $100 million Tranche A term loan facility, a $400 million Tranche B term loan facility and $500 million of revolving credit and (ii) issued and sold $300 million aggregate principal amount of Senior Unsecured Notes. On October 5, 2000, we terminated the Tranche A term loan facility to eliminate ongoing related commitment fees. See Note 8, "Credit Facilities - RE&C Financing Facilities and Senior Unsecured Notes" of the Notes to Consolidated Financial Statements in Item 8 of this report.
Also, on July 7, 2000, we borrowed net proceeds of $697.3 million consisting of (i) $400 million from the Tranche B term loan facility of the RE&C Financing Facilities at an interest rate based upon the applicable LIBOR plus an additional margin of 3.25% for an effective interest rate of 9.87% and (ii) $297.3 million in net proceeds from the $300 million aggregate principal amount of Senior Unsecured Notes with a stated coupon rate of 11.0%. The proceeds were used to (i) repay $96 million outstanding under the prior unsecured revolving credit facilities, (ii) pay financing fees of approximately $29 million for the RE&C Financing Facilities, (iii) fund the $53 million cash component of the purchase price for RE&C, the $30.8 million paid to the Sellers for cash held on April 30, 2000 by RE&C and the $84.4 million paid to the Sellers representing the net cash advanced or paid by the Sellers for the use or benefit of the purchased business between April 30, 2000 and closing and (iv) fund $7.7 million in acquisition related expenses. Cash on hand of $15.8 million at July 7, 2000 was retained by the RE&C businesses. The balance remained in cash and was anticipated to be used for our working capital requirements.
We announced on March 2, 2001 that we faced severe near-term liquidity problems due to delays in resolving purchase price adjustments in connection with our acquisition of RE&C and due to substantial cost overruns and negative cash flows associated with certain RE&C projects acquired. We also announced that we were in default under certain covenants in our RE&C Financing Facilities and we were unable to secure performance bonds necessary to obtain certain new projects. We funded approximately $250 million of cash flow deficits (i.e., cash disbursements in excess of receipts) generated by RE&C projects between December 2, 2000 and May 14, 2001.
We announced on March 8, 2001, that we had filed a fraud lawsuit against the Sellers and that we ceased activities on two RE&C contracts (the Mystic and Fore River power projects) with very large negative cash flows. The Sellers remained responsible for the performance of the contracts and as such continued to fund the construction of the projects. We were retained on a cost-reimbursable basis and continue to provide construction management and craft personnel to complete the projects.
On May 7, 2001, a letter of credit in the amount of $96 million was drawn and on May 10, 2001 two additional letters of credit totaling $76 million were drawn for a total of $172 million. The letters of credit were issued under the $500 million revolving credit facility of RE&C Financing Facilities and became funded debt. The borrowing rate for funded debt under the revolving credit facility was based upon the applicable LIBOR plus an additional margin of 2.75%, for an initial effective interest rate of 9.37%. The total funded debt as of May 10, 2001, was $870 million.
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We considered all alternatives to obtain additional sources of cash, including seeking waivers of default under the RE&C Financing Facilities, the incurrence of additional debt, the issuance of additional equity and the sale of non-core assets. However, our near-term liquidity problems limited our strategic alternatives. We were ultimately unable to find additional sources of cash and sought protection from our creditors under Chapter 11 of the U.S. Bankruptcy Code.
DIP FACILITY
On May 14, 2001, we filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code. See Note 4, "Reorganization Case and Fresh-start Reporting" of the Notes to Consolidated Financial Statements in Item 8 of this report. On the same day, we entered into a Secured Super-Priority Debtor In Possession Revolving Credit Agreement (the "DIP Facility"), with some of our subsidiaries as guarantors, with a commitment of $195 million with the ability to increase the total commitment to $350 million. On June 5, 2001 the DIP Facility lenders approved an increase in the total commitment from $195 million to $220 million. The DIP Facility was to be used (i) to finance the costs of restructuring; and (ii) for ongoing working capital, general corporate purposes and letter of credit issuance. The borrowing rate under the DIP Facility was the prime rate, plus an additional margin of 4.0%. The effective interest rate was 11.0% as of May 2001. The DIP Facility carried other fees, including commitment fees and letter of credit fees, normal and customary for such credit agreements. The credit agreement under which the DIP Facility was made available contained affirmative and negative covenants, reporting covenants and specified events of default typical for a credit agreement governing credit facilities of the size, type and tenor of the DIP Facility. Among the covenants were those limiting our ability and the ability of some of our subsidiaries to incur debt or liens, provide guarantees, make investments and pay dividends. As of January 24, 2002, we had no outstanding debt and $32.8 million of outstanding letters of credit under the DIP Facility. As discussed below, the DIP Facility was replaced by exit financing facilities on January 25, 2002.
During 2001, cash and cash equivalents declined by $265 million from $393 million to $128 million. The primary use of cash between December 2, 2000 and May 14, 2001 was the $250 million required to fund construction activities on projects acquired from the Sellers that led to the filing of petitions to reorganize under Chapter 11 of the U.S. Bankruptcy Code. Included in the cash and cash equivalents balance at November 30, 2001 was $22.4 million of cash held at our captive insurance subsidiary. A similar amount was reflected as securities available for sale at December 1, 2000, but the securities were converted to cash during 2001.
During 2001, as the bankruptcy filing caused revenue levels to decline, billed and unbilled receivables also declined, and the payment of some accounts payable were delayed to generate cash to fund operations and capital expenditures until our Plan of Reorganization could be implemented.
Cash flow during the reorganization, between May 14, 2001 and our emergence from bankruptcy on January 25, 2002, was slightly positive despite the added costs associated with the reorganization and our first-day motion allowing us to pay critical pre-petition subcontractors and suppliers. The primary reason for cash flow being slightly positive was $63 million cash settlement of a claim against the Department of Defense on a chemical demilitarization project in Umatilla, Oregon, in June 2001. During the pendency of the bankruptcy, we borrowed under the DIP Facility only to pay related fees.
In addition to affecting negatively our ability to fund cash outlays on existing projects, our near-term liquidity problems also affected our ability to obtain future projects. Immediately prior to and during the pendency of our bankruptcy proceedings, our ability to obtain performance bonds from surety companies was severely limited. As a result, we were able to bid only on contracts that limited surety bonds or on contracts in which we were to partner with a company able to obtain surety bonds.
We were able to successfully reorganize in the bankruptcy proceedings, and we emerged from bankruptcy on January 25, 2002, when our Plan of Reorganization became effective. In connection with our emergence from bankruptcy protection, we entered into (i) exit financing facilities under the Senior Secured Revolving Credit
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Facility providing for an aggregate of $350 million of revolving borrowing and letter of credit capacity, and (ii) exit bonding facilities, providing for up to an aggregate amount of $500 million of surety bonds.
SENIOR SECURED REVOLVING CREDIT FACILITY
The Senior Secured Revolving Credit Facility provides for a senior secured facility in an amount up to $350 million in the aggregate of loans and other financial accommodations allocated pro rata between two facilities as follows: a Tranche A facility in the amount of $208.35 million and a Tranche B facility in the amount of $141.65 million. The scheduled termination date for the Senior Secured Revolving Credit Facility is thirty months from January 24, 2002, and it may be increased up to a total of $375 million with the approval of the lenders.
The Senior Secured Revolving Credit Facility was entered into (i) to retire our DIP Facility and repay any DIP Facility balance (of which there was none); (ii) to replace or backstop approximately $122 million in letters of credit issued under our pre-petition RE&C Financing Facilities; (iii) to replace approximately $32.8 million in letters of credit issued under the DIP Facility; (iv) to make payments to the pre-petition senior secured lenders and Mitsubishi Heavy Industries pursuant to our Plan of Reorganization; (v) to finance the costs of restructuring; and (vi) for ongoing working capital, general corporate purposes and letter of credit issuance. The initial borrowing rate under the Senior Secured Revolving Credit Facility is the applicable LIBOR, which has a stated floor of 3%, plus an additional margin of 5.5%. Alternatively, we may choose the prime rate, plus an additional margin of 4.5%. As of January 2002, the effective LIBOR- and prime-based rates were 8.5% and 9.25%, respectively. The Senior Secured Revolving Credit Facility carries other fees, including commitment fees and letter of credit fees, normal and customary for such credit agreements. The Senior Secured Revolving Credit Facility contains affirmative, negative and financial covenants, including minimum net worth, capital expenditures, maintenance of certain financial and operating ratios, and specified events of default which are typical for a credit agreement governing credit facilities of the size, type and tenor of the Senior Secured Revolving Credit Facility. Among the covenants are those limiting our ability and the ability of certain of our subsidiaries to incur debt or liens, provide guarantees, make investment and pay dividends.
POST-EMERGENCE FINANCIAL CONDITION AND LIQUIDITY
Currently, we have three principal sources of near-term liquidity: (1) cash generated by operations; (2) existing cash and cash equivalents; and (3) revolving loan borrowings under our Senior Secured Revolving Credit Facility. In the three months ended March 29, 2002, we generated $4 million of net cash from our operating activities. We had cash and cash equivalents of $105.8 million at March 29, 2002, $78.6 million of which were restricted for use on the normal operations of our consolidated construction joint ventures, by projects having contractual cash restrictions and our self-insurance programs. At March 29, 2002, we had $137.5 million in letters of credit outstanding under the Senior Secured Revolving Credit Facility which when combined with existing borrowings of $25 million, leave $187.5 million available for borrowings and letters of credit.
We expect to use cash to, among other things, fund working capital requirements, make capital expenditures and make cure payments pursuant to our Plan of Reorganization. We anticipate capital expenditures for normal renewal and replacement will be approximately $25 million for the year. Funding of working capital and capital expenditures for major new construction projects will depend upon new awards during the balance of the year. It is anticipated that we will begin to sell equipment from the large hydroelectric project in the Philippines beginning in the third quarter of 2002. Currently we estimate proceeds from the sale of this equipment will be approximately $10 million during the balance of the year with an additional $25 to $30 million to be realized in 2003. However, we may use this equipment if a new project is awarded that would need the same type of equipment and is not otherwise available in our equipment fleet.
We believe that our cash flow from operations, existing cash and cash equivalents and available borrowings under our revolving credit facility will be sufficient to meet our reasonably foreseeable liquidity needs. We may, from time to time, pursue opportunities to complement existing operations through business combinations and participation in ventures, which may require additional financing and utilization of our capital resources.
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In addition to the above sources of liquidity, we have certain non-core assets held for sale (the Technology Center and EMD), which we expect will generate cash proceeds. The sales of these assets are expected to close during fiscal year 2002.
In line with industry practice, we are often required to provide performance and surety bonds to customers under fixed-price contracts. These bonds indemnify the customer should we fail to perform our obligations under the contract. If a bond is required for a particular project and we are unable to obtain an appropriate bond, we cannot pursue that project. We have an existing bonding facility with an aggregate capacity of $500 million, but, as is customary, the issuance of bonds under that facility is at the surety's sole discretion. Moreover, due to events that affect the insurance and bonding markets generally, bonding may be more difficult to obtain in the future or may only be available at significant additional cost. While there can be no assurance that bonds will continue to be available on reasonable terms, we believe that we have access to the bonding necessary to achieve our operating goals.
ENVIRONMENTAL CONTINGENCY
From July 1985 to June 1989, Industrial Constructors Corp. ("ICC"), one of our wholly-owned subsidiaries, performed various contract mining and construction services at the Summitville mine near Del Norte, Colorado. In 1996, the United States and the State of Colorado commenced an action under CERCLA in the U.S. District Court for the District of Colorado against Mr. Robert Friedland, a potentially responsible party, to recover the response costs incurred and to be incurred at the Summitville Mine Superfund Site (the "Site"). No other parties were named as defendants in the original complaints in this action. On April 30, 1999, Friedland filed a third-party complaint naming ICC and nine other defendants, alleging that such defendants are jointly and severally liable for such costs and requesting that the response costs be equitably allocated. In October 1999, the United States and Colorado amended their complaints to add direct claims against ICC and other parties.
On December 22, 2000, the United States and Colorado signed a Settlement Agreement and Consent Decree wherein Friedland agreed to pay $27.5 million in exchange for various promises by the United States and Colorado, including dismissal of Friedland from the action filed in 1996.
On January 2, 2001, Colorado filed a new federal action in Colorado, naming five defendants: Sunoco, ARCO, Asarco, Bechtel and A.O. Smith, alleging that these defendants are jointly and severally liable for costs incurred and to be incurred by Colorado at the Site. On January 12, 2001, Colorado amended this complaint by naming WGI, Washington Contractors Group, Inc., another one of our wholly-owned subsidiaries, and Dennis R. Washington, our chairman, as additional defendants. That case was dismissed on September 14, 2001 on the basis that the statute of limitations had expired and the complaint was untimely.
The United States and Colorado have estimated that the total response costs incurred and to be incurred at the Site will approximate $150 million. Prior to our bankruptcy filings, neither we nor Mr. Washington were a party to any agreement regarding allocation of responsibility, and neither the United States nor Colorado has made any formal allocation of responsibility among those defendants.
During the course of our bankruptcy proceedings, we entered into negotiations with the United States, Colorado and Mr. Friedland to settle the issues related to these matters. In December 2001, we entered into settlement agreements with the United States, Colorado and Mr. Friedland. As a result, the United States and Colorado were deemed to have a general unsecured claim against us in the amount of $20.3 million in the bankruptcy proceedings and Mr. Friedland obtained a settlement in the amount of $15 million. In connection with the bankruptcy cases, the general unsecured claim of the United States and Colorado was discharged on the Effective Date pursuant to our Plan of Reorganization. Mr. Friedland has been assigned the right to proceed against insurance carriers under specified insurance policies by which we were insured with respect to claims for defense, contribution or indemnity relating to the Site and to the actions brought by the United States and Colorado. Mr. Friedland has agreed to proceed directly against the insurance carriers and will not enforce or seek the payment of the settlement by us. As a result of this settlement, we recorded a liability of $20.3 million at December 1, 2000.
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RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") issued two new pronouncements, Statement No. 141 BUSINESS COMBINATIONS ("SFAS No. 141") and Statement No. 142 GOODWILL AND OTHER INTANGIBLE ASSETS ("SFAS No. 142"). SFAS No. 141, which is effective for acquisitions initiated after June 30, 2001, prohibits the use of the pooling-of-interest method for business combinations and establishes the accounting and financial reporting requirements for business combinations accounted for by the purchase method. Adoption of this statement had no effect on our financial statements. SFAS No. 142 requires that an intangible asset that is acquired shall be initially recognized and measured based on its fair value. The statement also provides that goodwill should not be amortized, but shall be tested for impairment annually, or more frequently if circumstances indicate potential impairment, through a comparison of fair value to its carrying amount. SFAS No. 142 will become effective for us for our fiscal year beginning December 29, 2001. The adoption of this statement is not expected to have a significant impact on the financial statements due to our adoption of fresh-start reporting on February 1, 2002. Fresh-start reporting revalues all of our assets and liabilities at fair value on that date. See Note 4, "Reorganization Case and Fresh-start Reporting" of the Notes to Consolidated Financial Statements in Item 8 of this report. The net book value of goodwill was $176.1 million and $265.1 million as of November 30, 2001 and December 1, 2000, respectively, exclusive of goodwill included in assets held for sale at November 30, 2001. See Note 7, "Sales of Businesses and Businesses Held for Sale" of the Notes to Consolidated Financial Statements in Item 8 of this report.
In July 2001, the FASB issued Statement No. 143 ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS ("SFAS No. 143"). Upon emergence from bankruptcy, we are required to early adopt SFAS No. 143 effective February 1, 2002. This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The implementation of SFAS No. 143 will not have a significant impact on our financial statements.
In August 2001, the FASB issued Statement No. 144 ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS which replaces SFAS No. 121 and APB No. 30, and became effective for us on February 1, 2002. This statement retains the requirements to (i) recognize an impairment loss only if the carrying amount of a long-lived asset is not recoverable from its undiscounted cash flows and (ii) measure an impairment loss as the difference between the carrying amount and fair value of the asset. This statement removes goodwill from its scope, eliminating the requirement to allocate goodwill to long-lived assets to be tested for impairment. This statement requires that a long-lived asset to be abandoned, exchanged for similar productive asset or distributed to owners in a spin-off, be considered held and used until it is disposed of. This statement requires the accounting model for long-lived assets to be disposed of by sale, be used for all long-lived assets, whether previously held and used or newly acquired. Discontinued operations are no longer measured on a net realization value basis, and future operating losses are no longer recognized before they occur. This statement broadens the presentation of discontinued operations in the income statement to include a component of an entity (rather than a segment of a business). A component of an entity comprises operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity. The adoption of this statement will not have a significant effect on our financial statements.
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QUARTERLY FINANCIAL DATA (IN MILLIONS EXCEPT PER SHARE DATA) - ------------------------------------------------------------------------------- Selected quarterly financial data for the years ended November 30, 2001 and December 1, 2000 are presented below.
(a) As discussed previously, significant adjustments were recorded to these items during the fourth quarter of 2000 resulting from the RE&C acquisition.
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ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK (IN MILLIONS)
INTEREST RATE RISK
Our exposure to market risk for changes in interest rates relates primarily to our short-term investment portfolios and debt obligations. Our short-term investment portfolio consists primarily of highly liquid instruments with maturities of one month or less. As of November 30, 2001, we had $32 million in short-term investments classified as cash equivalents. Of total cash and cash equivalents at November 30, 2001 of $128 million, $57.7 million was restricted for use on the normal operations of our consolidated joint ventures, by projects having contractual cash restrictions and our self-insurance programs.
From time to time, we effect borrowings under bank credit facilities or otherwise for general corporate purposes, including working capital requirements and capital expenditures. Borrowings under our DIP Facility at November 30, 2001, of which there were none, bear interest at the applicable LIBOR or prime rate, plus an additional margin and, therefore, were subject to fluctuations in interest rates.
FOREIGN CURRENCY RISK
We conduct our business in various regions of the world. Our operations are, therefore, subject to volatility because of currency fluctuations, inflation changes and changes in political and economic conditions in these countries. We are subject to foreign currency translation and exchange issues, primarily with regard to our mining venture, MIBRAG mbH, in Germany. At November 30, 2001 and December 1, 2000, the cumulative adjustments for translation gains (losses), net of related income tax benefits, were $1.9 million and $(8.6) million, respectively. While we endeavor to enter into contracts with foreign customers with repayment terms in U.S. currency in order to mitigate foreign exchange risk, our revenues and expenses are sometimes denominated in local currencies, and our results of operations may be affected adversely as currency fluctuations affect pricing and operating costs or those of our competitors. We engage from time to time in hedging operations, including forward foreign exchange contracts, to reduce the exposure of our cash flows to fluctuations in foreign currency rates. We do not engage in hedging for speculative investment reasons. We can give no assurances that our hedging operations will eliminate or substantially reduce risks associated with fluctuating currencies.
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ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WASHINGTON GROUP INTERNATIONAL, INC., AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
Consolidated Financial Statements and Financial Statement Schedule as of November 30, 2001 and December 1, 2000, and for each of the three years in the period ended November 30, 2001
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REPORT OF MANAGEMENT
Management prepared, and is responsible for, the consolidated financial statements and the other information appearing in this annual report. The consolidated financial statements present fairly the company's financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States. In preparing its consolidated financial statements, the company includes amounts that are based upon estimates and judgments that management believes are reasonable under the circumstances.
The company maintains internal controls designed to provide reasonable assurance that the company's assets are protected from unauthorized use and that all transactions are executed in accordance with established authorizations and recorded properly. The internal controls are supported by written policies and guidelines and are complemented by a staff of internal auditors. Management believes that the internal controls in place at November 30, 2001 provide reasonable assurance that the books and records reflect the transactions of the company and there has been compliance with its policies and procedures.
The company's fiscal 2001 and 2000 consolidated financial statements have been audited by Deloitte & Touche LLP, and the company's fiscal 1999 consolidated financial statements have been audited by PricewaterhouseCoopers LLP, both independent auditors. Management has made available to both independent auditors all of the company's financial records and related data, as well as the minutes of stockholders' and directors' meetings.
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DELOITTE & TOUCHE LLP Suite 1800 101 South Capitol Boulevard Boise, Idaho 83702
Tel: (208) 342-9361 Fax: (208) 342-2199 www.us.deloitte.com
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Washington Group International, Inc. (Debtor-in-Possession)
We have audited the accompanying consolidated balance sheets of Washington Group International, Inc. and subsidiaries (the "Corporation") (Debtor-in-Possession) as of November 30, 2001 and December 1, 2000, and the related consolidated statements of operations, comprehensive income (loss), stockholders' equity (deficit), and cash flows for each of the two years in the period ended November 30, 2001. Our audits also included the consolidated financial statement schedule listed in the Index at Item 8. These financial statements and financial statement schedule are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Washington Group International, Inc. and subsidiaries as of November 30, 2001 and December 1, 2000, and the results of their operations and their cash flows for each of the two years in the period ended November 30, 2001 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Note 3, on July 7, 2000, the Corporation purchased the capital stock and certain other assets and assumed certain liabilities of Raytheon Engineers & Constructors International, Inc. Subsequent to the purchase, substantial litigation was commenced between the parties. The litigation was settled effective January 25, 2002.
As discussed in Note 4, the Corporation and certain of its subsidiaries filed for reorganization under Chapter 11 of the Federal Bankruptcy Code on May 14, 2001. Also, as discussed in Note 4, on December 21, 2001, the Bankruptcy Court entered an order confirming the plan of reorganization that became effective after the close of business on January 25, 2002. The accompanying consolidated financial statements and financial statement schedule do not purport to reflect or provide for the consequences of the bankruptcy proceedings. In particular, such financial statements do not purport to show (a) as to assets, their realizable value on a liquidation basis or their availability to satisfy liabilities; (b) as to pre-petition liabilities, the amounts that were allowed for claims or contingencies, or the status and priority thereof; (c) as to stockholder accounts, the effect of any changes that were made in the capitalization of the Corporation; or (d) as to operations, the effect of any changes that were made in its business.
DELOITTE & TOUCHE LLP
Boise, Idaho June 21, 2002
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REPORT OF INDEPENDENT ACCOUNTANTS
To Board of Directors and Stockholders of Washington Group International, Inc. (formerly Morrison Knudsen Corporation):
In our opinion, the accompanying consolidated statements of operations, comprehensive income (loss), stockholders' equity (deficit) and cash flows present fairly, in all material respects, the results of operations and cash flows of Washington Group International, Inc. (formerly Morrison Knudsen Corporation) and its subsidiaries (the "Corporation") for the year ended December 3, 1999 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the accompanying financial statement schedule (Schedule II Valuation, Qualifying, and Reserve Accounts) for the year ended December 3, 1999 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and the financial statement schedule are the responsibility of the Corporation's management; our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
As discussed in Note 13 to the consolidated financial statements, a subsidiary of the Corporation has been named as a defendant in litigation regarding the Summitville Mine Superfund Site. The outcome of the litigation is not presently determinable and, accordingly, response costs have not been accrued in the accompanying financial statements.
PricewaterhouseCoopers LLP
Boise, Idaho January 28, 2000
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CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS EXCEPT PER SHARE DATA)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS.
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (IN THOUSANDS)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS.
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CONSOLIDATED BALANCE SHEETS (IN THOUSANDS EXCEPT PER SHARE DATA)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS.
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CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
Supplemental disclosure of cash flow information (Note 14) THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. II-33
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS.
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WASHINGTON GROUP INTERNATIONAL, INC. (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS EXCEPT PER SHARE DATA)
The terms "we," "us" and "our" as used in this annual report include Washington Group International, Inc. ("WGI") and its consolidated subsidiaries unless otherwise indicated. On May 14, 2001, WGI and several but not all of its subsidiaries filed for Chapter 11 bankruptcy protection. See Note 14, "Reorganization Case and Fresh-start Reporting."
1. SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
We were originally incorporated in Delaware on April 28, 1993 under the name Kasler Holding Company. In April 1996, we changed our name to Washington Construction Group, Inc. On September 11, 1996, we purchased Morrison Knudsen Corporation, which we refer to as "Old MK," and changed our name to Morrison Knudsen Corporation. On September 15, 2000, we changed our name to Washington Group International, Inc.
We are an international provider of a broad range of design, engineering, construction, construction management, facilities and operations management, environmental remediation and mining services to diverse public and private sector clients, including (i) engineering, construction and operations and maintenance services in nuclear and fossil power markets, (ii) diverse engineering and construction and construction management services for the highway and bridge, airport and seaport, dam, tunnel, water resource, railway, mining and commercial building markets, (iii) engineering, design, procurement, construction and construction management services to industrial companies, (iv) comprehensive nuclear and other environmental and hazardous substance remediation services and weapons and chemical demilitarization programs for governmental and private-sector clients, and (v) technology, engineering, procurement and construction services to the petroleum and chemical industries worldwide. In providing such services, we enter into three basic types of contracts: fixed-price or lump-sum contracts providing for a fixed price for all work to be performed, fixed-unit-price contracts providing for a fixed price for each unit of work performed, and cost-type contracts providing for reimbursement of costs plus a fee. Both anticipated income and economic risk are greater under fixed-price and fixed-unit-price contracts than under cost-type contracts. Engineering, construction management and environmental and hazardous substance remediation contracts are typically awarded pursuant to a cost-type contract.
We participate in construction joint ventures, often as sponsor and manager of projects, which are formed for the sole purpose of bidding, negotiating and completing specific projects. We also participate in two incorporated mining ventures: Westmoreland Resources, Inc., a coal mining company in Montana, and MIBRAG mbH, a company that operates lignite coal mines and power plants in Germany. On March 22, 1999, we and BNFL Nuclear Services, Inc. ("BNFL"), an unrelated entity, acquired the government and environmental services businesses of CBS Corporation (now Viacom, Inc.). On July 7, 2000, we purchased from Raytheon Company ("Raytheon") and Raytheon Engineers & Constructors International, Inc. ("RECI") the capital stock of the subsidiaries of RECI and specified other assets of RECI and we assumed specified liabilities of RECI. The businesses that we purchased provide engineering, design, procurement, construction, operation, maintenance and other services on a worldwide basis. See Note 3, "Acquisitions - Acquisition of Raytheon Engineers & Constructors."
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of WGI and all of its majority-owned subsidiaries and certain construction joint ventures. Investments in non-consolidated construction joint ventures and mining ventures are accounted for by the equity method. For these non-consolidated construction joint ventures, our proportionate share of revenue, cost of revenue and gross profit (loss) is included in the consolidated statements
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of operations, and equity in net earnings of our incorporated mining ventures is accounted for on the equity method. Intercompany accounts and transactions have been eliminated.
Our fiscal year had historically ended on November 30. Effective December 1, 1998, we adopted a 52/53 week fiscal year ending on the Friday closest to November 30. Effective December 1, 2001, we changed our fiscal year to the 52/53 weeks ending on the Friday closest to December 31. The changes in reporting period have not materially affected comparability between the reporting periods presented.
REVENUE RECOGNITION
Revenue is generally recognized on the percentage-of-completion method. Completion on contracts is generally measured based on the proportion of costs incurred to total estimated contract costs or on the proportion of labor hours or labor costs incurred to total estimated labor hours or labor costs. For certain long-term contracts involving mining, environmental and hazardous substance remediation, completion is measured on estimated physical completion or units of production.
Revenue recognition on certain fixed-price construction contracts begins when progress is sufficient to estimate the probable outcome, or on the completed contract method if the probable outcome cannot be reasonably estimated. The cumulative effect of revisions to contract revenue and estimated completion costs, including incentive awards, penalties, change orders, claims and anticipated losses, is recorded in the accounting period in which the amounts are known and can be reasonably estimated. Such revisions could occur at any time and the effects could be material. Change orders are included in total estimated contract revenue when it is probable that the change order will result in a bona fide addition to contract value and can be reliably estimated. If it is probable that the change order will result in the contract price exceeding the related costs incurred, that the excess over cost can be reliably estimated, and if realization is assured beyond a reasonable doubt, the original contract price is adjusted to the probable revised contract amount as the costs are recognized. Claims are included in total estimated contract revenue, only to the extent that contract costs related to the claim have been incurred, when it is probable that the claim will result in a bona fide addition to contract value and can be reliably estimated. No profit is recognized on claims until final settlement occurs.
We have a number of contracts and subcontracts with various agencies of the U.S. government which extend beyond one year and for which government funding has not yet been approved. All contracts with agencies of the U.S. government and some commercial and foreign contracts are subject to unilateral termination at the option of the customer. In the event of a termination, we would not receive projected revenues associated with the terminated portion of such contracts.
We have a history of making reasonably dependable estimates of the extent of progress towards completion, contract revenue and contract completion costs on our long-term engineering and construction contracts. However, due to uncertainties inherent in the estimation process, it is possible that actual completion costs may vary from estimates.
USE OF ESTIMATES
The preparation of our consolidated financial statements in conformity with generally accepted accounting principles necessarily requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet dates and the reported amounts of revenue and costs during the reporting periods. Actual results could differ from those estimates. On an ongoing basis, we review our estimates based on information that is currently available. Changes in facts and circumstances may result in revised estimates.
CLASSIFICATION OF CURRENT ASSETS AND LIABILITIES
We include in current assets and liabilities amounts realizable and payable under contracts that extend beyond one year. Accounts receivable at November 30, 2001 and December 1, 2000 include approximately $27,496 and
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$25,524, respectively, of contract retentions, which are not expected to be collected within one year. At November 30, 2001 and December 1, 2000, accounts receivable include $18,974 and $8,526, respectively, of short-term marketable securities jointly held with customers as contract retentions, the market value of which approximated the carrying amounts. We recognize interest income from marketable securities as earned. Advances from customers are non-interest bearing. Subcontracts payable, billings in excess of costs and estimated earnings on uncompleted contracts and estimated costs to complete long-term contracts each contain amounts that, depending on contract performance, resolution of U.S. government contract audits, negotiations, change orders, claims or changes in facts and circumstances, may not require payment within one year.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of liquid securities with remaining maturities of three months or less at the date of acquisition that are readily convertible into known amounts of cash. At November 30, 2001 cash and cash equivalents included amounts totaling $57,672 that were restricted for use on the normal operations of our consolidated construction joint ventures, by projects having contractual cash restrictions and our self-insurance programs. The comparable amount at December 1, 2000 was $18,961.
UNBILLED RECEIVABLES
Unbilled receivables represent costs incurred under contracts in process that have not yet been invoiced to customers, and arise from the use of the percentage-of-completion method of accounting, cost reimbursement-type contracts and the timing of billings. Substantially all unbilled receivables at November 30, 2001 are expected to be billed and collected within one year.
INVENTORIES
Inventories are stated at the lower of cost or market on a first-in, first-out basis and consist of inventoried costs relating to long-term contracts. The elements of cost included in inventories are direct labor, direct material and certain overhead costs.
CREDIT RISK CONCENTRATION
By policy, we limit the amount of credit exposure to any one financial institution and place investments with financial institutions evaluated as highly creditworthy. Concentrations of credit risk with respect to accounts receivable and unbilled receivables are believed to be limited due to the number, diversification and character of the obligors and our credit evaluation process. Typically, we have not required collateral for such obligations, but can place liens against property, plant or equipment constructed if a default occurs. Historically, we have not incurred any material credit-related losses.
GOODWILL
Goodwill is amortized using the straight-line method over 20 to 40 years. The carrying value of goodwill or other long-lived assets is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If impairment is indicated by the facts and circumstances, an impairment loss will be recognized based on a comparison of the carrying value of the long-lived assets and associated goodwill with the discounted cash flow of such assets. The carrying amount of the goodwill identifiable with such assets will be eliminated before recognition of impairment of the related long-lived tangible and identifiable intangible assets.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Major renewals and improvements are capitalized, while maintenance and repairs are expensed when incurred. Depreciation of construction equipment is provided on straight-line and accelerated methods, after an allowance for estimated salvage value, over estimated lives of 2 to
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10 years. Depreciation of buildings is provided on the straight-line method over estimated lives of 10 to 40 years, and improvements are amortized over the shorter of the asset life or lease term. Depreciation of equipment is provided under the straight-line method over estimated lives of 3 to 12 years. Upon disposition, cost and related accumulated depreciation of property and equipment are removed from the accounts and the gain or loss is reflected in results of operations.
FOREIGN CURRENCY TRANSLATION
The functional currency for foreign operations is generally the local currency. Translation of assets and liabilities to U.S. dollars is based on exchange rates at the balance sheet date. Translation of revenue and expenses to U.S. dollars is based on a weighted-average rate during the period. Translation gains or losses, net of income tax effects, are reported as a component of other comprehensive income (loss). Because of the short-term duration of certain construction and engineering projects, related translation gains or losses are recognized currently. Gains or losses from foreign currency transactions are included in the results of operations of the period in which the transaction is completed.
ENVIRONMENTAL LIABILITIES
Accruals for estimated costs of response actions for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. On a quarterly basis, we review estimates of costs of response actions at various sites, including sites in respect of which government agencies have designated us as a potentially responsible party ("PRP"). Accrued liabilities may be discounted and are exclusive of claims for recovery, if any. However, due to uncertainties inherent in the estimation process, it is possible that actual results may vary from estimates.
INCOME TAXES
Deferred income tax assets and liabilities are recognized for the effects of temporary differences between the carrying amounts and the income tax basis of assets and liabilities using enacted tax rates. A valuation allowance is established when it is more likely than not that net deferred tax assets will not be realized. Tax credits are generally recognized in the year they arise.
INCOME (LOSS) PER SHARE
Basic income (loss) per share is calculated on the weighted-average number of outstanding common shares during the applicable period. Diluted income (loss) per share is based on the weighted-average number of outstanding common shares plus the weighted-average number of potential outstanding common shares. Income (loss) per share is computed separately for each period presented.
In 2001 and 2000, because of our operating losses, all options and warrants were antidilutive and, therefore, are excluded from earnings per share calculations. For 1999, the additional weighted-average number of potential outstanding common shares for purposes of computing diluted earnings per share consisted solely of stock options for all periods presented. Stock purchase warrants were not included in the computation of diluted earnings per share because the exercise price was greater than the average market price of the warrants, and, therefore, the effect would be antidilutive.
Our emergence from bankruptcy in January 2002 resulted in the cancellation of all of our then outstanding capital stock, stock options and stock purchase warrants and the issuance of new shares of capital stock, stock purchase warrants and stock options. As such, we believe the presentation of income (loss) per share for these canceled instruments is not meaningful. For a detailed discussion of our bankruptcy proceedings and emergence from bankruptcy protection, see Note 4, "Reorganization Case and Fresh-start Reporting."
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RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") issued two new pronouncements, Statement No. 141 BUSINESS COMBINATIONS ("SFAS No. 141") and Statement No. 142 GOODWILL AND OTHER INTANGIBLE ASSETS ("SFAS No. 142"). SFAS No. 141, which is effective for acquisitions initiated after June 30, 2001, prohibits the use of the pooling-of-interest method for business combinations and establishes the accounting and financial reporting requirements for business combinations accounted for by the purchase method. Adoption of this statement had no effect on our financial statements. SFAS No. 142 requires that an intangible asset that is acquired shall be initially recognized and measured based on its fair value. The statement also provides that goodwill should not be amortized, but shall be tested for impairment annually, or more frequently if circumstances indicate potential impairment, through a comparison of fair value to its carrying amount. SFAS No. 142 will become effective for us for our fiscal year beginning December 29, 2001. The adoption of this statement is not expected to have a significant impact on the financial statements due to our adoption of fresh-start reporting on February 1, 2002. Fresh-start reporting revalues all of our assets and liabilities at fair value on that date. See Note 4, "Reorganization Case and Fresh-start Reporting." The net book value of goodwill was $176,108 and $265,068 as of November 30, 2001 and December 1, 2000, respectively, exclusive of goodwill included in assets held for sale at November 30, 2001. See Note 7, "Sales of Businesses and Businesses Held for Sale."
In July 2001, the FASB issued Statement No. 143 ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS ("SFAS No. 143"). Upon emergence from bankruptcy, we will be required to early adopt SFAS No. 143 effective February 1, 2002. This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The implementation of SFAS No. 143 will not have a significant impact on our financial statements.
In August 2001, the FASB issued Statement No. 144 ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS which replaces SFAS No. 121 and APB No. 30, which became effective for us on February 1, 2002. This statement retains the requirements to (i) recognize an impairment loss only if the carrying amount of a long-lived asset is not recoverable from its undiscounted cash flows and (ii) measure an impairment loss as the difference between the carrying amount and fair value of the asset. This statement removes goodwill from its scope, eliminating the requirement to allocate goodwill to long-lived assets to be tested for impairment. This statement requires that a long-lived asset to be abandoned, exchanged for similar productive asset or distributed to owners in a spin-off, be considered held and used until it is disposed of. This statement requires the accounting model for long-lived assets to be disposed of by sale, be used for all long-lived assets, whether previously held and used or newly acquired. Discontinued operations are no longer measured on a net realization value basis, and future operating losses are no longer recognized before they occur. This statement broadens the presentation of discontinued operations in the income statement to include a component of an entity (rather than a segment of a business). A component of an entity comprises operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity. The adoption of this statement will not have a significant effect on our financial statements.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year financial statements to conform to the current year presentation.
2. ADOPTION OF ACCOUNTING STANDARDS
Effective December 2, 2000, we adopted FASB Statement No. 133 ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES ("SFAS No. 133"). SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded into other contracts and for hedging activities. Under SFAS No. 133, we are required to recognize derivative instruments, including those embedded into other contracts as either assets or liabilities in our consolidated balance sheets and to measure them at fair value.
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SFAS No. 133 requires that the gain or loss on a derivative instrument, designated and qualifying as a fair value hedging instrument, as well as the offsetting gain or loss on the hedged item be recognized currently in earnings in the same accounting period. It also provides that the effective portion of the gain or loss on a derivative instrument designated and qualifying as a cash flow hedge be reported as a component of other comprehensive income. That amount would subsequently be reclassified into earnings in the same period or periods in which the hedge forecasted transaction affects earnings. Any remaining gain or loss on the derivative instrument, if any, must be recognized in earnings in the current period.
Our financial risk management philosophy is to ensure that financial exposures created by changes in foreign currency rates, interest rates and commodity prices are minimized. The intent of this philosophy is to minimize the volatility of cash flows and reported earnings which result from financial rather than business related factors, and thus minimize the financial consequences caused by fluctuations in financial and commodity markets.
Currently, we hedge certain foreign currency transactions denominated in the Philippine peso and the Euro to reduce exposure to change in the U.S. dollar / peso and U.S. dollar / Euro exchange rates. Previously, hedge accounting under generally accepted accounting principles allowed us to account for these forward contracts at spot exchange rates with the related market adjustment made to other comprehensive income. SFAS No. 133 eliminates special hedge accounting for such contracts, requiring us to account for the forward contracts at their fair value (that is, based on the forward exchange rate) with all changes in fair value reported currently in earnings. The adoption of SFAS No. 133 during 2001 resulted in an increase in liabilities of $1,901 and a corresponding pre-tax increase to other comprehensive income classified as a cumulative effect of adoption of accounting principle. The foreign currency contracts were terminated during 2001 in connection with our bankruptcy filing, resulting in a recognized loss of $1,396. We plan to continue our practice of hedging our foreign currency contracts because such an approach economically reduces the risks.
During the first quarter of 2001, we entered into an interest rate swap to reduce interest rate risk on our long-term debt obligations. The swap was designated as a cash flow hedge of variable rate debt obligations under SFAS No. 133. The interest rate swap was recorded at fair value with changes in fair value recorded in other comprehensive income. As of the first quarter of 2001, we recorded the fair value of the swap as a liability of $1,826 with a corresponding pre-tax entry to other comprehensive income. The swap was terminated during the second quarter of 2001 in connection with our bankruptcy filing, resulting in a recognized loss of $2,425.
In the ordinary course of business in executing construction, construction management, operations management and mining services, we enter into fixed-price contracts for future purchases of commodities from our suppliers. The nature of the terms and conditions of the contracts are considered normal purchases of inventory and have no financial statement impact under SFAS No. 133.
During the first quarter of 2001, we adopted Securities and Exchange Commission ("SEC") Staff Accounting Bulletin No. 101 ("SAB 101") which summarizes the SEC staff's position on selected revenue recognition issues. The implementation of SAB 101 did not have a significant impact on our results of operations or financial position.
3. ACQUISITIONS
ACQUISITION OF WESTINGHOUSE BUSINESSES
On March 22, 1999 BNFL and WGI acquired the government and environmental businesses, ("Westinghouse Businesses") of CBS Corporation.
Operations of the Westinghouse Businesses are conducted through the following two companies:
o Westinghouse Government Services Company LLC ("WGS"), a limited liability company that provides defense-related operations and maintenance services for the U.S. Departments of Energy and Defense,
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including the production of tritium for national weapons programs and high-level waste solidification (also known as "vitrification").
o Westinghouse Government Environmental Services Company LLC ("WGES"), a limited liability company that provides non-defense related governmental and environmental services, including environmental remediation and waste management services.
Our and BNFL's rights and obligations with respect to WGS and WGES are described in the Amended and Restated Consortium Agreement dated March 19, 1999 and in other related documents, collectively called the "Consortium Agreement." Under the Consortium Agreement, 60% of the profits, losses and cash flows of WGS and WGES are allocated to us and 40% are allocated to BNFL. WGS and WGES are components of our Government operating unit.
The aggregate purchase price of the Westinghouse Businesses was $207,611, consisting of net cash paid to CBS Corporation of $201,060 and acquisition costs of $6,551. Our share of the aggregate purchase price, $124,567 was funded primarily through borrowings under our bank credit facilities. The remaining balance of $83,044 was paid by BNFL.
We have accounted for the acquisition of the Westinghouse Businesses as a purchase business combination. The results of our operations, financial position and cash flows include WGS and WGES on a consolidated basis from the acquisition date with BNFL's 40% minority interest in WGS and WGES and a third party's 35% minority interest in Safe Sites of Colorado LLC, a subsidiary of WGES, reflected in a single minority interest line item in our consolidated financial statements. The aggregate purchase price was allocated to the net assets we acquired on the basis of estimates of fair values with the excess recorded as goodwill, as follows:
Completion of the purchase allocation resulted primarily in a reduction of employee benefit obligations of $18,050 with a corresponding reduction in goodwill. During the quarter ended December 1, 2000, a pre-acquisition contingency related to the Westinghouse Businesses was resolved. That resulted in an additional reduction in employee benefit obligations of $6,900 with a corresponding reduction in goodwill. Also, we revised our original estimate of legal costs, reducing the purchase price by an additional $5,130.
The following unaudited pro forma information presents our consolidated operating results as if the acquisition of the Westinghouse Businesses had taken place on December 1, 1998. These pro forma operating results have been prepared for illustrative purposes only and are not indicative of operating results that would have been experienced if the Westinghouse Businesses acquisition occurred on the dates indicated, or of future operating results.
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ACQUISITION OF RAYTHEON ENGINEERS & CONSTRUCTORS
On July 7, 2000, pursuant to a stock purchase agreement dated April 14, 2000 (the "Stock Purchase Agreement"), we purchased from Raytheon and RECI (collectively with Raytheon, the "Sellers") the capital stock of the subsidiaries of RECI, and specified other assets of RECI and we assumed specified liabilities of RECI. The businesses that we purchased, hereinafter called "RE&C", provide engineering, design, procurement, construction, operation, maintenance and other services on a worldwide basis. We financed the acquisition by obtaining new senior secured facilities (the "RE&C Financing Facilities") and issuing senior unsecured notes due July 1, 2010 (the "Senior Unsecured Notes"). See Note 8, "Credit Facilities" for a more detailed description of the RE&C Financing Facilities and the Senior Unsecured Notes.
The purchase price paid at the closing of the acquisition on July 7, 2000 was $53,000 in cash and the assumption of net liabilities originally estimated at $450,000. We also incurred acquisition costs of $7,705. The cash portion of the purchase price paid at closing was determined based upon a formula contained in the Stock Purchase Agreement and represented the estimated amount of the Adjusted Non-Current Net Assets and Adjusted Net Working Capital (as the terms are defined in the Stock Purchase Agreement) that we acquired, valued as of April 30, 2000. The amounts of Adjusted Non-Current Net Assets and Adjusted Net Working Capital were subject to post-closing finalization, including an audit by independent accountants, and other adjustments to the price paid at closing. In addition, the Stock Purchase Agreement contained a provision requiring us to either pay the Sellers or to be paid by the Sellers, the net amount of cash the Sellers either advanced to or withdrew from RE&C between April 30, 2000 and July 7, 2000. After closing, we paid the Sellers $84,400 representing the net amount of cash advanced or paid by the Sellers for the use or benefit of RE&C between April 30, 2000 and July 7, 2000.
The Stock Purchase Agreement provided that the Sellers would retain all non-restricted cash and cash equivalents held by RE&C at the close of business on April 30, 2000 ("Cut-Off Date Cash Balances"). At closing, for purposes of administrative convenience, RE&C kept all cash held by it ($15,790), and we paid the Sellers an additional $30,800 for the cash balances on April 30, 2000. That amount was subject to post-closing verification by us and adjustment in the event it was not equal to the Cut-Off Date Cash Balances held by RE&C. We subsequently verified the amount and no adjustment was required. In total, we paid net cash of $160,130 for the RE&C acquisition.
RECI retained, among other assets, all of its interest in and rights with respect to some of the existing contracts. In addition, the Stock Purchase Agreement provided that the contracts related to four specified construction projects would be transferred to RECI, and RE&C would enter into subcontracts to perform, on a cost-reimbursed basis, all of RECI's obligations under the contracts. Because the customer consents required to transfer the four contracts to RECI could not be obtained as of closing, we agreed to remain the contract party and continued to be directly obligated to the customers and other third parties under the contracts relating to the four projects. Accordingly, we and the Sellers agreed that the Sellers would provide us with full indemnification with respect to any risks associated with those contracts, which arrangement accomplished the original intent of the Stock Purchase Agreement. Under the Stock Purchase Agreement, we agreed that we would complete the four specified projects for the Sellers' account and the Sellers agreed to reimburse our costs to do so and to share equally with us any positive variance between actual costs and estimated costs. The Sellers also agreed to indemnify us against any losses, claims or liabilities under the contracts relating to such projects, except losses, claims or liabilities resulting from our gross negligence or willful misconduct, against which we would indemnify the Sellers.
The Stock Purchase Agreement did not contain a fixed purchase price at closing for the transaction, but rather, as noted above, provided that the purchase price would be adjusted post-closing upward or downward based on the effect on a formula that would be applied to an audited RE&C April 30, 2000 balance sheet to be prepared by the Sellers and audited by the Sellers' independent accountants. After closing, we extended the delivery date for the final audited RE&C balance sheet for April 30, 2000 to January 14, 2001.
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As part of the acquisition of RE&C, we undertook a comprehensive review of existing contracts that we acquired for the purpose of making a preliminary allocation of the acquisition price to the net assets acquired. As part of this review, we evaluated, among other matters, RECI's estimates of the costs at completion of the long-term contracts that were underway as of July 7, 2000 ("Acquisition Date EAC's"). During this process, information came to our attention that raised questions as to whether the Acquisition Date EAC's needed to be adjusted significantly. Our review process involved the analysis of an extensive amount of supporting data, including analysis of numerous, large construction projects in various stages of completion. Based on the information available at the time of the review, the preliminary results of this review indicated that the Acquisition Date EAC's of numerous long-term contracts required substantial adjustment. The adjustments resulted in contract losses or lower than market rate margins. As a result, in our report on Form 10-Q for the quarter ended September 1, 2000, we significantly decreased the carrying value of the net assets acquired and increased the goodwill associated with the transaction. Because many of the contracts we acquired contained either unrecorded losses or lower than market profits, these contracts were adjusted to their estimated fair value at the July 7, 2000 acquisition date in order to allow for a reasonable profit margin for completing the contracts, and a gross margin or normal profit reserve of $233,135 was established and recorded in billings in excess of cost and estimated earnings on uncompleted contracts.
Our review of the RE&C contracts and the purchase price allocation process continued thereafter, and, based on the results of that review, we expected that, as a result of the purchase price adjustment process, the purchase price of RE&C would be adjusted downward by a significant amount. Subsequent to the quarter ended September 1, 2000, we completed the review and made additional adjustments to the contracts we had acquired, resulting from a more accurate determination of the actual contract status at the acquisition date.
The normal profit reserve has been reduced as work has been performed on the affected projects. The reduction results in reductions to cost of revenue and corresponding increases in gross profit, but has no effect on cash. The establishment of and decreases in cost of revenue for the periods indicated are as follows:
An audited RE&C April 30, 2000 balance sheet was not delivered by Sellers, and therefore, on February 27, 2001, we filed a lawsuit against the Sellers seeking specific performance of the purchase price adjustment provisions of the Stock Purchase Agreement. On March 8, 2001, we amended our complaint to also seek money damages for misstatements and omissions allegedly made by the Sellers. Our lawsuit seeking specific performance was successful, and we and the Sellers thereafter commenced an arbitration proceeding before an independent accountant approved by the court to determine the purchase price adjustment. A significant arbitration claim was ultimately filed against the Sellers, as discussed below.
During the spring of 2000, in connection with the acquisition of RE&C, we received from the Sellers audited RECI financial statements at December 31, 1999 and 1998 and for each of the three years in the period ended December 31, 1999 and unaudited RECI financial statements as of and for the three months ended April 2, 2000 and April 4, 1999. In accordance with federal securities law disclosure requirements, we filed on July 13, 2000 those audited and unaudited financial statements and our related unaudited pro forma condensed combined financial statements as of and for the year ended December 3, 1999 and for the quarter ended March 3, 2000 in a current report on Form 8-K. Subsequently, in our current report on Form 8-K filed March 8, 2001, we advised that, for the reasons stated in such report, the foregoing audited and unaudited financial statements of RECI and our related unaudited pro forma condensed combined financial statements, which were derived therefrom, no longer should be relied upon. II-43
On March 2, 2001 we announced that we faced severe near-term liquidity problems as a result of our acquisition of RE&C. On March 9, 2001, because of those liquidity problems, we suspended work on two large construction projects located in Massachusetts that were part of the acquisition. The Sellers had provided the customer with parent performance guarantees on those two contracts, and the guarantees remained in effect after closing. Those performance guarantees required the Sellers to complete the work on the contracts in the event RE&C (owned by us as of July 7, 2000) did not complete them. The contracts were fixed-price in nature and our review of cost estimates indicated that there were substantial unrecognized future costs in excess of future contract revenues that were not reflected in RECI's Acquisition Date EAC's.
Upon our suspension of work, the Sellers undertook performance of those contracts pursuant to the outstanding performance guarantees. We, however, were obligated under the Stock Purchase Agreement to indemnify the Sellers for losses they incurred under those guarantees. The Sellers also assumed obligations under other contracts, primarily in the RE&C power generation construction business unit, which resulted in significant additional indemnification obligations by us to the Sellers. As a result of costs they incurred to perform under the parent guarantees, the Sellers filed a claim against us in the bankruptcy process for approximately $940,000. As further discussed below, this claim was ultimately settled without payment to the Sellers in connection with our emergence from bankruptcy protection. See Note 4, "Reorganization Case and Fresh-start Reporting." Until such settlement, we retained all liabilities related to the contracts, including normal profit reserves, on our balance sheet as accrued liabilities included in liabilities subject to compromise.
On May 14, 2001, because of the severe near-term liquidity problems resulting from our acquisition of RE&C, we filed for protection under Chapter 11 of the U.S. Bankruptcy Code. At various times between May 14, 2001 and November 20, 2001, we "rejected" numerous contracts (construction contracts, leases and others), as that term is used in the legal sense in bankruptcy law. Included in these rejections were numerous contracts that we acquired from the Sellers. Effective August 27, 2001, we also rejected the Stock Purchase Agreement.
On December 21, 2001, the bankruptcy court entered an order confirming the Second Amended Joint Plan of Reorganization of Washington Group International, Inc., et al., as modified (the "Plan of Reorganization"). The Plan of Reorganization became effective and we emerged from bankruptcy protection on January 25, 2002 (the "Effective Date").
During the pendency of the bankruptcy, we continued to negotiate with the Sellers a settlement of our outstanding litigation with respect to the RE&C acquisition. As a result of those negotiations, we reached a settlement regarding all issues and disputes between the parties, which settlement was incorporated into our Plan of Reorganization (the "Raytheon Settlement").
Under the Raytheon Settlement, the Sellers agreed that, with respect to their bankruptcy claim, the Sellers would be considered unpaid, unsecured creditors having rights in the unsecured creditor class, but that, upon completion of our Plan of Reorganization, they would waive any rights to receive any distributions to be given to unsecured creditors with allowed claims. In exchange, we agreed to dismiss all litigation against the Sellers related to the acquisition and to discontinue the purchase price adjustment and binding arbitration process. We released all claims based on any act occurring prior to the Effective Date of the Plan of Reorganization, including all claims against the Sellers, their affiliates and directors, officers, employees, agents and specified professionals. The Sellers released all claims based on any act occurring prior to the Effective Date of our Plan of Reorganization, including any claims related to any contracts or projects not assumed by us during the bankruptcy cases, against us and our directors, officers, employees, agents and professionals. No cash was exchanged as a result of this settlement.
In addition, under a services agreement entered into as a part of the Raytheon Settlement, the Sellers will direct the process for resolving pre-petition claims asserted against us in the bankruptcy case relating to any contract or project that we rejected and that involved some form of support arrangement from the Sellers. We will assist the Sellers in settling or litigating various claims related to those rejected projects. We will also complete work as requested by the Sellers on those rejected projects, and will be reimbursed on a cost-reimbursable basis.
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The Sellers may, with respect to the rejected projects described above, pursue or settle any of our claims against project owners, contractors or other third parties and will retain any resulting proceeds, except that for specified projects, recoveries in excess of amounts paid by the Sellers will be returned to us.
While this settlement eliminated our ability to continue to seek to collect our arbitration claim, it was necessary because the Sellers' large unsecured claims in the bankruptcy were substantially impeding our Plan of Reorganization process. Without this settlement, a successful emergence from Chapter 11 would have been delayed or impossible.
We have made adjustments to the preliminary purchase price allocation of the RE&C acquisition price to the net assets acquired that was included in the unaudited quarterly information at September 1, 2000, including the following, as a result of completing our review:
o We have made adjustments for amounts that were recorded as part of and subsequent to the initial preliminary purchase price allocation, as a result of additional information we obtained that supported that some of the July 7, 2000 balances were materially misstated based on generally accepted accounting principles and were, therefore, included in our purchase price adjustment arbitration claim against the Sellers. In the lawsuits and purchase price adjustment arbitration claim referred to above, we asserted that the Sellers should have recorded these as adjustments in the RE&C financial statements prior to the acquisition. The adjustments primarily relate to provisions for anticipated losses on fixed-price contracts that were not recorded in the RE&C financial statements prior to the acquisition. We recorded these amounts as a $444,055 arbitration claim receivable from the Sellers. However, as noted above, under the terms of the Raytheon Settlement we subsequently agreed to dismiss all litigation against the Sellers related to the acquisition and to discontinue the purchase price adjustment and binding arbitration process. Therefore, we wrote off the receivable from the Sellers as an asset impairment during 2000.
o We also have made adjustments for items that were identified subsequent to the initial purchase price allocation that we believe were additional misstatements, based on additional information we obtained, but that were not included in the arbitration claim. Cost of revenue included adjustments to estimates at completion on contracts and increases in self-insurance reserves. The impairment of assets was primarily unrecoverable accounts receivable. These amounts totaled $144,481 and were charged to operations in the three months ended December 1, 2000 as follows:
Because we cannot determine the final impact of the matters discussed above on the pre-acquisition RE&C financial statements or the pro forma adjustments that would be appropriate for the year ended December 1, 2000, unaudited pro forma consolidated results of operations as if the acquisition of RE&C had taken place on December 4, 1999 have not been presented.
We have accounted for the acquisition of the RE&C as a purchase business combination. The results of our operations, financial position and cash flows include the operations of RE&C on a consolidated basis from the July 7, 2000 acquisition date. We have made an allocation of the aggregate purchase price to the net assets we acquired, with the remainder recorded as goodwill, on the basis of estimates of fair values after adjustments for the arbitration claim against the Sellers and adjustments charged to operations, as follows:
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Of the 23 major RE&C projects that had significant contract adjustments discussed above, 7 are now complete and 5 were eliminated in the insolvency proceedings of Washington International B.V. See Note 4, "Reorganization Case and Fresh-start Reporting - Washington International B.V." Of the remaining projects, 6 have undergone reformation of the contracts to terms and conditions that permitted us to continue working on the original project and 5 are continuing under the original terms and conditions. Most of the projects will be completed by the end of 2002, and the remaining projects in 2003.
As a result of the foregoing events, and the substantial negative cash flows of RE&C, we analyzed for impairment the assets acquired in the acquisition of RE&C, including goodwill. Based upon the results of our analysis, we have taken a charge against income during the quarter ended December 1, 2000 for the following impairments of acquired assets:
As a result of the acquisition, we incurred significant costs associated with the integration and merger of the two companies. They consisted primarily of incremental costs for legal, accounting, consulting and other fees, including business consulting, promotion and systems integration. For the quarter and year ended November 30, 2001, those costs were $1,209 and $18,858, respectively, versus $5,246 and $15,302 for the comparable periods in 2000.
4. REORGANIZATION CASE AND FRESH-START REPORTING
REORGANIZATION CASE
On May 14, 2001, because of severe near-term liquidity issues WGI and several but not all of its direct and indirect wholly-owned domestic subsidiaries (the "Debtors") filed voluntary petitions to reorganize under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the District of Nevada. The various individual bankruptcy cases were administered jointly.
Under Chapter 11, certain claims against a debtor in existence prior to the filing of a petition for relief under the federal bankruptcy laws ("Pre-petition Claims") are stayed while the debtor continues business operations as a debtor-in-possession. Each of our Debtors in this case continued to operate its business and manage its property as a debtor-in-possession during the pendency of the case. Subsequent to the filing date, additional Pre-petition Claims resulted from the rejection of executory contracts, including leases, and from the resolution of claims for contingencies and other disputed amounts. The Pre-petition Claims are reflected in balance sheets as of dates between May 14, 2001 and February 1, 2002 as "liabilities subject to compromise." Secured claims, primarily
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representing liens on the Debtors' assets related to the RE&C Financing Facilities, were also stayed during the pendency of the bankruptcy.
The Debtors received approval from the bankruptcy court under first-day orders to pay and did pay specified pre-petition obligations, including employee wages and benefits, foreign vendors, tax obligations and critical vendor obligations.
Our ability to continue as a going-concern during the pendency of the bankruptcy was dependent upon obtaining sufficient debtor-in-possession financing in order to continue operations while in bankruptcy, the confirmation of a plan of reorganization by the bankruptcy court, and resolution of disputes between the Sellers and us. See Note 3, "Acquisitions - Acquisition of Raytheon Engineers & Constructors" for a description of these disputes.
As of May 14, 2001, we obtained a Secured Super-Priority Debtor in Possession Revolving Credit Facility (the "DIP Facility") with a commitment of $195,000 that was available to provide both ongoing funding and to support letters of credit. On June 5, 2001, the DIP Facility lenders approved an increase in the total commitment from $195,000 to $220,000. See Note 8, "Credit Facilities - DIP Facility." The DIP Facility was available and utilized as needed throughout the pendency of the bankruptcy, had no outstanding balance at November 30, 2001 and was replaced by a secured $350,000 30-month revolving credit facility (the "Senior Secured Revolving Credit Facility") entered into on January 25, 2002. For a detailed discussion of the Senior Secured Revolving Facility, see Note 8, "Credit Facilities - Senior Secured Revolving Credit Facility."
On December 21, 2001, the bankruptcy court entered an order confirming the Plan of Reorganization. Substantially all liabilities of the Debtors as of the date of the bankruptcy filing were subject to settlement under our Plan of Reorganization.
During the pendency of the bankruptcy, we continued to negotiate with the Sellers a settlement of our outstanding litigation with respect to the RE&C acquisition. As a result of those negotiations, we entered into the Raytheon Settlement.
The Plan of Reorganization became effective and the Debtors emerged from bankruptcy protection on the Effective Date. Our Plan of Reorganization provided for the following upon the Effective Date:
o All of our equity securities (common stock, stock purchase warrants and stock options) existing prior to the Effective Date were canceled and extinguished.
o $570,000 of secured debt under the RE&C Financing Facilities was exchanged for $20,000 in cash and 20,000 shares of the new common stock of reorganized WGI ("New Common Stock") as discussed further below. See Note 8, "Credit Facilities."
o We entered into a registration rights agreement with each holder of a secured claim who received New Common Stock and requested to be a party to such agreement.
o Vendor and subcontractor claims directly related to contracts we assumed during bankruptcy or upon emergence from bankruptcy that were not paid as critical vendor payments were to be paid in cash in a cure amount equal to the total claim.
o Each holder of unsecured claims at or under $5 (five thousand dollars) is to receive cash in an amount equal to its total unsecured claim ("Convenience Class Payments").
o Accounts payable and subcontracts payable that were not related to cure payments or Convenience Class Payments were discharged.
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o The holders of $300,000 of Senior Unsecured Notes and all other unsecured creditors were to receive a pro rata share of 5,000 shares of the New Common Stock and a pro rata share of 8,520 fully vested stock warrants to purchase additional shares of New Common Stock. The stock warrants expire if unexercised four years after the Effective Date. A reorganization plan committee has been established to evaluate and resolve objections to disputed claims of unsecured creditors and to determine each unsecured creditor's pro rata share of shares and warrants. The warrants consist of three tranches as follows:
o Specified members of management and designated employees were granted stock options pursuant to a management option plan. The management option plan provided for nonqualified stock option grants as of the Effective Date totaling 1,389 aggregate shares of the New Common Stock with a term of 10 years and a strike price of $24.00 per share. In addition, another 1,389 shares of the New Common Stock may be granted after the Effective Date at strike prices to be established by our board of directors.
o The chairman of our board of directors, Mr. Dennis R. Washington, was granted stock options to purchase shares of New Common Stock in three tranches. The first tranche expires five years after the Effective Date. The remaining tranches expire four years after the Effective Date. One-third of each tranche vested on the Effective Date, one-third of each tranche will vest on the first anniversary of the Effective Date and the final third of each tranche will vest on the second anniversary of the Effective Date. However, all options immediately vest if Mr. Washington is removed from his position as chairman for reasons other than death or disability or if we undergo a change of control. We also agreed with Mr. Washington that our amended certificate of incorporation and bylaws would permit his accumulation of up to 40% of the fully diluted shares of New Common Stock in open market or privately-negotiated transactions, including exercise of the stock options, and that we would take no action inconsistent with those provisions. The number of shares and respective strike prices for each tranche are as follows:
o We adopted fresh-start reporting as of February 1, 2002 as discussed below.
o We filed an amended and restated certificate of incorporation and adopted amended and restated bylaws and established a new board of directors.
On January 25, 2002, we entered into the Senior Secured Revolving Credit Facility to fund our working capital requirements. The Senior Secured Revolving Credit Facility bears variable interest at 5.5% above LIBOR, with a LIBOR floor of 3%, or 4.5% above the prime rate, at our choice. It is comprised of a $208,350 revolver and a $141,650 credit-linked note. Repayments are made on a pro rata basis between the revolver and the credit-linked note. The credit-linked note can be utilized for letters of credit or funded borrowings as needed. We are required to meet various financial covenants contained in the Senior Secured Revolving Credit Facility. $28,800 in letters of credit remain outstanding from previous credit facilities until they expire, primarily in 2002.
WASHINGTON INTERNATIONAL B.V.
As a result of our filing for protection under Chapter 11 of the U.S. Bankruptcy Code, the board of directors of Washington International B.V., one of our wholly-owned subsidiaries located in The Hague, the Netherlands,
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("BV"), determined that BV would have insufficient funds to continue operations in the same manner as it had prior to our bankruptcy filing. The determination was made based on the existing financial condition of BV and the fact that our DIP Facility contained terms that prohibited the additional commitment of our resources for BV operations.
On May 21, 2001, the BV board of directors directed management to consider strategic restructuring alternatives including the filing of a petition for suspension of payment under Dutch law. On May 29, 2001, the suspension of payment was granted and a trustee was appointed pursuant to Dutch law. Under the joint management of the trustee and the BV management, all payments to third parties were temporarily postponed while the trustee and management attempted to pursue strategic alternatives, including the sale of the business to various potentially interested parties. From the date of the trustee's appointment through June 21, 2001, the trustee and management gathered facts and attempted to sell the business to several interested parties.
Following discussions with the interested parties, it became clear that a sale of the business was not feasible. On June 21, 2001, the trustee transformed the suspension of payments to a procedure of insolvency and a curator was appointed to take over all management responsibilities and to liquidate the BV estate. The curator has been managing the estate since that date and we have cooperated and will continue to cooperate with the curator to resolve various intercompany issues, including third party intellectual property rights, foreign intercompany loans and other matters.
During the second quarter of 2001, as a result of the insolvency and liquidation of BV, we wrote off $30,652 of assets, $64,517 of liabilities and $1,904 of foreign currency translation losses, resulting in a net gain of $31,961 from the discharge of liabilities, which is included in reorganization items.
WASHINGTON INTERNATIONAL, LLC
Washington International, LLC, a Delaware limited liability company and wholly-owned subsidiary of Washington International Holding Limited, a United Kingdom wholly-owned subsidiary of WGI, filed for protection under the U.S. Bankruptcy Code in connection with our Chapter 11 filing. Washington International Holding Limited did not file for bankruptcy protection and, therefore, was not a debtor in our bankruptcy proceedings in the United States. Washington International, LLC conducted business primarily in the United Kingdom. On December 5, 2001, Washington E&C Limited, also a United Kingdom wholly-owned subsidiary of Washington International Holding Limited, purchased specified contracts, constituting the ongoing business of Washington International, LLC, for $250. At that time, Washington International, LLC ceased conducting business and on February 20, 2002, a "Winding Up" order was made under the insolvency laws of England and Wales against Washington International, LLC. Washington International, LLC is now under the control of a liquidator pursuant to the insolvency laws of England and Wales, and we no longer have any control over its activities. Once the winding up process is complete, Washington International, LLC will be dissolved and will cease to exist. Creditors of Washington International, LLC will not receive any shares of the New Common Stock or stock warrants to be distributed to the unsecured creditors of the Debtors.
Upon adoption of liquidation basis accounting in the quarter ending November 30, 2001, Washington International, LLC had assets of $9,208, liabilities of $12,155 and $364 of foreign currency translation losses, resulting in a net gain of $2,583, which is included in reorganization items.
REORGANIZATION ITEMS
Reorganization items for the year ended November 30, 2001 consisted of the following:
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LIABILITIES SUBJECT TO COMPROMISE
At November 30, 2001, liabilities subject to compromise consisted of the following:
During the pendency of our bankruptcy proceedings, we ceased accruing interest on our long-term debt. Contractual interest expense during 2001 not recorded was $48,235.
FRESH-START REPORTING
As of February 1, 2002, we adopted fresh-start reporting pursuant to the guidance provided by the American Institute of Certified Public Accountants Statement of Position 90-7 FINANCIAL REPORTING BY ENTITIES IN REORGANIZATION UNDER THE BANKRUPTCY CODE. In connection with the adoption of fresh-start reporting, a new entity has been created for financial reporting purposes. The effective date of our emergence from bankruptcy is considered to be the close of business on February 1, 2002 for financial reporting purposes. In the tables below, the periods presented through February 1, 2002 have been designated "Predecessor Company" and the period ending subsequent to February 1, 2002 has been designated "Successor Company."
Pursuant to this guidance, we used the purchase method of accounting to allocate our reorganization value to our net assets with the excess recorded as goodwill on the basis of estimates of fair values. The reorganization value was determined to be $550,000 as of February 1, 2002.
The reorganization value of $550,000 was developed by an independent financial advisor and was based upon the use of three valuation methodologies as follows:
o Comparable public company analysis is generally a historic or backward-looking technique. It is premised on the idea that the price an investor is willing to pay in the public markets for securities of similar publicly traded companies is a relevant measure to determine what an investor is willing to pay today for a target company. Publicly traded companies were selected that were generally comparable to us. Criteria for selection included lines of business, business risks, growth prospects, maturity of the business, market presence and size and scale of operations.
o Discounted cash flow valuation is a forward-looking approach that relates the value of an asset or business to the present value of expected future cash flows to be generated by that asset or business. The discount rate used to arrive at present values is a function of the risk inherent in estimated cash flows,
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with investors requiring higher rates of return for riskier assets and lower rates for assets with less expected risk.
o Precedent transaction analysis estimates value by examining public merger and acquisition transactions. An analysis of the disclosed purchase price as a multiple of various operating statistics reveals industry sales multiples for companies in similar lines of business. Merger and acquisition transactions in the engineering and construction sector and prices paid as a multiple of key operating statistics were analyzed.
Different weights were placed on each of these analyses and judgments were made as to the relative significance of each in determining an indicated enterprise value range. The weighted valuation methodologies resulted in an enterprise value range for the consolidated businesses. The total enterprise value was determined by applying valuation metrics against the various risks and opportunities identified to each business segment. Our reorganization value represented the value of the reorganized consolidated entity. This value was viewed as the fair value of our capital, comprising the value of long-term capital investment, including both long-term debt and equity, and the approximate amount a willing buyer would have paid for our net assets immediately after the reorganization was completed.
The calculated reorganization value was based upon a variety of estimates and assumptions about circumstances and events, not all of which have taken place to date. These estimates and assumptions are inherently subject to significant economic and competitive uncertainties beyond our control, including but not limited to, our ability to obtain and perform new contracts profitably.
On the Effective Date, we borrowed $40,000 under the Senior Secured Revolving Credit Facility; however, because the borrowings under the Senior Secured Revolving Credit Facility are revolving working capital loans, they were not included as part of the reorganization value. Therefore, the reorganization value of $550,000 represents the value of our stockholders' equity as of the Effective Date. Based on values determined by our financial advisor, we allocated $28,647 of the equity value to the stock purchase warrants and the remainder to the New Common Stock.
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The reorganization and the adoption of fresh-start reporting resulted in the following adjustments to our consolidated balance sheet as of February 1, 2002:
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- -------------------------------- Debt discharge: (a) Reflects payment of $24,500 in payments to creditors under the Plan of Reorganization and $34,749 in deferred financing costs for the Senior Secured Revolving Credit Facility. These emergence costs necessitated a $40,000 draw under the Senior Secured Revolving Credit Facility. (b) Records the effect of income taxes on the gain from debt discharge. The discharge of liabilities in bankruptcy is a taxable event. The pre-tax gain reported for financial statement purposes is $910,732. Our net operating loss carryforward, certain tax credit carryforwards and a portion of tax basis of goodwill and depreciable assets were utilized to offset the tax obligation arising on the discharge of liabilities. (c) Reflects the write-off of $22,123 in fees on the RE&C Financing Facilities and the Senior Unsecured Notes, and the payment of $34,749 of deferred financing costs for the Senior Secured Revolving Credit Facility. (d) Of the $1,880,900 of liabilities subject to compromise: o $373,545 of unsecured liabilities were retained by us and $4,500 was paid at emergence. o $926,288 in unsecured obligations were exchanged for 5,000 shares of New Common Stock and 8,520 warrants. The unsecured obligations include $300,000 of Senior Unsecured Notes and approximately $415,000 related to specified Power operating unit projects that were subject to guarantees by the Sellers. See Note 3, "Acquisitions - Acquisition of Raytheon Engineers & Constructors." o $576,567 in secured obligations, including accrued interest, were exchanged for 20,000 shares of New Common Stock, and $20,000 in cash paid on the Effective Date. (e) Reflects the gain on debt discharge of $1,460,732, less the value of New Common Stock and warrants issued of $550,000, net of income taxes of $343,539. Fresh-start adjustments: (f) Reflects the reclassification of Predecessor Company goodwill. (g) Records goodwill for value in excess of amounts allocable to identifiable assets. (h) Records adjustments to reflect assets and liabilities at fair market values. (i) Adjusts to reflect the assets and liabilities of businesses held for sale at their estimated realizable values. (j) Adjusts pension plan and post-employment obligations to recognize unrealized actuarial gains and losses. (k) Reflects the elimination of the deferred tax assets related to the remaining basis differences between book and tax goodwill of the Predecessor Company. This goodwill will continue to be amortized by the Successor Company over the remaining 13.5 year period for tax purposes. Also records adjustments to deferred tax assets and liabilities resulting from the adjustments to reflect assets and liabilities at fair value. (l) Records the cancellation of Predecessor Company common stock and elimination of retained earnings.
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On May 14, 2001, all liabilities of the Debtors were reclassified as liabilities subject to compromise. The resolution of liabilities subject to compromise was as follows:
5. RESTRUCTURING CHARGES
During the fourth quarter of 2001, we initiated restructuring actions to improve operational effectiveness and efficiency and reduce expenses worldwide relative to employment levels and excess facilities consistent with the Plan of Reorganization. A liability was recorded in other accrued liabilities with a corresponding charge to restructuring costs of $6,963 for employee termination benefits, impairment charges and enhanced pension benefits. The severance costs represent expected reductions in work force for 687 employees representing management, professional, administrative and operational overhead. Actual reductions in work force were 538 through November 30, 2001. Additional charges of $6,596 for 657 additional employee terminations and $19,667 for facility closure costs were accrued in December 2001 and during the quarter ended March 29, 2002.
During 2000, as part of the acquisition of RE&C, we established a restructuring liability of $28,264 for closure and consolidation of office facilities, some of which were already contemplated by the Sellers.
The following presents restructuring charges accrued and costs incurred:
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6. VENTURES
CONSTRUCTION JOINT VENTURES
We participate in joint ventures that are formed to bid, negotiate and complete specific projects. We generally participate in joint ventures as the sponsor and manager of projects. The size, scope and duration of joint-venture projects vary among periods. The tables below exclude consolidated joint ventures.
MINING VENTURES:
At November 30, 2001, we held ownership interests in two incorporated mining ventures, MIBRAG mbH (50%) and Westmoreland Resources, Inc. ("Westmoreland Resources") (20%) which are accounted for under the equity method. We provide contract mining services to these ventures. Effective March 28, 2001, we increased our ownership interest in MIBRAG mbH from 33% to 50% by purchasing the additional interests for approximately $17,500, which was funded through the reinvestment of dividend distributions from MIBRAG mbH. We are currently in litigation with Westmoreland Resources concerning the contract mining services we provide to it. See Note 13, "Contingencies and Commitments - Other."
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Undistributed earnings from mining ventures totaled $108,815 at November 30, 2001.
7. SALES OF BUSINESSES AND BUSINESSES HELD FOR SALE
During the year ended December 3, 1999, we sold a foreign non-core subsidiary and a domestic subsidiary engaged in the concrete and aggregate business. The $8,730 pretax gain on the sale of these businesses was recognized as other income. Operations of the subsidiaries resulted in revenue of $11,985 and net losses of $481 for 1999. Proceeds from the sales of both businesses totaled $25,914.
In November 2001, we and BNFL agreed to pursue the sale of the Electro-Mechanical Division ("EMD") of our Westinghouse Businesses. EMD designs and manufactures components for the U.S. Navy, nuclear power utilities and other industries. We are in discussions with potential buyers and anticipate that a sale will be completed in 2002. Operating results for EMD are included as part of the Government operating unit in Note 12, "Operating Segment, Geographic and Customer Information."
During 2001, we elected to pursue the sale of the process technology development portion of our petroleum and chemical business (the "Technology Center"). We are in discussions with potential buyers, and anticipate that a sale will be completed in 2002. Operating results for the Technology Center are included as part of the Petroleum & Chemicals operating unit in Note 12, "Operating Segment, Geographic and Customer Information."
For financial reporting purposes, the assets and liabilities of businesses held for sale have been classified as "Assets held for sale" and "Liabilities held for sale" in the Consolidated Balance Sheets. The table below provides detail of the assets and liabilities of EMD and the Technology Center as of November 30, 2001.
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Operating results of businesses held for sale are as follows:
8. CREDIT FACILITIES
CREDIT FACILITIES AND ACQUISITION FINANCING
On March 19, 1999, we replaced our existing bank credit facility with new uncollateralized revolving credit facilities providing an aggregate borrowing capacity of $250,000 in order to acquire the Westinghouse Businesses, to provide for general corporate purposes, to support working capital requirements and to support letters of credit and other potential acquisitions. On May 21, 1999, the new credit facilities were increased to $325,000 consisting of a $195,000 five-year facility, which provided for both revolving borrowings and the issuance of letters of credit, and a $130,000 one-year facility, which provided for revolving borrowings. The one-year facility included terms permitting extensions in one-year increments by mutual agreement of the banks and us or converted, at our option, to a term loan having a maturity of one year after the then current expiration of such facility. The facilities' covenants required the maintenance of financial ratios, and placed limitations on guarantees, liens, investments, dividends and other matters. At December 3, 1999, $55,000 and $45,000 were outstanding on the one-year and five-year facilities, respectively.
The facilities provided for interest on loans, payable at the conclusion of each interest commitment period not to exceed quarterly, at the applicable LIBOR rate or the base rate, as defined, plus an additional margin. The additional margin ranged from 1.25% to 2.00% for the LIBOR rate and .25% to 1.00% for the base rate, based on the ratio of earnings before interest, taxes, depreciation and amortization to our funded debt. The effective interest rate at December 3, 1999 was 6.98%. On March 19, 1999, we paid $3,700 in underwriting fees to the banks and were required to pay quarterly commitment and letter of credit fees. Commitment fees were based on the unused portion of the facilities. Letter of credit fees were based on a percentage of the letter of credit amount.
On July 7, 2000, in order to finance the acquisition of RE&C, refinance existing revolving credit facilities, fund working capital requirements and pay related fees and expenses, we (i) obtained the RE&C Financing Facilities, providing for an aggregate of $1,000,000 of term loans and revolving borrowing capacity and (ii) issued and sold $300,000 aggregate principal amount of Senior Unsecured Notes. The terms of the RE&C Financing Facilities and Senior Unsecured Notes are briefly summarized below.
RE&C FINANCING FACILITIES
The RE&C Financing Facilities provided for, on the terms and subject to the conditions stated in the RE&C Financing Facilities: (i) two senior secured term loan facilities in an aggregate principal amount of up to $500,000, including a multi-draw Tranche A term loan facility in an aggregate principal amount of $100,000 that matured July 7, 2005 and a Tranche B term loan facility in an aggregate principal amount of $400,000 that matured July 7, 2007, and (ii) a five-year senior secured revolving credit facility in an aggregate principal amount of up to $500,000, all of which was available for letters of credit. Initial borrowings under the RE&C Financing Facilities totaled $400,000, representing the full amount available under the Tranche B term loan facility. The initial borrowing rate under the Tranche B term loan facility was the applicable LIBOR plus an additional margin of 3.25%. The effective interest rate was 9.87% at December 1, 2000. The borrowing rate, when utilized, under the Tranche A term loan facility and the senior secured revolving credit facility was the applicable LIBOR plus an additional margin of 2.75% for an effective interest rate of 9.37% at December 1, 2000. The additional margins, which were determined based on an agreed pricing grid, could increase or decrease from time to time as the ratio of debt to EBITDA (as such term is defined in the RE&C Financing Facilities) increased or decreased. The credit agreement under which the RE&C Financing Facilities were made available contained affirmative, negative and
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financial covenants and specified events of default which are typical for a credit agreement governing credit facilities of the size, type and tenor of the RE&C Financing Facilities. Among the covenants were those limiting our ability and the ability of certain of our subsidiaries to incur debt or liens, provide guarantees, make investments and pay dividends or repurchase shares. On October 5, 2000, we terminated the Tranche A term loan facility to eliminate ongoing related commitment fees.
SENIOR UNSECURED NOTES
The Senior Unsecured Notes were unsecured senior obligations that were to mature on July 1, 2010. Interest on the Senior Unsecured Notes was payable semiannually in arrears on January 1 and July 1, commencing January 1, 2001. The Senior Unsecured Notes were sold in a private offering to qualified institutional buyers. Under a registration rights agreement for the benefit of the holders of the Senior Unsecured Notes, we were required to offer to exchange the Senior Unsecured Notes for new Senior Unsecured Notes that were registered under the Securities Act of 1933. The Senior Unsecured Notes provided for additional interest to the extent and for the period that the registration process was not completed within the specified periods. The Senior Unsecured Notes accrued interest at a rate of 11% per annum through September 20, 2000, and were then adjusted to 11.5% per annum. They were scheduled to continue at that rate until we fully complied with the registration requirements of the registration rights agreement, subject to a further increase in interest rate of ...5% per annum from and after December 20, 2000, until the registration process was completed. At that time, the Senior Unsecured Notes would accrue interest at the annual rate of 11%. The Senior Unsecured Notes ranked equally with our existing and future senior unsecured indebtedness. The Senior Unsecured Notes effectively ranked junior to all of our secured indebtedness and to all liabilities of our subsidiaries that were not guarantors of the Senior Unsecured Notes. The Senior Unsecured Notes ranked senior to any future subordinated indebtedness we might have incurred. The Senior Unsecured Notes were guaranteed on a senior basis by certain of our subsidiaries. The indenture under which the Senior Unsecured Notes were issued contained affirmative, restrictive and financial covenants and specified events of default which are typical for an indenture governing an issue of high-yield senior unsecured notes. Among the covenants were those limiting our ability and the ability of certain of our subsidiaries to incur debt or liens, provide guarantees, make investments and pay dividends or repurchase shares.
BANKRUPTCY DISCHARGE
As discussed in Note 4, "Reorganization Case and Fresh-start Reporting," our obligations under the RE&C Financing Facilities and the Senior Unsecured Notes were discharged upon our emergence from bankruptcy on January 25, 2002.
DIP FACILITY
On May 14, 2001, we filed a voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code. See Note 4, "Reorganization Case and Fresh-start Reporting." On the same day, we entered into the DIP Facility with some of our subsidiaries as guarantors, for a commitment of $195,000 with the ability to increase the total commitment to $350,000. On June 5, 2001 the DIP Facility lenders approved an increase in the total commitment from $195,000 to $220,000. The DIP Facility was to be used (i) to finance the costs of restructuring; and (ii) for ongoing working capital, general corporate purposes and letter of credit issuance. The borrowing rate under the DIP Facility was the prime rate, plus an additional margin of 4.0%. The effective interest rate was 11.0% as of May 2001. The DIP Facility carried other fees, including commitment fees and letter of credit fees, normal and customary for such credit agreements. The credit agreement under which the DIP Facility was made available contained affirmative and negative covenants, reporting covenants and specified events of default typical for a credit agreement governing credit facilities of the size, type and tenor of the DIP Facility. Among the covenants were those limiting our ability and the ability of some of our subsidiaries to incur debt or liens, provide guarantees, make investments and pay dividends. As of January 24, 2002, we had no outstanding debt and $32,800 of outstanding letters of credit under the DIP Facility. As discussed below, the DIP Facility was replaced by the Senior Secured Revolving Credit Facility on January 25, 2002.
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SENIOR SECURED REVOLVING CREDIT FACILITY
In connection with our emergence from bankruptcy protection on January 25, 2002, we entered into: (i) the Senior Secured Revolving Credit Facility, providing for an aggregate of $350,000 of revolving borrowing and letter of credit capacity, and (ii) exit bonding facilities, providing for an aggregate amount of $500,000 of surety bonds. The Senior Secured Revolving Credit Facility provides for an amount up to $350,000 in the aggregate of loans and other financial accommodations allocated pro rata between two facilities as follows: a Tranche A facility in the amount of $208,350 and a Tranche B facility in the amount of $141,650. The scheduled termination date for the Senior Secured Revolving Credit Facility is thirty months from January 24, 2002, and it may be increased up to a total of $375,000 with the approval of the lenders.
The Senior Secured Revolving Credit Facility was entered into (i) to retire our DIP Facility and to repay any DIP Facility balance (of which there was none); (ii) to replace or backstop approximately $122,000 letters of credit issued under our pre-petition RE&C Financing Facilities; (iii) to replace approximately $32,800 letters of credit issued under the DIP Facility; (iv) to make payments to the pre-petition senior secured lenders and Mitsubishi Heavy Industries pursuant to our Plan of Reorganization; (v) to finance the costs of restructuring; and (vi) for ongoing working capital, general corporate purposes and letter of credit issuance. The initial borrowing rate under the Senior Secured Revolving Credit Facility is the applicable LIBOR, which has a stated floor of 3%, plus an additional margin of 5.5%. Alternatively, we may choose the prime rate, plus an additional margin of 4.5%. As of January 2002, the effective LIBOR- and prime-based rates were 8.5% and 9.25%, respectively. The Senior Secured Revolving Credit Facility carries other fees including commitment fees and letter of credit fees normal and customary for such credit agreements. The Senior Secured Revolving Credit Facility contains affirmative, negative and financial covenants, including minimum net worth, capital expenditures, maintenance of certain financial and operating ratios, and specifies events of default, which are typical for a credit agreement governing credit facilities of the size, type and tenor of the Senior Secured Revolving Credit Facility. Among the covenants are those limiting our ability and the ability of some of our subsidiaries to incur debt or liens, provide guarantees, make investments and pay dividends.
9. TAXES ON INCOME
The components of the U.S. federal, state and foreign income tax expense (benefit) were as follows:
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The components of the deferred tax assets and liabilities and the related valuation allowances were as follows:
At November 30, 2001, we had consolidated regular tax net operating loss ("NOL") carryforwards for federal, state and foreign tax purposes of approximately $347,748, $271,580 and $145,654, respectively. The federal NOL's expire in years 2009 through 2021 and the state NOL's expire in years 2002 through 2016. The foreign NOL's primarily consist of losses incurred on two construction projects in the United Kingdom which were acquired as part of the RE&C acquisition. We also had a federal capital loss carry forward of $3,077. In addition, we had $18,802 of federal alternative minimum tax credits at November 30, 2001 which carry forward indefinitely and $11,149 of foreign tax credits which currently have no expiration date. The federal and state NOL's, federal capital loss and federal alternative minimum tax credits will be substantially eliminated due to the 2002 bankruptcy restructuring. Foreign NOL's will not be impacted.
The $44,675 valuation allowance reduces the deferred tax assets associated with the foreign NOL carryforwards to a level which we believe will, more likely than not, be realized based on estimated future taxable income. The increase of $90 in the valuation allowance at November 30, 2001 reflects the uncertainty regarding the future utilization of current year foreign net operating losses. The valuation allowance for the 2000 year reflected both an increase of $43,264 and a decrease of $40,666. The net change in valuation allowance at December 1, 2000 resulted from an evaluation of the likelihood of the future utilization of the NOL's of Old MK and foreign NOL's which were part of the acquisition of RE&C. The valuation allowance relating to the NOL's of Old MK was reduced by $40,666 with an equivalent reduction to goodwill. The reduction in the valuation allowance for the NOL's of Old MK reflects that the federal and state NOL's will be substantially utilized to offset the gain on cancellation of debt that was recognized on emergence from bankruptcy. See Note 4, "Reorganization Case and Fresh-start Reporting." The valuation allowance related to foreign NOL's includes $12,023 that was established as part of the acquisition of RE&C and was increased by $31,241 at December 1, 2000 to reduce the deferred tax asset associated with the foreign NOL's to a level that we believe, more likely than not, will be realized based on future foreign taxable income. The net decrease of $50,000 in the valuation allowance at December 3, 1999 resulted from an evaluation of the likelihood of the future realization of deductible temporary differences and utilization of NOL's of Old MK with an equivalent reduction to goodwill. The reduction in deferred tax liabilities related to investments in affiliates for 2000 is due to losses incurred by foreign subsidiaries, currency translation losses and Subpart F income recognized for U.S. federal income tax purposes.
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Years prior to 1994 are closed to examination for federal tax purposes. We believe that adequate provision has been made for probable tax assessments for all open tax years.
Income tax expense (benefit) differed from income taxes at the U.S. federal statutory tax rate of 35% as follows:
State taxes, net of federal benefit, include the impact of the cumulative effect of the state tax rate changes caused by to the impact of recent acquisitions. These acquisitions significantly impacted our state apportionment factors that had a corresponding impact on our deferred state tax assets and liabilities. Foreign taxes for the year ended November 30, 2001 include a benefit for current year losses in certain foreign jurisdictions. A full valuation allowance has been placed against the resulting foreign NOL's. Nondeductible expenses, net was principally comprised of nondeductible reorganization expenses and the nondeductible portion of meals and entertainment expenses.
Income (loss) before reorganization items, income taxes and minority interests is comprised of the following:
10. BENEFIT PLANS
PENSION PLANS
Through the RE&C acquisition, we assumed sponsorship of contributory defined benefit pension plans which covered employees of legal entities in the Netherlands and the United Kingdom. We made actuarially computed contributions, as necessary, based on local standards in the respective countries to adequately fund benefits for these plans. At December 1, 2000, plan assets for the pension plan in the Netherlands were invested in separate accounts through an insurance contract, and plan assets for the pension plan in the United Kingdom were invested in a pooled pension fund. Investments consisted primarily of publicly traded equity securities, bonds, government securities and cash equivalents. In May 2001 and November 2001, respectively, the legal entities sponsoring the pension plans in the Netherlands and the United Kingdom filed for bankruptcy and the plans were transferred to independent trustees and the related liabilities were extinguished. See Note 4, "Reorganization Case and Fresh-start Reporting."
Through the Westinghouse Businesses acquisition, we assumed sponsorship of contributory defined benefit pension plans which cover employees of Westinghouse Government Services Group ("WGSG"), which is comprised of the Westinghouse Businesses acquired by us. We make actuarially computed contributions as necessary to adequately fund benefits for these plans. As of December 1, 2000 and November 30, 2001, plan assets were invested in a WGSG master pension trust that invested primarily in publicly traded common stocks,
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bonds, government securities and cash equivalents. The portion of the unfunded obligation for these plans expected to be sold as part of EMD has been reclassified as part of liabilities held for sale. See Note 7, "Sales of Businesses and Businesses Held for Sale."
SUPPLEMENTAL RETIREMENT PLANS
We have an unfunded supplemental retirement plan for key executives of WGSG providing for periodic payments upon retirement. Benefits from this plan are based on salary and years of service and are reduced by benefits earned from certain other pension plans in which the executives participate. Benefits from this plan were frozen effective July 1, 2001, resulting in a curtailment gain of $4,382. The portion of the unfunded obligation for this plan expected to be sold as part of EMD has been reclassified as part of liabilities held for sale. See Note 7, "Sales of Businesses and Businesses Held for Sale."
We have assumed the nonqualified pension liabilities to approximately 60 employees and former employees of an acquired company. In addition, we have an unfunded pension liability for former non-employee directors of an acquired company. Participants do not accrue any service cost under the plans.
POST-RETIREMENT HEALTH CARE PLANS
We are the sponsors of an unfunded plan to provide certain health care benefits for employees of an acquired company who retired before July 1, 1993, including their surviving spouses and dependent children. Employees who retired after July 1, 1993 are not eligible for subsidized post-retirement health care benefits. The plan was amended in past years, and we reserve the right to amend or terminate the post-retirement health care benefits currently provided under the plan and may increase retirees' cash contributions at any time. The unrecognized prior service cost is being amortized to periodic health care expense over the 13-year average future expected lifetime of retirees and their surviving spouses beginning in 1997, the date of the last plan change.
We provide benefits under company sponsored retiree health care and life insurance plans for substantially all employees of WGSG. The portion of the unfunded obligation for these plans expected to be sold as part of EMD has been reclassified as part of liabilities held for sale. See Note 7, "Sales of Businesses and Businesses Held for Sale." We also provide benefits under company sponsored retiree health care to approximately 260 retired employees and provide a life insurance plan for substantially all retirees of RE&C. The retiree health care plans require retiree contributions and contain other cost sharing features. The retiree life insurance plans provide basic coverage on a noncontributory basis.
The actuarial assumptions used to determine costs and benefit obligations for the U.S. plans are as follows:
Experience gains and losses, as well as the effects of changes in actuarial assumptions and plan provisions, are amortized over the average future service period of employees.
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The components of net pension and post-retirement costs for the U.S. plans are as follows:
Reconciliation of beginning and ending balances of benefit obligations and fair value of plan assets and the funded status of the U.S. plans are as follows:
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Amounts recognized in the balance sheet for the U.S. plans are as follows:
At November 30, 2001, the benefit obligation for each pension and post-retirement benefit plan disclosed above exceeded the fair value of plan assets. Upon our emergence from bankruptcy, we applied fresh-start reporting that required the elimination of all unrecognized amounts as described above. See Note 4, "Reorganization Case and Fresh-start Reporting" for disclosure of the effect of the elimination.
An annual rate increase of 11.5% in the per capita cost of health care benefits was assumed, gradually declining to 5.5% in the year 2006 and continuing thereafter at that rate over the projected payout period of the benefits. The health care cost trend rate assumption has a significant effect on the accumulated projected benefit obligation. The effect of a 1% change in this assumption would be as follows:
DEFERRED COMPENSATION PLANS
We adopted a deferred compensation plan effective January 1, 1998 for the benefit of executive officers and key employees. The unfunded plan allowed participants to elect to defer salary and bonus subject to certain limits. The plan was terminated and assets were distributed to participants in March 2001. The net cost of this plan was $102 in 2001, $317 in 2000 and $221 in 1999.
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OTHER RETIREMENT PLANS
We sponsor a number of defined contribution retirement plans. Participation in these plans is available to substantially all salaried employees and to certain groups of hourly employees. Our cash contributions to these plans are based on either a percentage of employee contributions or on a specified amount per hour depending on the provisions of each plan. The net cost of these plans was $36,368 in 2001, $24,310 in 2000 and $13,767 in 1999.
MULTIEMPLOYER PENSION PLANS
We participate in and make contributions to numerous construction-industry multiemployer pension plans. Generally, the plans provide defined benefits to substantially all employees covered by collective bargaining agreements. Under the Employee Retirement Income Security Act, a contributor to a multiemployer plan is liable, upon termination or withdrawal from a plan, for its proportionate share of a plan's unfunded vested liability. We currently have no intention of withdrawing from any of the multiemployer pension plans in which we participate. The net cost of these plans was $42,452 in 2001, $30,420 in 2000 and $18,874 in 1999.
11. TRANSACTIONS WITH AFFILIATES
We purchased goods and services from and participated in joint ventures with affiliates of a principal stockholder who is also chairman of the board of directors, and was president and chief executive officer, of WGI (the "Principal Stockholder") as follows:
We performed construction services, mined and sold ballast, sold an aircraft and realized gains on sales of equipment to affiliates of the Principal Stockholder as follows:
Insurance, surety bonds and financial advisory services were purchased by us from firms owned by or affiliated with persons who were members of our board of directors at the time of purchase as follows:
In the first quarter of 2000, related to our acquisition of RE&C, we entered into an agreement with a financial services advisory firm, the Chairman and Chief Executive Officer of which was and continues to be a member of our board of directors. Pursuant to the agreement, we paid the financial services firm a success fee of $4,000 upon completion of the RE&C acquisition and paid an aggregate retainer fee of $50 per quarter.
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In January 1998, we entered into an agreement with an insurance brokerage firm owned by a then member of our board of directors for insurance and bond services. The agreement was effective January 1, 1998 and expired December 31, 2000. Pursuant to the agreement, the brokerage firm received an annual fixed fee of $1,150, which was paid in equal quarterly installments. All insurance commissions earned on policies purchased for us were credited 100% against the fee. The insurance brokerage firm retains 50% of all surety commissions in excess of $250 during each calendar year. In 1999, our board of directors approved an amendment to the agreement to increase the annual fee payable to the brokerage firm to $1,250, effective January 1, 1999. A new agreement, effective January 1, 2001, was approved by our board of directors in January 2001. The new agreement reduced the fixed fee to $850 and eliminated the provision allowing the retention of any surety commissions.
12. OPERATING SEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION
We operate through five operating units, each of which comprised a separate reportable business segment: Power, Infrastructure & Mining, Industrial/Process, Government and Petroleum & Chemicals. The reportable segments were separately managed, served different markets and customers, and differed in their expertise, technology and resources necessary to perform their services. The presentation of operating unit information for the years ended December 1, 2000 and December 3, 1999 have been reclassified to conform to the presentation for the year ended November 30, 2001.
Power provides engineering, construction and operations and maintenance services in both nuclear and fossil power markets for turnkey new power plant construction, plant expansion, retrofit and modification, decontamination and decommissioning, general planning, siting and licensing and environmental permitting.
Infrastructure & Mining provides diverse engineering and construction and construction management services for highways and bridges, airports and seaports, tunnels and tube tunnels, railroad and transit lines, water storage and transport, water treatment, site development, mine operations and hydroelectric facilities. The operating unit generally performs as a general contractor or as a joint venture partner with other contractors on domestic and international projects.
Industrial/Process provides engineering, design, procurement, construction services and total facilities management for general manufacturing, pharmaceutical and biotechnology, process, metals processing, institutional buildings, food and consumer products, automotive, aerospace, telecommunications and pulp and paper industries.
Government provides a complete range of technical services to the U.S. Departments of Energy and Defense, including operations and management services, environmental and chemical demilitarization services, waste handling and storage and weapons stockpile support. Services provided for commercial clients include design and manufacture of components of nuclear power facilities, safety management services, waste and environmental technology, design and manufacture of radioactive waste containers and licensing.
Petroleum & Chemicals provides technology, engineering, procurement and construction services to the petroleum and chemical industries worldwide. Major markets include commodity-organic chemicals, polymers, Fischer-Tropsch chemistry, fertilizers, oleochemicals, petroleum processing and lube oil processing.
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The accounting policies of the segments are the same as those described in the summary of significant accounting policies. We evaluate performance and allocate resources based on segment operating income. In 2000, segment asset balances were not measures reported to the chief operating decision-maker for purposes of making decisions about allocating resources to segments and assessing performance. Segment operating income is total segment revenue reduced by segment cost of revenue and goodwill amortization related to the acquisition of the Westinghouse Businesses. No other goodwill amortization is allocated to the segments. Corporate and other expense consists principally of general and administrative expenses.
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INVESTMENT IN EQUITY METHOD INVESTEES
At November 30, 2001 and December 1, 2000, we had $83,792 and $66,008, respectively, in investments accounted for by the equity method. We recorded earnings totaling $17,890, $13,080 and $12,435 in 2001, 2000 and 1999, respectively. These investments were held and reported as part of the Infrastructure & Mining segment.
GEOGRAPHIC AREAS
Geographic data regarding our revenue is shown below. Geographical disclosures of long-lived assets were impracticable.
Revenue from international operations in 2001, 2000 and 1999 were in numerous geographic areas without significant concentration.
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MAJOR CUSTOMERS
Ten percent or more of our total revenues for one or more of the three years in the period ended November 30, 2001 were derived from contracts and subcontracts performed by the Industrial/Process and Government segments with the following customers:
13. CONTINGENCIES AND COMMITMENTS
SUMMITVILLE ENVIRONMENTAL MATTERS
From July 1985 to June 1989, Industrial Constructors Corp. ("ICC"), one of our wholly-owned subsidiaries, performed various contract mining and construction services at the Summitville mine near Del Norte, Colorado. In 1996, the United States and the State of Colorado commenced an action under the Comprehensive Environmental Response, Compensation and Liability Act in the U.S. District Court for the District of Colorado against Mr. Robert Friedland, a PRP, to recover the response costs incurred and to be incurred at the Summitville Mine Superfund Site (the "Site"). No other parties were named as defendants in the original complaints in this action. On April 30, 1999, Friedland filed a third-party complaint naming ICC and nine other defendants, alleging that such defendants are jointly and severally liable for the response costs and requesting that the response costs be equitably allocated. In October 1999, the United States and Colorado amended their complaints to add direct claims against ICC and other parties.
On December 22, 2000, the United States and Colorado signed a Settlement Agreement and Consent Decree wherein Friedland agreed to pay $27,500 in exchange for various promises by the United States and Colorado, including dismissal of Friedland from the action filed in 1996.
On January 2, 2001, Colorado filed a new federal action in Colorado, naming five defendants: Sunoco, ARCO, Asarco, Bechtel and A.O. Smith, alleging that these defendants are jointly and severally liable for costs incurred and to be incurred by Colorado at the Site. On January 12, 2001, Colorado amended this complaint by naming WGI, Washington Contractors Group, Inc., which is another one of our wholly-owned subsidiaries, and Dennis R. Washington, our chairman, as additional defendants. That case was dismissed on September 14, 2001 on the basis that the statute of limitations had expired and the complaint was untimely.
The United States and Colorado have estimated that the total response costs incurred and to be incurred at the Site will approximate $150,000. Prior to our bankruptcy filings neither we nor Mr. Washington were a party to any agreement regarding allocation of responsibility, and neither the United States nor Colorado had made any formal allocation of responsibility among those defendants.
During the course of our bankruptcy proceedings we entered into negotiations with the United States, Colorado and Mr. Friedland to settle the issues related to these matters. In December 2001, we entered into settlement agreements with the United States, Colorado and Mr. Friedland. As a result, the United States and Colorado were deemed to have a general unsecured claim against us in the amount of $20,288 in the bankruptcy proceedings and Mr. Friedland obtained a settlement in the amount of $15,000. In connection with the bankruptcy cases, the general unsecured claim of the United States and Colorado was discharged on the Effective Date pursuant to our Plan of Reorganization. Mr. Friedland has been assigned the right to proceed against insurance carriers under specified insurance policies by which we were insured with respect to claims for defense, contribution or indemnity relating to the Site and to the actions brought by the United States and Colorado. Mr. Friedland has agreed to proceed directly against the insurance carriers and will not enforce or seek the payment of the settlement by us. As a result of this settlement, we recorded a liability of $20,288 at December 1, 2000.
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OTHER ENVIRONMENTAL MATTERS
We were identified as a PRP and were contingently liable for remediation liabilities in connection with Old MK's former transit business. We were obligated to indemnify the buyer of the transit business for remediation costs and have therefore accrued a $3,000 liability. Our obligations under this indemnification were discharged in our bankruptcy proceedings on the Effective Date of our Plan of Reorganization.
We are responsible for decontaminating and decommissioning a nuclear licensed site owned and operated by EMD, part of the Government operating unit, a business held for sale. During 2001, one facility underwent decontamination and decommissioning at a total cost of $8,000, of which the U.S. Navy paid 75% and we paid 25%. In April 2002, we presented a claim to the U.S. Navy requesting funding for the decontamination and decommissioning of the remaining site. Although we do not have a commitment from the U.S. Navy to pay for such future costs, we expect that, as in the past, the U.S. Navy will share in the responsibility for such costs. At November 30, 2001, we accrued $701 for what we currently estimate to be our share of the future decontamination and decommissioning costs at this site.
CONTRACT RELATED MATTERS
We have contracts with the U.S. government, the allowable costs of which are subject to adjustments upon audit and negotiation by various agencies of the U.S. government. Audits by the U.S. government and negotiations of indirect costs are substantially complete through 1999. Audits by the U.S. government of 2000 indirect costs are in progress. We are also in the process of preparing cost impact statements as required under U.S. Cost Accounting Standards for 1999 through 2001, which are subject to audit by the U.S. government and negotiation. We have also prepared and submitted to the government cost impact statements for 1989 through 1995 for which we believe no adjustments are necessary. We believe that the results of the indirect costs audits and negotiations and the cost impact statements will not result in a material change to our financial position, results of operations or cash flows.
LETTERS OF CREDIT
In the normal course of business, we cause letters of credit to be issued in connection with contract performance obligations that are not required to be reflected in the balance sheet. We are obligated to reimburse the issuer of such letters of credit for any payments made thereunder. At November 30, 2001 and December 1, 2000, $177,247 and $253,927, respectively, in face amount of letters of credit were outstanding. We have pledged cash and cash equivalents as collateral for our reimbursement obligations with respect to $22,410 in face amount of specified letters of credit that were outstanding at November 30, 2001. At November 30, 2001, $122,040 of the outstanding letters of credit were issued under the $500,000 RE&C Financing Facilities and $32,782 of outstanding letters of credit were issued under the DIP Facility described in Note 8, "Credit Facilities."
In connection with a 1989 sale of Old MK's ownership interest in a shipbuilding subsidiary, we assumed a guarantee of port facility bonds of $21,000 through 2002. The former subsidiary collateralized the bonds with some of its assets and has established a sinking fund for the bonds. This guarantee was rejected during our bankruptcy process without liability to us.
LONG-TERM LEASES
Total rental and long-term lease payments for real estate and equipment charged to operations in 2001, 2000 and 1999 were $74,718, $85,520 and $60,561, respectively. Future minimum rental payments under operating leases, some of which contain renewal or escalation clauses, with remaining noncancelable terms in excess of one year at November 30, 2001 were as follows:
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The table above represents obligations existing for the respective periods after adjustment for approximately $250,808 of future lease obligations that were rejected, eliminated or renegotiated during the bankruptcy process through reformation of the related lease.
OTHER
In May 1998, Leucadia National Corporation filed an action against us and some of our officers and directors in the U.S. District Court for the District of Utah. The complaint alleged fraud in the sale of shares of MK Gold Corporation ("MK Gold") by Old MK to Leucadia and sought rescission of the sale and restitution of $22,500. Leucadia contended that we knew or believed that a non-competition agreement between us and MK Gold was unenforceable and failed to disclose that belief to Leucadia. The non-competition agreement is the subject of separate litigation between MK Gold and WGI. MK Gold was seeking alleged damages of up to $10,000. On January 5, 1999, the two cases were consolidated for trial. In April 2001, we entered into a settlement agreement with Leucadia and MK Gold and, as a result, (i) the litigation was dismissed and the parties granted one another mutual releases; (ii) we paid to MK Gold $1,500; (iii) we issued a promissory note to MK Gold for $10,000; and (iv) we agreed to extend the term of the non-competition agreement through 2006. We recorded the charge for this settlement in November 2000. In our bankruptcy proceedings, the non-competition agreement and the extension thereof contained in the settlement agreement were rejected and terminated and amounts due to MK Gold under the promissory note were treated as a general unsecured claim and were discharged on the Effective Date pursuant to our Plan of Reorganization.
Some current and former officers, employees and directors of WGI were named defendants in an action filed by two former participants in the Old MK 401(k) Plan and Employee Stock Ownership Plan in the U.S. District Court for the District of Idaho. The complaint alleges, among other things, that the defendants breached certain fiduciary duties. On July 12, 2000, the court denied plaintiffs' motion to reconsider a prior summary judgment in favor of specified defendants and granted summary judgment with respect to specified other defendants with the result that WGI and all current and former officers, employees and directors have been dismissed from the action. The court also certified the case as a class action. The remaining defendants in this proceeding are the two plan committees and two companies (to which we had indemnification obligations that were discharged in our bankruptcy proceedings) involved in administration of the plans.
In September 2001, Westmoreland Resources, a mining venture in which we hold a 20% ownership interest and to which we provide contract mining services, asserted claims against us in our bankruptcy proceedings. As a threshold matter, Westmoreland Resources objected to our assumption in the course of our bankruptcy proceedings of the mining contract between us and Westmoreland Resources, and we have reserved the right to reject all pending agreements between Westmoreland Resources and us. In addition, Westmoreland Resources claimed that (i) we had been overpaid under various mining contracts over a six-year period, (ii) we likely would be obligated to reimburse Westmoreland Resources for a portion of past due royalties that may be imposed against Westmoreland Resources by the U.S. government and the Crow Indian Tribe, (iii) we are obligated to pay for repairs to mining equipment (a dragline) owned by Westmoreland Resources and (iv) Westmoreland Resources is entitled to adequate assurances about whether we would be able to perform final reclamation at the end of mining operations on the properties leased by Westmoreland Resources. Westmoreland Resources has also asserted that we are being overpaid by them for contract mining services we currently provide them.
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The claim for damage to the dragline was originally filed by Westmoreland Resources in the U.S. District Court for the District of Montana in March 2000 and will be tried in that court. We expect that the other disputes between us and Westmoreland Resources will be resolved as adversary proceedings in the bankruptcy court. Dispositive motions on the issues before the bankruptcy court are to be filed on or before November 15, 2002, and a trial date has been set for January 20, 2003 to resolve those claims. We will not be required to assume or reject the contracts between us and Westmoreland Resources until all adversary proceedings are resolved.
From the spring of 1996 through the spring of 2001, we were the environmental remediation contractor for the U.S. Army Corps of Engineers (the "Corps") with respect to remediation at the Tar Creek Superfund Site at a former mining area in northeast Oklahoma. The Corps had contracted with the U.S. Environmental Protection Agency to remove lead contaminated soil in residential areas from more than 2,000 sites and replace it with clean fill material. In February 2000, various federal investigators working with the U.S. Attorney's Office for the Northern District of Oklahoma executed search warrants and seized our local project records. Allegations made at the time included claims that the project had falsified truck load tickets and had claimed compensation for more loads than actually were hauled, or had indicated that full loads had been hauled when partial loads actually were carried, as well as claims that the project had sought compensation for truckers and injured workers who were directed to remain at the job site, but not to work. The criminal investigation that relates to the execution of the search warrants remains pending. Through claims filed in our bankruptcy proceedings and conversations with lawyers from the Civil Division of the U.S. Department of Justice, we have learned that a QUI TAM lawsuit has been filed against us under the federal False Claims Act by private citizens alleging fraudulent or false claims by us for payments we received in connection with the Tar Creek remediation project. We believe that there was no wrongdoing by us or our employees at this project.
Although the ultimate outcome of the matters discussed in the three preceding paragraphs cannot be predicted with certainty, we believe that the outcome of these actions, individually or collectively, will not have a material adverse impact on our financial position, results of operations or cash flows.
In addition to the foregoing, there are other claims, lawsuits, disputes with third parties, investigations and administrative proceedings against us relating to matters in the ordinary course of our business activities that are not expected to have a material adverse effect on our financial position, results of operations or cash flows.
14. SUPPLEMENTAL CASH FLOW INFORMATION
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15. COMPREHENSIVE INCOME (LOSS)
Comprehensive income for the years ended November 30, 2001, December 1, 2000 and December 3, 1999 was as follows:
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The accumulated balances related to each component of other comprehensive income (loss) were as follows:
16. CAPITAL STOCK, STOCK PURCHASE WARRANTS AND STOCK COMPENSATION PLAN
As discussed in Note 4, "Reorganization Case and Fresh-start Reporting," our Plan of Reorganization canceled all of the then outstanding shares of capital stock, stock purchase warrants and stock options as of January 25, 2002, and new capital stock, stock purchase warrants and stock options were issued. The following was the status of these shares, warrants and options as of November 30, 2001 prior to our filing for and emergence from bankruptcy protection.
CAPITAL STOCK
Pursuant to our certificate of incorporation, we had the authority to issue 100,000 shares of common stock and 10,000 shares of preferred stock. Preferred stock could be issued at any time or from time to time in one or more series with such designations, powers, preferences and rights, qualifications, limitations and restrictions thereon as determined by our board of directors.
STOCK PURCHASE WARRANTS
At November 30, 2001, we had outstanding stock purchase warrants giving rights to acquire 2,865 shares of our old common stock at an exercise price of $12.00 per share. All such warrants were scheduled to expire in March 2003.
STOCK REPURCHASE PROGRAM
In January 1998, our board of directors authorized the purchase, from time to time, of up to 2,000 shares of our common stock and up to 2,765 of our stock purchase warrants. As of June 1999, 2,000 shares had been repurchased. In July 1999, our board of directors authorized the purchase of an additional 2,000 shares of our common stock. As of November 30, 2001, no shares had been repurchased under the new authorization.
STOCK COMPENSATION PLAN
We had a stock compensation plan for employees and non-employee directors (the "1994 Plan") which provided for grants in the form of nonqualified stock options or incentive stock options ("ISOs") and restricted stock awards. Additional shares of common stock available each year for grants under the 1994 Plan were equal to 3% of the outstanding shares as of the first day of such year. Exercise prices for nonqualified stock options were determined by our board of directors. Exercise prices for ISOs were equal to the fair market value of our common stock at the date of grant. Stock options extended for and vested over periods of up to ten years as determined by our board of directors. Our board of directors could accelerate the vesting period after award of an option. The number of shares available for grant of ISOs could not exceed 2,900 shares, and no individual could be granted stock options or restricted stock awards for more than 5,000 shares over any three-year period.
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Non-employee directors could elect to forego receipt in cash of certain fees earned during any year in return for an option with a grant price equal to 80% of the fair market value of our common stock, vesting quarterly during the year with a term period of up to ten years as determined by our board of directors. Non-employee directors elected options for 95, 85 and 83 shares in lieu of fees earned in 2001, 2000 and 1999, respectively.
On April 11, 1997, our stockholders adopted the 1997 Stock Option and Incentive Plan for Non-employee Directors (the "1997 Plan") which provided for grants in the form of nonqualified stock options and restricted stock awards. Grant prices per share for stock options were at fair market value at the date of grant. The number of shares available for grant as options and restricted stock awards was 500 shares, of which no more than 100 shares could be awarded as restricted. Grants of nonqualified stock options and restricted stock awards to the non-employee directors under the 1997 Plan did not preclude grants under the 1994 Plan. Options were subject to terms and conditions determined by our board of directors and had a term not exceeding 10 years from the date of grant. Option activity under our stock plans is summarized as follows:
The terms and conditions of restricted stock awards issued to key employees were determined by our board of directors. Upon termination of employment, shares that remained subject to restriction were forfeited. At November 30, 2001, there were no restricted shares outstanding. No restricted stock awards were made in 2001, 2000 and 1999.
STOCK-BASED COMPENSATION
We adopted the disclosure-only provisions of the Financial Accounting Standards Board Statement No. 123 ACCOUNTING FOR STOCK-BASED COMPENSATION ("SFAS No. 123") issued in October 1995. Accordingly, compensation cost has been recorded based only on the intrinsic value of the options granted. We recognized $4, $192 and $219 of compensation cost in 2001, 2000 and 1999, respectively, for stock-based compensation awards. If we had elected to recognize compensation cost based on the fair value of the options granted at grant date as prescribed by SFAS No. 123, net income (loss) would have been adjusted to the pro forma amounts as follows:
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The pro forma amounts set forth above reflect the portion of the estimated fair value of awards earned in 2001, 2000 and 1999 based on the vesting period of the options.
The Black-Scholes option valuation model was used to estimate the fair value of the options for purposes of the pro forma presentation set forth above.
The following assumptions were used in the valuation and no dividends were assumed:
The assumptions used in the Black-Scholes option valuation model are highly subjective, particularly as to stock price volatility of the underlying stock, and can materially affect the resulting valuation.
The following table summarizes information regarding options that were outstanding at November 30, 2001:
STOCKHOLDER RIGHTS PLAN
On June 21, 2002, our board of directors adopted a stockholder rights plan under which we will issue one right for each outstanding share of our common stock. The rights expire in 2012 unless they are earlier redeemed, exchanged or amended by the board of directors. The board also adopted a Three-Year Independent Director Evaluation ("TIDE") policy with respect to the plan. Under the TIDE policy, a committee comprised solely of independent directors will review the plan at least once every three years to determine whether to modify the plan in light of all relevant factors.
The rights will initially trade together with our common stock and will not be exercisable until after 10 days from the earlier of a public announcement that a person or group has acquired beneficial ownership of 15% or more, with certain exceptions, of our common stock or the commencement of, or public announcement of an intent to commence, a tender or exchange offer which, if successful, would result in the offeror acquiring 15% or
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more of our common stock. Once exercisable, each right would separate from the common stock and be separately tradeable.
If a person or group acquires 15% or more, with certain exceptions, of our common stock, or if we are acquired in a merger or other business combination, each right then exercisable would entitle its holder to purchase, at the exercise price of $125 per right, shares of our common stock, or the surviving company's stock if we are not the surviving company, with a market value equal to twice the right's exercise price.
We may redeem the rights for $.01 per right until the rights become exercisable. We also may exchange each right for one share of common stock or an equivalent security until an acquiring person or group owns 50% or more of the outstanding common stock.
The rights are not considered to be common stock equivalents because there is no indication that any event will occur that would cause them to become exercisable.
17. FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments at November 30, 2001 were determined by us, using available market information and valuation methodologies believed to be appropriate. However, judgment is necessary in interpreting market data to develop the estimates of fair values. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that we could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies could have a material effect on the estimated fair value amounts.
The carrying amounts and estimated fair values of certain financial instruments at November 30, 2001 and December 1, 2000 were as follows:
The fair value of other financial instruments, including those included in assets and liabilities held for sale, was comprised of (i) cash and cash equivalents, accounts receivable excluding customer retentions, unbilled receivables and accounts and subcontracts payable excluding retentions which approximate cost because of the immediate or short-term maturity and (ii) customer retentions, subcontract retentions and customer advances estimated by discounting expected cash flows at rates currently available to us for instruments with similar risks and maturities. As discussed in Note 4, "Reorganization Case and Fresh-start Reporting," a significant amount of our liabilities, including all of our outstanding debt, were liabilities subject to compromise at November 30, 2001. As such, fair values for these liabilities are not meaningful.
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ITEM 9.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Following the commencement of the bankruptcy cases in 2001, PricewaterhouseCoopers LLP informed us that it had concluded that it was not a "disinterested person" with respect to the Debtors and, accordingly, could not continue to serve as independent public accountants of the Debtors during the pendency of the bankruptcy proceedings. In addition, PricewaterhouseCoopers LLP notified us that they could give no assurance that they would be able to act as our independent public accountants following the Debtors' emergence from bankruptcy protection. As a result, on October 3, 2001, we dismissed PricewaterhouseCoopers LLP and selected Deloitte & Touche LLP as our independent public accountants. For a more detailed discussion, see our current report on Form 8-K filed October 3, 2001
During the fiscal year ended November 30, 2001, there were no disagreements with accountants on accounting and financial disclosure matters.
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PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information with respect to our board of directors as of April 30, 2002, including business experience for the past five years and all positions held by them with the registrant, is set forth below. The authorized number of directors for our board of directors is eleven, and the directors are divided into three classes. Class I consists of three directors who will hold office until the annual meeting of stockholders to be held in 2003, Class II consists of four directors who will hold office until the annual meeting of stockholders to be held in 2004, and Class III consists of four directors who will hold office until the annual meeting of stockholders to be held in 2005.
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EXECUTIVE OFFICERS
Certain information with respect to our executive officers as of April 30, 2002, including all positions held by them with us, is set forth below. Our executive officers are elected by our board of directors for terms of one year and until their successors are elected and qualified.
(1) For certain biographical information regarding Mr. Washington, see "DIRECTORS" above.
(2) For certain biographical information regarding Mr. Hanks, see "DIRECTORS" above.
(3) Mr. Oliver is a member of the Office of the Chairman. He formerly served the registrant as Senior Executive Vice President and Chief Business Development Officer. He also formerly served Fluor Daniel, Inc. (engineering and construction) in various group president positions related to sales, strategic planning, project development and project finance.
(4) Mr. Johnson is a member of the Office of the Chairman. He formerly served the registrant as Senior Vice President. He also formerly served as Senior Vice President of Global Development, Marketing and Strategy for Fluor Corporation (engineering, procurement, construction, and maintenance services) and as Vice President of Sales for Fluor Daniel, Inc. (engineering and construction). Mr. Johnson is also a member of the Board of Directors of North-South American Trading Company (NSAT) of Montreal, Quebec, Canada.
(5) Mr. Juetten is a member of the Office of the Chairman. He formerly served Dresser Industries, Inc. (supplier of products and services for oil and natural gas industry) as Senior Vice President and Chief Financial Officer, and as Vice President and Controller.
(6) Mr. Williams formerly served the registrant as President and Chief Executive Officer of Industrial/Process and as Executive Vice President of Industrial/Process.
(7) Mr. DiSibio formerly served the registrant as Executive Vice President of Business Development-Power. He also formerly served Parsons Power Group as President.
(8) Mr. Schwallie formerly served the registrant as Executive Vice President and President and Chief Executive Officer of MK Government Services Group. He also formerly served as President of Westinghouse Savannah River Company (defense program contract services).
(9) Mr. Stricklin formerly served Flatiron Structures Company as President of Design/Build Division.
(10) Mr. Therrien formerly served the registrant as Executive Vice President-Operations of Industrial/Process, Senior Vice President- Automotive/Manufacturing/Buildings of Industrial/Process, and Vice President-Automotive Industrial Manufacturing of Industrial/Process.
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(11) Mr. Zarges formerly served the registrant as President and Chief Executive Officer of Industrial/Process Group and MK Engineers and Constructors and as Senior Vice President-Operations.
(12) Mr. Brimhall formerly served the registrant as Vice President of Audit and Government Accounting. He also formerly served as Secretary and Controller of Scientech, Inc. (energy and telecommunication consulting and technical services) and in various other executive and management positions at Stanford University (educational institution).
(13) Mr. Myers formerly served the registrant as Senior Vice President of Business Operations for Washington Government. He also formerly served as Vice President of Human Resources for Westinghouse Savannah River Company (defense program contract services) and in a variety of senior human resource positions.
(14) Mr. Parry formerly served the registrant as Vice President -Legal.
(15) Mr. Finlayson formerly served the registrant as Vice President of Project Finance.
(16) Ms. Stinger formerly served GPU Inc. as Vice President of Government Affairs and President of the GPU Foundation.
(17) Mr. Taylor formerly served the registrant as Associate General Counsel.
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ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table summarizes all plan and non-plan compensation awarded or paid to, or earned by, each individual who acted as our chief executive officer during the last fiscal year and our other four most highly compensated executive officers (collectively, the "Named Executives") (as well as David L. Myers, for whom disclosure would have been provided but for the fact that he was not serving as an executive officer at the end of the last completed fiscal year) during the fiscal years indicated:
(1) The numbers in this column notwithstanding, effective as of January 25, 2002, all of the above options were canceled pursuant to the Plan of Reorganization; therefore, none of these options are currently exercisable or will become exercisable at any time in the future.
(2) Consists of disability insurance premium of $10,712, imputed income of $810 in connection with an executive term life insurance policy, tax gross-up of $10,916 on the foregoing disability insurance premium and the value of the term life insurance premium, and distribution of $2,139 preferential interest earned on deferred compensation.
(3) Consists of $8,500 matching contributions to Mr. Hanks' 401(k) account, service recognition of $3,102, and $36,318 representing Mr. Hanks' interest in his executive life insurance policy's cash surrender value as projected on an actuarial basis attributable to the 2001 premium.
(4) Consists of disability insurance premium of $10,712, imputed income of $610 in connection with an executive life insurance policy, and tax gross-up of $10,727 on the foregoing disability insurance premium and the value of the term life insurance premium reported in the last column of this table.
(5) Consists of disability insurance premium of $10,712, imputed income of $520 in connection with an executive term life insurance policy, and tax gross-up of $10,641 on the foregoing disability insurance premium and the value of the term life insurance premium.
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(6) Consists of $8,500 matching contribution to Mr. Kontny's 401(k) account.
(7) Consists of perquisite allowance of $8,000 and $4,354 for personal financial planning service.
(8) Consists of $5,103 matching contribution to Mr. Schwallie's 401(k) account.
(9) Consists of imputed income of $661 in connection with executive life insurance, $8,000 perquisite allowance and $2,250 for personal financial planning services.
(10) Consists of perquisite allowance of $8,000 and $2,250 for personal financial planning services.
(11) Consists of disability insurance premium of $7,441, imputed income of $889 in connection with an executive term life insurance policy, tax gross-up of $6,309 on the foregoing disability insurance premium and the value of the term life insurance premium, reimbursement for $9,000 of incidental expenses in connection with relocation, and distribution of $8,701 preferential interest earned on deferred compensation.
(12) Consists of $8,500 matching contributions to Mr. Zarges' 401(k) account, relocation incentive payment of $142,323, tax gross-up of $81,852 on foregoing relocation incentive payment, imputed income of $1,937 with respect to relocation, tax gross-up of $1,648 on foregoing imputed income, and $17,375 representing Mr. Zarges' interest in his executive life insurance policy's cash surrender value as projected on an actuarial basis attributable to the 2001 premium.
(13) Consists of disability insurance premium of $7,342, imputed income of $780 in connection with an executive life insurance policy, and tax gross-up of $8,106 on the foregoing disability insurance premium and the value of the term life insurance premium reported in the last column of this table.
(14) Consists of disability insurance premium of $7,153, imputed income of $720 in connection with an executive term life insurance policy and tax gross-up of $7,139 on the foregoing disability insurance premium and the value of the term life insurance premium.
(15) Consists of $8,500 matching contribution to Mr. Oliver's 401(k) account, imputed income of $18,468 with respect to relocation, and tax gross-up of $16,840 on the foregoing imputed income.
(16) Consists of $8,500 matching contribution to Mr. Myers' 401(k) account, imputed income of $33,820 with respect to relocation, and tax gross-up of $30,671 on the foregoing imputed income.
(17) Consists of imputed income of $842 with respect to a life insurance policy and $1,706 with respect to relocation, as well as $1,536,880 in connection with retention and change in control arrangements with former employer.
OPTION GRANTS
The following table summarizes pertinent information concerning individual grants of options to purchase our common stock during fiscal year 2001, including a theoretical grant date present value for each grant:
(1) Messrs. Zarges' Oliver's, and Myers' options were granted on January 25, 2001. Mr. Oliver's options would have become exercisable in their entirety on January 1, 2003. The options awarded to Messrs. Zarges, and Myers become exercisable in four equal increments on each of the first four anniversaries of the date of grant.
Effective as of January 25, 2002, all of the above options were canceled pursuant to our Plan of Reorganization; therefore, none of these options are currently exercisable or will become exercisable at any time in the future.
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AGGREGATE OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
The following table summarizes pertinent information concerning the exercise of options to purchase our common stock during fiscal year 2001 by each of the Named Executives and the fiscal year-end value of unexercised options:
Effective as of January 25, 2002, all of the above options were canceled pursuant to the Plan of Reorganization; therefore, none of these options are currently exercisable or will become exercisable at any time in the future.
PENSION
Mr. Hanks is entitled to pension benefits payable under the terms of a group annuity contract purchased upon the termination of the Morrison Knudsen Corporation Retirement Plan of 1970. This plan was terminated December 12, 1987. Assuming a five-year certain and life annuity upon normal retirement, Mr. Hanks' total annual benefit at age 65 would be $7,142. For purposes of this benefit, Mr. Hanks has 12 years of credited service with us.
Mr. Schwallie is eligible for retirement benefits under the Westinghouse Government Services Group Pension Plan (the "WGS Plan"), the Westinghouse Savannah River Company/Bechtel Savannah River, Inc. Pension Plan (the "WSRC Plan") and the Westinghouse Government Services Group Executive Pension Plan (the "WGS Executive Pension Plan") (collectively, the "Westinghouse Pension Plans"). The following table indicates the approximate amounts of annual retirement income that would be payable as of June 30, 2001 to employees who were participants in the Westinghouse Pension Plans:
The WGS Plan and the WSRC Plan are contributory, defined benefit plans designed to provide retirement income related to an employee's salary and years of active service. All of our contributions are actuarially determined. The WGS Executive Pension Plan, which was frozen effective June 30, 2001, provides for
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supplemental pension payments, provided certain eligibility requirements are met. Such payments, when added to the pensions under the WGS Plan and the WSRC Plan as of June 30, 2001, result in a total average pension equal to 1.47% for each year of credited service multiplied by the employee's average annual compensation as defined by the WGS Executive Pension Plan. Average annual compensation is equal to the average of the five highest annualized base salaries plus the average of the five highest annual incentive awards, each in the last ten years of employment prior to June 30, 2001. In the event of retirement prior to age 60, the total annual pension would be reduced by an amount equal to the reduction in the benefits payable under the WGS Plan and the WSRC Plan.
The amounts presented in the above table are based on straight life annuity amounts and are not subject to any reduction for Social Security benefits but may be offset by amounts payable under certain other pension plans previously sponsored by Westinghouse. As of June 30, 2001, Mr. Schwallie had 29.25 years of credited service under the Westinghouse Pension Plans.
After the WGS Executive Pension Plan was frozen on June 30, 2001, Mr. Schwallie earned an additional monthly pension benefit under the WGS Plan of $118, or 2% of his eligible compensation from July 1, 2001 through November 30, 2001.
RETENTION AGREEMENTS
In March of 2001, we entered into retention agreements with Messrs. Hanks, Kontny, Schwallie, Zarges and Oliver, as part of a program to retain key personnel in order to preserve the value of the business and to optimize our financial performance and performance on projects. Each retention agreement provided a retention bonus as well as a severance benefit, payable under certain conditions.
Under the terms of Mr. Hanks' retention agreement, we agreed to pay to Mr. Hanks a retention bonus equal to 1.5 times his "Target Bonus" (which is defined as 120% of his base salary in effect on March 31, 2001) in three equal installments on each of September 1, 2001, March 1, 2002, and September 1, 2002, each such payment to be payable provided that Mr. Hanks was or is still employed by us on the applicable payment date. Payment of the first installment was postponed until after the Effective Date of our emergence from bankruptcy protection that occurred on January 25, 2002. If Mr. Hanks' employment with us were to terminate before any of the above payment dates due to his death or disability, we would pay to Mr. Hanks, or his estate, a pro rated portion of the payment otherwise due based upon the number of days he remained employed by us since the previous payment date. Mr. Hanks' retention agreement further provides that if we experience a change in control before December 31, 2002, or if Mr. Hanks' employment with us were to be terminated before December 31, 2002 (other than for cause or by reason of his death, disability or voluntary resignation or retirement), we would pay Mr. Hanks an amount equal to the sum of his base salary and his Target Bonus. In addition, Mr. Hanks would receive an amount equal to the pro rated portion of the next retention bonus payment, if any, that would otherwise be payable if Mr. Hanks' employment had not been terminated, based on the number of days he remained employed by us since the previous payment date.
Under the terms of the retention agreements entered into with Messrs. Kontny, Schwallie, Zarges and Oliver, we agreed to pay each of them individually a retention bonus equal to 1.5 times their individual "Target Bonus" (which is defined as 100% of base salary in effect on March 31, 2001) in three equal installments on each of September 1, 2001, March 1, 2002, and September 1, 2002, each such payment to be payable provided that the executive is still employed by us on the applicable payment date. Payments of the first installments were postponed until after the Effective Date of our emergence from bankruptcy protection, which occurred January 25, 2002. If any such executive's employment with us were to terminate before any of the above payment dates due to his death or disability, we would pay to him, or his estate, a pro rated portion of the payment otherwise due based upon the number of days he remained employed by us since the previous payment date. The retention agreements further provide that if the applicable executive's employment with us is terminated before December 31, 2002 (other than for cause for by reason of his death, disability or voluntary resignation or retirement), or if, following a change in control, such executive's base salary is reduced or he is asked to relocate to a city more than 50 miles from the office or location in which he is based on the date of the change in control and he resigns employment before December 31, 2002, rather than accepting such reduction in base salary or change of location,
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we will pay to him an amount equal to the sum of his base salary and his Target Bonus. In addition, he would receive an amount equal to the pro rated portion of the next retention bonus payment, if any, that would otherwise be payable if his employment had not been terminated, based on the number of days he remained employed by us since the previous payment date.
Notwithstanding any provision of the retention agreements to the contrary, if any amount or benefit to be paid or provided under any such retention agreement would be an "Excess Parachute Payment" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), or any successor provision thereto, the payments and benefits to be paid or provided would be reduced to the minimum extent necessary (but in no event less than zero) so that no portion of any such payment or benefit, as so reduced, constitutes an Excess Parachute Payment; provided, however, that the foregoing reduction would be made only if and to the extent that such reduction would result in an increase in the aggregate payment and benefits to be provided, determined on an after-tax basis (taking into account the excise tax imposed pursuant to Section 4999 of the Code and any tax imposed by any comparable provision of state law, and any applicable federal, state and local income and employment taxes).
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ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows stock ownership information as of April 30, 2002, for (i) the persons (as the term is used in Section 13(d)(3) of the Exchange Act) known to us to beneficially own more than 5% of our common stock, (ii) each director of WGI, (iii) each of the Named Executives; and (iv) all our current directors and executive officers as a group:
- ---------------- * Indicates that the percentage of shares beneficially owned does not exceed 1% of the class.
(1) Except as otherwise indicated, the mailing address of each person shown is c/o Washington Group International, Inc., 720 Park Boulevard, Boise, Idaho 83712. (2) For purposes of this table, shares are considered to be "beneficially" owned if the person directly or indirectly has the sole or shared power to vote or direct the voting of the securities or the sole or shared power to dispose of or direct the disposition of the securities, and a person is considered to be the beneficial owner of shares if that person has the right to acquire the beneficial ownership of the shares within 60 days of April 30, 2002. Unless otherwise noted, the beneficial owners have sole voting and dispositive power over their shares listed in this column. (3) Indicates shares included in the amounts shown to be beneficially owned as of April 30, 2002, by reason of a right to acquire beneficial ownership thereof within 60 days of such date. (4) The percentages shown are calculated based upon the number of shares of our common stock shown in the second column of this table, which includes shares that the stockholder has the right to acquire beneficial ownership of within 60 days of April 30, 2002. (5) Mr. Kontny retired on November 15, 2001. (6) Mr. Myers' employment terminated on March 1, 2002.
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ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
From time to time, we engage Batchelder & Partners, Inc., an investment advisory and consulting firm ("BPI"), of which Mr. Batchelder is chairman and chief executive officer, to act as our financial advisor with respect to potential acquisitions and divestitures pursuant to written engagement agreements. Such agreements traditionally include a retainer fee, reimbursement of reasonable out-of-pocket expenses, indemnification and payment of a success fee based upon the transaction value payable upon completion of the transaction.
In 1999, BPI entered into an engagement agreement with us (the "1999 Agreement") with respect to our acquisition of RE&C and other unrelated engagements. The RE&C acquisition was completed on July 7, 2000 and, accordingly, in fiscal year 2000, we paid BPI a success fee of $4 million as prescribed in the 1999 Agreement. In addition, pursuant to the 1999 Agreement, in fiscal year 2000, we paid to BPI $200,000 in retainer fees ($50,000 per quarter) and $100,190 for expenses related to the acquisition of RE&C and other unrelated engagements.
On March 15, 2001, BPI entered into a Letter Agreement with us that superseded all previous engagement agreements. Pursuant to the Letter Agreement, BPI agreed to act as our financial advisor in relation to the emerging liquidity crisis and we agreed to pay a monthly retainer fee of $100,000 to BPI, effective January 1, 2001. Accordingly, we paid BPI $500,000 in retainer fees for January through May 2001, which included a $50,000 credit for a first quarter 2001 retainer fee paid under the 1999 Agreement. Upon our filing for bankruptcy protection on May 14, 2001, subsequent retainer fees were not paid. However, under our Plan of Reorganization, the Letter Agreement was assumed and all amounts owing thereunder (i.e., retainer amounts from June 1, 2001 forward) were brought current promptly after the Effective Date of the Plan of Reorganization. Accordingly, in February 2002, we paid BPI $700,000 in retainer fees for June through December 2001. With the consent of both WGI and BPI, the Letter Agreement expired upon the Effective Date of our emergence from bankruptcy protection.
Terry W. Payne, who was one of our directors during fiscal year 2001, is Chairman and owner of Terry Payne & Co., Inc. ("TPC"), which provides insurance and bonding brokerage services to us and our subsidiaries. In January 1998, our board of directors approved a Professional Services Agreement for insurance brokering services supplied by TPC to us effective January 1, 1998, and expiring December 31, 2000, with automatic renewal annually for 12-month terms thereafter, unless canceled by either party prior to the annual date (the "1998 Professional Services Agreement"). Pursuant to the 1998 Professional Services Agreement, TPC would receive an annual fixed fee of $1,150,000 to be paid in equal quarterly installments with all insurance and surety commissions earned on policies purchased for the registrant to be credited 100% against the fee, except that, should surety commissions exceed $250,000 in any given calendar year, then TPC would credit only 50% of all surety commissions above $250,000 for the remainder of the year. In 1999, our board of directors approved an amendment to the 1998 Professional Services Agreement to increase the annual fixed fee payable to TPC to $1,250,000 per calendar year, effective as of January 1, 1999.
In January 2001, the board of directors approved a new agreement with TPC, effective January 1, 2001, substantially similar to the 1998 Professional Services Agreement, as amended, except for the following material differences: the scope of insurance services is reduced; the annual fixed fee is $850,000; and the $250,000 threshold with respect to surety commissions is eliminated and 100% of all insurance commissions and 50% of all surety commissions are credited against the fixed fee.
In addition, in February 2001, we paid $425,000 to TPC for services performed in connection with due diligence and post-closing activities related to our acquisition of the RE&C businesses.
Mr. Washington is the founder and owner of Washington Corporations ("WC"). We chartered a corporate jet from WC and WC Leasing Corporation ("WC Leasing"), a WC wholly-owned subsidiary, in connection with our business. During fiscal year 2001, we paid WC and WC Leasing approximately $3.4 million for such jet usage
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and related maintenance and support services. Also, during fiscal year 2001, we paid WC $250,000 for miscellaneous support services performed in connection with the registrant's business.
As the pit mine operator at the Pipestone Mine Project in Montana, we sell ballast to Montana Rail Link, Inc., a corporation owned by Mr. Washington. During fiscal year 2001, the registrant realized revenues totaling $1.9 million from such ballast sales.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act and the rules thereunder require our officers and directors and persons who own more than 10% of our outstanding common stock to file reports of ownership and changes in ownership with, among others, the Securities and Exchange Commission and to furnish us with copies.
Except as disclosed below, based on our review of copies of such forms or written representations from certain reporting persons, we believe that, during fiscal year 2001, all directors, executive officers and beneficial owners of greater than 10% of our outstanding common stock complied with the filing requirements applicable to them.
Each of our following directors and officers inadvertently failed to timely file a Form 5, Annual Statement of Beneficial Ownership, for fiscal year ended November 30, 2001: David H. Batchelder, George H. Juetten, Larry L. Myers, Charles R. Oliver, G. Bretnell Williams and Thomas H. Zarges (current directors and officers); R. S. Miller, Dorn Parkinson and Terry W. Payne (former directors); and David L. Myers and James P. O'Donnell (former officers). Each such Form 5 that was not timely filed disclosed one transaction with respect to each of the above listed officers and directors, involving grants in January 2001 of options to purchase our common stock to each above listed director and officer. All of such options were canceled on the Effective Date pursuant to our Plan of Reorganization.
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PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS A PART OF THIS ANNUAL REPORT OF FORM 10-K.
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Deloitte & Touche LLP as successor independent accountants, subject to the approval of the bankruptcy court.
On October 15, 2001, we filed a current report on Form 8-K dated October 15, 2001, reporting that we would not timely file our quarterly report on Form 10-Q for the quarterly period ended August 31, 2001 because we needed additional time to prepare the consolidated financial statements and related disclosures required to be included in that quarterly report.
On October 16, 2001, we filed a current report on Form 8-K dated October 15, 2001, reporting that, on October 15, 2001, we filed with the bankruptcy court a monthly operating report for the month ended August 31, 2001, including certain financial information.
On November 21, 2001, we filed a current report on Form 8-K dated November 15, 2001, reporting that, on November 15, 2001, we filed with the bankruptcy court a monthly operating report for the month ended September 28, 2001, including certain financial information. We also reported certain executive and organizational changes.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, we have duly caused this annual report on Form 10-K to be signed on our behalf by the undersigned, thereunto duly authorized on July 9, 2002.
Washington Group International, Inc.
By /s/ George H. Juetten - -------------------------------------------------------------------------------- George H. Juetten, Executive Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this annual report on Form 10-K has been signed below on July 9, 2002 by the following persons on our behalf in the capacities indicated.
*Craig G. Taylor, by signing his name hereto, does hereby sign this annual report on Form 10-K on behalf of each of the above-named officers and directors of Washington Group International, Inc., pursuant to powers of attorney executed on behalf of each such officer and director.
By /s/ Craig G. Taylor - ----------------------------------------- Craig G. Taylor, Attorney-in-fact
WASHINGTON GROUP INTERNATIONAL, INC. SCHEDULE II. VALUATION, QUALIFYING AND RESERVE ACCOUNTS FOR THE YEAR ENDED NOVEMBER 30, 2001 (IN THOUSANDS)
ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLES DEDUCTED IN THE BALANCE SHEET FROM ACCOUNTS RECEIVABLE
DEFERRED INCOME TAX ASSET VALUATION ALLOWANCE DEDUCTED IN THE BALANCE SHEET FROM DEFERRED INCOME TAX ASSET
ESTIMATED COSTS TO COMPLETE LONG-TERM CONTRACTS REFLECTED IN THE BALANCE SHEET
PROVISION FOR FUTURE LOSSES ON JOINT VENTURE CONTRACTS DEDUCTED IN THE BALANCE SHEET FROM INVESTMENTS IN AND ADVANCES TO JOINT VENTURES
- -------------------- (1) Change in valuation allowance related to estimates of the future realization of acquired deductible temporary differences that have been treated as a reduction of goodwill. (2) Value of foreign net operating losses acquired in acquisition of RE&C. (3) Represents amount transferred to liabilities held for sale.
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WASHINGTON GROUP INTERNATIONAL, INC. EXHIBIT INDEX
COPIES OF EXHIBITS WILL BE SUPPLIED UPON REQUEST. EXHIBITS WILL BE PROVIDED AT A FEE OF $.25 PER PAGE REQUESTED.
- ----------------
# Management contract or compensatory plan * Filed herewith
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