**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C.   20549**

 

**Form 10-K**

**Annual Report**

**Forthe Fiscal Year Ended January 2, 2004**

 

**Pursuantto Section 13 or 15(d) of the Securities Exchange Act of 1934**

 

**Commission File Number 1-12054**

 

| **WASHINGTON  GROUP INTERNATIONAL, INC.**        |
|--------------------------------------------------|
|                                             |
| **A Delaware Corporation**                       |
| IRS Employer Identification No. **33-0565601**   |
|                                             |
| **720 PARK BOULEVARD, BOISE, IDAHO  83712** |
| **208 / 386-5000**                               |

 

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**SECURITIESREGISTERED PURSUANT TO SECTION 12(b) and**

**SECTION12(g) OF THE ACT**

 

Securities registered pursuant to Section 12(b) of the ExchangeAct:  **None**

 

Securities registered pursuant to Section 12(g) of the Exchange Act:

 

**Common Stock, $.01 par value per share**

(Title of class)

 

**Preferred Stock Purchase Rights**

(Title of class)

 

**COMPLIANCEWITH REPORTING REQUIREMENTS**

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports) and (2) has been subject to suchfiling requirements for the past 90 days.

ý  Yes  o  No

 

Indicate by check mark whether the registrant is an accelerated filer.

ý  Yes  o  No

 

Indicate by check mark whether the registrant has filed all documentsand reports required to be filed by Section 12, 13, or 15(d) of the ExchangeAct subsequent to the distribution of securities under a plan confirmed by acourt.

ý  Yes  o  No

 

 

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**DISCLOSUREPURSUANT TO ITEM 405 OF REGULATION S-K**

Indicate by check mark if disclosure ofdelinquent filers pursuant to Item 405 of Regulation S-K is not containedherein, and will not be contained, to the best of registrant’s knowledge, indefinitive proxy or information statements incorporated by reference in PartIII of this Form 10-K or any amendment to this Form 10-K. ý

** **

**AGGREGATEMARKET VALUE OF COMMON STOCK HELD BY NON-AFFILIATES**

At February 20, 2004, the aggregate market value ofthe registrant’s common stock held by non-affiliates of the registrant, basedon the closing price on February 20, 2004, as reported on the NASDAQ NationalMarket®, was approximately $954,501,892. At July 4, 2003 (the last business dayof the registrant’s most recently completed second fiscal quarter), theaggregate market value of the registrant’s common stock held by nonaffiliatesof the registrant, based on the closing price on July 3, 2003, as reported bythe NASDAQ National Market®, was approximately $521,720,782.

 

The number of shares of common stock outstanding as ofFebruary 20, 2004 was 25,153,665.

 

**DOCUMENTSINCORPORATED BY REFERENCE**

Portions of the registrant’s definitive proxy statement for its annualmeeting of stockholders to be held on May 7, 2004, which is expected to befiled with the Securities and Exchange Commission not later than April 7, 2004,are incorporated by reference into Part III of this report on Form 10-K. In theevent such proxy statement is not filed by April 7, 2004, the requiredinformation will be filed as an amendment to this report on Form 10-K no laterthan that date.

 

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**WASHINGTONGROUP INTERNATIONAL, INC.**

 

**Form10-K**

**AnnualReport**

**Forthe Fiscal Year Ended January 2, 2004**

 

**TABLEOF CONTENTS**

 
|           | Note Regarding Forward-Looking Information                                                  |   |
|----------------|---------------------------------------------------------------------------------------------|--------|
|           |                                                                                        |   |
| **PART I**     |                                                                                        |
|           |                                                                                        |   |
| Item 1.        | Business                                                                                    |   |
| Item 2.        | Properties                                                                                  |   |
| Item 3.        | Legal Proceedings                                                                           |   |
| Item 4.        | Submission of Matters to a Vote of Security  Holders                                        |   |
|           |                                                                                        |   |
| **PART  II**   |                                                                                        |
|           |                                                                                        |   |
| Item 5.        | Market for the Registrant’s Common Stock  and Related Stockholder Matters              |   |
| Item 6.        | Selected Financial Data                                                                     |   |
| Item 7.        | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |
| Item  7A.      | Quantitative  and Qualitative Disclosure About Market Risk                                  |   |
| Item 8.        | Financial  Statements and Supplementary Data                                                |   |
| Item 9.        | Change  in and Disagreements with Accountants on Accounting and Financial Disclosure        |   |
| Item  9A.      | Controls  and Procedures                                                                    |   |
|           |                                                                                        |   |
| **PART  III**  |                                                                                        |
|           |                                                                                        |   |
| Item  10.      | Directors  and Executive Officers of the Registrant                                         |   |
| Item  11.      | Executive  Compensation                                                                     |   |
| Item 12.       | Security  Ownership of Certain Beneficial Owners and Management                             |   |
| Item  13.      | Certain  Relationships and Related Transactions                                             |   |
| Item  14.      | Principal  Accountant Fees and Services                                                     |   |
|           |                                                                                        |   |
| **PART  IV**   |                                                                                        |
|           |                                                                                        |   |
| Item  15.      | Exhibits,  Financial Statement Schedule and Reports on Form 8-K                             |   |
|           |                                                                                        |   |
| **SIGNATURES** |                                                                                        |

 

**NOTE REGARDING FORWARD-LOOKING INFORMATION**

 

This report contains forward-looking statements. You can identifyforward-looking statements by the use of terminology such as “may,” “will,”“anticipate,” “believe,” “estimate,” “expect,” “future,” “intend,” “plan,”“could,” “should,” “potential” or “continue,” or the negative or othervariations thereof, as well as other statements regarding matters that are nothistorical fact. These forward-looking statements include, among others, statementsconcerning:

 

•                  Ourbusiness strategy and competitive advantages

 

•                  Ourexpectations as to potential revenues from designated markets or customers

 

•                  Ourexpectations as to profits, cash flows, return on invested capital and netincome

 

•                  Ourexpectations as to new work and backlog

 

•                  Themarkets for our services and products

 

•                  Ouranticipated contractual obligations, capital expenditures and fundingrequirements

 

Forward-looking statements are only predictions. The forward-lookingstatements in this report are subject to risks and uncertainties, including,among others, the risks and uncertainties identified in this report and otheroperational, business, industry, market, legal and regulatory developments,which could cause actual events or results to differ materially from thoseexpressed or implied by the forward-looking statements. Important factors thatcould prevent us from achieving the expectations expressed include, but are notlimited to, our failure to:

 

•                  Manageand avoid delays or cost overruns in existing and future contracts

 

•                  Maintainrelationships with key customers, partners and suppliers

 

•                  Successfullybid for, and enter into, new contracts on satisfactory terms

 

•                  Successfullymanage and negotiate change orders and claims

 

•                  Manageand maintain our operations and financial performance and the operations andfinancial performance of our current and future operating subsidiaries andjoint ventures

 

•                  Respondeffectively to regulatory, legislative and judicial developments, including anylegal or regulatory proceedings, affecting our existing contracts, includingcontracts concerning environmental remediation and restoration

 

•                  Obtainand maintain any required governmental authorizations, franchises and permits,all in a timely manner, at reasonable costs and on satisfactory terms andconditions

 

•                  Satisfythe restrictive covenants imposed by our indebtedness documents

 

•                  Maintainaccess to sufficient working capital through our existing revolving creditfacility or otherwise

 

•                  Maintainaccess to sufficient bonding capacity through our existing surety facility orotherwise

 

•                  Realizeanticipated reductions in overhead and other costs

 

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Some other factors that may affect our businesses, financial positionor results of operations include:

 

•                  Accidentsand conditions, including industrial accidents, labor disputes, geologicalconditions, environmental hazards, weather and other natural phenomena

 

•                  Specialrisks of international operations, including uncertain political and economicenvironments, acts of terrorism or war, potential incompatibilities withforeign joint venture partners, foreign currency fluctuations and controls,civil disturbances and labor issues

 

•                  Specialrisks of contracts with the government, including the failure of applicablegoverning authorities to take necessary actions to secure or maintain fundingfor particular projects with us, the unilateral termination of contracts by thegovernment and reimbursement obligations to the government for funds previouslyreceived

 

•                  Theoutcome of legal proceedings

 

•                  Maintenanceof government-compliant cost systems

 

•                  Theeconomic well-being of our private and public customer base and its ability andintentions to invest capital in engineering and construction activities

 

**PART I**

 

**ITEM 1. BUSINESS**

 

Unless otherwise indicated, the terms “we,”“us” and “our” refer to Washington Group International, Inc. (“Washington GroupInternational”) and its consolidated subsidiaries; references to 2003 arereferences to our fiscal year ended January 2, 2004; references to 2002 arereferences to our one month ended February 1, 2002 combined with our elevenmonths ended January 3, 2003; and references to 2001 are references to ourfiscal year ended November 30, 2001. **Effective December 29, 2001, wechanged our 52/53 week fiscal year from a year ending on the Friday closest toNovember 30 to a year ending on the Friday closest to December 31.**

 

**Our commonstock (the “New Common Stock”) currently trades on the NASDAQ National Market®under the ticker symbol “WGII.” We also have outstanding three tranches ofwarrants to purchase shares of our common stock which trade in theover-the-counter market on the OTC Bulletin Board®. All of the warrants expireon January 25, 2006. The Tranche A warrants, which have an exercise price of$28.50 per share, trade under the ticker symbol WGIIW.OB; the Tranche Bwarrants, which have an exercise price of $31.74, trade under the ticker symbolWGIIZ.OB; and the Tranche C warrants, which have an exercise price of $33.51per share, trade under the ticker symbol WGIIL.OB.**

 

**We fileannual reports on Form 10-K, quarterly reports on Form 10-Q, current reports onForm 8-K and other information with the Securities and Exchange Commission (the“SEC”). The public can obtain copies of these materials by visiting the SEC’sPublic Reference Room at 450 Fifth Street, NW, Washington DC 20549, or bycalling the SEC at 1-800-SEC-0330, or by accessing the SEC’s website athttp://www.sec.gov. In addition, as soon as reasonably practicable after suchmaterials are filed with or furnished to the SEC, we make copies available tothe public free of charge on or through our website at http://www.wgint.com.The information on our website is not incorporated into, and is not part of,this report.**

 

**We haveadopted a Code of Business Conduct and Ethics (the “Code”) which requires allemployees, officers and directors of Washington Group International, Inc. toact, at all times and places, as law-abiding, responsible, and responsivecitizens. The Code will be published on our website at www.wgint.com underInvestor Relations, Corporate Governance, on or before March 17, 2004. A copyof the Code is available by contacting us through**

** **

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**our website under InvestorRelations, or by writing to the Investor Relations Department at the corporateheadquarters.**

 

**Our principal executive offices are locatedat 720 Park Boulevard, Boise, Idaho 83712. Our telephone number is (208)386-5000.**

*** ***

**GENERAL**

 

We are an international provider of a broadrange of design, engineering, construction, construction management, facilitiesand operations management, environmental remediation and mining services. Weoffer our various services separately or as part of an integrated packagethroughout the life cycle of a customer’s project.

 

•                  Inproviding engineering and design services, we participate in theconceptualization and planning stages of projects that are part of our customers’overall capital programs. We develop the physical designs and determine thetechnical specifications. We also devise project configurations to maximizeboth construction and operating efficiency.

 

•                  Asa contractor, we are responsible for the construction and completion of eachcontract in accordance with its specifications and contracting terms (primarilyschedule and total cost). In this capacity, we often manage the procurement ofmaterials, subcontractors and craft labor. Depending on the project, we mayfunction as the primary contractor or as a subcontractor to another firm.

 

•                  Onsome projects, we function as a construction manager, engaged by the customerto oversee other contractors’ compliance with design specifications andcontracting terms.

 

•                  Underoperations and maintenance contracts, we provide staffing, technical support,repair, renovation, predictive and preventive services to customer facilitiesglobally. We also offer other facility services, such as general buildingmaintenance and asset management. In addition, we provide inventory and productlogistics for manufacturing plants, information technology support, equipmentservicing and tooling changeover.

 

On some projects, particularly those ofsignificant size and requiring specialized technology or know-how, we partnerwith other firms, both to increase our opportunity to win the contract and tomanage development and execution risk. Partners may include, among others,specialized process engineering firms, other engineers, constructors,operations contractors or equipment manufacturers. These partnerships may bestructured as joint ventures or consortia, with each participating firm havingan economic interest relative to the scope of its work.

 

We enter into four basic types of contractswith our customers:

 

•                  Undera “fixed-price” contract, we provide the customer a total project for anagreed-upon price, subject to project circumstances and changes in scope. Wecommonly refer to fixed-price contracts under which the total project cost isdetermined up front as “lump-sum” contracts. Plant and facility constructionprojects and large design-build infrastructure projects are typically awardedon a lump-sum basis.

 

•                  Undera “fixed-unit-price” contract, the customer pays us for materials, labor,overhead, equipment rentals or other costs at fixed rates as each unit of workis performed. Highway infrastructure and mining projects are typically awardedon a fixed-unit-price basis.

 

•                  Undera “target-price” contract, we provide the customer with a total project at atarget price agreed upon by the customer, subject to project circumstances andchanges in scope. Should costs exceed the target within the agreed-upon scope,we will absorb those costs generally to the extent of our expected fee orprofit; however, the customer reimburses us for the costs that we incur ifcosts continue to escalate beyond our expected fee. An additional fee is earnedif costs are below the target.

 

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•                  Undera “cost-type” contract, a customer reimburses us for the costs that we incur(primarily materials, labor, overhead and subcontractor services), plus apredetermined fee. The fee portion of the contract may equal a percentage ofthe costs incurred and/or may be based on the achievement of specificperformance incentives or milestones. The fee portion may also be subject to amaximum. Engineering, construction management and environmental and hazardoussubstance remediation contracts, including most of our work for U.S. governmentcustomers, are typically awarded pursuant to a cost-type contract.

 

Both anticipated income and economic risk are greaterunder fixed-price and fixed-unit-price contracts than under target-price andcost-type contracts. We follow strict guidelines in bidding for and enteringinto all four types of contracts.

 

Some fixed-price contracts require the contractor toprovide a surety bond to its customer. This general industry practice providesindemnification to the customer if the contractor fails to perform itsobligations. Surety companies consider factors such as capitalization,available working capital, past performance and management expertise todetermine the amount of bonds they are willing to issue to a particularengineering and construction firm.

 

**BACKGROUND**

 

We were originally incorporated in Delawareon April 28, 1993 under the name Kasler Holding Company. In April 1996, wechanged our name to Washington Construction Group, Inc. On September 11, 1996,we purchased Morrison Knudsen Corporation, which we refer to in this report as“Old MK,” and changed our name to Morrison Knudsen Corporation. Our purchase ofOld MK was structured as a merger with and into us and was an integral part ofthe reorganization of Old MK under a plan of reorganization that Old MK filedin the U.S. Bankruptcy Court for the District of Delaware. We have no remainingobligations under that plan of reorganization.

 

On March 22, 1999, we and BNFL NuclearServices, Inc. (“BNFL”) acquired the government and environmental servicesbusinesses of CBS Corporation (now Viacom, Inc.). In this report, we refer tothese businesses as the “Westinghouse Businesses.” The Westinghouse Businessescurrently make up a significant part of our Energy & Environment businessunit and a small part of our Defense business unit.

 

On July 7, 2000, we purchased from RaytheonCompany and Raytheon Engineers & Constructors International, Inc. (“RECI”and, collectively with Raytheon Company, the “Sellers”), the capital stock ofthe subsidiaries of RECI and specified other assets of RECI and assumedspecified liabilities of RECI. The businesses that we purchased, which we referto in this report as “RE&C,” provide engineering, design, procurement,construction, operation, maintenance and other services on a global basis.Following the acquisition, on September 15, 2000, we changed our name toWashington Group International, Inc.

 

On May 14, 2001, due to near-term liquidityproblems resulting from our acquisition of RE&C, we filed for protection underChapter 11 of the U.S. Bankruptcy Code. On December 21, 2001, the bankruptcycourt entered an order confirming the Second Amended Joint Plan ofReorganization of Washington Group International, Inc., et al., as modified(the “Plan of Reorganization”). The Plan of Reorganization became effective andwe emerged from bankruptcy protection on January 25, 2002. For a discussion ofthe RE&C acquisition and the resulting bankruptcy, see Note 3,“Acquisition, Reorganization Case and Fresh-start Reporting” of the Notes toConsolidated Financial Statements in Item 8 of this report.

 

The U.S. Bankruptcy Court for the District ofNevada retains jurisdiction to interpret our Plan of Reorganization and toresolve outstanding claims and third party disputes relating thereto. Areorganization plan committee (the “Reorganization Plan Committee”) wasestablished by the bankruptcy court to evaluate claims of unsecured creditors,prosecute any disputed unsecured claims, determine each unsecured creditor’sdistribution under the Plan of Reorganization, and generally monitorimplementation of the Plan of Reorganization.

 

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We are responsible for all fees and expensesincurred in connection with the administration of our Plan of Reorganization,including fees and expenses of the Reorganization Plan Committee, the UnitedStates Trustee appointed by the bankruptcy court, and their and our counsel.

 

**BUSINESSUNITS**

 

We operate our business through six businessunits, each of which comprises a separate reportable business segment: Power,Infrastructure, Mining, Industrial/Process, Defense and Energy &Environment.

 

***Power***

 

Our Power business unit specializes inengineering, design, construction, modification and maintenance of power generatingfacilities and electrical transmission systems and operations and maintenanceservices in both the fossil and nuclear power markets. Customers includeregulated and deregulated utilities, industrial co-generators, independentpower producers, original equipment manufacturers (“OEMs”) and governments.These customers generate power in a wide variety of methods, including throughcoal-, oil- and gas-fired power plants, combustion turbine, simple cycle andcombined cycle generation, nuclear power generation, hydroelectric generationand waste-to-energy generation. We provide our services to customers in theUnited States and around the world on both fixed-price and cost-reimbursablebases, and the work we have pursued in the recent past has reflected an arrayof commercial arrangements. (See “Business – General” above for a descriptionof types of contracts and corresponding risks.) The Power business unitprovides a range of services that includes:

 

# ***BasicServices***

•                  General Planning

•                  Siting and licensing

•                  Environmentalpermitting

•                  Engineering andconstruction, startup

•                  Transmission anddistribution

•                  Expansion,retrofit and modification

•                  Operations andmaintenance

•                  Decontaminationand decommissioning

 

# ***BasicMarkets***

•                  New Generation

•                  Combustion turbine(natural gas, oil)

•                  Coal

•                  Other:waste-to-energy, wind, biomass, geothermal

•                  Modificationsand Maintenance

•                  Fossil:  clean air retrofits

•                  Repowering

•                  Nuclear:  major component replacement

•                  EngineeringServices

•                  Fossil andnuclear

•                  Transmission,distribution, substations

 

In 2002, the market for new power plants inthe United States suffered a severe downturn as regional reserves grew toexcessive levels and the economy slumped. We expect that it may take four tosix years for these reserve margins to dissipate before a need for additionalcapacity will stimulate a new wave of power development. In the interim, thepower industry anticipated that the passage of pending federal legislation inthe forms of the Federal Energy Bill and one of the contenders for Clean AirAct regulation would revitalize the market. Though these bills may yet pass,their timing is uncertain and their market impacts may not be felt for sometime to come, if at all.

 

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Consequently, the Power business unitembarked on a strategy to maintain our presence in all our principal markets,while minimizing our exposure to long-term capital risk. In new powergeneration, we are limiting the opportunities we pursue to those we determinepose an acceptable level of risk, particularly with established customers.While following these restrictions, we have expanded our traditional base ofpower industry customers by targeting the power needs of the customers of ourother business units. The mix of traditional Power business unit customers andthe customers of our other business units with power needs has proven to besuccessful, with recent awards for new power plants in Wisconsin (550 megawatt(“MW”) combined cycle), Siberia (conversion of plutonium reactor to coal-firedplant) and Iraq (180 MW as part of the reconstruction effort).

 

Despite the lack of new federal Clean Airlegislation, the power market is being propelled by consent decrees,independent state legislation and the promised enforcement of New Source ReviewStandards by the Environmental Protection Agency. A substantial number of largesystem retrofits to control sulfur oxide and nitrous oxide have been announcedor are under consideration, and we have secured awards in all phases ofimplementing these retrofits.

 

The abundance of power supply in the UnitedStates combined with the manifestation of electricity as a commodity has forcedmost power suppliers to compete for the sale of kilowatts and improve theefficiency of existing resources. Many owners of nuclear plants are seekingextensions of their existing licenses rather than decommissioning units with upto 40 years of service. Among the most common life-extension strategies is thereplacement of steam generators and reactor vessel heads. Through a 50%-ownedjoint venture with Framatome-ANP, Inc., we specialize in these replacements andhave established ourselves as a leading competitor in the United States forthis market. Most visible in the international arena today is our ongoing workfor the reconstruction of Iraq’s power infrastructure, where we are designingand building new generation and rehabilitating existing generation andtransmission and distribution systems.

 

***Infrastructure***

 

Our Infrastructurebusiness unit provides a full range of infrastructure services to clientsglobally, including project development, design-build-operate-maintain,consulting, engineering, design, project management, construction management,construction, and operations and maintenance. The business unit generallyperforms as a general contractor or as a joint venture partner with othercontractors on domestic and international projects. Typically, consulting,engineering, design, project management, construction management and operationsand maintenance type contracts are performed on a cost-reimbursable basis,while design-build and construction contracts are performed on a fixed-pricebasis.

 

***Infrastructure serves both private and public sectorcustomers across four major markets:***

*** ***

•                  *Rail andtransit*: Design, construction, operation and maintenance of lightrail, subways, commuter/inter-city railroads, railroads, freight transport,people movers, bus rapid transit, electrification and multimodal facilities.Our current significant projects in this market include:

•                  Hudson-BergenLight Rail Transit System: We are operating under a contract with a valueexceeding $500 million to design, build, operate and maintain the Hudson-BergenLight Rail Transit System in New Jersey. The design-build phase is scheduled tobe completed in 2005, and the operations and maintenance in 2015.

•                  NewRiver Bridge: A $53 million design/build contract for a commuter railroadbridge in Fort Lauderdale, Florida for the Tri-County Commuter Rail Authority.Work began in 2003.

 

•                  *Highways andbridges*: Design and construction of interstates/freeways, arterialhighways/streets, interchanges, bridges, tunnels and intelligent transportationsystems. Our significant projects in this market include:

•                  SR-125:A joint venture led by us to design and build the 10-mile privately-funded tollroad section of the public-private State Route 125 South Expressway project inSan Diego, California, under a

 

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$270 million contract and a 3.5-mile publicly-funded segment of StateRoute 125 under a $90 million design-build contract.

•                  I-215Southern Beltway: An $82.2 million contract with the Nevada Department ofTransportation to construct an interchange and six-lane connector near LasVegas.

 

•                  *Waterresource and hydropower*: Design and construction of hydroelectricpower, water supply, flood control, locks and dams, irrigation and drainage,hydraulic structures and environmental and safety analysis. Our significantprojects in this market include:

•                  SanRoque Multipurpose Dam and Reservoir: A $700 million design/build contract fora dam and powerhouse in the Philippines. Substantial completion of this projectwas reached in 2003.

•                  OlmstedDam: A $564 million cost-reimbursable-plus-award-fee joint venture for theconstruction of a 2,700-foot concrete dam across the lower Ohio River awardedin January 2004.

 

•                  *Airports*:Design, construction, development and operation of airport, airside andlandside infrastructure, security and environmental services. A current projectin this market is:

•                  AddisonAirport: As part of a joint venture, we manage and operate Addison Airport nearDallas, Texas.

 

Additionally, the Infrastructure businessunit is also leading our effort on two contracts with the U.S. Army Corps ofEngineers (the “USACOE”) to provide a variety of design, engineering andconstruction services to the Transatlantic Programs Center of the USACOEthroughout Central Asia, North Africa and the Middle East. Due to the breadthof the assignments, these programs may utilize virtually all of our businessunits. The contracts are indefinite delivery/indefinite quantity (“ID/IQ”)contracts that do not identify a specific quantity of services, but do setceilings on the total amount of work that can be awarded to a company duringthe life of the contract. Under the first contract, awarded in April 2003, weare performing $344 million worth of tasks under a contract that has a $500million ceiling. Most of the current work is being performed in Iraq, where weare refurbishing and installing electricity generating plants, reconstructing460 kilometers of 400 kilovolt electrical transmission lines and bringing ahospital back into full service. Other tasks are being performed in Afghanistanand Kuwait. Under the second contract, announced in January 2004, we will bidfor specific assignments to support the USACOE over the next five years. Thework will be confined to the U.S. Central Command area of operations, whichincludes Iraq and 24 other countries from the Horn of Africa through CentralAsia. The contract has a monetary ceiling of $500 million for the first year.It also includes four one-year options, each with a $250 million ceiling.

 

We see modest growth indomestic infrastructure markets. Federal highway funding is subject toauthorization from TEA-21, while budget deficits at the state level limitavailability of funds for capital programs. Certain markets continue to haveviable projects, and the design-build method of delivery, with its reliance onprivate capital and potential opportunities for public-private partnerships,continues to grow in popularity.

 

***Mining***

 

Our Mining business unit is an integratedsupplier providing a full range of services, including design/build; engineer,procure, construct (EPC); engineer, procure, construct, manage (EPCM);construction management; contract-mining; engineering; resource evaluation;geologic modeling; mine planning; simulation modeling; equipment selection;production scheduling; and operations management to the precious metals, coal,oil sands, industrial minerals and metals markets globally. The services covera broad spectrum of tasks from front-end engineering and design, such as mineplanning and feasibility studies, to reclamation planning and field activitiesnecessary for mine reclamation and closure.

 

Currently, the Mining business unit isproviding services to the oil sands and phosphate industries in Canada, coalmines in the United States, Venezuela and Germany, gold mines in the UnitedStates and Mexico, and the magnesium oxide industry in Jordan. Mining contractsare typically two- to five-year contracts that are normally

 

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renewed insubsequent bidding cycles throughout the useful life of the mine, which canrange from 20 to 30 years. Mining contracts are largely fixed-unit-price ortarget-price in nature.

 

In addition to the Mining business unit’scontracted services, we hold ownership interests in two mining ventures:

•                  MIBRAGmbH (50%) is located in Germany and operates two surface lignite coal minesthat provide lignite to two utility-owned power generation plants, as well assmall commercial plants and three company-owned power plants. Power generatedby the company-owned plants is primarily utilized by the mining operations, andsurplus power is sold at wholesale to the utilities. The mines have lignitereserves and contracts in place for 20 to 40 years of supply. Because of thesignificance to us of the earnings of MIBRAG mbH for our 2003 and 2002 fiscalyears, the financial statements of MIBRAG mbH have been included in this reporton Form 10-K as Exhibit 99.1.

•                  WestmorelandResources, Inc. (20%) is a Montana surface coal mine providing sub-bituminouscoal to utilities in the upper Midwest.

 

See Note 5, “Ventures” of the Notes toConsolidated Financial Statements in Item 8 of this report.

 

***Industrial/Process***

 

Our Industrial/Process business unit is asingle-source provider of engineering, construction, operations, maintenance,logistics and program management services. A key component ofIndustrial/Process’ approach is to closely align with its clients to supporttheir objectives and develop long-term, value-added partnerships and to balancethe markets we serve in order to effectively deal with economic cycles thatimpact industrial and consumer spending.

 

Services are provided using a variety ofcommercial terms, including various forms of cost reimbursable, target pricingand lump sum contracting. Industrial/Process’ current projects are primarilycost reimbursable. The unit’s goal over the next few years is to achieve a moreevenly balanced commercial mix between cost reimbursable and fixed-pricedcontracts. We believe the benefits to be derived from this change in service mixare a better risk/reward balance and improved cash flow.

 

Organized in three divisions, theIndustrial/Process business unit is focused on the following strategic areas:Biopharmaceuticals, Industrial Services and Process.

 

•                  *Biopharmaceuticals.*We provide design, engineering, construction, validation and maintenanceservices to the biotechnology and pharmaceutical industries. We provide anintegrated delivery platform in the areas of biologics, chemical synthesis,dosage form and devise manufacturing to create innovative production solutions.

 

Currently, we are working with AventisPasteur, a leading vaccine supplier, to design, build and validate an $80million manufacturing facility in Pennsylvania. Other representative clientsinclude Pfizer-Pharmacia, Merck, Eli Lilly, Johnson & Johnson, Novartis andWyeth.

 

•                  *IndustrialServices.* Our Industrial Services division provides life-cycleservices, including design, engineering, construction, operations, maintenance,facility management, logistics and quality programs, for the automotive,manufacturing, food and pulp and paper industries.

 

In the automotive markets, we currently workwith General Motors, Ford, Daimler/Chrysler and Hyundai. During 2003, we led aconstruction workforce of more than 1,600 to repair a General Motors assemblyplant severely damaged by a tornado. The plant was back into production in onlyseven weeks.

 

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We have long-term alliance partnerships withAnheuser-Busch, Kraft and General Mills/Pillsbury in the foods market. Weprovide facility and process design solutions for breweries and producers ofbaked goods, cake mix, cereal, prepared entrees, snack foods, soups and yogurt.

 

We are a single-source provider to the pulpand paper industry. Currently, we are at work on a variety of projectsinvolving paper machine rebuilds and plant modifications for clients such asSAPPI, Mead, Smurfit Stone and Weyerhaeuser.

 

We provide management solutions includingoperations, maintenance, facility management, quality programs and logisticsservices across a diverse set of industries to customers seeking to outsourcenon-core business functions. Customers include many long-term clients such asBP, Caterpillar, DuPont, IBM, Motiva, Nissan and Tektronix.

 

•                  *Process.*The Process division provides services to several markets, including oilproduction, gas treating, gas monetization, gas storage, refineries andbulk/specialty chemicals.

 

In Wyoming, we recently concluded more than adecade of partnership and cooperation with Burlington Resources with thestart-up of the Lost Cabin natural gas processing plant. Train Three is thethird unit designed and built by us since 1991 to produce pipeline-qualitynatural gas for the nation’s energy market. In addition, we recently completeda gas monetization project in Equatorial Guinea, and we are currently at workassisting in the development of oil and gas reserves in the Sakhalin Islandsand gas-to-liquids initiatives in the Middle East.

 

Clients include ExxonMobil, ConocoPhillips,ChevronTexaco, DuPont, Burlington Resources, El Paso, Dow Corning, PolyOne andEastman Chemical, among others.

 

***Defense***

 

The structure of our Defense business unithas changed dramatically as the needs of our major customer, the U.S. government,and, more specifically, the Department of Defense, have changed. Today, ourDefense business unit manages, integrates and delivers life-cycle services fordomestic and international programs under three markets: Threat Reduction,Defense Infrastructure Services and Homeland Security.

 

•                  *ThreatReduction*. Threat Reduction focuses on global proliferationprevention and elimination of CBRNE (chemical, biological, radiological,nuclear and high explosives) materials and weapon systems. We are a globalleader in the elimination of chemical weapons and agents. We providedemilitarization services to federal clients, including chemical and biologicalwarfare material elimination and nuclear weapons delivery systems disarmament.This market includes support for the Department of Defense in the destructionof the United States chemical weapons stockpile, as the system contractor forfour of the U.S. Army’s five incineration-based chemical weapons destructionthermal facilities. Additionally, we provide support to a fifth facility andpurchase equipment for these sites. We are also responsible for the start-up,pilot plant testing, operations and maintenance and closure of two additionalneutralization-based plants dealing with intact chemical weapons. All of thesefacilities are designed to destroy chemical weapons that have been stored formany years in underground bunkers.

 

We also provide demilitarization services, funded by the U.S.government, to the Commonwealth of Independent States, and have been awardedsignificant participation in the Cooperative Threat Reduction IntegratedContract. This contract is financed by the United States to preventproliferation of and safely eliminate weapons of mass destruction located inthe former Soviet Union. Work performed includes elimination of strategicmissiles and related delivery systems. In addition, in 2003, we were selectedto convert the Seversk, Russia, plutonium production facility into a peacetimeelectrical power production plant.

 

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Over the last year, we completed a chemical weapons demilitarizationfacility closure on Johnston Island in the Pacific and started up the firstthird-generation incineration-based facility in Anniston, Alabama.

 

A major objective of Threat Reduction is optimizing the value ofexisting contracts. Since we have now exhausted major domestic chemicaldemilitarization opportunities, our business development efforts are focused onevaluating adjacent market opportunities and selecting higher probabilitymarket sectors for development and penetration.

 

•                  *DefenseInfrastructure Services*. Defense Infrastructure Services principallyaddresses Department of Defense needs, offering operations services,management/technical services and EPC services with an objective of reducingtheir risk in mission execution due to infrastructure vulnerabilities. Wesupport the Department of Defense entities and agencies that operate ormaintain major facilities, providing classified and unclassified architecturalengineering services and engineering, procurement and construction services.These same services are provided to the Department of State and variousintelligence agencies of the U.S. government.

 

•                  *HomelandSecurity*. Homeland Security provides integrated solutions thatreduce vulnerability to terrorist acts or similar hostile acts and thatmitigate the consequences of such acts, with emphasis on high-value securitysystems, force protection and emergency response services. We provide threatanalysis and mitigation services to a variety of clients. We support one of thenation’s highest priorities, the security of our nation and the safety ofUnited States citizens abroad. The market and demand for our services areprincipally derived from federal requirements and include funding estimates for17 federal agencies (including defense activities). With the creation of theDepartment of Homeland Security, we devote our considerable experience insecurity research and technologies to compete for resulting business. We arepursuing multiple opportunities for securing transportation systems, includingenhanced security at ports of entry, improved security of offshore transportsystems and improved intelligence and data mining for early threatidentification.

 

The Defense business unit applies ourcomprehensive skills to create cost-effective solutions to operationalchallenges, drawing resources from all of our business units. Such integrationis essential to successfully compete in existing and emerging markets.Virtually all Defense work is performed on a cost-plus-fee basis.

 

***Energy &Environment***

 

Our Energy & Environment business unitprovides services to the U.S. Department of Energy, which is responsible formaintaining the nation’s nuclear weapons stockpile and performing environmentalcleanup and remediation. The business unit also provides the U.S. governmentwith construction, contract management, supply-chain management, qualityassurance, administrative and environmental cleanup and restoration services.Energy & Environment provides safety management consulting and waste andenvironmental technology and engineered products, including radioactive wastecontainers and technical support services. The Westinghouse Businesses comprisea significant portion of our Energy & Environment business unit. Almost allof this business unit’s revenues are from contracts funded by the federalgovernment, with the Department of Energy accounting for about 97% of itsrevenues.

 

The Energy & Environment business unit alsoprovides products and services to commercial clients, including the design andmanufacture of engineered canisters to ship and store spent nuclear fuel,safety planning, integrated safety management consulting, facility operation,hazardous material management and licensing.

 

The Energy & Environment business unitprimarily serves the U.S. Department of Energy in the environmental managementmarket segment, while also serving the National Nuclear Security Agency bymanaging nuclear operations and the Department of Defense in selectedengineering, design, construction, environmental cleanup and remediationprojects. There are currently three market units within Energy &

 

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Environment:Management Services, Projects and Consulting Services. We are positioning afourth market unit, International, to provide the services of the existingthree market units for international customers.

 

•                  *ManagementServices.* The Management Services market unit focuses on Departmentof Energy site management and support contracts, under which key personnel aresupplied to effectively manage existing site operations, infrastructure andhuman resources. Our current emphasis is managing complex, high-hazardfacilities and operations using our experience in technology, commercialnuclear operations, safety and operations in a regulatory environment.

 

Management Services has long-term managementcontracts with the Department of Energy. We serve two major programs within theDepartment of Energy, Environmental Management and the National NuclearSecurity Agency. The Environmental Management program consists of theenvironmental cleanup activities (radioactive and hazardous waste) resultingfrom the U.S. government’s nuclear weapons production. The National NuclearSecurity Agency consists of the Department of Energy’s defense programs andweapons production activities at national laboratories and productionfacilities including the Savannah River Site. We also perform work indirectly forthe Department of Energy as subcontractors to their prime contractors.

 

Our key existing contracts include theSavannah River Site in South Carolina, the West Valley Nuclear Services Site inNew York and the Waste Isolation Pilot Project in New Mexico.

 

•                  *Projects.*The Projects market unit provides life-cycle services to the Department ofEnergy and its prime contractors, as well as to other U.S. government agencies.We utilize our skills in environmental remediation, design of complexhigh-hazard facilities and construction capability to service this market. TheProjects market unit provides nuclear and high-hazard facility engineering,procurement and construction; nuclear and high-hazard facility deactivation,decommissioning, decontamination and dismantlement; and environmentalcharacterization, design and remediation. The Projects market also includesmid-level design, construction and environmental projects for the Department ofDefense.

 

The Projects market unit offers a broadportfolio of services and technologies to the Department of Energy, theDepartment of Defense and the Environmental Protection Agency, with fivedistinct clients within the agencies. In the Department of Energy, we serveEnvironmental Management and the National Nuclear Security Agency. In theDepartment of Defense, our customers include the U.S. Air Force Center forEnvironmental Excellence, the USACOE and the U.S. Navy Facilities EngineeringCommand. We believe these customers will need assistance with work in Iraq.

 

•                  *ConsultingServices.* Consulting Services provides services to most Departmentof Energy sites. These services are also sold to other governmental agencies orcommercial clients. The core products and services include safety analysis,regulatory services, criticality and radiological engineering, safeguards andsecurity management and environmental services. We self-perform for our sites,support other sites and are equipped to provide services throughout the lifecycle of a project.

 

Consulting Services is primarily concentratedin the Washington Safety Management Solutions LLC and has been growing at arapid pace. Washington Safety Management Solutions LLC takes the expertisedeveloped through our experience in the Department of Energy ManagementServices business and develops programs that are utilized at other Departmentof Energy and governmental sites and with commercial clients. The Department ofEnergy facilities are our principal customers.

 

•                  *International.*The International market unit addresses new markets for our core services inthe United Kingdom, Canada, Europe and Russia. We believe these countries willeventually seek such services to address their environmental legacies. Inaddition, Russia currently is required to have a program parallel to the UnitedStates’ mixed oxide program for disposition of Russia’s weapons-gradeplutonium.  We 

 

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believe we are well-positioned to compete for this work given ourexperience and the scope of our projects in the hazardous environmentalmanagement field in the United States.

 

For financial information about each of ourbusiness units, geographic areas in which we operate, and additionaldisclosures, see “Management’s Discussion and Analysis of Financial Conditionand Results of Operations -Business Unit Results” in Item 7 of this report and Note 12, “OperatingSegment, Geographic and Customer Information” of the Notes to ConsolidatedFinancial Statements in Item 8 of this report.

 

**MATERIALCUSTOMERS**

 

During 2003, 10% or more of our totalconsolidated revenue was derived from contracts and subcontracts performed bythe Power, Infrastructure, Industrial/Process, Defense and Energy &Environment business units for the following customers:

 
|                  |   | **Percent of  Consolidated Revenue** |   |
|-----------------------|--------|--------------------------------------|--------|
| Department of Defense |   | 24%                                  |   |
| Department of Energy  |   | 14%                                  |   |

 

Although we presently have good relationshipswith the Department of Defense and the Department of Energy, the loss of thesecustomers, or significant reductions in government funding, could have amaterial adverse effect primarily on our Defense and Energy & Environmentbusiness units and our company as a whole. See Risk Factors, “Economicdownturns and reductions in government funding could have a negative impact onour business,” later in Item 1 of this report.

 

**GOVERNMENTCONTRACTS AND BACKLOG**

 

Government funded contracts are, and areexpected to continue to be, a significant part of our business.****Wederived 42% of our consolidated operating revenues in 2003 from contracts withthe U.S. government. Allowable costs under U.S. government contracts aresubject to audit by the government. To the extent that these audits result indeterminations that costs claimed as reimbursable are not allowable costs orwere not allocated in accordance with federal regulations, we could be requiredto reimburse the government for amounts previously received. We also have anumber of U.S. government contracts that extend beyond one year and for whichgovernment funding has not yet been approved. All U.S. government contracts andsome foreign contracts are subject to unilateral termination at the convenienceof the customer.

 

Backlog represents the total value of allawarded contracts that have not been completed and will be recognized asrevenues or as equity in income of unconsolidated affiliates over the life ofthe project or over the construction period. Backlog includes our proportionateshare of construction joint venture contracts and the uncompleted portions ofmining service contracts and ventures for the next five years. Backlog forgovernment contracts includes only two years’ worth of the portions of suchcontracts that are currently funded or that we are highly confident will befunded. We have indefinite delivery contracts that are signed contracts underwhich we perform work only when the client issues specific task orders. Theterms of these contracts include a maximum contract value and a specified timeperiod that may include renewal option periods at the client’s discretion.While we believe that we will continue to receive work over the entire term,because of the uncertainty of the renewals and our dependence on the issuanceof individual task orders for new projects, we cannot be assured that we willultimately realize the maximum contract value for any particular contract. Onlythose task orders that are signed and funded are included in backlog. Thereported backlog excludes approximately $713 million of government contracts inprogress for work to be performed beyond December 2005.

 

Backlog at January 2, 2004 totaled $3.3billion compared with backlog of $2.8 billion at January 3, 2003. Approximately$1.4 billion of the backlog at January 2, 2004 was comprised of U.S. governmentcontracts that are subject to termination by the government, $0.7 billion ofwhich had not yet been funded. Historically, we have not experiencedsignificant reductions in funding of U.S. government contracts once they havebeen awarded.

 

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Terminationsfor the convenience of the government generally provide for recovery ofcontract costs and related earnings. Approximately $1.9 billion, or 56%, ofbacklog at January 2, 2004 is expected to be recognized as contract revenue oras equity in income of unconsolidated affiliates in 2004.

 

Although backlog reflects business that weconsider to be firm, cancellations or scope adjustments may occur. We haveadjusted backlog to reflect project cancellations, deferrals and revisions inscope and cost (both upward and downward) known at the reporting date; however,future contract modifications or cancellations may increase or reduce backlogand future revenues.

 
| **Composition of backlog(In millions)**    |   | **January 2,  2004** |    | **January 3,  2003** |   |
|--------------------------------------------|--------|----------------------|---------|----------------------|--------|
| Cost-type and target-price contracts       |   | $                    | 1,916.5 |                 | 58     | % | $ | 1,553.1 |   | 56 | % |
| Fixed-price and fixed-unit-price contracts |   | 1,406.0              |    | 42                   | %      | 1,202.0 |   | 44 | % |
| Total backlog                              |   | $                    | 3,322.5 |                 | 100    | % | $ | 2,755.1 |   | 100 | % |

 

**COMPETITION**

 

We are engaged in highly competitivebusinesses in which customer contracts are typically awarded throughcompetitive bidding processes. We compete based primarily on price, reputationand reliability with other general and specialty contractors, both foreign anddomestic,  including large internationalcontractors and small local contractors. Success or failure in our lines ofbusiness is, in large measure, based upon the ability to compete successfullyfor contracts and to provide the engineering, planning, procurement,construction, operations and project management and project financing skillsrequired to complete them in a timely and cost-efficient manner. Somecompetitors have greater financial and other resources than we do, which, insome instances, could give them a competitive advantage over us.

 

**EMPLOYEES**

 

Our total global employment varies widelywith the volume, type and scope of operations under way at any given time. AtJanuary 2, 2004, we employed approximately 26,000 employees. Approximately 13%of our employees are covered either by one of our regional labor agreements, whichexpire between May 2004 and January 2008, or by specific project laboragreements, each of which expires upon completion of the relevant project.

 

**RAWMATERIALS**

 

We can purchase most of the raw materials andcomponents necessary to operate our businesses from numerous sources. We do notanticipate any unavailability of raw materials or components that would have amaterial adverse effect on our businesses in the foreseeable future.

 

**ENVIRONMENTALMATTERS**

 

Our environmental and hazardous substanceremediation and contract mining services involve risks of liability underfederal, state and local environmental laws and regulations, including theComprehensive Environmental Response, Compensation and Liability Act(“CERCLA”). We perform environmental remediation at Superfund sites as aresponse action contractor for the Environmental Protection Agency and, in suchcapacity, are exempt from liability under any federal law, including CERCLA,unless our conduct is negligent. Moreover, we may be entitled to indemnificationfrom agencies of the United States against liability arising out of thenegligent performance of work in such capacity.

 

We are subject to risks of liability underfederal, state and local environmental laws and regulations, as well as commonlaw. These laws and regulations and the risk of attendant litigation can causesignificant delays to a project and add significantly to its cost. Violationsof these laws and regulations could subject us to civil and

 

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criminalpenalties and other liabilities, including liabilities for property damage,costs of investigation and cleanup of hazardous or toxic substances on propertycurrently or previously owned by us or arising out of our current and past remediation,waste management and contract mining activities.

 

For additional information regardingenvironmental matters, see “Risk Factors -We could be subject to liability under environmental laws.”

 

**RISKFACTORS**

 

We are subject to a number of risks, includingthose enumerated below. Any or all of these risks could have a material adverseeffect on our business, financial condition, results of operations and cashflows and on the market price of our common stock. See also “Note RegardingForward-looking Information.”

 

***The documentsgoverning our indebtedness restrict our ability and the ability of some of oursubsidiaries to engage in some business transactions.***

 

OnOctober 9, 2003, we obtained a new senior secured revolving credit facility(the “New Credit Facility”), which provides for up to $350 million of loans andother financial accommodations. The credit agreement governingthe New Credit Facility restricts or places certain limits on our ability andthe ability of some of our subsidiaries to, among other things:

 

•                  incur orguarantee additional indebtedness;

 

•                  declare or paydividends on, redeem or repurchase capital stock;

 

•                  paydividends or other distributions or transfer assets or make loans between usand some of our subsidiaries;

 

•                  makeinvestments;

 

•                  incuror permit to exist liens;

 

•                  enterinto transactions with affiliates;

 

•                  makematerial changes in the nature or conduct of our business;

 

•                  mergeor consolidate with, or acquire substantially all of the stock or assets of,other companies;

 

•                  transferor sell assets; and

 

•                  engagein sale-leaseback transactions.

 

The New Credit Facility contains covenantsthat are typical for credit facilities of its size, type and tenor, such asrequirements that we meet specified financial ratios and financial conditiontests. Our ability to borrow under the New Credit Facility otherwise dependsupon satisfaction of these covenants. Our ability to meet these covenants andrequirements may be affected by events beyond our control.

 

Our failure to comply with obligations underthe New Credit Facility could result in an event of default under the facility.A default, if not cured or waived, could permit acceleration of any outstandingindebtedness. 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 havefunds available to pay the accelerated indebtedness or that we will have theability to refinance the accelerated indebtedness on terms favorable to us orat all.

 

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***We are engaged inhighly competitive businesses and must typically bid against competitors toobtain engineering, construction and service contracts.***

 

We are engaged in highly competitivebusinesses in which customer contracts are typically awarded throughcompetitive bidding processes. We compete with other general and specialtycontractors, both foreign and domestic, including large internationalcontractors and small local contractors. Some competitors have greaterfinancial and other resources than we do, which, in some instances, could givethem a competitive advantage over us.

 

***Strikes, workstoppages and other similar events, as well as resulting increases in operatingcosts, would have a negative impact on our operations and results.***

 

We are party to several regional laboragreements that expire between May 2004 and January 2008, as well asproject-specific labor agreements that commit us to use union building tradeson certain projects. If the industry were unable to negotiate with any of theunions, it could result in strikes, work stoppages or increased operating costsas a result of higher than anticipated wages or benefits. If the unionizedworkers engage in a strike or other work stoppage, or other employees becomeunionized, we could experience a disruption of our operations and higherongoing labor costs, which could adversely affect portions of our businessesand our financial position, results of operations and cash flows. See“Employees” earlier in Part I of this report.

 

***Our success dependson attracting and retaining qualified personnel in a competitive environment.***

 

We are dependent upon our ability to attractand retain highly qualified managerial, technical and business developmentpersonnel. Competition for key personnel is intense. We cannot be certain thatwe will retain our key managerial, technical and business development personnelor that we will attract or assimilate key personnel in the future. Failure toretain or attract such personnel could materially adversely affect ourbusinesses, financial position, results of operations and cash flows.

 

***Economic downturnsand reductions in government funding could have a negative impact on ourbusinesses.***

 

Demand for the services offered by us has been,and is expected to continue to be, subject to significant fluctuations due to avariety of factors beyond our control, including economic conditions. Duringeconomic downturns, the ability of both private and governmental entities tomake expenditures may decline significantly. We cannot be certain that economicor political conditions will be generally favorable or that there will not besignificant fluctuations adversely affecting our industry as a whole or keymarkets targeted by us. In addition, our operations are, in part, dependentupon government funding. Significant changes in the level of government fundingcould have an unfavorable impact on our business, financial position, resultsof operations and cash flows.

 

***Our fixed-pricecontracts subject us to the risk of increased project costs.***

 

Our fixed-price contracts involve risksrelating to our inability to receive additional compensation in the event thecosts of performing those contracts prove to be greater than anticipated. Ourcost of performing the contracts may be greater than anticipated due touncertainties inherent in estimating contract completion costs, contractmodifications by customers resulting in claims, failure of subcontractors andjoint venture partners to perform and other unforeseen events and conditions.At January 2, 2004, approximately 42%, or $1.4 billion, of our backlogrepresented fixed-price and fixed-unit-price contracts. Any one or more ofthese risks could result in reduced profits or increased losses on a particularcontract or contracts.

 

***The U.S. governmentcan 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 continue to be, asignificant part of our business. We derived approximately 42% of ourconsolidated revenues in

 

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2003 fromcontracts funded by the U.S. government. Allowable costs under governmentcontracts are subject to audit by the U.S. government. To the extent that theseaudits result in determinations that costs claimed as reimbursable are notallowable costs or were not allocated in accordance with federal government regulations,we could be required to reimburse the U.S. government for amounts previouslyreceived. In addition, if we were to lose and not replace our revenuesgenerated by one or more of the U.S. government contracts, our businesses,financial condition, results of operations and cash flows could be adverselyaffected.

 

We have a number of contracts andsubcontracts with agencies of the U.S. government, principally forenvironmental remediation, restoration and operations work, which extend beyondone year and for which government funding has not yet been approved. We cannotbe certain that funding will be approved. All contracts with agencies of theU.S. government and some commercial and foreign contracts are subject tounilateral termination at the convenience of the customer. In the event of atermination, we would not receive projected revenues or profits associated withthe terminated portion of those contracts.

 

In addition, government contracts are subjectto specific procurement regulations, contract provisions and a variety of othersocioeconomic requirements relating to the formation, administration,performance and accounting of these contracts. Many of these contracts includeexpress or implied certifications of compliance with applicable laws and contractprovisions. As a result of our government contracting, claims for civil orcriminal fraud may be brought by the government for violations of theseregulations, requirements or statutes. We may also be subject to *qui tam*litigation brought by private individuals on behalf of the government under theFederal Civil False Claims Act, which could include claims for up to trebledamages. Further, if we fail to comply with any of these regulations,requirements or statutes, our existing government contracts could beterminated, we could be suspended from government contracting orsubcontracting, including federally funded projects at the state level, and ourability to participate in foreign projects funded by the United States could beadversely affected. If one or more of our government contracts are terminatedfor any reason, or if we are suspended from government work, we could suffer asignificant reduction in expected revenues.

 

***Our dependence onone or a few customers could adversely affect us.***

 

One or a few clients have in the past and mayin the future contribute a significant portion of our consolidated revenues inany one year or over a period of several consecutive years. In 2003,approximately 24% of our revenues were from the U.S. Department of Defense andapproximately 14% of our revenues were from the U.S. Department of Energy. Asour backlog frequently reflects multiple projects for individual clients, onemajor customer may comprise a significant percentage of our backlog at anypoint in time. For example, the U.S. Department of Defense, with which we have15 contracts, represented an aggregate of 27% of our backlog at January 2,2004, and the U.S. Department of Energy, with which we have 77 contracts,represented an aggregate of 12% of our backlog at January 2, 2004. Backlog fromthe U.S. government or U.S. government-owned entities accounted for 42% ofbacklog at January 2, 2004.

 

Because these significant customers generallycontract with us for specific projects, we may lose these customers from yearto year as their projects with us are completed. If we do not replace them withother customers or other projects, our business could be materially adverselyaffected.

 

Additionally, we have long-standingrelationships with many of our significant customers. Our contracts with thesecustomers, however, are on a project-by-project basis, and the customers mayunilaterally reduce or discontinue their purchases at any time. The loss ofbusiness from any one of such customers could have a material adverse effect onour business or results of operations.

 

***Our backlog issubject to unexpected adjustments and cancellations and is, therefore, anuncertain indicator of our future earnings.***

 

As of January 2, 2004, our backlog wasapproximately $3.3 billion. We cannot assure that the revenues projected in ourbacklog will be realized or, if realized, will result in profits. Projects mayremain in our backlog for an extended period of time prior to project executionand, once project execution begins, it may occur

 

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unevenly overthe current and multiple future periods. In addition, project terminations,suspensions or reductions in scope may occur from time to time with respect tocontracts reflected in our backlog. Such backlog reductions would adverselyaffect the revenue and profit we actually receive from contracts reflected inour backlog. Future project cancellations and scope adjustments could furtherreduce the dollar amount of our backlog and the revenues and profits that weactually earn.

 

***Our businessesinvolve many project-related and contract-related risks.***

 

Our businesses are subject to a variety ofproject-related risks, including changes in political and other circumstances,particularly since contracts for major projects are performed over extendedperiods of time. These risks include the failure of applicable governingauthorities to take necessary actions, opposition by third parties toparticular projects and the failure by customers to obtain adequate financingfor particular projects. Due to these factors, losses on a particular contractor contracts could occur, and we could experience significant changes inoperating results on a quarterly or annual basis.

 

We may also be adversely affected by variousrisks and hazards, including industrial accidents, labor disputes, geologicalconditions, environmental hazards, acts of terrorism or war, weather and othernatural phenomena such as earthquakes and floods.

 

***Our dependence onsubcontractors and equipment manufacturers could adversely affect us.***

 

We rely on third-party subcontractors as wellas third-party equipment manufacturers to complete our projects. To the extentthat we cannot engage subcontractors or acquire equipment or materials, ourability to complete a project in a timely fashion or at a profit may beimpaired. If the amount we are required to pay for these goods and servicesexceeds the amount we have estimated in bidding for fixed-price,fixed-unit-price or target-price contracts, we could experience losses in theperformance of these contracts. In addition, if a subcontractor or amanufacturer is unable to deliver its services, equipment or materialsaccording to the negotiated terms for any reason, including the deterioration ofits financial condition, we may be required to purchase the services, equipmentor materials from another source at a higher price. This may reduce the profitto be realized or result in a loss on a project for which the services,equipment or materials were needed.

 

***If we guarantee to acustomer the timely completion or performance standards of a project, we couldincur additional costs to meet our guarantee obligations.***

 

In certain instances, including in some ofour fixed-price contracts, we guarantee a customer that we will complete aproject by a scheduled date. We sometimes also provide that the project, whencompleted, will achieve certain performance standards. If we subsequently failto complete the project as scheduled, or if the project subsequently fails tomeet the guaranteed performance standards, we may be held responsible for costimpacts to the client resulting from any delay or the costs to cause theproject to achieve the performance standards. In most cases where we fail tomeet contract-defined performance standards, we may be subject to agreed-uponliquidated damages. To the extent that these events occur, the total costs forthe project would exceed our original estimates, and we could experiencereduced profits, or in some cases, a loss for that project.

 

***Our internationaloperations involve special risks.***

 

We pursue project opportunitiesinternationally through foreign and domestic subsidiaries as well as throughagreements with domestic and foreign joint venture partners. Our internationaloperations accounted for approximately 10% of our revenues in 2003. Our foreignoperations are subject to special risks, including:

 

•                  unstablepolitical, economic, financial and market conditions;

 

•                  potentialincompatibility with foreign joint venture partners;

 

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•                  foreign currencycontrols and fluctuations;

 

•                  traderestrictions;

 

•                  restrictions onrepatriating foreign profits back to the United States;

 

•                  increases intaxes;

 

•                  civil disturbancesand acts of terrorism, violence or war in the United States or elsewhere; and

 

•                  changes in laborconditions, labor strikes and difficulties in staffing and managinginternational operations.

 

Events outside of our control may limit ordisrupt operations, restrict the movement of funds, result in the deprivationof contract rights, increase foreign taxation or limit repatriation ofearnings. In addition, in some cases, applicable law and joint venture or otheragreements may provide that each joint venture partner is jointly and severallyliable for all liabilities of the venture.

 

***Our internationaloperations may require our employees or subcontractors to travel to highsecurity risk countries, which may result in employee injury, repatriationcosts or other unforeseen costs.***

 

As a global provider of engineering,construction and management services, we dispatch employees and subcontractorsto various countries around the world. A country may represent a high securityrisk because of its political, social or economic upheaval such as war, civilunrest or ongoing acts of terrorism. Senior level employees and other keyemployees and subcontractors have been, and may continue to be, deployed toprovide services in high security risk countries. As a result, it is possiblethat our employees or subcontractors may suffer injury or death, repatriationproblems or other unforeseen costs and risks in the course of theirinternational projects, which could negatively impact our operations.

 

***We could be subjectto liabilities as a result of our performance.***

 

The nature of our engineering andconstruction businesses exposes us to potential liability claims and contractdisputes that may reduce our profits.

 

We engage in engineering and constructionactivities for large industrial facilities where design, construction orsystems failures can result in substantial injury or damage to third parties.Any liability in excess of our insurance limits at locations engineered orconstructed by us, where our products are installed or where our services areperformed could result in significant liability claims against us, which claimsmay reduce our earnings. In addition, if a customer disputes our performance ofproject services, the customer may decide to delay or withhold payment to us.If we were ultimately unable to collect on these payments, our profits would bereduced.

 

***We could be subjectto liability under environmental laws and regulations.***

 

We are subject to a variety of environmental,health and safety laws and regulations governing, among other things,discharges to air and water, the handling, storage and disposal of hazardous orsolid waste materials and the remediation of contamination associated withreleases of hazardous substances. These laws and regulations and the risk ofattendant litigation can cause significant delays to a project and addsignificantly to its cost. Violations of these environmental, health and safetylaws and regulations could subject us and our management to civil and criminalpenalties and other liabilities. These laws and regulations may become morestringent, or be more stringently enforced, in the future.

 

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Various federal, state and localenvironmental laws and regulations, as well as common law, may impose liabilityfor property damage and costs of investigation and cleanup of hazardous ortoxic substances on property currently or previously owned by us or arising outof our waste management or environmental remediation activities. These laws mayimpose responsibility and liability without regard to knowledge of or causationof the presence of contaminants. The liability under these laws is joint andseveral. We have potential liabilities associated with our past wastemanagement and contract mining activities and with our current and priorownership of various properties.

 

***Expiration of thePrice-Anderson Act’s indemnification authority could have adverse consequenceson our Power and Energy & Environment business units.***

 

Our Power and Energy & Environmentbusiness units provide engineering, construction and operations and maintenanceservices in the nuclear power market, and approximately 15% of our backlog isderived from nuclear services. The Price-Anderson Act promotes and regulates thenuclear power industry in the United States. It comprehensively regulates themanufacture, use and storage of radioactive materials, and promotes the nuclearpower industry by offering broad indemnification to nuclear power plantoperators and certain Department of Energy contractors like us. While thePrice-Anderson Act’s indemnification provisions are broad, it has not beendetermined whether they apply to all liabilities that might be incurred by aradioactive materials cleanup contractor. The Price-Anderson Act’s provisionswith respect to indemnification of Department of Energy contractors under newlysigned contracts will expire on December 31, 2004. Congress has extended theexpiration date of the Act in the past, and it is expected that it will extendthe expiration date in the future beyond December 31, 2004. Our business unitscould be adversely affected if the Price-Anderson Act is not extended beyondDecember 31, 2004 due to either the unwillingness of plant operators to retainus or our inability to obtain adequate indemnification and insurance because ofthe unavailability of the protections of the Price-Anderson Act.

 

***Actual results coulddiffer from the estimates and assumptions used to prepare our financialstatements.***

 

In order to prepare financial statements inconformity with generally accepted accounting principles, our management isrequired to make estimates and assumptions as of the date of the financialstatements. These estimates and assumptions affect the reported values of assets,liabilities, revenues and expenses, and disclosures of contingent assets andliabilities. Areas requiring significant estimates by our management include:

 

•                  determinationof new work awards and backlog;

 

•                  recognitionof contract revenue, costs, profit or losses in applying the principles ofpercentage-of-completion accounting;

 

•                  recognitionof recoveries under contract change orders or claims;

 

•                  collectibilityof billed and unbilled accounts receivable and the need and amount of anyallowance for doubtful accounts;

 

•                  theamount of reserves necessary for self-insured risks;

 

•                  thedetermination of liabilities under pension and other post-retirement benefitprograms;

 

•                  estimatedamounts for expected project losses, reclamation costs, warranty costs or othercontract closing costs;

 

•                  recoverabilityof goodwill;

 

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•                  provisionsfor income taxes and any related valuation allowances; and

 

•                  accrualsfor other estimated liabilities, including litigation reserves.

 

***Our use ofpercentage-of-completion accounting could result in a reduction or eliminationof previously reported profits.***

 

As more fully discussed in “Management’sDiscussion and Analysis of Financial Condition and Results of Operations -Overview” in Item 7 and in Note 1, “Significant Accounting Policies” of theNotes to Consolidated Financial Statements in Item 8 of this report, asubstantial portion of our revenues are recognized using thepercentage-of-completion method of accounting. Generally, thepercentage-of-completion accounting practices we utilize result in ourrecognizing contract revenues and earnings ratably, based on the proportion ofcosts incurred to total estimated contract costs or on the proportion of laborhours or labor costs incurred to total estimated labor hours or labor costs.For certain long-term contracts, completion is measured on estimated physicalcompletion or units of production.

 

The cumulative effect of revisions tocontract revenues and estimated completion costs, including incentive awards,penalties, change orders, claims and anticipated losses, is recorded in theaccounting period in which the amounts are known and can be reasonablyestimated. Such revisions could occur at any time and the effects could be material.A change order is included in total estimated contract revenue when it isprobable that the change order will result in a bona fide addition to contractvalue and can be reliably estimated. Claims are included in total estimatedcontract revenue, only to the extent that contract costs related to the claimhave been incurred, when it is probable that the claim will result in a bonafide addition to contract value and can be reliably estimated. No profit isrecognized on claims until final settlement occurs.

 

Although we have a history of makingreasonably dependable estimates of the extent of progress towards completion ofcontract revenue and of contract completion costs on our long-term engineeringand construction contracts, due to uncertainties inherent in the estimationprocess, it is possible that actual completion costs may vary from estimates,and it is possible that such variances could be material to our operatingresults.

 

***If we have to writeoff a significant amount of intangible assets, our earnings will be negativelyimpacted.***

 

Goodwill is included on our balance sheet andis a significant asset, totaling $360 million at January 2, 2004. If ourgoodwill were to be significantly impaired, we would be required to write-offthe impaired amount. The write-off would negatively impact our earnings;however, it would not impact our cash flows. See Note 1, “SignificantAccounting Policies” of the Notes to Consolidated Financial Statements in Item8 of this report.

 

***Our stockholderrights plan, our organizational documents, some of our agreements andprovisions of Delaware law could inhibit a change in control.***

 

We are subject to various restrictions andother requirements that may have the effect of delaying, deterring orpreventing a change in control of us, such as:

 

•                  ourstockholder rights plan;

 

•                  provisionsin our certificate of incorporation and bylaws;

 

•                  someof our agreements, including the disbursing agreement that we entered into inconnection with our emergence from bankruptcy; and

 

•                  Section203 of the Delaware General Corporation law.

 

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On June 21, 2002, our board of directorsapproved a stockholder rights plan. Under this plan, each share of our commonstock is accompanied by a right that entitles the holder of that share, uponthe occurrence of specified events that may be intended to effect a change incontrol, to purchase either additional shares of our common stock or shares ofan acquiring company’s common stock at a price equal to one-half of the currentmarket price of the relevant shares.

 

A number of provisions in our certificate ofincorporation and bylaws also may make a change in control more difficult,including, among others, provisions relating to a classified board ofdirectors, removal of directors only for cause, the elimination of ourstockholders’ ability to fill vacancies on the board of directors and to callspecial meetings and supermajority stockholder amendments. In addition, ourcertificate of incorporation authorizes the issuance of up to 100 millionshares of our common stock and 10 million shares of our preferred stock. Ourboard of directors has the power to determine the price and terms under whichadditional capital stock may be issued and to fix the terms of preferred stock.Existing shareholders will not have preemptive rights with respect to any ofthose shares.

 

On January 25, 2002, the date on which weemerged from bankruptcy protection pursuant to our Plan of Reorganization, weissued 5,000,000 shares of our common stock and warrants to acquire anadditional 8,520,424 shares of our common stock to a disbursing agent for thebenefit of unsecured creditors in our bankruptcy. As of February 20, 2004,1,737,294 shares of our common stock had been distributed to various unsecuredcreditors. Pending the distribution of the remaining shares to the unsecuredcreditors, the disbursing agreement requires the disbursing agent to vote theshares held by the disbursing agent as recommended by our board of directors,unless the reorganization plan committee established in connection with ourbankruptcy directs it to vote the shares in proportion to the votes cast andabstentions claimed by all other stockholders eligible to vote on theparticular matter.

 

Since March 6, 2003, our common stock hasbeen quoted on the NASDAQ National Market®. As a result, Section 203 of theDelaware General Corporation Law is applicable to us and generally limits theability of major stockholders to engage in specified transactions with us thatmay be intended to effect a change in control.

 

***The significantdemands on our cash resources could affect our ability to achieve our businessplan.***

 

We have substantial demands on our cashresources in addition to operating expenses and interest expense, principallycapital expenditures. See “Management’s Discussion and Analysis of FinancialCondition and Results of Operations -Financial Condition and Liquidity.”

 

Our ability to fund working capitalrequirements will depend upon our future operating performance, which, in turn,will be affected by prevailing economic conditions and financial, business andother factors, many of which are beyond our control. If we are unable to fundour businesses, we will be forced to adopt an alternative strategy that mayinclude:

 

•                  reducingor delaying capital expenditures;

 

•                  limitingour growth;

 

•                  seekingadditional debt financing or equity capital;

 

•                  sellingassets; or

 

•                  restructuringor refinancing our indebtedness.

 

We cannot provide assurance that any of thesestrategies could be affected on favorable terms or at all. See “Management’sDiscussion and Analysis of Financial Condition and Results of Operations -Financial Condition and Liquidity.”

 

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***Adequate bonding isnecessary for us to successfully win new work awards on some types ofcontracts.***

 

In line with industry practice, we are oftenrequired to provide performance and surety bonds to customers under fixed-pricecontracts. These bonds indemnify the customer should we fail to perform ourobligations under the contract. If a bond is required for a particular projectand we are unable to obtain an appropriate bond, we cannot pursue that project.We have a bonding facility but, as is typically the case, the issuance of bondsunder that facility is at the surety’s sole discretion. Moreover, due to eventsthat affect the insurance and bonding markets generally, bonding may be moredifficult to obtain in the future or may only be available at significantadditional cost. There can be no assurance that bonds will continue to beavailable to us on reasonable terms. Our inability to obtain adequate bondingand, as a result, to bid on new work could have a material adverse effect onour businesses, financial condition, results of operations and cash flows.

 

**ITEM 2. PROPERTIES**

 

We do not own significant real property foroperations. Our principal administrative office facilities located in Boise,Idaho; Cleveland, Ohio; Aiken, South Carolina; Denver, Colorado; Princeton, NewJersey; Birmingham, Alabama; and Arlington, Virginia are leased underlong-term, noncancelable leases expiring in 2008, 2006, 2011, 2007, 2007, 2007and 2007, respectively. As of January 2, 2004, we owned more than 3,200 unitsof heavy and light mobile construction, environmental remediation and contractmining equipment. We consider our construction, environmental remediation andmining equipment and leased administrative and engineering facilities to bewell maintained and suitable for our current operations.

 

As of January 2, 2004, our principalfacilities were as follows:

 
| **Property location** |   | **Facility Sq. Ft.** | ** ** | **Owned/Leased** | ** ** | **Segment/  Business Unit*** | ** ** | **Usage**                                  | ** ** |
|-----------------------|--------|----------------------|------------|------------------|------------|------------------------------|------------|--------------------------------------------|------------|
|                  |   |                 |       |             |       |                         |       |                                       |       |
| Aiken, SC             |   | 96,250               |       | Leased           |       | 6,5                          |       | Business unit  headquarters/ engineering   |       |
| Arlington, VA         |   | 25,009               |       | Leased           |       | 2,5,6,7                      |       | Business unit headquarters/regional office |       |
| Bellevue, WA          |   | 16,991               |       | Leased           |       | 2,4                          |       | Area office                                |       |
| Birmingham, AL        |   | 140,635              |       | Leased           |       | 4,8                          |       | Regional office                            |       |
| Boise, ID             |   | 50,511               |       | Leased           |       | 7                            |       | Records/retention center                   |       |
| Boise, ID             |   | 184,453              |       | Leased           |       | 1,2,4,6,7                    |       | Corporate/business unit headquarters       |       |
| Boothwyn, PA          |   | 14,400               |       | Leased           |       | 4                            |       | Office                                     |       |
| Bucharest, Romania    |   | 48,438               |       | Leased           |       | 5,8                          |       | Engineering                                |       |
| Carlsbad, NM          |   | 222,306              |       | Leased           |       | 6                            |       | Office/warehouse/container fabrication     |       |
| Cleveland, OH         |   | 88,775               |       | Leased           |       | 4,5,8                        |       | Business unit headquarters/engineering     |       |
| Denver, CO            |   | 215,903              |       | Leased           |       | 1,2,3,4,5,6,7,8              |       | Corporate/business unit headquarters/      |       |
|                  |   |                 |       |             |       |                         |       |                                       |       |
| Downers Grove, IL     |   | 13,888               |       | Leased           |       | 1,4                          |       | Office/engineering                         |       |
| Ewa, HI               |   | 215,099              |       | Leased           |       | 2                            |       | Land                                       |       |
| Hato Rey, Puerto Rico |   | 16,100               |       | Leased           |       | 4                            |       | Office/engineering                         |       |
| Highland, CA          |   | 17,400               |       | Owned            |       | 2                            |       | Regional office/equipment yard             |       |
| Holmbrook, England    |   | 10,632               |       | Leased           |       | 4                            |       | Area office                                |       |
| Irvine, CA            |   | 10,630               |       | Leased           |       | 2,4                          |       | Area office/engineering                    |       |
| Joliet, IL            |   | 52,560               |       | Leased           |       | 2                            |       | Storage yard/warehouse                     |       |
| Las Vegas, NV         |   | 217,800              |       | Leased           |       | 2                            |       | Storage yards                              |       |

 

I-22

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| **Property location** |   | **Facility Sq. Ft.** | ** ** | **Owned/Leased** | ** ** | **Segment/  Business Unit*** | ** ** | **Usage**                                               | ** ** |
|-----------------------|--------|----------------------|------------|------------------|------------|------------------------------|------------|---------------------------------------------------------|------------|
| Monmouth Junction, NJ |   | 10,000               |       | Leased           |       | 1                            |       | Office/warehouse                                        |       |
| New York, NY          |   | 28,331               |       | Leased           |       | 1,2                          |       | Area office                                             |       |
| Petaluma, CA          |   | 43,800               |       | Owned            |       | 2                            |       | Office/precast concrete fabrication                     |       |
| Pine Bluff, AR        |   | 114,052              |       | Leased           |       | 6                            |       | Warehouse                                               |       |
| Ploiesti, Romania     |   | 48,437               |       | Leased           |       | 5,8                          |       | Engineering                                             |       |
| Princeton, NJ         |   | 368,245              |       | Leased           |       | 1,2,4,6,8                    |       | Business unit headquarters/regional offices/engineering |       |
| San Ramon, CA         |   | 15,684               |       | Leased           |       | 2                            |       | Regional office                                         |       |
| St. Louis, MO         |   | 7,500                |       | Leased           |       | 4                            |       | Regional office/engineering                             |       |
| Warrington, England   |   | 51,836               |       | Leased           |       | 4                            |       | Office                                                  |       |
| West Valley, NY       |   | 41,329               |       | Leased           |       | 6                            |       | Office                                                  |       |

 

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* Segment/businessunit:
|   | 1 – Power                                         |
|--------|--------------------------------------------------------|
|   | 2 – Infrastructure                                |
|   | 3 – Mining                                        |
|   | 4 – Industrial/Process                            |
|   | 5 – Defense                                       |
|   | 6 – Energy & Environment                      |
|   | 7 – Corporate                                     |
|   | 8 – Operations centers used by all business units |

 

**ITEM 3.  LEGALPROCEEDINGS**

 

We are a defendant in various lawsuits resulting fromallegations that third parties sustained injuries and damage from theinhalation of asbestos fibers contained in materials used in constructionprojects. In addition, based on proofs of claims filed with the court duringthe pendency of our bankruptcy proceedings, we are aware of other potentialasbestos claims against us. We never were a manufacturer of asbestos orproducts which contain asbestos. Asbestos-related lawsuits against us resultfrom allegations that third parties sustained injuries and damage from theinhalation of asbestos fibers contained in materials used in constructionprojects and that we allegedly were negligent, the typical negligence claimbeing that we had a duty but failed to warn the plaintiff or claimant of, orfailed to protect the plaintiff or claimant from, the dangers of asbestos. Webelieve that we have substantial third party insurance coverage for most, butnot all, of these existing and potential claims and remaining amounts will nothave a material adverse impact on our financial position, results of operationsor cash flows.

 

While we expect that additional asbestos claims willbe filed against us in the future, we have no basis for estimating the numberof claims or individual or cumulative settlement amounts and, accordingly, noprovision has been made for future claims. We believe, however, that theoutcome of these actions, individually and collectively, will not have amaterial adverse impact on our financial position, results of operations orcash flows.

 

We also incorporate by reference the informationregarding legal proceedings set forth under the caption “Other” in Note 13,“Contingencies and Commitments” of the Notes to Consolidated FinancialStatements in Item 8 of this report.

 

Our reorganization case is “*In re Washington Group International,Inc. and Related Cases*, Docket No. BK-N 01-31627-GWZ, in the U.S.Bankruptcy Court for the District of Nevada.

 

The litigation related to the Old MK 401(k) Plandiscussed 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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refers to *John B.Blyler, et al., v. William J. Agee, et al.*, Case No.CIV97-0332-S-BLW, in the U.S. District Court for the District of Idaho.

 

The litigation brought by the Authority of the City ofNew York discussed under the caption “Other” in Note 13, “Contingencies andCommitments” of the Notes to Consolidated Financial Statements in Item 8 ofthis report refers to *Trataros Construction, Inc. et al. v. The New YorkCity School Construction Authority et al.*, Index No. 20213/01, inthe Supreme Court of the State of New York, County of Kings.

 

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

 

We submitted no matters to a vote of our stockholdersduring the fourth quarter of 2003.

** **

I-24

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**PARTII**

 

**ITEM 5.  MARKET FOR THE REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDERMATTERS**

 

***Market information***

 

On January 25,2002, the date on which we emerged from bankruptcy protection pursuant to ourPlan of Reorganization, all of our then-existing equity securities, includingour common stock, were canceled and extinguished, and 25,000,000 shares of NewCommon Stock were issued.

 

From its issuanceon January 25, 2002 until March 6, 2003, our New Common Stock traded in theover-the-counter market. The price of our New Common Stock was quoted by thePink Sheets® quotation service under the ticker symbol “WNGXQ” until July 30,2002 when the OTC Bulletin Board® began quotation of our common stock under theticker symbol “WGII.” Our New Common Stock began trading on the NASDAQ NationalMarket® under the ticker symbol “WGII” on March 6, 2003.

 

At the close ofbusiness on February 20, 2004, we had 25,153,665 shares of common stock issuedand outstanding; 5,000,000 of these shares were allocated to the unsecuredcreditor pool as part of the Plan of Reorganization, 1,737,294 shares have beendistributed to various unsecured creditors, and the remaining 3,262,706 shareswill be distributed as the claim pool is resolved. As part of the Plan ofReorganization, 8,520,424 stock purchase warrants were issued and awarded tothe unsecured creditor pool. At the close of business on February 20, 2004,2,960,496 warrants had been distributed to various unsecured creditors, and theremaining 5,559,928 warrants will be distributed as the claim pool is resolved.

 

The followingtables set forth the high and low prices per share of our New Common Stock foreach quarterly period in 2003 and 2002.

 

**Common stock market prices**

 
| **2003 quarters ended** |   | **April 4  2003 (1)** |   | **July 4  2003 (2)** |   | **October 3  2003 (2)** |   | **January 2  2004 (2)** |   |
|-------------------------|--------|-----------------------|--------|----------------------|--------|-------------------------|--------|-------------------------|--------|
| High                    |   | $                     | 17.75  |                 | $      | 23.15                   |   | $                       | 27.95  |   | $ | 34.33 |   |
| Low                     |   | 14.35                 |   | 17.38                |   | 21.59                   |   | 26.85                   |   |
|                         |        |                       |        |                      |        |                         |        |                         |        |  |  |  |  |

 
| **2002 quarters ended** |   | **March 29  2002 (3)** |   | **June 28  2002 (3)** |   | **September 27  2002 (4)** |   | **January 3  2003 (5)** |   |
|-------------------------|--------|------------------------|--------|-----------------------|--------|----------------------------|--------|-------------------------|--------|
| High                    |   | $                      | 24.00  |                  | $      | 24.00                      |   | $                       | 22.00  |   | $ | 17.00 |   |
| Low                     |   | 17.20                  |   | 19.00                 |   | 13.00                      |   | 12.20                   |   |
|                         |        |                        |        |                       |        |                            |        |                         |        |  |  |  |  |

 

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(1)          Our common stock began trading on theNASDAQ National Market® on March 6, 2003. Previously, our stock was reported bythe OTC Bulletin Board®. The high common stock price for this quarter wasreported by the NASDAQ National Market®. The low common stock price for thisquarter was reported by the OTC Bulletin Board®. The over-the-counterquotations reflect inter-dealer prices, without retail mark-up, mark-down orcommission and may not necessarily represent actual transactions.

(2)          The high and low prices are the high andlow bid prices per share of our common stock, as reported by the NASDAQNational Market®.

(3)          Prices are high and low over-the-counterbid prices per share of our common stock, as reported by the Pink Sheets®quotation service. The over-the-counter quotations reflect inter-dealer prices,without retail mark-up, mark-down or commission and may not necessarilyrepresent actual transactions.

(4)          The high price is the highover-the-counter Pink Sheets® quotation service composite bid price per shareof our common stock, and the low price is the low over-the-counter bid priceper share of our common stock, as reported by the OTC Bulletin Board®. Theover-the-counter quotations reflect inter-dealer prices, without retailmark-up, mark-down or commission and may not necessarily represent actualtransactions.

 

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(5)          The high and low prices are the high andlow over-the-counter bid prices per share of our common stock, as reported bythe OTC Bulletin Board®. The over-the-counter quotations reflect inter-dealerprices, without retail mark-up, mark-down or commission and may not necessarilyrepresent actual transactions.

 

***Holders***

 

The number ofholders of our voting common stock at January 2, 2004 was approximately 499.This number does not include all beneficial owners of our common stock held inthe name of a nominee.

 

***Dividends***

 

We have not paid acash dividend since the first quarter of fiscal 1994 and do not intend to paycash dividends in the near term.  Ourcredit facility has specified restrictions on dividend payments. For a moredetailed discussion, see Note 8, “Credit Facilities” of the Notes toConsolidated Financial Statements in Item 8 of this report.

 

***Recent Sales of Unregistered Equity Securities***

 

We did not sellany unregistered equity securities during 2003.

 

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**ITEM6.  SELECTED FINANCIAL DATA**

*(In millions, except per share data)*

 

As of February 1,2002, in connection with our emergence from bankruptcy protection, we adoptedfresh-start reporting pursuant to the guidance provided by the AmericanInstitute of Certified Public Accountants Statement of Position (“SOP”) 90-7, *FinancialReporting by Entities in Reorganization Under the Bankruptcy Code*.In connection with the adoption of fresh-start reporting, we created a newentity for financial reporting purposes. The effective date of our emergencefrom bankruptcy is considered to be the close of business on February 1, 2002for financial reporting purposes. In the tables below, the periods presentedthrough February 1, 2002 have been designated “Predecessor Company” and theperiods subsequent to February 1, 2002 have been designated “SuccessorCompany.”

 

Effective December29, 2001, we changed our fiscal year to the 52/53 weeks ending on the Fridayclosest to December 31 from the 52/53 weeks ending on the Friday closest toNovember 30.

 
|                                                         |   | **Successor Company**            |    | **Predecessor Company**                     |
|--------------------------------------------------------------|--------|----------------------------------|---------|---------------------------------------------|
| **OPERATIONS  SUMMARY**                                      |   | **Year Ended  January 2,  2004** |    | **Eleven  Months  Ended  January 3,  2003** |   | **One  Month  Ended  February 1,  2002** |   | **One  Month  Ended  December 28,  2001** |   | **Year Ended  November 30,  2001** |   | **Year Ended  December 1,  2000 (a)** |   | **Year Ended  December 3,  1999 (b)** |   |
| Revenue                                                      |   | $                                | 2,501.2 |                                        | $ | 3,311.6 |   | $ | 349.9 |   | $ | 308.3 |   | $ | 4,041.6 |   | $ | 3,090.8 |   | $ | 2,292.0 |   |
| Gross  profit (loss)                                         |   | 176.3                            |    | 149.0                                       |   | 11.1 |   | .2 |   | 97.7 |   | (94.7) | (c) | 111.7 |   |
| Equity  in income of unconsolidated affiliates               |   | 25.5                             |    | 27.4                                        |   | 3.1 |   | 1.3 |   | 17.9 |   | 13.1 |   | 12.4 |   |
| Operating  income (loss)                                     |   | 150.5                            |    | 131.7                                       |   | 9.4 |   | (31.8 | ) | 18.3 |   | (1,351.5) | (d) | 85.5 |   |
| Extraordinary  item –gain on debt discharge             |   | —                           |    | —                                      |   | 567.2 | (e) | — |   | — |   | — |   | — |   |
| Net  income (loss)                                           |   | 42.1                             |    | 37.7                                        |   | 522.2 |   | (26.0 | ) | (85.0 | ) | (859.4 | ) | 48.3 |   |
| Income  per common share:                                    |   |                             |    |                                        |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                        |   | 1.68                             |    | 1.51                                        |   | — | (f) | — | (f) | — | (f) | — | (f) | — | (f) |
| Diluted                                                      |   | 1.66                             |    | 1.51                                        |   | — | (f) | — | (f) | — | (f) | — | (f) | — | (f) |
| Shares  used to compute income per common share:             |   |                             |    |                                        |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                        |   | 25.0                             |    | 25.0                                        |   | — | (f) | — | (f) | — | (f) | — | (f) | — | (f) |
| Diluted                                                      |   | 25.3                             |    | 25.0                                        |   | — | (f) | — | (f) | — | (f) | — | (f) | — | (f) |
| **FINANCIAL POSITION SUMMARY AT END  OF PERIOD­­** |   |                             |    |                                        |   |   |   |   |   |   |   |   |   |   |   |
| Current  assets                                              |   | $                                | 789.0   |                                        | $ | 731.1 |   | $ | 1,072.4 |   | $ | 1,191.8 |   | $ | 1,203.0 |   | $ | 1,581.3 |   | $ | 595.7 |   |
| Total  assets                                                |   | 1,410.5                          |    | 1,415.4                                     |   | 1,783.4 |   | 2,133.9 |   | 2,140.4 |   | 2,656.0 |   | 1,267.0 |   |
| Current  liabilities                                         |   | 538.4                            |    | 595.1                                       |   | 973.2 |   | 621.7 |   | 627.1 |   | 1,969.6 |   | 437.9 |   |
| Liabilities  subject to compromise                           |   | —                           |    | —                                      |   | — |   | 1,950.3 |   | 1,928.2 |   | — |   | — |   |
| Long-term  debt                                              |   | —                           |    | —                                      |   | 40.0 |   | — |   | — |   | 692.9 |   | 100.0 |   |
| Minority  interests                                          |   | 48.5                             |    | 56.1                                        |   | 78.0 |   | 75.8 |   | 76.5 |   | 79.7 |   | 103.1 |   |
| Stockholders’  equity (deficit)                         |   | 660.9                            |    | 596.8                                       |   | 550.0 |   | (576.9 | ) | (551.5 | ) | (464.9 | ) | 403.1 |   |

 

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(a)          On July 7, 2000, we acquired RE&C in atransaction accounted for as a purchase; accordingly, the results of operationsof RE&C have been included in our operations from the date of theacquisition. See Items 1 and 7 of this report and Note 3, “Acquisition,Reorganization Case and Fresh-start Reporting” of the Notes to ConsolidatedFinancial Statements in Item 8 of this report.

 

(b)         On March 22, 1999, we acquired a majorityeconomic interest in the government and environmental services businesses ofCBS Corporation (now Viacom, Inc.) in a transaction accounted for as apurchase; accordingly, the results of operations of the acquired businesseshave been included in our operations from the date of the acquisition.

 

(c)          Gross loss during the year ended December 1,2000 includes $141.0 of adjustments to the allocation of the RE&C purchaseprice to the net assets acquired for items that we believe were additionalmisstatements, based on subsequent

 

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information we obtained, but that were notincluded in an arbitration claim against the Sellers, including adjustments toestimates at completion on contracts and increases in self-insurance reserves.

 

(d)         Operating loss during the year ended December1, 2000 includes adjustments for items discussed in (c) and a $444.1 impairmentof an arbitration claim receivable from the Sellers. In addition, we analyzedfor impairment the assets acquired in the acquisition of RE&C, including goodwill.Based upon the results of our analysis, we recorded an impairment of $747.5 ofacquired assets.

 

(e)          Extraordinary item consists of the gain ondebt discharge of $1,460.7, less the value of New Common Stock and warrantsissued of $550.0, net of income tax of $343.5, upon emergence from bankruptcy.See Note 3, “Acquisition, Reorganization Case and Fresh-start Reporting” of theNotes to Consolidated Financial Statements in Item 8 of this report.

 

(f)            Net income per share is not presented forthese periods as it is not meaningful because of the revised capital structureof the Successor Company.

 

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**ITEM 7****.          MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

*Thefollowing management’s discussion and analysis of our financial condition andresults of operations should be read in conjunction with the consolidated financialstatements and notes thereto in Item 8 of this report. The following analysiscontains forward-looking statements about our future revenues, operatingresults and expectations. See “Note Regarding Forward-Looking Statements” for adiscussion of the risks and uncertainties affecting these statements and “RiskFactors” in Item 1 of this report.*

 

References in our management’s discussion and analysis to 2003 are forthe year ended January 2, 2004. References to 2002 are for the one month endedFebruary 1, 2002, which preceded our emergence from bankruptcy protection,combined with the post-emergence eleven months ended January 3, 2003.References to 2001 are for the year ended November 30, 2001.

 

**OVERVIEW**

 

We are an international provider of a broad range of design,engineering, construction, construction management, facilities and operationsmanagement, environmental remediation and mining services. We offer our variousservices separately or as part of an integrated package throughout the lifecycle of a customer’s project. We serve our clients through six business units:Power, Infrastructure, Mining, Industrial/Process, Defense and Energy &Environment.

 

We are subject to numerous factors, whichhave an impact on our ability to obtain new work. The Power business unit isdependent on the domestic demand for new power generating facilities and themodification of existing power facilities. Infrastructure is affected by theavailability of public sector funding for transportation projects andavailability of bonding. Mining is affected by demand for coal and otherextractive resources. The Industrial/Process business unit is affected ingeneral by the growth prospects in the U.S. economy and more directly by thecapital spending plans of its large customer base. Finally, the Defense andEnergy & Environment business units are almost entirely dependent on thespending levels of the U.S. government, in particular, the Departments ofEnergy and Defense.

 

**CRITICAL ACCOUNTINGPOLICIES AND RELATED CRITICAL ACCOUNTING ESTIMATES**

 

Our accounting and financial reporting policies are in conformity withaccounting principles generally accepted in the United States of America(“GAAP”). The preparation of our consolidated financial statements inconformity with GAAP requires us to make estimates and judgments that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the balance sheet date, and the reported amounts ofrevenue and expenses during the reporting period. Although our significantaccounting policies are described in Note 1, “Significant AccountingPolicies” of the Notes toConsolidated Financial Statements in Item 8 of this report, the followingdiscussion is intended to describe those accounting policies most critical tothe preparation of our consolidated financial statements. The development andselection of the critical accounting policies, related critical accountingestimates and the disclosure below have been reviewed with the audit reviewcommittee of our board of directors.

 

***Revenue recognition.***We follow the provisions of SOP 81-1, *Accounting for Performance of Construction-Type andCertain Production-Type Contracts.* We recognize revenue onengineering and construction-type contracts using the percentage-of-completionmethod of accounting whereby revenue is recognized as performance under thecontract progresses. For most of our fixed-price and target-price contracts, weuse a cost-to-cost approach to measure progress towards completion. Under thecost-to-cost method, we make periodic estimates of our progress towardscompletion by comparing costs incurred to date with total estimated contractcosts. Revenue is then calculated on a cumulative basis (project-to-date) asthe total contract value multiplied by the current percentage complete. Revenuefor a reporting period is calculated as the cumulative project-to-date revenueless project revenue recognized in prior periods. However, we defer profitrecognition on fixed-price and certain target-priced construction contractsuntil progress is sufficient to estimate the probable outcome, which

 

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generallydoes not occur until the project is at least 20% complete. Fixed-pricecontracts accounted for 30% of our total revenue for the year ended January 2,2004.

 

For contracts that include significant materials or equipment costs, weuse an efforts expended method to measure progress towards completion based onlabor hours, labor dollars or some other measurement of physical completion.For certain long-term contracts involving mining and environmental andhazardous substance remediation, progress towards completion is measured usingthe units of production method. Revenues from reimbursable or cost-plus contractsare recognized on the basis of costs incurred during the period plus the feeearned. Service-related contracts, including operations and maintenancecontracts, are accounted for over the period of performance, in proportion tothe costs of performance, evenly over the period or over units of production.Award fees associated with U.S. government contracts are initially estimatedand recognized based on prior historical performance until the client hasconfirmed the final award fee. Performance-based incentive fees are included incontract value when a basis exists for the reasonable prediction of performancein relation to established targets. When a basis for reasonable prediction doesnot exist, performance-based incentive fees are recognized when actuallyawarded by the client.

 

Revenue recognition for construction and engineering contracts alsodepends on whether the contract or project is determined to be an “at-risk” oran “agency” relationship between the client and us. Determination of the relationshipis based on characteristics of the contract or the relationship with theclient. For “at-risk” relationships, the gross revenue and the costs ofmaterials, services, payroll, benefits, non-income tax and other costs arerecognized in our statement of operations. For “agency” relationships, where weact as an agent for our client, only fee revenue is recognized, meaning thatdirect project costs and the related reimbursement from the client are netted.

 

The use of the percentage-of-completion method for revenue recognitionrequires the use of various estimates, including among others, the extent ofprogress towards completion, contract completion costs and contract revenue.Profit margins to be recognized are dependent upon the accuracy of estimated engineeringprogress, materials quantities, achievement of milestones and other incentives,penalty provisions, labor productivity and other cost estimates. Such estimatesare dependent upon various judgments we make with respect to those factors, andsome are difficult to accurately determine until the project is significantlyunderway. Progress is evaluated each reporting period. We recognize adjustmentsto profitability on contracts utilizing the percentage-of-completion method ona cumulative basis, when such adjustments are identified. We have a history ofmaking reasonably dependable estimates of the extent of progress towardscompletion, contract revenue and contract completion costs on our long-termengineering and construction contracts. However, due to uncertainties inherentin the estimation process, it is possible that actual completion costs may varyfrom estimates. In limited circumstances, we may use the completed-contractmethod for specific contracts for which reasonably dependable estimates cannotbe made or for which inherent hazards make the estimates doubtful.

 

***Change orders and claims.*** Once contract performance is underway, we often experience changes inconditions, client requirements, specifications, designs, materials andexpectations regarding the period of performance. The majority of such changespresent minimal or no financial risk to us. Generally, a “change order” will benegotiated with our customer to modify the original contract to approve boththe scope and price of the change. Occasionally, however, disagreements ariseregarding changes, their nature, measurement, timing and other characteristicsthat impact costs and revenue under the contract. When a change becomes a pointof dispute between our customer and us, we then consider it as a claim.

 

Costs related to change orders and claims are recognized when they areincurred. Change orders are included in total estimated contract revenue whenit is probable that the change order will result in a bona fide addition tocontract value and can be reliably estimated. Claims are included in totalestimated contract revenue, only to the extent that contract costs related tothe claim have been incurred, when it is probable that the claim will result ina bona fide addition to contract value and can be reliably estimated. No profitis recognized on claims until final settlement occurs. This can lead to asituation where costs are recognized in one period and revenue is recognizedwhen customer agreement is obtained or claim resolution occurs, which can be insubsequent periods. We recognized $35.2 million, $15.4 million and $31.7million of claim revenue during 2003, 2002 and 2001,

 

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respectively.Substantially all claims were settled and collected during each respectiveperiod for which claim revenue was recognized. Additional contract relatedcosts, including subcontractors’ share of claim settlements, of $9.0 millionand $2.6 million for 2003 and 2002, respectively, reduced the impact onoperating income of the claim settlements disclosed above.

 

***Estimated losses on uncompleted contracts and changes in contractestimates.*** Werecord provisions for estimated losses on uncompleted contracts in the periodin which such losses are identified. The cumulative effect of revisions tocontract revenue and estimated completion costs are recorded in the accountingperiod in which the amounts become evident and can be reasonably estimated.These revisions include such items as the effects of change orders and claims,warranty claims, liquidated damages or other contractual penalties, adjustmentsfor audit findings on U.S. government contracts and contract closeoutsettlements. It is possible that there will be future and currently unknownsignificant adjustments to our estimated contract revenues, costs and grossmargins for contracts currently in process, particularly in the later stages ofthe contracts. These adjustments are common in the construction industry andinherent in the nature of our contracts. These adjustments could, depending onthe magnitude of the adjustments and/or the number of contracts beingcompleted, materially, positively or negatively, affect our operating resultsin an annual or quarterly reporting period.

 

***Goodwill.***EffectiveFebruary 1, 2002, in conjunction with fresh-start reporting, we used thepurchase method of accounting to allocate our reorganization value of $550million to our net assets, based on estimates of fair value, with the excessbeing recorded as goodwill. As of January 2, 2004, we have $359.9 million ofgoodwill. Pursuant to Statement of Financial Accounting Standards (“SFAS”) No.142, *Goodwilland Other Intangible Assets,*goodwillis no longer amortized but is to be tested for impairment at least annually. Weregularly evaluate whether events and circumstances have occurred which mayindicate a possible impairment of goodwill and perform the annual impairmenttest for all of our reporting units each October. In conducting the impairmenttest, we apply various techniques to estimate the fair value of our reportingunits. These techniques are inherently subjective, and the resulting values arenot necessarily representative of the values we might obtain in a sale of ourreporting units to a willing third party. Based on our annual review of therecoverability of goodwill as of October 31, 2003, we determined that ourgoodwill is not impaired. However, our businesses are cyclical and subject tocompetitive pressures. Therefore it is possible that the goodwill values of ourbusiness units could be adversely impacted in the future by these or otherfactors and that a significant impairment adjustment, which would reduceearnings and potentially affect debt covenants, could be required in suchcircumstances.

 

***Litigation claims and contingencies.*** In the normal course of business, we aresubject to a variety of contractual guarantees and litigation. In general,guarantees can relate to project scheduling, project completion, plantperformance or meeting required standards of workmanship. Most of ourlitigation involves us as a defendant in workers’ compensation, personalinjury, contract, environmental, environmental exposure, professional liabilityand other similar lawsuits. We maintain insurance coverage for some aspects ofour business and operations. In addition, we have elected to retain a portionof insured losses that may occur through the use of various deductibles, limitsand retentions under our insurance programs. This situation may subject us tosome future liability for which we are only partially insured, or completelyuninsured.

 

Government funded contracts are, and are expected to continue to be, asignificant part of our business. We derived 42% of our consolidated operatingrevenues in 2003 from contracts with the U.S. government. Allowable costs underU.S. government contracts are subject to audit by the government. To the extentthat these audits result in determinations that costs claimed as reimbursableare not allowable costs or were not allocated in accordance with federalregulations, we could be required to reimburse the government for amountspreviously received. We also have a number of U.S. government contracts whichextend beyond one year and for which government funding has not yet been approved.All U.S. government contracts and some foreign contracts are subject tounilateral termination at the convenience of the customer.

 

Estimating liabilities and costs associated with such claims,guarantees, litigation and audits and investigations requires judgment andassessment based on professional knowledge and experience of our management andlegal counsel. In accordance with SFAS No. 5, *Accountingfor Contingencies*, amounts are recorded as charges to earnings whenwe determine that it is probable that a liability has been incurred and the

 

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amountof loss can be reasonably estimated. The ultimate resolution of any suchexposure may vary from earlier estimates as further facts and circumstances becomeknown. We determine the level of reserves to establish for both insurancerelated claims that are known and have been asserted against us, as well as forinsurance-related claims that are believed to have been incurred based onactuarial analysis, but have not yet been reported to our claims administratorsas of the respective balance sheet dates. We include any adjustments to suchinsurance reserves in our consolidated results of operations.

 

**OTHER SIGNIFICANTACCOUNTING POLICIES AND TERMS**

 

The following summary of significantaccounting policies and terms is presented to provide a better understanding ofour industry, our consolidated financial statements and discussion and analysisof our results of operations and financial position and liquidity.

 

**Newwork**. New work represents the monetary value of acontract entered into with a client that is binding on both parties andreflects the revenue, or equity in income of unconsolidated affiliates,expected to be recognized from that contract.

 

**Backlog.** Backlog represents the total accumulation ofnew work awarded less the amount of revenue, or equity in income ofunconsolidated affiliates, recognized to date on contracts at a specific pointin time. It comprises the total value of awarded contracts that are notcomplete and the revenue, or equity in income of unconsolidated affiliates,that is expected to be recognized over the remaining life of the projects inprocess. We believe backlog is a key predictor of future earnings potential.Although backlog reflects business that we consider to be firm, cancellationsor reductions may occur and may reduce backlog and future revenues. We have asignificant number of clients that consistently extend or add to the scope ofexisting contracts. We do not include any estimate of this ongoing work inbacklog until awarded.

 

There are three unique aspects of ourapproach to recording new work and backlog:

 

·                  ***Government contracts***-Most of our government contracts cover several years. However, funding for thecontracts is subject to annual appropriations by Congress. To account for therisk that future amounts may not be appropriated, we only include the mostimmediate two years of forecast revenue in our backlog. Therefore, as timepasses and appropriations occur, additional new work is recorded on existinggovernment contracts. At January 2, 2004, U.S. government funded contractscomprised approximately 42% of our total backlog.

 

·                  ***Mining contracts***-Mining contracts span varying periods of time up to the life of the resource.For new work and backlog purposes, we limit the amount recorded to five years.Similar to our practices with government contracts, as time passes, werecognize additional new work as commitments for that future work are firmedup. At January 2, 2004, mining contracts comprised approximately 13% of ourtotal backlog.

 

·                  ***At-risk and agency contracts***- The amount of new work and related backlogrecognized depends on whether the contract or project is determined to be an“at-risk” or “agency” relationship between the client and us. For “at-risk”relationships, the expected gross revenue is included in new work and backlog.For relationships where we act as an agent for our client, only the expectednet fee revenue is included in new work and backlog. At January 2, 2004, agencycontracts comprised approximately 7% of our total backlog.

 

**Jointventures and equity investments.** Joint ventures andequity investments are utilized when contracts are executed jointly throughpartnerships and joint ventures with unrelated third parties.

 

·                  ***Joint ventures***. Alarge part of our work on large construction and engineering projects isperformed through unincorporated joint ventures with one or more partners. Forthose in which we control the joint

 

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venture by contract terms or other means, theassets, liabilities and results of operations of the joint venture are fullyconsolidated in our financial statements, and the minority interests of thirdparties are separately deducted in our financial statements. For thoseconstruction joint ventures in which we do not control the joint venture, wereport our pro rata portion of revenue and costs, but the balance sheetreflects only our net investment in the project. Joint ventures that do notinvolve construction or engineering activities, and we do not control the jointventure, are reported using the equity method of accounting in which we recordour portion of the joint venture’s net income (loss) as equity in income (loss)of unconsolidated affiliates and our investment on the balance sheet reflectsour original investment, at cost, as adjusted for our equity in the income(loss) of the joint venture.

 

·                  ***Partially owned subsidiarycompanies.*** For incorporated ventures in which we have acontrolling interest, the assets, liabilities and results of operations of thesubsidiary company are fully consolidated in our financial statements, and theminority interests of third parties are separately deducted in our financialstatements. However, for those in which we do not have a controlling interestbut do have significant influence, we use the equity method of accounting inwhich we record our portion of the subsidiary company’s net income (loss) asequity in income (loss) of unconsolidated affiliates and our investment on thebalance sheet reflects our original investment, at cost, as adjusted for ourequity in the income (loss) of the subsidiary company.

 

**Normalprofit.** Normal profit is an accounting concept thatresults from the requirement that an acquiring company record all contracts ofan acquiree that are in-process at the date of acquisition, includingconstruction contracts, at fair value based on estimated normal profit margins.As such, an asset for favorable contracts or a liability for unfavorablecontracts is recorded in purchase accounting. These assets or liabilities arethen reduced based on revenues recorded over the remaining contract lives,effectively resulting in the recognition of a reasonable or normal profit marginon contract activity performed subsequent to the acquisition. Because of theacquisition of RE&C and the below market profit status of many of thesignificant acquired contracts, we recorded significant liabilities in purchaseaccounting. The reduction of these liabilities has a significant impact on ourrecorded net income, but has no impact on our cash flows. Most of the contractswith normal profit attributes are now completed and only minor amounts remainto be recognized annually.

 

**Accountsreceivable.** Our accounts receivable represent amountsbilled to clients that have not been paid. On large fixed-price constructioncontracts, contract provisions may allow the client to withhold from 5% to 10%of invoices until the project is completed, which may be several months oryears. These amounts withheld, referred to as retentions, are recorded asreceivables and are separately disclosed in the financial statements.

 

**Unbilledreceivables.** Unbilled receivables is comprised ofcosts incurred on projects, together with any profit recognized on projectsusing the percentage-of-completion method, and represents work performed butnot yet billed pursuant to contract terms or billed after the accounting periodcut-off occurred.

 

**Billingsin excess of cost and estimated earnings on uncompleted contracts.**This represents amounts actually billed to clients, and perhaps collected, inexcess of costs and profits incurred on a project and, as such, is reflected asa liability. Also, in limited situations, we negotiate substantial advancepayments as a contract condition. These advance payments are reflected inbillings in excess of cost and estimated earnings on uncompleted contracts.Provisions for losses on contracts, reclamation reserves on mining contractsand reserves for punch-list costs, demobilization and warranty costs oncontracts that have achieved substantial completion and reserves for audit andcontract closing adjustments on U.S. government contracts are also included inbillings in excess of cost and estimated earnings on uncompleted contracts.

 

**Estimateat completion.** An estimate at completion is afinancial forecast of a project that indicates the best current estimate oftotal revenues and profits at the point in time when the project will becompleted. If a project estimate at completion indicates that a project willincur a loss, a provision for the entire loss on the contract is recognized atthat time.

 

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**Generaland administrative expenses** include executive salariesand corporate functions, such as legal services, human resources and financeand accounting.

 

**Self-insurancereserves.** We establish and maintain self-insurancereserves for uninsured business risks. We carry substantial premium-paid, traditionalinsurance for our various business risks; however, we do self-insure the lowerlevel deductibles for workers’ compensation and general, automobile andprofessional liability. Most of our self-insurance is underwritten by BroadwayInsurance Company, a wholly owned captive Bermuda insurance subsidiary. Assuch, we carry self-insurance reserves on our balance sheet. The currentportion of the self-insurance reserves is included in other accruedliabilities.

 

**Minorityinterest** reflects the equity investment by thirdparties in certain subsidiary companies and joint ventures that we haveconsolidated in our financial statements, and is comprised primarily of BNFL’sinterest in the Westinghouse Businesses.

 

**Governmentcontract costs** are incurred under some of ourcontracts, primarily in our Defense and Energy & Environment businessunits. We have contracts with the U.S. government that contain provisionsrequiring compliance with the U.S. Federal Acquisition Regulations and the U.S.Cost Accounting Standards. The allowable costs we charge to those contracts aresubject to adjustment upon audit and negotiation by various agencies of theU.S. government. Audits and negotiations of indirect costs are substantiallycomplete through 2000. Audits of 2001 indirect costs are in progress. We arealso in the process of preparing cost impact statements as required under theU.S. Cost Accounting Standards for 1999 through 2003, which are subject toaudit and negotiation. We have also prepared and submitted to the U.S. governmentcost impact statements for 1989 through 1998 for which we believe noadjustments are necessary. We believe that the results of the indirect costaudits and negotiations and the cost impact statements will not result in amaterial change to our financial position, results of operations or cash flows.

 

**Pensionand post-retirement benefit plans** include certainplans for which we assumed sponsorship through (1) the acquisition by BNFL andus of the Westinghouse Businesses and (2) our acquisition from the Sellers ofRE&C. We assumed sponsorship of contributory defined benefit pension plansthat cover employees of the Westinghouse Businesses. We make actuariallycomputed contributions as necessary to adequately fund benefits for theseplans. We are also the sponsors of an unfunded plan to provide health carebenefits for employees of Old MK who retired before July 1, 1993, includingtheir surviving spouses and dependent children. Employees who retired from OldMK after July 1, 1993 are not eligible for subsidized post-retirement healthcare benefits. We also provide benefits under company-sponsored retiree healthcare and life insurance plans for substantially all employees of theWestinghouse Businesses. The retiree health care plans require retiree contributionsand contain other cost sharing features. The retiree life insurance planprovides basic coverage on a noncontributory basis.

 

**AdjustedEarnings Before Interest, Taxes, Depreciation and Amortization (“AdjustedEBITDA”)** is presented because it is a measure commonlyused in financial analysis in credit and equity markets to evaluate operatingliquidity. In addition, management includes it in the various performancemeasures that are routinely produced and analyzed as a measure of liquidity.Adjusted EBITDA is not a measure of operating performance computed inaccordance with GAAP, and should not be considered as a substitute for earningsfrom operations, net income or loss, cash flows from operating activities orother statements of operations or cash flow data prepared in conformity withGAAP, or as a GAAP measure of profitability or liquidity. In addition, AdjustedEBITDA may not be comparable to similarly titled measures of other companies.

 

Our calculation of Adjusted EBITDA representsearnings, adjusted to exclude non-cash stock compensation and non-cashreorganization items, but before interest, taxes, depreciation and amortizationand normal profit. Components of Adjusted EBITDA are presented below:

 

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| **(In millions)**                                         |   | **January 2,  2004** | ** ** | **Year ended  January 3, 2003** | ** ** |
|-----------------------------------------------------------|--------|----------------------|------------|---------------------------------|------------|
| Net income                                                |   | $                    | 42.1       |                            | $          | 559.9 |   |
| Non-cash stock compensation and  reorganization items (a) |   | 6.2                  |       | (531.2                          | )          |
| Taxes                                                     |   | 46.9                 |       | 26.1                            |       |
| Interest expense (b)                                      |   | 34.4                 |       | 28.0                            |       |
| Depreciation and amortization(c)                          |   | 31.3                 |       | 56.3                            |       |
| Normal profit                                             |   | (2.3                 | )          | (30.9                           | )          |
| Total (d)                                                 |   | $                    | 158.6      |                            | $          | 108.2 |   |

 

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(a)          Includes $6.2 million of stock compensationexpense in 2003 and for 2002 includes the extraordinary gain on debt dischargeof $567.2 million, net of tax of $343.5 million, offset by $36.0 million ofnon-cash reorganization charges.

(b)         Interest expense for the year ended January 2,2004 includes the write-off of deferred financing fees of $9.8 million thatoccurred in the fourth quarter of 2003 in connection with refinancing theSenior Secured Revolving Credit Facility.

(c)          Depreciation and goodwill amortizationincludes $10.1 million for the year ended January 2, 2004 and $30.1 million forthe year ended January 3, 2003 of depreciation on equipment used on a large damand hydropower construction project in the Philippines, which we completed in2003. We began selling the equipment during the third quarter of 2002. Themajority of the equipment was sold at January 2, 2004.

(d)         Adjusted EBITDA for the year ended January 2,2004 includes cash reorganization charges of $(4.9) million, which providedminimal tax benefit. For the year ended January 3, 2003, Adjusted EBITDAincludes $(36.1) million, after tax benefit of $3.1 million for cashreorganization charges.

 

**RECONCILIATIONOF ADJUSTED EBITDA TO NET CASH PROVIDED BY OPERATING ACTIVITIES**

 

We believe that net cash provided byoperating activities is the financial measure calculated and presented inaccordance with GAAP that is most directly comparable to Adjusted EBITDA. Thefollowing table reconciles Adjusted EBITDA to net cash provided by operatingactivities for each of the periods for which Adjusted EBITDA is presented.

 
|                                                                                |   | **Year ended**       |       |
|-------------------------------------------------------------------------------------|--------|----------------------|------------|
| **(In millions)**                                                                   |   | **January 2,  2004** | ** ** | **January 3,  2003** | ** ** |
| Adjusted EBITDA                                                                     |   | $                    | 158.6      |   | $ | 108.2 |   |
| Tax expense                                                                         |   | (46.9                | )          | (26.1 | ) |
| Interest expense (a)                                                                |   | (34.4                | )          | (28.0 | ) |
| Reorganization items                                                                |   | 4.9                  |       | 39.2 |   |
| Cash paid for reorganization items                                                  |   | (9.9                 | )          | (39.6 | ) |
| Amortization and write-off of deferred  financing loan fees                         |   | 19.6                 |       | 11.7 |   |
| Deferred income taxes                                                               |   | 43.1                 |       | 31.2 |   |
| Minority interest in income of subsidiaries                                         |   | 21.9                 |       | 21.7 |   |
| Equity in income of unconsolidated  affiliates less dividends received              |   | (17.1                | )          | (18.9 | ) |
| Gain on sale of assets, net                                                         |   | (7.7                 | )          | (5.4 | ) |
| Changes in net operating assets and  liabilities                                    |   | (52.5                | )          | (14.6 | ) |
| Cash provided by operating activities                                               |   | $                    | 79.6       |   | $ | 79.4 |   |
| Cash provided by operating activities for  the eleven months ended  January 3, 2003 |   |                 |       | $ | 72.8 |   |
| Plus: Cash provided by operating activities for the month ended  February 1, 2002   |   |                 |       | 6.6 |   |
| Cash provided by operating activities for  the twelve months ended January 3, 2003  |   |                 |       | $ | 79.4 |   |

 

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(a)                                  Includesthe write-off of deferred financing fees of $9.8 million that occurred in thefourth quarter of 2003 in connection with refinancing the Senior SecuredRevolving Credit Facility.

 

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**REORGANIZATIONCASE AND FRESH-START REPORTING**

 

On May 14, 2001, Washington GroupInternational and several but not all of its direct and indirect subsidiariesfiled voluntary petitions to reorganize under Chapter 11 of the U.S. BankruptcyCode in the U.S. Bankruptcy Court for the District of Nevada (Case No.BK-N-01-31627). The various legal entities that filed for bankruptcy arecollectively referred to hereafter as the “Debtors.” The individual bankruptcycases were administered jointly. Each of the Debtors continued to operate itsbusiness and manage its property as a debtor-in-possession pursuant to sections1107 and 1108 of the U.S. Bankruptcy Code during the pendency of the cases. Fora more detailed discussion, see our current report on Form 8-K filed May 29,2001.

 

On December 21, 2001, the bankruptcy courtentered an order confirming the Plan of Reorganization. For a more detaileddiscussion, see our current report on Form 8-K filed January 4, 2002.

 

On the January 25, 2002 (the “EffectiveDate”), we emerged from bankruptcy protection pursuant to our Plan ofReorganization. We also entered into a secured $350 million, 30-month revolvingcredit facility to fund our working capital requirements and obtained bondingcapacity to take on new projects. Under our Plan of Reorganization, on theEffective Date, all our equity securities existing prior to the Effective Datewere canceled and extinguished; we issued an aggregate 25,000,000 shares of ourNew Common Stock; we issued warrants to purchase an additional aggregate8,520,424 shares of New Common Stock; we filed an amended and restatedcertificate of incorporation and adopted amended and restated bylaws; weadopted new stock option plans and granted options under those plans for anaggregate 4,417,000 shares of New Common Stock, including options granted toDennis R. Washington to purchase an aggregate 3,224,100 shares of New CommonStock; and we entered into various other agreements.

 

During the pendency of the bankruptcy cases,we continued to negotiate a settlement of our outstanding litigation with theSellers with respect to the RE&C acquisition. We entered into the RaytheonSettlement regarding the issues and disputes between the parties, whichsettlement was incorporated into our Plan of Reorganization. See also Note 3,“Acquisition, Reorganization Case and Fresh-start Reporting” of the Notes toConsolidated Financial Statements in Item 8 of this report.

 

Under the Raytheon Settlement, the Sellersagreed that, with respect to their bankruptcy claim, the Sellers would beconsidered unpaid, unsecured creditors having rights in the unsecured creditorclass, but that, upon completion of our reorganization, they would waive anyrights to receive any distributions to be given to unsecured creditors withallowed claims. In exchange, we agreed to dismiss all litigation against theSellers related to the acquisition, and to discontinue the purchase priceadjustment and binding arbitration process. We released all claims based on anyact occurring prior to our emergence from bankruptcy protection, including allclaims against the Sellers, their affiliates and their directors, officers,employees, agents and specified professionals. The Sellers released all claimsbased on any act occurring prior to our emergence from bankruptcy protection,including any claims related to any contracts or projects not assumed by usduring the bankruptcy cases, against us and our directors, officers, employees,agents and professionals. No cash was exchanged as a result of the settlement.

 

In addition, under a services agreemententered into as a part of the Raytheon Settlement, the Sellers agreed to directthe process for resolving pre-petition claims asserted against us in thebankruptcy case relating to any contract or project that we rejected and thatinvolved some form of support arrangement from the Sellers. We agreed to assistthe Sellers in settling or litigating various claims related to those rejectedprojects. We also agreed to complete work as requested by the Sellers on thoserejected projects, and to be reimbursed on a cost-reimbursable basis. TheSellers may, with respect to the rejected projects described above, pursue orsettle any of our claims against project owners, contractors or other thirdparties and will retain any resulting proceeds, except that for specifiedprojects, recoveries in excess of amounts paid by the Sellers will be returnedto us.

 

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As of February 1, 2002, we adoptedfresh-start reporting pursuant to the guidance provided by SOP 90-7. Inconnection with the adoption of fresh-start reporting, we created a new entityfor financial reporting purposes. The effective date of our emergence frombankruptcy protection is considered to be the close of business on February 1,2002 for financial reporting purposes. The periods presented through February1, 2002 have been designated “Predecessor Company” and the periods subsequentto February 1, 2002 have been designated “Successor Company.”

 

These events are discussed in greater detailin Note 3, “Acquisition, Reorganization Case and Fresh-start Reporting” of theNotes to Consolidated Financial Statements in Item 8 of this report and arediscussed in our annual reports on Form 10-K for the fiscal years endedDecember 1, 2000, November 30, 2001 and January 3, 2003.

 

**YEAR-ENDCHANGE**

 

We have changed our fiscal year from a52/53-week year ending on the Friday closest to the end of November to a52/53-week year ending on the Friday closest to December 31. This change becameeffective on December 29, 2001. The one-month transition period ended December28, 2001, is one of the financial periods presented in Item 8 of this report.

 

**BUSINESS UNIT NEWWORK AND BACKLOG**

 

New work for each business unit, whichrepresents additions to backlog for the period, is presented below:

 
|                      |   | **Three  months ended** |       | **Twelve  months ended** |       |
|---------------------------|--------|-------------------------|------------|--------------------------|------------|
| **NEW WORK(In millions)** |   | **January 2,  2004**    | ** ** | **January 3,  2003**     | ** ** | **January 2,  2004** | ** ** | **January 3,  2003** | ** ** |
| Power                     |   | $                       | 96.1       |                     | $          | 225.8 |   | $ | 647.7 |   | $ | 880.3 |   |
| Infrastructure            |   | 262.4                   |       | 79.9                     |       | 916.7 |   | 479.0 |   |
| Mining                    |   | 108.0                   |       | 45.9                     |       | 265.3 |   | 117.2 |   |
| Industrial/Process        |   | 69.8                    |       | 162.3                    |       | 429.7 |   | 541.9 |   |
| Defense                   |   | 161.5                   |       | 341.4                    |       | 500.2 |   | 712.4 |   |
| Energy & Environment  |   | 54.3                    |       | 195.8                    |       | 420.7 |   | 571.8 |   |
| Other                     |   | (4.6                    | )          | (9.0                     | )          | 5.3 |   | 16.3 |   |
| Total new work            |   | $                       | 747.5      |                     | $          | 1,042.1 |   | $ | 3,185.6 |   | $ | 3,318.9 |   |

 

New work awarded in the year ended January 2,2004 for businesses held for sale totaled $18.0 million. New work awarded inthe three and twelve months ended January 3, 2003 to businesses held for saletotaled $8.7 million and $159.1 million, respectively.

 

Backlog at January 2, 2004 and January 3,2003 consisted of:

 
| **BACKLOG  (In millions)** |   | **January 2, 2004** |    | **January 3, 2003** |   |
|----------------------------|--------|---------------------|---------|---------------------|--------|
| Power                      |   | $                   | 437.9   |                | $      | 302.4 |   |
| Infrastructure             |   | 1,107.5             |    | 766.1               |   |
| Mining                     |   | 435.2               |    | 279.8               |   |
| Industrial/Process         |   | 259.2               |    | 357.7               |   |
| Defense                    |   | 641.6               |    | 647.5               |   |
| Energy & Environment   |   | 441.1               |    | 386.8               |   |
| Other                      |   | —              |    | 14.8                |   |
| Total backlog              |   | $                   | 3,322.5 |                | $      | 2,755.1 |   |

 

II-13

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***New work and backlog***

 

At January 2, 2004, our backlog was $3,322.5million, an increase of $120.7 million and $567.4 million from the thirdquarter and the beginning of 2003, respectively. Backlog on governmentcontracts includes only two years’ worth of the portions of such contracts thatare currently funded or which management is highly confident will be funded. Inthis regard, the reported backlog at January 2, 2004 excludes approximately$713 million of government contracts in progress for work to be performedbeyond December 2005. Approximately $1.9 billion, or 56%, of backlog at January2, 2004 is expected to be recognized as contract revenue or as equity in incomeof unconsolidated affiliates in 2004. Our backlog at the end of 2003 consistedof approximately 58% cost-type and 42% fixed-price contracts compared with 56%cost-type and 44% fixed-price contracts at the end of 2002.

 

During the three months ended January 2,2004, we recorded $747.5 million of new work, $120.7 million more thanrecognized as revenue or as equity income from our unconsolidated affiliates.The Power business unit’s new work during the fourth quarter of $96.1 millionconsisted of $65.1 million of modification services, $20.2 million ofengineering services and $10.8 million of new generation power work. TheInfrastructure business unit recorded $262.4 million of new work during thefourth quarter, including $228.9 million of new construction work, principallyconsisting of work with the Transatlantic Programs Center of the USACOEservicing Iraq, Afghanistan and Kuwait (“USACOE task orders”) and $22.5 millionof engineering work orders. The Mining business unit recorded $108.0 million ofnew work during the fourth quarter, including $74.5 million related to acontract for site development and contract mining services for a gold andsilver mine in central Mexico. The Industrial/Process business unit, whichcontinues to be impacted by the general economic slowdown and delays in clientspending, recorded $69.8 million of new work during the fourth quarter, themajority of which related to integrated services work. The Defense businessunit recorded $161.5 million of new work, including $132.3 million of awardsfor threat reduction and $28.5 million for infrastructure projects. New workfor the Energy & Environment business unit of $54.3 million included $26.7million of awards for management services, $10.8 million for consulting servicesand awards of $16.8 million for energy projects.

 

New work awards for 2003 totaled $3,185.6million. Major awards in 2003 for the Power business unit included a $177.8million award for a new power generation project, $95.3 million derived fromfour projects purchased in the RE&C transaction which were originallyfixed-price contracts but were converted during 2001 to cost-reimbursablecontracts (the “Reformed Contracts”), and $100.0 million from a customer formodification services. Under the Reformed Contracts, the Sellers remainedresponsible for the performance of the contracts and, as such, continued tofund the construction of the projects. See Note 3, “Acquisition, ReorganizationCase and Fresh-start Reporting” of the Notes to Consolidated Financial Statementsin Item 8 of this report. These projects are now complete. During 2003, ourInfrastructure business unit recorded significant awards of $344.0 millionrelated to the USACOE task orders, $310.1 million from the awards of threedesign-build projects and $82.2 million for the construction of a highwayinterchange in Nevada. Significant awards in 2003 for the Mining business unitincluded $93.3 million for a phosphate mining project in Canada, $74.5 millionrelated to a contract for site development and contract mining services for agold and silver mine in central Mexico and $26.0 million for a reclamationproject in the State of Washington. The remainder of the new work for Miningprimarily relates to additions to existing contracts. The Industrial/Processbusiness unit recorded new work during 2003 of $429.7 million, of which $255.1million related to various integrated project contracts. The Defense businessunit recorded $500.2 million of new work in 2003, of which $455.3 millionrelated to threat reduction projects. New work awards for the Energy &Environmental business unit in 2003 included $182.3 million related tomanagement services projects, $147.5 million for renegotiated energy projectsand $90.9 million of new projects in consulting services.

 

**RESULTSOF OPERATIONS**

 

On January 25, 2002, we emerged from Chapter11 bankruptcy proceedings and implemented fresh-start reporting effectiveFebruary 1, 2002. Accordingly, all assets and liabilities at the Effective Datewere adjusted to reflect their respective fair values. The consolidatedfinancial statements after that date are those of a new reporting entity andare not comparable to the pre-emergence periods. However, to better describethe results of a

 

II-14

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complete operating cycle, we have combinedthe eleven months ended January 3, 2003 (post-emergence) with the month endedFebruary 1, 2002 (pre-emergence), and presented reorganization items asbankruptcy-related items, net of tax. Comparisons of pre-emergence financialdata to post-emergence financial data are not meaningful. The following tableis included solely to facilitate our analysis and discussion of results ofoperations.

 
|                                                                                |   | **Pro forma  (a)Year ended** |    |
|-------------------------------------------------------------------------------------|--------|------------------------------|---------|
| **(In millions)**                                                                   |   | **January 2,  2004**         |    | **January 3,  2003** |   | **November  30,  2001** | ** ** |
| Backlog                                                                             |   |                         |    |   |   |   |   |
| Beginning backlog                                                                   |   | $                            | 2,755.1 |   | $ | 3,378.7 |   | $ | 5,659.4 |   |
| New work                                                                            |   | 3,185.6                      |    | 3,318.9 |   | 2,968.3 |   |
| Backlog sold or adjusted                                                            |   | (91.5                        | )       | (250.5 | ) | (1,020.7 | ) |
| Revenue and equity income recognized                                                |   | (2,526.7                     | )       | (3,692.0 | ) | (4,059.5 | ) |
| Ending backlog                                                                      |   | $                            | 3,322.5 |   | $ | 2,755.1 |   | $ | 3,547.5 |   |
|                                                                                |   |                         |    |   |   |   |   |
| Revenue                                                                             |   | $                            | 2,501.2 |   | $ | 3,661.5 |   | $ | 4,041.6 |   |
| Gross profit                                                                        |   | $                            | 176.3   |   | $ | 160.1 |   | $ | 97.7 |   |
| Equity in income of unconsolidated  affiliates                                      |   | 25.5                         |    | 30.5 |   | 17.9 |   |
| General and administrative expenses                                                 |   | (57.5                        | )       | (52.3 | ) | (56.9 | ) |
| Goodwill amortization                                                               |   | —                       |    | — |   | (14.6 | ) |
| Integration and merger costs                                                        |   | —                       |    | — |   | (18.8 | ) |
| Restructuring charges                                                               |   | —                       |    | (.6 | ) | (7.0 | ) |
| Other operating income                                                              |   | 6.2                          |    | 3.4 |   | — |   |
| Operating income                                                                    |   | 150.5                        |    | 141.1 |   | 18.3 |   |
| Investment income                                                                   |   | 1.8                          |    | 1.3 |   | 9.2 |   |
| Interest expense                                                                    |   | (24.6                        | )       | (28.0 | ) | (56.8 | ) |
| Write-off of deferred financing fees                                                |   | (9.8                         | )       | — |   | — |   |
| Other income (expense), net                                                         |   | (2.1                         | )       | 1.3 |   | (10.5 | ) |
| Income (loss) before income taxes, minority  interests and bankruptcy related items |   | 115.8                        |    | 115.7 |   | (39.8 | ) |
| Income tax (expense) benefit                                                        |   | (46.9                        | )       | (49.9 | ) | 18.0 |   |
| Minority interests in income of  consolidated subsidiaries                          |   | (21.9                        | )       | (21.7 | ) | (15.5 | ) |
| Income (loss) before bankruptcy related  items                                      |   | 47.0                         |    | 44.1 |   | (37.3 | ) |
| Reorganization items, net of tax                                                    |   | (4.9                         | )       | (51.4 | ) | (47.7 | ) |
| Extraordinary item: debt discharge, net of  tax                                     |   | —                       |    | 567.2 |   | — |   |
| Net income (loss)                                                                   |   | $                            | 42.1    |   | $ | 559.9 |   | $ | (85.0 | ) |

 

----

(a)          For an explanation of pro forma adjustments,see “Reconciliation of GAAP to Pro forma Summary Financial Data” providedbelow.

 

**RECONCILIATIONOF GAAP TO PRO FORMA SUMMARY FINANCIAL DATA**

 

Our financial results for theyears ended January 2, 2004, January 3, 2003 and November 30, 2001 presentedand discussed herein are pro forma in nature and reflect the following proforma adjustments:

 

**Theresults for the year ended January 2, 2004 are adjusted as follows:**

•                  The results arereclassified for the effects of accrued reorganization items of $4.9 million,which resulted from professional fees and expenses related to the bankruptcyproceedings. The tax benefit associated with these expenses was only minimal.

 

II-15

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**The results for the year ended January 3,2003 are adjusted as follows:**

•                  The results ofoperations for the year ended January 3, 2003 combine the results of thereorganized company for the eleven months ended January 3, 2003 withpre-emergence results for the one month ended February 1, 2002.

•                  The effects ofaccrued reorganization items, including “fresh-start” accounting to reflect thefinancial position at fair value of the newly reorganized company on February1, 2002, are presented as reorganization items, net of tax. The reorganizationitems consisted of charges to earnings of $(36.0) million, and professionalfees and expenses related to the bankruptcy proceeding of $(39.2) million,which together totaled $(75.2) million, or $(51.4) million after tax.

 

**The results for the year ended November 30,2001 are adjusted as follows:**

•                  The effects ofaccrued reorganization items, including professional fees and expenses relatedto the bankruptcy proceedings of $(54.7) million and net charges to earnings of$(1.8) million, which together totaled $(56.5) million, are presented asreorganization items, net of tax.

 
| **(In  millions)**                                                           |   | **Year ended  January 2, 2004** |    | **Adjustments** |   | **Year ended  January 2, 2004  (Pro forma)** |   |
|------------------------------------------------------------------------------|--------|---------------------------------|---------|-----------------|--------|----------------------------------------------|--------|
| Revenue                                                                      |   | $                               | 2,501.2 |            | $      | —                                       |   | $ | 2,501.2 |   |
| Gross profit                                                                 |   | $                               | 176.3   |            | $      | —                                       |   | $ | 176.3 |   |
| Equity in income of unconsolidated  affiliates                               |   | 25.5                            |    | —          |   | 25.5                                         |   |
| General and administrative expenses                                          |   | (57.5                           | )       | —          |   | (57.5                                        | )      |
| Other operating income                                                       |   | 6.2                             |    | —          |   | 6.2                                          |   |
| Operating income                                                             |   | 150.5                           |    | —          |   | 150.5                                        |   |
| Investment income                                                            |   | 1.8                             |    | —          |   | 1.8                                          |   |
| Interest expense                                                             |   | (24.6                           | )       | —          |   | (24.6                                        | )      |
| Write-off of deferred financing fees                                         |   | (9.8                            | )       | —          |   | (9.8                                         | )      |
| Other income (expense), net                                                  |   | (2.1                            | )       | —          |   | (2.1                                         | )      |
| Income before income taxes, minority  interests and bankruptcy related items |   | 115.8                           |    | —          |   | 115.8                                        |   |
| Reorganization items                                                         |   | (4.9                            | )       | 4.9             |   | —                                       |   |
| Income tax expense                                                           |   | (46.9                           | )       | —          |   | (46.9                                        | )      |
| Minority interests in income of  consolidated subsidiaries                   |   | (21.9                           | )       | —          |   | (21.9                                        | )      |
| Income before bankruptcy related items                                       |   | 42.1                            |    | 4.9             |   | 47.0                                         |   |
| Reorganization items, net of tax                                             |   | —                          |    | (4.9            | )      | (4.9                                         | )      |
| Net income                                                                   |   | $                               | 42.1    |            | $      | —                                       |   | $ | 42.1 |   |

 

II-16

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| **(In millions)**                                                            |   | **Successor Company  Eleven months  ended  January 3, 2003** |          | **Predecessor Company  One month  ended  February 1, 2002** |   | **Adjustments** |   | **Twelve months  ended  January 3, 2003  (Pro forma)** |         |
|------------------------------------------------------------------------------|--------|--------------------------------------------------------------|---------------|-------------------------------------------------------------|--------|-----------------|--------|--------------------------------------------------------|--------------|
| Revenue                                                                      |   | $                                                            |  3,311.6 |                                                        | $      |  349.9     |   | $                                                      |  — |   | $ |  3,661.5 |   |
| Gross profit                                                                 |   | $                                                            |  149.0   |                                                        | $      |  11.1      |   | $                                                      |  — |   | $ |  160.1 |   |
| Equity in income of unconsolidated  affiliates                               |   | 27.4                                                         |          | 3.1                                                         |   | —          |   | 30.5                                                   |         |
| General and administrative expenses                                          |   | (48.1                                                        | )             | (4.2                                                        | )      | —          |   | (52.3                                                  | )            |
| Restructuring charges                                                        |   | —                                                       |          | (.6                                                         | )      | —          |   | (.6                                                    | )            |
| Other operating income                                                       |   | 3.4                                                          |          | —                                                      |   | —          |   | 3.4                                                    |         |
| Operating income                                                             |   | 131.7                                                        |          | 9.4                                                         |   | —          |   | 141.1                                                  |         |
| Investment income                                                            |   | .9                                                           |          | .4                                                          |   | —          |   | 1.3                                                    |         |
| Interest expense                                                             |   | (26.8                                                        | )             | (1.2                                                        | )      | —          |   | (28.0                                                  | )            |
| Other income (expense), net                                                  |   | 1.8                                                          |          | (.5                                                         | )      | —          |   | 1.3                                                    |         |
| Income before income taxes, minority  interests and bankruptcy related items |   | 107.6                                                        |          | 8.1                                                         |   | —          |   | 115.7                                                  |         |
| Reorganization items                                                         |   | (3.1                                                         | )             | (72.1                                                       | )      | 75.2            |   | —                                                 |         |
| Income tax (expense) benefit                                                 |   | (46.2                                                        | )             | 20.1                                                        |   | (23.8           | )      | (49.9                                                  | )            |
| Minority interests in income of  consolidated subsidiaries                   |   | (20.6                                                        | )             | (1.1                                                        | )      | —          |   | (21.7                                                  | )            |
| Income (loss) before bankruptcy related  items                               |   | 37.7                                                         |          | (45.0                                                       | )      | 51.4            |   | 44.1                                                   |         |
| Reorganization items, net of tax                                             |   | —                                                       |          | —                                                      |   | (51.4           | )      | (51.4                                                  | )            |
| Extraordinary item: debt discharge, net of  tax                              |   | —                                                       |          | 567.2                                                       |   | —          |   | 567.2                                                  |         |
| Net income                                                                   |   | $                                                            |  37.7    |                                                        | $      |  522.2     |   | $                                                      |  — |   | $ |  559.9 |   |

 
| **(In  millions)**                                                           |   | **Year ended  November 30, 2001** |    | **Adjustments** |   | **Year ended  November 30, 2001  (Pro forma)** |   |
|------------------------------------------------------------------------------|--------|-----------------------------------|---------|-----------------|--------|------------------------------------------------|--------|
| Revenue                                                                      |   | $                                 | 4,041.6 |            | $      | —                                         |   | $ | 4,041.6 |   |
| Gross profit                                                                 |   | $                                 | 97.7    |            | $      | —                                         |   | $ | 97.7 |   |
| Equity in income of unconsolidated  affiliates                               |   | 17.9                              |    | —          |   | 17.9                                           |   |
| General and administrative expenses                                          |   | (56.9                             | )       | —          |   | (56.9                                          | )      |
| Goodwill amortization                                                        |   | (14.6                             | )       | —          |   | (14.6                                          | )      |
| Integration and merger costs                                                 |   | (18.8                             | )       | —          |   | (18.8                                          | )      |
| Restructuring charges                                                        |   | (7.0                              | )       | —          |   | (7.0                                           | )      |
| Operating income                                                             |   | 18.3                              |    | —          |   | 18.3                                           |   |
| Investment income                                                            |   | 9.2                               |    | —          |   | 9.2                                            |   |
| Interest expense                                                             |   | (56.8                             | )       | —          |   | (56.8                                          | )      |
| Other income (expense), net                                                  |   | (10.5                             | )       | —          |   | (10.5                                          | )      |
| Income before income taxes, minority  interests and bankruptcy related items |   | (39.8                             | )       | —          |   | (39.8                                          | )      |
| Reorganization items                                                         |   | (56.5                             | )       | 56.5            |   | —                                         |   |
| Income tax (expense) benefit                                                 |   | 26.8                              |    | (8.8            | )      | 18.0                                           |   |
| Minority interests in income of  consolidated subsidiaries                   |   | (15.5                             | )       | —          |   | (15.5                                          | )      |
| Income before bankruptcy related items                                       |   | (85.0                             | )       | 47.7            |   | (37.3                                          | )      |
| Reorganization items, net of tax                                             |   | —                            |    | (47.7           | )      | (47.7                                          | )      |
| Net loss                                                                     |   | $                                 | (85.0   | )               | $      | —                                         |   | $ | (85.0 | ) |

 

II-17

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**2003 COMPARED TO 2002**

 

***Revenue and operating income***

 

Revenue for 2003 declined $1,160.3, or 32%,compared to 2002 due to a number of anticipated events, including the completionof several major projects and the sale in October 2002 of theElectro-Mechanical Division (“EMD”) within the Energy & Environmentbusiness unit. The Power business unit experienced a decline in revenueprimarily from the completion of four power generation projects acquired in theRE&C acquisition. Revenue from the Infrastructure business unit declinedprimarily from the substantial completion of certain large projects, includinga dam and hydropower project in the Philippines. In addition, our Industrial/Processbusiness unit was affected by a weakness in the domestic and internationaleconomies, causing a reduction in demand and capital spending for our servicesin this market.

 

Although revenue declined, operating incomefor 2003 increased slightly by $9.4 million, or 7%, from 2002 primarily fromperformance incentives and lower than expected costs incurred by the Powerbusiness unit related to the completion of a steam generator replacementcontract and the settlement of contract claims and improved operatingperformance in the Infrastructure business unit. The Energy & Environmentbusiness unit experienced a decline in operating income primarily from the saleof EMD. Additionally, general and administrative expense increased in 2003primarily due to expense associated with the extension of our chairman’s stockoptions recognized in the fourth quarter. The overall decline in revenue fromprojects completed or near completion mentioned above had little impact onoperating income in 2002, as several of these major projects contributednominal operating earnings during 2002. Operating income included therecognition of normal profit of $2.3 million and $30.9 million in 2003 and2002, respectively, due to the completion of acquired contracts assigned normalprofit. Normal profit has no affect on our cash flows.

 

The diversification of our business may causemargins to vary between periods due to the inherent risks and rewards onfixed-price contracts causing unplanned gains and losses on contracts. Marginsmay also vary between periods due to changes in mix and timing of contractsexecuted by us, which contain various risk and profit profiles and are subjectto uncertainties inherent in the estimation process.

 

For a more detailed discussion of our revenueand operating income, see “Business Unit Results” later in our Management’sDiscussion and Analysis.

 

***Equity in income ofunconsolidated affiliates***

 

Equity in income of unconsolidated affiliatesfor 2003 declined $5.0 million from 2002. We account for MIBRAG mbH on theequity method. In 2002, the MIBRAG mbH mining venture in Germany, whichaccounts for a significant portion of the equity in income of unconsolidatedaffiliates, recognized a one-time award of power cogeneration credits, of whichour share was $6.0 million.

 

***General andadministrative expenses***

 

General and administrative expenses for 2003increased $5.2 million compared to 2002. On November 14, 2003, our chairman,Dennis R. Washington, agreed to continue to serve in that role through January2007. In return, our board of directors approved the extension of the term ofhis previously granted outstanding options to 2012. The exercise price ofcertain of his options was below our stock’s closing price at November 14,2003, giving rise to $6.2 million of stock compensation expense with acorresponding increase to additional paid-in capital.

 

***Other operatingincome (expense), net***

 

Other operating income (expense), net of $6.2million for 2003 included a gain of $4.9 million from the April 2003 sale ofthe Technology Center and wind-up of related contract issues, a gain of $3.2million from the sale of coal leases, a gain of $1.5 million from theresolution of certain contingent issues related to the October 2002 sale

 

II-18

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of EMD offset by a charge of $3.4 million related to a legalsettlement. In 2002, we recognized a gain of $3.4 million related to the saleof EMD.

 

***Interest expense***

 

Interest expense in 2003 declined $3.4million from 2002, primarily due to more favorable terms under our New CreditFacility that we entered into on October 9, 2003. Interest expense for 2003consisted of $9.7 million of amortization of deferred financing fees paid inconnection with the New Credit Facility and our Senior Secured Revolving CreditFacility and $14.9 million of cash and accrued interest expense consistingprimarily of letter of credit fees, commitment fees, fronting fees andadministrative fees paid to the agent bank. Deferred financing fees paid inconnection with the New Credit Facility are being amortized over the 48-monthterm of the facility. Letter of credit fees and commitment fees are recorded asinterest expense.

 

***Write-off ofdeferred financing fees***

 

On October 9, 2003, we entered into anagreement replacing our Senior Secured Revolving Credit Facility with a NewCredit Facility. In connection with the termination of the Senior SecuredRevolving Credit Facility, we wrote off the remaining unamortized balance ofthe related deferred financing fees totaling $9.8 million.

 

***Income tax expense***

 

The components of the effective tax rate for the various periods areshown in the table below:

 
|                                                      |   | **Successor  Company**          |       | **Predecessor  Company**                  |       |
|-----------------------------------------------------------|--------|---------------------------------|------------|-------------------------------------------|------------|
|                                                      |   | **Year ended  January 2, 2004** | ** ** | **Eleven months  ended  January 3, 2003** | ** ** | **One month  ended  February 1, 2002** | ** ** |
| Federal tax rate                                          |   | 35.0                            | %          | 35.0                                      | %          | 35.0 | % |
| State tax                                                 |   | 3.2                             |       | 3.5                                       |       | 2.8 |   |
| Nondeductible items                                       |   | 2.8                             |       | 3.0                                       |       | .4 |   |
| Foreign tax                                               |   | 1.3                             |       | 2.7                                       |       | — |   |
| Effective tax rate                                        |   | 42.3                            |       | 44.2                                      |       | 38.2 |   |
| Adjust for effect of bankruptcy and  reorganization items |   | (1.8                            | )          | (1.5                                      | )          | 7.5 |   |
| Pro forma effective tax rate (a)                          |   | 40.5                            | %          | 42.7                                      | %          | 45.7 | % |

 

----

(a)          The pro forma effective tax rate representsthe tax rate after removing the effects of bankruptcy and reorganization items.

 

The effective tax rate for the year ended January 2, 2004 decreasedcompared to the effective tax rate for the eleven months ended January3, 2003, primarily due to the impact of higher pre-tax earnings and lowernon-deductible items and foreign taxes. A higher level of pre-tax earnings reducesthe impact non-deductible items and foreign taxes have on the effective taxrate. The decrease in the effective tax rate for state taxes resulted from anincrease in the amount of foreign earnings not subject to state tax.

 

***Minority interests***

 

Minority interests in income of consolidatedsubsidiaries for 2003 increased by $0.2 million from 2002. The majority of ourminority interests relates to BNFL’s 40% ownership of the WestinghouseBusinesses that are included in the Energy & Environment business unit.Increases in income of our majority-owned subsidiaries cause an increase in theminority interest share of income from those operations.

 

II-19

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***Reorganization items***

 

During 2003, we recognized a charge of $4.9million as a result of estimated additional professional fees and expenses tobe incurred by the unsecured creditors’ committee to settle outstanding claimsin connection with our reorganization. During 2002, $75.2 million ofreorganization charges were recognized. This included $35.1 million inadjustments to reflect all assets and liabilities at their respective fairvalues in fresh-start reporting. The remainder of the reorganization items wasprimarily for professional fees incurred in connection with the bankruptcyproceedings, including the defense of the appeals to our Plan ofReorganization. Cash paid for reorganization items totaled $9.9 million and$39.6 million for 2003 and 2002, respectively.

 

***Extraordinary item***

 

During January 2002, an extraordinary gain of$567.2 million was recorded as a result of the discharge of liabilities of$1,460.7 million as part of our Plan of Reorganization, less the fair value ofNew Common Stock and warrants issued of $550.0 million and income taxes of $343.5million.

 

**2002COMPARED TO 2001**

 

As of February 1, 2002, inconnection with our emergence from bankruptcy protection, we adoptedfresh-start reporting and created a new entity for financial reportingpurposes. Accordingly, our results of operations subsequent to February 1, 2002are not comparable to the periods prior to February 1, 2002. As a result of thenon-comparability between 2002 and 2001, the following comparisons of revenueand operating income include separate discussions of significant transactionsand events for each period.

 

***2002 revenue andoperating income***

 

Revenue for 2002 was $3,661.5 million. ThePower, Defense and Energy & Environment business units generated strong,consistent revenue during 2002 primarily from continuing work on new powergeneration projects acquired as part of the RE&C acquisition, increases infunded scope requirements of chemical demilitarization and defense constructioncontracts and favorable performance on Department of Energy management servicecontracts. Revenue during 2002 was impacted negatively by the Infrastructurebusiness unit’s inability to obtain historical levels of new work during thependency of our bankruptcy and by the Industrial/Process business unit due to asoftening of the domestic and international economies and downturn in thetelecommunications market.

 

Operating income for 2002 was $141.1 million,driven by strong performance in the Power, Defense and Energy & Environmentbusiness units resulting from the sources of favorable revenue variancesdescribed above. During 2002, the Defense business unit successfully completeda chemical demilitarization project within the cost estimate and on schedule.As a result, we recognized additional profit of $8.9 million, including anequitable adjustment claim of $1.5 million. Operating income of the Energy& Environment business unit benefited from favorable performance fromDepartment of Energy management service contracts and the operations of EMDthrough October 2002. Operating income of the Infrastructure business unit for2002 was favorably impacted by profit of $26.6 million recognized on a lightrail project. However, that project was essentially offset by contract lossesof $23.4 million recorded for a Philippine dam and hydropower project.

 

During the fourth quarter of 2002, MIBRAG mbHsuccessfully negotiated amendments to the original agreement that had beenentered into with the German government in 1993. As a result of thosenegotiations, MIBRAG mbH recognized $13.0 million in operating income, of whichour portion was $6.5 million. In addition, during the fourth quarter, MIBRAGmbH recognized a $12.0 million one-time award of power cogeneration credits, ofwhich our portion was $6.0 million. MIBRAG mbH’s operating income was favorablyimpacted by coal production increases during the year.

 

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During the fourth quarter, we sold EMD, abusiness that designs and manufactures components for nuclear power use, whichhad been a part of the Energy & Environment business unit. We recognized a$3.4 million gain on the sale, which is reported as other operating income.

 

Included in operating income was therecognition of normal profit of $30.9 million for 2003, primarily related toInfrastructure projects. The recognition of normal profit had no effect on ourcash flows.

 

For a more detailed discussion of our revenueand operating income, see “Business Unit Results” below in our Management’sDiscussion and Analysis.

 

***2001 revenue andoperating income***

 

On May 14, 2001, we filed for protectionunder Chapter 11 of the U.S. Bankruptcy Code. During the remainder of 2001, weoperated under the direction of the U.S. Bankruptcy Court for the District ofNevada. Operations during those periods were impacted by the “Rejection,” asthat term is used in bankruptcy law, of certain contracts in process. Assetsrelated to those contracts in process, including accounts receivable andunbilled receivables, were written-off through charges against income upon thedate of rejection. The charges to income were classified as “reorganizationitems” in the statement of operations. Related liabilities, includingliabilities subject to compromise, were not discharged (written-off) until theU.S. Bankruptcy Court approved our Plan of Reorganization and we emerged frombankruptcy protection on January 25, 2002. Any liabilities that arose as aresult of the rejection of contracts were accrued by charges against income(reorganization items) upon the date of rejection.

 

Revenue for 2001 was $4,041.6 million. TheRE&C operations acquired in 2000 contributed primarily to the Power,Infrastructure, Defense and, to a lesser extent, Industrial/Process businessunits’ revenues.

 

Operating income for 2001 was $18.3 million.Of that amount, the Energy & Environment and Defense business unitscontributed $54.8 million and $28.1 million, respectively. The Power andIndustrial/Process business units incurred operating losses during 2001 of $8.3million and $6.3 million, respectively. Additionally, operating income in 2001was decreased by $18.8 million of integration and merger costs, $7.0 million ofrestructuring costs and $14.6 million of goodwill amortization. During 2001,normal profit of $87.2 million was recognized. The recognition of normal profithad no impact on our cash flows. During the second half of 2001, we implementedoverhead reduction strategies to support lower future revenue than hadoriginally been anticipated when RE&C was acquired.

 

During 2001, the Mining business unitrecognized $17.9 million in equity in income of unconsolidated affiliates,primarily from MIBRAG mbH.

 

***General andadministrative expenses***

 

General and administrative expenses for 2002were $52.3 million, a decline of $4.6 million from 2001. The reduction was aresult of the initiatives taken to reduce costs under our restructuring plan.

 

***Goodwillamortization***

 

Effective for our 2002 fiscal year, we ceasedamortization of goodwill upon the adoption of SFAS No. 142. Goodwillamortization during 2001 was primarily due to the amortization of goodwillarising from the acquisition of the Westinghouse Businesses.

 

II-21

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***Integration andmerger costs***

 

Integration and merger costs were $18.8million for 2001. These costs related to the integration of RE&C into ourbusinesses and were principally comprised of incremental legal, accounting andconsulting services. There were no such costs in 2002.

 

***Investment income***

 

Investment income declined $7.9 million forthe 2002 fiscal year from 2001 as a result of lower interest rates combinedwith lower available cash balances for investment.

 

***Interest expense***

 

Interest expense for 2002 consisted of $12.1million of amortization of bank fees paid primarily at the closing of thesecured revolving credit facility entered into in connection with our emergencefrom bankruptcy protection on January 25, 2002 (the “Senior Secured RevolvingCredit Facility”) and $15.9 million of cash interest expense consistingprimarily of letter of credit fees, commitment fees on available undrawnamounts under the Senior Secured Revolving Credit Facility and interest onfunded debt. Interest expense for 2002 was high relative to borrowings incurredunder our Senior Secured Revolving Credit Facility due to the significantfinancing costs incurred in obtaining the facility. Such costs were beingamortized over the 30-month term of the facility. During the bankruptcyproceedings, the accrual of interest under the previous credit facility wasstayed. Therefore, contractual interest of $7.1 million was not recorded inJanuary 2002 (pre-emergence).

 

Interest expense incurred from May 14, 2001through November 30, 2001 consisted primarily of amortization of prepaid bankfees from costs related to the RE&C Financing Facilities, and SeniorUnsecured Notes and costs related to the Debtor-in-Possession (“DIP”) Facility.For a description of these facilities and notes, see Note 8, “CreditFacilities” of the Notes to Consolidated Financial Statements in Item 8 of thisreport. Interest expense incurred during 2001, but prior to May 14, 2001,included interest incurred on Senior Unsecured Notes and outstanding borrowingsunder the RE&C Financing Facilities to fund substantial working capitalrequirements of the acquired RE&C contracts. We ceased accruing interest onthe RE&C Financial Facilities and Senior Unsecured Notes upon our filingfor relief under Chapter 11 of the U.S. Bankruptcy Code on May 14, 2001 sincethe lenders’ claims were then subject to compromise. Contractual interest notrecorded during 2001 was $48.2 million. See Note 8, “Credit Facilities” of theNotes to Consolidated Financial Statements in Item 8 of this report.

 

***Other income(expense), net***

 

Other income (expense), net for 2002consisted primarily of a $2.8 million distribution received from the conversionto a stock company from a mutual insurance company of an insurance carrier thatprovides our employee long-term disability coverage. In connection with theconversion, the distribution was received following the insurance company’sinitial public offering during the first quarter of 2002.

 

Other income (expense), net for 2001 included$(3.5) million in costs associated with our World Trade Center office destroyedin the September 11, 2001 terrorist attacks.

 

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***Income tax expense***

 

Thecomponents of the effective tax rate for the various periods are shown in thetable below:

 
|                                |   | **Successor Company**                      |   | **Predecessor  Company**                |   |
|-------------------------------------|--------|--------------------------------------------|--------|-----------------------------------------|--------|
|                                |   | **Eleven months  ended  January 3,  2003** |   | **One month  ended  February 1,  2002** |   | **One month  ended  December 28,  2001** |   | **Year ended  November 30,  2001** |   |
| Federal tax rate                    |   | 35.0                                       | %      | 35.0                                    | %      | 35.0 | % | 35.0 | % |
| State tax                           |   | 3.5                                        |   | 2.8                                     |   | 3.9 |   | 5.5 |   |
| Nondeductible items                 |   | 3.0                                        |   | .4                                      |   | (3.1 | ) | (14.4 | ) |
| Foreign tax                         |   | 2.7                                        |   | —                                  |   | — |   | (1.3 | ) |
| Goodwill                            |   | —                                     |   | —                                  |   | .7 |   | 3.0 |   |
| Effective tax rate                  |   | 44.2                                       |   | 38.2                                    |   | 36.5 |   | 27.8 |   |
| Adjust for effect of bankruptcy and |   |                                       |   |                                    |   |   |   |   |   |
| reorganization items                |   | (1.5                                       | )      | 7.5                                     |   | 3.1 |   | 17.4 |   |
| Pro forma effective tax rate (a)    |   | 42.7                                       | %      | 45.7                                    | %      | 39.6 | % | 45.2 | % |

 

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(a)          The pro forma effective tax rate representsthe tax rate after removing the effects of bankruptcy and reorganization items.

 

We recognized a pre-tax loss in the yearended November 30, 2001 and the one month ended December 28, 2001. When theeffective tax rate is applied to a loss before taxes, a tax benefit results. Inthese periods, nondeductible expenses decreased the effective tax rate. Whenthe effective tax rate is applied to income before taxes, a tax expenseresults. In these periods, nondeductible expenses increase the effective taxrate.

 

***Minority interests***

 

The majority of our minority interestsrelates to BNFL’s 40% ownership of the Westinghouse Businesses that areincluded in the Energy & Environment business unit. Minority interests inthe income of consolidated subsidiaries for 2002 increased to $21.7 millionfrom $15.5 million for 2001 due to an increase in income from the WestinghouseBusinesses in 2002.

 

***Reorganization items***

 

During the month ended February 1, 2002, werecognized, as part of fresh-start reporting, charges that aggregated $35.1million for adjustments to reflect all assets and liabilities at theirrespective fair values. Other reorganization charges totaled $37.0 million andrepresent mainly professional fees incurred in connection with the bankruptcyproceedings. Duringthe eleven months ended January 3, 2003 (post-emergence), we recognized acharge of $3.1 million related to additional professional fees in connectionwith various bankruptcy-related issues, including the defense of the appeals ofour Plan of Reorganization. The tax benefit associated with thesereorganization items was $23.8 million, resulting in a net-of-tax charge of$51.4 million.

 

Reorganization items of $47.7 million, net oftax benefit of $8.8 million, for the year ended November 30, 2001 included$54.7 million of professional fees and other expenses related to the bankruptcyproceedings and $36.3 million of charges related to the impairment of assets ofrejected projects, offset by a net gain of $34.5 million from the liquidationof two international subsidiaries.

 

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***Extraordinary item***

 

During the first quarter of 2002, anextraordinary gain was recorded comprised of $1,460.7 million for the dischargeof liabilities as part of our Plan of Reorganization, offset by the fair valueof New Common Stock and warrants issued of $550.0 million and income taxes of$343.5 million.

 

**BUSINESSUNIT RESULTS*(Inmillions)***
|                                                |   | **Year ended  January 2,  2004** |    | **Year ended  January 3,  2003  (Pro forma)** |   | **Year ended  November 30,  2001** |   |
|-----------------------------------------------------|--------|----------------------------------|---------|-----------------------------------------------|--------|------------------------------------|--------|
| **Revenue**                                         |   |                             |    |                                          |   |                               |   |   |   |   |
| Power                                               |   | $                                | 511.8   |                                          | $      | 1,005.6                            |   | $ | 839.4 |   |
| Infrastructure                                      |   | 575.3                            |    | 772.0                                         |   | 940.3                              |   |
| Mining                                              |   | 84.2                             |    | 68.6                                          |   | 92.2                               |   |
| Industrial/Process                                  |   | 458.2                            |    | 638.7                                         |   | 957.2                              |   |
| Defense                                             |   | 506.1                            |    | 557.1                                         |   | 582.5                              |   |
| Energy & Environment                            |   | 368.2                            |    | 610.7                                         |   | 598.2                              |   |
| Intersegment, eliminations and other                |   | (2.6                             | )       | 8.8                                           |   | 31.8                               |   |
| Total revenue                                       |   | $                                | 2,501.2 |                                          | $      | 3,661.5                            |   | $ | 4,041.6 |   |
| **Operating income (loss)**                         |   |                             |    |                                          |   |                               |   |
| Power                                               |   | $                                | 39.0    |                                          | $      | 24.1                               |   | $ | (8.3 | ) |
| Infrastructure                                      |   | 30.4                             |    | 17.8                                          |   | 24.5                               |   |
| Mining                                              |   | 33.5                             |    | 32.4                                          |   | 27.5                               |   |
| Industrial/Process                                  |   | 7.2                              |    | 4.1                                           |   | (6.3                               | )      |
| Defense                                             |   | 49.9                             |    | 44.1                                          |   | 28.1                               |   |
| Energy & Environment                            |   | 67.1                             |    | 83.4                                          |   | 54.8                               |   |
| Intersegment and other unallocated  operating costs |   | (19.1                            | )       | (12.5                                         | )      | (45.1                              | )      |
| General and administrative expenses                 |   | (57.5                            | )       | (52.3                                         | )      | (56.9                              | )      |
| Total operating income                              |   | $                                | 150.5   |                                          | $      | 141.1                              |   | $ | 18.3 |   |

 

**RECONCILIATION OFGAAP SEGMENT INFORMATION TO PRO FORMA FINANCIAL INFORMATION**

 

GAAP requires us to report ourresults for the reorganized entity separately from those that existed prior tothe reorganization. Following is post-emergence segment information for theeleven months ended January 3, 2003 and pre-emergence segment information forthe month ended February 1, 2002, as well as pro forma combined segment informationfor the year ended January 3, 2003.

 

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| **(In millions)**                                   |   | **Eleven months ended  January 3, 2003** |    | **One month ended  February 1, 2002** |   | **Year ended  January 3, 2003  (Pro forma)** |   |
|-----------------------------------------------------|--------|------------------------------------------|---------|---------------------------------------|--------|----------------------------------------------|--------|
| **REVENUE**                                         |   |                                     |    |                                  |   |                                         |   |   |   |   |
| Power                                               |   | $                                        | 920.1   |                                  | $      | 85.5                                         |   | $ | 1,005.6 |   |
| Infrastructure                                      |   | 692.1                                    |    | 79.9                                  |   | 772.0                                        |   |
| Mining                                              |   | 63.3                                     |    | 5.3                                   |   | 68.6                                         |   |
| Industrial/Process                                  |   | 574.4                                    |    | 64.3                                  |   | 638.7                                        |   |
| Defense                                             |   | 495.0                                    |    | 62.1                                  |   | 557.1                                        |   |
| Energy & Environment                            |   | 560.3                                    |    | 50.4                                  |   | 610.7                                        |   |
| Intersegment, eliminations and other                |   | 6.4                                      |    | 2.4                                   |   | 8.8                                          |   |
| Total revenue                                       |   | $                                        | 3,311.6 |                                  | $      | 349.9                                        |   | $ | 3,661.5 |   |
| **OPERATING INCOME**                                |   |                                     |    |                                  |   |                                         |   |
| Power                                               |   | $                                        | 23.9    |                                  | $      | .2                                           |   | $ | 24.1 |   |
| Infrastructure                                      |   | 14.8                                     |    | 3.0                                   |   | 17.8                                         |   |
| Mining                                              |   | 29.2                                     |    | 3.2                                   |   | 32.4                                         |   |
| Industrial/Process                                  |   | 3.5                                      |    | .6                                    |   | 4.1                                          |   |
| Defense                                             |   | 42.2                                     |    | 1.9                                   |   | 44.1                                         |   |
| Energy & Environment                            |   | 77.8                                     |    | 5.6                                   |   | 83.4                                         |   |
| Intersegment and other unallocated  operating costs |   | (11.6                                    | )       | (.9                                   | )      | (12.5                                        | )      |
| General and administrative expense,  corporate      |   | (48.1                                    | )       | (4.2                                  | )      | (52.3                                        | )      |
| Total operating income                              |   | $                                        | 131.7   |                                  | $      | 9.4                                          |   | $ | 141.1 |   |

 

## **2003 COMPARED TO 2002**

 

***Power***

 

Revenue for 2003 declined $493.8 million, or49%, from 2002. The decline in revenue was primarily due to the winding downand completion of the four Reformed Contracts and the completion of twoemissions projects and a simple cycle project, partially offset by revenue fromthe start of a new power generation project and a steam generator replacementproject. Revenue from the four Reformed Contracts declined $419.1 million in2003 compared to 2002.

 

Operating income for 2003 increased $14.9million from 2002 primarily due to $15.2 million of earnings on the successfulearly completion of the second of two steam generator replacements as comparedto a $7.2 million loss from cost overruns on the first replacement in 2002.Additionally, in 2003, we earned $6.2 million in connection with a settlementand renegotiation of a plant modification contract and $6.2 million from a newsteam generator project. Operating income on the four Reformed Contracts and asimple cycle project declined $14.9 million in 2003 as compared to 2002 as aresult of the wind-up and completion of the projects. Operating income includedno normal profit in 2003 compared to $3.2 million recognized in 2002.

 

***Infrastructure***

 

Revenue for 2003 declined $196.7 million, or25%, from 2002. The decline in revenue was primarily attributable to thesubstantial completion in 2002 of a toll road project in Colorado, a Philippinedam and hydropower project and a large rail project in California. Revenue for2003 included $59.2 million of activity in the fourth quarter of 2003 from theUSACOE task orders under a new indefinite delivery, indefinite quantitycontract with the USACOE in Iraq, Afghanistan and Kuwait.

 

Operating income for 2003 increased $12.6million from 2002. Results for 2003 were positively impacted by increasedprofit projections on two large toll road projects in Colorado, the resolutionof a claim of $6.8 million

 

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(net of $7.0 million of additional contract related expenses) on aPhilippine dam and hydropower project, other claim and insurance settlements of$7.9 million (net of $2.0 million of additional contract expenses) and incomefrom the USACOE task orders. These positive results were partially offset bythe recognition of unfavorable contract adjustments of $6.3 million on a railproject in California, a highway project in Nevada and a pump station inNevada. Operating income of $17.8 million for 2002 included $26.6 million on alight rail project and $5.0 million primarily attributable to the recovery of aclaim on a completed construction project. Results for 2002 were negativelyimpacted by unfavorable contract adjustments of $23.4 million on the Philippinedam and hydropower project and contract adjustments on two highway projects of$5.1 million. Operating income for 2003 included $2.3 million from therecognition of normal profit compared to $25.5 million for the comparableperiod of 2002.

 

***Mining***

 

Revenue for 2003 increased $15.6 million, or23%, from 2002. The increase in revenue was due to work on new projects,including a phosphate mining project in Canada, increased activity at areclamation project in the State of Washington, a production support contractin Wyoming and a gold mine in Nevada.

 

Operating income for 2003 increased $1.1million from 2002. Operating income included $25.7 million and $30.5 million in2003 and 2002, respectively, from equity in income of unconsolidatedaffiliates, which is comprised primarily of our portion of the results ofoperations of the MIBRAG mbH mining venture in Germany. Our share of equityearnings from MIBRAG mbH declined $4.9 million in 2003 compared to 2002 as aresult of $12.0 million of income recognized by MIBRAG mbH in the fourthquarter of 2002, of which our share was $6.0 million, from a one-time award ofpower cogeneration credits. Favorable results from other mining operations in2003 accounted for the overall increase in operating income over the prioryear. Operating income for 2003 included a $3.2 million gain from the sale ofcoal leases during the fourth quarter of 2003, improved performance at twomining operations over the prior year and income from new projects.

 

***Industrial/Process***

 

Revenue for 2003 declined $180.5 million, or28%, from 2002. The decline was primarily due to the softness of the domesticand international economies and related reduction in capital spending by ourFortune 100 client base. Revenue was also down compared to 2002 as a result ofthe completion of a large, turnkey process facility as well as the completionof several large automotive contracts.

 

Operating income for 2003 increased $3.1million compared to 2002 primarily due to a combination of better utilizationof professional resources and a reduction in business unit overhead costspartially offset by a lower volume of work. In addition, operating income in2002 included the recognition of an unfavorable contract adjustment totaling$2.5 million on an international methanol plant construction project. Operatingincome included no normal profit in 2003 compared to $1.6 million recognized in2002.

 

***Defense***

 

Revenue for 2003 declined $51.0 million, or9%, from 2002. Revenue in 2003 declined $117.0 million due to the completion oftwo major construction projects in 2002 and by $29.5 million due to thecompletion of the closure activities on a chemical demilitarization project.These effects were offset by higher revenues of $72.0 million on the other fivechemical demilitarization projects as they transition from construction to thesystemization and operations phases of the projects, and $24.4 million fromcooperative threat reduction projects in the former Soviet Union, principallydue to the award of two new projects.

 

Operating income in 2003 increased $5.8million over the comparable period of 2002 and included $15.1 million from theincrease in scope and fees on four threat reduction operations and maintenancecontracts, an $8.0 million claim settlement on the closeout of a fixed-priceconstruction project, $5.6 million from an additional claim settlement and $4.4million favorable settlement of government indirect cost rates. Operatingincome in 2003 included a fourth quarter charge associated with unbillableindirect costs related to a recently completed

 

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chemical demilitarization project of $5.4million. The costs primarily related to the period December 2000 throughDecember 2003. In 2002, the Defense business unit negotiated a $7.2 millionsettlement in connection with reforming a construction contract and recognized$7.0 million of additional profit related to favorable progress on a chemicaldemilitarization contract, both obtained in the acquisition of RE&C. Inaddition, the Defense business unit successfully completed a chemicaldemilitarization project within the cost estimate and on schedule. As a result,we recognized additional profit of $8.9 million.

 

***Energy &Environment***

 

Revenue for 2003 declined $242.5 million, or40%, from 2002. The decline was the result of the sale in October 2002 of EMD,which had recognized revenue totaling $144.0 million in 2002, and the windingdown of a large construction contract and an environmental remediation contracttogether totaling $125.7 million.

 

Operating income for 2003 declined $16.3million from 2002. The decline was due to the sale of EMD which had operatingincome of $24.9 million in 2002, and a reduction of $7.0 million of operatingincome in 2003 from the winding down of a large cost-type contract beginning inthe second quarter of 2003. The renegotiation of a large cost-type contract in2003 resulted in a reduction of operating income of $9.4 million as compared to2002. Partially offsetting the decline in operating income was an increase of$19.5 million in 2003 from the renegotiation of two large operations,maintenance and management contracts.

 

***Intersegment andother***

 

Intersegment operating loss of $(19.1)million in 2003 primarily included residual costs from our non-union subsidiaryof $8.4 million and bonding fees of $5.3 million, a $5.4 million chargeresulting from an under accrual of employee benefits related to periods priorto our emergence from bankruptcy protection, a charge of $3.4 million relatedto a legal settlement, all partially offset by a gain of $4.9 million from thesale of the Technology Center.

 

Intersegment operating loss of $(12.5)million for 2002 includes the operations of the Technology Center, a businessheld for sale. It also includes residual costs from our non-union subsidiary of$7.0 million and bonding fees of $4.6 million, including amortization of thebonding facility fee paid upon emergence from bankruptcy protection.

 

**2002COMPARED TO 2001**

 

As of February 1, 2002, inconnection with our emergence from bankruptcy protection, we adoptedfresh-start reporting and created a new entity for financial reportingpurposes. Accordingly, our results of operations subsequent to February 1, 2002are not comparable to the periods prior to February 1, 2002. As a result of thenon-comparability between 2002 and 2001, the following comparisons of revenueand operating income include separate discussions of significant transactionsand events for each period.

 

***Power***

 

Revenue for 2002 was derived primarily fromcontinuing work on new power generation projects acquired as part of RE&C,steam generator replacement projects and operations and maintenance servicescontracts. Included in revenue was $544.5 million related to the four ReformedContracts.

 

On March 9, 2001, we suspended work on twolarge construction projects located in Massachusetts that were a part of theacquisition of RE&C. Although we were subsequently retained to participateon these two projects, our role during 2001 was significantly diminished.Approximately $437.1 million of revenue in 2002 is related to the four ReformedContracts acquired from the Sellers which were originally fixed-pricecontracts, but which were converted during 2001 to cost-reimbursable contracts.The Sellers remained responsible for the performance of the contracts and, assuch, continued to fund the construction of the projects. We were retained bythe Sellers on a cost-reimbursable basis and continued to provide constructionmanagement services on the projects.

 

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Operating income for 2002 was $24.1 million.The four Reformed Contracts generated income of $15.6 million beforeallocations of related overhead costs, and engineering services added another$10.1 million. During the year, we recognized a loss of $7.2 million from costoverruns on a steam generator replacement project. Operating income for theyear included the recognition of $3.2 million of normal profit. The recognitionof normal profit had no impact on our cash flows.

 

Operating loss for 2001 was $(8.3) millionand included recognition of normal profit of $26.4 million in 2001. However,upon conversion of the four Reformed Contracts to cost-reimbursable contracts,the recognition of normal profit was eliminated. Only fee income was recognizedfor the balance of the year. During 2001, the Power business unit recognizedlosses of $(11.4) million related to the completion of a significantinternational project which was acquired as part of the RE&C acquisitionand recognized cost overruns of $(9.0) million on a domestic nuclear facility.

 

***Infrastructure***

 

The Infrastructure business unit generatedrevenue of $772.0 million during 2002. Revenue during 2002 was impacted by theInfrastructure business unit’s inability to obtain historical levels of newwork during the pendency of our bankruptcy proceedings. Revenue was primarilygenerated from existing backlog. Significant sources of revenue includedcontinued work on the dam and hydropower project in the Philippines, the lightrail project in New Jersey, a variety of highway and other heavy constructionwork and engineering services projects.

 

Revenue for 2001 was $940.3 million dueprincipally to contracts acquired in the acquisition of RE&C and, inparticular, a large hydroelectric dam in the Philippines and a large light railproject in New Jersey.

 

Operating income was $17.8 million for 2002.During the year, we recognized operating income of $26.6 million on a lightrail project; however, unfavorable contract adjustments of $23.4 million wererecorded on the Philippine dam and hydropower project. In addition, werecognized $5.0 million in profit primarily attributable to the recovery of aclaim on a completed construction project. The remaining operating income wasgenerated by numerous construction and infrastructure services projects.Additional unfavorable contract adjustments were recognized during 2002 on twohighway projects of $5.1 million. Operating income for the year included therecognition of $25.5 million of normal profit, primarily from certain contractsobtained in the RE&C acquisition.

 

Operating income for 2001 was $24.5 million.Operating income included recognition of normal profit of $42.2 million,primarily on the hydroelectric dam and light rail projects referred to above. Operatingincome was impacted by the recognition of losses on fixed-price contractstotaling $(25.0) million.

 

***Mining***

 

Revenue during 2002 of $68.6 million wasgenerated predominantly by continuing work on mine projects and mine managementcontracts that existed during previous years. Revenue was negatively impactedby the completion of contracts in 2001 that were not replaced during 2002.

 

During 2002, we recognized operating incomeof $32.4 million. Operating income included $30.5 million during the year fromequity in income of unconsolidated affiliates, which is comprised primarily ofour portion of the results of operations of MIBRAG mbH. MIBRAG mbH successfullynegotiated amendments to the original agreement on transportation creditmatters that had been entered into with the German government in 1993. As aresult of those negotiations, MIBRAG mbH recognized $13.0 million in operatingincome, of which our portion was $6.5 million. In addition, during the fourthquarter, MIBRAG mbH recognized a $12.0 million one-time award of powercogeneration credits, of which our portion was $6.0 million. MIBRAG mbH’soperating income was also favorably impacted by coal production increasesduring the year and by the strengthening of the Euro as compared to the U.S. dollar.

 

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During 2001, we completed the acquisition ofan additional 17% of MIBRAG mbH for approximately $17.5 million, increasing ourownership to 50%. We financed the acquisition through dividends from MIBRAGmbH. Equity in income of unconsolidated affiliates was $17.9 million in 2001,reflecting the increased ownership interest of MIBRAG mbH.

 

***Industrial/Process***

 

The Industrial/Process business unit’srevenue during 2002 was $638.7 million as compared to $957.2 million in 2001and continued to be impacted by a combination of the softness of the domesticand international economies, the downturn in the telecommunications market andthe winding down of some significant projects. Some sectors of the Industrial/Processbusiness unit’s markets continued strong, including automotive, gas processingand biopharmaceuticals.

 

Operating income for 2002 was $4.1 million,reflecting the impact of economic factors described above. Reduced revenue waspartially offset by significant reductions in overhead costs, including theclosing of multiple offices, employee terminations and elimination of redundantcosts. Significant factors affecting the Industrial/Process business unit’soperating income during the year included the $4.0 million favorable resolutionof a long-standing contract claim, $(4.1) million in unfavorable contractadjustments on a contract and $(7.6) million in costs from under-utilization ofthe business unit’s professional engineering staff. Operating income for 2002included the recognition of $1.6 million of normal profit from certaincontracts obtained in the RE&C acquisition.

 

Operating loss for 2001 was $(6.3) milliondue to excess personnel costs as new work declined during the year, provisionsrelated to uncollectible receivables on certain contracts, restructuringcharges incurred to adjust the size of the business unit to reflect lowerlevels of activity expected in the future and higher overhead costs reflectinga full year of activity from the acquisition of RE&C.

 

***Defense***

 

The Defense business unit’s revenue for 2002was $557.1 million and was favorably impacted by increases in funded scoperequirements on four chemical demilitarization projects. These four chemicaldemilitarization contracts accounted for $462.2 million of the total revenuefor 2002. Defense threat reduction contracts in the former Soviet Unioncontributed $23.2 million. The remainder was generated by defenseinfrastructure services.

 

Revenue for 2001 was $582.5 million, of whichdefense threat reduction contracts contributed $477.4 million. In addition, amajor construction contract contributed $78.9 million during 2001.

 

Chemical demilitarization contracts produced$44.6 million in operating income during 2002, benefiting from the scopeexpansions previously described. During the year, the Defense business unitnegotiated settlements on a reformed construction contract and a chemicaldemilitarization contract, both obtained in the acquisition of RE&C, for atotal of $14.2 million. In addition, the Defense business unit successfullycompleted a chemical demilitarization project within the cost estimate and onschedule. As a result, we recognized additional profit of $8.9 million.

 

Operating income for 2001 of $28.1 millionwas primarily related to ongoing threat reduction contracts. Operating incomeincluded $10.5 million in 2001 as a result of the recognition of normal profitrelated to certain fixed-price contracts from the acquisition of RE&C. Inaddition, during 2001 the Defense business unit negotiated a $28.5 millionclaim settlement on the closeout of a fixed price construction project whichwas partially offset by $21.6 million of unfavorable contract adjustments onanother fixed price construction project.

 

***Energy & Environment***

 

The Energy & Environment business unitrecognized $610.7 million in revenue during 2002. EMD, which was sold onOctober 28, 2002, recognized $144.0 million in revenue for the year through thedate of sale.

 

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Remaining revenues were recognized primarilyfrom environmental construction contracts totaling $295.6 million during theyear and from Department of Energy management service contracts totaling $80.9million during the year.

 

Revenue for 2001 was $598.2 million.Department of Energy management service contracts were the primary sources ofrevenue and contributed approximately 80% of the operating income for 2001,with the balance from energy and environment projects, EMD and commercial businesses.Revenue reflected the completion of the construction phase of the WasteIsolation Pilot Project in New Mexico in 2001 and the start-up of theoperations phase of the project, which generated less revenue than did theconstruction phase.

 

Operating income for 2002 included $43.4million from our performance on Department of Energy management projects. OurDepartment of Energy management service contracts are “agency” contracts;therefore, revenue increases benefit operating income nearly dollar for dollar.EMD generated $24.9 million, and energy and environment projects generated$14.2 million during the year.

 

Operating income for 2001 was $54.8 million,reflecting increased earnings and higher award and incentive fees on certainprojects and increased volume and profitability on commercial contracts.Operating income included goodwill amortization of $13.7 million. Wediscontinued the amortization of goodwill in 2002 due to our adoption of SFASNo. 142 effective December 29, 2001.

 

***Intersegment and other***

 

Intersegment and other income for 2002includes the operations of the process technology development portion of theTechnology Center, a business held for sale. It also includes residual costs ofa non-union construction services center, bonding fees, including amortizationof the bonding facility fee paid upon emergence from bankruptcy and unallocatedinsurance costs.

 

Intersegment and other for 2001 consistedprimarily of integration and merger costs of $18.8 million, corporaterestructuring charges of $4.1 million, $3.7 million of residual costs of anon-union construction services center and $14.6 million in operating lossesfrom the Technology Center and international petroleum and chemical operationsthat were included in the liquidation of Washington International B.V. See Note3, “Acquisition, Reorganization Case and Fresh-start Reporting” of the Notes toConsolidated Financial Statements in Item 8 of this report.

 

**FINANCIAL CONDITION AND LIQUIDITY**

 

***Cash flows****(In millions)*

*** ***
| **Liquidity  and capital resources** |   | **Year ended  January 2, 2004** |   | **Year ended  January 3, 2003** |   |
|--------------------------------------|--------|---------------------------------|--------|---------------------------------|--------|
| Cash and cash equivalents            |   |                            |   |                            |   |
| Beginning of period                  |   | $                               | 171.2  |                            | $      | 138.2 |   |
| End of period                        |   | 238.8                           |   | 171.2                           |   |
|                                      |        |                                 |        |                                 |        |  |  |

 
| **Year ended**              |   | **Year ended  January 2, 2004** |   | **Year ended  January 3, 2003** |   |
|-----------------------------|--------|---------------------------------|--------|---------------------------------|--------|
| Net cash provided (used) by |   |                            |   |                            |   |
| Operating activities        |   | $                               | 79.6   |                            | $      | 79.5 |   |
| Investing activities        |   | 40.3                            |   | 71.9                            |   |
| Financing activities        |   | (52.3                           | )      | (118.4                          | )      |
|                             |        |                                 |        |                                 |        |  |  |

 

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**RECONCILIATION OF GAAP CASH FLOW INFORMATIONTO PRO FORMA FINANCIAL INFORMATION**

 
|                        |   | **Eleven  months ended  January 3, 2003** |   | **One month  ended  February 1, 2002** |   | **Year ended  January 3, 2003** |   |
|-----------------------------|--------|-------------------------------------------|--------|----------------------------------------|--------|---------------------------------|--------|
| Net cash provided (used) by |   |                                      |   |                                   |   |                            |   |
| Operating activities        |   | $                                         | 72.9   |                                   | $      | 6.6                             |   | $ | 79.5 |   |
| Investing activities        |   | 73.5                                      |   | (1.6                                   | )      | 71.9                            |   |
| Financing activities        |   | (103.4                                    | )      | (15.0                                  | )      | (118.4                          | )      |
|                             |        |                                           |        |                                        |        |                                 |        |  |  |  |

 

Currently, we have three principal sources of near-term liquidity: (1)cash generated by operations; (2) existing cash and cash equivalents; and (3)available capacity under our New Credit Facility. We had cash and cashequivalents of $238.8 million at January 2, 2004, of which $70.7 million wasrestricted for use on the normal operations of our consolidated joint ventureprojects or was restricted under our self-insurance programs. In January 2004,approximately $23 million of the $70.7 million restricted at January 2, 2004was released for our general use. At January 2, 2004, we had no borrowings and$141.4 million in letters of credit outstanding under the New Credit Facility,leaving borrowing capacity of $208.6 million under the facility. For moreinformation on our financing activities, see “New Credit Facility” below andNote 8, “Credit Facilities” of the Notes to Consolidated Financial Statementsin Item 8 of this report.

 

In 2003, cash and cash equivalents increased $67.6 million from $171.2million at January 3, 2003 to $238.8 million at January 2, 2004. This comparesto an increase of cash of $33.0 million in 2002. The discussion belowhighlights significant aspects of our cash flows.

 

•                  ***Operating activities:***  In 2003, operating activities provided $79.6million of cash compared to $79.5 million provided in 2002. Cash in both yearsincreased from favorable results of operations that included severalsignificant non-cash items, including depreciation, non-cash income taxes andthe amortization and write-off of deferred financing fees. Operating activitiesfor 2003 used $43.1 million of cash for working capital, $14.3 million forinterest payments associated with our credit facilities, $5.7 million for stateand foreign income tax payments and $9.9 million paid for reorganization items.In 2002, operating activities used $44.4 million of cash for working capital,$16.3 million for interest payments associated with our credit facilities, $3.6million for state and foreign income tax payments and $39.6 million of cashpaid for reorganization items.

 

Cash used for working capital in 2003 was primarily the result of ouruse of advance payments from customers of $34.4 million to complete severalpower and industrial/process projects. Cash paid for professional feesassociated with our reorganization in 2003 declined $29.8 million from 2002primarily due to the significant legal and professional fees incurred inconnection with our emergence from bankruptcy protection. Professional feespaid in 2003 are primarily associated with expenses of the unsecured creditors’committee for settlement of outstanding claims in connection with ourreorganization.

 

•                  ***Investing activities:***During 2003, investing activities provided $40.3 million of cash, consisting of$34.8 million in proceeds from the sales of property and equipment, $17.7million of proceeds from the sale of the Technology Center, partially offset by$12.2 million used for the acquisition of plant and equipment requiredprimarily for new work orders in the Infrastructure and Mining business unitsand to update our information technology systems. Property and equipment salesin 2003 included $17.2 million in proceeds from the sale of excess equipmentresulting from the completion of a dam and hydropower project in thePhilippines. During 2002, investing activities provided $71.9 million of cash,including $77.1 million from the sale of EMD. Property and equipment sales of$19.3 million in 2002 included $10.0 million from the sale of excess equipmentin the Philippines.

 

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•                  ***Financing activities:***During 2003, cash used by financing activities of $52.3 million included $42.1million in distributions to minority interests (including approximately $27million to BNFL) and $11.4 million of financing fees paid in connection withthe New Credit Facility. Additionally, we received $1.2 million in cash fromthe exercise of stock options during the year. In 2002, cash used by financingactivities of $118.4 million included distributions to minority interests of$63.6 million (including $30.9 million related to the sale of EMD), $34.7million financing and bonding fees paid in connection with the Senior SecuredRevolving Credit Facility and a new bonding agreement and $20.0 million ofpayments to senior creditors of the RE&C financing facilities.

 

***Income taxes***

 

We anticipate that cash payments for income taxes for 2004 and lateryears will be substantially less than income tax expense recognized in thefinancial statements. This difference results from expected tax deductions forgoodwill amortization and from use of net operating loss (“NOL”) carryovers. Asof January 2, 2004, we have remaining tax goodwill of approximately $60 millionresulting from the acquisition of the Westinghouse Businesses and $634 millionresulting from the acquisition of RE&C. The amortization of this taxgoodwill is deductible over remaining periods of 10.2 and 11.5 years,respectively, resulting in annual tax deductions of approximately $61 million,net of minority interest. The federal NOL carryovers as of January 2, 2004 wereapproximately $248 million, most of which are subject to an annual limitationof approximately $27 million. Unused limitation from previous years plus NOLcarryovers not subject to limitation would allow us to use as much as $77million of the NOL carryovers in 2004. Until the tax goodwill deductions andthe NOL carryovers are exhausted, we will not pay cash taxes (other than aminimal impact for alternative minimum tax) on at least the first $88 millionof federal taxable income before tax goodwill amortization and application ofNOL carryovers each year.

 

***Cash flows for 2004***

 

As in 2003, we expect to generate positive cash flows from operationsin 2004. Specific issues which are relevant to understanding 2004 cash flowsinclude:

 

•                  ***Income taxes:*** Weanticipate the payment of state and foreign income taxes. Because ofanticipated utilization of tax goodwill amortization of $61 million, and theavailability of $77 million of NOL carryovers, we will not pay federal taxes,other than a minimal impact for alternative minimum tax, on the first $138million of taxable income. Our partners in joint ventures are responsible fortheir share of the income tax consequences of the joint ventures.

 

•                  ***Property and equipment:***To maintain our construction and mining equipment fleet, normal capitalexpenditures for the other business units and to upgrade our informationsystems hardware and software, we expect to spend approximately $15 millionannually. Additionally, in the normal course of business, we sell a portion ofour construction and mining equipment fleet each year, depending on estimatedfuture requirements. Depreciation expense for 2003 was $31.4 million, including$10.1 million relating to the equipment used on the Philippine dam andhydropower project. We anticipate additional proceeds from the sale of theremaining equipment will be approximately $10 million.

 

•                  ***Pension and post-retirement benefitplans:***We expect to fund $12.6 million to our defined benefit pension andpost-retirement benefit plans during 2004 as compared to $10.6 million fundedin 2003. We estimate financial statement expense under these plans to beapproximately $10.0 million in 2004 as compared to $10.7 million in 2003.

 

•                  ***Reorganization items:***We expect to pay professional fees of approximately $4 million associated withexpenses of the unsecured creditors’ committee for settlement of outstandingclaims in connection with our reorganization.

 

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•                  ***Financing activities:***During the year ended January 2, 2004, we sold the Technology Center for $17.7million in cash proceeds and refinanced our existing credit facility, incurringa cash payment of $11.4 million. We do not anticipate similar transactions in2004.

 

On January 2, 2004, we had outstandingapproximately 8.5 million warrants to purchase New Common Stock. These warrantswill expire in January 2006. Additionally, we have issued common stock optionsthat are currently exercisable. At January 2, 2004, the market price of our NewCommon Stock exceeded the exercise price of the warrants and options. If thewarrants or options are exercised, we would receive proceeds to the extent ofthe exercise price of the warrant or options. For a complete discussion ofthese, see Note 16, “Capital Stock, Stock Purchase Warrants and StockCompensation Plans” of the Notes to Consolidated Financial Statements in Item 8of this report.

 

•                  ***MIBRAG mbH:*** Duringthe first quarter of 2003, MIBRAG mbH, our German mining venture that operateslignite coal mines and power plants in Germany, reached an agreement with oneof its customers to contribute to a retrofit of the customer’s power plantbecause the quality of the coal MIBRAG mbH is delivering had fallen belowspecifications in the coal supply contract. MIBRAG mbH has agreed to contribute45 million Euros toward the retrofit, of which 21 million Euros were paid in2003 and 14 million Euros will be paid in 2004 and 10 million Euros in 2005.The coal supply contract was assumed by MIBRAG mbH in the privatization in1994. MIBRAG mbH believes the German government guaranteed that the coalquality was sufficient to fulfill the terms of the contract assumed.Discussions are ongoing with government representatives regarding potentialcontributions from the government to reduce the contribution of MIBRAG mbH tothe retrofit. MIBRAG mbH will amortize the cost over the remaining 17 years ofthe coal supply contract. In addition, higher coal sales have required a reviewof the timing of capital expenditures, and some acceleration of expendituresmay be required to meet commitments. The combination of these two issues mayreduce cash distributions from MIBRAG mbH over the next two to three years.Distributions received in 2003 amounted to $6.6 million.

 

***Financialcondition and liquidity***

 

We expect to use cash to, among other things, satisfy contractualobligations, fund working capital requirements and make capital expenditures.For additional information on contractual obligations and capital expenditures,see “Contractual Obligations” below and “Property and Equipment” above.

 

We believe that our cash flows from operations, existing cash and cashequivalents and available capacity under our revolving credit facility will besufficient to meet our reasonably foreseeable liquidity needs.

 

In line with industry practice, we are often required to provideperformance and surety bonds to customers under fixed-price contracts. Thesebonds indemnify the customer should we fail to perform our obligations underthe contract. If a bond is required for a particular project and we are unableto obtain an appropriate bond, we cannot pursue that project. We have an existingbonding facility but, as is customary, the issuance of bonds under thatfacility is at the surety’s sole discretion. Moreover, due to events thataffect the insurance and bonding markets generally, bonding may be moredifficult to obtain in the future or may only be available at significantadditional cost. While there can be no assurance that bonds will continue to beavailable on reasonable terms, we believe that we have access to the bondingnecessary to achieve our operating goals.

 

We continually evaluate alternative capital structures and the terms ofour credit facilities. We may also, from time to time, pursue opportunities tocomplement existing operations through business combinations and participationin ventures, which may require additional financing and utilization of ourcapital resources.

 

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***Contractual obligations***

 

As of January 2, 2004, we had the following contractual obligations:

 
|                                                                                     |   | **Payments  due by period** |   |
|------------------------------------------------------------------------------------------|--------|-----------------------------|--------|
| **Contractual  obligations  (In millions)**                                              |   | **Less than  1 year**       |   | **1 - 2  years** |   | **3 - 5  years** |   | **More than  5 years** |   | **Total** |   |
| Long-term debt obligations                                                               |   | $                           | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Capital lease obligations                                                                |   | —                      |   | — |   | — |   | — |   | — |   |
| Operating lease obligations                                                              |   | 35.4                        |   | 57.3 |   | 25.3 |   | 11.2 |   | 129.2 |   |
| Purchase obligations (a)                                                                 |   | 7.7                         |   | 16.4 |   | 16.2 |   | 16.6 |   | 56.9 |   |
| Other long-term liabilities reflected on  the Registrant’s balance sheet under GAAP |   | —                      |   | — |   | — |   | — |   | — |   |
| Credit facility (b)                                                                      |   | 12.5                        |   | 25.2 |   | 9.5 |   | — |   | 47.2 |   |
| Total                                                                                    |   | $                           | 55.6   |   | $ | 98.9 |   | $ | 51.0 |   | $ | 27.8 |   | $ | 233.3 |   |

 

----

(a)          Purchase commitments represent future cashpayments for information technology services. Commitments pursuant tosubcontracts and other purchase orders related to engineering and constructioncontracts are not included since such amounts are expected to be funded undercontract billings.

(b)         Represents payments for letter of credit,commitment and administrative fees for our New Credit Facility.

 

In addition, $274,697 of long-term debt, non-recourse to the parentcompanies, existed on our unconsolidated affiliates at January 2, 2004.

 

In the normal course of business, we cause letters of credit and suretybonds to be issued generally in connection with contract performanceobligations that are not required to be recorded in our consolidated balancesheets. We are obligated to reimburse the issuer of our letters of credit orsurety bonds for any payments made thereunder. The table below presents theexpiration of our estimated outstanding commitments on letters of credit andsurety bonds outstanding as of January 2, 2004 for each of the next five yearsand thereafter. Although letters of credit under the New Credit Facility expireupon termination of the New Credit Facility, the presentation is prepared basedon the expiration period of our contractual obligations with the customer orbeneficiary. At January 2, 2004, $141.4 million of the outstanding letters ofcredit was issued under the New Credit Facility. We have pledged cash and cashequivalents as collateral for our reimbursement obligation with respect to$34.0 million in face amount of specified letters of credit that wereoutstanding at January 2, 2004 outside of our New Credit Facility. Ourcommitments under performance bonds generally end concurrent with theexpiration of our contractual obligation. The face amount of the surety bondsexpiring by period is presented below. Our actual exposure is limited toestimated cost to complete our bonded contracts which was approximately $395million at January 2, 2004.

 
| **Other  commercial commitments (in millions)** |   | **Letters of  credit** |   | **Surety  bonds** |   | **Total** |   |
|-------------------------------------------------|--------|------------------------|--------|-------------------|--------|-----------|--------|
| Commitments expiring by period                  |   |                   |   |              |   |      |   |
| 2004                                            |   | $                      | 20.6   |              | $      | 414.8     |   | $ | 435.4 |   |
| 2005                                            |   | 1.0                    |   | 373.6             |   | 374.6     |   |
| 2006                                            |   | 5.6                    |   | —            |   | 5.6       |   |
| 2007                                            |   | .3                     |   | 556.3             |   | 556.6     |   |
| 2008                                            |   | —                 |   | —            |   | —    |   |
| Thereafter                                      |   | 147.9                  |   | —            |   | 147.9     |   |
| Total other commercial commitments              |   | $                      | 175.4  |              | $      | 1,344.7   |   | $ | 1,520.1 |   |

 

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# ***Guarantees***

 

We have guaranteed the indemnity obligationsof the Westinghouse Businesses relating to the sale of EMD to Curtiss-WrightCorporation for the potential occurrence of specified events, includingbreaches of representations and warranties and/or failure to perform certaincovenants or agreements. Generally, the indemnification provisions expire withinthree years and are capped at $20 million. In addition, the indemnityprovisions relating to environmental conditions obligate the WestinghouseBusinesses to pay Curtiss-Wright Corporation up to a maximum $3.5 million forenvironmental losses they incur over $5 million. The Westinghouse Businessesare also responsible for environmental losses that exceed $1.3 million relatedto a specified parcel of the sold property. If the Westinghouse Businesses areunable to perform their indemnity obligations, BNFL has agreed to indemnify usfor 40% of losses we incur as a result of our guarantee. We believe that theindemnification provisions will not have a material adverse effect on ourfinancial position, results of operations or cash flows.

 

***New Credit Facility***

 

The New Credit Facility provides for a seniorsecured facility in an amount up to $350 million in the aggregate of loans andother financial accommodations allocated pro rata between two facilities asfollows: a Tranche A facility in the amount of $115.0 million and a Tranche Bfacility in the amount of $235.0 million.

 

The New Credit Facility was entered into toreplace the old Senior Secured Revolving Credit Facility and for ongoingworking capital, general corporate purposes and letter of credit issuance.Borrowings under the New Credit Facility are required to be allocated betweenthe two tranches on a proportional basis, based upon the size of each tranche.The borrowing rate under the New Credit Facility is the applicable LIBOR, whichhas a stated floor of 2%, plus an additional margin of 3.75%. As of January 2,2004, the effective rate was 5.75%. The New Credit Facility carries other fees,including commitment fees and letter of credit fees, normal and customary forsuch credit agreements. For the year ended January 2, 2004, commitment andletter of credit fees expense was $12.4 million. The New Credit Facilitycontains financial covenants, including minimum net worth, capitalexpenditures, maintenance of certain financial and operating ratios, and specifiedevents of default which are typical for a credit agreement governing creditfacilities of the size, type and tenor of the Credit Facility. The CreditFacility also contains affirmative and negative covenants limiting our abilityand the ability of certain of our subsidiaries to incur debt or liens, provideguarantees, make investment and pay dividends. See “Risk Factors -The documents governing our indebtedness restrict our ability and the abilityof some of our subsidiaries to engage in some business transactions” in Item 1of this report.

 

At January 2, 2004, there were no amountsborrowed under our New Credit Facility. As of January 2, 2004, we had issuedfinancial letters of credit under the New Credit Facility in the amount of$141.4 million, leaving borrowing capacity of $208.6 million under the NewCredit Facility.

 

## **ACCOUNTING STANDARDS**

 

***Adoption ofaccounting standards***

 

In April 2003, “FASB” issued SFAS No. 149, *Amendment ofStatement 133 on Derivative Instruments and Hedging Activities*, whichamends and clarifies accounting for derivative instruments, including certainderivative instruments embedded in other contracts, and for hedging activitiesunder SFAS No. 133, *Accounting for Derivative Instruments and HedgingActivities*. SFAS No. 149 is effective for contracts entered into ormodified after June 30, 2003, with certain exceptions, and for hedgingrelationships designated after June 30, 2003. Because we did not have anyderivative instruments subject to the provisions of SFAS No. 133, the adoptionof SFAS No. 149 did not impact our financial statements.

 

In May 2003, the FASB issued SFAS No. 150, *Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity*, which establishesstandards for how an issuer classifies and measures certain financialinstruments with characteristics of both liabilities and equity. It requiresthat an issuer classify a financial instrument that is within its scope as aliability (or an asset in some circumstances) that may previously have beenclassified as equity. Most of the guidance in SFAS No. 150 was effective forall financial instruments entered into or modified after May 31, 2003, andotherwise was effective at the beginning of our third

 

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quarter of 2003. The adoption of SFAS No. 150did not have a significant impact on our financial position, results ofoperations or cash flows.

 

In December 2003, the FASB issued SFAS No.132 (Revised) (“Revised SFAS No. 132”), *Employer’s Disclosure about Pensions and OtherPostretirement Benefits*. Revised SFAS No. 132 retains the disclosurerequirements of SFAS No. 132 and requires additional disclosures relating topension and post-retirement assets, obligations, cash flows and net periodicbenefit cost. Revised SFAS No. 132 is effective for our year ended January 2,2004, except that certain disclosures are effective for fiscal years endingafter June 15, 2004. Interim period disclosures are effective for us in thefirst quarter of 2004. The adoption of Revised SFAS No. 132 did not impact ourfinancial position, results of operations or cash flows. The disclosures inNote 10, “Benefit Plans,” have been revised to include the additionaldisclosures required by Revised SFAS No. 132.

 

***Recently issuedaccounting standards***

 

In January 2003, the FASB issuedInterpretation No. 46, *Consolidation of Variable Interest Entities*(“FIN 46”), which is an interpretation of Accounting Research Bulletin No. 51, *ConsolidatedFinancial Statements*. FIN 46 requires a variable interest entity tobe consolidated by a company that is considered to be the primary beneficiaryof that variable interest entity. In December 2003, the FASB issued FIN 46(revised December 2003), *Consolidation of Variable Interest Entities*(“FIN 46-R”) to address certain FIN 46 implementation issues. The effectivedates and impact of FIN 46 and FIN 46-R to our consolidated financialstatements include:

 

•                  ***Special purpose entities.***We completed our assessment and determined we have no investment in specialpurpose entities as defined by FIN 46-R.

•                  ***Non-special purpose entities.***We are required to adopt FIN 46-R at the end of the first quarter of 2004. Asis common to our industry, we have executed contracts jointly with thirdparties through partnerships and joint ventures. We account for a majority ofthese investments in accordance with Emerging Issues Task Force (“EITF”) Issue00-01, *InvestorBalance Sheet and Income Statement Display under the Equity Method forInvestments in Certain Partnerships and Other Ventures*. We believethe adoption of FIN 46-R will not be material to our financial position,results of operations or cash flows for non-special purpose entities. To theextent we enter into any significant joint venture and partnership agreementsin the future that would require consolidation under FIN 46-R, it could have amaterial impact on our consolidated financial statements in future filings.

## ** **

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## **ITEM 7A.** QUANTITATIVE AND QUALITATIVE DISCLOSUREABOUT MARKET RISK

*(In millions)*

 

***Interest rate risk***

 

Our exposure to market risk for changes ininterest rates relates primarily to our short-term investment portfolios anddebt obligations. Our short-term investment portfolio consists primarily ofhighly liquid instruments with maturities of one month or less. Substantiallyall cash and cash equivalents at January 2, 2004 of $239 million were held inshort-term investments classified as cash equivalents.

 

From time to time, we effect borrowings under bank credit facilities orotherwise for general corporate purposes, including working capitalrequirements and capital expenditures. Borrowings under our New CreditFacility, of which there currently are none, bear interest at the applicableLIBOR or prime rate, plus an additional margin and, therefore, are subject tofluctuations in interest rates.

 

***Foreign currency risk***

 

We conduct our business in various regions of the world. Our operationsare, therefore, subject to volatility because of currency fluctuations,inflation changes and changes in political and economic conditions in thesecountries. We are subject to foreign currency translation and exchange issues,primarily with regard to our mining venture, MIBRAG mbH, in Germany. At January2, 2004 and January 3, 2003, the cumulative adjustments for translation gains(losses), net of related income tax benefits, were $25.5 million and $9.7million, respectively. While we endeavor to enter into contracts with foreigncustomers with repayment terms in U.S. currency in order to mitigate foreignexchange risk, our revenues and expenses are sometimes denominated in localcurrencies, and our results of operations may be affected adversely as currencyfluctuations affect our pricing and operating costs or those of ourcompetitors. We engage from time to time in hedging operations, includingforward foreign exchange contracts, to reduce the exposure of our cash flows tofluctuations in foreign currency rates. We do not engage in hedging for speculativeinvestment reasons. We can give no assurances that our hedging operations willeliminate or substantially reduce risks associated with fluctuating currencies.

 

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**ITEM 8****.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

 

#### **INDEX TO FINANCIAL STATEMENTS**

#### ** **

## **WASHINGTONGROUP INTERNATIONAL, INC. AND SUBSIDIARIES**

## ** **

Consolidated Financial Statements and Financial StatementSchedule as of

January 2, 2004 and January 3, 2003, and for the year ended

January 2, 2004, the eleven months ended January 3, 2003, theone month ended

February 1, 2002, the one month ended December 28, 2001 and

the year ended November 30, 2001

 
|                                                                |   |
|---------------------------------------------------------------------|--------|
| Independent Auditors’  Report                                  |   |
| Consolidated  Statements of Operations                              |   |
| Consolidated  Statements of Comprehensive Income (Loss)             |   |
| Consolidated Balance Sheets                                         |   |
| Consolidated  Statements of Cash Flows                              |   |
| Consolidated  Statements of Stockholders’ Equity (Deficit)     |   |
| Notes to  Consolidated Financial Statements                         |   |
| Quarterly Financial Data  (Unaudited)                               |   |
| Schedule II - Valuation, Qualifying  and Reserve Accounts      |   |
| Financial Statements of Mitteldeutsche  Braunkohlengesellschaft mbH |   |

 

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# ***INDEPENDENT AUDITORS’ REPORT***

# *** ***

Tothe Board of Directors and Stockholders of Washington Group International, Inc.

 

Wehave audited the accompanying consolidated balance sheets of Washington GroupInternational, Inc. and subsidiaries as of January 2, 2004 andJanuary 3, 2003 (Successor Company balance sheets) and the relatedconsolidated statements of operations, comprehensive income (loss), cash flowsand stockholders’ equity (deficit) for the year ended January 2, 2004 andthe eleven months ended January 3, 2003 (Successor Company operations),and for the one month ended February 1, 2002, the one month ended December 28,2001, and the year ended November 30, 2001 (Predecessor Companyoperations). Our audits also included the consolidated financial statementschedule listed in the Index at Item 8. These financial statements andfinancial statement schedule are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements and financial statement schedule based on our audits.

 

Weconducted our audits in accordance with auditing standards generally acceptedin the United States of America. Those standards require that we plan andperform the audits to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide a reasonablebasis for our opinion.

 

Asdiscussed in Note 3 to the financial statements, on December 21, 2001, thebankruptcy court entered an order confirming the Plan of Reorganization whichbecame effective after the close of business on January 25, 2002. Accordingly,the accompanying financial statements have been prepared in conformity withAICPA Statement of Position 90-7, *FinancialReporting for Entities in Reorganization under the Bankruptcy Code*,for the Successor Company as a new entity with assets, liabilities and acapital structure having carrying values not comparable with prior periods asdescribed in Note 1.

 

Inour opinion, the Successor Company consolidated financial statements presentfairly, in all material respects, the financial position of Washington GroupInternational, Inc. and subsidiaries as of January 2, 2004 andJanuary 3, 2003, and the results of their operations and their cash flowsfor the year ended January 2, 2004 and the eleven months endedJanuary 3, 2003, in conformity with accounting principles generallyaccepted in the United States of America. Further, in our opinion, thePredecessor Company consolidated financial statements referred to above presentfairly, in all material respects, the results of the Predecessor Company operationsand cash flows for the one month ended February 1, 2002, the one monthended December 28, 2001, and the year ended November 30, 2001, inconformity with accounting principles generally accepted in the United Statesof America. Also, in our opinion, such consolidated financial statementschedule, when considered in relation to the basic consolidated financialstatements taken as a whole, presents fairly in all material respects theinformation set forth therein.

 

Asdiscussed in Note 1 to the consolidated financial statements, the Companychanged their method of accounting for goodwill and other intangible assets forperiods after December 28, 2001 to conform to Statement of FinancialAccounting Standards No. 142.

 
| /s/  DELOITTE & TOUCHE LLP |   |
|--------------------------------|--------|
|                           |
| Boise,  Idaho                  |
| March 2,  2004            |

 

II-39

----

 

## **CONSOLIDATED STATEMENTS OF OPERATIONS**

*(In thousands except per share data)*

 
|                                                                                                |   | **Successor Company**                     |       | **Predecessor Company**                             |       |
|-----------------------------------------------------------------------------------------------------|--------|-------------------------------------------|------------|-----------------------------------------------------|------------|
|                                                                                                |   | **Year ended****January 2,****2004** |       | **Eleven months  ended****January 3,****2003** | ** ** | **One month  ended****February 1,****2002** | ** ** | **One month  ended****December 28,****2001** | ** ** | **Year ended****November 30,****2001** | ** ** |
| Revenue                                                                                             |   | $                                         | 2,501,151  |                                                | $          | 3,311,614 |   | $ | 349,912 |   | $ | 308,289 |   | $ | 4,041,615 |   |
| Cost of revenue                                                                                     |   | (2,324,802                                | )          | (3,162,578                                          | )          | (338,792 | ) | (308,087 | ) | (3,943,920 | ) |
| Gross profit                                                                                        |   | 176,349                                   |       | 149,036                                             |       | 11,120 |   | 202 |   | 97,695 |   |
| Equity in income of unconsolidated affiliates                                                       |   | 25,519                                    |       | 27,342                                              |       | 3,109 |   | 1,258 |   | 17,890 |   |
| General and administrative expenses                                                                 |   | (57,520                                   | )          | (48,138                                             | )          | (4,180 | ) | (5,443 | ) | (56,878 | ) |
| Goodwill amortization                                                                               |   | —                                    |       | —                                              |       | — |   | (1,553 | ) | (14,635 | ) |
| Integration and merger costs (Note 3)                                                               |   | —                                    |       | —                                              |       | — |   | — |   | (18,858 | ) |
| Restructuring charges (Note 4)                                                                      |   | —                                    |       | —                                              |       | (625 | ) | (26,262 | ) | (6,963 | ) |
| Other operating income                                                                              |   | 6,182                                     |       | 3,420                                               |       | — |   | — |   | — |   |
| Operating income (loss)                                                                             |   | 150,530                                   |       | 131,660                                             |       | 9,424 |   | (31,798 | ) | 18,251 |   |
| Investment income                                                                                   |   | 1,748                                     |       | 926                                                 |       | 400 |   | 149 |   | 9,278 |   |
| Interest expense (a)                                                                                |   | (24,587                                   | )          | (26,784                                             | )          | (1,193 | ) | (603 | ) | (56,769 | ) |
| Write-off of deferred financing fees (Note 8)                                                       |   | (9,831                                    | )          | —                                              |       | — |   | — |   | — |   |
| Other income (expense), net                                                                         |   | (2,101                                    | )          | 1,874                                               |       | (563 | ) | (473 | ) | (10,494 | ) |
| Income (loss) before reorganization items, income  taxes, minority interests and extraordinary item |   | 115,759                                   |       | 107,676                                             |       | 8,068 |   | (32,725 | ) | (39,734 | ) |
| Reorganization items (Note 3)                                                                       |   | (4,900                                    | )          | (3,174                                              | )          | (72,057 | ) | (8,148 | ) | (56,479 | ) |
| Income tax (expense) benefit                                                                        |   | (46,888                                   | )          | (46,217                                             | )          | 20,078 |   | 14,907 |   | 26,765 |   |
| Minority interests in (income) loss of  consolidated subsidiaries                                   |   | (21,908                                   | )          | (20,584                                             | )          | (1,132 | ) | 56 |   | (15,528 | ) |
| Income (loss) before extraordinary item                                                             |   | 42,063                                    |       | 37,701                                              |       | (45,043 | ) | (25,910 | ) | (84,976 | ) |
| Extraordinary item - gain on debt discharge, net  of tax of $343,539 (Note 3)                       |   | —                                    |       | —                                              |       | 567,193 |   |   |   | — |   |
| Net income (loss)                                                                                   |   | $                                         | 42,063     |                                                | $          | 37,701 |   | $ | 522,150 |   | $ | (25,910 | ) | $ | (84,976 | ) |
| Income per share:                                                                                   |   |                                      |       |                                                |       |   |   |   |   |   |   |
| Basic                                                                                               |   | $                                         |  1.68 |                                                | $          |  1.51 |   | — | (b) | — | (b) | — | (b) |
| Diluted                                                                                             |   | 1.66                                      |       | 1.51                                                |       | — | (b) | — | (b) | — | (b) |
| Common shares used to compute income per share:                                                     |   |                                      |       |                                                |       |   |   |   |   |   |   |
| Basic                                                                                               |   | 25,007                                    |       | 25,000                                              |       | — | (b) | — | (b) | — | (b) |
| Diluted                                                                                             |   | 25,322                                    |       | 25,005                                              |       | — | (b) | — | (b) | — | (b) |

 

 

*The accompanying notes are an integral part of theconsolidated financial statements.*

 

----

(a)          Contractualinterest expense not recorded during bankruptcy proceedings for the one monthended February 1, 2002, the one month ended December 28, 2001 and theyear ended November 30, 2001 was $7,090, $6,320 and $48,235, respectively.

 

(b)         Netincome per share is not presented for these periods, as it is not meaningfulbecause of the revised capital structure of the Successor Company.

 

II-40

----

 

**CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME****(LOSS)**

*(In thousands)*

 
|                                                                    |   | **Successor  Company**                  |   | **Predecessor  Company**                          |   |
|-------------------------------------------------------------------------|--------|-----------------------------------------|--------|---------------------------------------------------|--------|
|                                                                    |   | **Year ended****January 2,  2004** |   | **Eleven months  ended****January 3,  2003** |   | **One month  ended****February 1,  2002** |   | **One month  ended****December 28,  2001** |   | **Year ended****November 30,  2001** |   |
|                                                                    |   |                                    |   |                                              |   |   |   |   |   |   |   |
| Net income (loss)                                                       |   | $                                       | 42,063 |                                              | $      | 37,701 |   | $ | 522,150 |   | $ | (25,910 | ) | $ | (84,976 | ) |
| Other comprehensive income (loss), net of tax:                          |   |                                    |   |                                              |   |   |   |   |   |   |   |
| Foreign currency translation adjustments                                |   | 15,844                                  |   | 9,652                                             |   | 80 |   | 482 |   | 1,851 |   |
| Unrealized gains on marketable securities:                              |   |                                    |   |                                              |   |   |   |   |   |   |   |
| Unrealized net holding gains arising during period                      |   | —                                  |   | —                                            |   | — |   | — |   | 474 |   |
| Less: Reclassification adjustment for net gains  realized in net income |   | —                                  |   | —                                            |   | — |   | — |   | (861 | ) |
| Amounts reclassified to net income in fresh-start  reporting (Note 3)   |   | —                                  |   | —                                            |   | 20,268 |   | — |   | — |   |
| Derivatives designated as cash flow hedges:                             |   |                                    |   |                                              |   |   |   |   |   |   |   |
| Cumulative effect of adoption of accounting  principle                  |   | —                                  |   | —                                            |   | — |   | — |   | (1,161 | ) |
| Realized loss on settled or terminated contracts                        |   | —                                  |   | —                                            |   | — |   | — |   | 2,750 |   |
| Minimum pension liability adjustment, net                               |   | (1,154                                  | )      | (603                                              | )      | — |   | — |   | (4,630 | ) |
| Other comprehensive income (loss), net of tax                           |   | 14,690                                  |   | 9,049                                             |   | 20,348 |   | 482 |   | (1,577 | ) |
| Comprehensive income (loss)                                             |   | $                                       | 56,753 |                                              | $      | 46,750 |   | $ | 542,498 |   | $ | (25,428 | ) | $ | (86,553 | ) |

 

*The accompanying notes are an integral part of the consolidatedfinancial statements.*

 

II-41

----

 

**CONSOLIDATEDBALANCE SHEETS**

*(In thousands except per share data)*

 
|                                                                            |   | **Successor Company**     |       |
|---------------------------------------------------------------------------------|--------|---------------------------|------------|
|                                                                            |   | **January 2,  2004** |       | **January 3,  2003** | ** ** |
| **ASSETS**                                                                      |   |                      |       |   |   |
| **Current assets**                                                              |   |                      |       |   |   |
| Cash and cash equivalents                                                       |   | $                         | 238,835    |   | $ | 171,192 |   |
| Accounts receivable, including retentions of  $13,663 and $23,546, respectively |   | 248,456                   |       | 214,678 |   |
| Unbilled receivables                                                            |   | 142,250                   |       | 178,290 |   |
| Investments in and advances to construction joint  ventures                     |   | 26,346                    |       | 23,271 |   |
| Deferred income taxes                                                           |   | 89,320                    |       | 74,223 |   |
| Assets held for sale                                                            |   | —                    |       | 23,543 |   |
| Other                                                                           |   | 43,804                    |       | 45,897 |   |
| Total current assets                                                            |   | 789,011                   |       | 731,094 |   |
|                                                                            |   |                      |       |   |   |
| **Investments and other assets**                                                |   |                      | ** ** |   | ** ** |
| Investments in unconsolidated affiliates                                        |   | 145,144                   |       | 99,356 |   |
| Goodwill                                                                        |   | 359,903                   |       | 387,254 |   |
| Deferred income taxes                                                           |   | 26,644                    |       | 51,219 |   |
| Other                                                                           |   | 18,928                    |       | 27,210 |   |
| Total investments and other assets                                              |   | 550,619                   |       | 565,039 |   |
|                                                                            |   |                      |       |   |   |
| **Property and equipment**                                                      |   |                      | ** ** |   | ** ** |
| Construction equipment                                                          |   | 94,234                    |       | 124,099 |   |
| Other equipment and fixtures                                                    |   | 28,500                    |       | 25,233 |   |
| Buildings and improvements                                                      |   | 10,212                    |       | 12,377 |   |
| Land and improvements                                                           |   | 2,491                     |       | 5,950 |   |
| Total property and equipment                                                    |   | 135,437                   |       | 167,659 |   |
| Less accumulated depreciation                                                   |   | (64,544                   | )          | (48,428 | ) |
| Property and equipment, net                                                     |   | 70,893                    |       | 119,231 |   |
| Total assets                                                                    |   | $                         | 1,410,523  |   | $ | 1,415,364 |   |

 

*The accompanying notes are an integral part of theconsolidated financial statements.*

 

II-42

----

 
|                                                                                                              |   | **Successor Company**     |       |
|-------------------------------------------------------------------------------------------------------------------|--------|---------------------------|------------|
|                                                                                                              |   | **January 2,  2004** |       | **January 3,  2003** |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                    |   |                      |       |   |   |
| **Current liabilities**                                                                                           |   |                      |       |   |   |
| Accounts payable and subcontracts payable,  including retentions of $21,184 and $19,623, respectively             |   | $                         | 176,300    |   | $ | 165,618 |   |
| Billings in excess of cost and estimated earnings  on uncompleted contracts                                       |   | 170,182                   |       | 202,600 |   |
| Accrued salaries, wages and benefits, including  compensated absences of $45,765 and $43,580, respectively        |   | 131,216                   |       | 136,214 |   |
| Other accrued liabilities                                                                                         |   | 60,708                    |       | 82,513 |   |
| Liabilities related to assets held for sale                                                                       |   | —                    |       | 8,167 |   |
| Total current liabilities                                                                                         |   | 538,406                   |       | 595,112 |   |
| **Non-current liabilities**                                                                                       |   |                      | ** ** |   | ** ** |
| Self-insurance reserves                                                                                           |   | 58,674                    |       | 69,934 |   |
| Pension, post-retirement and other benefit  obligations                                                           |   | 104,090                   |       | 97,453 |   |
| Total non-current liabilities                                                                                     |   | 162,764                   |       | 167,387 |   |
| **Contingencies and commitments**                                                                                 |   |                      | ** ** |   | ** ** |
| **Minority interests**                                                                                            |   | **48,469**                | ** ** | **56,115** | ** ** |
| **Stockholders’ equity**                                                                                     |   |                      | ** ** |   | ** ** |
| Preferred stock, par value $.01 per share, 10,000  shares authorized                                              |   | —                    |       | — |   |
| Common stock, par value $.01 per share, 100,000 shares  authorized; 25,046 and 25,000 shares issued, respectively |   | 250                       |       | 250 |   |
| Capital in excess of par value                                                                                    |   | 528,484                   |       | 521,103 |   |
| Stock purchase warrants                                                                                           |   | 28,647                    |       | 28,647 |   |
| Retained earnings                                                                                                 |   | 79,764                    |       | 37,701 |   |
| Accumulated other comprehensive income                                                                            |   | 23,739                    |       | 9,049 |   |
| Total stockholders’ equity                                                                                   |   | 660,884                   |       | 596,750 |   |
| Total liabilities and stockholders’ equity                                                                   |   | $                         | 1,410,523  |   | $ | 1,415,364 |   |

 

II-43

----

 

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

*(In thousands)*

 
|                                                                                                           |   | **Successor  Company**                  |       | **Predecessor  Company**                         |       |
|----------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------|------------|--------------------------------------------------|------------|
|                                                                                                           |   | **Year ended  January 2,****2004** |       | **Eleven  months  ended  January 3,  2003** | ** ** | **One month  ended  February 1,****2002** | ** ** | **One month  ended  December 28,****2001** | ** ** | **Year ended  November 30,****2001** | ** ** |
| **Operating activities**                                                                                       |   |                                    |       |                                             |       |   |   |   |   |   |   |
| Net income (loss)                                                                                              |   | $                                       | 42,063     |                                             | $          | 37,701 |   | $ | 522,150 |   | $ | (25,910 | ) | $ | (84,976 | ) |
| Reorganization items                                                                                           |   | 4,900                                   |       | 3,174                                            |       | 36,979 |   | 8,148 |   | 56,479 |   |
| Adjustments to reconcile net income (loss) to cash  provided (used) by operating activities:                   |   |                                    |       |                                             |       |   |   |   |   |   |   |
| Reorganization items:                                                                                          |   |                                    |       |                                             |       |   |   |   |   |   |   |
| Cash paid for reorganization items                                                                             |   | (9,869                                  | )          | (19,091                                          | )          | (20,548 | ) | (11,364 | ) | (40,958 | ) |
| Fresh-start adjustments                                                                                        |   | —                                  |       | —                                           |       | 35,078 |   | — |   | — |   |
| Extraordinary item-gain on debt discharge                                                                      |   | —                                  |       | —                                           |       | (567,193 | ) | — |   | — |   |
| Depreciation of property and equipment                                                                         |   | 31,369                                  |       | 50,742                                           |       | 5,612 |   | 5,292 |   | 74,397 |   |
| Amortization of goodwill                                                                                       |   | —                                  |       | —                                           |       | — |   | 1,553 |   | 14,635 |   |
| Amortization and write-off of financing fees                                                                   |   | 19,565                                  |       | 11,091                                           |       | 624 |   | 354 |   | 20,715 |   |
| Normal profit                                                                                                  |   | (2,331                                  | )          | (27,425                                          | )          | (3,518 | ) | (4,378 | ) | (87,200 | ) |
| Non-cash income tax expense                                                                                    |   | 43,057                                  |       | 40,309                                           |       | (9,147 | ) | (13,413 | ) | (44,068 | ) |
| Minority interests in net income of consolidated  subsidiaries                                                 |   | 21,908                                  |       | 20,584                                           |       | 1,132 |   | (56 | ) | 15,528 |   |
| Equity in income of unconsolidated affiliates,  less dividends received                                        |   | (17,091                                 | )          | (15,717                                          | )          | (3,109 | ) | (1,058 | ) | 530 |   |
| Self-insurance reserves                                                                                        |   | (11,259                                 | )          | 20,611                                           |       | 7,921 |   | 2,540 |   | (24,667 | ) |
| Compensation related to stock options                                                                          |   | 6,174                                   |       | —                                           |       | — |   | — |   | — |   |
| Loss (gain) on sale of assets, net                                                                             |   | (7,682                                  | )          | (5,599                                           | )          | 227 |   | (262 | ) | (6,562 | ) |
| Gain on foreign entity bankruptcies, including  cash forfeited of $7,185                                       |   | —                                  |       | —                                           |       | — |   | — |   | (41,729 | ) |
| Other                                                                                                          |   | 1,901                                   |       | 8,857                                            |       | (7,635 | ) | (1,990 | ) | (9,834 | ) |
| Changes in other assets and liabilities (including  assets and liabilities held for sale):                     |   |                                    |       |                                             |       |   |   |   |   |   |   |
| Accounts receivable and unbilled receivables                                                                   |   | 605                                     |       | 150,644                                          |       | 41,883 |   | 13,994 |   | 167,033 |   |
| Investments in and advances to construction joint  ventures                                                    |   | (7,531                                  | )          | 14,936                                           |       | 4,138 |   | 3,765 |   | 970 |   |
| Other current assets                                                                                           |   | 2,869                                   |       | 15,607                                           |       | (5,212 | ) | 8,301 |   | (31,166 | ) |
| Accounts payable and subcontracts payable, accrued  salaries, wages and benefits and other accrued liabilities |   | (4,629                                  | )          | (102,270                                         | )          | 20,027 |   | 29,288 |   | 21,363 |   |
| Billings in excess of cost and estimated earnings                                                              |   | (34,408                                 | )          | (131,291                                         | )          | (52,821 | ) | (3,587 | ) | (234,574 | ) |
| Net cash provided (used) by operating activities                                                               |   | 79,611                                  |       | 72,863                                           |       | 6,588 |   | 11,217 |   | (234,084 | ) |
| **Investing activities**                                                                                       |   |                                    | ** ** |                                             | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Property and equipment acquisitions                                                                            |   | (12,213                                 | )          | (22,957                                          | )          | (3,903 | ) | (1,266 | ) | (37,018 | ) |
| Property and equipment disposals                                                                               |   | 34,881                                  |       | 19,326                                           |       | 2,339 |   | 434 |   | 26,178 |   |
| Purchases of available-for-sale securities                                                                     |   | —                                  |       | —                                           |       | — |   | — |   | (12,224 | ) |
| Sales and maturities of available-for-sale  securities                                                         |   | —                                  |       | —                                           |       | — |   | — |   | 51,347 |   |
| Purchase of equity investment                                                                                  |   | —                                  |       | —                                           |       | — |   | — |   | (17,500 | ) |
| Proceeds from business sales                                                                                   |   | 17,700                                  |       | 77,133                                           |       | — |   | — |   | — |   |
| Net cash provided (used) by investing activities                                                               |   | 40,368                                  |       | 73,502                                           |       | (1,564 | ) | (832 | ) | 10,783 |   |
|                                                                                                                |        |                                         |            |                                                  |            |  |  |  |  |  |  |  |  |  |  |  |

 

II-44

----

 
|                                                                                                                              |   | **Successor  Company**                  |       | **Predecessor  Company**                           |       |
|-----------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------|------------|----------------------------------------------------|------------|
|                                                                                                                              |   | **Year ended  January 2,****2004** |       | **Eleven months  ended  February 1,****2003** | ** ** | **One month  ended  February 1,****2002** | ** ** | **One month  ended  December 28,****2001** | ** ** | **Year ended  November 30,****2001** | ** ** |
| **Financing activities**                                                                                                          |   |                                    | ** ** |                                               | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Payments on senior secured credit facilities                                                                                      |   | —                                  |       | —                                             |       | (20,000 | ) | — |   | — |   |
| Proceeds from debtor-in-possession financing                                                                                      |   | —                                  |       | —                                             |       | — |   | — |   | 16,000 |   |
| Repayment of debtor-in-possession financing                                                                                       |   | —                                  |       | —                                             |       | — |   | — |   | (16,000 | ) |
| Net payments on long-term revolving line of credit                                                                                |   | —                                  |       | —                                             |       | — |   | — |   | (1,294 | ) |
| Payment of financing and bonding fees                                                                                             |   | (11,438                                 | )          | —                                             |       | (34,749 | ) | — |   | (16,500 | ) |
| Net borrowings (repayments) under credit agreement                                                                                |   | —                                  |       | (40,000                                            | )          | 40,000 |   | — |   | — |   |
| Distributions to minority interests, net  (including $30,853 related to sale of EMD in eleven months ended  January 3, 2003) |   | (42,105                                 | )          | (63,374                                            | )          | (227 | ) | (547 | ) | (24,023 | ) |
| Proceeds from exercise of stock options                                                                                           |   | 1,207                                   |       | —                                             |       | — |   | — |   | — |   |
| Net cash used by financing activities                                                                                             |   | (52,336                                 | )          | (103,374                                           | )          | (14,976 | ) | (547 | ) | (41,817 | ) |
| Increase (decrease) in cash and cash equivalents                                                                                  |   | 67,643                                  |       | 42,991                                             |       | (9,952 | ) | 9,838 |   | (265,118 | ) |
| Cash and cash equivalents at beginning of period                                                                                  |   | 171,192                                 |       | 128,201                                            |       | 138,153 |   | 128,315 |   | 393,433 |   |
| Cash and cash equivalents at end of period                                                                                        |   | $                                       | 238,835    |                                               | $          | 171,192 |   | $ | 128,201 |   | $ | 138,153 |   | $ | 128,315 |   |
|                                                                                                                                   |        |                                         |            |                                                    |            |  |  |  |  |  |  |  |  |  |  |  |

 

Supplementaldisclosure of cash flow information (Note 14)

*The accompanying notes are an integral part of theconsolidated financial statements.*

 

II-45

----

 

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY****(DEFICIT)**

*(In thousands)*

 
|                                                                                |   |              |   |         |   |          |   | **Capital**   |   |             |   | **Retained** |   |              |   | **Accumulated**    |   |
|-------------------------------------------------------------------------------------|--------|-------------------|--------|--------------|--------|---------------|--------|---------------|--------|------------------|--------|--------------|--------|-------------------|--------|--------------------|--------|
|                                                                                |   | **Shares of**     |   |         |   | **in**        |   | **Stock**     |   | **earnings**     |   |         |   | **other**         |   |
|                                                                                |   | **Common  stock** |   | **Common**   |   | **excess of** |   | **purchase**  |   | **(Accumulated** |   | **Treasury** |   | **comprehensive** |   |
| **Period ended**                                                                    |   | **Issued**        |   | **Treasury** |   | **stock**     |   | **par value** |   | **warrants**     |   | **deficit)** |   | **stock**         |   | **income  (loss)** |   |
| **December 1, 2000**                                                           |   | 54,486            |   | (2,019       | )      | $             | 545    |          | $      | 250,112          |   | $            | 6,550  |              | $      | (679,680           | )      | $ | (23,192 | ) | $ | (19,253) |   |
| Net loss                                                                            |   |              |   |         |   |          |   |          |   |             |   | (84,976      | )      |              |   |               |   |
| Shares issued under stock award plan                                                |   |              |   |         |   |          |   | 6             |   |             |   |         |   |              |   |               |   |
| Foreign currency translation adjustments, net                                       |   |              |   |         |   |          |   |          |   |             |   |         |   |              |   | 1,851              |   |
| Change in unrealized gain on available-for-sale  securities, net                    |   |              |   |         |   |          |   |          |   |             |   |         |   |              |   | (387               | )      |
| Derivatives designated as cash flow hedges:                                         |   |              |   |         |   |          |   |          |   |             |   |         |   |              |   |               |   |
| Cumulative effect of adoption of accounting  principle                              |   |              |   |         |   |          |   |          |   |             |   |         |   |              |   | (1,161             | )      |
| Realized loss on settled or terminated contracts                                    |   |              |   |         |   |          |   |          |   |             |   |         |   |              |   | 2,750              |   |
| Minimum pension liability adjustment, net                                           |   |              |   |         |   |          |   |          |   |             |   |         |   |              |   | (4,630             | )      |
| **November 30, 2001**                                                          |   | 54,486            |   | (2,019       | )      | 545           |   | 250,118       |   | 6,550            |   | (764,656     | )      | (23,192           | )      | (20,830            | )      |
| Net loss                                                                            |   |              |   |         |   |          |   |          |   |             |   | (25,910      | )      |              |   |               |   |
| Foreign currency translation adjustments, net                                       |   |              |   |         |   |          |   |          |   |             |   |         |   |              |   | 482                |   |
| **December 28, 2001**                                                          |   | 54,486            |   | (2,019       | )      | 545           |   | 250,118       |   | 6,550            |   | (790,566     | )      | (23,192           | )      | (20,348            | )      |
| Net income, including extraordinary gain of  $567,193                               |   |              |   |         |   |          |   |          |   |             |   | 522,150      |   |              |   |               |   |
| Foreign currency translation adjustments, net                                       |   |              |   |         |   |          |   |          |   |             |   |         |   |              |   | 80                 |   |
| Plan of Reorganization:                                                             |   |              |   |         |   |          |   |          |   |             |   |         |   |              |   |               |   |
| Cancel Predecessor common stock                                                     |   | (54,486           | )      | 2,019        |   | (545          | )      | (250,118      | )      |             |   |         |   | 23,192            |   |               |   |
| Cancel Predecessor stock purchase warrants                                          |   |              |   |         |   |          |   |          |   | (6,550           | )      |         |   |              |   |               |   |
| Eliminate Predecessor accumulated deficit and  accumulated other comprehensive loss |   |              |   |         |   |          |   |          |   |             |   | 268,416      |   |              |   | 20,268             |   |
| Issue Successor common shares                                                       |   | 25,000            |   |         |   | 250           |   | 521,103       |   |             |   |         |   |              |   |               |   |
| Issue Successor stock purchase warrants                                             |   |              |   |         |   |          |   |          |   | 28,647           |   |         |   |              |   |               |   |
| **February 1, 2002**                                                           |   | 25,000            |   | —       |   | 250           |   | 521,103       |   | 28,647           |   | —       |   | —            |   | —             |   |
| Net income                                                                          |   |              |   |         |   |          |   |          |   |             |   | 37,701       |   |              |   |               |   |
| Foreign currency translation adjustments, net                                       |   |              |   |         |   |          |   |          |   |             |   |         |   |              |   | 9,652              |   |
| Minimum pension liability adjustment, net                                           |   |              |   |         |   |          |   |          |   |             |   |         |   |              |   | (603               | )      |
| **January 3, 2003**                                                            |   | 25,000            |   | —       |   | 250           |   | 521,103       |   | 28,647           |   | 37,701       |   | —            |   | 9,049              |   |
| Net income                                                                          |   |              |   |         |   |          |   |          |   |             |   | 42,063       |   |              |   |               |   |
| Shares issued upon exercise of stock options                                        |   | 46                |   |         |   |          |   | 1,207         |   |             |   |         |   |              |   |               |   |
| Compensation related to stock options                                               |   |              |   |         |   |          |   | 6,174         |   |             |   |         |   |              |   |               |   |
| Foreign currency translation adjustments, net                                       |   |              |   |         |   |          |   |          |   |             |   |         |   |              |   | 15,844             |   |
| Minimum pension liability adjustment, net                                           |   |              |   |         |   |          |   |          |   |             |   |         |   |              |   | (1,154             | )      |
| **January 2, 2004**                                                            |   | 25,046            |   | —       |   | $             | 250    |          | $      | 528,484          |   | $            | 28,647 |              | $      | 79,764             |   | $ | — |   | $ | 23,739 |   |

 

*The accompanying notes are an integral part of theconsolidated financial statements.*

 

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**WASHINGTON GROUP INTERNATIONAL, INC.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

*(In thousands except per share data)*

 

Theterms “we,” “us” and “our” as used in this annual report include WashingtonGroup International, Inc. (“Washington Group International”) and its consolidatedsubsidiaries unless otherwise indicated. On May 14, 2001, Washington GroupInternational and several but not all of its subsidiaries filed for Chapter 11bankruptcy protection. On January 25, 2002, we emerged from bankruptcyprotection. See Note 3, “Acquisition, Reorganization Case and Fresh-startReporting.”

 

**1.****             ****SIGNIFICANT ACCOUNTINGPOLICIES**

 

***Business***

 

Wewere originally incorporated in Delaware on April 28, 1993 under the nameKasler Holding Company. In April 1996, we changed our name to WashingtonConstruction Group, Inc. On September 11, 1996, we purchased MorrisonKnudsen Corporation, which we refer to as “Old MK,” and changed our name toMorrison Knudsen Corporation. On September 15, 2000, we changed our nameto Washington Group International, Inc.

 

Weare 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 privatesector clients, including (1) engineering, construction and operations andmaintenance services in nuclear and fossil power markets; (2) diverseengineering and construction and construction management services for thehighway and bridge, airport and seaport, dam, tunnel, water resource, railwayand commercial building markets; (3) engineering, design, procurement,construction and construction management services to industrial companies; (4)contract mining, technical and engineering services for the metals, precious metals,coal, minerals and minerals processes markets; (5) comprehensive nuclear andother environmental and hazardous substance remediation services forgovernmental and private-sector clients and 6) weapons and chemicaldemilitarization programs for governmental and private-sector clients. Inproviding these services, we enter into four basic types of contracts:fixed-price or lump-sum contracts providing for a fixed price for all work tobe performed, fixed-unit-price contracts providing for a fixed price for eachunit of work to be performed, target-price contracts providing for an agreedupon price whereby we absorb cost escalations to the extent of our expected feeor profit and are reimbursed for costs which continue to escalate beyond ourexpected fee and cost-type contracts providing for reimbursement of costs plusa fee. Both anticipated income and economic risk are greater under fixed-priceand fixed-unit-price contracts than under cost-type contracts. Engineering,construction management and environmental and hazardous substance remediationcontracts are typically awarded pursuant to a cost-type contract.

 

Weparticipate in construction joint ventures, often as sponsor and manager ofprojects, which are formed for the sole purpose of bidding, negotiating andcompleting specific projects. We participate in two incorporated miningventures: Westmoreland Resources, Inc., a coal mining company in Montana, andMIBRAG mbH, a company that operates lignite coal mines and power plants inGermany. We also participate in two incorporated government contractingventures, collectively the Westinghouse Businesses. Our venture partner isBritish Nuclear Services, Inc. (“BNFL”). We hold a 60% economic interest in theWestinghouse Businesses and BNFL holds a 40% economic interest. On July 7,2000, we purchased from Raytheon Company (“Raytheon”) and Raytheon Engineers& Constructors International, Inc. (“RECI”) the capital stock of thesubsidiaries of RECI and specified other assets of RECI, and we assumed specifiedliabilities of RECI. The businesses that we purchased, hereinafter called“RE&C,” provide engineering, design, procurement, construction, operation,maintenance and other services on a global basis. See Note 3, “Acquisition,Reorganization Case and Fresh-start Reporting.”

 

***Basis of presentation***

 

Theconsolidated financial statements include the accounts of Washington GroupInternational and all of its majority-owned subsidiaries and certainmajority-owned construction joint ventures. Investments in

 

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unconsolidatedconstruction joint ventures are accounted for by the equity method on thebalance sheet with our proportionate share of revenue, cost of revenue andgross profit included in the consolidated statements of operations. Investmentsin incorporated unconsolidated affiliates are accounted for using the equitymethod. Intercompany accounts and transactions have been eliminated.

 

Asof February 1, 2002, we adopted fresh-start reporting pursuant to theguidelines provided by the American Institute of Certified Public AccountantsStatement of Position (“SOP”) 90-7, *FinancialReporting by Entities in Reorganization Under the Bankruptcy Code*.In connection with the adoption of fresh-start reporting, a new entity wascreated for financial reporting purposes. We used the purchase method ofaccounting to allocate our reorganization value of $550 million to our assetsand liabilities based on estimates of fair value. Accordingly, periodssubsequent to February 1, 2002 are not comparable to prior periods. In theaccompanying financial statements and notes to financial statements, theperiods presented through February 1, 2002 have been designated“Predecessor Company,” and the periods subsequent to February 1, 2002 havebeen designated “Successor Company.” See Note 3, “Acquisition, ReorganizationCase and Fresh-start Reporting.”

 

EffectiveDecember 29, 2001, we changed our fiscal year to the 52/53 weeks ending onthe Friday closest to December 31 from the 52/53 weeks ending on theFriday closest to November 30. The change in reporting period has notmaterially affected comparability between the reporting periods presented.

 

***Revenue recognition***

 

Wefollow the provisions of SOP 81-1,*Accounting for Performance of Construction-Type and Certain Production-TypeContracts.* We recognizerevenue on engineering and construction-type contracts using thepercentage-of-completion method of accounting whereby revenue is recognized asperformance under the contract progresses. For most of our fixed-price andtarget-price contracts, we use a cost-to-cost approach to measure progresstowards completion. Under the cost-to-cost method, we make periodic estimatesof our progress towards completion by comparing costs incurred to date with totalestimated contract costs. Revenue is then calculated on a cumulative basis(project-to-date) as the total contract value multiplied by the currentpercentage complete. Revenue for a reporting period is calculated as thecumulative project-to-date revenue less project revenue recognized in priorperiods. However, we defer profit recognition on fixed-price and certaintarget-priced construction contracts until progress is sufficient to estimatethe probable outcome, which generally does not occur until the project is atleast 20% complete.

 

Forcontracts that include significant materials or equipment costs, we use anefforts expended method to measure progress towards completion based on laborhours, labor dollars or some other measurement of physical completion. Forcertain long-term contracts involving mining and environmental and hazardoussubstance remediation, progress towards completion is measured using the unitsof production method. Revenues from reimbursable or cost-plus contracts arerecognized on the basis of costs incurred during the period plus the feeearned. Service-related contracts, including operations and maintenancecontracts, are accounted for over the period of performance, in proportion tothe costs of performance, evenly over the period or over units of production.Award fees associated with U.S. government contracts are initially estimatedand recognized based on prior historical performance until the client hasconfirmed the final award fee. Performance-based incentive fees are included incontract value when a basis exists for the reasonable prediction of performancein relation to established targets. When a basis for reasonable prediction doesnot exist, performance-based incentive fees are recognized when actuallyawarded by the client.

 

Revenuerecognition for construction and engineering contracts also depends on whetherthe contract or project is determined to be an “at-risk” or an “agency”relationship between the client and us. Determination of the relationship isbased on characteristics of the contract or the relationship with the client.For “at-risk” relationships, the gross revenue and the costs of materials,services, payroll, benefits, non-income tax and other costs are recognized inour statements of operations. For “agency” relationships, where we act as anagent for our client, only fee revenue is recognized, meaning that directproject costs and the related reimbursement from the client are netted.

 

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Theuse of the percentage-of-completion method for revenue recognition requires theuse of various estimates, including among others, the extent of progresstowards completion, contract completion costs and contract revenue. Profitmargins to be recognized are dependent upon the accuracy of estimatedengineering progress, materials quantities, achievement of milestones and otherincentives, penalty provisions, labor productivity and other cost estimates.Such estimates are dependent upon various judgments we make with respect tothose factors, and some are difficult to accurately determine until the projectis significantly underway. Progress is evaluated each reporting period. Werecognize adjustments to profitability on contracts utilizing thepercentage-of-completion method on a cumulative basis, when such adjustmentsare identified. We have a history of making reasonably dependable estimates ofthe extent of progress towards completion, contract revenue and contractcompletion costs on our long-term engineering and construction contracts.However, due to uncertainties inherent in the estimation process, it ispossible that actual completion costs may vary from estimates. In limitedcircumstances, we may use the completed-contract method for specific contractsfor which reasonably dependable estimates cannot be made or for which inherenthazards make the estimates doubtful. The completed contract method was notutilized during any of the periods presented.

 

***Change orders and claims***

 

Oncecontract performance is underway, we often experience changes in conditions,client requirements, specifications, designs, materials and expectationsregarding the period of performance. The majority of such changes presentminimal or no financial risk to us. Generally, a “change order” will benegotiated with our customer to modify the original contract to approve boththe scope and price of the change. Occasionally, however, disagreements ariseregarding changes, their nature, measurement, timing and other characteristicsthat impact costs and revenue under the contract. When a change becomes a pointof dispute between our customer and us, we then consider it as a claim.

 

Costsrelated to change orders and claims are recognized when they are incurred.Change orders are included in total estimated contract revenue when it isprobable that the change order will result in a bona fide addition to contractvalue and can be reliably estimated. Claims are included in total estimatedcontract revenue, only to the extent that contract costs related to the claimhave been incurred, when it is probable that the claim will result in a bonafide addition to contract value and can be reliably estimated. Those twoconditions are satisfied when (1) the contract or other evidence provides alegal basis for the claim or a legal opinion is obtained providing a reasonablebasis to support the claim, (2) additional costs incurred were caused byunforeseen circumstances and are not the result of deficiencies in ourperformance, (3) costs associated with the claim are identifiable andreasonable in view of work performed and (4) evidence supporting the claim isobjective and verifiable. No profit is recognized on claims until finalsettlement occurs. This can lead to a situation where costs are recognized inone period and revenue is recognized when customer agreement is obtained orclaim resolution occurs, which can be in subsequent periods. We recognizedrevenue related to claims in the following amounts for the periods presented:

 

| **Successor  Company**                |   | **Predecessor  Company**                          |   |
|---------------------------------------|--------|---------------------------------------------------|--------|
| **Year ended  January 2,  2004** |   | **Eleven months  ended  January 3,****2003** |   | **One month  ended  February 1,****2002** | ** ** | **One month  ended  December 28,****2001** | ** ** | **Year ended  November 30,****2001** | ** ** |
| $                                     | 35,199 |                                              |   | $ | 15,393 |   |   | $ | — |   |   | $ | — |   |   | $ | 31,683 |   |   |
|                                       |        |                                                   |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Substantiallyall claims were settled and collected during each respective period for whichclaim revenue was recognized. Additional contract related costs, includingsubcontractors’ share of claim settlements, of $8,998 and $2,554 for the yearended January 2, 2004 and the eleven months ended January 3, 2003,respectively, reduced the impact on gross profit of the claim settlementsincluded above.

 

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***Estimated losses on uncompleted contractsand changes in contract estimates***

 

Werecord provisions for estimated losses on uncompleted contracts in the periodin which such losses are identified. The cumulative effects of revisions tocontract revenue and estimated completion costs are recorded in the accountingperiod in which the amounts become evident and can be reasonably estimated.These revisions can include such items as the effects of change orders andclaims, warranty claims, liquidated damages or other contractual penalties,adjustments for audit findings on U.S. government contracts and contractcloseout settlements.

 

***Segmenting contracts***

# *** ***

Occasionallya contract may include several elements or phases, each of which werenegotiated separately with the customer that we agreed to perform withoutregard to the performance of others. We follow the criteria set forth in SOP81-1 when segmenting contracts. In these situations, we segment the contractand assign revenues to the different elements or phases to achieve differentrates of profitability based on the relative value of each element or phase tothe estimated contract revenue. Values assigned to the segments are based onour normal historical prices and terms of such services to other customers.

 

***Normal profit***

 

Normalprofit is an accounting concept that results from the requirement that anacquiring company record all contracts of an acquiree that are in-process atthe date of acquisition, including construction contracts, at fair value. Assuch, an asset for favorable contracts or a liability for unfavorable contractsis recorded in purchase accounting. These assets or liabilities are thenreduced based on revenues recorded over the remaining contract lives,effectively resulting in the recognition of a reasonable or normal profitmargin on contract activity performed subsequent to the acquisition. Because ofthe acquisition of RE&C and the below market profit status of many of thesignificant acquired contracts, we recorded significant liabilities in purchaseaccounting. The reduction of these liabilities has a significant impact on ourrecorded net income, but has no impact on our cash flows.

 

***Use of estimates***

 

Thepreparation of our consolidated financial statements in conformity withgenerally accepted accounting principles necessarily requires us to makeestimates and assumptions that affect the reported amounts of assets andliabilities, the disclosure of contingent assets and liabilities at the balancesheet dates and the reported amounts of revenue and costs during the reportingperiods. 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 andliabilities***

 

Weinclude in current assets and liabilities amounts realizable and payable undercontracts that extend beyond one year. Accounts receivable at January 2,2004 and January 3, 2003 included approximately $6,296 and $3,189,respectively, of contract retentions, which are not expected to be collectedwithin one year. At January 2, 2004 and January 3, 2003, accountsreceivable included $1,141 and $14,101, respectively, of short-term marketablesecurities jointly held with customers as contract retentions, the market valueof which approximated the carrying amounts. We recognize interest income frommarketable securities as earned. Advances from customers are non-interestbearing. Subcontracts payable, billings in excess of costs and estimatedearnings on uncompleted contracts and estimated costs to complete long-termcontracts 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 oneyear.

 

***Cash and cash equivalents***

 

Cashand cash equivalents consist of liquid securities with remaining maturities ofthree months or less at the date of acquisition that are readily convertibleinto known amounts of cash. At January 2, 2004, cash and cash

 

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equivalentsincluded amounts totaling $70,667 that were restricted for use in the normaloperations of our consolidated construction joint ventures, by projects havingcontractual cash restrictions and by our self-insurance programs. Thecomparable amount at January 3, 2003 was $90,791.

 

***Accounts and unbilled receivables***

 

Accountsreceivable at January 2, 2004 and January 3, 2003 include allowancefor doubtful accounts of $13,519 and $19,414, respectively. Unbilledreceivables represent costs incurred under contracts in process that have notyet been invoiced to customers and arise from the use of thepercentage-of-completion method of accounting, cost reimbursement-typecontracts and the timing of billings. Substantially all unbilled receivables atJanuary 2, 2004 are expected to be billed and collected within one year.

 

***Credit risk concentration***

 

Bypolicy, we limit the amount of credit exposure to any one financial institutionand place investments with financial institutions evaluated as highlycreditworthy. Concentrations of credit risk with respect to accounts receivableand unbilled receivables are believed to be limited due to the number,diversification and character of the obligors and our credit evaluationprocess. Typically, we have not required collateral for such obligations, butwe may place liens against property, plant or equipment constructed if adefault occurs. Historically, we have not incurred any material credit-relatedlosses.

 

***Goodwill***

 

Goodwillis now subject to annual impairment tests pursuant to SFAS No. 142,*Goodwill and Other Intangible Assets*. Inperiods prior to 2002, we amortized goodwill. Effective February 1, 2002,in conjunction with fresh-start reporting, we used the purchase method ofaccounting to allocate our reorganization value to our net assets, with theexcess recorded as goodwill on the basis of estimates of fair value. See Note3, “Acquisition, Reorganization Case and Fresh-start Reporting.” For income taxpurposes, we have tax deductible goodwill in excess of financial statementgoodwill. As goodwill is deducted for income tax purposes, substantially allthe resulting tax benefit reduces financial statement goodwill.

 

SFASNo. 142, adopted effective December 29, 2001, provides that prior periods’results, in which goodwill was amortized, should not be restated. The followingtable presents our comparative operating results for the periods prior to theadoption of SFAS No. 142 reflecting the elimination of goodwill amortizationexpense.

 
|                                                 |   | **Successor Company**                 |   | **Predecessor Company**                           |       |
|------------------------------------------------------|--------|---------------------------------------|--------|---------------------------------------------------|------------|
|                                                 |   | **Year ended****January 2,2004** |   | **Eleven months  ended  January 3,****2003** | ** ** | **One month  ended  February 1,****2002** | ** ** | **One month  ended  December 28,****2001** | ** ** | **Year ended  November 30,****2001** | ** ** |
| Reported income (loss) before extraordinary item     |   | $                                     | 42,063 |                                              | $          | 37,701 |   | $ | (45,043 | ) | $ | (25,910 | ) | $ | (84,976 | ) |
| Goodwill amortization, net of tax                    |   | —                                |   | —                                            |       | — |   | 962 |   | 9,097 |   |
| Minority interest                                    |   | —                                |   | —                                            |       | — |   | (278 | ) | (3,333 | ) |
| Income (loss) before extraordinary item as  adjusted |   | $                                     | 42,063 |                                              | $          | 37,701 |   | $ | (45,043 | ) | $ | (25,226 | ) | $ | (79,212 | ) |
| Reported net income (loss)                           |   | $                                     | 42,063 |                                              | $          | 37,701 |   | $ | 522,150 |   | $ | (25,910 | ) | $ | (84,976 | ) |
| Goodwill amortization, net of tax                    |   | —                                |   | —                                            |       | — |   | 962 |   | 9,097 |   |
| Minority interest                                    |   | —                                |   | —                                            |       | — |   | (278 | ) | (3,333 | ) |
| Net income (loss) as adjusted                        |   | $                                     | 42,063 |                                              | $          | 37,701 |   | $ | 522,150 |   | $ | (25,226 | ) | $ | (79,212 | ) |

 

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***Property and equipment***

 

Propertyand equipment was stated at estimated fair value as of February 1, 2002.Subsequent major renewals and improvements are capitalized at cost, whilemaintenance and repairs are expensed when incurred. Depreciation ofconstruction equipment is provided based on the straight-line and acceleratedmethods, after an allowance for estimated salvage value, over estimated livesof 2 to 10 years. Depreciation of buildings is provided based on thestraight-line method over estimated lives of 10 to 40 years, and improvementsare amortized over the shorter of the asset life or lease term. Depreciation ofequipment is provided based on the straight-line method over estimated lives of3 to 12 years. Upon disposition, cost and related accumulated depreciation ofproperty and equipment are removed from the accounts, and the gain or loss isreflected in results of operations.

 

***Billings in excess of cost and estimatedearnings on uncompleted contracts***

 

Billingsin excess of cost and estimated earnings on uncompleted contracts representamounts actually billed to clients, and perhaps collected, in excess of costsand profits incurred on the project and, as such, is reflected as a liability.Also, in limited situations, we negotiate substantial advance payments as acontract condition. These advance payments are reflected in billings in excessof cost and estimated earnings on uncompleted contracts. Provisions for losseson contracts, reclamation reserves on mining contracts and reserves forpunch-list costs, demobilization and warranty costs on contracts that haveachieved substantial completion and reserves for audit and contract closingadjustments on U.S. government contracts are also included in billings inexcess of cost and estimated earnings on uncompleted contracts. The followingtable summarizes the components of billings in excess of cost and estimated earningson uncompleted contracts.

 
|                                                                        |   | **January 2,  2004** |    | **January 3,  2003** |   |
|-----------------------------------------------------------------------------|--------|---------------------------|---------|---------------------------|--------|
| Billings in excess of cost and estimated earnings  on uncompleted contracts |   | $                         | 97,982  |                      | $      | 109,860 |   |
| Estimated costs to complete long-term contracts                             |   | 49,900                    |    | 71,847                    |   |
| Normal profit reserve                                                       |   | 13,737                    |    | 16,068                    |   |
| Other reserves                                                              |   | 8,563                     |    | 4,825                     |   |
|                                                                        |   | $                         | 170,182 |                      | $      | 202,600 |   |

 

***Self-insurance reserves***

 

Self-insurancereserves represent reserves established through a program under which wedetermine the extent to which we self-insure certain business risks. We carrysubstantial premium-paid, traditional insurance for our various business risks;however, we do self-insure the lower level deductibles for workers’compensation and general, automobile and professional liability. Most of thisself-insurance is handled through Broadway Insurance Company, a wholly ownedcaptive Bermuda insurance subsidiary. Our total self-insurance reserves atJanuary 2, 2004 and January 3, 2003 are $71,656 and $83,078,respectively. The current portion of the self-insurance reserves of $12,982 and$13,144, respectively, at January 2, 2004 and January 3, 2003 isincluded in other accrued liabilities.

 

***Foreign currency translation***

 

Thefunctional currency for foreign operations is generally the local currency.Translation of assets and liabilities to U.S. dollars is based on exchangerates at the balance sheet date. Translation of revenue and expenses to U.S.dollars is based on a weighted-average rate during the period. Translationgains or losses, net of income tax effects, are reported as a component ofother comprehensive income (loss). Because of the short-term duration ofcertain construction and engineering projects, related translation gains orlosses are recognized currently. Gains or losses from foreign currency transactionsare included in the results of operations of the period in which thetransaction is completed.

 

***Income taxes***

 

Deferredincome tax assets and liabilities are recognized for the effects of temporarydifferences between the carrying amounts and the income tax basis of assets andliabilities using enacted tax rates. A valuation allowance

 

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isestablished when it is more likely than not that net deferred tax assets willnot be realized. Tax credits are generally recognized in the year they arise.

 

***Income per share***

 

Basicincome per share is calculated on the weighted-average number of outstandingcommon shares during the applicable period. Diluted income per share is basedon the weighted-average number of outstanding common shares plus theweighted-average number of potential outstanding common shares. Income pershare is computed separately for each period presented.

 

Forthe eleven months ended January 3, 2003, the 8,520 outstanding stockpurchase warrants and 5,033 outstanding stock options were not included in thecomputation of diluted earnings per share because the exercise price wasgreater than the average market price of the warrants and options, and,therefore, the effect would be antidilutive. During the year endedJanuary 2, 2004, the weighted average number of outstanding warrants andoptions excluded from the computation of diluted earnings per share was 7,749and 3,270, respectively.

 

Ouremergence from bankruptcy in January 2002 resulted in the cancellation ofall of our then-outstanding capital stock, stock options and stock purchasewarrants and the issuance of new shares of capital stock, stock purchasewarrants and stock options. As such, we believe the presentation of income(loss) per share for these canceled instruments is not meaningful. For adetailed discussion of our bankruptcy proceedings and emergence from bankruptcyprotection, see Note 3, “Acquisition, Reorganization Case and Fresh-startReporting.”

 

***Stock-based compensation***

 

Wehave used the intrinsic value method to account for stock-based employeecompensation under the recognition and measurement principles of AccountingPrinciples Bulletin (“APB”) Opinion No. 25, *Accountingfor Stock Issued to Employees*, and related interpretations for allperiods presented. Our stock-based employee compensation plans are described inNote 16, “Capital Stock, Stock Purchase Warrants and Stock Compensation Plans.”The following table presents the pro forma effect on net income (loss) and incomeper share as if we had applied the fair value recognition provisions of theSFAS No. 123, *Accounting for Stock-BasedCompensation*, to stock-based employee compensation.

 
|                                                                                                           |   | **Successor Company**                   |   | **Predecessor Company**                           |       |
|----------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------|--------|---------------------------------------------------|------------|
|                                                                                                           |   | **Year ended  January 2,****2004** |   | **Eleven months  ended  January 3,****2003** | ** ** | **One month  ended  February 1,****2002** | ** ** | **One month  ended  December 28,****2001** | ** ** | **Year ended  November 30,****2001** | ** ** |
| Net income (loss) as reported                                                                                  |   | $                                       | 42,063 |                                              | $          | 37,701 |   | $ | 522,150 |   | $ | (25,910 | ) | $ | (84,976 | ) |
| Deduct: Stock-based employee compensation expense  determined under fair value based method for all awards (1) |   | (15,923                                 | )      | (25,888                                           | )          | 10,995 |   | (472 | ) | (6,750 | ) |
| Add: Compensation cost recognized using intrinsic  value method                                                |   | 6,174                                   |   | —                                            |       | — |   | — |   | 4 |   |
| Tax effects                                                                                                    |   | 3,805                                   |   | 10,104                                            |       | (4,291 | ) | 184 |   | 2,624 |   |
| Pro forma net income (loss)                                                                                    |   | $                                       | 36,119 |                                              | $          | 21,917 |   | $ | 528,854 | (2) | $ | (26,198 | ) | $ | (89,098 | ) |
| Income per share (3)                                                                                           |   |                                    |   |                                              |       |   |   |   |   |   |   |
| As reported - basic                                                                                            |   | $                                       | 1.68   |                                              | $          | 1.51 |   | — |   | — |   | — |   |
| As reported - diluted                                                                                          |   | 1.66                                    |   | 1.51                                              |       | — |   | — |   | — |   |
| Pro forma - basic                                                                                              |   | 1.44                                    |   | .88                                               |       | — |   | — |   | — |   |
| Pro forma - diluted                                                                                            |   | 1.43                                    |   | .88                                               |       | — |   | — |   | — |   |

 

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(1)          Wepresent pro forma compensation cost assuming all stock options granted willvest, with pro forma recognition of actual forfeitures as they occur. Ouremergence from bankruptcy protection in January 2002 and the resultingcancellation of all of our previously existing stock options therefore gaverise to a reversal of compensation expense on a pro forma basis for the onemonth ended February 1, 2002. Upon emergence from bankruptcy protection,we granted options of which one-third immediately vested. Due to this vesting,a significant portion of the total pro forma compensation cost associated withthese options is presented on a pro forma basis during the eleven months endedJanuary 3, 2003 with the remainder substantially recognized during theyear ended January 2, 2004.

(2)          Proforma income (loss) before extraordinary item was $(38,339) for the one monthended February 1, 2002.

(3)          Incomeper share is not presented for the Predecessor Company periods, as it is notmeaningful because of the revised capital structure of the Successor Company.

 

SeeNote 16, “Capital Stock, Stock Purchase Warrants and Stock Compensation Plans”for a discussion of the assumptions used for the table above.

 

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***Reclassifications***

 

Certainreclassifications have been made to prior periods’ financial statements toconform to the current year presentation.

 

**2.****             ****ACCOUNTING STANDARDS**

 

***Adoption of accounting standards***

 

InApril 2003, the Financial Accounting Standards Board (“FASB”) issued SFASNo. 149, *Amendment of Statement 133 onDerivative Instruments and Hedging Activities*, which amends andclarifies accounting for derivative instruments, including certain derivativeinstruments embedded in other contracts, and for hedging activities under SFASNo. 133, *Accounting for DerivativeInstruments and Hedging Activities*. SFAS No. 149 is effective forcontracts entered into or modified after June 30, 2003, with certainexceptions, and for hedging relationships designated after June 30, 2003.Because we did not have any derivative instruments subject to the provisions ofSFAS No. 133, the adoption of SFAS No. 149 did not impact our financialstatements.

 

InMay 2003, the FASB issued SFAS No. 150, *Accountingfor Certain Financial Instruments with Characteristics of both Liabilities andEquity*, which establishes standards for how an issuer classifies andmeasures certain financial instruments with characteristics of both liabilitiesand equity. It requires that an issuer classify a financial instrument that iswithin its scope as a liability (or an asset in some circumstances) that maypreviously have been classified as equity. Most of the guidance in SFAS No. 150was effective for all financial instruments entered into or modified after May31, 2003, and otherwise was effective at the beginning of our third quarter of2003. The adoption of SFAS No. 150 did not have a significant impact on ourfinancial position, results of operations or cash flows.

 

InDecember 2003, the FASB issued SFAS No. 132 (Revised) (“Revised SFAS No.132”), *Employer’s Disclosure about Pensionsand Other Postretirement Benefits*. Revised SFAS No. 132 retains thedisclosure requirements of SFAS No. 132 and requires additional disclosuresrelating to pension and post-retirement assets, obligations, cash flows and netperiodic benefit cost. Revised SFAS No. 132 is effective for our year endedJanuary 2, 2004, except that certain disclosures are effective for fiscalyears ending after June 15, 2004. Interim period disclosures are effectivefor us in the first quarter of 2004. The adoption of Revised SFAS No. 132 didnot impact our financial position, results of operations or cash flows. Thedisclosures in Note 10, “Benefit Plans,” have been revised to include theadditional disclosures required by Revised SFAS No. 132.

 

***Recently issued accounting standards***

 

InJanuary 2003, the FASB issued Interpretation No. 46, *Consolidation of Variable Interest Entities*(“FIN 46”), which is an interpretation of Accounting Research Bulletin No. 51, *Consolidated Financial Statements*. FIN 46requires a variable interest entity to be consolidated by a company that isconsidered to be the primary beneficiary of that variable interest entity. InDecember 2003, the FASB issued FIN 46 (revised December 2003), *Consolidation of Variable Interest Entities*(“FIN 46-R”) to address certain FIN 46 implementation issues. The effectivedates and impact of FIN 46 and FIN 46-R to our consolidated financialstatements include:

 

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•                  ***Specialpurpose entities.*** Wecompleted our assessment and determined we have no investment in specialpurpose entities as defined by FIN 46-R.

•                  ***Non-specialpurpose entities.*** We arerequired to adopt FIN 46-R at the end of the first quarter of 2004. As iscommon in our industry, we have executed contracts jointly with third partiesthrough partnerships and joint ventures. We account for a majority of theseinvestments in accordance with Emerging Issues Task Force Issue (“EITF”) 00-01,*Investor Balance Sheet and Income StatementDisplay under the Equity Method for Investments in Certain Partnerships andOther Ventures*. We believe the adoption of FIN 46-R will not bematerial to our financial position, results of operations or cash flows fornon-special purpose entities. To the extent we enter into any significant jointventure and partnership agreements in the future that would requireconsolidation under FIN 46-R, it could have a material impact on ourconsolidated financial statements in future filings.

 

**3.****             ****ACQUISITION, REORGANIZATION CASE AND FRESH-STARTREPORTING**

 

***Acquisition of RE&C***

 

Thefollowing discussion describes our acquisition of Raytheon Engineers &Constructors in 2000 and the resulting issues and events, including theestablishment of normal profit reserves, our severe near-term liquidityproblems and filing for protection under Chapter 11 of the U.S. BankruptcyCode, and integration and merger costs related to the acquisition. These issuesand events primarily pertain to our 2001 financial statements.

 

OnJuly 7, 2000, pursuant to a stock purchase agreement dated April 14,2000 (the “Stock Purchase Agreement”), we purchased from Raytheon and RECI(collectively, the “Sellers”) RE&C, which provides engineering, design,procurement, construction, operation, maintenance and other services on aglobal basis. We financed the acquisition by obtaining new senior securedfacilities (the “RE&C Financing Facilities”) and issuing senior unsecurednotes due July 1, 2010 (the “Senior Unsecured Notes”). See Note 8, “CreditFacilities” for a more detailed description of the RE&C FinancingFacilities and the Senior Unsecured Notes.

 

RECIretained, among other assets, all of its interest in and rights with respect tosome of the existing contracts. In addition, the Stock Purchase Agreementprovided that the contracts related to four specified construction projectswould 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 RECIcould not be obtained as of closing, we agreed to remain the contract party andcontinued to be directly obligated to the customers and other third partiesunder the contracts relating to the four projects. Accordingly, we and theSellers agreed that the Sellers would provide us with full indemnification withrespect to any risks associated with those contracts, which arrangementaccomplished the original intent of the Stock Purchase Agreement. Under theStock Purchase Agreement, we agreed that we would complete the four specifiedprojects for the Sellers’ account and the Sellers agreed to reimburse our coststo do so and to share equally with us any positive variance between actualcosts and estimated costs. The Sellers also agreed to indemnify us against anylosses, claims or liabilities under the contracts relating to such projects,except losses, claims or liabilities resulting from our gross negligence orwillful misconduct, against which we would indemnify the Sellers.

 

Aspart of the acquisition of RE&C, we undertook a comprehensive review ofexisting contracts that we acquired for the purpose of making a preliminaryallocation of the acquisition price to the net assets acquired. As part of thisreview, we evaluated, among other matters, RECI’s estimates of the costs atcompletion of the long-term contracts that were underway as of July 7,2000 (“Acquisition Date EAC’s”). During this process, information came to ourattention that raised questions as to whether the Acquisition Date EAC’s neededto be adjusted significantly. Our review process involved the analysis of anextensive amount of supporting data, including analysis of numerous, largeconstruction projects in various stages of completion. Based on the informationavailable at the time of the review, the preliminary results of this reviewindicated that the Acquisition Date EAC’s of numerous long-term contractsrequired substantial adjustment. The adjustments resulted in contract losses orlower than market rate margins. As a result, in our report on Form 10-Q for the

 

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quarterended September 1, 2000, we significantly decreased the carrying value ofthe net assets acquired and increased the goodwill associated with thetransaction. Because many of the contracts we acquired contained eitherunrecorded losses or lower than market profits, these contracts were adjustedto their estimated fair value at the July 7, 2000 acquisition date inorder to allow for a reasonable profit margin for completing the contracts, anda gross margin or normal profit reserve of $233,135 was established and recordedin billings in excess of cost and estimated earnings on uncompleted contracts.

 

Ourreview of the RE&C contracts and the purchase price allocation processcontinued thereafter, and, based on the results of that review, we expectedthat, as a result of the purchase price adjustment process, the purchase priceof RE&C would be adjusted downward by a significant amount. Subsequent tothe quarter ended September 1, 2000, we completed the review and madeadditional adjustments to the contracts we had acquired, resulting from a moreaccurate determination of the actual contract status at the acquisition date.

 

Thenormal profit reserve has been reduced as work has been performed on theaffected projects. The reduction results in decreases to cost of revenue andcorresponding increases in gross profit, but has no effect on cash. The changesin the normal profit reserve for the periods indicated are as follows:

 

**Normal profit reserve**

 
| December 1, 2000 balance                               |   | $       | 182,864 |   |
|-------------------------------------------------------------|--------|---------|---------|--------|
| Adjustments on reformed and rejected contracts  (see below) |   | (53,376 | )       |
| Cost of revenue (decrease)                                  |   | (87,200 | )       |
| November 30, 2001 balance                              |   | 42,288  |    |
| Cost of revenue (decrease)                                  |   | (4,378  | )       |
| December 28, 2001 balance                              |   | 37,910  |    |
| Increase from fresh-start reporting                         |   | 9,101   |    |
| Cost of revenue (decrease)                                  |   | (3,518  | )       |
| February 1, 2002 balance                               |   | 43,493  |    |
| Cost of revenue (decrease)                                  |   | (27,425 | )       |
| January 3, 2003 balance                                |   | 16,068  |    |
| Cost of revenue (decrease)                                  |   | (2,331  | )       |
| January 2, 2004 balance                                |   | $       | 13,737  |   |

 

OnFebruary 27, 2001, we filed a lawsuit against the Sellers seeking specificperformance of the purchase price adjustment provisions of the Stock PurchaseAgreement. On March 8, 2001, we amended our complaint to also seek moneydamages for misstatements and omissions allegedly made by the Sellers. Our lawsuitseeking specific performance was successful, and we and the Sellers thereaftercommenced an arbitration proceeding before an independent accountant approvedby the court to determine the purchase price adjustment. A significantarbitration claim was ultimately filed against the Sellers, as discussed below.

 

Duringthe spring of 2000, in connection with the acquisition of RE&C, we receivedfrom the Sellers audited RECI financial statements at December 31, 1999and 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 monthsended April 2, 2000 and April 4, 1999. In accordance with federalsecurities law disclosure requirements, on July 13, 2000, we filed thoseaudited and unaudited financial statements and our related unaudited pro formacondensed combined financial statements as of and for the year endedDecember 3, 1999 and for the quarter ended March 3, 2000 in a currentreport on Form 8-K. Subsequently, in our current report on Form 8-K filedMarch 8, 2001, we advised that, for the reasons stated in such report, theforegoing audited and unaudited financial statements of RECI and our relatedunaudited pro forma condensed combined financial statements, which were derivedtherefrom, no longer should be relied upon.

 

OnMarch 2, 2001, we announced that we faced severe near-term liquidityproblems as a result of our acquisition of RE&C. On March 9, 2001,because of those liquidity problems, we suspended work on two large

 

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constructionprojects located in Massachusetts that were part of the acquisition. TheSellers had provided the customer with parent performance guarantees on thosetwo contracts, and the guarantees remained in effect after closing the StockPurchase Agreement. Those performance guarantees required the Sellers tocomplete the work on the contracts in the event RE&C (owned by us as ofJuly 7, 2000) did not complete them. The contracts were fixed-price innature, and our review of cost estimates indicated that there were substantialunrecognized future costs in excess of future contract revenues that were notreflected in RECI’s Acquisition Date EAC’s.

 

Uponour suspension of work, the Sellers undertook performance of those contractspursuant to the outstanding performance guarantees. We, however, were obligatedunder the Stock Purchase Agreement to indemnify the Sellers for losses theyincurred under those guarantees. The Sellers also assumed obligations under othercontracts, primarily in the RE&C power generation construction businessunit, which resulted in significant additional indemnification obligations byus to the Sellers. As a result of costs they incurred to perform under theparent guarantees, the Sellers filed a claim against us in the bankruptcyprocess for approximately $940,000. As further discussed below, this claim wasultimately settled without payment to the Sellers in connection with ouremergence from bankruptcy protection. See “Reorganization case” further in thisNote. Until such settlement, we retained all liabilities related to thecontracts, including normal profit reserves, on our balance sheet as accruedliabilities included in liabilities subject to compromise.

 

OnMay 14, 2001, because of the severe near-term liquidity problems resulting fromour acquisition of RE&C, we filed for protection under Chapter 11 of theU.S. Bankruptcy Code. At various times between May 14, 2001 andNovember 20, 2001, we “rejected” numerous contracts (constructioncontracts, leases and others), as that term is used in the legal sense inbankruptcy law. Included in these rejections were numerous contracts that weacquired from the Sellers. On August 27, 2001, we also rejected the StockPurchase Agreement.

 

OnDecember 21, 2001, the bankruptcy court entered an order confirming theSecond Amended Joint Plan of Reorganization of Washington Group International,Inc., et al., as modified (the “Plan of Reorganization”). The Plan ofReorganization became effective and we emerged from bankruptcy protection onJanuary 25, 2002 (the “Effective Date”).

 

Duringthe pendency of the bankruptcy, we continued to negotiate with the Sellers asettlement of our outstanding litigation with respect to the RE&Cacquisition. As a result of those negotiations, we reached a settlementregarding all issues and disputes between the parties, which settlement wasincorporated into our Plan of Reorganization (the “Raytheon Settlement”).

 

Underthe Raytheon Settlement, the Sellers agreed that, with respect to theirbankruptcy claim, the Sellers would be considered unpaid, unsecured creditorshaving rights in the unsecured creditor class, but that, upon completion of ourPlan of Reorganization, they would waive any rights to receive any distributionsto be given to unsecured creditors with allowed claims. In exchange, we agreedto dismiss all litigation against the Sellers related to the acquisition and todiscontinue the purchase price adjustment and binding arbitration process. Wereleased all claims based on any act occurring prior to the Effective Date ofthe Plan of Reorganization, including all claims against the Sellers, theiraffiliates and directors, officers, employees, agents and specifiedprofessionals. The Sellers released all claims based on any act occurring priorto the Effective Date of our Plan of Reorganization, including any claimsrelated to any contracts or projects not assumed by us during the bankruptcycases, against us and our directors, officers, employees, agents and professionals.**No cash was exchanged as a result of thissettlement.

 

Inaddition, under a services agreement entered into as a part of the RaytheonSettlement, the Sellers will direct the process for resolving pre-petitionclaims asserted against us in the bankruptcy case relating to any contract orproject that we rejected and that involved some form of support arrangementfrom the Sellers. We agreed to assist the Sellers in settling or litigatingvarious claims related to those rejected projects. We also agreed to completework as requested by the Sellers on those rejected projects on acost-reimbursable basis. The Sellers may, with respect to the rejected projectsdescribed 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 theSellers will be returned to us.

 

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Whilethis settlement eliminated our ability to continue to seek to collect ourarbitration claim, it was necessary because the Sellers’ large unsecured claimsin the bankruptcy were substantially impeding our Plan of Reorganizationprocess. Without this settlement, a successful emergence from Chapter 11 wouldhave been delayed or impossible.

 

Asa result of the acquisition, we incurred significant costs associated with theintegration and merger of the two companies. The costs consisted primarily ofincremental costs for legal, accounting, consulting and other fees, includingbusiness consulting, promotion and systems integration. For the year endedNovember 30, 2001, those costs were $18,858.

 

***Reorganization case***

 

Aspreviously discussed, on May 14, 2001, because of severe near-term liquidityissues Washington Group International and several, but not all, of its directand indirect wholly owned domestic subsidiaries (the “Debtors”) filed voluntarypetitions to reorganize under Chapter 11 of the U.S. Bankruptcy Code in theU.S. Bankruptcy Court for the District of Nevada. The various individualbankruptcy cases were administered jointly.

 

UnderChapter 11, certain claims against a debtor in existence prior to the filing ofa petition for relief under the federal bankruptcy laws (“Pre-petition Claims”)are stayed while the debtor continues business operations as adebtor-in-possession. Each of our Debtors in this case continued to operate itsbusiness and manage its property as a debtor-in-possession during the pendencyof the case. Subsequent to the filing date, additional Pre-petition Claimsresulted from the rejection of executory contracts, including leases, and fromthe resolution of claims for contingencies and other disputed amounts. Securedclaims, primarily representing liens on the Debtors’ assets related to theRE&C Financing Facilities, were also stayed during the pendency of thebankruptcy.

 

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

 

Ourability to continue as a going-concern during the pendency of the bankruptcywas dependent upon obtaining sufficient debtor-in-possession financing in orderto continue operations while in bankruptcy, the confirmation of a plan ofreorganization by the bankruptcy court, and resolution of disputes between theSellers and us.

 

Asof May 14, 2001, we obtained a Secured Super-Priority Debtor-in-PossessionRevolving Credit Facility (the “DIP Facility”) with a commitment of $195,000that was available to provide both ongoing funding and to support letters ofcredit. On June 5, 2001, the DIP Facility lenders approved an increase inthe total commitment from $195,000 to $220,000. See Note 8, “Credit Facilities- DIP Facility.” The DIP Facility was available and utilized as neededthroughout the pendency of the bankruptcy and was replaced by a secured$350,000, 30-month revolving credit facility (the “Senior Secured RevolvingCredit Facility” or the “Credit Facility”) entered into on January 25,2002. For a detailed discussion of the Senior Secured Revolving Facility, seeNote 8, “Credit Facilities - Senior Secured Revolving Credit Facility.”

 

Duringthe pendency of the bankruptcy, we continued to negotiate with the Sellers asettlement of our outstanding litigation with respect to the RE&Cacquisition. As a result of those negotiations, we entered into the RaytheonSettlement as disclosed previously in this Note 3.

 

OnDecember 21, 2001, the bankruptcy court entered an order confirming thePlan of Reorganization. Substantially all liabilities of the Debtors as of thedate of the bankruptcy filing were subject to settlement under our Plan ofReorganization.

 

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ThePlan of Reorganization became effective and the Debtors emerged from bankruptcyprotection on the Effective Date. Our Plan of Reorganization provided for thefollowing upon the Effective Date:

 

•                  All of our equity securities (common stock,stock purchase warrants and stock options) existing prior to the Effective Datewere canceled and extinguished.

 

•                  $570,000 of secured debt under the RE&CFinancing Facilities was exchanged for $20,000 in cash and 20,000 shares of thenew common stock of reorganized Washington Group International (“New CommonStock”) as discussed further below. See Note 8, “Credit Facilities.”

 

•                  We entered into a registration rightsagreement with each holder of a secured claim that received New Common Stockand requested to be a party to such agreement.

 

•                  Vendor and subcontractor claims directlyrelated to contracts we assumed during bankruptcy or upon emergence frombankruptcy that were not paid as critical vendor payments were paid in cash ina cure amount equal to the total claim.

 

•                  Each holder of unsecured claims at or under$5 (five thousand dollars) is to receive cash in an amount equal to its totalunsecured claim (“Convenience Class Payments”).

 

•                  Accounts payable and subcontracts payablethat were not related to cure payments or Convenience Class Payments weredischarged.

 

•                  The holders of $300,000 of Senior UnsecuredNotes and all other unsecured creditors were to receive a pro rata share of5,000 shares of the New Common Stock and a pro rata share of 8,520 fully vestedstock warrants to purchase additional shares of New Common Stock. The stockwarrants expire if unexercised four years after the Effective Date. Areorganization plan committee was established to evaluate and resolve objectionsto disputed claims of unsecured creditors and to determine each unsecuredcreditor’s pro rata share of shares and warrants. The warrants consist of threetranches as follows:

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

 

•                  Specified members of management anddesignated employees were granted stock options pursuant to a management optionplan. The management option plan provided for nonqualified stock option grantsas of the Effective Date totaling 1,389 aggregate shares of the New CommonStock with a term of 10 years and an exercise price of $24.00 per share. Inaddition, another 1,389 shares of the New Common Stock were reserved for grantsafter the Effective Date at exercise prices to be established by our board ofdirectors.

 

•                  The chairman of our board of directors, Mr.Dennis R. Washington, was granted stock options to purchase shares of NewCommon Stock in three tranches. The first tranche was to expire five yearsafter the Effective Date. The remaining tranches were to expire four yearsafter the Effective Date. One-third of each tranche vested on the EffectiveDate, one-third of each tranche vested on the first anniversary of theEffective Date and the final third of each tranche vested on the secondanniversary of the Effective Date, January 25, 2004. We also agreed withMr. Washington that our amended certificate of incorporation and bylaws wouldpermit his accumulation of up to 40% of the fully diluted shares of New CommonStock in open market or privately-negotiated transactions, including exerciseof the stock options, and that we would take no action inconsistent with thoseprovisions. Mr. Washington’s stock options were amended in November 2003, extendingthe expiration dates on all three tranches to ten years from the original date

 

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ofgrant, or January 25, 2012. The number of shares and respective exerciseprices for each tranche are as follows:

 
|      |   | **Number of shares** |   | **Exercise price   per share** |   |
|-----------|--------|----------------------|--------|--------------------------------|--------|
| Tranche A |   | 1,389                |   | $                              | 24.00  |   |
| Tranche B |   | 882                  |   | $                              | 31.74  |   |
| Tranche C |   | 953                  |   | $                              | 33.51  |   |

 

•                  We adopted fresh-start reporting as ofFebruary 1, 2002 as discussed below.

 

•                  We filed an amended and restated certificateof incorporation and adopted amended and restated bylaws and established a newboard of directors.

 

OnJanuary 25, 2002, we entered into the Senior Secured Revolving CreditFacility to fund our working capital requirements. See Note 8, “Credit Facilities.”

 

***Washington International B.V.***

 

Asa result of our filing for protection under Chapter 11 of the U.S. BankruptcyCode, the board of directors of Washington International B.V., one of ourwholly owned subsidiaries located in The Hague, the Netherlands, (“BV”),determined that BV would have insufficient funds to continue operations in thesame manner as it had prior to our bankruptcy filing. The determination wasmade based on the then-existing financial condition of BV and the fact that ourDIP Facility contained terms that prohibited the additional commitment of ourresources for BV operations.

 

OnMay 21, 2001, the BV board of directors directed management to considerstrategic restructuring alternatives including the filing of a petition for suspensionof payment under Dutch law. On May 29, 2001, the suspension of payment wasgranted and a trustee was appointed pursuant to Dutch law. Under the jointmanagement of the trustee and the BV management, all payments to third partieswere temporarily postponed while the trustee and management attempted to pursuestrategic alternatives, including the sale of the business to variouspotentially interested parties. From the date of the trustee’s appointmentthrough June 21, 2001, the trustee and management gathered facts andattempted to sell the business to several interested parties.

 

Followingdiscussions with the interested parties, it became clear that a sale of thebusiness was not feasible. On June 21, 2001, the trustee transformed thesuspension of payments to a procedure of insolvency, and a curator wasappointed to take over all management responsibilities and to liquidate the BVestate. The curator has been managing the estate since that date and we havecooperated and will continue to cooperate with the curator to resolve variousintercompany issues, including third party intellectual property rights,foreign intercompany loans and other matters.

 

During2001, as a result of the insolvency and liquidation of BV, we wrote off $30,652of assets, $64,517 of liabilities and $1,904 of foreign currency translationlosses, resulting in a net gain of $31,961 from the discharge of liabilities,which is included in reorganization items.

 

***Washington International, LLC***

 

WashingtonInternational, LLC, a Delaware limited liability company and wholly ownedsubsidiary of Washington International Holding Limited, a United Kingdom whollyowned subsidiary of Washington Group International, filed for protection underthe U.S. Bankruptcy Code in connection with our Chapter 11 filing. WashingtonInternational 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 Kingdomwholly owned subsidiary of Washington International Holding Limited, purchasedspecified contracts, constituting the ongoing 

 

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businessof Washington International, LLC, for $250. At that time, WashingtonInternational, LLC ceased conducting business and on February 20, 2002, a“Winding Up” order was made under the insolvency laws of England and Walesagainst Washington International, LLC. Washington International, LLC is nowunder the control of a liquidator pursuant to the insolvency laws of Englandand Wales, and we no longer have any control over its activities. Once thewinding up process is complete, Washington International, LLC will be dissolvedand will cease to exist. Creditors of Washington International, LLC will notreceive any shares of the New Common Stock or stock warrants to be distributedto the unsecured creditors of the Debtors.

 

Uponadoption of liquidation basis accounting in 2001, Washington International, LLChad assets of $9,208, liabilities of $12,155 and $364 of foreign currencytranslation losses, resulting in a net gain of $2,583, which is included inreorganization items.

 

***Reorganization items***

 

Reorganization items consisted of thefollowing:

 
|                                                                    |   | **Successor  Company**                |   | **Predecessor  Company**                         |       |
|-------------------------------------------------------------------------|--------|---------------------------------------|--------|--------------------------------------------------|------------|
|                                                                    |   | **Year ended  January 2,  2004** |   | **Eleven  months  ended  January 3,  2003** | ** ** | **One month  ended  February 1,  2002** | ** ** | **One month  ended  December 28,  2001** | ** ** | **Year ended  November 30,  2001** | ** ** |
| Professional fees and other expenses  related to bankruptcy proceedings |   | $                                     | 4,900  |                                             | $          | 3,174 |   | $ | 36,072 |   | $ | 8,148 |   | $ | 54,663 |   |
| Impairment of assets of rejected contracts                              |   | —                                |   | —                                           |       | 907 |   | — |   | 36,360 |   |
| Net gain from liquidation of insolvent  subsidiaries                    |   | —                                |   | —                                           |       | — |   | — |   | (34,544 | ) |
| Adjustments to fair values in fresh-start                               |   | —                                |   | —                                           |       | 35,078 |   | — |   | — |   |
| Total reorganization items                                              |   | $                                     | 4,900  |                                             | $          | 3,174 |   | $ | 72,057 |   | $ | 8,148 |   | $ | 56,479 |   |

 

***Contractualinterest expense***

 

During the pendency of our bankruptcyproceedings, we ceased accruing interest on our long-term debt. Contractualinterest expense not recorded during the one month ended February 1, 2002,the one month ended December 28, 2001 and the year ended November 30,2001 was $7,090, $6,320 and $48,235, respectively.

 

***Fresh-startreporting***

 

As of February 1, 2002, we adoptedfresh-start reporting pursuant to the guidance provided by SOP 90-7, *Financial Reporting by Entities in Reorganizationunder the Bankruptcy Code.* In connection with the adoption offresh-start reporting, a new entity was created for financial reportingpurposes. The effective date of our emergence from bankruptcy is considered tobe the close of business on February 1, 2002 for financial reportingpurposes.

 

Pursuant to SOP 90-7, we used the purchasemethod of accounting to allocate our reorganization value to our net assetswith 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. On the Effective Date, we borrowed $40,000 under the Senior SecuredRevolving Credit Facility; however, because the borrowings under the SeniorSecured Revolving Credit Facility are revolving working capital loans, theywere not included as part of the reorganization value. Therefore, thereorganization value of $550,000 represents the value of our stockholders’equity as of the Effective Date. Based on estimated fair value, we allocated$28,647 of the equity value to the stock purchase warrants and the remainder tothe New Common Stock.

 

As part of our emergence from bankruptcy, thefollowing transactions were recorded:

 

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(a)          We madepayments of $24,500 to creditors under the Plan of Reorganization and $34,749in deferred financing costs related to the Senior Secured Revolving CreditFacility and deferred bonding fees. These emergence costs necessitated the$40,000 draw under the Senior Secured Revolving Credit Facility.

(b)         We wrote-off$22,123 in fees on the RE&C Financing Facilities and the Senior UnsecuredNotes.

(c)          Uponemergence, $1,880,900 of liabilities subject to compromise were treated asfollows:

•                  $373,545 ofunsecured liabilities were retained by us and $4,500 were paid at emergence.

•                  $926,288 inunsecured obligations were exchanged for 5,000 shares of New Common Stock and8,520 warrants. The unsecured obligations included $300,000 of Senior UnsecuredNotes and approximately $415,000 related to specified Power business unitprojects that were subject to guarantees by the Sellers.

•                  $576,567 insecured obligations, including accrued interest, were exchanged for 20,000shares of New Common Stock, and $20,000 in cash paid on the Effective Date.

(d)         We recorded again on debt discharge of $1,460,732, less the value of New Common Stock andwarrants issued of $550,000, net of income taxes of $343,539.

 

**4.****             ****RESTRUCTURING CHARGES**

 

During 2001, we initiated restructuring actionsto improve operational effectiveness and efficiency and reduce expensesglobally relative to employment levels and excess facilities consistent withthe Plan of Reorganization. A liability was recorded as other accruedliabilities for employee termination benefits, impairment charges and enhancedpension benefits. The severance costs represented expected reductions in workforce for management, professional, administrative and operational overhead.The facility closure costs consist primarily of future lease payments, net ofestimated sub-tenant rental income, for vacated excess facilities. As part ofthe Plan of Reorganization in January 2002, restructuring liabilities of$14,155 representing the remaining balance recorded as part of the acquisitionof RE&C and consisting of non-cancelable lease obligations were discharged.The remaining liability at January 2, 2004 primarily represents facilityclosure costs.

 

The following presents restructuring chargesaccrued and costs incurred for the periods presented:

 
|                                                    |   | **Successor Company**                   |   | **Predecessor Company**                           |   |
|---------------------------------------------------------|--------|-----------------------------------------|--------|---------------------------------------------------|--------|
|                                                    |   | **Year ended  January 2,****2004** |   | **Eleven months  ended  January 3,****2003** |   | **One month  ended  February 1,****2002** |   | **One month  ended  December 28,****2001** |   | **Year ended  November 30,****2001** |   |
| Accrued  restructuring liability at beginning of period |   | $                                       | 11,987 |                                              | $      | 24,718 |   | $ | 44,072 |   | $ | 17,921 |   | $ | 24,331 |   |
| Charges and  liabilities accrued:                       |   |                                    |   |                                              |   |   |   |   |   |   |   |
| Severance and other  employee related costs             |   | —                                  |   | —                                            |   | 625 |   | 6,596 |   | 6,963 |   |
| Facility closure  costs                                 |   | —                                  |   | —                                            |   | — |   | 19,666 |   | — |   |
| Cash expenditures,  net of sub-tenant rental income     |   | (2,533                                  | )      | (12,731                                           | )      | (5,824 | ) | (111 | ) | (13,373 | ) |
| Liabilities  discharged in bankruptcy                   |   | —                                  |   | —                                            |   | (14,155 | )) | — |   | — |   |
| Accrued  restructuring liability at end of period       |   | $                                       | 9,454  |                                              | $      | 11,987 |   | $ | 24,718 |   | $ | 44,072 |   | $ | 17,921 |   |

 

**5.****             ****VENTURES**

 

***Constructionjoint ventures***

 

We participate in unconsolidated constructionjoint ventures that are formed to bid, negotiate and complete specificprojects. The unconsolidated construction joint ventures are reflected in ourconsolidated balance sheets as investments in and advances to constructionjoint ventures accounted for under the equity method, and our proportionateshare of revenue, cost of revenue and gross profit is included in ourconsolidated statements of operations. The size, scope and duration ofjoint-venture projects vary among periods. The tables below present the financialinformation of our unconsolidated construction joint ventures in which we donot hold a controlling interest but do exercise significant influence.

 

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| **Combined financial position  of**             |   | **Successor Company**    |    |
|-------------------------------------------------|--------|--------------------------|---------|
| **unconsolidated construction  joint ventures** |   | **January 2, 2004** |    | **January 3, 2003** |   |
| Current assets                                  |   | $                        | 217,893 |   | $ | 273,719 |   |
| Property and  equipment, net                    |   | 3,785                    |    | 8,194 |   |
| Current liabilities                             |   | (165,284                 | )       | (246,873 | ) |
| Net assets                                      |   | $                        | 56,394  |   | $ | 35,040 |   |

 
|                                                                                                                       |   | **Successor Company**                 |    | **Predecessor Company**                         |   |
|----------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|---------|-------------------------------------------------|--------|
| **Combined  results of operations of  unconsolidated construction joint ventures**                                         |   | **Year ended  January 2,  2004** |    | **Eleven months  ended  January 3,  2003** |   | **One month  ended  February 1,  2002** |   | **One month  ended  December 28,  2001** |   | **Year ended  November 30,  2001** |   |
| Revenue                                                                                                                    |   | $                                     | 702,648 |                                            | $      | 596,965 |   | $ | 43,751 |   | $ | 42,632 |   | $ | 557,209 |   |
| Cost of revenue                                                                                                            |   | (624,535                              | )       | (574,175                                        | )      | (42,436 | ) | (40,563 | ) | (537,327 | ) |
| Gross profit                                                                                                               |   | $                                     | 78,113  |                                            | $      | 22,790 |   | $ | 1,315 |   | $ | 2,069 |   | $ | 19,882 |   |
| **Washington Group  International’s share of results of operations of****unconsolidated construction joint ventures** |   |                                  |    |                                            |   |   |   |   |   |   |   |
| Revenue                                                                                                                    |   | $                                     | 271,218 |                                            | $      | 236,701 |   | $ | 17,790 |   | $ | 16,327 |   | $ | 210,904 |   |
| Cost of revenue                                                                                                            |   | (239,881                              | )       | (229,383                                        | )      | (17,387 | ) | (15,653 | ) | (205,871 | ) |
| Gross profit                                                                                                               |   | $                                     | 31,337  |                                            | $      | 7,318 |   | $ | 403 |   | $ | 674 |   | $ | 5,033 |   |

 

***Unconsolidatedaffiliates***

 

At January 2, 2004, we held ownershipinterests in several unconsolidated affiliates that are accounted for under theequity method, the most significant of which are two incorporated miningventures: MIBRAG mbH (50%) and Westmoreland Resources, Inc. (“WestmorelandResources”) (20%). We provide consulting services to MIBRAG mbH and contractmining services to Westmoreland Resources. The tables below present thefinancial information of our unconsolidated affiliates in which we do not holda controlling interest but do exercise significant influence.

 
| **Combined financial position  of**      |   | **Successor Company**    |    |
|------------------------------------------|--------|--------------------------|---------|
| **unconsolidated affiliates**            |   | **January 2, 2004** |    | **January 3, 2003** |   |
| Current assets                           |   | $                        | 187,983 |   | $ | 201,779 |   |
| Property and  equipment, net             |   | 520,107                  |    | 450,604 |   |
| Other non-current  assets                |   | 698,817                  |    | 538,880 |   |
| Current liabilities                      |   | (87,306                  | )       | (50,365 | ) |
| Long-term debt,  non-recourse to parents |   | (274,697                 | )       | (272,120 | ) |
| Other non-current  liabilities           |   | (739,741                 | )       | (662,454 | ) |
| Net assets                               |   | $                        | 305,163 |   | $ | 206,324 |   |

 

 
|                                                                |   | **Successor Company**                 |    | **Predecessor Company**                         |   |
|---------------------------------------------------------------------|--------|---------------------------------------|---------|-------------------------------------------------|--------|
| **Combined  results of operations of****unconsolidated affiliates** |   | **Year ended  January 2,  2004** |    | **Eleven months  ended  January 3,  2003** |   | **One month  ended  February 1,  2002** |   | **One month  ended  December 28,  2001** |   | **Year ended  November 30  2001** |   |
| Revenue                                                             |   | $                                     | 447,386 |                                            | $      | 296,335 |   | $ | 28,403 |   | $ | 25,465 |   | $ | 315,261 |   |
| Costs and expenses                                                  |   | (394,847                              | )       | (240,358                                        | )      | (21,508 | ) | (22,827 | ) | (276,249 | ) |
| Net income                                                          |   | $                                     | 52,539  |                                            | $      | 55,977 |   | $ | 6,895 |   | $ | 2,638 |   | $ | 39,012 |   |

 

In the fourth quarter of 2002, MIBRAG mbHsuccessfully negotiated amendments to the original agreement on transportationcredit matters it had entered into with the German government in 1993. As aresult of those negotiations, MIBRAG mbH recognized $13,000 in operatingincome, of which our portion was $6,500. In addition, MIBRAG mbH recognized a$12,000 one-time award of power cogeneration credits, of which our portion was$6,000. The negotiations also included a settlement agreement replacing annualpayments to be received by MIBRAG mbH over approximately 19 years from theGerman government with a one-time, up-front

 

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payment totaling approximately $383,000, whichwas recorded as deferred income in other non-current liabilities. MIBRAG mbHalso capitalized approximately $392,000 as a non-current asset for coaltransportation and mining rights acquired through the settlement agreement.Both the deferred revenue and the rights will be amortized over approximately19 years.

 

**6.****             ****SALE OF BUSINESSES**

 

In November 2001, we and BNFL agreed topursue the sale of the Electro-Mechanical Division (“EMD”) of the WestinghouseBusinesses. EMD designed and manufactured components for the U.S. Navy, nuclearpower utilities and other industries. On October 28, 2002, we sold EMD toa subsidiary of Curtiss-Wright Corporation. Curtiss-Wright Corporation agreedto pay $80,000 in cash, subject to certain adjustments, and assumed certainliabilities, including pension and other post-retirement obligations. Cashproceeds, net of a required contribution to the pension plan assumed byCurtiss-Wright Corporation were $77,133 and were distributed 60:40 between usand BNFL. We recognized $46,280 in net cash proceeds and a $3,420 gain ($1,145net of tax and minority interest) on the sale of EMD, which was reflected asother operating income in 2002. Operating results for EMD are included as partof the Energy & Environment business unit in Note 12, “Operating Segment,Geographic and Customer Information” through the date of the sale.

 

On April 18, 2003, we sold the processtechnology development portion of our petroleum and chemical business (the“Technology Center”) for $17,700, subject to certain adjustments, and recognizeda gain of $4,946 on the sale reflected as other operating income in 2003.Operating results for the Technology Center are included as part of the“Intersegment and other unallocated operating costs” in Note 12, “OperatingSegment, Geographic and Customer Information” through the date of the sale.

 

Operating results of the Technology Center andEMD included in our consolidated results of operations for periods prior to thesales are as follows:

 
|              |   | **Successor Company**                   |   | **Predecessor Company**                           |   |
|-------------------|--------|-----------------------------------------|--------|---------------------------------------------------|--------|
|              |   | **Year ended  January 2,****2004** |   | **Eleven months  ended  January 3,****2003** |   | **One month  ended  February 1,****2002** |   | **One month  ended  December 28,****2001** |   | **Year ended  November 30****2001** |   |
| Revenue           |   | $                                       | 9,989  |                                              | $      | 150,086 |   | $ | 17,088 |   | $ | 16,413 |   | $ | 171,876 |   |
| Net income (loss) |   | (590                                    | )      | 7,333                                             |   | 960 |   | 22 |   | (231 | ) |
|                   |        |                                         |        |                                                   |        |  |  |  |  |  |  |  |  |  |  |  |

 

For financial reporting purposes, the assetsand liabilities of the Technology Center were classified as “Assets held forsale” and “Liabilities related to assets held for sale” in the accompanyingJanuary 3, 2003 Consolidated Balance Sheet.

 

**7.****                                     ****GOODWILL**

 

The following table reflects the changes in thecarrying value of goodwill from December 28, 2001 to January 2, 2004.During the month ended February 1, 2002, we eliminated Predecessor Companygoodwill in fresh-start reporting and established goodwill of the SuccessorCompany. See Note 3, “Acquisition, Reorganization Case and Fresh-startReporting.” During the eleven months ended January 3, 2003 and the yearended January 4, 2004, we reduced goodwill as a result of amortization ofthe excess of tax deductible goodwill over financial reporting goodwill inaccordance with the provisions of SFAS No. 109, *Accounting for Income Taxes*.

 

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| **Goodwill activity by  reporting segment**                                                                                 |   | **Power** |   | **Industrial/  Process** |   | **Infrastructure** |   | **Mining** |   | **Defense** |   | **Energy &  Environment** |   | **Corporate  and other** |   | **Total** |   |
|-----------------------------------------------------------------------------------------------------------------------------|--------|-----------|--------|--------------------------|--------|--------------------|--------|------------|--------|-------------|--------|-------------------------------|--------|--------------------------|--------|-----------|--------|
| Balance at  December 28, 2001                                                                                          |   | $         | — |                     | $      | —             |   | $          | 721    |        | $      | —                        |   | $                        | — |      | $      | 160,165 |   | $ | 14,023 |   | $ | 174,909 |   |
| Elimination of  Predecessor Company goodwill                                                                                |   | —    |   | —                   |   | (721               | )      | —     |   | —      |   | (160,165                      | )      | (14,023                  | )      | (174,909  | )      |
| Establishment of  Successor Company goodwill in fresh- start reporting                                                      |   | 6,846     |   | 118,888                  |   | 52,539             |   | —     |   | 44,444      |   | 179,635                       |   | —                   |   | 402,352   |   |
| Balance at  February 1, 2002                                                                                           |   | 6,846     |   | 118,888                  |   | 52,539             |   | —     |   | 44,444      |   | 179,635                       |   | —                   |   | 402,352   |   |
| Adjustment for  amortization of the excess tax deductible goodwill over financial reporting  goodwill                       |   | (460      | )      | (6,811                   | )      | (3,531             | )      | —     |   | (2,987      | )      | (1,309                        | )      | —                   |   | (15,098   | )      |
| Balance at  January 3, 2003                                                                                            |   | 6,386     |   | 112,077                  |   | 49,008             |   | —     |   | 41,457      |   | 178,326                       |   | —                   |   | 387,254   |   |
| Reorganization of  reporting structure                                                                                      |   | 1,695     |   | (9,658                   | )      | 7,963              |   | —     |   | —      |   | —                        |   | —                   |   | —    |   |
| Adjustment for  amortization of the excess tax deductible goodwill over financial reporting  goodwill and other adjustments |   | (834      | )      | (12,338                  | )      | (6,397             | )      | —     |   | (5,412      | )      | (2,370                        | )      | —                   |   | (27,351   | )      |
| Balance at  January 2, 2004                                                                                            |   | $         | 7,247  |                     | $      | 90,081             |   | $          | 50,574 |        | $      | —                        |   | $                        | 36,045 |      | $      | 175,956 |   | $ | — |   | $ | 359,903 |   |

 

Prior to January 3, 2003, an open-shopsubsidiary was assigned to the Industrial/Process reporting segment. During2003, the subsidiary was assigned to the Power, Industrial/Process andInfrastructure reporting segments because of a change in segments to which thesubsidiary was providing service. Goodwill was therefore reallocated betweenthe reporting segments in accordance with SFAS No. 142, *Goodwill and Other Intangible Assets*.

 

We perform our annual goodwill impairment testfor all of our reporting segments as of October 31, in conjunction withour annual budgeting and forecasting process. There was no goodwill identifiedfor impairment during our annual review of goodwill for the year endedJanuary 2, 2004 and the eleven months ended January 3, 2003.

 

**8.****             ****CREDIT FACILITIES**

 

On July 7, 2000, in order to finance theacquisition of RE&C, to refinance existing revolving credit facilities, tofund working capital requirements and to pay related fees and expenses, we (1)obtained the RE&C Financing Facilities, providing for an aggregate of$1,000,000 of term loans and revolving borrowing capacity and (2) issued andsold $300,000 aggregate principal amount of Senior Unsecured Notes. The termsof the RE&C Financing Facilities and Senior Unsecured Notes are brieflysummarized below.

 

***RE&CFinancing Facilities***

 

The RE&C Financing Facilities provided for,on the terms and subject to the conditions stated in the RE&C FinancingFacilities: (1) two senior secured term loan facilities in an aggregateprincipal amount of up to $500,000, including a multi-draw Tranche A term loanfacility 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 (2) a five-year senior securedrevolving credit facility in an aggregate principal amount of up to $500,000,all of which was available for letters of credit. Initial borrowings under theRE&C Financing Facilities totaled $400,000, representing the full amountavailable under the Tranche B term loan facility. On October 5, 2000, weterminated the Tranche A term loan facility to eliminate ongoing relatedcommitment fees.

 

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***SeniorUnsecured Notes***

 

The Senior Unsecured Notes were unsecuredsenior obligations that were to mature on July 1, 2010. The SeniorUnsecured Notes accrued interest at a rate of 11% per annum throughSeptember 20, 2000, and were then adjusted to 11.5% per annum. They werescheduled to continue at that rate until we fully complied with theregistration requirements of a registration rights agreement, subject to afurther increase in interest rate of 0.5% per annum from and afterDecember 20, 2000, until the registration process was completed. TheSenior Unsecured Notes ranked equally with our existing and future seniorunsecured indebtedness. The Senior Unsecured Notes effectively ranked junior toall of our secured indebtedness and to all liabilities of our subsidiaries thatwere not guarantors of the Senior Unsecured Notes.

 

***Bankruptcydischarge***

 

As discussed in Note 3, “Acquisition,Reorganization Case and Fresh-start Reporting,” our obligations under theRE&C Financing Facilities and the Senior Unsecured Notes were dischargedupon our emergence from bankruptcy on January 25, 2002.

 

***DIP Facility***

 

On May 14, 2001, we filed a voluntary petitionfor relief under Chapter 11 of the U.S. Bankruptcy Code. See Note 3,“Acquisition, 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 commitmentto $350,000. On June 5, 2001 the DIP Facility lenders approved an increasein the total commitment from $195,000 to $220,000. The DIP Facility was to beused (1) to finance the costs of restructuring and (2) for ongoing workingcapital, general corporate purposes and letter of credit issuance. Theborrowing rate under the DIP Facility was the prime rate, plus an additionalmargin of 4.0%. The effective interest rate was 11.0% as of May 2001. The DIPFacility carried other fees, including commitment fees and letter of creditfees, normal and customary for such credit agreements. As of January 24,2002, we had no outstanding debt and $32,800 of outstanding letters of creditunder the DIP Facility. As discussed below, the DIP Facility was replaced bythe Senior Secured Revolving Credit Facility on January 25, 2002.

 

***SeniorSecured Revolving Credit Facility***

 

In connection with our emergence frombankruptcy protection on January 25, 2002, we entered into a SeniorSecured Revolving Credit Facility (“Credit Facility”) providing for anaggregate of $350,000 of revolving borrowing and letter of credit capacity, ofwhich the borrowing capacity was limited to $200,000. The Credit Facilityprovided for an amount up to $350,000 in the aggregate of loans and otherfinancial 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 theamount of $141,650. The scheduled termination date for the Credit Facility wasJuly 24, 2004.

 

Borrowings under the Credit Facility wererequired to be allocated between the two tranches on a proportional split basedupon the size of each tranche. The borrowing rate under the Credit Facilitywas, for Tranche A, the applicable LIBOR, which had a stated floor of 3%, plusan additional margin of 5.5%, and for Tranche B, LIBOR plus an additionalmargin of 5.5%. The Credit Facility carried other fees, including commitmentfees and letter of credit fees, normal and customary for such creditagreements. The Credit Facility contained affirmative, negative and financialcovenants, including minimum net worth, capital expenditures, maintenance ofcertain financial and operating ratios, and specified events of default whichare typical for a credit agreement governing credit facilities of the size,type and tenor of the Credit Facility. The Credit Facility also containedaffirmative and negative covenants limiting our ability and the ability ofcertain of our subsidiaries to incur debt or liens, provide guarantees, makeinvestments and pay any dividends. At January 3, 2003, $169,011 in faceamount of letters of credit were issued and outstanding, and no amountsborrowed were outstanding under the Credit Facility. On October 9, 2003, wereplaced the Credit Facility with a New Senior Secured Revolving CreditFacility (“New Credit Facility”). As a result of the refinancing, a pre-taxcharge to income of $9,831 was recorded in the fourth quarter of 2003associated with the unamortized balance of the financing fees of the CreditFacility.

 

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***New SeniorSecured Revolving Credit Facility***

 

The New Credit Facility provides for an amountup to $350,000 in the aggregate of loans and other financial accommodationsallocated pro rata between two facilities as follows: a Tranche A facility inthe amount of $115,000 and a Tranche B facility in the amount of $235,000. Thescheduled termination date for the New Credit Facility is October 9, 2007.Borrowings under the New Credit Facility are required to be allocated betweenthe two tranches on a proportional basis, based upon the size of each tranche.The borrowing rate for Tranche A and Tranche B is LIBOR, which has a statedfloor of 2%, plus an additional margin of 3.75%. As of January 2, 2004,the effective rate was 5.75%. The New Credit Facility also provides for otherfees, including commitment and letter of credit fees, normal and customary forsuch credit agreements. The New Credit Facility contains financial covenantsrequiring the maintenance of certain financial and operating ratios, andspecified events of default which are typical for a credit agreement governingcredit facilities of this size, type and tenor. While not as restrictive as theCredit Facility, the New Credit Facility also contains affirmative and negativecovenants which continue to limit our ability and the ability of certainsubsidiaries to incur debt or liens, provide guarantees, make investments andpay dividends. At January 2, 2004, approximately $141,417 of letters ofcredit were issued and outstanding, and no borrowings were outstanding underthe New Credit Facility. The New Credit Facility is secured by substantiallyall of the assets of Washington Group International and our wholly owneddomestic subsidiaries. Financing fees of approximately $11,500 incurred inconnection with the New Credit Facility have been capitalized and are beingamortized over the 48-month term of the facility.

 

**9.****             ****TAXES ON INCOME**

 

The components of the U.S. federal, state andforeign income tax expense (benefit) were as follows:

 
|                              |   | **Successor Company**                   |   | **Predecessor Company**                           |   |
|-----------------------------------|--------|-----------------------------------------|--------|---------------------------------------------------|--------|
|                              |   | **Year ended  January 2,****2004** |   | **Eleven months  ended  January 3,****2003** |   | **One month  ended  February 1,****2002** |   | **One month  ended  December 28,****2001** |   | **Year ended  November 30,****2001** |   |
| Currently payable                 |   |                                    |   |                                              |   |   |   |   |   |   |   |
| U.S. federal                      |   | $                                       | 684    |                                              | $      | — |   | $ | — |   | $ | — |   | $ | — |   |
| State                             |   | 1,247                                   |   | 1,660                                             |   | (129 | ) | 20 |   | 649 |   |
| Foreign                           |   | 4,927                                   |   | 4,158                                             |   | 361 |   | 899 |   | 4,967 |   |
| Total current  expense            |   | 6,858                                   |   | 5,818                                             |   | 232 |   | 919 |   | 5,616 |   |
| Deferred                          |   |                                    |   |                                              |   |   |   |   |   |   |   |
| U.S. federal                      |   | 34,605                                  |   | 36,107                                            |   | (19,178 | ) | (13,173 | ) | (23,917 | ) |
| State                             |   | 4,175                                   |   | 3,900                                             |   | (1,246 | ) | (2,467 | ) | (8,728 | ) |
| Foreign                           |   | 1,250                                   |   | 392                                               |   | 114 |   | (186 | ) | 264 |   |
| Total deferred  expense (benefit) |   | 40,030                                  |   | 40,399                                            |   | (20,310 | ) | (15,826 | ) | (32,381 | ) |
| Income tax expense  (benefit)     |   | $                                       | 46,888 |                                              | $      | 46,217 |   | $ | (20,078 | ) | $ | (14,907 | ) | $ | (26,765 | ) |

 

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The componentsof the deferred tax assets and liabilities and the related valuation allowanceswere as follows:

 
|                                    |   | **Successor  Company** |       |
|-----------------------------------------|--------|------------------------|------------|
| **Deferred tax assets and liabilities** |   | **January 2,  2004**   | ** ** | **January 3,  2003** | ** ** |
| Deferred tax assets                     |   |                   |       |   |   |
| Goodwill                                |   | $                      | 4,557      |   | $ | 26,204 |   |
| Compensation and benefits               |   | 45,915                 |       | 37,637 |   |
| Depreciation                            |   | —                 |       | 298 |   |
| Provision for losses                    |   | 42,279                 |       | 50,694 |   |
| Joint ventures                          |   | 9,065                  |       | 9,097 |   |
| Revenue recognition                     |   | 3,343                  |       | — |   |
| Self-insurance reserves                 |   | 28,790                 |       | 34,336 |   |
| Alternative minimum tax                 |   | 16,796                 |       | — |   |
| Foreign tax credit                      |   | 16,462                 |       | 12,210 |   |
| Net operating loss carryovers           |   | 150,393                |       | 48,512 |   |
| Valuation allowance                     |   | (144,582               | )          | (48,512 | ) |
| Total deferred tax assets               |   | 173,018                |       | 170,476 |   |
| Deferred tax liabilities                |   |                   |       |   |   |
| Depreciation                            |   | (1,493                 | )          | — |   |
| Investment in affiliates                |   | (38,670                | )          | (21,382 | ) |
| Revenue recognition                     |   | —                 |       | (6,804 | ) |
| Other, net                              |   | (16,891                | )          | (16,848 | ) |
| Total deferred tax liabilities          |   | (57,054                | )          | (45,034 | ) |
| Total deferred tax assets, net          |   | $                      | 115,964    |   | $ | 125,442 |   |

 

During thethird quarter of 2003, we completed an analysis of the tax laws applicable tothe cancellation of debt under our bankruptcy proceedings resulting inadjustments to deferred income taxes for the year ended January 2, 2004. Thefollowing adjustments to deferred taxes have been recorded:

 

•                  Net operatingloss (“NOL”) carryovers have been increased by $278,704, resulting in adeferred tax asset of $108,778. A valuation allowance of  $91,834 has been established against thisdeferred tax asset.

 

•                  Alternativeminimum tax (“AMT”) credit carryovers increased by $16,112, resulting in adeferred tax asset of $16,112.

 

•                  The tax basis indepreciable assets was reduced by $37,187, resulting in a deferred taxliability of $13,016.

 

As of January2, 2004, we have remaining tax goodwill of $59,690 resulting from theacquisition of the Westinghouse Businesses and $634,493 resulting from theacquisition of RE&C.  Theamortization of this tax goodwill is deductible over remaining periods of 10.2and 11.5 years, respectively, resulting in annual tax deductions of $61,045,net of minority interest. At January 2, 2004, we had federal NOL carryovers of$248,002, most of which is subject to an annual limitation of $26,510. Thefederal NOL carryovers expire in years 2019 through 2022. We also had foreignNOL carryovers of $175,233, most of which are not subject to expiration. Theforeign NOL carryovers primarily consist of losses incurred on two constructionprojects in the United Kingdom which were acquired as part of the RE&Cacquisition. We also had $16,462 of foreign tax credits which currently have noexpiration date.

 

The $144,582valuation allowance reduces the deferred tax assets associated with the NOLcarryovers to a level which we believe will, more likely than not, be realizedbased on estimated future taxable income. As the NOL is used against taxable income or the valuation allowance isno longer considered necessary, the valuation

 

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allowance will be reduced,substantially all of which will result in a corresponding reduction tofinancial statement goodwill.

 

Years prior to1994 are closed to examination for federal tax purposes. We believe thatadequate provision has been made for probable tax assessments for all open taxyears.

 

Income taxexpense (benefit) differed from income taxes at the U.S. federal statutory taxrate of 35.0% as follows:

 
|                              |   | **Successor  Company**           |   | **Predecessor  Company**                    |   |
|-----------------------------------|--------|----------------------------------|--------|---------------------------------------------|--------|
|                              |   | **Year ended  January 2,  2004** |   | **Eleven  months  ended  January 3,  2003** |   | **One month   ended  February 1,  2002** |   | **One month  ended  December 28,  2001** |   | **Year ended  November 30,  2001** |   |
| Federal tax rate                  |   | 35.0                             | %      | 35.0                                        | %      | 35.0 | % | 35.0 | % | 35.0 | % |
| State tax, net of federal benefit |   | 3.2                              |   | 3.5                                         |   | 2.8 |   | 3.9 |   | 5.5 |   |
| Nondeductible items               |   | 2.8                              |   | 3.0                                         |   | .4 |   | (3.1 | ) | (14.4 | ) |
| Foreign tax                       |   | 1.3                              |   | 2.7                                         |   | — |   | — |   | (1.3 | ) |
| Goodwill                          |   | —                           |   | —                                      |   | — |   | .7 |   | 3.0 |   |
| Effective  tax rate               |   | 42.3                             | %      | 44.2                                        | %      | 38.2 | % | 36.5 | % | 27.8 | % |

 

State taxes,net of federal benefit, include the impact of the cumulative effect of thestate tax rate changes caused by changes in our state apportionment factorsthat had a corresponding impact on our deferred state tax assets andliabilities. Foreign taxes include a benefit for current year losses in certainforeign jurisdictions. A full valuation allowance has been placed against theresulting foreign NOL’s. Nondeductible items were principally comprised ofnondeductible reorganization expenses, net of previously capitalized expensesfrom an earlier reorganization, and the nondeductible portion of meals andentertainment expenses.

 

Income (loss)before reorganization items, income taxes, minority interests and extraordinaryitem is comprised of the following:

 
|                                                                                                |   | **Successor  Company**           |    | **Predecessor  Company**                    |   |
|-----------------------------------------------------------------------------------------------------|--------|----------------------------------|---------|---------------------------------------------|--------|
|                                                                                                |   | **Year ended  January 2,  2004** |    | **Eleven  months  ended  January 3,  2003** |   | **One month  ended  February 1,  2002** |   | **One month  ended  December 28,  2001** |   | **Year ended  November 30,  2001** |   |
| U.S. source                                                                                         |   | $                                | 46,018  |                                        | $      | 60,059 |   | $ | 4,648 |   | $ | (35,485 | ) | $ | (156,471 | ) |
| Foreign source                                                                                      |   | 69,741                           |    | 47,617                                      |   | 3,420 |   | 2,760 |   | 116,737 |   |
| Income (loss) before reorganization items, income taxes, minority  interests and extraordinary item |   | $                                | 115,759 |                                        | $      | 107,676 |   | $ | 8,068 |   | $ | (32,725 | ) | $ | (39,734 | ) |

 

**10.  BENEFITPLANS**

 

***Pensionplans and supplemental retirement plans***

 

Through anacquisition in 1999, we assumed sponsorship of contributory defined benefitpension plans which cover employees of the Westinghouse Businesses. We makeactuarially computed liability calculations for financial reporting purposesand make contributions as necessary to adequately fund benefits for these plans.Plan assets are invested in master pension trusts for the WestinghouseBusinesses that invest primarily in publicly traded common stocks, bonds,government securities and cash equivalents.

 

We have anunfunded supplemental retirement plan for key executives of the WestinghouseBusinesses providing for periodic payments upon retirement. Benefits from thisplan are based on salary and years of service

 

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and are reduced by benefitsearned from certain other pension plans in which the executives participate.Benefits from this plan were frozen effective July 1, 2001, resulting in acurtailment gain of $4,382.

 

We haveassumed the nonqualified pension liabilities for approximately 60 employees andformer employees of Old MK. In addition, we have an unfunded pension liabilityfor former non-employee directors of Old MK. Participants do not accrue anyservice costs under the plans.

 

We use anOctober 31 measurement date for all pension plans, except for one plan whichuses a December 31 measurement date. Reconciliation of beginning and endingbalances of benefit obligations and fair value of plan assets and the fundedstatus of the pension plans are as follows:

 
|                                                        |   | **Successor  Company** |    |
|-------------------------------------------------------------|--------|------------------------|---------|
| **Change in benefit obligations**                           |   | **January 2,  2004**   |    | **January 3,  2003** |   |
| Benefit obligations at beginning of period                  |   | $                      | 62,619  |   | $ | 161,738 |   |
| Service cost                                                |   | 3,367                  |    | 4,503 |   |
| Interest cost                                               |   | 4,091                  |    | 9,111 |   |
| Participant contributions                                   |   | 447                    |    | 841 |   |
| Benefit payments                                            |   | (3,627                 | )       | (7,548 | ) |
| Actuarial loss                                              |   | 5,310                  |    | 9,478 |   |
| Divestiture – sale of EMD                              |   | —                 |    | (115,504 | ) |
| Benefit obligations at end of period                        |   | $                      | 72,207  |   | $ | 62,619 |   |
|                                                        |   |                   |    |   |   |
| **Change in plan assets**                                   |   |                   |    |   |   |
| Fair value of plan assets at beginning of  period           |   | $                      | 9,620   |   | $ | 92,137 |   |
| Actual return on plan assets                                |   | 2,480                  |    | (10,000 | ) |
| Company contributions                                       |   | 6,130                  |    | 6,922 |   |
| Participant contributions                                   |   | 447                    |    | 841 |   |
| Benefit payments                                            |   | (3,627                 | )       | (7,548 | ) |
| Divestiture – sale of EMD                              |   | (445                   | )       | (72,732 | ) |
| Fair value of plan assets at end of period                  |   | $                      | 14,605  |   | $ | 9,620 |   |
|                                                        |   |                   |    |   |   |
| Funded status (obligations less fair value  of plan assets) |   | $                      | (57,602 | ) | $ | (52,999 | ) |
| Unrecognized net actuarial loss                             |   | 7,915                  |    | 3,078 |   |
| Accrued benefit cost                                        |   | (49,687                | )       | (49,921 | ) |
| Contributions made after the measurement  date              |   | 507                    |    | 1,275 |   |
| Accrued benefit cost at end of period                       |   | $                      | (49,180 | ) | $ | (48,646 | ) |

 

Amountsrecognized in the balance sheet for the pension plans are as follows:

 
|                                           |   | **Successor  Company** |    |
|------------------------------------------------|--------|------------------------|---------|
|                                           |   | **January 2,  2004**   |    | **January 3,  2003** | ** ** |
| Accrued benefit liability                      |   | $                      | (53,227 | ) | $ | (49,907 | ) |
| Accumulated other comprehensive loss           |   | 2,881                  |    | 992 |   |
| Minority interest in other comprehensive  loss |   | 1,166                  |    | 269 |   |
| Net amount recognized                          |   | $                      | (49,180 | ) | $ | (48,646 | ) |

 

We expect tocontribute $8,593 to our pension plans in 2004. At January 2, 2004, the benefitobligation for each pension benefit plan disclosed above exceeded the fairvalue of plan assets.

 

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Theaccumulated benefit obligation for all defined benefit pension plans was$67,365 and $59,138 at January 2, 2004 and January 3, 2003, respectively.

 

The componentsof net pension costs for the plans are as follows:

 
|                                |   | **Successor  Company**           |   | **Predecessor  Company**                    |   |
|-------------------------------------|--------|----------------------------------|--------|---------------------------------------------|--------|
| **Components of net pension costs** |   | **Year ended  January 2,  2004** |   | **Eleven  months  ended  January 3,  2003** |   | **One month  ended  February 1,  2002** |   | **One month  ended  December 28,  2001** |   | **Year ended  November 30,  2001** |   |
| Service cost                        |   | $                                | 3,367  |                                        | $      | 4,503 |   | $ | 369 |   | $ | 369 |   | $ | 4,717 |   |
| Interest cost                       |   | 4,091                            |   | 9,111                                       |   | 854 |   | 854 |   | 11,369 |   |
| Expected return on assets           |   | (923                             | )      | (6,214                                      | )      | (600 | ) | (600 | ) | (7,947 | ) |
| Recognized net actuarial loss       |   | 125                              |   | 11                                          |   | 13 |   | 13 |   | — |   |
| Amortization of prior service cost  |   | —                           |   | —                                      |   | — |   | — |   | 21 |   |
| Net periodic pension costs          |   | $                                | 6,660  |                                        | $      | 7,411 |   | $ | 636 |   | $ | 636 |   | $ | 8,160 |   |

 

The actuarialassumptions used to determine pension benefit obligations for the plans are asfollows:

 
|                      |   | **Successor  Company** |   |
|---------------------------|--------|------------------------|--------|
|                      |   | **January 2,  2004**   |   | **January 3,  2003** |   |
| Discount rate             |   | 6.3                    | %      | 6.8 | % |
| Compensation increases    |   | 4.0                    |   | 4.0 |   |
| Expected return on assets |   | 8.0                    |   | 9.0 |   |

 

Experiencegains and losses, as well as the effects of changes in actuarial assumptionsand plan provisions, are amortized over the average future service period ofemployees.

 

To determinethe overall expected long-term rate of return on assets, we evaluate thefollowing: (i) expectations of investment performance based on the specificinvestment policies and strategy for each class of plan assets, (ii) historicalrates of return for each significant category of plan assets and (iii) otherrelevant market and company specific factors we believe have historicallyimpacted long-term rates of return. The decrease in 2003 to an expected 8.0%rate of return from the 2002 expected 9.0% rate of return is based on loweractual rates of return experienced during the last two years, as well as adecrease in expectations of performance for our classes of plan assets.

 

Separateinvestment committees manage the assets of the two master trusts, which holdthe plan assets. In accordance with the investment guidelines, the assets ofthe funds are invested in a manner consistent with the fiduciary standards ofthe Employee Retirement Income Security Act of 1974 (ERISA). The investmentsare made solely in the interest of the participants and beneficiaries and forthe exclusive purpose of providing benefits to the participants and theirbeneficiaries. The asset allocation targets for these two master trusts areapproximately 60 percent in equities and 40 percent in fixed income securities.Actual allocation percentages will vary from the target percentages based onshort-term fluctuations in cash flows and market fluctuations.

 

The pensionplan’s weighted-average asset allocations by asset category are:

 
| **Asset category**           |   | **January 2,  2004** |   | **January 3,  2003** |   |
|------------------------------|--------|----------------------|--------|----------------------|--------|
| U.S. equity securities       |   | 55                   | %      | 38                   | %      |
| Fixed income debt securities |   | 36                   |   | 29                   |   |
| Non-U.S. equity securities   |   | 6                    |   | 6                    |   |
| Cash and cash equivalents    |   | 3                    |   | 27                   |   |

 

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***Post-retirementhealth care plans***

 

We are thesponsors of an unfunded plan to provide certain health care benefits foremployees of Old MK who retired before July 1, 1993, including their survivingspouses and dependent children. Employees who retired after July 1, 1993 arenot eligible for subsidized post-retirement health care benefits. The plan was amendedin past years, and we reserve the right to amend or terminate thepost-retirement health care benefits currently provided under the plan and mayincrease retirees’ cash contributions at any time.

 

We providebenefits under company sponsored retiree health care and life insurance plansfor substantially all employees of the Westinghouse Businesses. We also providebenefits under company sponsored retiree health care plans to approximately 60retired employees and provide a life insurance plan for substantially allretirees of RE&C. The retiree health care plans require retireecontributions and contain other cost sharing features. The retiree life insurance plan provides basic coverage on anoncontributory basis.

 

We use an October 31measurement date for our post-retirement health care plans.

 

Reconciliationof beginning and ending balances of post-retirement benefit obligations andfair value of plan assets and the funded status are as follows:

 
|                                                        |   | **Successor  Company** |    |
|-------------------------------------------------------------|--------|------------------------|---------|
| **Change in post-retirement benefit obligations**           |   | **January 2,  2004**   |    | **January 3,  2003** |   |
| Benefit obligations at beginning of period                  |   | $                      | 48,179  |   | $ | 77,395 |   |
| Service cost                                                |   | 889                    |    | 1,216 |   |
| Interest cost                                               |   | 3,119                  |    | 4,623 |   |
| Participant contributions                                   |   | 1,244                  |    | 1,066 |   |
| Benefit payments                                            |   | (5,688                 | )       | (7,131 | ) |
| Actuarial loss                                              |   | 7,147                  |    | 4,449 |   |
| Divestiture – sale of EMD                              |   | —                 |    | (33,439 | ) |
| Benefit obligations at end of period                        |   | $                      | 54,890  |   | $ | 48,179 |   |
|                                                        |   |                   |    |   |   |
| **Change in plan assets**                                   |   |                   |    |   |   |
| Fair value of plan assets at beginning of  period           |   | $                      | —  |   | $ | — |   |
| Company contributions                                       |   | 4,444                  |    | 6,065 |   |
| Participant contributions                                   |   | 1,244                  |    | 1,066 |   |
| Benefit payments                                            |   | (5,688                 | )       | (7,131 | ) |
| Fair value of plan assets at end of period                  |   | $                      | —  |   | $ | — |   |
|                                                        |   |                   |    |   |   |
| Funded status (obligations less fair value  of plan assets) |   | $                      | (54,890 | ) | $ | (48,179 | ) |
| Unrecognized net actuarial loss                             |   | 8,464                  |    | 1,056 |   |
| Accrued benefit cost                                        |   | (46,426                | )       | (47,123 | ) |
| Contributions made after the measurement  date              |   | 577                    |    | 1,161 |   |
| Accrued benefit cost at end of period                       |   | $                      | (45,849 | ) | $ | (45,962 | ) |

 

As of January2, 2004 and January 3, 2003, the accrued benefit liabilities recognized in thebalance sheet for the postretirement health care plans are $(45,849) and$(45,962), respectively.

 

We expect tocontribute $3,997 to our post-retirement plans in 2004.

 

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The componentsof net post-retirement costs are as follows:

 
|                                         |   | **Successor  Company**           |   | **Predecessor  Company**                    |   |
|----------------------------------------------|--------|----------------------------------|--------|---------------------------------------------|--------|
| **Components of net  post-retirement costs** |   | **Year ended  January 2,  2004** |   | **Eleven  months  ended  January 3,  2003** |   | **One month  ended  February 1,  2002** |   | **One month  ended  December 28,  2001** |   | **Year ended  November 30,  2001** |   |
| Service cost                                 |   | $                                | 889    |                                        | $      | 1,216 |   | $ | 25 |   | $ | 25 |   | $ | 701 |   |
| Interest cost                                |   | 3,119                            |   | 4,623                                       |   | 292 |   | 292 |   | 5,523 |   |
| Recognized net actuarial gain                |   | —                           |   | —                                      |   | (31 | ) | (30 | ) | — |   |
| Amortization of prior service credit         |   | —                           |   | —                                      |   | (32 | ) | (33 | ) | (2,087 | ) |
| Settlement                                   |   | —                           |   | —                                      |   | — |   | — |   | (391 | ) |
| Net post-retirement costs                    |   | $                                | 4,008  |                                        | $      | 5,839 |   | $ | 254 |   | $ | 254 |   | $ | 3,746 |   |

 

The actuarial assumptionsused to determine post-retirement benefit obligations are as follows:

 
|                                                                               |   | **Successor  Company** |   |
|------------------------------------------------------------------------------------|--------|------------------------|--------|
|                                                                               |   | **January 2,  2004**   |   | **January 3,  2003** |   |
| Discount rate                                                                      |   | 6.3                    | %      | 6.8 | % |
| Health care cost trend rate assumed for  next year                                 |   | 9.6                    | %      | 11.5 | % |
| Rate to which the cost trend rate is  assumed to decline (the ultimate trend rate) |   | 5.5                    | %      | 5.5 | % |
| Year that the rate reaches the ultimate  trend rate                                |   | 2006                   |   | 2006 |   |

 

Experiencegains and losses, as well as the effects of changes in actuarial assumptionsand plan provisions, are amortized over the average future service period ofemployees.

 

The health carecost trend rate assumption has a significant effect on the amounts reported forhealth care plans. The effect of a 1% change in this assumption would be asfollows:

 
|                                                |   | **Successor  Company** |   |
|-----------------------------------------------------|--------|------------------------|--------|
| **Post-retirement benefits**                        |   | **January 2,  2004**   |   | **January 3,  2003** |   |
| Effect on total of service and interest  cost       |   |                   |   |   |   |
| 1% point increase                                   |   | $                      | 433    |   | $ | 697 |   |
| 1% point decrease                                   |   | (338                   | )      | (550 | ) |
| Effect on accumulated projected benefit  obligation |   |                   |   |   |   |
| 1% point increase                                   |   | 4,367                  |   | 3,667 |   |
| 1% point decrease                                   |   | (3,618                 | )      | (3,068 | ) |
|                                                     |        |                        |        |  |  |  |  |

 

***Deferredcompensation plans***

 

We providenonqualified plans for executives. We have a deferred compensation plan whichallows for deferral of salary and incentive compensation beyond amounts allowedunder our 401(k) plan and a restoration plan that provides matchingcontributions on compensation not eligible for matching contributions under our401(k) plan. As of January 2, 2004 and January 3, 2003, the accrued benefitamounts are $5,014 and $1,584, respectively, and are included in pension,post-retirement and other benefit obligations in the accompanying consolidatedbalance sheets.

 

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***Otherretirement plans***

 

We sponsor anumber of defined contribution retirement plans. Participation in these plansis available to substantially all salaried employees and to certain groups ofhourly employees. Our cash contributions to these plans are based on either apercentage of employee contributions or on a specified amount per hourdepending on the provisions of each plan. The net cost of these plans was$28,915 for the year ended January 2, 2004, $29,643 in the eleven months endedJanuary 3, 2003, $2,557 for the month ended February 1, 2002, $2,631 for themonth ended December 28, 2001 and $36,368 for the year ended November 30, 2001.

 

***Multiemployerpension plans***

 

We participatein and make contributions to numerous construction-industry multiemployerpension plans. Generally, the plans provide defined benefits to substantiallyall employees covered by collective bargaining agreements. Under the EmployeeRetirement Income Security Act, a contributor to a multiemployer plan isliable, upon termination or withdrawal from a plan, for its proportionate shareof a plan’s unfunded vested liability. We currently have no intention ofwithdrawing from any of the multiemployer pension plans in which weparticipate. The net cost of these plans was $51,566 in the year ended January2, 2004, $89,242 in the eleven months ended January 3, 2003, $6,479 for themonth ended February 1, 2002, $5,710 for the month ended December 28, 2001, and$42,452 in 2001. During the eleven months ended January 3, 2003, the net costof the multiemployer pension plans included cost incurred by us on severallarge projects performed under the Raytheon Settlement which were funded on acost reimbursable basis. Such costs decreased during the year ended January 2,2004, as the projects were substantially completed.

 

**11.  TRANSACTIONSWITH AFFILIATES**

 

We purchasedgoods and services from companies owned by the chairman of our board ofdirectors as follows:

 
|                                        |   | **Successor  Company**           |   | **Predecessor  Company**                    |   |
|---------------------------------------------|--------|----------------------------------|--------|---------------------------------------------|--------|
|                                        |   | **Year ended  January 2,  2004** |   | **Eleven  months  ended  January 3,  2003** |   | **One month  ended  February 1,  2002** |   | **One month  ended  December 28,  2001** |   | **Year ended  November 30,  2001** |   |
| Capital expenditures                        |   | $                                | 25     |                                        | $      | 258 |   | $ | 17 |   | $ | 55 |   | $ | 299 |   |
| Lease and maintenance of corporate aircraft |   | 1,875                            |   | 1,934                                       |   | 149 |   | 199 |   | 3,370 |   |
| Parts, rentals, overhauls and repairs       |   | 1,242                            |   | 731                                         |   | 111 |   | 17 |   | 1,436 |   |
| Administrative support services             |   | 3                                |   | 21                                          |   | — |   | 9 |   | 250 |   |
|                                             |        |                                  |        |                                             |        |  |  |  |  |  |  |  |  |  |  |  |

 

We mined andsold ballast used in railroad beds and realized gains on sales of equipment toaffiliates of the chairman of our board of directors as follows:

 
|                            |   | **Successor  Company**           |   | **Predecessor  Company**                   |   |
|---------------------------------|--------|----------------------------------|--------|--------------------------------------------|--------|
|                            |   | **Year ended  January 2,  2004** |   | **Eleven months  ended  January 3,  2003** |   | **One month  ended  February 1,  2002** |   | **One month  ended  December 28,  2001** |   | **Year ended  November 30,  2001** |   |
| Ballast sales                   |   | $                                | 667    |                                       | $      | 2,383 |   | $ | 8 |   | $ | — |   | $ | 1,931 |   |
| Sale of construction equipment  |   | 2                                |   | —                                     |   | — |   | — |   | 630 |   |
| Gain on sales of equipment, net |   | —                           |   | —                                     |   | — |   | — |   | 314 |   |
|                                 |        |                                  |        |                                            |        |  |  |  |  |  |  |  |  |  |  |  |

 

Insurance,surety bonds, financial advisory services and construction materials werepurchased by us from firms owned by or affiliated with persons who were membersof our board of directors at the time of purchase as follows:

 

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|                         |   | **Successor  Company**           |   | **Predecessor  Company**                    |   |
|------------------------------|--------|----------------------------------|--------|---------------------------------------------|--------|
|                         |   | **Year ended  January 2,  2004** |   | **Eleven  months  ended  January 3,  2003** |   | **One month  ended  February 1,  2002** |   | **One month  ended  December 28,  2001** |   | **Year ended  November 30,  2001** |   |
| Insurance premiums paid, net |   | $                                | — |                                        | $      | — |   | $ | — |   | $ | — |   | $ | 17,333 |   |
| Insurance fees               |   | —                           |   | —                                      |   | — |   | — |   | 1,048 |   |
| Financial advisory services  |   | —                           |   | —                                      |   | 700 |   | — |   | 536 |   |
| Construction materials       |   | 203                              |   | 1,879                                       |   | — |   | — |   | — |   |
|                              |        |                                  |        |                                             |        |  |  |  |  |  |  |  |  |  |  |  |

 

From time totime, we engaged Relational Advisors LLC, an investment advisory and consultingfirm formerly known as Batchelder & Partners, Inc. (“BPI”), of which aprincipal of the firm is a member of our board of directors, to act as ourfinancial advisor pursuant to written engagement agreements. In March 2001, weentered into an agreement with BPI pursuant to which we were to pay a monthlyretainer of $100; however, retainer fees subsequent to our entering intoChapter 11 reorganization on May 14, 2001 were not paid. Under our Plan ofReorganization, the agreement was assumed and retainer fees were broughtcurrent after the Effective Date of the Plan of Reorganization. With ourconsent and the consent of BPI, all retainer agreements between the two partiesexpired on the Effective Date.

 

**12.  OPERATINGSEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION**

 

We operatethrough six business units, each of which comprises a separate reportablebusiness segment: Power, Infrastructure, Mining, Industrial/Process, Defenseand Energy & Environment. The reportable segments are separately managed,serve different markets and customers and differ in their expertise, technologyand resources necessary to perform their services.

 

Power providesengineering, construction and operations and maintenance services in bothnuclear and fossil power markets for turnkey new power plant construction,plant expansion, retrofit and modification, decontamination anddecommissioning, general planning, siting and licensing and environmentalpermitting.

 

Infrastructureprovides diverse engineering and construction and construction managementservices for highways and bridges, airports and seaports, tunnels and tubetunnels, railroad and transit lines, water storage and transport, watertreatment, site development and hydroelectric facilities. The business unitgenerally performs as a general contractor or as a joint venture partner withother contractors on domestic and international projects.

 

Miningprovides contract-mining, engineering, resource evaluation, geologic modeling,mine planning, simulation modeling, equipment selection, production schedulingand operations management to coal, industrial minerals and metals markets.

 

Industrial/Processprovides engineering, design, procurement, construction services and totalfacilities management for general manufacturing, pharmaceutical andbiotechnology, metals processing, institutional buildings, food and consumerproducts, automotive, aerospace, telecommunications and pulp and paperindustries.

 

Defenseprovides a complete range of technical services to the U.S. Department ofDefense, including operations and management services, environmental andchemical demilitarization services, waste handling and storage, architecturalengineering services and engineering, procurement and construction services forthe armed forces.

 

Energy &Environment provides services to the U.S. Department of Energy, which isresponsible for maintaining the nation’s nuclear weapons stockpile andperforming environmental cleanup and remediation. The business unit alsoprovides the U.S. government with construction, contract management, supplychain management, quality assurance, administration and environmental cleanupand restoration services. Energy &

 

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Environment also providessafety management consulting and waste and environmental technology andengineered products, including radioactive waste containers and technicalsupport services.

 

The accountingpolicies of the segments are the same as those described in the summary ofsignificant accounting policies. We evaluate performance and allocate resourcesbased on segment assets, gross profit and equity in income of unconsolidatedaffiliates. Segment operating income is total segment revenue reduced bysegment cost of revenue, goodwill amortization, integration and merger costs,restructuring costs and other operating income.

 
|                                                           |   | **Successor  Company**           |      | **Predecessor  Company**                    |   |
|----------------------------------------------------------------|--------|----------------------------------|-----------|---------------------------------------------|--------|
|                                                           |   | **Year ended  January 2,  2004** |      | **Eleven  months  ended  January 3,  2003** |   | **One month  ended  February 1,  2002** |   | **One month  ended  December 28,  2001** |   | **Year ended  November 30,  2001** |   |
| **Revenue**                                                    |   |                             |      |                                        |   |   |   |   |   |   |   |
| Power                                                          |   | $                                | 511,788   |                                        | $      | 920,068 |   | $ | 85,551 |   | $ | 67,487 |   | $ | 839,434 |   |
| Infrastructure                                                 |   | 575,284                          |      | 692,107                                     |   | 79,924 |   | 71,784 |   | 940,334 |   |
| Mining                                                         |   | 84,150                           |      | 63,227                                      |   | 5,326 |   | 4,172 |   | 92,237 |   |
| Industrial/Process                                             |   | 458,184                          |      | 574,468                                     |   | 64,271 |   | 65,730 |   | 957,156 |   |
| Defense                                                        |   | 506,092                          |      | 494,981                                     |   | 62,107 |   | 56,358 |   | 582,447 |   |
| Energy & Environment                                       |   | 368,217                          |      | 560,355                                     |   | 50,357 |   | 41,544 |   | 598,180 |   |
| Intersegment, eliminations and other                           |   | (2,564                           | )         | 6,408                                       |   | 2,376 |   | 1,214 |   | 31,827 |   |
| Total revenues                                                 |   | $                                | 2,501,151 |                                        | $      | 3,311,614 |   | $ | 349,912 |   | $ | 308,289 |   | $ | 4,041,615 |   |
| **Gross profit (loss)**                                        |   |                             |      |                                        |   |   |   |   |   |   |   |
| Power                                                          |   | $                                | 38,045    |                                        | $      | 23,886 |   | $ | 199 |   | $ | 1,049 |   | $ | (8,136 | ) |
| Infrastructure                                                 |   | 30,915                           |      | 14,758                                      |   | 3,028 |   | 3,355 |   | 24,468 |   |
| Mining                                                         |   | 4,581                            |      | 1,805                                       |   | 100 |   | (624 | ) | 9,909 |   |
| Industrial/Process                                             |   | 5,944                            |      | 3,536                                       |   | 631 |   | (1,984 | ) | (3,462 | ) |
| Defense                                                        |   | 49,852                           |      | 42,140                                      |   | 1,956 |   | 1,977 |   | 28,119 |   |
| Energy & Environment                                       |   | 67,471                           |      | 74,411                                      |   | 5,568 |   | 325 |   | 68,496 |   |
| Intersegment and other unallocated  operating costs            |   | (20,459                          | )         | (11,500                                     | )      | (362 | ) | (3,896 | ) | (21,699 | ) |
| Total gross profit                                             |   | $                                | 176,349   |                                        | $      | 149,036 |   | $ | 11,120 |   | $ | 202 |   | $ | 97,695 |   |
| **Equity in income of unconsolidated affiliates**              |   |                             |      |                                        |   |   |   |   |   |   |   |
| Power                                                          |   | $                                | 417       |                                        | $      | — |   | $ | — |   | $ | — |   | $ | — |   |
| Infrastructure                                                 |   | —                           |      | —                                      |   | — |   | — |   | — |   |
| Mining                                                         |   | 25,740                           |      | 27,342                                      |   | 3,109 |   | 1,258 |   | 17,890 |   |
| Industrial/Process                                             |   | 1,242                            |      | —                                      |   | — |   | — |   | — |   |
| Defense                                                        |   | —                           |      | —                                      |   | — |   | — |   | — |   |
| Energy & Environment                                       |   | (1,880                           | )         | —                                      |   | — |   | — |   | — |   |
| Intersegment, and other                                        |   | —                           |      | —                                      |   | — |   | — |   | — |   |
| Total equity in income of unconsolidated  affiliates           |   | $                                | 25,519    |                                        | $      | 27,342 |   | $ | 3,109 |   | $ | 1,258 |   | $ | 17,890 |   |
| **Operating income (loss)**                                    |   |                             |      |                                        |   |   |   |   |   |   |   |
| Power                                                          |   | $                                | 39,003    |                                        | $      | 23,886 |   | $ | 199 |   | $ | (6,755 | ) | $ | (8,273 | ) |
| Infrastructure                                                 |   | 30,374                           |      | 14,758                                      |   | 3,028 |   | 2,334 |   | 24,430 |   |
| Mining                                                         |   | 33,521                           |      | 29,147                                      |   | 3,209 |   | 611 |   | 27,528 |   |
| Industrial/Process                                             |   | 7,186                            |      | 3,536                                       |   | 631 |   | (13,961 | ) | (6,274 | ) |
| Defense                                                        |   | 49,852                           |      | 42,140                                      |   | 1,956 |   | 1,928 |   | 28,061 |   |
| Energy & Environment                                       |   | 67,106                           |      | 77,831                                      |   | 5,568 |   | (4,906 | ) | 54,772 |   |
| Intersegment and other unallocated  operating income and costs |   | (18,992                          | )         | (11,500                                     | )      | (987 | ) | (5,606 | ) | (45,115 | ) |
| General and administrative expenses,  corporate                |   | (57,520                          | )         | (48,138                                     | )      | (4,180 | ) | (5,443 | ) | (56,878 | ) |
| Total operating income (loss)                                  |   | $                                | 150,530   |                                        | $      | 131,660 |   | $ | 9,424 |   | $ | (31,798 | ) | $ | 18,251 |   |

 

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|                     |   | **Successor  Company** |      |
|--------------------------|--------|------------------------|-----------|
| **Assets as of**         |   | **January 2,  2004**   |      | **January 3,  2003 (a)** |   |
| Power                    |   | $                      | 48,169    |   | $ | 54,377 |   |
| Infrastructure           |   | 249,727                |      | 312,471 |   |
| Mining                   |   | 178,690                |      | 133,998 |   |
| Industrial/Process       |   | 177,324                |      | 228,777 |   |
| Defense                  |   | 125,369                |      | 110,306 |   |
| Energy & Environment |   | 264,529                |      | 284,129 |   |
| Corporate and other (b)  |   | 366,715                |      | 291,306 |   |
| Total assets             |   | $                      | 1,410,523 |   | $ | 1,415,364 |   |

 

----

(a)          Beginningin the year ended January 3, 2003, our management evaluated our business unitson a basis that included the allocation of goodwill to each business unit.Assets as of January 3, 2003 are restated for comparability and to conform tothe current year presentation.

 

(b)         Corporateand other assets principally consist of cash and cash equivalents and deferredtax assets.

 
|                       |   | **Successor  Company**           |   | **Predecessor  Company**                    |   |
|----------------------------|--------|----------------------------------|--------|---------------------------------------------|--------|
| **Capital expenditures**   |   | **Year ended  January 2,  2004** |   | **Eleven  months  ended  January 3,  2003** |   | **One month  ended  February 1,  2002** |   | **One month  ended  December 28,  2001** |   | **Year ended  November 30,  2001** |   |
| Power                      |   | $                                | 34     |                                        | $      | 269 |   | $ | 15 |   | $ | 57 |   | $ | 229 |   |
| Infrastructure             |   | 3,651                            |   | 3,424                                       |   | 296 |   | 361 |   | 15,460 |   |
| Mining                     |   | 3,715                            |   | 2,972                                       |   | 58 |   | 372 |   | 2,574 |   |
| Industrial/Process         |   | 571                              |   | 3,286                                       |   | 657 |   | 320 |   | 1,199 |   |
| Defense                    |   | —                           |   | 113                                         |   | — |   | — |   | — |   |
| Energy & Environment   |   | 403                              |   | 5,321                                       |   | 1,474 |   | 156 |   | 12,024 |   |
| Corporate and other        |   | 3,839                            |   | 7,572                                       |   | 1,403 |   | — |   | 5,532 |   |
| Total capital expenditures |   | $                                | 12,213 |                                        | $      | 22,957 |   | $ | 3,903 |   | $ | 1,266 |   | $ | 37,018 |   |

 
|                                          |   | **Successor  Company**           |   | **Predecessor  Company**                    |   |
|-----------------------------------------------|--------|----------------------------------|--------|---------------------------------------------|--------|
| **Depreciation and goodwill amortization**    |   | **Year ended  January 2,  2004** |   | **Eleven  months  ended  January 3,  2003** |   | **One month  ended  February 1,  2002** |   | **One month  ended  December 28,  2001 (a)** |   | **Year ended  November 30,  2001 (a)** |   |
| Power                                         |   | $                                | 149    |                                        | $      | 137 |   | $ | 12 |   | $ | 279 |   | $ | 2,947 |   |
| Infrastructure                                |   | 15,461                           |   | 34,505                                      |   | 2,971 |   | 3,272 |   | 42,650 |   |
| Mining                                        |   | 6,314                            |   | 6,269                                       |   | 586 |   | 583 |   | 6,048 |   |
| Industrial/Process                            |   | 1,962                            |   | 2,780                                       |   | 270 |   | 664 |   | 5,593 |   |
| Defense                                       |   | 103                              |   | 137                                         |   | 14 |   | 14 |   | 38 |   |
| Energy & Environment                      |   | 873                              |   | 1,214                                       |   | 172 |   | 1,375 |   | 21,197 |   |
| Corporate and other                           |   | 6,507                            |   | 5,700                                       |   | 1,587 |   | 658 |   | 10,559 |   |
| Total depreciation and goodwill  amortization |   | $                                | 31,369 |                                        | $      | 50,742 |   | $ | 5,612 |   | $ | 6,845 |   | $ | 89,032 |   |

 

----

(a)   Includes goodwill amortization of $1,553 and$14,635 for the one month ended December 28, 2001 and the year ended November30, 2001, respectively.

 

***Investmentsin unconsolidated affiliates***

 

At January 2,2004 and January 3, 2003, we had $145,144 and $99,356, respectively, in investmentsaccounted for by the equity method. These investments were held and reportedprimarily as part of the Mining business unit.

 

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----

 

***Geographicareas***

 

Geographicdata regarding our revenue is shown below. Geographical disclosures oflong-lived assets are impracticable to prepare.

 
|                |   | **Successor  Company**           |      | **Predecessor  Company**                    |   |
|---------------------|--------|----------------------------------|-----------|---------------------------------------------|--------|
| **Geographic data** |   | **Year ended  January 2,  2004** |      | **Eleven  months  ended  January 3,  2003** |   | **One month  ended  February 1,  2002** |   | **One month  ended  December 28,  2001** |   | **Year ended  November 30,  2001** |   |
| Revenue             |   |                             |      |                                        |   |   |   |   |   |   |   |
| United States       |   | $                                | 2,259,826 |                                        | $      | 3,044,201 |   | $ | 321,885 |   | $ | 271,152 |   | $ | 3,416,522 |   |
| International       |   | 241,325                          |      | 267,413                                     |   | 28,027 |   | 37,137 |   | 625,093 |   |
| Total revenue       |   | $                                | 2,501,151 |                                        | $      | 3,311,614 |   | $ | 349,912 |   | $ | 308,289 |   | $ | 4,041,615 |   |

 

Revenue frominternational operations in all periods presented was in numerous geographicareas without significant concentration.

 

***Majorcustomers***

 

Ten percent ormore of our total revenues were derived from contracts and subcontractsperformed by the Power, Infrastructure, Industrial/Process, Defense and Energy& Environment business units to the following customers for the periodspresented:

 
|                       |   | **Successor  Company**           |    | **Predecessor  Company**                    |   |
|----------------------------|--------|----------------------------------|---------|---------------------------------------------|--------|
|                       |   | **Year ended  January 2,  2004** |    | **Eleven  months  ended  January 3,  2003** |   | **One month  ended  February 1,  2002** |   | **One month  ended  December 28,  2001** |   | **Year ended  November 30,  2001** |   |
| U.S. Department of Energy  |   | $                                | 340,027 |                                        | $      | 315,687 |   | $ | 26,938 |   | $ | 17,726 |   | $ | 398,300 |   |
| U.S. Department of Defense |   | 605,942                          |    | 748,656                                     |   | 84,745 |   | 77,380 |   | 813,606 |   |
| Raytheon Company           |   | 129,296                          |    | 513,247                                     |   | 44,058 |   | 31,024 |   | 42,540 |   |
|                            |        |                                  |         |                                             |        |  |  |  |  |  |  |  |  |  |  |  |

 

**13.  CONTINGENCIESAND COMMITMENTS**

 

***Contractrelated matters***

 

We havecontracts with the U.S. government, the allowable costs of which are subject toadjustments upon audit and negotiation by various agencies of the U.S.government. Audits by the U.S. government and negotiations of indirect costsare substantially complete through 2000. Audits by the U.S. government of 2001indirect costs are in progress. We are also in the process of preparing costimpact statements as required under U.S. Cost Accounting Standards for 1999through 2003, which are subject to audit by the U.S. government andnegotiation. We have also prepared and submitted to the government cost impactstatements for 1989 through 1998 for which we believe no adjustments arenecessary. We believe that the results of the indirect costs audits andnegotiations and the cost impact statements will not result in a materialchange to our financial position, results of operations or cash flows.

 

***Lettersof credit***

 

In the normalcourse of business, we cause letters of credit to be issued in connection withcontract performance obligations that are not required to be reflected in thebalance sheet. We are obligated to reimburse the issuer of such letters ofcredit for any payments made thereunder. At January 2, 2004 and January 3,2003, $175,417 and $207,110, respectively, in face amount of letters of creditwere outstanding. We have pledged cash and cash equivalents as collateral forour reimbursement obligations with respect to $34,000 in face amount ofspecified letters of credit that were outstanding at January 2, 2004 notrelated to the New Credit Facility. At

 

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January 2, 2004, $141,417 ofthe outstanding letters of credit were issued under the Senior SecuredRevolving Credit Facility.

 

***Long-termleases***

 

Total rentaland long-term lease payments for real estate and equipment charged tooperations were $51,724 for the year ended January 2, 2004, $53,488 in theeleven months ended January 3, 2003, $5,235 for the month ended February 1,2002, $6,352 for the month ended December 28, 2001 and $74,718 for the yearended November 30, 2001. Future minimum rental payments under operating leases,some of which contain renewal or escalation clauses, with remainingnoncancelable terms in excess of one year at January 2, 2004 were as follows:

 
| **Year ending**   |   | **Real  estate** |    | **Equipment** |   | **Total** |   |
|-------------------|--------|------------------|---------|---------------|--------|-----------|--------|
| December 31, 2004 |   | $                | 29,397  |          | $      | 5,967     |   | $ | 35,364 |   |
| December 30, 2005 |   | 26,440           |    | 3,527         |   | 29,967    |   |
| December 29, 2006 |   | 24,698           |    | 2,673         |   | 27,371    |   |
| December 28, 2007 |   | 16,676           |    | 2,014         |   | 18,690    |   |
| January 2, 2009   |   | 6,559            |    | 56            |   | 6,615     |   |
| Thereafter        |   | 11,171           |    | 3             |   | 11,174    |   |
| Totals            |   | $                | 114,941 |          | $      | 14,240    |   | $ | 129,181 |   |

 

***Guarantees***

 

We haveguaranteed the indemnity obligations of the Westinghouse Businesses relating tothe sale of EMD to Curtiss-Wright Corporation for the potential occurrence ofspecified events, including breaches of representations and warranties and/orfailure to perform certain covenants or agreements. Generally, theindemnification provisions expire within three years and are capped at $20,000.In addition, the indemnity provisions relating to environmental conditionsobligate the Westinghouse Businesses to pay Curtiss-Wright Corporation up to amaximum $3,500 for environmental losses they incur over $5,000. TheWestinghouse Businesses are also responsible for environmental losses thatexceed $1,300 related to a specified parcel of the sold property. If theWestinghouse Businesses are unable to perform their indemnity obligations, BNFLhas agreed to indemnify us for 40% of losses we incur as a result of ourguarantee. We believe that the indemnification provisions will not have amaterial adverse effect on our financial position, results of operations orcash flows.

 

***Other***

 

Some currentand former officers, employees and directors of Washington Group Internationalwere named defendants in an action filed in 1997 by two former participants inthe Old MK 401(k) Plan and the Old MK Employee Stock Ownership Plan in the U.S.District Court for the District of Idaho. The complaint alleges, among otherthings, that the defendants breached certain fiduciary duties under theEmployee Retirement Income Security Act of 1974 (“ERISA”). In October 2003, anagreement in principle was reached to settle the matter. The settlement willinclude contributions from insurance carriers, the two trustees and WashingtonGroup International. In addition, the plaintiffs’ claim in our reorganizationcase will be allowed and plaintiffs will be entitled to participate in thedistribution of shares of common stock and warrants to unsecured creditors. Thesettlement is subject to approval by the trial court in which the class actionis pending and has been approved by the bankruptcy court which presides overour reorganization case. A charge of $3,480 for settlement costs and legalexpenses related to this matter was included in other operating income(expense) in the year ended January 2, 2004.

 

In 1998,Washington Infrastructure, Inc., formerly known as Raytheon Infrastructure,Inc., a wholly owned subsidiary from the acquisition of RE&C, contractedwith the School Construction Authority of the City of New York (the“Authority”) to provide construction management and inspection services inconnection with the construction of a new school facility. The Authoritybrought suit against the prime contractor to correct deficiencies in materialsand/or workmanship. The prime contractor agreed to perform rework and absorbthe cost

 

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of approximately $4,500 to endthe dispute with the Authority. As part of the settlement, the Authority alsoagreed to assign to the prime contractor any claims it had against us arisingfrom the defective work. Thereafter, the prime contractor sued the Authorityalleging claims for betterment, sued us alleging negligent inspection and sueda number of other parties. Although this matter is in the discovery stage, weexpect the range of potential additional loss to be zero to $3,500.

 

From thespring of 1996 through the spring of 2001, we were the environmentalremediation contractor for the U.S. Army Corps of Engineers (the “Corps”) withrespect to remediation at the Tar Creek Superfund site at a former mining areain northeast Oklahoma. The Corps had contracted with the U.S. EnvironmentalProtection Agency to remove lead contaminated soil in residential areas frommore than 2,000 sites and replace it with clean fill material. In February2000, various federal investigators working with the U.S. Attorney’s Office forthe Northern District of Oklahoma executed search warrants and seized our localproject records. Allegations made at the time included claims that the projecthad falsified truck load tickets and had claimed compensation for more loadsthan actually were hauled, or had indicated that full loads had been hauledwhen partial loads actually were carried, as well as claims that the projecthad sought compensation for truckers and injured workers who were directed toremain at the job site, but not to work. The criminal investigation relating tothe execution of the search warrants remains pending. Through claims filed inour bankruptcy proceedings and conversations with lawyers from the CivilDivision 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 privatecitizens alleging fraudulent or false claims by us for payments we received inconnection with the Tar Creek remediation project. We believe that there was nowrongdoing by us or our employees at this project. Based on the status of thismatter, we cannot make an estimate of potential additional loss, if any.

 

In 2002, theInspector General for the U.S. Agency for International Development (“USAID”)requested documentation about and made inquiries into the contractualrelationships between one of our U.S. joint ventures and a local constructioncompany in Egypt. The focus of the inquiry, which is ongoing, is whether thestructure of our business relationships with Egyptian companies violated USAIDcontract regulations with respect to source, origin and nationalityrequirements. In March 2003, we were notified by the Department of Justice thatit is considering recommending civil litigation against us under the FalseClaims Act and at common law in connection with the matters being investigatedby USAID. The Department of Justice is looking at potential violations of theUSAID source, origin and nationality regulations in connection with five of ourUSAID-financed host-country projects located in Egypt beginning in 1996. InJuly 2003, our U.S. joint venture partner was notified that it had beensuspended by USAID, but only for USAID-financed host-country projects; thatsuspension was lifted in August 2003. In January 2004, we entered into anagreement with USAID whereby we agreed to undertake certain compliance andtraining measures and USAID agreed that we are presently eligible for USAIDcontracts, including for host-country projects, and are not under threat ofsuspension or debarment arising out of matters covered by the USAID inquiry. Wecontinue to respond to inquiries from the Department of Justice and tocooperate with the investigation. Our joint venture for one of the fiveprojects referred to above has brought arbitration proceedings before anabitral tribunal in Egypt in which it has asserted a claim for additionalcompensation for the construction of water and wastewater treatment facilitiesin Egypt. The project owner, an Egyptian government agency, has asserted in acounterclaim that, by reason of alleged violations of the USAID source, originand nationality regulations and alleged violations of Egyptian law, our jointventure should forfeit its claim, disgorge all funds which the joint venturereceived with respect to the project, and pay unspecified additional damages aswell as the owner’s costs of defending against the joint venturer’s claims.Based on the status of these matters, we cannot make an estimate of potentialadditional loss, if any.

 

In addition tothe foregoing, there are other claims, lawsuits, disputes with third parties,investigations and administrative proceedings against us relating to matters inthe ordinary course of our business activities that are not expected to have amaterial adverse effect on our financial position, results of operations orcash flows. Government contracts are subject to specific procurementregulations, contract provisions and a variety of other requirements relatingto the formation, administration, performance and accounting for thesecontracts. As a result of our government contracting, claims for civil orcriminal fraud may be brought by the government for violations of thoseregulations, requirements and statutes.

 

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**14.****       SUPPLEMENTALCASH FLOW INFORMATION**

 
|                                                                                                          |   | **Successor  Company**           |   | **Predecessor  Company**                    |   |
|---------------------------------------------------------------------------------------------------------------|--------|----------------------------------|--------|---------------------------------------------|--------|
|                                                                                                          |   | **Year ended  January 2,  2004** |   | **Eleven  months  ended  January 3,  2003** |   | **One month  ended  February 1,  2002** |   | **One month  ended  December 28,  2001** |   | **Year ended  November 30,  2001** |   |
| Supplemental cash flow information                                                                            |   |                             |   |                                        |   |   |   |   |   |   |   |
| Interest paid                                                                                                 |   | $                                | 14,285 |                                        | $      | 15,874 |   | $ | 451 |   | $ | 7 |   | $ | 31,975 |   |
| Income taxes paid, net                                                                                        |   | 5,725                            |   | 2,646                                       |   | 975 |   | 304 |   | 7,125 |   |
| Supplemental non-cash investing activities                                                                    |   |                             |   |                                        |   |   |   |   |   |   |   |
| Adjustment to investment in foreign  subsidiaries for cumulative translation adjustments, net of income taxes |   | $                                | 15,844 |                                        | $      | 9,652 |   | $ | 80 |   | $ | 482 |   | $ | 1,851 |   |

 

**15.  COMPREHENSIVEINCOME (LOSS)**

 

Comprehensiveincome (loss) for the periods ended January 2, 2004, January 3, 2003, February1, 2002, December 28, 2001 and November 30, 2001 was as follows:

 
| **Year ended January 2, 2004**                                          |   | **Before-tax  amount** |   | **Tax  (expense)  or benefit** |   | **Net-of-tax  amount** |   |
|-------------------------------------------------------------------------|--------|------------------------|--------|--------------------------------|--------|------------------------|--------|
| Foreign currency translation adjustments                                |   | $                      | 24,376 |                           | $      | (8,532                 | )      | $ | 15,844 |   |
| Minimum pension liability adjustment, net  of minority interests        |   | (1,890                 | )      | 736                            |   | (1,154                 | )      |
| Other comprehensive income                                              |   | $                      | 22,486 |                           | $      | (7,796                 | )      | $ | 14,690 |   |
| **Eleven months ended January 3, 2003**                                 |   |                   |   |                           |   |                   |   |
| Foreign currency translation adjustments                                |   | $                      | 14,849 |                           | $      | (5,197                 | )      | $ | 9,652 |   |
| Minimum pension liability adjustment, net  of minority interests        |   | (992                   | )      | 389                            |   | (603                   | )      |
| Other comprehensive income                                              |   | $                      | 13,857 |                           | $      | (4,808                 | )      | $ | 9,049 |   |
| **One month ended February 1, 2002**                                    |   |                   |   |                           |   |                   |   |
| Foreign currency translation adjustments                                |   | $                      | 123    |                           | $      | (43                    | )      | $ | 80 |   |
| Amounts reclassified to net income in  fresh-start reporting            |   | 31,038                 |   | (10,770                        | )      | 20,268                 |   |
| Other comprehensive income                                              |   | $                      | 31,161 |                           | $      | (10,813                | )      | $ | 20,348 |   |
| **One month ended December 28, 2001**                                   |   |                   |   |                           |   |                   |   |
| Foreign currency translation adjustments                                |   | $                      | 748    |                           | $      | (266                   | )      | $ | 482 |   |
| Other comprehensive income                                              |   | $                      | 748    |                           | $      | (266                   | )      | $ | 482 |   |
| **Year ended November 30, 2001**                                        |   |                   |   |                           |   |                   |   |
| Foreign currency translation adjustments                                |   | $                      | 2,849  |                           | $      | (998                   | )      | $ | 1,851 |   |
| Unrealized gains on marketable securities:                              |   |                   |   |                           |   |                   |   |
| Unrealized net holding gains arising during  period                     |   | 775                    |   | (301                           | )      | 474                    |   |
| Less: Reclassification adjustment for net  gains realized in net income |   | (1,411                 | )      | 550                            |   | (861                   | )      |
| Net unrealized losses                                                   |   | (636                   | )      | 249                            |   | (387                   | )      |
| Derivatives designated as cash flow hedges:                             |   |                   |   |                           |   |                   |   |
| Cumulative effect of adoption of accounting  principle                  |   | (1,901                 | )      | 740                            |   | (1,161                 | )      |
| Realized loss on settled or terminated contracts                        |   | 4,502                  |   | (1,752                         | )      | 2,750                  |   |
| Net derivative activity                                                 |   | 2,601                  |   | (1,012                         | )      | 1,589                  |   |
| Minimum pension liability adjustment, net  of minority interests        |   | (7,578                 | )      | 2,948                          |   | (4,630                 | )      |
| Other comprehensive loss                                                |   | $                      | (2,764 | )                              | $      | 1,187                  |   | $ | (1,577 | ) |

 

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Theaccumulated balances related to each component of other comprehensive income(loss) were as follows:
|                              |   | **Foreign  currency  items** |    | **Unrealized  gains (losses)  on securities** |   | **Net  derivative  activity** |   | **Minimum  pension  liability  adjustment** |   | **Accumulated  Other  comprehensive  income (loss)** |   |
|-----------------------------------|--------|------------------------------|---------|-----------------------------------------------|--------|-------------------------------|--------|---------------------------------------------|--------|------------------------------------------------------|--------|
| Balance at December 1, 2000       |   | $                            | (18,051 | )                                             | $      | 387                           |   | $                                           | (1,589 | )                                                    | $      | — |   | $ | (19,253 | ) |
| Other comprehensive income (loss) |   | 1,851                        |    | (387                                          | )      | 1,589                         |   | (4,630                                      | )      | (1,577                                               | )      |
| Balance at November 30, 2001      |   | (16,200                      | )       | —                                        |   | —                        |   | (4,630                                      | )      | (20,830                                              | )      |
| Other comprehensive income        |   | 482                          |    | —                                        |   | —                        |   | —                                      |   | 482                                                  |   |
| Balance at December 28, 2001      |   | (15,718                      | )       | —                                        |   | —                        |   | (4,630                                      | )      | (20,348                                              | )      |
| Other comprehensive income        |   | 15,718                       |    | —                                        |   | —                        |   | 4,630                                       |   | 20,348                                               |   |
| Balance at February 1, 2002       |   | —                       |    | —                                        |   | —                        |   | —                                      |   | —                                               |   |
| Other comprehensive income (loss) |   | 9,652                        |    | —                                        |   | —                        |   | (603                                        | )      | 9,049                                                |   |
| Balance at January 3, 2003        |   | 9,652                        |    | —                                        |   | —                        |   | (603                                        | )      | 9,049                                                |   |
| Other comprehensive income (loss) |   | 15,844                       |    | —                                        |   | —                        |   | (1,154                                      | )      | 14,690                                               |   |
| Balance at January 2, 2004        |   | $                            | 25,496  |                                          | $      | —                        |   | $                                           | — |                                                 | $      | (1,757 | ) | $ | 23,739 |   |

 

**16.  CAPITALSTOCK, STOCK PURCHASE WARRANTS AND STOCK COMPENSATION PLANS**

 

As discussedin Note 3, “Acquisition, Reorganization Case and Fresh-start Reporting,” ourPlan of Reorganization canceled all of the then outstanding shares of capitalstock, stock purchase warrants and stock options as of January 25, 2002, andnew capital stock, stock purchase warrants and stock options were issued.

 

***Capitalstock***

 

Pursuant toour certificate of incorporation, we have the authority to issue 100,000 sharesof common stock and 10,000 shares of preferred stock. Preferred stock can beissued at any time or from time to time in one or more series with suchdesignations, powers, preferences and rights, qualifications, limitations andrestrictions thereon as determined by our board of directors.

 

***Stockpurchase warrants***

 

At January 2,2004, we had outstanding warrants giving rights to acquire 8,520 shares of ourcommon stock. The warrants were issued in connection with our Plan ofReorganization to unsecured creditors in three series as follows:

 

Tranche A -3,086 shares at an exercise price of $28.50 per share

Tranche B -3,527 shares at an exercise price of $31.74 per share

Tranche C -1,907 shares at an exercise price of $33.51 per share

 

All of theabove warrants will expire in January 2006.

 

***Stockcompensation plans***

 

We had a stockcompensation plan for employees and non-employee directors (the “1994 Plan”)which provided for grants in the form of nonqualified stock options orincentive stock options (“ISOs”) and restricted stock awards.         On April 11, 1997, our stockholdersadopted the 1997 Stock Option and Incentive Plan for Non-employee Directors(the “1997 Plan”) which provided for grants in the form of nonqualified stockoptions and restricted stock awards. As of January 25, 2002, all outstandinggrants under the 1994 Plan and 1997 Plan were canceled.

 

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WashingtonGroup International, Inc.’s Equity and Performance Incentive Plan (the “2002 Plan”)became effective January 25, 2002 upon our emergence from bankruptcy. Anamended and restated version of the 2002 Plan was approved at our annualmeeting of stockholders on May 9, 2003. Under the 2002 Plan, our board ofdirectors may approve the award of option rights, appreciation rights,performance units, performance shares, restricted shares, deferred shares orother awards to directors, officers and key employees for us and oursubsidiaries. Our common shares available to the 2002 Plan shall not exceed6,002 shares. Awards are subject to terms and conditions determined by ourboard of directors. As of January 2, 2004, only option rights and performanceunits have been awarded under the 2002 Plan.

 

***Long-termincentive program***

 

We have along-term incentive program (“LTIP”) designed to provide long-term incentivesto executives to increase stockholder value. The LTIP consists of nonqualifiedfixed-price stock options and performance unit awards granted under the 2002Plan annually. The LTIP links a portion of compensation to stockholder returnsand utilizes vesting periods to encourage participating executives to continuein our employ. The size and timing of awards are determined by the compensationcommittee of the board of directors.

 

From January25, 2002 through January 2, 2004, specified members of management, designatedemployees and our board of directors (other than the chairman) were grantednonqualified stock options to purchase an aggregate total of 2,471 shares ofthe New Common Stock, subject to dilution, with terms of ten years and exerciseprices determined at the market prices on the dates of grant, ranging from$13.40 to $29.01 per share. Options granted in 2002 vested one-third on thedate of grant, one-third on the first anniversary of the date of grant and thefinal third on the second anniversary of the date of grant. Options grantedafter 2002 vest one-third on the first anniversary of the date of grant,one-third on the second anniversary of the date of grant and the final third onthe third anniversary of the date of grant. The vesting period for futuregrants will be determined by the compensation committee of our board ofdirectors.

 

On January 25,2002, the chairman of our board of directors, Mr. Dennis R. Washington, wasgranted stock options to purchase shares of New Common Stock in three tranches.The first tranche was to expire five years after the Effective Date. Theremaining tranches were to expire four years after the Effective Date.One-third of each tranche vested on the Effective Date, an additional one-thirdof each tranche vested on the first anniversary of the Effective Date and thefinal third of each tranche vested on the second anniversary of the EffectiveDate, January 25, 2004. As consideration for an additional three years ofservice as chairman of our board of directors, Mr. Washington’s stock optionswere amended in November 2003 extending the expiration dates on all threetranches to ten years from the original date of grant, or January 25, 2012. Asa result of this extension, we recorded compensation expense of $6,174 duringthe year ended January 2, 2004 as general administrative expenses and as anincrease to additional paid-in capital. The number of shares and respectiveexercise prices for each tranche are as follows:

 
|      |   | **Number of  shares** |   | **Exercise  price per share** |   |
|-----------|--------|-----------------------|--------|-------------------------------|--------|
| Tranche A |   | 1,389                 |   | $                             | 24.00  |   |
| Tranche B |   | 882                   |   | $                             | 31.74  |   |
| Tranche C |   | 953                   |   | $                             | 33.51  |   |

 

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Optionactivity under our stock plans is summarized as follows:

 
| **Number of options**                                 |   | **Outstanding  at  beginning of period** |       | **Granted** |       | **Canceled** |       | **Exercised**                     |       | **Outstanding  at   end of period** |       |
|-------------------------------------------------------|--------|------------------------------------------|------------|-------------|------------|--------------|------------|-----------------------------------|------------|-------------------------------------|------------|
| **Successor Company**                                 |   |                                     |       |        |       |         |       |                              |       |                                |       |
| Year ended January 2, 2004                            |   | 5,033                                    |       | 652         |       | (76          | )          | (46                               | )          | 5,563                               |       |
| Eleven months ended January 3, 2003                   |   | 4,417                                    |       | 626         |       | (10          | )          | —                            |       | 5,033                               |       |
| Options issued upon emergence from  bankruptcy        |   | —                                   |       | 4,417       |       | —       |       | —                            |       | 4,417                               |       |
| **Predecessor Company**                               |   |                                     |       |        |       |         |       |                              |       |                                |       |
| One month ended February 1, 2002                      |   | 7,390                                    |       | —      |       | (7,390       | )          | —                            |       | —                              |       |
| One month ended December 28, 2001                     |   | 7,417                                    |       | —      |       | (27          | )          | —                            |       | 7,390                               |       |
| Year ended November 30, 2001                          |   | 7,638                                    |       | 636         |       | (857         | )          | —                            |       | 7,417                               |       |
|                                                  |   |                                     |       |        |       |         |       |                              |       |                                |       |
| **Weighted-average exercise prices**                  |   |                                     |       |        |       |         |       |                              |       |                                |       |
| **Successor Company**                                 |   |                                     |       |        |       |         |       |                              |       |                                |       |
| Year ended January 2, 2004                            |   | $                                        | 26.62      |        | $          | 16.18        |       | $                                 | 19.47      |                                | $          | 23.13 |   | $ | 25.52 |   |
| Eleven months ended January 3, 2003                   |   | 27.60                                    |       | 19.65       |       | 24.00        |       | —                            |       | 26.62                               |       |
| Options issued upon emergence from  bankruptcy        |   | —                                   |       | 27.60       |       | —       |       | —                            |       | 27.60                               |       |
| **Predecessor Company**                               |   |                                     |       |        |       |         |       |                              |       |                                |       |
| One month ended February 1, 2002                      |   | 8.72                                     |       | —      |       | 8.72         |       | —                            |       | —                              |       |
| One month ended December 28, 2001                     |   | 8.72                                     |       | —      |       | 9.38         |       | —                            |       | 8.72                                |       |
| Year ended November 30, 2001                          |   | 8.73                                     |       | 9.46        |       | 9.33         |       | —                            |       | 8.72                                |       |
|                                                  |   |                                     |       |        |       |         |       |                              |       |                                |       |
| **Number of options**                                 |   |                                     | ** ** |        | ** ** |         | ** ** | **Exercisable  at end of period** | ** ** | **Shares  available  for grant**    | ** ** |
| **Successor Company**                                 |   |                                     |       |        |       |         |       |                              |       |                                |       |
| January 2, 2004                                       |   |                                     |       |        |       |         |       | 3,323                             |       | 393                                 |       |
| January 3, 2003                                       |   |                                     |       |        |       |         |       | 1,688                             |       | 969                                 |       |
| Options issued upon emergence from  bankruptcy        |   |                                     |       |        |       |         |       | 1,486                             |       | 1,585                               |       |
| **Predecessor Company**                               |   |                                     |       |        |       |         |       |                              |       |                                |       |
| February 1, 2002                                      |   |                                     |       |        |       |         |       | —                            |       | —                              |       |
| December 28, 2001                                     |   |                                     |       |        |       |         |       | 2,450                             |       | 2,689                               |       |
| November 30, 2001                                     |   |                                     |       |        |       |         |       | 2,476                             |       | 2,663                               |       |
|                                                  |   |                                     |       |        |       |         |       |                              |       |                                |       |
| **Weighted-average exercise price of vested options** |   |                                     | ** ** |        | ** ** |         | ** ** |                              | ** ** | **Exercisable  at  end of period**  | ** ** |
| **Successor Company**                                 |   |                                     |       |        |       |         |       |                              |       |                                |       |
| January 2, 2004                                       |   |                                     |       |        |       |         |       |                              |       | $                                   | 26.67      |   |
| January 3, 2003                                       |   |                                     |       |        |       |         |       |                              |       | 26.60                               |       |
| Options issued upon emergence from  bankruptcy        |   |                                     |       |        |       |         |       |                              |       | 27.56                               |       |
| **Predecessor Company**                               |   |                                     |       |        |       |         |       |                              |       |                                |       |
| February 1, 2002                                      |   |                                     |       |        |       |         |       |                              |       | —                              |       |
| December 28, 2001                                     |   |                                     |       |        |       |         |       |                              |       | 8.34                                |       |
| November 30, 2001                                     |   |                                     |       |        |       |         |       |                              |       | 8.36                                |       |
|                                                       |        |                                          |            |             |            |              |            |                                   |            |                                     |            |  |  |  |  |  |

 

Beginning in2003, performance units are awarded annually and mature at the end of theirthree-year performance period. The value of each performance unit will becalculated at the end of the three-year performance period to which it relates,based on performance results relative to predetermined corporate financialgoals. At the end of each three-year period, the value of mature performanceunits generally will be paid in cash, provided the threshold performancemetrics have been achieved. Certain executives who are subject to stockownership guidelines may elect to have the value of mature performance unitspaid in stock to the extent

 

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necessary to satisfy thoseguidelines. During 2003, $2,563 was recorded as compensation related to theperformance units based on the 2003 performance results.

 

***Stock-basedcompensation***

 

We adopted thedisclosure-only provisions of the SFAS No. 123. Accordingly, compensation costhas been recorded based only on the intrinsic value of the options granted. Nocompensation cost was recognized for the eleven months ended January 3, 2003,one month ended February 1, 2002 and one month ended December 28, 2001. Werecognized $6,174 and $4 of compensation cost during the year ended January 2,2004 and the year ended November 30, 2001, respectively, for stock-basedcompensation awards. If we had elected to recognize compensation cost based onthe 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 asdisclosed in Note 1, “Significant Accounting Policies.”

 

TheBlack-Scholes option valuation model was used to estimate the fair value of theoptions for purposes of the pro forma presentation set forth in Note 1,“Significant Accounting Policies.”

 

The followingassumptions were used in the valuation and no dividends were assumed:

 
|                                               |   | **Successor  Company**           |   | **Predecessor  Company**                   |   |
|----------------------------------------------------|--------|----------------------------------|--------|--------------------------------------------|--------|
|                                               |   | **Year ended  January 2,  2004** |   | **Eleven  months ended  January 3,  2003** |   | **Year ended  November 30,  2001** |   |
| Average expected life (years)                      |   | 6                                |   | 5                                          |   | 7 |   |
| Expected volatility                                |   | 40.2                             | %      | 42.3                                       | %      | 40.7 | % |
| Risk-free interest rate                            |   | 4.6                              | %      | 5.0                                        | %      | 5.7 | % |
| Weighted-average fair value:                       |   |                             |   |                                       |   |   |   |
| Exercise price greater than market price at  grant |   | $                                | — |                                       | $      | 8.00 |   | $ | — |   |
| Exercise price equal to market price at  grant     |   | 7.48                             |   | 8.65                                       |   | 3.71 |   |
| Exercise price less than market price at  grant    |   | —                           |   | —                                     |   | 4.44 |   |
|                                                    |        |                                  |        |                                            |        |  |  |  |  |  |

 

Theassumptions used in the Black-Scholes option valuation model are highlysubjective, particularly as to stock price volatility of the underlying stock,and can materially affect the resulting valuation.

 

The followingtable summarizes information regarding options that were outstanding at January2, 2004:

 
|            |            | **Options  outstanding** |   | **Options  exercisable**             |   |
|-----------------|-----------------|--------------------------|--------|--------------------------------------|--------|
| **Price range** |            | **Number**               |   | **Weighted-average  exercise price** |   | **Weighted-average  remaining  contractual life (years)** |   | **Number** |   | **Weighted-average  exercise price** |   |
| Below $24.00    |            | 1,028                    |   | $                                    | 16.69  |   | 8.89 |   | 282 |   | $ | 17.88 |   |
| $               | 24.00 -  $28.00 |                     | 2,693  |                                 | 24.02  |   | 7.94 |   | 1,818 |   | 24.00 |   |
| Above $28.00    |            | 1,842                    |   | 32.65                                |   | 8.07 |   | 1,223 |   | 32.67 |   |
|                 |                 |                          |        |                                      |        |  |  |  |  |  |  |  |  |  |

 

***Stockholderrights plan***

 

On June 21,2002, our board of directors adopted a stockholder rights plan under which weissue one right for each outstanding share of our common stock. The rights expirein 2012 unless they are earlier redeemed, exchanged or amended by the board ofdirectors. The board also adopted a Three-Year Independent Director Evaluation(“TIDE”) policy with respect to the plan. Under the TIDE policy, a committeecomprised solely of independent directors will review the plan at least onceevery three years to determine whether to modify the plan in light of allrelevant factors.

 

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The rightsinitially trade together with our common stock and are not exercisable until 10days after the earlier of a public announcement that a person or group hasacquired beneficial ownership of 15% or more, with certain exceptions, of ourcommon stock or the commencement of, or public announcement of an intent tocommence, a tender or exchange offer which, if successful, would result in theofferor acquiring 15% or more of our common stock. Once exercisable, each rightwould separate from the common stock and be separately tradeable.

 

If a person orgroup acquires beneficial ownership of 15% or more, with certain exceptions, ofour common stock, or if we are acquired in a merger or other businesscombination, each right then exercisable would entitle its holder to purchase,at the exercise price of $125 per right, shares of our common stock, or thesurviving company’s stock if we are not the surviving company, with a marketvalue equal to twice the right’s exercise price.

 

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

 

The rights arenot considered to be common stock equivalents because there is no indicationthat any event will occur that would cause them to become exercisable.

 

**17.  FINANCIALINSTRUMENTS**

 

The estimatedfair values of financial instruments at January 2, 2004 and January 3, 2003were determined, using available market information and valuation methodologiesbelieved to be appropriate. However, judgment is necessary in interpretingmarket data to develop the estimates of fair values. Accordingly, the estimatespresented herein are not necessarily indicative of the amounts that we couldrealize in a current market exchange. The use of different market assumptionsand/or estimation methodologies could have a material effect on the estimatedfair value amounts.

 

The carryingamounts and estimated fair values of certain financial instruments at January2, 2004 and January 3, 2003 were as follows:

 
|                      |   | **Successor  Company** |   |
|---------------------------|--------|------------------------|--------|
|                      |   | **January 2,  2004**   |   | **January 3,  2003** |   |
|                      |   | **Carrying  amount**   |   | **Fair  value** |   | **Carrying  amount** |   | **Fair  value** |   |
| **Financial assets**      |   |                   |   |   |   |   |   |   |   |
| Customer retentions       |   | $                      | 13,663 |   | $ | 13,277 |   | $ | 23,546 |   | $ | 22,733 |   |
| **Financial liabilities** |   |                   |   |   |   |   |   |   |   |
| Subcontract retentions    |   | 21,184                 |   | 20,585 |   | 19,623 |   | 18,946 |   |
|                           |        |                        |        |  |  |  |  |  |  |  |  |  |  |

 

The fair valueof customer retentions and subcontract retentions was estimated by discountingexpected cash flows at rates currently available to us for instruments withsimilar risks and maturities. The fair value of other financial instrumentsincluding cash and cash equivalents, accounts receivable excluding customerretentions, unbilled receivables and accounts and subcontracts payableexcluding retentions (as well as similar financial instruments classifiedwithin assets and liabilities held for sale) approximate cost because of theimmediate or short-term maturity.

 

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**QUARTERLYFINANCIAL DATA**

*(In millions except per share data)*

**UNAUDITED**

 

Selected quarterly financialdata for the years ended January 2, 2004 and January 3, 2003 is presentedbelow.

 
|                    |   | **Successor  Company** |   |
|-------------------------|--------|------------------------|--------|
| **2003 Quarters ended** |   | **April 4,  2003**     |   | **July 4,  2003** |   | **October 3,  2003** |   | **January 2,  2004** |   |
| Revenue                 |   | $                      | 657.5  |   | $ | 634.7 |   | $ | 588.1 |   | $ | 620.9 |   |
| Gross profit            |   | 37.5                   |   | 47.7 |   | 53.8 |   | 37.3 |   |
| Reorganization items    |   | —                 |   | (3.7 | ) | — |   | (1.2 | ) |
| Net income              |   | 12.8                   |   | 14.3 |   | 12.8 |   | 2.2 |   |
| Income per share        |   |                   |   |   |   |   |   |   |   |
| Basic                   |   | .51                    |   | .57 |   | .51 |   | .09 |   |
| Diluted                 |   | .51                    |   | .57 |   | .51 |   | .09 |   |
| Market price            |   |                   |   |   |   |   |   |   |   |
| High                    |   | $                      | 17.75  |   | $ | 23.15 |   | $ | 27.95 |   | $ | 34.33 |   |
| Low                     |   | 14.35                  |   | 17.38 |   | 21.59 |   | 26.85 |   |

 
|                                           |   | **Predecessor  Company**   |   | **Successor  Company**  |   |
|------------------------------------------------|--------|----------------------------|--------|-------------------------|--------|
| **Quarters ended**                             |   | **February  1,  2002 (a)** |   | **March 29,  2002 (b)** |   | **June 28,  2002** |   | **September  27,  2002** |   | **January 3,  2003** |   |
| Revenue                                        |   | $                          | 349.9  |                    | $      | 607.0 |   | $ | 960.5 |   | $ | 903.7 |   | $ | 840.4 |   |
| Gross profit                                   |   | 11.1                       |   | 27.9                    |   | 41.2 |   | 45.7 |   | 34.2 |   |
| Reorganization items                           |   | (72.1                      | )      | —                  |   | — |   | (3.5 | ) | .4 |   |
| Income (loss) before extraordinary item        |   | (45.0                      | )      | 9.5                     |   | 9.2 |   | 9.3 |   | 9.7 |   |
| Extraordinary item–gain on debt discharge |   | 567.2                      |   | —                  |   | — |   | — |   | — |   |
| Net income                                     |   | 522.2                      |   | 9.5                     |   | 9.2 |   | 9.3 |   | 9.7 |   |
| Income per share -  basic and diluted          |   | —                     | (c)    | .38                     |   | .37 |   | .37 |   | .39 |   |
| Market price                                   |   |                       |   |                    |   |   |   |   |   |   |   |
| High                                           |   |                       |   | $                       | 24.00  |   | $ | 24.00 |   | $ | 22.00 |   | $ | 17.00 |   |
| Low                                            |   |                       |   | 17.20                   |   | 19.00 |   | 13.00 |   | 12.20 |   |
|                                                |        |                            |        |                         |        |  |  |  |  |  |  |  |  |  |  |  |

 

## ****

(a)          Onemonth ended February 1, 2002.

(b)         Twomonths ended March 29, 2002.

(c)          Netincome (loss) per share is not presented for this period, as it is notmeaningful because of the revised capital structure of the Successor Company.

 

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**ITEM 9.****     CHANGEIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

## ** **

During thefiscal years ended January 2, 2004 and January 3, 2003, there were no changesin, or disagreements with, accountants on accounting and financial disclosurematters.

 

**ITEM9A****.       CONTROLSAND PROCEDURES**

 

***Evaluationof our Disclosure Controls and disclosure of changes to Internal Control overFinancial Reporting.***

 

We maintain aset of disclosure controls and procedures designed to ensure that informationrequired to be disclosed by us in reports that we file or submit under theSecurities Exchange Act of 1934 is recorded, processed, summarized and reportedwithin the time periods specified in Securities and Exchange Commission (“SEC”)rules and forms. As of the date of the financial statements, an evaluation wascarried out under the supervision and with the participation of our management,including the Chief Executive Officer (“CEO”) and Chief Financial Officer(“CFO”), of the effectiveness of our disclosure controls and procedures. Basedon that evaluation, the CEO and CFO have concluded that our disclosure controlsand procedures are effective.

 

***CEOand CFO certificates***

 

Attached asExhibits 31.1 and 31.2 to this report on Form 10-K are two certifications, oneeach by the CEO and the CFO. They are required in accordance with Rule 13a-14of the Exchange Act. This Item 9A, *Controls and Procedures,* includes theinformation concerning the controls evaluation referred to in thecertifications and should be read in conjunction with the certifications.

 

***Disclosurecontrols***

 

“DisclosureControls” are controls and procedures that are designed to reasonably ensurethat information required to be disclosed in our reports filed under theSecurities Exchange Act of 1934, such as this report on Form 10-K, is recorded,processed, summarized and reported within the time periods specified in the SECrules and forms. Disclosure Controls are also designed to ensure thatinformation required to be disclosed is accumulated and communicated to ourmanagement, including our CEO and CFO.

 

***Internalcontrols over financial reporting***

 

Our DisclosureControls include components of our internal control over financial reporting,which consist of procedures that are designed to provide reasonable assuranceregarding the reliability of our financial reporting and the preparation of ourfinancial statements in accordance with generally accepted accountingprinciples.

 

***Limitationson the effectiveness of controls***

 

Ourmanagement, including the CEO and CFO, does not expect that our DisclosureControls and/or our internal control over financial reporting will prevent ordetect all error or fraud. A system of controls is able to provide onlyreasonable, not complete, assurance that the control objectives are being met,no matter how extensive those control systems may be. Also, control systemsmust be established considering the benefits of a control system relative toits costs. Because of these inherent limitations that exist in all controlsystems, no evaluation of controls can provide absolute assurance that allerrors or fraud, if any, have been detected. The inherent limitations in controlsystems include various human and system factors that may include errors injudgment or interpretation regarding events or circumstances or inadvertenterror. Additionally, controls can be circumvented by the acts of a singleperson, by collusion on the part of two or more people or by managementoverride of the control. Over time, controls can also become ineffective asconditions, circumstances, policies, technologies, level of compliance andpeople change. Because of such inherent limitations, in any cost-effectivecontrol system over financial information, misstatements may occur due to erroror fraud and may not be detected.

 

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***Scopeof evaluation of Disclosure Controls***

 

The evaluationof our Disclosure Controls performed by our CEO and CFO included obtaining anunderstanding of the design and objective of the controls, the implementationof those controls and the results of the controls on this report on Form 10-K.We have established a Disclosure Committee whose duty is to perform proceduresto evaluate the Disclosure Controls and provide the CEO and CFO with theresults of their evaluation as part of the information considered by the CEOand CFO in their evaluation of Disclosure Controls. In the course of theevaluation of Disclosure Controls, we reviewed the controls that are in placeto record, process, summarize and report, on a timely basis, matters thatrequire disclosure in our reports filed under the Securities Exchange Act of1934. We also considered the adequacy of the items disclosed in this report onForm 10-K.

 

***Conclusions***

 

Based upon theevaluation of Disclosure Controls described above, our CEO and CFO haveconcluded that, subject to the limitations described above, our DisclosureControls are effective to provide reasonable assurance that materialinformation relating to Washington Group International, Inc. and itsconsolidated subsidiaries is made known to management, including the CEO andCFO, so that required disclosures have been included in this report on Form10-K.

 

We have alsoreviewed our internal control over financial reporting during the most recentfiscal quarter, and our CEO and CFO have concluded that there have been nochanges that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

 

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**PART III**

 

**ITEM10.****       DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT**

 

Theinformation called for by this Item will be set forth under the captions“Directors” and****“Executive Officers” in our definitive proxy statement forour annual meeting of stockholders, to be filed not later than April 7, 2004,and is incorporated herein by this reference.

 

**ITEM11****.       EXECUTIVECOMPENSATION**

 

Theinformation called for by this Item will be set forth under the caption “Reportof the Compensation Committee on Executive Compensation for 2003” in ourdefinitive proxy statement for our annual meeting of stockholders, to be filednot later than April 7, 2004, and is incorporated herein by this reference.

 

**ITEM12****.       SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**

 

***Securitiesauthorized for issuance under equity compensation plans***

 
|                                                        |   | **(a)**                                                                                             |   | **(b)**                                                                            |   | **(c)**                                                                                                                                              |    |
|-------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------|---------|
| **Plan category**                                           |   | **Number of  securities to  be issued upon exercise  of outstanding options,  warrants and rights** |   | **Weighted-average  exercise price of  outstanding options,  warrants and rights** |   | **Number of  securities remaining  available for future issuance  under equity compensation  plans (excluding securities  reflected in column (a))** |    |
| Equity compensation plans approved by  security holders     |   | 5,563,000                                                                                           |   | $                                                                                  | 25.52  |                                                                                                                                                 | 393,000 |   |
| Equity compensation plans not approved by  security holders |   | —                                                                                              |   | —                                                                             |   | —                                                                                                                                               |    |
| Total                                                       |   | 5,563,000                                                                                           |   | $                                                                                  | 25.52  |                                                                                                                                                 | 393,000 |   |

 

Additional information calledfor by this item will be set forth under the caption “Security Ownership ofCertain Beneficial owners and Management” in our definitive proxy statement forour annual meeting of stockholders, to be filed not later than April 7, 2004, andis incorporated herein by this reference.

 

**ITEM13****.       CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS**

 

Theinformation called for by this Item will be set forth under the caption“Certain Relationships and Related Transactions” in our definitive proxy statementfor our annual meeting of stockholders, to be filed not later than April 7,2004, and is incorporated herein by this reference.

 

**ITEM14****.       PRINCIPALACCOUNTANT FEES AND SERVICES**

 

Theinformation called for by this Item will be set forth under the caption“Principal Accountant Fees and Services” in our definitive proxy statement forour annual meeting of stockholders, to be filed not later than April 7, 2004,and is incorporated herein by this reference.

 

III-1

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**PART IV**

 

**ITEM15****.       EXHIBITS,FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K**

 

(a)          *Documents filed as a part of this Form10-K.*

 
|   |   |                                                                                                                                                                                                                                                                                                       |   |   |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|   |   |                                                                                                                                                                                                                                                                                                       |   |   |
| 1.     |   | The  Consolidated Financial Statements, together with the report thereon of  Deloitte & Touche LLP, are included in Part II, Item 8 of this report                                                                                                                                                     |   |   |
|   |   |                                                                                                                                                                                                                                                                                                       |   |   |
|   |   | Independent Auditors’ Report                                                                                                                                                                                                                                                                          |   |   |
|   |   |                                                                                                                                                                                                                                                                                                       |   |   |
|   |   | Consolidated Statements of Operations for  the year ended January 2, 2004, the eleven months ended January 3, 2003  (Successor Company), the one month ended February 1, 2002, the one month  ended December 28, 2001 and the year ended November 30, 2001 (Predecessor  Company)                          |   |   |
|   |   |                                                                                                                                                                                                                                                                                                       |   |   |
|   |   | Consolidated Statements of Comprehensive  Income (Loss) for the year ended January 2, 2004, the eleven months ended  January 3, 2003 (Successor Company), the one month ended February 1, 2002,  the one month ended December 28, 2001 and the year ended November 30, 2001  (Predecessor Company)         |   |   |
|   |   |                                                                                                                                                                                                                                                                                                       |   |   |
|   |   | Consolidated Balance Sheets at January 2, 2004 and January 3, 2003  (Successor Company)                                                                                                                                                                                                                    |   |   |
|   |   |                                                                                                                                                                                                                                                                                                       |   |   |
|   |   | Consolidated Statements of Cash Flows for  the year ended January 2, 2004, the eleven months ended January 3, 2003  (Successor Company), the one month ended February 1, 2002, the one month  ended December 28, 2001 and the year ended November 30, 2001 (Predecessor  Company)                          |   |   |
|   |   |                                                                                                                                                                                                                                                                                                       |   |   |
|   |   | Consolidated Statements of Stockholders’  Equity (Deficit) for the year ended January 2, 2004, the eleven months ended  January 3, 2003 (Successor Company), the one month ended February 1, 2002,  the one month ended December 28, 2001 and the year ended November 30, 2001  (Predecessor Company) |   |   |
|   |   |                                                                                                                                                                                                                                                                                                       |   |   |
|   |   | Notes to Consolidated Financial Statements                                                                                                                                                                                                                                                                 |   |   |
|   |   |                                                                                                                                                                                                                                                                                                       |   |   |
| 2.     |   | Valuation, Qualifying and Reserve Accounts                                                                                                                                                                                                                                                                 |   |   |
|   |   |                                                                                                                                                                                                                                                                                                       |   |   |
|   |   | Financial  statement schedules not listed above are omitted because they are not  required or are not applicable, or the required information is given in the  financial statements including the notes thereto. Captions and column  headings have been omitted where not applicable.                     |   |   |
|   |   |                                                                                                                                                                                                                                                                                                       |   |   |
| 3.     |   | Exhibits                                                                                                                                                                                                                                                                                                   |   |   |
|   |   |                                                                                                                                                                                                                                                                                                       |   |   |
|   |   | The exhibits  to this report are listed in the Exhibit Index contained elsewhere in this  report.                                                                                                                                                                                                          |   |   |

 

IV-1

----

 

(b)   *Reports on Form 8-K.*

 

On November18, 2003, we filed a current report on Form 8-K dated November 17, 2003detailing Washington Group International’s third quarter 2003 financialresults.

 

On October 14,2003, we filed a current report on Form 8-K dated October 13, 2003 announcingWashington Group International’s entering into a new credit facility with afinancial syndicate led by Credit Suisse First Boston.

 

IV-2

----

 

**SIGNATURES**

 

Pursuant to the requirements ofSection 13 or 15(d) of the Securities Exchange Act of 1934, we have duly causedthis Form 10-K to be signed on our behalf by the undersigned, thereunto dulyauthorized on March 4, 2004.

 

Washington Group International,Inc.

 
| By                                                                       | /s/  George H. Juetten |   |
|--------------------------------------------------------------------------|-----------------------------|--------|
| George H.  Juetten, Executive Vice President and Chief Financial Officer |                        |
|                                                                          |                             |        |  |

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, this Form 10-K has been signed below onMarch 4, 2004 by the following persons on our behalf in the capacitiesindicated.

 
|                               |                                                 |
|------------------------------------|------------------------------------------------------|
|                               | Chief Executive Officer and President and Director   |
| /s/ Stephen  G. Hanks              |                                                 | (Principal Executive Officer) |
|                               |                                                 |
|                               | Executive Vice President and Chief Financial Officer |
| /s/ George  H. Juetten             |                                                 | (Principal Financial Officer) |
|                               |                                                 |
|                               | Vice President and Controller                        |
| /s/ Jerry K.  Lemon                |                                                 | (Principal Accounting Officer) |
|                               |                                                 |
| /s/ Dennis  R. Washington*         |                                                 | Chairman and Director |
|                               |                                                 |   |
| /s/ David H.  Batchelder*          |                                                 | Director |
|                               |                                                 |   |
| /s/ Michael  R. D’Appolonia * |                                                 | Director |
|                               |                                                 |   |
| /s/ William  J. Flanagan*          |                                                 | Director |
|                               |                                                 |   |
| /s/ C. Scott  Greer*               |                                                 | Director |
|                               |                                                 |   |
| /s/ William  H. Mallender*         |                                                 | Director |
|                               |                                                 |   |
| /s/ Michael  P. Monaco*            |                                                 | Director |
|                               |                                                 |   |
| /s/ Cordell  Reed*                 |                                                 | Director |
|                               |                                                 |   |
| /s/ Bettina  M. Whyte*             |                                                 | Director |
|                               |                                                 |   |
| /s/ Dennis  K. Williams*           |                                                 | Director |

 

----

*Craig G. Taylor, by signinghis name hereto, does hereby sign this Form 10-K on behalf of each of theabove-named directors of Washington Group International, Inc., pursuant topowers of attorney executed on behalf of each such officer and director.

 
| By     | /s/ Craig G.  Taylor               |   |
|--------|------------------------------------|--------|
|   | Craig G.  Taylor, Attorney-in-fact |   |

 

----

 

**WASHINGTON GROUPINTERNATIONAL, INC.**

**SCHEDULE II****.  VALUATION, QUALIFYING AND RESERVE ACCOUNTS**

***(In thousands)***

 

**Allowance forDoubtful Accounts Receivables Deducted in the Balance Sheet from AccountsReceivable**

 
| **Period Ended**                    |   | **Balance at  Beginning  of Period** |    | **Provisions  Charged to  Operations** |   | **Other** |   | **Deductions** |   | **Balance at  End of  Period** |   |
|-------------------------------------|--------|--------------------------------------|---------|----------------------------------------|--------|-----------|--------|----------------|--------|--------------------------------|--------|
| **Predecessor Company**             |   |                                 |    |                                   |   |      |   |           |   |                           |   |
| Year ended November 30, 2001        |   | $                                    | (15,270 | )                                      | $      | (21,847   | )      | $              | — |                           | $      | 13,216 |   | $ | (23,901 | ) |
| One month ended December 28, 2001   |   | (23,901                              | )       | (6,467                                 | )      | —    |   | 4,427          |   | (25,941                        | )      |
| One month ended February 1, 2002    |   | (25,941                              | )       | (160                                   | )      | —    |   | 1,311          |   | (24,790                        | )      |
| **Successor Company**               |   |                                 |    |                                   |   |      |   |           |   |                           |   |
| Eleven months ended January 3, 2003 |   | (24,790                              | )       | (13,444                                | )      | —    |   | 18,820         |   | (19,414                        | )      |
| Year ended January 2, 2004          |   | (19,414                              | )       | (5,321                                 | )      | —    |   | 11,216         |   | (13,519                        | )      |
|                                     |        |                                      |         |                                        |        |           |        |                |        |                                |        |  |  |  |  |  |

 

**Deferred Income TaxAsset Valuation Allowance Deducted in the Balance Sheetfrom Deferred Income Tax Assets**

 
| **Period Ended**                    |   | **Balance at  Beginning  of Period** |    | **Provisions  Charged to  Operations** |   | **Other** |   | **Deductions** |   | **Balance at  End of  Period** |   |
|-------------------------------------|--------|--------------------------------------|---------|----------------------------------------|--------|-----------|--------|----------------|--------|--------------------------------|--------|
| **Predecessor Company**             |   |                                 |    |                                   |   |      |   |           |   |                           |   |
| Year ended November 30, 2001        |   | $                                    | (44,585 | )                                      | $      | (90       | )      | $              | — |                           | $      | — |   | $ | (44,675 | ) |
| One month ended December 28, 2001   |   | (44,675                              | )       | —                                 |   | —    |   | —         |   | (44,675                        | )      |
| One month ended February 1, 2002    |   | (44,675                              | )       | (577                                   | )      | —    |   | —         |   | (45,252                        | )      |
| **Successor Company**               |   |                                 |    |                                   |   |      |   |           |   |                           |   |
| Eleven months ended January 3, 2003 |   | (45,252                              | )       | (3,260                                 | )      | —    |   | —         |   | (48,512                        | )      |
| Year ended January 2, 2004          |   | (48,512                              | )       | —                                 |   | (97,194   | )(a)   | 1,124          |   | (144,582                       | )      |
|                                     |        |                                      |         |                                        |        |           |        |                |        |                                |        |  |  |  |  |  |

 

----

(a)          Otheradjustments to the deferred income tax valuation allowance for January 2, 2004include a $91,834 increase related to NOL retained after the cancellation ofdebt and increase of $5,360 primarily related to foreign exchange gains onforeign NOL carryovers.

 

S-1

----

 

**WASHINGTON GROUPINTERNATIONAL, INC.**

**EXHIBIT INDEX**

 

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

 
| **Exhibit  Number** |   | **Exhibit  Description**                                                                                                                                                                                                                                                                                                                                                                             |
|---------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
| 2.1                 |   | Stock  Purchase Agreement dated as of April 14, 2000, among Raytheon Company,  Raytheon Engineers & Constructors International, Inc. and Washington  Group International, Inc. (“Washington Group International”) (filed as  Exhibit 2 to Washington Group International’s Form 10-Q Quarterly Report for  the quarter ended March 3, 2000 and incorporated herein by reference). |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
| 2.2.1               |   | Seconded  Amended Joint Plan of Reorganization of Washington Group International, et  al. (filed as Exhibit 99.1 to Washington Group International’s Form 8-K  Current Report filed on August 2, 2001 and incorporated herein by reference).                                                                                                                                                    |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
| 2.2.2               |   | Modification  to Seconded Amended Joint Plan of Reorganization of Washington Group  International, et al. (filed as Exhibit 99.1 to Washington Group  International’s Form 8-K Current Report filed on August 31, 2001 and  incorporated herein by reference).                                                                                                                                  |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
| 2.2.3               |   | Second  Modification to Seconded Amended Joint Plan of Reorganization of Washington  Group International, et al. (filed as Exhibit 2.3 to Washington Group  International’s Form 8-K Current Report filed on January 4, 2002 and  incorporated herein by reference).                                                                                                                            |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
| 2.2.4               |   | Third  modification to Seconded Amended Joint Plan of Reorganization of Washington  Group International, et al. (filed as Exhibit 2.4 to Washington Group  International’s Form 8-K Current Report filed on January 4, 2002 and  incorporated herein by reference).                                                                                                                             |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
| 3.1                 |   | Amended and  Restated Certificate of Incorporation of Washington Group International  (filed as Exhibit 3.1 to Washington Group International’s Form 8-K Current  Report filed on February 8, 2002 and incorporated herein by reference).                                                                                                                                                       |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
| 3.2                 |   | Amended and  Restated Bylaws of Washington Group International (filed as Exhibit 3.2 to  Washington Group International’s Form 8-K Current Report filed on February 8,  2002 and incorporated herein by reference).                                                                                                                                                                             |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.1                 |   | Specimen  certificate of Washington Group International’s common stock (filed as  Exhibit 4.1 to Washington Group International’s Form 10-Q Quarterly Report  for the quarter ended June 28, 2002 and incorporated herein by reference).                                                                                                                                                   |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.2                 |   | Specimen  certificate of Washington Group International’s Tranche A Warrants (filed as  Exhibit 4.2 to Washington Group International’s Form 10-Q Quarterly Report  for the quarter ended June 28, 2002 and incorporated herein by reference).                                                                                                                                             |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.3                 |   | Specimen  certificate of Washington Group International’s Tranche B Warrants (filed as  Exhibit 4.3 to Washington Group International’s Form 10-Q Quarterly Report  for the quarter ended June 28, 2002 and incorporated herein by reference).                                                                                                                                             |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.4                 |   | Specimen  certificate of Washington Group International’s Tranche C Warrants (filed as  Exhibit 4.4 to Washington Group International’s Form 10-Q Quarterly Report  for the quarter ended June 28, 2002 and incorporated herein by reference).                                                                                                                                             |

 

E-1

----

 
| 4.5    |   | Warrant  Agreement dated as of January 25, 2002 between Washington Group International  and Wells Fargo Bank Minnesota, National Association, as warrant agent (filed  as Exhibit 4.3 to Washington Group International’s Form 8-K Current Report  filed on February 8, 2002 and incorporated herein by reference).                                                                                                                                                                                                                                                          |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 4.6    |   | Registration  Rights Agreement dated January 25, 2002 among Washington Group International  and certain parties identified therein (filed as Exhibit 4.2 to Washington  Group International’s Form 8-K Current Report filed on February 8, 2002 and  incorporated herein by reference).                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 4.11   |   | Rights  Agreement dated as of June 21, 2002 between Washington Group International  and Wells Fargo Bank Minnesota, National Association, as rights agent (filed  as Exhibit 4.1 to Washington Group International’s Registration Statement on  Form 8-A Current Report filed on June 24, 2002 and incorporated herein by  reference).                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.1.1 |   | Credit  Agreement dated as of January 24, 2002 among Washington Group International,  Credit Suisse First Boston, as administrative agent, collateral monitoring  agent, lead arranger and book manager, ABLECO Finance LLC, as documentation  agent, and certain lenders and issuers identified therein (filed as Exhibit  10.1 to Washington Group International’s Form 8-K Current Report filed on  February 8, 2002 and incorporated herein by reference).                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.1.2 |   | Amendment  No. 1 and Consent dated as of June 28, 2002 to Washington Group  International’s Credit Agreement dated as of January 24, 2002 among  Washington Group International, Credit Suisse First Boston, as administrative  agent, collateral monitoring agent, lead arranger and book manager, ABLECO  Finance LLC, as documentation agent, and certain lenders and issuers  identified therein (filed as Exhibit 10.1 to Washington Group International’s  Form 10-Q Quarterly Report for the quarter ended June 28, 2002 and  incorporated herein by reference). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.2   |   | Pledge and  Security Agreement dated as of January 24, 2002 among Washington Group  International, certain subsidiaries of Washington Group International  identified therein and Credit Suisse First Boston, as administrative agent,  collateral monitoring agent, lead arranger and book manager, ABLECO Finance  LLC, as documentation agent (filed as Exhibit 10.2 to Washington Group  International’s Form 8-K Current Report filed on February 8, 2002 and  incorporated herein by reference).                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.3   |   | Shareholders  Agreement dated December 18, 1993 among Morrison Knudsen BV, a wholly owned  subsidiary of Washington Group International, Lambique Beheer BV and Ergon  Overseas Holdings Limited (filed as Exhibit 10.6 to Washington Group  International’s Form 10-K Annual Report for fiscal year ended November 30,  1997 and incorporated herein by reference).                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.4   |   | Asset  Purchase Agreement dated as of June 25, 1998 between CBS Corporation and WGNH  Acquisition, LLC related to the acquisition of the Westinghouse Energy  Systems Business Unit from CBS Corporation (filed as Exhibit 10.10 to  Washington Group International’s Form 10-K Annual Report for fiscal year ended  November 30, 1998 and incorporated herein by reference).                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.5   |   | Asset  Purchase Agreement dated as of June 25, 1998 between CBS Corporation and WGNH  Acquisition, LLC related to the acquisition of the Westinghouse Government  and Environmental Services Company business from CBS Corporation (filed as  Exhibit 10.11 to Washington Group International’s Form 10-K Annual Report for  fiscal year ended November 30, 1998 and incorporated herein by reference).                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.6   |   | Amended and  Restated Consortium Agreement between Washington Group International’s wholly  owned subsidiary, Washington Group International, Inc., an Ohio corporation,  and BNFL USA Group, Inc. (filed as Exhibit 10.3 to Washington Group  International’s Form 10-Q Quarterly Report for the quarter ended February 26,  1999 and incorporated herein by reference).                                                                                                                                                                                               |

 

E-2

----

 
| 10.7     |   | Asset  Purchase Agreement dated as of October 25, 2002 between Westinghouse  Government Services Company LLC and Curtiss-Wright Electro-Mechanical  Corporation (filed as Exhibit 99.2 to Washington Group International’s Form  8-K/A Amended Current Report filed on November 1, 2002 and incorporated  herein by reference).                                                                                                                                                                                |
|----------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.8     |   | Trust and  Disbursing Agreement dated as of January 25, 2002 among Washington Group  International, the Official Unsecured Creditors’ Committee and Wells Fargo  Bank Minnesota, National Association, as disbursing agent (filed as Exhibit  10.4 to Washington Group International’s Form 8-K Current Report filed on  February 8, 2002 and incorporated herein by reference).                                                                                                                          |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.9     |   | Settlement  Agreement dated as of January 23, 2002 among Washington Group International,  Raytheon Company and Raytheon Engineers & Constructors International,  Inc. (filed as Exhibit 10.5 to Washington Group International’s Form 8-K  Current Report filed on February 8, 2002 and incorporated herein by  reference).                                                                                                                                                                                |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.10    |   | Asset  Purchase Agreement dated as of April 17, 2003 between The Shaw Group Inc. and  Washington Group International related to the sale of Washington Group  International’s Petrochemical Technology Center in Cambridge, Massachusetts,  to Stone & Webster Inc., a subsidiary of The Shaw Group Inc. of Baton  Rouge, Louisiana (filed as Exhibit 10.1 to Washington Group International’s  Form 10-Q Quarterly Report for the quarter ended July 4, 2003 and  incorporated herein by reference). |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.11    |   | Amended and  Restated Credit Agreement dated as of October 9, 2003 among Washington Group  International, the lenders and issuers party thereto, Credit Suisse First  Boston, as administrative agent, sole lead arranger and book manager, LaSalle  Bank National Association, as documentation agent, and ABLECO Finance LLC, as  syndication agent (filed as Exhibit 10.1 to Washington Group International’s  Form 8-K Current Report filed on October 13, 2003 and incorporated herein by  reference).    |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.12    |   | Joinder  Agreement dated as of October 9, 2003, delivered by subsidiaries of  Washington Group International and acknowledged and agreed by Credit Suisse  First Boston (filed as Exhibit 10.2 to Washington Group International’s Form  8-K Current Report filed on October 13, 2003 and incorporated herein by  reference).                                                                                                                                                                                  |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.13.1  |   | Washington  Group International Equity and Performance Incentive Plan, Amended and  Restated as of November 9, 2002 (filed as Appendix E to Washington Group  International’s Def 14A Definitive Proxy Statement filed on April 8, 2003 and  incorporated herein by reference). #                                                                                                                                                                                                                              |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.13.2* |   | Washington  Group International Equity and Performance Incentive Plan, Amended and  Restated as of August 14, 2003. #                                                                                                                                                                                                                                                                                                                                                                                               |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.14    |   | Washington  Group International, Inc. Equity and Performance Incentive Plan — California  (filed as Exhibit 10.8 to Washington Group International’s Form 8-K Current  Report filed on February 8, 2002 and incorporated herein by reference). #                                                                                                                                                                                                                                                          |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.15    |   | Description  of Washington Group International’s additional retention and incentive  arrangements (filed as Exhibit 10.9 to Washington Group International’s Form  10-Q Quarterly Report for the quarter ended March 29, 2002 and incorporated  herein by reference). #                                                                                                                                                                                                                                   |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.16    |   | Letter  Agreement dated as of November 15, 2001 between Washington Group  International and Dennis R. Washington (filed as Exhibit 10.9 to Washington  Group International’s Form 8-K Current Report filed on February 8, 2002 and  incorporated herein by reference).                                                                                                                                                                                                                                         |

 

E-3

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| 10.17*  |   | Letter  Agreement of January 21, 2004, effective as of November 14, 2003, between  Washington Group International and Dennis R. Washington.                                                                                                                                                                                                                                                                   |
|---------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.18   |   | Form of  Indemnification Agreement (filed as Exhibit 10.10 to Washington Group  International’s Form 8-K Current Report filed on February 8, 2002 and  incorporated herein by reference). # A schedule listing the directors and  officers with whom Washington Group International has entered into such  agreements is filed herewith. # *                                                             |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.19   |   | Washington  Group International Key Executive Disability Insurance Plan (filed as Exhibit  10.12 to Old MK’s Form 10-K Annual Report for the year ended December 31,  1992 and incorporated herein by reference). #                                                                                                                                                                                      |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.20   |   | Washington  Group International Key Executive Life Insurance Plan (filed as Exhibit 10.13  to Old MK’s Form 10-K Annual Report for the year ended December 31, 1992 and  incorporated herein by reference). #                                                                                                                                                                                            |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.21.1 |   | Washington  Group International’s Retention Agreement with Stephen G. Hanks dated as of  March 20, 2001 (filed as Exhibit 10.20 to Washington Group International’s  Form 10-K Annual Report for fiscal year ended November 30, 2001 and  incorporated herein by reference). #                                                                                                                      |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.21.2 |   | Amendment  dated August 20, 2002 to Washington Group International’s Retention Agreement  of March 20, 2001 with Stephen G. Hanks (filed as Exhibit 10.17.2 to  Washington Group International’s Form 10-K Annual Report for fiscal year  ended January 3, 2003 and incorporated herein by reference). #                                                                                            |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.22.1 |   | Form of  Washington Group International’s Retention Agreement (filed as Exhibit 10.21  to Washington Group International’s Form 10-K Annual Report for fiscal year  ended November 30, 2001 and incorporated herein by reference). #  A schedule listing the Executive Officers  with whom Washington Group International has entered into such agreements is  filed herewith. *               |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.22.2 |   | Form of  Amendment to Washington Group International’s Retention Agreement (filed as  Exhibit 10.18.2 to Washington Group International’s Form 10-K Annual Report  for fiscal year ended January 3, 2003 and incorporated herein by reference).  #  A schedule listing the Executive Officers  with whom Washington Group International has entered into such agreements is  filed herewith. * |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.23   |   | Washington  Group International’s letter agreement with Thomas H. Zarges dated as of  March 7, 2001 (filed as Exhibit 10.23 to Washington Group International’s  Form 10-K Annual Report for fiscal year ended November 30, 2001 and  incorporated herein by reference). #                                                                                                                          |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.24   |   | Washington  Group International, Inc. Short-Term Incentive Plan (filed as Appendix D to  Washington Group International’s Def 14A Proxy Statement filed on April 8,  2003 and incorporated herein by reference). #                                                                                                                                                                                       |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.25   |   | Washington  Group International, Inc. Restoration Plan effective as of January 1, 2003,  amended and restated as of August 14, 2003 (filed as Exhibit 10.3 to Washington  Group International’s Form 10-Q Quarterly Report for the quarter ended  October 3, 2003 and incorporated herein by reference). #                                                                                               |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.26   |   | Washington  Group International, Inc. Voluntary Deferred Compensation Plan effective as  of January 1, 2003, amended and restated as of August 14, 2003 (filed as  Exhibit 10.4 to Washington Group International’s Form 10-Q Quarterly Report  for the quarter ended October 3, 2003 and incorporated herein by reference).  #                                                                          |

 

E-4

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| 10.27      |   | Description  of Washington Group International Executive Financial Counseling Program  adopted on February 14, 2003 (filed as Exhibit 10.23 to Washington Group  International’s Form 10-K Annual Report for fiscal year ended January 3, 2003  and incorporated herein by reference). # |
|------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                                                                                                                                                                          |
| 21.*       |   | Subsidiaries  of Washington Group International.                                                                                                                                                                                                                                              |
|       |   |                                                                                                                                                                                                                                                                                          |
| 23.1*      |   | Consent of  Deloitte & Touche LLP.                                                                                                                                                                                                                                                        |
|       |   |                                                                                                                                                                                                                                                                                          |
| 23.2*      |   | Consent of  Deloitte & Touche GmbH.                                                                                                                                                                                                                                                       |
|       |   |                                                                                                                                                                                                                                                                                          |
| 24.*       |   | Powers of  Attorney.                                                                                                                                                                                                                                                                          |
|       |   |                                                                                                                                                                                                                                                                                          |
| 31.1*      |   | Certification  of the Principal Executive Officer of Washington Group International,  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                              |
|       |   |                                                                                                                                                                                                                                                                                          |
| 31.2*      |   | Certification  of the Principal Financial Officer of Washington Group International,  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                              |
|       |   |                                                                                                                                                                                                                                                                                          |
| 32.1† |   | Certification  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                     |
|       |   |                                                                                                                                                                                                                                                                                          |
| 99.1*      |   | Financial  Statements of Mitteldeutsche Braunkohlengesellschaft mbH for the year ended  December 31, 2003.                                                                                                                                                                                    |

 

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#      Management contract or compensatory plan.

*      Filed herewith.

†      Furnished herewith.

 

E-5

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