**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C.   20549**

** **

**Form 10-K**

**Annual Report**

**Forthe Fiscal Year Ended January 3, 2003**

** **

**Pursuant to Section 13 or 15(d) of the SecuritiesExchange Act of 1934**

** **

**CommissionFile Number 1-12054**

** **

**WASHINGTON GROUP INTERNATIONAL, INC.**

 

**ADelaware Corporation**

IRS EmployerIdentification No. **33-0565601**

 

**720PARK BOULEVARD, BOISE, IDAHO  83712**

**208/ 386-5000**

 

----

 

**SECURITIES REGISTERED PURSUANT TOSECTION 12(b) andSECTION 12(g) OF THE ACT**

 

Pursuant to the Second AmendedJoint Plan of Reorganization of Washington Group International, Inc., et al.,as modified and confirmed, on January 25, 2002, all of the registrant’s thenexisting equity securities, including common stock, were deemed canceled andextinguished, and new common stock was issued.

 

Securities registeredpursuant to Section 12(b) of the Exchange Act: None

 

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

 

**CommonStock, $.01 par value per share**

(Title of class)

 

**PreferredStock Purchase Rights**

(Title of class)

 

**COMPLIANCE WITH REPORTINGREQUIREMENTS**

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports) and (2) has been subject to such filing requirements for the past90 days.

**ý**  Yes                     o  No

 

Indicate by check markwhether the registrant is an accelerated filer.

**ý  **Yes                     o  No

 

Indicate by check markwhether the registrant has filed all documents and reports required to be filedby Section 12, 13, or 15(d) of the Exchange Act subsequent to the distributionof securities under a plan confirmed by a court.

**ý  **Yes                     o  No

 

**DISCLOSURE PURSUANT TO ITEM 405 OFREGULATION S-K**

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-Kis not contained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K. **ý**

 

**AGGREGATE MARKET VALUE OF COMMONSTOCK HELD BY NON-AFFILIATES**

At February 28, 2003, theaggregate market value of the registrant’s common stock held by non-affiliatesof the registrant, based on the closing bid price on February 28, 2003, asreported on the OTC Bulletin Board®, was approximately $371,000,000. At June28, 2002 (the last business day of the registrant’s most recently completed secondfiscal quarter), the aggregate market value of the registrant’s common stockheld by nonaffiliates of the registrant, based on the closing bid price on June28, 2002, as reported by the Pink Sheets® quotation service, was approximately$550,000,000. No shares are assumed to be held by affiliates of the registranton such dates for the purpose of these calculations.

 

The number of shares ofcommon stock outstanding as of February 28, 2003 was 25,000,000.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

Portions of theregistrant’s definitive proxy statement for its annual meeting of stockholdersto be held on May 9, 2003, which is expected to be filed with the Securitiesand Exchange Commission not later than April 9, 2003, are incorporated byreference into Part III of this report on Form 10-K. In the event such proxystatement is not filed by April 9, 2003, the required information will be filedas an amendment to this report on Form 10-K no later than that date.

 

 

----

 

**WASHINGTON GROUP INTERNATIONAL, INC.**

 

**Form 10-K**

**Annual Report**

**For the Fiscal Year Ended January 3,2003**

 

**TABLE OF 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        |
|               |                                                                                        |
| **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.           | Controls and Procedures                                                                     |
|               |                                                                                        |
| **PART IV**        |
|               |                                                                                        |
| Item 15.           | Exhibits, Financial Statement Schedule and  Reports on Form 8-K                             |
|               |                                                                                        |
| **SIGNATURES**     |
|               |                                                                                        |
| **CERTIFICATIONS** |

 

----

 

**NOTEREGARDING FORWARD-LOOKING INFORMATION**

 

*This report contains forward-lookingstatements.  You can identify forward-lookingstatements 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 other variations thereof, as wellas other statements regarding matters that are not historical fact.  These forward-looking statements include,among others, statements concerning:*

 

•                  *Our business strategy and competitive advantages*

 

•                  *Our expectations as to potential revenues fromdesignated markets or customers*

 

•                  *Our expectations as to profits, cash flows, return oninvested capital and net income*

 

•                  *Our expectations as to new work and backlog*

 

•                  *The markets for our services and products*

 

•                  *Our anticipated capital expenditures and fundingrequirements*

 

*Forward-looking statements are onlypredictions. The forward-looking statements in this report are subject to risksand uncertainties, including, among others, the risks and uncertaintiesidentified in this report and other operational, business, industry, market,legal and regulatory developments, which could cause actual events or resultsto differ materially from those expressed or implied by the forward-lookingstatements. The most important factors that could prevent us from achieving theexpectations expressed include, but are not limited to, our failure to:*

 

•                  *Satisfy the restrictive covenants imposed by ourindebtedness*

 

•                  *Raise sufficient working capital on acceptable termsand on a timely basis*

 

•                  *Maintain relationships with key customers, partners,sureties and suppliers*

 

•                  *Manage and avoid delays or cost overruns in existingand future contracts*

 

•                  *Successfully bid for, and enter into, new contractson satisfactory terms*

 

•                  *Successfully negotiate claims and change orders*

 

•                  *Manage and maintain our operations and financialperformance and the operations and financial performance of our current andfuture operating subsidiaries and joint ventures*

 

•                  *Respond to competitors in our existing and plannedmarkets*

 

•                  *Respond effectively to regulatory, legislative andjudicial developments, including any legal or regulatory proceedings, affectingour existing contracts, including contracts concerning environmentalremediation and restoration*

 

•                  *Obtain and maintain any required governmentalauthorizations, franchises and permits, all in a timely manner, at reasonablecosts and on satisfactory terms and conditions*

 

•                  *Realize anticipated reductions in overhead and othercosts*

 

I-1

----

 

*Some other factors that may affectour businesses, financial position or results of operations include:*

 

•                  *Accidents and conditions, including industrialaccidents, labor disputes, geological conditions, environmental hazards,weather and other natural phenomena*

 

•                  *Special risks of international operations, includinguncertain political and economic environments, acts of terrorism or war,potential incompatibilities with foreign joint venture partners, foreigncurrency fluctuations and controls, civil disturbances and labor issues*

 

•                  *Special risks of contracts with the government,including the failure of applicable governing authorities to take necessaryactions to secure or maintain funding for particular projects with us, theunilateral termination of contracts by the government and reimbursementobligations to the government for funds previously received*

 

•                  *Maintenance of government-compliant cost systems*

 

•                  *The economic well-being of our private and publiccustomer base and its ability and intentions to invest capital in engineeringand construction activities*

 

**PARTI**

 

**ITEM1.  BUSINESS**

 

Unless otherwiseindicated, the terms “we,” “us” and “our” refer to Washington GroupInternational, Inc. (“Washington Group”) and its consolidated subsidiaries; andreferences to 2002 are references to our fiscal year ended January 3, 2003;references to 2001 are references to our fiscal year ended November 30, 2001;and references to 2000 are references to our fiscal year ended December 1,2000.

 

The common stock of reorganized Washington Group (“New Common Stock”)currently trades on the NASDAQ National Market® under the ticker symbol “WGII.”

 

We have changed our 52/53 week fiscal year from a year ending on theFriday closest to November 30 to a year ending on the Friday closest toDecember 31. This change became effective on December 29, 2001.

 

We file annual reports on Form 10-K, quarterly reports on Form 10-Q,current reports on Form 8-K and other information with the Securities andExchange Commission (the “SEC”). The public can obtain copies of thesematerials by visiting the SEC’s Public Reference Room at 450 Fifth Street, NW,Washington DC 20549, or by calling the SEC at 1-800-SEC-0330, or by accessingthe SEC’s website at http://www.sec.gov. In addition, as soon as reasonablypracticable after such materials are filed with or furnished to the SEC, wemake copies available to the public free of charge on or through our website athttp://www.wgint.com. The information on our website is not incorporated into,and is not part of, this report.

 

Our principal executiveoffices are located at 720 Park Boulevard, Boise, Idaho 83712. Our telephonenumber is (208) 386-5000.

 

**GENERAL**

 

We are an international provider of a broad range ofdesign, engineering, construction, construction management, facilities andoperations management, environmental remediation and mining services. We offerour various services separately or as part of an integrated package throughoutthe life cycle of a customer’s project.

 

I-2

----

 

•                  In providing engineering and designservices, we participate in the conceptualization and planning stages ofprojects that are part of our customers’ overall capital programs. We developthe physical designs and determine the technical specifications. We also deviseproject configurations to maximize both construction and operating efficiency.

 

•                  As a contractor, we are responsiblefor the construction and completion of each contract in accordance with itsspecifications and contracting terms (primarily schedule and total cost). Inthis capacity, we often manage the procurement of materials, subcontractors andcraft labor. Depending on the project, we may function as the primarycontractor or as a subcontractor to another firm.

 

•                  On some projects, we function as aconstruction manager, engaged by the customer to oversee other contractors’compliance with design specifications and contracting terms.

 

•                  Under operations and maintenancecontracts, we provide staffing, technical support, repair, renovation, predictiveand preventive services to customer facilities globally. We also offer otherfacility services, such as general building maintenance and asset management.In addition, we provide inventory and product logistics for manufacturingplants, information technology support, equipment servicing and toolingchangeover.

 

On some projects, particularly those of significantsize and requiring specialized technology or know-how, we partner with otherfirms, both to (1) increase our opportunity to win the contract and (2) managedevelopment and execution risk. Partners may include specialized processengineering firms, other engineers, constructors, operations contractors orequipment manufacturers. These partnerships may be structured as joint venturesor consortia, with each participating firm having an economic interest relativeto the scope of its work.

 

We enter into four basic types of contracts with ourcustomers:

 

•                  Under a “fixed-price” contract, weprovide the customer a total project for an agreed-upon price, subject toproject circumstances and changes in scope. We commonly refer to contractsunder which the total project cost is determined up front as “lump-sum”contracts. Plant and facility construction projects and large design-buildinfrastructure projects are typically awarded on a lump-sum basis. We followstrict guidelines in bidding for and entering into fixed-price contracts.

 

•                  Under a “fixed-unit-price” contract,the customer pays us for materials, labor, overhead, equipment rentals or othercosts at fixed rates as each unit of work is performed. Highway infrastructureand mining projects are typically awarded on a fixed-price per-unit basis.

 

•                  Under a “target-price” contract, weprovide the customer with a total project at a target price agreed upon by thecustomer, subject to project circumstances and changes in scope. Should costsexceed the target within the agreed-upon scope, we will absorb those costs tothe extent of our expected fee or profit; however, the customer reimburses usfor the costs that we incur if costs continue to escalate beyond our expectedfee. Additional fee is earned if costs are below the target. We follow strictguidelines in bidding for and entering into target-price contracts.

 

•                  Under a “cost-type” contract, a customerreimburses us for the costs that we incur (primarily materials, labor, overheadand subcontractor services), plus a predetermined fee. The fee portion of thecontract may equal a percentage of the costs incurred and/or may be based onthe achievement of specific performance incentives or milestones. The feeportion may also be subject to a maximum. Engineering, construction managementand environmental and hazardous substance remediation contracts, including mostof our work for U.S. government customers, are typically awarded pursuant to acost-type contract.

 

Both anticipated income and economic risk are greaterunder fixed-price and fixed-unit-price contracts than under target-price andcost-type contracts.

 

I-3

----

 

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 Delaware on April28, 1993 under the name Kasler Holding Company.  In April 1996, we changed our name to Washington ConstructionGroup, 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 MorrisonKnudsen Corporation. Our purchase of Old MK was structured as a merger with andinto us and was an integral part of the reorganization of Old MK under a planof reorganization that Old MK filed in the U.S. Bankruptcy Court for theDistrict of Delaware. We have no remaining obligations under that plan ofreorganization.

 

On March 22, 1999, we and BNFL Nuclear Services, Inc.(“BNFL”) acquired the government and environmental services businesses of CBSCorporation (now Viacom, Inc.). In this report, we refer to these businesses asthe “Westinghouse Businesses.” The Westinghouse Businesses currently constituteour Westinghouse Government Services Group (“WGSG”), which is primarily a partof our Energy & Environment business unit.

 

On July 7, 2000, we purchased from Raytheon Companyand Raytheon Engineers & Constructors International, Inc. (“RECI” and,collectively with Raytheon Company, the “Sellers”), the capital stock of thesubsidiaries of RECI and specified other assets of RECI and assumed specifiedliabilities of RECI. The businesses that we purchased, which we refer to inthis 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 liquidity problemsresulting 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” and Note 4, “Reorganization Case and Fresh-start Reporting” ofthe Notes to Consolidated Financial Statements in Item 8 of this report.

 

The U.S. Bankruptcy Court for the District of Nevadaretains jurisdiction to interpret our Plan of Reorganization and to resolveoutstanding claims and third party disputes relating thereto. A reorganizationplan committee (the “Reorganization Plan Committee”) was established by thebankruptcy court to evaluate claims of unsecured creditors, to prosecute anydisputed unsecured claims, to determine each unsecured creditor’s distributionunder the Plan of Reorganization, and generally to monitor implementation ofthe Plan of Reorganization.

 

We are responsible for all fees and expenses incurredin connection with the administration of our Plan of Reorganization, includingfees and expenses of the Reorganization Plan Committee, the United StatesTrustee appointed by the bankruptcy court, and their counsel and our counsel.

 

**BUSINESS UNITS**

 

During the fiscal quarter ended March 29, 2002, wereorganized our business to operate through six business units, each of whichcomprises a separate reportable business segment: Power, Infrastructure,Mining, Industrial/Process, Defense and Energy & Environment.

 

I-4

----

 

***Power***

 

Our Power business unit provides engineering,construction, and operations and maintenance services in both the fossil andnuclear power markets. Its customers include utilities, industrialco-generators, independent power producers, and governments that generate powerin a wide variety of ways, including coal-, oil- and gas-fired power plants,combustion turbine and combined cycle generation, nuclear power generation,hydroelectric generation and waste-to-energy generation. The Power businessunit provides a range of services that includes:

 

•                  generalengineering and design;

•                  powergeneration planning;

•                  sitingand licensing;

•                  environmentalpermitting and engineering;

•                  plantconstruction, expansion, refurbishment, retrofit and modification, includingthe construction of new power plants, distribution and transmission systems andenergy storage facilities, the installation of flue-gas cleaning systems incoal-fired power plants and the replacement of major components in nuclearpower plants;

•                  decontaminationand decommissioning of nuclear power plants; and

•                  operationsand maintenance, including renewal and repair, supply and logistics managementand maintenance and modification services at several nuclear power plants.

 

***Infrastructure***

 

Our Infrastructure business unit providesinfrastructure services to clients globally via project development,design-build-operate-maintain, consulting, engineering, design, projectmanagement, construction management, construction and operations andmaintenance. The business unit generally performs as a general contractor or asa joint venture partner with other contractors on domestic and internationalprojects.

 

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

 

•                  *Rail and transit*: Design, construction,operation and maintenance of light rail, subways, commuter/inter-cityrailroads, railroads, freight transport, people movers, bus rapid transit,electrification and multimodal facilities.

 

•                  *Highways and bridges*: Design andconstruction of interstates/freeways, arterial highways/streets, interchanges,bridges, tunnels and intelligent transportation systems.

 

•                  *Water resource and hydropower*: Design andconstruction of hydroelectric power, water supply, flood control, irrigationand drainage, hydraulic structures and environmental and safety analysis.

 

•                  *Airports and seaports*: Design,construction, development and operation of airport airside and landsideinfrastructure, security and environmental services.

 

***Mining***

 

Our Mining business unit provides design/buildservices; engineer, procure, construct (EPC); engineer, procure, construct,manage (EPCM); construction management; contract-mining; engineering; resourceevaluation; geologic modeling; mine planning; simulation modeling; equipmentselection; production scheduling and operations management to the preciousmetals, coal, oil sands, industrial minerals and metals markets globally. Thebusiness unit currently operates six mines producing minerals in North andSouth America and Europe. Mining contracts typically are two- to five-yearcontracts that are renewed in subsequent bidding cycles throughout the usefullife of the mine, which can range from 20 to 30 years. Mining contracts arelargely fixed-price or fixed-unit-price in nature. We hold ownership interestsin two mining ventures: MIBRAG mbH, a 

 

I-5

----

 

company that operates lignite mines and power plants in Germany (50%ownership), and Westmoreland Resources, Inc., a coal company in Montana (20%ownership). See Note 6, “Ventures” of the Notes to Consolidated FinancialStatements in Item 8 of this report.

 

***Industrial/Process***

 

The Industrial/Process business unit provides servicesin each stage of a project’s life cycle, including planning, engineering,design, procurement, construction and total facilities management. Totalfacilities management services of Industrial/Process include inventory andsupply chain management, shutdown and turnaround management and othermaintenance, operations and logistics management services. Industrial/Processserves companies in the following markets:

 

•                  automotive;

•                  pharmaceutical and biotechnology;

•                  oil and gas processing;

•                  fine chemical processing;

•                  buildings;

•                  food and consumer products;

•                  general and manufacturing;

•                  aerospace;

•                  telecommunications;

•                  pulp and paper markets; and

•                  metals processing.

 

***Defense***

 

The structure of our Defense business unit has changeddramatically as the needs of our major customer, the U.S. government and morespecifically, the Department of Defense, have changed. After the September 11attack on the United States, the Defense business unit identified three majormarkets to best serve its clients.

 

•                  *Threat reduction*. We providedemilitarization services to federal clients, including chemical and biologicalwarfare material neutralization and nuclear weapons delivery systemsdisarmament. This market includes support for the Department of Defense in thedestruction of the U.S. chemical weapons stockpile as the lead contractor forfour of the U.S. Army’s five chemical weapons destruction thermal facilities.Additionally, we provide support to a fifth facility, purchase equipment forthese sites and we are responsible for the start-up, operations and closure ofthe first neutralization plant dealing with intact weapons. These facilitiesare designed to destroy chemical weapons that have been stored for many yearsin underground bunkers. In addition, the business unit providesdemilitarization services, funded by the U.S. government, to the Commonwealthof Independent States, and has recently been awarded significant participationin the Cooperative Threat Reduction Integrated Contract. The contract isfinanced by the United States to protect and safely destroy weapons of massdestruction located in the former Soviet Union.

 

•                  *Defense infrastructure services*. OurDefense business unit supports the Department of Defense and other U.S.government agencies that operate or maintain major facilities providingarchitectural engineering services and engineering, procurement andconstruction services for the armed forces. These same services are provided tothe Department of State and various intelligence agencies of the U.S.government. Transportation nodes, such as airports, seaports, internationalboundaries and transit points, bridges, rail systems and commercial aircraftand the Command & Control systems are all being evaluated and will besupported by Defense infrastructure services.

 

I-6

----

 

•                  *International and homeland security*. Weprovide threat analysis and mitigation services to a variety of clients. TheDefense business unit supports one of the nation’s highest priorities -the security of our nation and the safety of U.S. citizens abroad. Congress hascreated a new Department of Homeland Security, which has been given a broadmandate and significant funding. We will devote our considerable experience insecurity research and technologies to compete for this business.

 

***Energy & Environment***

 

Our Energy & Environment business unit providesservices to the U.S. Department of Energy, which is responsible for maintainingthe nation’s nuclear weapons stockpile and performing environmental cleanup andremediation. The business unit also provides the U.S. government withconstruction, contract management, supply-chain management, quality assurance,administrative and environmental cleanup and restoration services. Energy &Environment provides safety management consulting and waste and environmentaltechnology and engineered products, including radioactive waste containers andtechnical support services. WGSG, in which we have a 60% economic interest andBNFL has a 40% interest, operates within the Energy & Environment businessunit. Almost all of this business unit’s revenues are from contracts funded bythe federal government, with the Department of Energy accounting for about 97%of its revenues.

 

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, andsafety planning, integrated safety management consulting, facility operation,hazardous material management and licensing.

 

For financial information about each of our businessunits and additional disclosures, see “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations -Business Unit Results” in Item 7 of this report and Note 13, “OperatingSegment, Geographic and Customer Information” of the Notes to ConsolidatedFinancial Statements in Item 8 of this report.

 

For financial information relating to geographic areasin which we operate and additional disclosures, see Note 13, “OperatingSegment, Geographic and Customer Information” of the Notes to ConsolidatedFinancial Statements in Item 8 of this report.

 

**MATERIAL CUSTOMERS**

 

During 2002, 10% or more of our total consolidatedrevenue was derived from contracts and subcontracts performed by the Power,Industrial/Process, Defense and Energy & Environment business units asfollows:

 
|                   |   | **Percent of  Consolidated Revenue** |   |
|------------------------|--------|--------------------------------------|--------|
| Department  of Defense |   | 23                                   | %      |
| Raytheon  Company      |   | 15                                   | %      |

 

Although we presentlyhave a good relationship with the Department of Defense, the loss of thiscustomer, or significant reductions in government funding, could have a materialadverse effect on our Defense and Energy & Environment business units andour company taken as a whole. See Risk Factors, “Economic downturns andreductions in government funding could have a negative impact on our business,”later in Part I of this report.

 

Our revenue derived from Raytheon Company isprincipally the result of work performed in the Power business unit under aservices agreement entered into as part of our settlement agreement with theRaytheon Company (the “Raytheon Settlement”). Under this agreement, we performwork as requested by Raytheon Company and are reimbursed on a cost-reimbursablebasis on certain projects which were rejected by us during our bankruptcy forwhich Raytheon Company had indemnified performance to the customer. See Note 3,“Acquisition” of the Notes to Consolidated Financial Statements in Item 8 ofthis report. Although the revenues derived from work performed under theRaytheon Settlement were significant to our business during 2002, we 

 

I-7

----

 

expect the work to be substantially completed in 2003. We anticipatethat the reduction of revenue from the completion of work under the RaytheonSettlement will be partially replaced with new work awarded from other customersin the near term and will not have a material adverse effect on our business inthe long term.

 

**GOVERNMENT CONTRACTS AND BACKLOG**

 

Government funded contracts are, and are expected tocontinue to be, a significant part of our business.****We derived 35% of ourconsolidated operating revenues in 2002 from contracts with the U.S.government. Allowable costs under U.S. government contracts are subject toaudit 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 which 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 option ofthe customer.

 

Backlog represents the total value of all awardedcontracts that have not been completed and will be recognized as revenues or asequity in income of mining ventures over the life of the project or over theconstruction period. Backlog includes our proportionate share of constructionjoint venture contracts and the uncompleted portions of mining servicecontracts and ventures for the next five years. Backlog for governmentcontracts includes only two years’ worth of the portions of such contracts thatare currently funded or which we are highly confident will be funded. Thereported backlog excludes approximately $1.0 billion of government contracts inprogress for work to be performed beyond December 2004.

 

Backlog at January 3, 2003 totaled $2.8 billioncompared with backlog of $3.5 billion at November 30, 2001. During the fourthquarter of 2002, we sold the Electro-Mechanical Division (“EMD”) of the Energy& Environment business unit. See Note 7, “Sale of Business and BusinessesHeld for Sale” of the Notes to Consolidated Financial Statements in Item 8 ofthis report. As part of this transaction, we sold contracts with backlog valuedat $252.1 million at the end of the third quarter of 2002. Approximately $1.1billion of the backlog at January 3, 2003 was comprised of U.S. governmentcontracts that are subject to termination by the government, $512.1 million ofwhich had not yet been funded. Historically, we have not experiencedsignificant reductions in funding of U.S. government contracts once they havebeen awarded. Terminations for the convenience of the government generallyprovide for recovery of contract costs and related earnings. Approximately $1.4billion or 52% of backlog at January 3, 2003 is expected to be recognized ascontract revenue or as equity in income of mining ventures in 2003.

 

Although backlog reflects business that we consider tobe firm, cancellations or scope adjustments may occur. We have adjusted backlogto reflect project cancellations, deferrals and revisions in scope and cost(both upward and downward) known at the reporting date; however, futurecontract modifications or cancellations may increase or reduce backlog andfuture revenues.

 
| **Composition of backlog  (In millions)**   |   | **January 3,  2003** |    | **February  1,  2002** |   | **November  30,  2001** |              |
|---------------------------------------------|--------|----------------------|---------|------------------------|--------|-------------------------|-------------------|
|                                        |   |                 |    |
|                                        |   |                 |    |                   |   |                    | **(Fresh-start)** |   |   |   |   |   |   |
|                                        |   |                 |    |                   |   |                    |              |   |   |   |   |   |   |   |   |   |
| Cost-type  and target-price contracts       |   | $                    | 1,553.1 |                   | 56     | %                       | $                 | 1,560.6 |   | 46 | % | $ | 1,500.9 |   | 42 | % |
| Fixed-price  and fixed-unit-price contracts |   | 1,202.0              |    | 44                     | %      | 1,806.6                 |              | 54 | % | 2,046.6 |   | 58 | % |
| Total  backlog                              |   | $                    | 2,755.1 |                   | 100    | %                       | $                 | 3,367.2 |   | 100 | % | $ | 3,547.5 |   | 100 | % |

 

During 2001, we reversed previously recorded backlogof $1,020.7 million. This reversal was principally due to the suspension ofwork on two large construction projects located in Massachusetts that were partof the RE&C acquisition. See Note 3, “Acquisition” of the Notes toConsolidated Financial Statements in Item 8 of this report. During December2001, we were re-engaged to continue work on the suspended projects andcontinued to work on them throughout 2002 and into 2003. Completion is expectedduring 2003. During 2002, $537.6 million of the additions to our backlog wereprimarily related to these two projects.

 

I-8

----

 

**COMPETITION**

 

We are engaged in highly competitive businesses inwhich customer contracts are typically awarded through competitive biddingprocesses. We compete based primarily on price, reputation and reliability withother general and specialty contractors, both foreign and domestic. Success orfailure in our lines of business is, in large measure, based upon the abilityto compete successfully for contracts and to provide the engineering, planning,procurement, construction, operations and project management and projectfinancing skills required to complete them in a timely and cost-efficientmanner. We compete with other general and specialty contractors, both foreignand domestic, including large international contractors and small localcontractors.  Some competitors havegreater financial and other resources than we do, which in some instances,could give them a competitive advantage over us.

 

**EMPLOYEES**

 

Our total global employment varies widely with thevolume, type and scope of operations under way at any given time. At January 3,2003, we employed approximately 30,000 employees. Approximately 20% of our craftlabor employees are covered either by one of our regional labor agreements,which expire between January 2003 and September 2006, or by specific projectlabor agreements, each of which expires upon completion of the relevantproject.

 

**RAW MATERIALS**

 

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

 

**ENVIRONMENTAL MATTERS**

 

Our environmental and hazardous substance remediationand contract mining services involve risks of liability under federal, stateand local environmental laws and regulations, including the ComprehensiveEnvironmental Response, Compensation and Liability Act (“CERCLA”). We performenvironmental remediation at Superfund sites as a response action contractorfor the Environmental Protection Agency and, in such capacity, are exempt fromliability under any federal law, including CERCLA, unless our conduct isnegligent. Moreover, we may be entitled to indemnification from agencies of theUnited States against liability arising out of the negligent performance ofwork in such capacity.

 

We are subject to risks of liability under federal,state and local environmental laws and regulations, as well as common law.  These laws and regulations and the risk ofattendant litigation can cause significant delays to a project and addsignificantly to its cost. Violations of these laws and regulations couldsubject us to civil and criminal penalties and other liabilities, includingliabilities for property damage, costs of investigation and cleanup ofhazardous or toxic substances on property currently or previously owned by usor arising out of our current and past remediation, waste management andcontract mining activities.

 

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

 

**RISK FACTORS**

 

We are subject to a number of risks, including thoseenumerated 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 securities. See also “Note RegardingForward-looking Information.”

 

I-9

----

 

***The documents governing our indebtedness restrict ourability and the ability of some of our subsidiaries to engage in some businesstransactions.***

 

In connection with our emergence from bankruptcyprotection, we entered into exit financing facilities (the “Senior SecuredRevolving Credit Facility” or the “Credit Facility”) providing for an aggregateof $350 million of revolving borrowing and letter of credit capacity. Thecredit agreement governing the Senior Secured Revolving Credit Facilityrestricts our ability and the ability of some of our subsidiaries to, amongother things:

 

•                  incuror guarantee additional indebtedness;

 

•                  declareor pay dividends on, redeem or repurchase capital stock;

 

•                  pay dividends or other distributionsor transfer assets or make loans between us and some of our subsidiaries;

 

•                  make investments;

 

•                  incur or permit to exist liens;

 

•                  enter into transactions withaffiliates;

 

•                  make material changes in the natureor conduct of our business;

 

•                  merge or consolidate with, acquiresubstantially all of the stock or assets of other companies;

 

•                  transfer or sell assets; and

 

•                  engage in sale-leasebacktransactions.

 

The Senior Secured Revolving Credit Facility alsocontains other covenants that are typical for credit facilities of this size,type and tenor, such as requirements that we meet specified financial ratiosand financial condition tests. Our ability to make additional borrowings underthe Senior Secured Revolving Credit Facility otherwise depends uponsatisfaction of these covenants. Our ability to meet these covenants andrequirements may be affected by events beyond our control.

 

Our failure to comply with obligations under the SeniorSecured Revolving Credit Facility could result in an event of default under thefacility. A default, if not cured or waived, could permit acceleration of ourindebtedness. 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.

 

***We are engaged in highly competitive businesses and musttypically bid against competitors to obtain engineering, construction andservice contracts.***

 

We are engaged in highly competitive businesses inwhich customer contracts are typically awarded through competitive biddingprocesses. We compete with other general and specialty contractors, bothforeign and domestic, including large international contractors and small localcontractors. Some competitors have greater financial and other resources thanwe do, which in some instances, could give them a competitive advantage overus.

 

I-10

----

 

***Strikes, work stoppages and other similar events, as well asresulting increases in operating costs, would have a negative impact on ouroperations and results.***

 

We are party to several regional labor agreements thatexpire between January 2003 and September 2006, as well as project-specificlabor agreements that commit us to use union building trades on certainprojects. If the industry were unable to negotiate with any of the unions, itcould result in strikes, work stoppages or increased operating costs as aresult of higher than anticipated wages or benefits. If the unionized workersengage in a strike or other work stoppage, or other employees become unionized,we could experience a disruption of our operations and higher ongoing laborcosts, which could adversely affect portions of our businesses, financialposition, results of operations and cash flows. See “Employees” in Part I ofthis report.

 

***Our success depends on attracting and retaining qualifiedpersonnel in a competitive environment.***

 

We are dependent upon our ability to attract andretain 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 downturns and reductions in government fundingcould have a negative impact on our businesses.***

 

Demand for the services offered by us has been, and isexpected 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 fundingof these projects could have an unfavorable impact on our business, financialposition, results of operations and cash flows.

 

***Our fixed-price contracts subject us to the risk ofincreased project cost.***

 

Our fixed-price contracts involve risks relating toour inability to receive additional compensation in the event the costs ofperforming those contracts proves to be greater than anticipated. Our cost ofperforming the contracts may be greater than anticipated due to uncertaintiesinherent in estimating contract completion costs, contract modifications bycustomers resulting in claims, failure of subcontractors and joint venturepartners to perform and other unforeseen events and conditions. At January 3,2003, approximately 44% or $1.2 billion of our backlog represented fixed-priceand fixed-unit-price contracts. Any one or more of these risks could result inreduced profits or increased losses on a particular contract or contracts.

 

***The U.S. government can audit and disallow claims forcompensation under our government contracts, and can terminate those contractswithout 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 35% of ourconsolidated revenues in 2002 from contracts funded by the U.S. government.Allowable costs under government contracts are subject to audit by the U.S. government.To the extent that these audits result in determinations that costs claimed asreimbursable are not allowable costs or were not allocated in accordance withfederal government regulations, we could be required to reimburse the U.S.government for amounts previously received. In addition, if we were to lose andnot replace our revenues generated by one or more of the U.S. governmentcontracts, our businesses, financial condition, results of operations and cashflows could be adversely affected.

 

I-11

----

 

We have a number of contracts and subcontracts withagencies of the U.S. government, principally for environmental remediation,restoration and operations work, which extend beyond one year and for whichgovernment funding has not yet been approved. We cannot be certain that fundingwill be approved. All contracts with agencies of the U.S. government and somecommercial and foreign contracts are subject to unilateral termination at theoption of the customer. In the event of a termination, we would not receiveprojected revenues or profits associated with the terminated portion of thosecontracts.

 

In addition, government contracts are subject tospecific 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 andcontract provisions. As a result of our government contracting, claims forcivil or criminal fraud may be brought by the government for violations ofthese regulations, 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 be terminated,we could be suspended from government contracting or subcontracting, includingfederally funded projects at the state level, and our ability to participate inforeign projects funded by the United States could be adversely affected. Ifone or more of our government contracts are terminated for any reason, or if weare suspended from government work, we could suffer a significant reduction inexpected revenues.

 

***Our backlog is subject to unexpected adjustments andcancellations and is, therefore, an uncertain indicator of our future earnings.***

 

As of January 3, 2003, our backlog was approximately$2.8 billion. We cannot guarantee that the revenues projected in our backlogwill be realized or, if realized, will result in profits. Projects may remainin our backlog for an extended period of time prior to project execution and,once project execution begins, it may occur unevenly over the current andmultiple future periods. In addition, project terminations, suspensions orreductions in scope may occur from time to time with respect to contractsreflected in our backlog. Such backlog reductions would adversely affect therevenue and profit we actually receive from contracts reflected in our backlog.Future project cancellations and scope adjustments could further reduce thedollar amount of our backlog and the revenues and profits that we actuallyearn.

 

***Our businesses involve many project-related andcontract-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 various risks andhazards, including industrial accidents, labor disputes, geological conditions,environmental hazards, acts of terrorism or war, weather and other naturalphenomena such as earthquakes and floods.

 

***If we guarantee the timely completion or performancestandards of a project, we could incur additional costs to meet our guaranteeobligations.***

 

In certain instances, including some of ourfixed-price contracts, we guarantee a customer that we will complete a projectby 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 

 

I-12

----

 

cases where we fail to meet contract-defined performance standards, wemay be subject to agreed-upon liquidated damages. To the extent that theseevents occur, the total costs for the project would exceed our originalestimates, and we could experience reduced profits, or in some cases, a lossfor that project.

 

***Our international operations involve special risks.***

 

We pursue project opportunities internationallythrough foreign and domestic subsidiaries as well as through agreements withdomestic and foreign joint venture partners. Our international operationsaccounted for approximately 8% of our revenues in 2002. Our foreign operationsare subject to special risks, including:

 

•                  unstable political, economic,financial and market conditions;

 

•                  potential incompatibility withforeign joint venture partners;

 

•                  foreign currency controls andfluctuations;

 

•                  trade restrictions;

 

•                  restrictions on repatriating foreignprofits back to the United States;

 

•                  increases in taxes;

 

•                  civil disturbances and acts ofterrorism, violence or war in the United States or elsewhere; and

 

•                  changes in labor conditions, laborstrikes and difficulties in staffing and managing international operations.

 

Events outside ofour control may limit or disrupt operations, restrict the movement of funds,result in the deprivation of contract rights, increase foreign taxation orlimit repatriation of earnings. In addition, in some cases, applicable law andjoint venture or other agreements may provide that each joint venture partneris jointly and severally liable for all liabilities of the venture.

 

***We could be subject to liabilities as a result of ourperformance.***

 

The nature of ourengineering and construction businesses exposes us to potential liabilityclaims and contract disputes that may reduce our profits.

 

We engage inengineering and construction activities for large industrial facilities wheredesign, construction or systems failures can result in substantial injury ordamage to third parties. Any liability in excess of our insurance limits atlocations engineered or constructed by us, where our products are installed orwhere our services are performed could result in significant liability claimsagainst us, which claims may reduce our earnings. In addition, if a customerdisputes our performance of project services, the customer may decide to delayor withhold payment to us. If we were ultimately unable to collect on thesepayments, our profits would be reduced.

 

***We could be subject to liability under environmental laws.***

 

We are subject toa variety of environmental 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 with releasesof hazardous substances. These laws and regulations and the risk of attendantlitigation can cause significant delays to a project and add significantly toits cost. Violations of these environmental laws and regulations could subjectus and our management to civil and criminal penalties and other liabilities.These laws and regulations may become more stringent, or be more stringentlyenforced, in the future.

 

I-13

----

 

Various federal,state and local environmental laws and regulations, as well as common law, mayimpose liability for property damage and costs of investigation and cleanup ofhazardous or toxic substances on property currently or previously owned by usor arising out of our waste management or environmental remediation activities.These laws may impose responsibility and liability without regard to knowledgeof or causation of the presence of contaminants. The liability under these lawsis joint and several. We have potential liabilities associated with our pastwaste management and contract mining activities and with our current and priorownership of various properties.

 

***Expiration of the Price-Anderson Act’s indemnificationauthority could have adverse consequences on our Power, Defense and Energy& Environment business units.***

 

Our Power, Defenseand Energy & Environment business units provide engineering, constructionand operations and maintenance services in the nuclear power market, andapproximately 15% of our backlog is derived from nuclear services. ThePrice-Anderson Act promotes and regulates the nuclear power industry in theUnited States. It comprehensively regulates the manufacture, use and storage ofradioactive materials, and promotes the nuclear power industry by offering broadindemnification to nuclear power plant operators and certain Department ofEnergy contractors like us. While the Price-Anderson Act’s indemnificationprovisions are broad, it has not been determined whether they apply to allliabilities that might be incurred by a radioactive materials cleanupcontractor. The Price-Anderson Act’s provisions with respect to indemnificationof Department of Energy contractors under newly signed contracts will expire onDecember 31, 2004. Congress has extended the expiration date of the Act in thepast, and it is expected that it will extend the expiration date in the futurebeyond December 31, 2004. Our business units could be adversely affected if thePrice-Anderson Act were not extended beyond December 31, 2004 due to either theunwillingness of plant operators to retain us or our inability to obtainadequate indemnification and insurance because of the unavailability of theprotections of the Price-Anderson Act.

 

***Actual results could differ from the estimates and assumptionsused to prepare our financial statements.***

 

In order toprepare financial statements in conformity with generally accepted accountingprinciples, our management is required to make estimates and assumptions as ofthe date of the financial statements which affect the reported values of assetsand liabilities and revenues and expenses, and disclosures of contingent assetsand liabilities. Areas requiring significant estimates by our managementinclude: (1) determination of new work awards and backlog, (2) recognition ofcontract revenue, costs, profit or losses in applying the principles ofpercentage-of-completion accounting, (3) recognition of recoveries undercontract change orders or claims, (4) collectibility of billed and unbilledaccounts receivable and the need and amount of any allowance for doubtfulaccounts, (5) the amount of reserves necessary for self-insured risks, (6) thedetermination of liabilities under pension and other post-retirement benefitprograms, (7) estimated amounts for expected project losses, reclamation costs,warranty costs or other contract closing costs, (8) recoverability of goodwill,(9) provisions for income taxes and any related valuation allowances and (10)accruals for other estimated liabilities, including litigation reserves.

 

***Our use of percentage-of-completion accounting could resultin a reduction or elimination of previously reported profits.***

 

As more fullydiscussed in “Management’s Discussion and Analysis of Financial Condition andResults of Operations - Overview” in Item7 and in Note 1, “Significant Accounting Policies” of the Notes to ConsolidatedFinancial Statements in Item 8 of this report, a substantial portion of ourrevenues are recognized using the percentage-of-completion method ofaccounting. Generally, the percentage-of-completion accounting practices weutilize result in our recognizing contract revenues and earnings ratably, basedon the proportion of costs incurred to total estimated contract costs or on theproportion of labor hours or labor costs incurred to total estimated laborhours or labor costs. For certain long-term contracts, completion is measuredon estimated physical completion or units of production.

 

I-14

----

 

The cumulativeeffect of revisions to contract revenues and estimated completion costs,including incentive awards, penalties, change orders, claims and anticipatedlosses, is recorded in the accounting period in which the amounts are known andcan be reasonably estimated. Such revisions could occur at any time and theeffects could be material. A change order is included in total estimatedcontract revenue when it is probable that the change order will result in abona fide addition to contract value and can be reliably estimated. If it isprobable that the change order will result in the contract price exceeding therelated costs incurred and that the excess over cost can be reliably estimated,and if realization is assured beyond a reasonable doubt, the original contractprice is adjusted to the probable revised contract amount as the costs arerecognized. Claims are included in total estimated contract revenue, only tothe extent that contract costs related to the claim have been incurred, when itis probable that the claim will result in a bona fide addition to contractvalue and can be reliably estimated. No profit is recognized on claims untilfinal settlement occurs.

 

Although we have ahistory of making reasonably dependable estimates of the extent of progresstowards completion of contract revenue and of contract completion costs on ourlong-term engineering and construction contracts, due to uncertainties inherentin the estimation process, it is possible that actual completion costs may varyfrom estimates, and it is possible that such variances could be material to ouroperating results.

 

***If we have to write off a significant amount of intangibleassets, our earnings will be negatively impacted.***

 

Goodwill isincluded on our balance sheet and is a significant asset, comprising $387.3million at January 3, 2003. If our goodwill were to be significantly impaired,we would be required to write-off the impaired amount. The write-off wouldnegatively impact our earnings; however, it would not impact our cash flows.See Note 1, “Significant Accounting Policies” of the Notes to ConsolidatedFinancial Statements in Item 8 of this report.

 

***Our stockholder rights plan, our organizational documents,some of our agreements and provisions of Delaware law could inhibit a change incontrol.***

 

We are subject tovarious restrictions and other requirements that may have the effect ofdelaying, deterring or preventing a change in control of us, such as:

 

•                  our stockholder rights plan;

 

•                  provisions in our certificate ofincorporation and bylaws;

 

•                  some of our agreements, including thedisbursing agreement that we entered into in connection with our emergence frombankruptcy; and

 

•                  Section 203 of the Delaware GeneralCorporation law.

 

On June 21, 2002,our board of directors approved a stockholder rights plan. Under this plan,each share of our common stock is accompanied by a right that entitles theholder of that share, upon the occurrence of specified events that may beintended to effect a change in control, to purchase either additional shares ofour common stock or shares of an acquiring company’s common stock at a priceequal to one-half of the current market price of the relevant shares.

 

A number ofprovisions in our certificate of incorporation and bylaws also may make achange in control more difficult, including, among others, provisions relatingto a classified board of directors, removal of directors only for cause, theelimination of our stockholders’ ability to fill vacancies on the board ofdirectors and to call special meetings and supermajority stockholderamendments. In addition, our certificate of incorporation authorizes theissuance of up to 100 million shares of our common stock and 10 million sharesof our preferred stock. Our board of directors has the power to determine theprice and terms under which additional capital stock 

 

I-15

----

 

may be issued and to fixthe terms of preferred stock. Existing shareholders will not have preemptiverights with respect to any of those shares.

 

On January 25,2002 (the “Effective Date”), we issued 5,000,000 shares of our common stock toa disbursing agent for the benefit of unsecured creditors in our bankruptcy. Asof February 28, 2003, 1,089,050 shares of our common stock had been distributedto various unsecured creditors. Pending the distribution of the remainingshares to the unsecured creditors, the disbursing agreement requires thedisbursing agent to vote the shares held by the disbursing agent as recommendedby our board of directors, unless the reorganization plan committee establishedin connection with our bankruptcy directs it to vote the shares in proportionto the votes cast and abstentions claimed by all other stockholders eligible tovote on the particular matter.

 

On March 4, 2003,our common stock was authorized for quotation on the NASDAQ National Market®.As a result, Section 203 of the Delaware General Corporation Law has becomeapplicable to us and generally limits the ability of major stockholders toengage in specified transactions with us that may be intended to effect achange in control.

 

***The significant demands on our cash resources could affectour ability to achieve our business plan.***

 

We havesubstantial demands on our cash resources in addition to operating expenses andinterest expense, principally capital expenditures. See “Management’sDiscussion and Analysis of Financial Condition and Results of Operations -Financial Condition and Liquidity.”

 

Our ability tofund working capital requirements will depend upon our future operatingperformance, which, in turn, will be affected by prevailing economic conditionsand financial, business and other factors, many of which are beyond ourcontrol. If we are unable to fund our businesses, we will be forced to adopt analternative strategy that may include:

 

•                  reducing or delaying capitalexpenditures;

 

•                  limiting our growth;

 

•                  seeking additional debt financing orequity capital;

 

•                  selling assets; or

 

•                  restructuring or refinancing ourindebtedness.

 

We cannot provideassurance that any of these strategies could be affected on favorable terms orat all. See “Management’s Discussion and Analysis of Financial Condition andResults of Operations - FinancialCondition and Liquidity.”

 

***We may be subject to additional risks associated with ouremergence from bankruptcy.***

 

Our emergence frombankruptcy on January 25, 2002 does not assure our continued success, and theeffect, if any, that the bankruptcy may have on our future operations cannot beaccurately predicted or quantified. We are engaged in highly competitivebusinesses in which customer contracts are typically awarded throughcompetitive bidding processes, and winning new work and new customers is vitalto our success. In addition, on some projects, particularly those of significantsize and requiring specialized technology or know-how, we partner with othercompanies, both to increase our opportunity to win the contract and to managedevelopment and execution risk.  Forsome projects, if we cannot find a suitable partner on satisfactory terms, wewill not be able to pursue the project on our own. The adverse publicity of ourrecent bankruptcy could impair our ability to attract new customers, win newwork from existing customers and establish partnerships and joint ventures withother 

 

I-16

----

 

companies on favorableterms. Any of these circumstances would adversely affect our ability to competeand could have a material adverse effect on our businesses, financialcondition, results of operations and cash flows.

 

***Adequate bonding is necessary for us to successfully win newwork awards on some types of contracts.***

 

In line withindustry practice, we are often required to provide performance and suretybonds to customers under fixed-price contracts. These bonds indemnify thecustomer should we fail to perform our obligations under the contract. If abond is required for a particular project and we are unable to obtain anappropriate bond, we cannot pursue that project. We have a bonding facilitybut, as is typically the case, the issuance of bonds under that facility is atthe surety’s sole discretion. Moreover, due to events that affect the insuranceand bonding markets generally, bonding may be more difficult to obtain in thefuture or may only be available at significant additional cost. There can be noassurance that bonds will continue to be available to us on reasonable terms.Our inability to obtain adequate bonding and, as a result, to bid on new workcould have a material adverse effect on our businesses, financial condition,results of operations and cash flows.

 

**ITEM2.  PROPERTIES**

 

We do not ownsignificant real property for operations other than land and improvements inHighland and Petaluma, California. Our principal administrative officefacilities located in Boise, Idaho; Cleveland, Ohio; Aiken, South Carolina;Denver, Colorado; Princeton, New Jersey; Birmingham, Alabama; and Arlington,Virginia; are leased under long-term, noncancelable leases expiring in 2008,2006, 2011, 2007, 2007, 2007 and 2007, respectively. As of January 3, 2003, weowned more than 4,000 units of heavy and light mobile construction,environmental remediation and contract mining equipment. We consider ourconstruction, environmental remediation and mining equipment and leasedadministrative and engineering facilities to be well maintained and suitablefor our current operations.

 

As of January 3,2003, our principal facilities were as follows:

 
| **Property location**  |   | **Facility  Sq. Ft.** |   | **Owned/Leased** |   | **Segment***  |   | **Usage**                                                 |
|------------------------|--------|-----------------------|--------|------------------|--------|---------------|--------|-----------------------------------------------------------|
| Aiken,  SC             |   | 75,094                |   | Leased           |   | 6             |   | Business unit  headquarters/ engineering                  |
| Arlington,  VA         |   | 20,824                |   | Leased           |   | 2,5,6         |   | Business unit  headquarters/ regional office              |
| Bellevue,  WA          |   | 16,991                |   | Leased           |   | 2,4           |   | Area office                                               |
| Birmingham,  AL        |   | 140,635               |   | Leased           |   | 2,4           |   | Regional office                                           |
| Boise,  ID             |   | 50,511                |   | Leased           |   | 7             |   | Records/retention  center                                 |
| Boise,  ID             |   | 220,533               |   | Leased           |   | 1,2,4,6,7     |   | Corporate/business unit  headquarters                     |
| Boothwyn,  PA          |   | 14,400                |   | Leased           |   | 4             |   | Office                                                    |
| Cambridge,  MA         |   | 84,856                |   | Leased           |   | 1,2,4,5,6     |   | Business unit  headquarters/ regional offices/engineering |
| Carlsbad,  NM          |   | 191,300               |   | Leased           |   | 6             |   | Office/warehouse/container  fabrication                   |
| Cleveland,  OH         |   | 88,775                |   | Leased           |   | 4             |   | Business unit  headquarters/ engineering                  |
| Deerfield  Beach, FL   |   | 8,799                 |   | Leased           |   | 2             |   | Office                                                    |
| Denver,  CO            |   | 218,693               |   | Leased           |   | 1,2,3,4,5,6,7 |   | Corporate/business unit  headquarters/                    |
| Downers  Grove, IL     |   | 13,888                |   | Leased           |   | 4             |   | Office/engineering                                        |
| East  Weymouth, MA     |   | 19,350                |   | Leased           |   | 1             |   | Office/manufacturing/warehouse                            |
| Ewa,  HI               |   | 215,099               |   | Leased           |   | 2             |   | Land                                                      |
| Fresno,  CA            |   | 217,800               |   | Leased           |   | 2             |   | Storage yard                                              |
| 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                                               |
| Idaho  Falls, ID       |   | 118,000               |   | Leased           |   | 6             |   | Warehouse                                                 |
| Irvine,  CA            |   | 17,533                |   | Leased           |   | 2,4           |   | Area office/engineering                                   |
| Jersey  City, NJ       |   | 12,500                |   | Leased           |   | 1             |   | Office                                                    |
| Joliet,  IL            |   | 52,560                |   | Leased           |   | 2             |   | Storage yard/warehouse                                    |
| Las  Vegas, NV         |   | 217,800               |   | Leased           |   | 2             |   | Storage yards                                             |
| 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        |   | 146,052               |   | Leased           |   | 6             |   | Warehouse                                                 |
| Pittsburgh,  PA        |   | 5,954                 |   | Leased           |   | 6             |   | Office                                                    |
| Ploiesti,  Romania     |   | 48,437                |   | Leased           |   | 5             |   | Engineering                                               |
| Princeton,  NJ         |   | 368,245               |   | Leased           |   | 1,2,4,6       |   | Business unit  headquarters/ regional offices/engineering |
| San  Francisco, CA     |   | 6,345                 |   | Leased           |   | 2,4,6         |   | Regional  office/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                                                    |
|                        |        |                       |        |                  |        |               |        |                                                           |  |  |  |  |  |  |  |

 

 

I-17

----

 

----

* Business unit:                                                          1-Power

2 -Infrastructure

3 -Mining

4 -Industrial/Process

5 -Defense

6 -Energy & Environment

7 -Corporate

 

**ITEM3.  LEGAL PROCEEDINGS**

 

We are a defendant invarious lawsuits resulting from allegations that third parties sustainedinjuries and damage from the inhalation of asbestos fibers contained inmaterials used in construction projects. In addition, based on proofs of claimsfiled with the court during the pendency of our bankruptcy proceedings, we areaware of other potential asbestos claims against us. We believe that we havesubstantial third party insurance coverage for a significant portion of theseexisting and potential claims and remaining amounts will not have a materialadverse impact on our financial position, results of operations or cash flows.

 

While we expect thatadditional asbestos claims will be filed against us in the future, we have nobasis for estimating the number of claims or individual or cumulativesettlement amounts and, accordingly, no provision has been made for futureclaims. We believe, however, that the outcome of these actions, individuallyand collectively, will not have a material adverse impact on our financialposition, results of operations or cash flows.

 

In 2002, the InspectorGeneral for the U.S. Agency for International Development (“USAID”) requesteddocumentation and made inquiries into the contractual relationships between oneof our U.S. joint ventures and a local construction company in Egypt. The focusof the inquiry is whether the structure of the business relationship with theEgyptian company violated USAID contract regulations. We are responding tothese inquiries and are cooperating with the investigation.

 

I-18

----

 

We also incorporate byreference the information regarding legal proceedings set forth under thecaption “Other” in Note 14, “Contingencies and Commitments” of the Notes toConsolidated Financial Statements in Item 8 of this report.

 

**ITEM4.  SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

 

We submitted no mattersto a vote of our stockholders during the fourth quarter of 2002.

 

I-19

----

 

**PARTII**

 

**ITEM 5.****               MARKETFOR THE REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS**

 

***Market information***

 

On January 25, 2002, thedate on which we emerged from bankruptcy protection pursuant to our Plan ofReorganization, all of our then-existing equity securities, including ourcommon stock, were canceled and extinguished, and 25,000,000 shares of newcommon stock were issued.

 

Since its issuance onJanuary 25, 2002, our new common stock has traded in the over-the-countermarket. The price of our new common stock was quoted by the Pink Sheets®quotation service under the ticker symbol “WNGXQ” until July 30, 2002 when theOTC Bulletin Board® began quotation of our common stock under the ticker symbol“WGII.” Our common stock began trading on the NASDAQ National Market® under theticker symbol “WGII” on March 6, 2003.

 

At the close of businesson February 28, 2003, we had 25,000,000 shares of common stock issued andoutstanding; 5,000,000 of these shares were allocated to the unsecured creditorpool as part of the Plan of Reorganization. 1,089,050 shares have beendistributed to various unsecured creditors, and the remaining 3,910,950 will bedistributed as the claim pool is resolved.

 

The following table setsforth the high and low prices per share of our new common stock, which wasissued on January 25, 2002 upon our emergence from bankruptcy protection, foreach quarterly period in 2002.

 

**Common stock market price(1)**

 
| **Quarters ended** |   | **March 29  2002(1)** |   | **June 28  2002(1)** |   | **September  27  2002(2)** |   | **January 3  2003(3)** |   |
|--------------------|--------|-----------------------|--------|----------------------|--------|----------------------------|--------|------------------------|--------|
| High               |   | $                     | 24.00  |                 | $      | 24.00                      |   | $                      | 22.00  |   | $ | 17.00 |   |
| Low                |   | 17.20                 |   | 19.00                |   | 13.00                      |   | 12.20                  |   |
|                    |        |                       |        |                      |        |                            |        |                        |        |  |  |  |  |

 

----

(1)          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.

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

(3)          The high and low pricesare the high and low over-the-counter bid prices per share of our common stock,as reported by the OTC Bulletin Board®. The over-the-counter quotations reflectinter-dealer prices, without retail mark-up, mark-down or commission and maynot necessarily represent actual transactions.

 

***Holders***

 

The number of holders ofour voting common stock at January 3, 2003 was approximately 415.

 

***Dividends***

 

We have not paid a cashdividend since the first quarter of fiscal 1994 and do not intend to pay cashdividends in the foreseeable future. Our credit facilities place restrictionson dividend payments. For a more detailed discussion, see Note 9, “CreditFacilities” of the Notes to Consolidated Financial Statements in Item 8 of thisreport.

 

II-1

----

 

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

 

We did not sell anyunregistered equity securities during 2002 other than the shares of commonstock and warrants to purchase shares of common stock issued to our formercreditors pursuant to our Plan of Reorganization. See Note 4, “ReorganizationCase and Fresh-start Reporting” of the Notes to Consolidated FinancialStatements in Item 8 of this report. All of the securities which we issuedpursuant to our Plan of Reorganization were exempt from registration under theSecurities Act of 1933 pursuant to Section 1145 of the U.S. Bankruptcy Code.

 

II-2

----

 

**ITEM 6.  SELECTEDFINANCIAL DATA**

*(In millions, except per share data)*

 

As of February 1, 2002,we adopted fresh-start reporting pursuant to the guidance provided by theAmerican Institute of Certified Public Accountants Statement of Position 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 theperiod ending subsequent to February 1, 2002 has been designated “SuccessorCompany.”

 

Effective December 1,1998, we adopted a 52/53 week fiscal year ending on the Friday closest toNovember 30. Effective December 29, 2001, we changed our fiscal year to the52/53 weeks ending on the Friday closest to December 31.

 
|                                                       |   | **Successor  Company**                      |    | **Predecessor  Company**                      |   |
|------------------------------------------------------------|--------|---------------------------------------------|---------|-----------------------------------------------|--------|
| **OPERATIONS SUMMARY**                                     |   | **Eleven  Months  Ended  January 3,  2003** |    | **Two  Months  Ended  February 1,  2002 (a)** |   | **Year Ended  November 30,  2001** |   | **Year Ended  December 1,  2000(b)** |   | **Year Ended  December 3,  1999(c)** |   | **Year Ended  November 30,  1998** |   |
| Total  revenue                                             |   | $                                           | 3,311.6 |                                          | $      | 658.2 |   | $ | 4,041.6 |   | $ | 3,090.8 |   | $ | 2,292.0 |   | $ | 1,900.2 |   |
| Gross  profit (loss)                                       |   | 149.0                                       |    | 11.3                                          |   | 97.7 |   | (94.7 | )(d) | 111.7 |   | 93.2 |   |
| Equity  in income of mining ventures                       |   | 27.3                                        |    | 4.4                                           |   | 17.9 |   | 13.1 |   | 12.4 |   | 7.7 |   |
| Operating  income (loss)                                   |   | 131.7                                       |    | (22.4                                         | )      | 18.3 |   | (1,351.5 | )(e) | 85.5 |   | 73.2 |   |
| Extraordinary  item                                        |   | —                                      |    | 567.2                                         | (f)    | — |   | — |   | — |   | — |   |
| Net  income (loss)                                         |   | 37.7                                        |    | 496.2                                         |   | (85.0 | ) | (859.4 | ) | 48.3 |   | 37.6 |   |
| Income  per common share, basic and diluted                |   | 1.51                                        |    | —                                        | (g)    | — | (g) | — | (g) | — | (g) | — | (g) |
| Shares  used to compute basic and diluted income per share |   | 25.0                                        |    | —                                        | (g)    | — | (g) | — | (g) | — | (g) | — | (g) |
| **FINANCIAL  POSITION SUMMARY AT END OF PERIOD**           |   |                                        |    |                                          |   |   |   |   |   |   |   |   |   |
| Current  assets                                            |   | $                                           | 731.1   |                                          | $      | 1,072.4 |   | $ | 1,203.0 |   | $ | 1,581.3 |   | $ | 595.7 |   | $ | 534.2 |   |
| Total  assets                                              |   | 1,415.4                                     |    | 1,783.4                                       |   | 2,140.4 |   | 2,656.0 |   | 1,267.0 |   | 904.0 |   |
| Current  liabilities                                       |   | 595.1                                       |    | 973.2                                         |   | 627.1 |   | 1,969.6 |   | 437.9 |   | 398.4 |   |
| Liabilities  subject to compromise                         |   | —                                      |    | —                                        |   | 1,928.2 |   | — |   | — |   | — |   |
| Long-term  debt                                            |   | —                                      |    | 40.0                                          |   | — |   | 692.9 |   | 100.0 |   | — |   |
| Minority  interests                                        |   | 56.1                                        |    | 78.0                                          |   | 76.5 |   | 79.7 |   | 103.1 |   | 20.6 |   |
| Stockholders’  equity (deficit)                       |   | 596.8                                       |    | 550.0                                         |   | (551.5 | ) | (464.9 | ) | 403.1 |   | 370.9 |   |

 

----

(a)          The two months endedFebruary 1, 2002 include the transitional period of the one month endedDecember 28, 2001, as a result of the change in our fiscal year end asdiscussed above, and the one month ended February 1, 2002, which is the finalmonth of operations of the Predecessor Company. Details of these two periodshave been summarized for presentation purposes. See “Consolidated Statements ofOperations” in Item 8 of this report for the results of operations of therespective periods.

 

(b)         On July 7, 2000, weacquired RE&C from the Sellers in a transaction accounted for as apurchase.  See Items 1 and 7 of thisreport and Note 3, “Acquisition” of the Notes to Consolidated FinancialStatements in Item 8 of this report.

 

(c)          On March 22, 1999, weacquired a majority economic interest in the government and environmentalservices businesses of CBS Corporation (now Viacom, Inc.) in a transactionaccounted for as a purchase.

 

(d)         Gross loss during theyear ended December 1, 2000 includes the impact of adjustments of $141.0 to thepreliminary allocation of the RE&C purchase price to the net assetsacquired for items that we believe were additional misstatements, based onadditional information we obtained, but that were not included in an arbitrationclaim against the Sellers, 

 

II-3

----

 

includingadjustments to estimates at completion on contracts and increases inself-insurance reserves. See Note 3, “Acquisition” of the Notes to ConsolidatedFinancial Statements in Item 8 of this report.

 

(e)          Operating loss duringthe year ended December 1, 2000 includes adjustments for items discussed in (d)and a $444.1 impairment of an arbitration claim receivable from the Sellers. Inaddition, we analyzed for impairment the assets acquired in the acquisition ofRE&C, including goodwill. Based upon the results of our analysis, werecorded an impairment of $747.5 of acquired assets. See Note 3, “Acquisition”of the Notes to Consolidated Financial Statements in Item 8 of this report.

 

(f)            Extraordinary itemconsists of the gain on debt discharge of $1,460.7, less the value of NewCommon Stock and warrants issued of $550.0, net of income tax of $343.5 uponemergence from bankruptcy. See Note 4, “Reorganization Case and Fresh-startReporting” of the Notes to Consolidated Financial Statements in Item 8 of thisreport.

 

(g)         Net income per share isnot presented for these periods as it is not meaningful because of the revisedcapital structure of the Successor Company.

 

II-4

----

 
| **ITEM 7****.** | **MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS** |
|-----------------|-------------------------------------------------------------------------------------------------|

 

**OVERVIEW**

 

We are a globalengineering and construction company serving clients through six business units:Power, Infrastructure, Mining, Industrial/Process, Defense and Energy &Environment.

 

We are subject tonumerous factors, which have an impact on our ability to win new work. ThePower business unit is dependent on the domestic demand for new power generatingfacilities and the modification of existing power facilities. Infrastructure isaffected by the availability of public sector funding for transportationprojects and availability of bonding. Mining is affected by demand for coal andother extractive 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.

 

We believe thefollowing accounting issues and policies are the most significant and criticalto a complete understanding of our results of operations.

 

**New work**representsthe monetary value of a contract entered into with a client that is binding onboth parties and reflects the revenue or equity income on mining venturesexpected to be recognized from that contract.

 

**Backlog** representsthe total accumulation of new work awarded less the amount of revenue or equityincome on mining ventures recognized to date on contracts at a specific pointin time; therefore, it comprises the total value of awarded contracts that arenot complete and the revenue or equity income on mining ventures that isexpected to be reflected over the remaining life of the projects in process.Backlog is the key predictor of future earnings potential. Although backlogreflects business that we consider to be firm, cancellations or scopereductions 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.

 

There are threeunique aspects of our approach to new work and backlog:

 

•                  ***Government contracts***-Most of our government contracts span several years. However, they are subjectto annual appropriations by Congress. To account for the risk that futureamounts may not be appropriated, we only include the most immediate two yearsof forecast revenue in our backlog. Therefore, as time passes andappropriations occur, additional new work is recorded on existing governmentcontracts. At January 3, 2003, government funded contracts comprisedapproximately 38% 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 3, 2003, mining contracts comprised approximately 10% of ourtotal backlog.

 

•                  ***At risk and agency contracts***-The amount of new work and related backlog recognized depends on whether thecontract or project is determined to be an “at-risk” or “agency” relationshipbetween the client and us. Determination of the relationship is based oncharacteristics of the contract or the relationship with the client. For“at-risk” relationships, the expected gross revenue is included in new work andbacklog. For relationships where we act as an agent for our client, only theexpected net fee 

 

II-5

----

 

revenue isincluded in new work and backlog. At January 3, 2003, agency contractscomprised approximately 6% of our total backlog.

 

**Revenue recognition**is generally recognized on the “percentage-of-completion” method forconstruction-type contracts, and as work is performed and award and other feesare earned for cost-type and operation and maintenance-type contracts. Thereare various means of determining revenue under the percentage-of-completionmethod. Most of our fixed-price and target-price contracts use a cost-to-costapproach, where revenue is earned in proportion to costs incurred divided bytotal costs expected to be incurred. However, if a project includes significantmaterials or equipment costs, we require that the percentage-of-completionmethod be based on labor hours, labor dollars or some other appropriateapproximation of physical completion rather than on a strict percentage ofcosts incurred. For certain long-term contracts involving mining and environmentaland hazardous substance remediation, completion is measured on estimatedphysical completion or units of production.

 

Revenuerecognition on certain fixed-price and target-price construction contractsbegins when progress is sufficient to estimate the probable outcome. Wegenerally do not recognize any profit on fixed-price or target-price contractsuntil the project is at least 20% complete.

 

We have a numberof contracts and subcontracts with various agencies of the U.S. government thatextend beyond one year and for which government funding has not yet beenapproved. All contracts with agencies of the U.S. government and somecommercial and foreign contracts are subject to unilateral termination at theoption of the customer. In the event of a termination, we would not receiveprojected revenues associated with the terminated portion of such contracts.

 

With respect toaward fees associated with U.S. government contracts, we recognize only anestimated award fee based on historical performance until the client hasconfirmed the final award fee. Performance-based incentive fees are recognizedwhen actually awarded 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 inthe income statement. For “agency” relationships, where we act as an agent forour client, only fee revenue is recognized, meaning that direct project costsand the related reimbursement from the client are netted.

 

The use of thepercentage-of-completion method for revenue recognition requires that estimatesof progress towards completion must be developed to determine the amount ofrevenue and profit to recognize. Under the percentage-of-completion method,profit margins to be recognized are dependent upon the accuracy of a variety ofestimates, including engineering progress, materials quantities, achievement ofmilestones and other incentives, penalty provisions, labor productivity, costestimates and others. Such estimates are dependent upon various judgments wemake with respect to those factors, and some are difficult to accuratelydetermine until the project is significantly underway. We recognize adjustmentsto profitability on contracts utilizing the percentage-of-completion method ona cumulative basis, when such adjustments are identified.

 

We have a historyof making 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.

 

**Provisions for estimated losses onuncompleted contracts** are made in the period in which suchlosses are identified. The cumulative effect of revisions to contract revenueand estimated completion costs, including incentive awards, penalties, changeorders, claims and anticipated losses, is recorded in the accounting period inwhich the amounts are known and can be reasonably estimated. Such revisionscould occur at any time, and the effects could be material. The effects ofother changes to estimated contract profit or loss are recognized in the 

 

II-6

----

 

period in whichsuch revisions are identified. They can include such items as the effects ofchange orders and claims (see also “Change orders and claims” in this section),warranty claims, liquidated damages or other contractual penalties, adjustmentsfor audit findings on U.S. government contracts and contract close-outsettlements. Should such items result in reductions to or elimination ofpreviously reported profits, they would be recognized by a charge againstcurrent period earnings. Such adjustments could be significant.

 

**Change orders and claims**are common on construction contracts when changes occur once contractperformance is underway. These changes are to be documented and terms agreedwith the client before the work is performed. Also, costs may be incurred inaddition to amounts originally estimated under the assumption that the customerwill agree to pay for such additional costs. Change orders are included ontotal estimated contract revenue when it is probable that the change order willresult in a bona fide addition to contract value and can be reliably estimated.If it is probable that the change order will result in the contract priceexceeding the related costs incurred and that the excess over cost can bereliably estimated, and if realization is assured beyond a reasonable doubt,the original contract price is adjusted to the probable revised contract amountas the costs are recognized. Claims are included on total estimated contractrevenue, only to the extent that contract costs related to the claim have beenincurred, when it is probable that the claim will result in a bona fideaddition to contract value and can be reliably estimated. No profit isrecognized on claims until final settlement occurs. This can lead to asituation where losses are recognized when costs are incurred before clientagreement is obtained and subsequent income is recognized when signedagreements are negotiated.

 

**Joint ventures and equity investments**are utilized when contracts are executed jointly through partnerships and jointventures with unrelated third parties.

 

•                  ***Joint ventures***- Much of our workon large construction projects is performed through unincorporated jointventures with one or more partners. The accounting treatment depends on ourownership percentage of the joint venture. For those in which our ownershipexceeds 50% and/or we control the joint venture by contract terms or othermeans, the assets, liabilities and results of operations of the joint ventureare fully consolidated in our financial statements, and the minority interestsof third parties are separately deducted in our financial statements. For thosewhere our ownership is 50% or less or 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.

 

•                  ***Partially-owned subsidiary companies***-Again, the accounting treatment depends on our ownership percentage of thesubsidiary company. For those where our ownership exceeds 50%, the assets,liabilities and results of operations of the subsidiary company are fullyconsolidated in our financial statements, and the minority interests of thirdparties are separately deducted in our financial statements. However, where ourownership is 50% or less, we reflect our proportion of the net income in theresults of operations as equity in earnings of mining ventures and ourinvestment on the balance sheet as our net percentage investment in thesubsidiary company.

 

**Normal profit** is anaccounting concept that results from the requirement that an acquiring companyrecord all contracts of an acquiree that are in-process at the date ofacquisition, including construction contracts, at fair value. As such, an assetfor favorable contracts or a liability for unfavorable contracts is recorded inpurchase accounting. These assets or liabilities are then reduced based onrevenues recorded over the remaining contract lives, effectively resulting in therecognition of a reasonable or normal profit margin on contract activityperformed subsequent to the acquisition. Because of the acquisition of RE&Cand the below market profit status of many of the significant acquiredcontracts, we recorded significant liabilities in purchase accounting. Thereduction of these liabilities has a significant impact on our recorded netincome, but has no impact on our cash flows.

 

**Accounts receivable**represent amounts billed to clients that have not been paid. One unusual itemis client retention. On large fixed-price construction contracts, contractprovisions may allow the client to withhold from 

 

II-7

----

 

5% to 10% ofinvoices until the project is completed, which may be several months or years.Retention is recorded as a receivable and is separately disclosed in thefinancial statements.

 

**Unbilled receivables**is comprised of costs incurred on projects, together with any profit recognizedon projects using the percentage-of-completion method, and represents workperformed but not yet billed pursuant to contract terms or billed after theaccounting period cut-off occurred.

 

**Billings in excess of cost andestimated earnings on uncompleted contracts** represent amountsactually billed to clients, and perhaps collected, in excess of costs andprofits incurred on the project and, as such, is reflected as a liability.Also, in specified business segments, we are sometimes able to negotiatesubstantial advance payments as a contract condition. These advance paymentsare reflected in billings in excess of cost and estimated earnings onuncompleted contracts. Provisions for losses on contracts, reclamation reserveson mining contracts and reserves for punch-list costs, demobilization and warrantycosts on contracts that have achieved substantial completion and reserves foraudit and contract closing adjustments on U.S. government contracts are alsoincluded in billings in excess of cost and estimated earnings on uncompletedcontracts.

 

**Estimate at completion**is a financial forecast of a project that indicates the best current estimateof total 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.

 

**General and administrative expenses**include executive salaries and corporate functions, such as legal services,human resources and finance and accounting.

 

**Self-insurance reserves**represent reserves established through a program under which we determine theextent to which we self-insure certain business risks. We carry substantialpremium-paid, traditional insurance for our various business risks; however, wedo self-insure the lower level deductibles for workers’ compensation andgeneral, automobile and professional liability. Most of this self-insurance ishandled through Broadway Insurance Company, a wholly-owned captive Bermudainsurance subsidiary. As such, we carry self-insurance reserves on our balancesheet that are reviewed annually by an independent actuary. The current portionof the self-insurance reserves is included in other accrued liabilities.

 

**Minority interest**reflects the equity investment by third parties in certain subsidiary companiesand joint ventures that we have consolidated in our financial statements, andis comprised primarily of BNFL’s interest in the Westinghouse GovernmentServices Group (“WGSG”).

 

**Government contract costs**are incurred under some of our contracts, primarily in the Defense and Energy& Environment business units. We have contracts with the U.S. governmentthat contain provisions requiring compliance with the U.S. Federal AcquisitionRegulation and the U.S. Cost Accounting Standards. The allowable costs wecharge to those contracts are subject to adjustment upon audit and negotiationby various agencies of the U.S. government. Audits and negotiations of indirectcosts are substantially complete through 2000. Audits of 2001 indirect costsare in progress. We are also in the process of preparing cost impact statementsas required under the U.S. Cost Accounting Standards for 1999 through 2002,which are subject to audit and negotiation. We have also prepared and submittedto the U.S. government cost impact statements for 1989 through 1995 for whichwe believe no adjustments are necessary. We believe that the results of theindirect cost audits and negotiations and the cost impact statements will notresult in a material change to our financial position, results of operations orcash flows.

 

**Pension and post-retirement benefitplans** include certain plans for which we assumed sponsorshipthrough (1) the acquisition from CBS Corporation (now Viacom, Inc.) 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 WGSG. We make actuarially computed contributions asnecessary to adequately fund benefits for these plans. We are also the sponsorsof an unfunded plan to provide health care benefits for employees of WGSG whoretired before July 1, 1993, including their surviving spouses and dependentchildren. We also provide benefits under company-sponsored retiree health careand life insurance 

 

II-8

----

 

plans forsubstantially all employees of WGSG. The retiree health care plans requireretiree contributions and contain other cost sharing features. The retiree lifeinsurance plan provides basic coverage on a noncontributory basis. Asubstantial portion of the net pension and post-retirement benefit planobligations of WGSG were divested during the sale of EMD. See Note 7, “Sale ofBusiness and Businesses Held for Sale” and Note 11, “Benefit Plans” of theNotes to Consolidated Financial Statements in Item 8 of this report.

 

**Goodwill** is nolonger amortized, but is subject to annual impairment tests under the new rulesissued in June 2001 by the Financial Accounting Standards Board (“FASB”) inStatements No. 141, *Business Combinations* (“SFAS No. 141”) andNo. 142, *Goodwilland Other Intangible Assets* (“SFAS No. 142”). These statements areeffective for our fiscal year 2002. Effective February 1, 2002, in conjunctionwith fresh-start reporting, we adjusted all of our assets and liabilities toestimated fair value. In addition, our income tax attributes include taxdeductible goodwill in excess of financial statement goodwill. The tax value ofgoodwill generates tax deductible amortization although financial statementgoodwill is no longer amortized. As goodwill amortization is deducted forincome tax purposes, substantially all of the resulting tax benefit reducesfinancial statement goodwill. Our annual review of the recoverability ofgoodwill was performed as of October 31, 2002 and indicated that no impairmentof goodwill had been experienced.

 

**Earnings Before Interest, Taxes,Depreciation and Amortization (“EBITDA”)** is presented becauseit is a measure commonly used in financial analysis in credit and equitymarkets to evaluate operating liquidity. In addition, management includes it inthe various performance measures that are routinely produced and analyzed as ameasure of liquidity. EBITDA is not a measure of operating performance computedin accordance with generally accepted accounting principles (“GAAP”), andshould not be considered as a substitute for earnings from operations, netincome or loss, cash flows from operating activities or other statements ofoperations or cash flow data prepared in conformity with GAAP, or as a GAAPmeasure of profitability or liquidity. In addition, EBITDA may not becomparable to similarly titled measures of other companies.

 

Our calculation ofadjusted EBITDA represents earnings before interest, taxes, depreciation andamortization, normal profit and exclusion of bankruptcy-related items.Components of adjusted EBITDA are presented below:

 
| ***(In millions)***                                 |   | **Three  months ended  January 3, 2003** |   | **Twelve  months ended  January 3, 2003** |   |
|-----------------------------------------------------|--------|------------------------------------------|--------|-------------------------------------------|--------|
| Net  income                                         |   | $                                        | 9.7    |                                      | $      | 559.9 |   |
| Reorganization  items (a)                           |   | (.4                                      | )      | 51.4                                      |   |
| Net  gain in bankruptcy (c)                         |   | —                                   |   | (567.2                                    | )      |
| Net  income, after adjustments for bankruptcy items |   | 9.3                                      |   | 44.1                                      |   |
| Taxes                                               |   | 13.4                                     |   | 49.9                                      |   |
| Interest  expense                                   |   | 7.5                                      |   | 28.0                                      |   |
| Depreciation  and amortization(b)                   |   | 12.0                                     |   | 56.3                                      |   |
| Normal  profit                                      |   | (1.7                                     | )      | (30.9                                     | )      |
| Total                                               |   | $                                        | 40.5   |                                      | $      | 147.4 |   |

 

----

(a)          Net of tax of $23.8million for the twelve months ended January 3, 2003. There was no tax benefitfor reorganization items for the three months ended January 3, 2003.

(b)         Depreciation includes$8.4 million and $30.1 million of depreciation on equipment used on a large damand hydropower construction project in the Philippines. We began selling theequipment during the third quarter of 2002.

(c)          See also Note 4,“Reorganization Case and Fresh-start Reporting” of the Notes to ConsolidatedFinancial Statements in Item 8 of this report.

 

II-9

----

 

**RECONCILIATION OF PRO FORMA SUMMARY FINANCIAL DATA TO GAAP**

 
| ***(In millions)***                                                                     |   | **Three  months ended  January 3, 2003** |   | **Twelve  months ended  January 3, 2003** |   |
|-----------------------------------------------------------------------------------------|--------|------------------------------------------|--------|-------------------------------------------|--------|
| Adjusted  EBITDA                                                                        |   | $                                        | 40.5   |                                      | $      | 147.4 |   |
| Tax  expense                                                                            |   | (13.4                                    | )      | (26.1                                     | )      |
| Interest  expense                                                                       |   | (7.5                                     | )      | (28.0                                     | )      |
| Cash  paid for reorganization items                                                     |   | (6.8                                     | )      | (39.6                                     | )      |
| Amortization  of prepaid loan fees                                                      |   | 3.0                                      |   | 11.7                                      |   |
| Deferred  income taxes                                                                  |   | 7.4                                      |   | 17.2                                      |   |
| Minority  interest in income of subsidiaries                                            |   | 12.0                                     |   | 35.6                                      |   |
| Equity  in income of mining ventures less dividends received                            |   | (14.2                                    | )      | (18.8                                     | )      |
| Self-insurance  reserves                                                                |   | 20.6                                     |   | 28.5                                      |   |
| Gain  on sale of assets, net                                                            |   | (5.4                                     | )      | (5.4                                      | )      |
| Changes  in other assets and liabilities, including assets held for sale                |   | (44.8                                    | )      | (44.3                                     | )      |
| Other  operating cash flow items                                                        |   | 8.9                                      |   | 1.2                                       |   |
| Cash  provided by operating activities                                                  |   | $                                        | .3     |                                      | $      | 79.4 |   |
| Cash  provided by operating activities for eleven months ended January 3, 2003          |   | $                                        | 72.8   |                                      |   |   |
| Less:  Cash provided by operating activities for eight months ended September 27,  2002 |   | (72.5                                    | )      |                                      |   |
| Cash  provided by operating activities for three months ended January 3, 2003           |   | $                                        | .3     |                                      |   |   |
| Cash  provided by operating activities for eleven months ended January 3, 2003          |   |                                     |   | $                                         | 72.8   |   |
| Plus:  Cash provided by operating activities for one month ended February 1, 2002       |   |                                     |   | 6.6                                       |   |
| Cash  provided by operating activities for twelve months ended January 3, 2003          |   |                                     |   | $                                         | 79.4   |   |

 

**REORGANIZATION CASE AND FRESH-STARTREPORTING**

 

On May 14, 2001,Washington Group and several but not all of its direct and indirectsubsidiaries filed voluntary petitions to reorganize under Chapter 11 of theU.S. Bankruptcy Code in the U.S. Bankruptcy Court for the District of Nevada(Case No. BK-N-01-31627). The various legal entities that filed for bankruptcyare collectively referred to hereafter as the “Debtors.” The individualbankruptcy cases were administered jointly. Each of the Debtors continued tooperate its business and manage its property as a debtor-in-possession pursuantto sections 1107 and 1108 of the U.S. Bankruptcy Code during the pendency ofthe cases. For a more detailed discussion, see our current report on Form 8-Kfiled May 29, 2001.

 

Shortly after thecommencement of the bankruptcy cases, the committee representing our securedlenders and Dennis R. Washington began negotiations regarding Mr. Washington’scontinued involvement with us during the bankruptcy cases and after ouremergence from bankruptcy protection. The result of these negotiations was anagreement, embodied in our Plan of Reorganization, that provided that inexchange for Mr. Washington’s agreement to render ongoing services to us and toremain as chairman of our board of directors, Mr. Washington would be grantedoptions to purchase shares of our common stock to be issued in connection withour emergence from bankruptcy protection. For a more detailed discussion, seeour current report on Form 8-K filed January 4, 2002.

 

II-10

----

 

On December 21,2001, the bankruptcy court entered an order confirming the Plan ofReorganization. For a more detailed discussion, see our current report on Form8-K filed January 4, 2002.

 

On the EffectiveDate, we emerged from bankruptcy protection pursuant to our Plan ofReorganization. We also entered into a secured $350 million, 30-month revolvingcredit facility to fund our working capital requirements and obtained bondingcapacity to take on new projects. Under our Plan of Reorganization, on theEffective Date, all our equity securities existing prior to the Effective Datewere canceled and extinguished; we issued an aggregate 25,000,000 shares of our$.01 par value common stock; we issued warrants to purchase an additionalaggregate 8,520,424 shares of 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 common stock, including options granted to DennisR. Washington to purchase an aggregate 3,224,100 shares of common stock; and weentered into various other agreements.

 

During thependency of the bankruptcy cases, we continued to negotiate a settlement withthe Sellers of our outstanding litigation with respect to the RE&Cacquisition. We entered into the Raytheon Settlement regarding the issues anddisputes between the parties, which settlement was incorporated into our Planof Reorganization. See also Note 3, “Acquisition” of the Notes to ConsolidatedFinancial Statements in Item 8 of this report.

 

Under the RaytheonSettlement, the Sellers agreed that, with respect to their bankruptcy claim,the Sellers would be considered unpaid, unsecured creditors having rights inthe unsecured creditor class, but that, upon completion of our reorganization,they would waive any rights to receive any distributions to be given tounsecured creditors with allowed claims. In exchange, we agreed to dismiss alllitigation against the Sellers related to the acquisition, and to discontinuethe purchase price adjustment and binding arbitration process. We released allclaims based on any act occurring prior to our emergence from bankruptcyprotection, including all claims against the Sellers, their affiliates andtheir directors, officers, employees, agents and specified professionals. TheSellers released all claims based on any act occurring prior to our emergencefrom bankruptcy protection, including any claims related to any contracts orprojects not assumed by us during the bankruptcy cases, against us and ourdirectors, officers, employees, agents and professionals. No cash was exchangedas a result of the settlement.

 

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

 

As of February 1,2002, we adopted fresh-start reporting pursuant to the guidance provided by theAmerican Institute of Certified Public Accountants Statement of Position 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 protection is considered to be the close of business onFebruary 1, 2002 for financial reporting purposes. The periods presented priorto February 1, 2002 have been designated “Predecessor Company” and the periodsending subsequent to February 1, 2002 have been designated “Successor Company.”

 

These events arediscussed in greater detail in Note 3, “Acquisition,” and Note 4,“Reorganization Case and Fresh-start Reporting” of the Notes to ConsolidatedFinancial Statements in Item 8 of this report and are discussed in our annualreports on Form 10-K for the fiscal years ended December 1, 2000 and November30, 2001.

 

II-11

----

 

**YEAR-END CHANGE**

 

We have changed our fiscal year from a 52/53 week yearending on the Friday closest to the end of November to a 52/53 week year endingon the Friday closest to December 31. This change became effective on December29, 2001. The transition period, the month ended December 28, 2001, has beenincluded as a component of the financial periods presented in Item 8 of thisreport.

 

**BACKGROUND**

 

***Integration of RE&C***

 

While we were operating under the protection of thebankruptcy court, we continued both to integrate the RE&C business withWashington Group, and to restructure the way we do business to focus on our keymarkets and reduce the overall cost structure. The following major initiativeswere undertaken during 2001:

 

•                  Restructuringour organization to be market-focused, which led to the modification of ourorganizational structure to six business units.

•                  Establishmentof operations centers in Princeton, New Jersey, and Denver, Colorado, to takeadvantage of economies-of-scale and reduce our overall engineering costs.Engineers in those operations centers support all business units rather than anindividual business unit, thereby increasing overall utilization.

•                  Closureof 25 offices around the country to eliminate unnecessary overhead costs.

•                  Establishmentof a corporate business development function to coordinate sales efforts andfocus on fewer but more significant prospects.

 

These efforts culminated in a reduction of some 1,283employees, which together with the office closings, reduced the overall coststructure by approximately $70 million in 2002 compared to 2000, most of whichresulted in improved gross profit from the business units.

 

***Contract renegotiation***

 

Of the 23 major RE&C projects that had significantcontract adjustments, 14 are now complete, 4 are still in process and 5 wereeliminated in the insolvency proceedings of Washington International B.V. SeeNote 4, “Reorganization Case and Fresh-start Reporting -Washington International B.V.” of the Notes to Consolidated FinancialStatements in Item 8 of this report. The remaining contracts in process arecontinuing and are expected to be completed in 2003.

 

**BUSINESS UNIT NEW WORK AND BACKLOG**

 

New work for each business unit, which representsadditions to backlog for the period, is presented below:

 
|                        |   | **Three months ended** |    | **Twelve months ended** |   |
|-----------------------------|--------|------------------------|---------|-------------------------|--------|
| **NEW WORK  (In millions)** |   | **January 3,  2003**   |    | **November  30,  2001** |   | **January 3,  2003** |   | **November  30,  2001** |   |
| Power                       |   | $                      | 225.8   |                    | $      | 243.5 |   | $ | 880.3 |   | $ | 571.2 |   |
| Infrastructure              |   | 79.9                   |    | 60.4                    |   | 479.0 |   | 543.9 |   |
| Mining                      |   | 45.9                   |    | 6.5                     |   | 117.2 |   | 58.3 |   |
| Industrial/Process          |   | 162.3                  |    | 140.6                   |   | 541.9 |   | 767.6 |   |
| Defense                     |   | 341.4                  |    | 87.9                    |   | 712.4 |   | 376.4 |   |
| Energy  & Environment   |   | 195.8                  |    | 175.1                   |   | 571.8 |   | 642.3 |   |
| Other                       |   | (9.0                   | )       | (24.2                   | )      | 16.3 |   | 8.6 |   |
| Total  new work             |   | $                      | 1,042.1 |                    | $      | 689.8 |   | $ | 3,318.9 |   | $ | 2,968.3 |   |

 

II-12

----

 

New work awarded in the three and twelve months endedJanuary 3, 2003 to businesses held for sale totaled $8.7 million and $159.1million, respectively.

 

Backlog at January 3, 2003, February 1, 2002 andNovember 30, 2001 consisted of:

 
| **BACKLOG  (In millions)** |   | **January 3,  2003** |    | **February  1, 2002** |   | **November  30, 2001** | ** ** |
|----------------------------|--------|----------------------|---------|-----------------------|--------|------------------------|------------|
|                       |   |                 |    | **(Fresh-start)**     |   |                   |       |
| Power                      |   | $                    | 302.4   |                  | $      | 407.6                  |       | $ | 472.6 |   |
| Infrastructure             |   | 766.1                |    | 984.6                 |   | 1,138.5                |       |
| Mining                     |   | 279.8                |    | 272.0                 |   | 222.1                  |       |
| Industrial/Process         |   | 357.7                |    | 475.9                 |   | 505.9                  |       |
| Defense                    |   | 647.5                |    | 483.1                 |   | 496.6                  |       |
| Energy  & Environment  |   | 386.8                |    | 734.3                 |   | 704.3                  |       |
| Other                      |   | 14.8                 |    | 9.7                   |   | 7.5                    |       |
| Total  backlog             |   | $                    | 2,755.1 |                  | $      | 3,367.2                |       | $ | 3,547.5 |   |

 

***New work and backlog***

 

During the three months ended January 3, 2003, werecorded $1,042.1 million of new work awards, which was $183.9 million morethan revenue and equity in income of mining ventures recognized during thatperiod. The Power business unit’s new work of $225.8 million consisted of $40.3million of modification services, $20.8 million of engineering services and $164.7million of new power generation work. The Infrastructure business unit recorded$79.9 million in new work during the fourth quarter, consisting of $58.8million of new construction projects and $21.1 million of new work fromengineering work orders. The Mining business unit recorded $45.9 million in newwork during the fourth quarter, resulting primarily from additions to currentcontracts. The Industrial/Process business unit recorded $162.3 million in newwork during the fourth quarter, consisting mainly of $103.4 million of new workfrom integrated services contracts, $24.1 million of industrial projects, $15.7million from process industries and $11.3 million in numerous biopharmaceuticalcontracts. The Defense business unit recorded $341.4 million in new work duringthe fourth quarter of 2002, nearly all from additions and accelerations inchemical demilitarization and threat reduction markets. The Energy &Environment business unit recorded $195.8 million in new work during the fourthquarter from new work awards of $103.0 million on energy projects, $40.0million of new work related to U.S. Department of Energy (“DOE”) management and$52.8 million of new work in commercial operations.

 

Total new work awards for the year ended January 3,2003 was $3,318.9 million. The Power business unit’s new work related primarilyto continuing work on the four reformed contracts obtained in the RE&Cacquisition. New work on the reformed contracts totaled $537.6 million; theremainder was mostly from new power generation work. The Infrastructurebusiness unit was awarded $360.0 million in construction contracts and $119.0million in engineering and operations contracts. The Mining business unitrecorded $117.2 million in new work awards, primarily in contract extensionsand modifications. The Industrial/Process business unit new work awardsincluded $63.4 million in biopharmaceutical contracts, $116.5 million inindustrial and process industries contracts, $21.5 million in consumer productscontracts and $340.5 million in integrated services contracts. The Defensebusiness unit recorded $712.4 million in new work, $655.6 million of whichrelated to chemical demilitarization and threat reduction projects. Theremainder was from defense infrastructure awards. The Energy & Environmentbusiness unit recorded $571.8 million in new work awards, $255.7 million ofwhich related to energy projects, $219.0 million from commercial operations,including $128.3 million from EMD (a business sold on October 28, 2002), and$97.1 million from DOE management projects.

 

At January 3, 2003, backlog was $2,755.1 million, adecline of $623.6 million from the beginning of the twelve month period thenended. Backlog declined because (1) we sold EMD’s backlog valued at $252.1million at the end of the third quarter of 2002 and (2) our revenue of $3,661.5million, plus equity in income of mining ventures of $30.5 million, exceedednew work awards. See the backlog schedule in “Results of Operations”immediately below. Backlog on government contracts includes only two years’worth of the portions of such

 

II-13

----

 

contracts that are currently funded or which management is highlyconfident will be funded. The reported backlog excludes approximately $1.0 billionof government contracts in progress for work we expect to perform beyond thefourth quarter of 2004.

 

**RESULTS OF OPERATIONS**

 

On January 25, 2002, we emerged from Chapter 11bankruptcy proceedings and implemented fresh-start reporting effective February1, 2002. Accordingly, all assets and liabilities at the Effective Date wereadjusted to reflect their respective fair values. The consolidated financialstatements after that date are those of a new reporting entity and are notcomparable to the pre-emergence periods. However, to better describe theresults of a complete operating cycle, the eleven months ended January 3, 2003(post-emergence) were combined with the month ended February 1, 2002(pre-emergence) and reorganization items are presented as bankruptcy-relateditems, net of tax. Comparisons of pre-emergence financial data topost-emergence financial data are not meaningful. The following table isincluded solely for use in analysis of results of operations, and to complementmanagement’s discussion and analysis.

 
|                                                                                |   | **Quarter  ended**   |    | **Year ended**          |   |
|-------------------------------------------------------------------------------------|--------|----------------------|---------|-------------------------|--------|
| **RESULTS OF OPERATIONS  (In millions)**                                            |   | **January 3,  2003** |    | **November  30,  2001** |   | **January 3,  2003** |   | **November  30,  2001** |   | **December  1,  2000** |   |
| Backlog                                                                             |   |                 |    |                    |   |   |   |   |   |   |   |
| Beginning  backlog                                                                  |   | $                    | 2,821.7 |                    | $      | 4,048.3 |   | $ | 3,378.7 |   | $ | 5,659.4 |   | $ | 2,819.7 |   |
| New  work                                                                           |   | 1,042.1              |    | 689.8                   |   | 3,318.9 |   | 2,968.3 |   | 2,654.5 |   |
| Backlog  acquired, (sold) or adjusted                                               |   | (250.5               | )       | (91.5                   | )      | (250.5 | ) | (1,020.7 | ) | 3,289.1 |   |
| Revenue  and equity income                                                          |   | (858.2               | )       | (1,099.1                | )      | (3,692.0 | ) | (4,059.5 | ) | (3,103.9 | ) |
| Ending  backlog                                                                     |   | $                    | 2,755.1 |                    | $      | 3,547.5 |   | $ | 2,755.1 |   | $ | 3,547.5 |   | $ | 5,659.4 |   |
|                                                                                |   |                 |    |                    |   |   |   |   |   |   |   |
| Total  revenue                                                                      |   | $                    | 840.4   |                    | $      | 1,090.9 |   | $ | 3,661.5 |   | $ | 4,041.6 |   | $ | 3,090.8 |   |
| Gross  profit (loss)                                                                |   | $                    | 34.2    |                    | $      | 18.2 |   | $ | 160.1 |   | $ | 97.7 |   | $ | (94.7 | ) |
| Equity  in income of mining ventures                                                |   | 17.8                 |    | 8.2                     |   | 30.5 |   | 17.9 |   | 13.1 |   |
| General  and administrative expenses                                                |   | (17.4                | )       | (13.1                   | )      | (52.3 | ) | (56.9 | ) | (37.8 | ) |
| Goodwill  amortization                                                              |   | —               |    | (3.6                    | )      | — |   | (14.6 | ) | (25.2 | ) |
| Integration  and merger costs                                                       |   | —               |    | (1.2                    | )      | — |   | (18.8 | ) | (15.3 | ) |
| Impairment  of arbitration claim                                                    |   | —               |    | —                  |   | — |   | — |   | (444.1 | ) |
| Impairment  of acquired assets                                                      |   | —               |    | —                  |   | — |   | — |   | (747.5 | ) |
| Restructuring  costs                                                                |   | —               |    | (7.0                    | )      | (.6 | ) | (7.0 | ) | — |   |
| Other  operating income                                                             |   | 3.4                  |    | —                  |   | 3.4 |   | — |   | — |   |
| Operating  income (loss)                                                            |   | 38.0                 |    | 1.5                     |   | 141.1 |   | 18.3 |   | (1,351.5 | ) |
| Investment  income                                                                  |   | .5                   |    | .8                      |   | 1.3 |   | 9.2 |   | 10.9 |   |
| Interest  expense                                                                   |   | (7.5                 | )       | (9.7                    | )      | (28.0 | ) | (56.8 | ) | (38.4 | ) |
| Other  income (loss), net                                                           |   | (.8                  | )       | (4.0                    | )      | 1.3 |   | (10.5 | ) | (5.3 | ) |
| Income  (loss) before income taxes, minority interests and bankruptcy-related items |   | 30.2                 |    | (11.4                   | )      | 115.7 |   | (39.8 | ) | (1,384.3 | ) |
| Income  tax (expense) benefit                                                       |   | (13.4                | )       | 5.2                     |   | (49.9 | ) | 18.0 |   | 534.3 |   |
| Minority  interests in consolidated subsidiaries                                    |   | (7.5                 | )       | (6.7                    | )      | (21.7 | ) | (15.5 | ) | (9.4 | ) |
| Income  (loss) before bankruptcy-related items                                      |   | 9.3                  |    | (12.9                   | )      | 44.1 |   | (37.3 | ) | (859.4 | ) |
| Reorganization  items, net of tax                                                   |   | .4                   |    | (27.2                   | )      | (51.4 | ) | (47.7 | ) | — |   |
| Extraordinary  item: debt discharge, net of tax                                     |   | —               |    | —                  |   | 567.2 |   | — |   | — |   |
| Net  income (loss)                                                                  |   | $                    | 9.7     |                    | $      | (40.1 | ) | $ | 559.9 |   | $ | (85.0 | ) | $ | (859.4 | ) |

 

II-14

----

 

**RECONCILIATION OF GAAP TO PRO FORMA SUMMARY FINANCIAL DATA**

*(In millions)*

**(UNAUDITED)**

 
|                                                                     |   | **Three  months ended  January 3, 2003** |   | **Adjustments** |   | **Pro forma** |   |
|--------------------------------------------------------------------------|--------|------------------------------------------|--------|-----------------|--------|---------------|--------|
| Total  revenue                                                           |   | $                                        | 840.4  |            | $      | —        |   | $ | 840.4 |   |
| Income  before reorganization items, income taxes and minority interests |   | $                                        | 30.2   |            | $      | —        |   | $ | 30.2 |   |
| Reorganization  items                                                    |   | .4                                       |   | —          |   | .4            |   |
| Income  tax expense                                                      |   | (13.4                                    | )      | —          |   | (13.4         | )      |
| Minority  interests in consolidated subsidiaries                         |   | (7.5                                     | )      | —          |   | (7.5          | )      |
| Net  income                                                              |   | $                                        | 9.7    |            | $      | —        |   | $ | 9.7 |   |

 
|                                                                            |   | **Three  months ended  November 30, 2001** |    | **Adjustments** |   | **Pro forma** |   |
|---------------------------------------------------------------------------------|--------|--------------------------------------------|---------|-----------------|--------|---------------|--------|
| Total  revenue                                                                  |   | $                                          | 1,090.9 |            | $      | —        |   | $ | 1,090.9 |   |
| Income  (loss) before reorganization items, income taxes and minority interests |   | $                                          | (11.4   | )               | $      | —        |   | $ | (11.4 | ) |
| Reorganization  items                                                           |   | (34.9                                      | )       | 7.7             |   | (27.2         | )      |
| Income  tax expense                                                             |   | 12.9                                       |    | (7.7            | )      | 5.2           |   |
| Minority  interests in consolidated subsidiaries                                |   | (6.7                                       | )       | —          |   | (6.7          | )      |
| Net  loss                                                                       |   | $                                          | (40.1   | )               | $      | —        |   | $ | (40.1 | ) |

 
|                                                                                          |   | **Eleven  months ended  January 3, 2003** |    | **One month  ended  February 1, 2002** |   | **Adjustments** |   | **Pro forma** |   |
|-----------------------------------------------------------------------------------------------|--------|-------------------------------------------|---------|----------------------------------------|--------|-----------------|--------|---------------|--------|
| Total  revenue                                                                                |   | $                                         | 3,311.6 |                                   | $      | 349.9           |   | $             | — |   | 3,661.5 |   |
| Operating  income                                                                             |   | $                                         | 131.7   |                                   | $      | 9.4             |   | $             | — |   | $ | 141.1 |   |
| Income  before reorganization items, income taxes, minority interests and  extraordinary item |   | $                                         | 107.6   |                                   | $      | 8.1             |   | $             | — |   | $ | 115.7 |   |
| Reorganization  items                                                                         |   | (3.1                                      | )       | (72.1                                  | )      | 23.8            |   | (51.4         | )      |
| Income  tax (expense) benefit                                                                 |   | (46.2                                     | )       | 20.1                                   |   | (23.8           | )      | (49.9         | )      |
| Minority  interests in consolidated subsidiaries                                              |   | (20.6                                     | )       | (1.1                                   | )      | —          |   | (21.7         | )      |
| Income  (loss) before extraordinary item                                                      |   | 37.7                                      |    | (45.0                                  | )      | —          |   | (7.3          | )      |
| Extraordinary  item - gain on debt  discharge, net of income tax benefit of $343.5            |   | —                                    |    | 567.2                                  |   | —          |   | 567.2         |   |
| Net  income                                                                                   |   | $                                         | 37.7    |                                   | $      | 522.2           |   | $             | — |   | $ | 559.9 |   |

 
|                                                                            |   | **Twelve  months ended  November 30, 2001** |    | **Adjustments** |   | **Pro forma** |   |
|---------------------------------------------------------------------------------|--------|---------------------------------------------|---------|-----------------|--------|---------------|--------|
| Total  revenue                                                                  |   | $                                           | 4,041.6 |            | $      | —        |   | $ | 4,041.6 |   |
| Income  (loss) before reorganization items, income taxes and minority interests |   | $                                           | (39.8   | )               | $      | —        |   | $ | (39.8 | ) |
| Reorganization  items                                                           |   | (56.5                                       | )       | 8.8             |   | (47.7         | )      |
| Income  tax expense                                                             |   | 26.8                                        |    | (8.8            | )      | 18.0          |   |
| Minority  interests in consolidated subsidiaries                                |   | (15.5                                       | )       | —          |   | (15.5         | )      |
| Net loss                                                                        |   | $                                           | (85.0   | )               | $      | —        |   | $ | (85.0 | ) |

 

II-15

----

 

**2002 COMPARED TO 2001**

 

***2002 Revenue, gross profit and equity in income of miningventures***

 

Revenue for the quarter and year ended January 3, 2003was $840.4 million and $3,661.5 million, respectively. The Power, Defense andEnergy & Environment business units generated strong, consistent revenueduring 2002 primarily from continuing work on new power generation projectsacquired as part of the RE&C acquisition, increases in funded scoperequirements of chemical demilitarization and defense construction contractsand favorable performance on DOE management service contracts. Revenue during2002 was impacted by the Infrastructure business unit’s inability to obtainhistorical levels of new work during the pendency of our bankruptcy and in theIndustrial/Process business unit due to a softening of the domestic andinternational economies and downturn in the telecommunications market.

 

Gross profit for the quarter and year ended January 3,2003 was $34.2 million and $160.1 million, respectively, and was driven bystrong performance in the Power, Defense and Energy & Environment businessunits resulting from the sources of favorable revenue variances described above.During the quarter ended January 3, 2003, the Defense business unitsuccessfully completed a chemical demilitarization project within the costestimate and on schedule. As a result, we recognized additional profit of $8.9million, including an equitable adjustment of $1.5 million. Gross profit of theEnergy & Environment business unit benefited from favorable performancefrom DOE management service contracts and the operations during the quarter andyear ended January 3, 2003. Gross profit of the Infrastructure business unitduring the year was favorably impacted by profit of $26.6 million recognized ona light rail project. However, that project was essentially offset by contractlosses of $23.4 million recorded for a Philippine dam and hydropower project.

 

Included in gross profit is the recognition of normalprofit of $1.7 million and $30.9 million for the quarter and year ended January3, 2003, respectively, primarily related to Infrastructure projects. Therecognition of normal profit had no affect on our cash flows.

 

The diversification of our business may cause grossmargins to vary between periods due to the inherent risks and rewards onfixed-price contracts causing unexpected gains and losses on contracts. Grossmargins may also vary between periods due to changes in the mix and timing ofcontracts executed by us which contain various risk and profit profiles and aresubject to uncertainties inherent in the estimation process.

 

We account for the operations of MIBRAG mbH on theequity method. The equity in income of mining ventures is primarily our portionof the results of operations of MIBRAG mbH. During the fourth quarter, MIBRAGmbH successfully 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.

 

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

 

For a more detailed discussion of our revenue andgross profit, see “Business Unit Results” below in our management’s discussionand analysis.

 

***2001 Revenue, gross profit and equity in income of miningventures***

 

On May 14, 2001, we filed for protection under Chapter11 of the U.S. Bankruptcy Code. During the remainder of 2001, we operated underthe direction of the U.S. Bankruptcy Court for the District of Nevada.Operations during those periods were impacted by the “rejection,” as that termis used in bankruptcy law, of contracts in process. Assets related to thosecontracts in process, including accounts receivable and unbilled

 

II-16

----

 

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 on January 25, 2002. Any liabilities that arose as a result of therejection of contracts were accrued by charges against income (reorganizationitems) upon the date of rejection.

 

Revenue for the year ended November 30, 2001 was$4,041.6 million and included a full year’s revenue from RE&C operations.RE&C operations contributed primarily to the Power, Infrastructure, Defenseand, to a lesser extent, Industrial/Process business units’ revenues.

 

Gross profit for the year ended November 30, 2001 was$97.7 million. Of that amount, the Energy & Environment and Defensebusiness units contributed $68.5 million and $28.1 million, respectively. ThePower and Industrial/Process business units incurred operating losses during2001 of $8.1 million and $3.5 million, respectively. During 2001, normal profitof $87.2 million was recognized. The recognition of normal profit had no impacton our cash flows. During the second half of 2001, we implemented overheadreduction strategies to support lower future revenue than had originally beenanticipated when RE&C was acquired.

 

During 2001, the Mining business unit recognized $17.9million in equity in the net income of its mining ventures, primarily fromMIBRAG mbH.

 

***General and administrative expenses***

 

General and administrative expenses for the year endedJanuary 3, 2003 were $52.3 million and represent the executive andadministrative costs of supporting our operations. During the fourth quarter,we incurred certain discretionary expenses for business development, incentivecompensation and other corporate initiatives of approximately $4.5 million.General and administrative expenses declined $4.6 million for the 2002 fiscalyear from 2001. The reduction was a result of the initiatives taken to reducecosts under our restructuring plan.

 

***Goodwill amortization***

 

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.

 

***Integration and merger costs***

 

Integration and merger costs were $18.8 million forthe year ended November 30, 2001. These costs related to the integration ofRE&C into our businesses and were principally comprised of incrementallegal, accounting and consulting services. There were no such costs in 2002.

 

***Investment income***

 

Investment income declined $7.9 million for the 2002fiscal year from 2001 as a result of lower interest rates combined with loweravailable cash balances for investment.

 

***Interest expense***

 

Interest expense for 2002 consisted of $12.1 millionof amortization of bank fees paid primarily at the closing of the SeniorSecured Revolving Credit Facility and $15.9 million of cash interest expenseconsisting primarily of letter of credit fees, commitment fees on availableundrawn amounts under the Senior Secured Revolving Credit Facility and intereston funded debt. Interest expense for 2002 is high relative to borrowingsincurred under our Senior Secured Revolving Credit Facility due to the significantfinancing costs incurred in obtaining the facility. Such costs are beingamortized over the 30-month term of the facility. During the bankruptcyproceedings, the

 

II-17

----

 

accruing ofinterest under the previous credit facility was stayed. Therefore, contractualinterest of $7.1 million was not recorded in January 2002 (pre-bankruptcyemergence).

 

Interest expense incurredfrom May 14, 2001 through November 30, 2001 consisted primarily of amortizationof prepaid bank fees from costs related to the RE&C Financing Facilities,and Senior Unsecured Notes and costs related to the Debtor-in-Possession(“DIP”) Facility. For a description of these facilities and notes, see Note 9,“Credit Facilities” of the Notes to Consolidated Financial Statements in Item 8of this report. Interest expense incurred during 2001, but prior to May 14,2001, included interest incurred on Senior Unsecured Notes and outstandingborrowings under the RE&C Financing Facilities to fund substantial workingcapital requirements of the acquired RE&C contracts. We ceased accruinginterest on the RE&C Financing Facilities and Senior Unsecured Notes uponour filing for relief under Chapter 11 of the U.S. Bankruptcy Code on May 14,2001 since the lenders’ claims were then subject to compromise. Contractualinterest not recorded during 2001 was $48.2 million. See Note 9, “CreditFacilities” of the Notes to Consolidated Financial Statements in Item 8 of thisreport.

 

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

 

Other income (expense),net for 2002 of $1.3 million, consisted primarily of a $2.8 milliondistribution received from the conversion to a stock company from a mutualinsurance company of an insurance carrier that provides our employee long-termdisability coverage. In connection with the conversion, the distribution wasreceived following the insurance company’s initial public offering during thefirst quarter of 2002.

 

Other income (expense),net for 2001 of $(10.5) million included $(3.5) million in costs associatedwith our World Trade Center office destroyed in the September 11, 2001terrorist attacks.

 

***Income tax expense***

 

The components of theeffective tax rate for the various periods are shown in the table 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** |   | **Year ended****December  1,  2000** |   |
| Federal  tax rate                                             |   | 35.0                                           | %      | 35.0                                       | %      | 35.0 | % | 35.0 | % | 35.0 | % |
| State  tax                                                    |   | 3.5                                            |   | 2.8                                        |   | 3.9 |   | 5.5 |   | 4.1 |   |
| Nondeductible  items                                          |   | 3.0                                            |   | .4                                         |   | (3.1 | ) | (14.4 | ) | (.1 | ) |
| Foreign  tax                                                  |   | 2.7                                            |   | —                                     |   | — |   | (1.3 | ) | (.5 | ) |
| Goodwill                                                      |   | —                                         |   | —                                     |   | .7 |   | 3.0 |   | .1 |   |
| Effective  tax rate                                           |   | 44.2                                           |   | 38.2                                       |   | 36.5 |   | 27.8 |   | 38.6 |   |
| Adjust  for effect of bankruptcy and reorganization items (a) |   | (1.5                                           | )      | 7.5                                        |   | 3.1 |   | 17.4 |   | — |   |
| Pro  forma effective tax rate                                 |   | 42.7                                           | %      | 45.7                                       | %      | 39.6 | % | 45.2 | % | 38.6 | % |

 

----

(a)          The pro forma effectivetax rate represents the tax rate after removing the effects of bankruptcy andreorganization items.

 

When the effective taxrate is applied to a loss before taxes, a tax benefit results. In theseperiods, nondeductible expenses decrease the effective tax rate. When theeffective tax rate is applied to income before taxes, a tax expense results. Inthese periods, nondeductible expenses increase the effective tax rate.

 

Income recognized uponthe cancellation of debt in the bankruptcy restructuring was offset by a netoperating loss (“NOL”) carryover, capital loss carryover, federal tax creditcarryovers, such as the alternative minimum tax credit, and the reduction inthe tax basis of goodwill. Current tax liabilities for 2003 and later years areanticipated to be substantially less than the total taxes provided for in thefinancial statements. While the NOL carryover for federal and state incometaxes was substantially utilized as a result of the cancellation of debt in thebankruptcy

 

II-18

----

 

restructuring, there will continue to be substantial tax deductions forgoodwill amortization. As of January 3, 2003, we have remaining tax goodwill ofapproximately $87 million resulting from the acquisition of the WestinghouseBusinesses and $618 million resulting from the acquisition of RE&C. Theamortization of this tax goodwill is deductible over remaining periods of 11.2and 12.5 years, respectively, resulting in annual tax deductions ofapproximately $50 million net of minority interest and application oflimitations under the Internal Revenue Code. In effect, we will not pay cashtaxes on the first $50 million of federal taxable income before amortizationeach year.

 

Fresh-start impact onincome taxes is described as follows: Deferred tax assets such as the NOLcarryover and certain tax credit carryovers were substantially utilized by thecancellation of debt recognized upon our emergence from bankruptcy. Deferredtax assets were also reduced because we adopted fresh-start accounting forfinancial reporting purposes. The main impact on deferred taxes as a result offresh-start accounting was that the deferred tax asset that had been previouslyrecorded for the difference between the financial reporting and the tax basesin goodwill was eliminated. This elimination and the other changes associatedwith fresh-start accounting reduced the net deferred tax assets by $193.8million. The remainder of the change to deferred tax assets from the balanceshown at the end of 2001 was associated with the cancellation of debt.

 

***Minority interests***

 

The majority of ourminority interests relates to BNFL’s 40% ownership of WGSG that are included inthe Energy & Environment business unit. Minority interests in the income ofconsolidated subsidiaries for the year ended January 3, 2003 increased to $21.7million from $15.5 million for 2001 due to an increase in income from WGSG in2002.

 

***Reorganization items***

 

During the month endedFebruary 1, 2002, we recognized, as part of fresh-start reporting, charges thataggregated $35.1 million for adjustments to reflect all assets and liabilitiesat their respective fair values. Other reorganization charges totaled $37.0million and represent mainly professional fees incurred in connection with thebankruptcy proceedings.

 

During the eleven monthsended January 3, 2003 (post-bankruptcy emergence), we recognized a charge of $3.1million related to additional professional fees in connection with variousbankruptcy-related issues including the defense of the appeals to our Plan ofReorganization.

 

Reorganization items of$56.5 million for the year ended November 30, 2001 included $54.7 million ofprofessional fees and other expenses related to the bankruptcy proceedings and$36.4 million of charges related to the impairment of assets of rejectedprojects, offset by a net gain of $34.5 million from the liquidation of twointernational subsidiaries.

 

***Extraordinary item***

 

During the first quarterof 2002, an extraordinary gain was recorded comprised of $1,460.7 million forthe discharge of liabilities that resulted from our Plan of Reorganization,offset by the fair value of new common stock and warrants issued of $550.0million and income taxes of $343.5 million.

 

**2001 COMPARED TO 2000**

 

***Revenue and gross profit***

 

Revenue for the yearended November 30, 2001 increased 31% from the year ended December 1, 2000 to$4,041.6. The increase was due to the inclusion of revenue from a full year ofRE&C operations compared to five months in 2000.

 

II-19

----

 

Cost of revenue for theyear ended December 1, 2000 includes $141.0 million in charges for itemsrelated to the acquisition of RE&C that were identified subsequent to theinitial purchase price allocation based on additional information we obtained,but that were not included in the arbitration claim. See Note 3, “Acquisition,”of the Notes to Consolidated Financial Statements in Item 8 of this report.These amounts are comprised of the following:

 
| **In millions**                                                  |   |   |   |
|------------------------------------------------------------------|--------|--------|--------|
| Adjustments to estimates at completion on  performance contracts |   | $      | 113.3  |   |
| Adjustments to self-insurance reserves                           |   | 21.1   |   |
| Other                                                            |   | 6.6    |   |
| Total adjustments                                                |   | $      | 141.0  |   |

 

Exclusive of the $141.0million in charges discussed above, gross profit increased $51.4 million from$46.3 million in 2000 to $97.7 million in 2001. The increase was attributableto the recognition of normal profit on contracts from the RE&C acquisitionof $87.2 million in 2001 compared to $50.2 million in 2000 as a result of afull year of revenue on the RE&C projects to which the normal profitrelates. The recognition of normal profit has no impact on our cash flows. Inaddition, gross profit for 2000 included a $20.3 million provision related tothe Summitville environmental matter. See Note 14, “Contingencies andCommitments - SummitvilleEnvironmental Matters” of the Notes to Consolidated Financial Statements inItem 8 of this report. Business unit overhead included in cost of revenueincreased 19.5% from 2001 compared to 2000 due to the inclusion of a full yearof indirect costs associated with the RE&C business in 2001 compared tofive months of comparable indirect costs in 2000. Business unit overhead wasinitially structured to support a $5 billion revenue organization envisioned atthe time of the RE&C acquisition. During the last half of 2001, steps weretaken to reduce operating overhead to support lower expected future revenue.

 

Our gross margins oftenvary between periods due to inherent risks and rewards on fixed-price contractscausing unexpected gains and losses on contracts. Gross margins may also varybetween periods due to changes in the mix and timing of contracts executed byus, which contain various risk and profit profiles and are subject touncertainties inherent in the estimation process.

 

***General and administrative expenses***

 

General andadministrative expenses for the year ended November 30, 2001 increased $19.1million compared to 2000. The increase relates to a full year of general andadministrative costs associated with the acquisition of RE&C.

 

***Goodwill amortization***

 

For the year endedNovember 30, 2001, goodwill amortization decreased $10.6 million as compared to2000, to $14.6 million. The decrease in goodwill was principally due to theimpairment, in the fourth quarter of 2000, of goodwill related to theacquisition of RE&C.

 

***Integration and merger costs***

 

As a result of theacquisition of RE&C on July 7, 2000, we incurred significant costsassociated with the integration and merger of the two companies. For the yearended November 30, 2001, those costs were $18.8 compared to $15.3 million in2000. The costs were primarily incurred for accounting, legal and financialadvisory fees.

 

II-20

----

 

***Impairment of acquired assets***

 

During the fourth quarterof 2000, we recognized asset impairment losses of $444.1 million and $747.5million for our inability to collect our purchase price adjustment from theSellers and for impairment of goodwill and other assets acquired as a part ofthe RE&C transaction, respectively. There were no such charges in 2001.

 

***Restructuring costs***

 

In the fourth quarter of2001, during the pendency of our bankruptcy proceedings, we initiatedrestructuring actions to improve operational effectiveness and efficiency andreduce expenses globally relative to employment levels and excess facilitiesresulting from our proposed plan of reorganization. Restructuring costs for theyear include a pre-tax charge for termination benefits of $2.4 million foremployees notified as of November 30, 2001, an impairment charge of $4.1million for nonrecoverable asset values and enhanced pension benefits of $.5million. The severance costs represent expected reductions in work force for687 employees representing management, professional, administrative andoperational overhead. Actual reductions in work force were 538 through November30, 2001. Additional charges of $6.6 million for 596 additional employeeterminations and $19.7 million for facility closure costs were accrued inDecember 2001. During January 2002, charges of $.6 million for employeeterminations were accrued. As part of the Plan of Reorganization in January2002, restructuring liabilities of $14.2 million representing the remainingbalance recorded as part of the acquisition of RE&C and consisting ofnon-cancelable lease obligations were discharged. A review of our restructuringplan during the eleven months ended January 3, 2003 indicated that work forcereductions were essentially complete.

 

***Investment income***

 

Investment income for theyear ended November 30, 2001 decreased $1.6 million from 2000 due to asignificant decrease in cash balances.

 

***Interest expense***

 

Interest expense includesthree components: amortization of fees associated with our lines of credit,fees on letters of credit, and interest expense.  Interest expense for the quarter ended November 30, 2001 decreased$11.0 million over the comparable period of 2000 due to a cessation of accrualof interest expense at the date of our bankruptcy filing. Had we continued toaccrue interest expense, we would have recognized an additional $20.9 millionand $48.2 million during the quarter and year ended November 30, 2001,respectively. During the bankruptcy proceedings, the accruing of interest underthe previous credit facility was stayed. Interest expense in 2001 increased$18.4 million compared to 2000 principally due to interest accrued onsignificantly greater outstanding borrowings under the RE&C FinancingFacility.

 

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

 

Other income (expense)was $(10.5) million for the year ended November 30, 2001 compared to $(5.3)million in 2000. Other income (expense) for the fourth quarter of 2000 included$(6.2) million related to the MK Gold Corporation litigation settlement. Otherincome (expense) for 2001 included $(3.5) million for costs associated with ourWorld Trade Center office destroyed in the September 11, 2001 terroristattacks.

 

***Income tax expense***

 

The effective tax ratefor the year ended November 30, 2001 was 27.8% compared to 38.6% for 2000. Theprimary reason for the decrease in the effective tax rate for 2001 was theimpact of nondeductible expenses, mainly reorganization costs, reducing the taxdeductible loss. This accounted for an 11.4% reduction in the effective taxrate.

 

II-21

----

 

***Minority interests***

 

Minority interests in theincome of consolidated subsidiaries for the year ended November 30, 2001increased to $15.5 million compared to $9.4 million for 2000 due to increasesin income from WGSG in 2001. Minority interests principally consist of the 40%minority interest of BNFL in the income of WGSG and a 35% minority interest inthe income of Safe Sites of Colorado, LLC, a subsidiary of WGSG.

 

***Reorganization items***

 

As a result of thebankruptcy, we incurred charges during 2001 of $91.1 million associated withthe process of filing a plan of reorganization, offset by a net gain fromliquidation of insolvent foreign subsidiaries of $34.5 million. The costsincurred included accounting, legal and financial advisory fees of $54.7million and charges for asset impairment of assets of rejected contracts of$36.4 million. See Note 4, “Reorganization and Fresh-start Reporting” of theNotes to Consolidated Financial Statements in Item 8 of this report.

 

**BUSINESS UNIT RESULTS**

*(In millions)*

 
| **Total revenue**                     |   | **Quarter  ended  January 3,  2003** |   | **Year ended  January 3,  2003** |   | **Year ended  November 30,  2001** |   | **Year ended  December 1,  2000** |    |
|---------------------------------------|--------|--------------------------------------|--------|----------------------------------|--------|------------------------------------|--------|-----------------------------------|---------|
| Power                                 |   | $                                    | 235.0  |                             | $      | 1,005.6                            |   | $                                 | 839.4   |   | $ | 480.7 |   |
| Infrastructure                        |   | 175.6                                |   | 772.0                            |   | 940.3                              |   | 699.8                             |    |
| Mining                                |   | 14.9                                 |   | 68.6                             |   | 92.2                               |   | 98.1                              |    |
| Industrial  Process                   |   | 156.7                                |   | 638.7                            |   | 957.2                              |   | 762.1                             |    |
| Defense                               |   | 121.6                                |   | 557.1                            |   | 582.5                              |   | 364.5                             |    |
| Energy  & Environment             |   | 139.6                                |   | 610.7                            |   | 598.2                              |   | 633.3                             |    |
| Intersegment,  eliminations and other |   | (3.0                                 | )      | 8.8                              |   | 31.8                               |   | 52.3                              |    |
| Total  revenue                        |   | $                                    | 840.4  |                             | $      | 3,661.5                            |   | $                                 | 4,041.6 |   | $ | 3,090.8 |   |

 

Operating income (loss)for the business units was as follows:

 
| **Total operating income (loss)**    |   | **Quarter  ended  January 3,  2003** |   | **Year ended  January 3,  2003** |   | **Year ended  November 30,  2001** |   | **Year ended  December 1,  2000** |   |
|--------------------------------------|--------|--------------------------------------|--------|----------------------------------|--------|------------------------------------|--------|-----------------------------------|--------|
| Power                                |   | $                                    | (.4    | )                                | $      | 24.1                               |   | $                                 | (8.3   | ) | $ | (49.2 | ) |
| Infrastructure                       |   | 5.6                                  |   | 17.8                             |   | 24.5                               |   | (16.0                             | )      |
| Mining                               |   | 16.3                                 |   | 32.4                             |   | 27.5                               |   | 28.3                              |   |
| Industrial/Process                   |   | (3.7                                 | )      | 4.1                              |   | (6.3                               | )      | (.8                               | )      |
| Defense                              |   | 14.4                                 |   | 44.1                             |   | 28.1                               |   | (75.8                             | )      |
| Energy  & Environment            |   | 27.7                                 |   | 83.4                             |   | 54.8                               |   | 24.9                              |   |
| Intersegment,  impairments and other |   |                                 |   |                             |   |                               |   |                              |   |
| unallocated  operating costs         |   | (4.5                                 | )      | (12.5                            | )      | (45.1                              | )      | (1,225.1                          | )      |
| General  and administrative expenses |   | (17.4                                | )      | (52.3                            | )      | (56.9                              | )      | (37.8                             | )      |
| Total  operating income (loss)       |   | $                                    | 38.0   |                             | $      | 141.1                              |   | $                                 | 18.3   |   | $ | (1,351.5 | ) |

 

In order to improve thecomparability of the operating income (loss) of the business units, we haveexcluded from our 2000 business unit income (loss) amounts on the followingtable the $141 million charge for changes to estimates at completion onacquired contracts. See Note 3, “Acquisition” of the Notes to ConsolidatedFinancial Statements in Item 8 of this report.

 

II-22

----

 
| **As adjusted  Total operating income (loss)**                   |   | **Quarter  ended  January 3,  2003** |   | **Year ended  January 3,  2003** |   | **Year ended  November 30,  2001** |   | **Year ended  December 1,  2000** |   |
|------------------------------------------------------------------|--------|--------------------------------------|--------|----------------------------------|--------|------------------------------------|--------|-----------------------------------|--------|
| Power                                                            |   | $                                    | (.4    | )                                | $      | 24.1                               |   | $                                 | (8.3   | ) | $ | 4.3 |   |
| Infrastructure                                                   |   | 5.6                                  |   | 17.8                             |   | 24.5                               |   | (12.4                             | )      |
| Mining                                                           |   | 16.3                                 |   | 32.4                             |   | 27.5                               |   | 28.3                              |   |
| Industrial/Process                                               |   | (3.7                                 | )      | 4.1                              |   | (6.3                               | )      | 12.2                              |   |
| Defense                                                          |   | 14.4                                 |   | 44.1                             |   | 28.1                               |   | (12.5                             | )      |
| Energy  & Environment                                        |   | 27.7                                 |   | 83.4                             |   | 54.8                               |   | 24.9                              |   |
| Changes  to estimates at completion on acquired contracts        |   | —                               |   | —                           |   | —                             |   | (141.0                            | )      |
| Intersegment,  impairments and other unallocated operating costs |   | (4.5                                 | )      | (12.5                            | )      | (45.1                              | )      | (1,217.5                          | )      |
| General  and administrative expenses                             |   | (17.4                                | )      | (52.3                            | )      | (56.9                              | )      | (37.8                             | )      |
| Total  operating income (loss)                                   |   | $                                    | 38.0   |                             | $      | 141.1                              |   | $                                 | 18.3   |   | $ | (1,351.5 | ) |

 

Our discussion andanalysis which follows is based on the table above.

 

**2002**

 

***Power***

 

Revenue for the quarterand year ended January 3, 2003 was derived primarily from continuing work onnew power generation projects acquired as part of RE&C, steam generatorreplacement projects and operations and maintenance services contracts.Included in revenue for the fourth quarter and year are approximately $135.8million and $544.5 million, respectively, related to four new power generationprojects from the RE&C acquisition. These four projects were originallyfixed-price contracts, but were converted (reformed) in December 2001 to costreimbursable contracts and include terms established as part of the RaytheonSettlement. (See Note 3, “Acquisition” of the Notes to Consolidated FinancialStatements in Item 8 of this report.) In addition, during the quarter and yearended January 3, 2003, unfavorable contract adjustments of $3.0 million and $6.7million were recorded on a fixed-price contract.

 

Operating income for 2002was $24.1 million. The four reformed projects generated income of $15.6 millionbefore allocations of related overhead costs, and engineering services addedanother $10.1 million. During the year, project loss reserves of $6.7 millionwere established on a steam generator replacement project.

 

Operating income for theyear included the recognition of $3.2 million of normal profit. The recognitionof normal profit has no impact on our cash flows.

 

***Infrastructure***

 

The Infrastructurebusiness unit generated revenue of $175.6 million and $772.0 million during thequarter and year ended January 3, 2003, respectively. 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.

 

Operating income was $5.6million and $17.8 million for the quarter and year ended January 3, 2003,respectively. During the quarter, we recognized $5.6 million in profitprimarily attributable to the recovery of a claim on a completed constructionproject. We recognized operating income of $26.6 million on a light railproject during the year ended January 3, 2003; however, unfavorable contractadjustments of $23.4 million were recorded on the Philippine dam and hydropowerproject. Contract claims have been prepared which, if successful, may offsetsome or all of the effects of the contract adjustments. At this time, norevenue or profit has been

 

II-23

----

 

recognized as a result of those claims. The remaining operating incomewas generated by numerous construction and infrastructure services projects.Additional unfavorable contract adjustments were recognized during 2002 on twohighway projects of $5.1 million, less minority interests of $1.7 million and$1.9 million on a light rail project.

 

Operating income for theyear included the recognition of $25.5 million of normal profit, primarily fromcertain contracts obtained in the RE&C acquisition. The recognition ofnormal profit has no impact on our cash flows.

 

***Mining***

 

Revenue during the quarterand year ended January 3, 2003 of $14.9 million and $68.6 million,respectively, was generated predominantly by continuing work on mine projectsand mine management contracts that existed during previous years. Revenue wasnegatively impacted by the completion of contracts in 2001 that were notreplaced during 2002.

 

During the quarter andyear ended January 3, 2003, we recognized operating income of $16.3 million and$32.4 million, respectively. Operating income included $17.8 million and $30.5million during the quarter and year ended January 3, 2003, respectively, fromequity in the net income of our mining ventures, which is comprised primarilyof our portion of the results of operations of MIBRAG mbH. MIBRAG mbHsuccessfully negotiated amendments to the original agreement on transportationcredit matters that had been entered into with the German government in 1993.As a result of those negotiations, MIBRAG mbH recognized $13.0 million inoperating income, of which our portion was $6.5 million. In addition, duringthe fourth quarter, MIBRAG mbH recognized a $12.0 million one-time award ofpower cogeneration 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.

 

***Industrial/Process***

 

The Industrial/Processbusiness unit’s revenue during the quarter and year ended January 3, 2003 was$156.7 million and $638.7 million, respectively, and continued to be impactedby a combination of the softness of the domestic and international economies,the downturn in the telecommunications market and the winding down of somesignificant projects. Some sectors of the Industrial/Process business unit’smarkets continue to be strong, including automotive, gas processing andbio-pharmaceuticals.

 

Operating income (loss)for the quarter and year ended January 3, 2003 was $(3.7) million and $4.1million, respectively, reflecting the impact of economic factors describedabove. Reduced revenue has been partially offset by significant reductions inoverhead costs, including the closing of multiple offices, employeeterminations and elimination of redundant costs. Significant factors affectingthe Industrial/Process business unit’s operating income during the quarter andyear included the $4.0 million favorable resolution of a long-standing contractclaim, $(4.1) million in unfavorable contract adjustments on a contract and$(1.6) million and $(7.6) million, respectively, in costs from underutilization of the business unit’s professional engineering staff.

 

Operating income for theyear ended January 3, 2003 included the recognition of $1.6 million of normalprofit from certain contracts obtained in the RE&C acquisition. Therecognition of normal profit has no impact on our cash flows.

 

***Defense***

 

The Defense businessunit’s revenue for the quarter and year ended January 3, 2003 was $122.0million and $557.1 million, respectively, and was favorably impacted byincreases in funded scope requirements on four chemical demilitarizationprojects. These four chemical demilitarization contracts accounted for $108.8million and $462.2 million of the total revenue for the quarter and year,respectively. Defense threat reduction contracts in

 

II-24

----

 

the former Soviet Union contributed $6.7 million and $23.2 million,respectively. The remainder was generated by defense infrastructure services.

 

Chemical demilitarizationcontracts produced $17.7 million and $44.6 million in operating income during the quarter and year endedJanuary 3, 2003, respectively, benefiting from the scope expansions previouslydescribed. During the third quarter, the Defense business unit negotiatedsettlements on a reformed construction contract and a chemical demilitarizationcontract, both obtained in the acquisition of RE&C, for a total of $14.2million. During the fourth quarter, 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,including an equitable adjustment of $1.5 million.

 

***Energy & Environment***

 

During the year endedJanuary 3, 2003, the Energy & Environment business unit recognized revenueon DOE management service contracts earlier in the year than in prior years.Historically, award fees on such projects were “back-end loaded,” causing asignificant portion of the profit for this business unit to be recognized inthe third and particularly the fourth quarters of the year. However, currentcontract terms provide for more evenly distributed notification and recognitionof award fees throughout the year.

 

The Energy &Environment business unit recognized $139.6 million and $610.7 million inrevenue during the quarter and year ended January 3, 2003, respectively. EMD,which was sold on October 28, 2002, recognized $17.0 million and $144.0 millionin revenue, respectively, for the fourth quarter and the year through the date ofsale. Remaining revenues were recognized primarily from DOE management servicecontracts that were $26.5 million and $80.9 million during the quarter and theyear, respectively, and from environmental construction contracts totaling$73.7 million and $295.6 million during the quarter and the year, respectively.

 

Operating income for thequarter and year ended January 3, 2003 included $13.2 million and $43.4million, respectively, from our performance on DOE management projects. Our DOEmanagement service contracts are “agency” contracts, therefore, revenueincreases benefit operating income nearly dollar for dollar. EMD generated $6.0million and $24.9 million, and energy and environment projects generated $7.1million and $14.2 million during the quarter and year, respectively.

 

***Intersegment and other***

 

Intersegment and otherincome for 2002 includes the operations of the process technology developmentportion of our petroleum and chemical business (the “Technology Center”), abusiness held for sale. It also includes residual costs of a non-unionconstruction services center, bonding fees, including amortization of thebonding facility fee paid upon emergence from bankruptcy (see also “FinancialCondition and Liquidity – Cash Flows for 2002”), and unallocated insurancecosts. No merger and integration costs were incurred in 2002. Goodwill was notamortized in 2002 due to our adoption of SFAS No. 142 effective December 29,2001.

 

**2001 COMPARED TO 2000**

 

***Power***

 

On March 9, 2001, wesuspended work on two large construction projects located in Massachusetts thatwere a part of the acquisition of the RE&C businesses. Although we weresubsequently retained to participate on these two projects, our role during2001 was significantly diminished. Revenue and operating income during 2001reflected the impact of our diminished role.

 

Revenue for 2001 was$839.4 million, an increase of 74.6% compared to 2000 due principally to a fullyear of revenues attributable to the acquisition of RE&C. Approximately$437.1 million of revenue is related to four projects acquired from the Sellerswhich were originally fixed-price contracts, but which were converted during2001 to cost-reimbursable contracts. The Sellers remained responsible for theperformance of the contracts and as

 

II-25

----

 

such continue to fund the construction of the projects. We wereretained by the Sellers on a cost-reimbursable basis and continue to provideconstruction management services on the projects.

 

Operating income (loss)for 2001 was a loss of $(8.3) million compared to income of $4.3 million in2000. Operating income (loss) included recognition of normal profit of $26.4million in 2001 compared to $21.3 million in 2000. However, upon conversion ofthe four projects referred to above to cost-reimbursable contracts, therecognition of normal profit was eliminated and the related reservereclassified to accrued liabilities until the settlement with the Sellers. Onlyfee income was recognized for the balance of the year. Normal profit on thesefixed-price contracts was substantially higher than fees earned on thecost-reimbursable contracts. During 2001, the Power business unit recognizedlosses of $(11.4) million related to the completion of a significant internationalproject which was acquired as part of the RE&C acquisition and recognizedcost overruns of $(9.0) million on a domestic nuclear facility. In 2000, thebusiness unit recognized losses of $24.3 million related to the completion andstart-up of two power generation projects, one in the United States and one inthe United Kingdom. Also, business unit overhead was $11.9 million higher in2001 than in 2000 reflecting the inclusion of a full year of expenses for theacquired RE&C businesses.

 

The operating loss for2001 included the recognition of $26.4 million of normal profit. Therecognition of normal profit has no impact on our cash flows.

 

***Infrastructure***

 

Revenue for 2001 was$940.3 million, an increase of $240.5 million compared to 2000 due principallyto the acquisition of RE&C and, in particular, a large hydroelectric dam inthe Philippines and a large light rail project in New Jersey.

 

Operating income for 2001increased $36.9 million to $24.5 million compared to an operating loss of$(12.4) million in 2000. Operating profit for 2001 included recognition ofnormal profit of $42.2 million, primarily on the hydroelectric dam and lightrail projects referred to above, compared to $15.3 million during 2000. Therecognition of normal profit has no impact on our cash flows. Significantsources of revenue and operating income included the dam and hydropower projectin the Philippines, the light rail project in New Jersey, a variety of highwayand other heavy construction work and engineering services projects. Operatingincome for 2000 was reduced by a $20.3 million provision to settle theSummitville environmental matter. See Note 14, “Contingencies and Commitments -Summitville environmental matters” of the Notes to Consolidated FinancialStatements in Item 8 of this report. Both years’ operating income was impactedby the recognition of losses on fixed-price contracts totaling $(17.0) millionin 2000 and $(25.0) million in 2001.

 

***Mining***

 

Revenue for the Miningbusiness unit declined slightly from $98.1 million in 2000 to $92.2 million in2001, caused by the closing of a mining project in Wyoming. Operating incomewas down slightly from $28.3 million in 2000 to $27.5 million in 2001.

 

During 2001, we completedthe acquisition of an additional 17% of MIBRAG mbH for approximately $17.5million, increasing our ownership to 50%. We financed the acquisition throughdividends from MIBRAG mbH. Equity in the net income of mining venturesincreased from $13.1 million in 2000 to $17.9 million in 2001, reflecting theincreased ownership interest.

 

***Industrial/Process***

 

Revenue for 2001 was$957.2 million, an increase of $195.1 million compared to 2000. Revenueincreased as a result of a full year of activity from the acquisition ofRE&C and the addition of a large telecom project.

 

Operating income (loss)for 2001 was a loss of $(6.3) million compared to income of $12.2 million in2000 due to excess personnel costs as new work declined during the year,provisions related to uncollectable

 

II-26

----

 

receivables on certain contracts, restructuring charges incurred toadjust the size of the business unit to reflect lower levels of activityexpected in the future and higher overhead costs reflecting a full year ofactivity from the acquisition of RE&C.

 

***Defense***

 

Revenue for 2001 was$582.5 million, an increase of $218.0 million compared to 2000 due principallyto a full year of activity from RE&C. Revenue during 2001 was impacted by a$(39.7) million unfavorable contract adjustment on a construction projectobtained through the RE&C acquisition. In addition, the growth in scope ofa reformed construction contract obtained through the RE&C acquisitioncontributed $26.4 million during 2001. Defense threat reduction contracts contributed$477.4 million during 2001.

 

Operating income for 2001was $28.1 million, an increase of $40.6 million compared to 2000 dueprincipally to: (1) increased earnings and higher award fees on certainprojects and (2) conversion in 2001 from fixed price to cost reimbursable oftwo projects acquired in the RE&C transaction that had sustainedsignificant losses in 2000. Operating income was increased $10.5 million and$9.1 million in 2001 and 2000, respectively, as a result of the recognition ofnormal profit related to certain fixed-price contracts from the acquisition ofRE&C. The recognition of normal profit has no impact on our cash flows.

 

***Energy & Environment***

 

Revenue for 2001 was$598.2 million, a decrease of $35.1 million compared to 2000. The reduction wasprimarily the result of the completion of the construction phase of the WasteIsolation Pilot Project in New Mexico in 2001 and the startup of the operationsphase of the project, which generated less revenue than did the constructionphase. DOE management service contracts were the primary sources of thisrevenue and contributed approximately 80% of the operating income for yearended November 30, 2001 with the balance from energy and environment projects,EMD and commercial businesses.

 

Operating income for 2001was $54.8 million, an increase of $29.9 million over 2000. Increased earningsand higher award and incentive fees on certain projects and increased volumeand profitability on commercial contracts caused the increase.

 

***Intersegment, impairment and other***

 

Intersegment, impairmentand other for 2001 consisted primarily of integration and merger costs of $18.8million, corporate restructuring charges of $4.1 million, $3.7 million ofresidual costs of a non-union construction services center and $14.6 million inoperating losses from a petroleum and chemical technology center andinternational petroleum and chemical operations that were included in theliquidation of Washington International B.V. See Note 4, “Reorganization Caseand Fresh-start Reporting” of the Notes to Consolidated Financial Statements inItem 8 of this report. For 2000, this amount consisted principally of theimpairment of arbitration claim of $444.1 million, the impairment of acquiredassets of $747.5 million, integration and merger costs of $15.2 million andamortization of goodwill associated with the acquisition of Old MK of $10.1million. See Note 3, “Acquisition” of the Notes to Consolidated FinancialStatements in Item 8 of this report.

 

II-27

----

 

**FINANCIAL CONDITION AND LIQUIDITY**

 

***Cash flows for 2002***

 
| **Liquidity  and capital resources  Year ended  *(In millions)*** |   | **January 3, 2003** |   | **November 30, 2001** | ** ** |
|------------------------------------------------------------------------|--------|---------------------|--------|-----------------------|------------|
| Cash and cash equivalents                                              |   |                |   |                  |       |
| Beginning of period                                                    |   | $                   | 138.1  |                  | $          | 393.4 |   |
| End of period                                                          |   | 171.1               |   | 128.3                 |       |
|                                                                        |        |                     |        |                       |            |  |  |

 
| **Year ended**               |   | **January 3, 2003** | ** ** | **November 30, 2001** |   |
|------------------------------|--------|---------------------|------------|-----------------------|--------|
| Net cash provided (used) by: |   |                |       |                  |   |
| Operating activities         |   | $                   | 79.5       |                  | $      | (234.1 | ) |
| Investing activities         |   | 71.9                |       | 10.8                  |   |
| Financing activities         |   | (118.4              | )          | (41.8                 | )      |
|                              |        |                     |            |                       |        |  |  |

 

Currently, we have threeprincipal sources of near-term liquidity: (1) cash generated by operations; (2)existing cash and cash equivalents; and (3) revolving loan borrowings under ourSenior Secured Revolving Credit Facility. During 2002, we generated $79.5million of net cash from our operating activities of which $26.6 million wasdistributed, primarily to BNFL. We had cash and cash equivalents of $171.1million at January 3, 2003, $90.8 million of which were restricted for use inthe normal operations of our consolidated construction joint ventures, byprojects having contractual cash restrictions and by our self-insuranceprograms.  At January 3, 2003, we had noborrowings and $169.1 million in letters of credit outstanding under the SeniorSecured Revolving Credit Facility, leaving borrowing capacity of $180.9 millionunder the facility. For additional information regarding our Senior SecuredRevolving Credit Facility, see “Senior Secured Revolving Credit Facility”below.

 

Cash and cash equivalentsincreased $43 million from $128 million at November 30, 2001 to $171 million atJanuary 3, 2003. During 2002, increases in cash were derived from operationsand the sale of non-core assets (EMD). At January 3, 2003 and November 30,2001, cash and cash equivalents included amounts totaling $90.8 million and$57.7 million, respectively, that were restricted for use on the normaloperations of our consolidated construction joint ventures, by projects havingcontractual cash restrictions and our self-insurance programs. For moreinformation on our financing activities, see the comments below and Note 9,“Credit Facilities” of the Notes to Consolidated Financial Statements in Item 8of this report.

 

Total cash flows for theyear ended January 3, 2003, as reflected in the consolidated statement of cashflows, were $33.0 million. The following discussion highlights those aspects ofour cash flows necessary for a complete understanding:

 

•                  Uponemergence from bankruptcy on January 25, 2002, $72.9 million was paid,consisting of up-front fees on the Senior Secured Revolving Credit Facility of$30.2 million, payments to secured creditors of $20 million, payments tounsecured creditors of $4.5 million, a payment to our surety of $4.5 millionand payments for insurance premiums and professional advisors of $13.7 million,which is included in operating activities. During the balance of 2002, we madeadditional payments to professionals, trustee fees and other expenses of $19.3million. To fund the payments made at the time of emergence, we borrowed $40 millionunder the Senior Secured Revolving Credit Facility, which was repaid during thefirst and second quarters of 2002.

 

•                  Cashmanagement of WGSG with BNFL is handled on a daily basis with BNFL receiving oradvancing its 40% share of cash flows each day. During 2002, the joint venturegenerated $139.7 million in positive cash flows (including $77.1 million fromthe sale of EMD), of which 60% or $83.8 million was our share. The 40%distributed to BNFL is reflected as distribution to minority interest in theconsolidated statement of cash flows

 

II-28

----

 

•                  InOctober 2002, we sold EMD for $80.0 million. Cash proceeds, net of a requiredcontribution to the pension plan assumed by Curtiss-Wright Corporation were $77.1million and were distributed 60:40 between us and BNFL. We recognized $46.3million in net cash proceeds and a $3.4 million gain on the sale of EMD.

 

•                  Thereare three significant items that were included in the determination of our 2002net income but did not impact our cash flows:

 

•                  Acombination of (1) available net operating loss carryforwards, (2) amortizationof tax deductible goodwill, (3) non-taxable resolution of contingencies and (4)non-taxable impact of normal profit resulted in $6.7 million of our $370million tax expense being paid in cash during 2002.

 

•                  Asexplained in “Overview,” normal profit does not generate cash. Accordingly,cash flows from operations is reduced by the amount of normal profit ($30.9million) included in income. In 2003, normal profit will not be a significantcomponent of income.

 

•                  Theterms of the Senior Secured Revolving Credit Facility required an up frontpayment of $30.2 million. This fee is being amortized over the 30-month termsof the facility. As a result, approximately $12 million of our annual interestexpense is a non-cash charge.

 

***Cash flows for 2003***

 

As in 2002, weexpect to generate positive cash flows from operations in 2003. Specific issueswhich are relevant to understanding 2003 cash flows include:

 

•                  AtJanuary 3, 2003, working capital excluding cash, deferred income taxes and netassets held for sale amounted to $(124.8) million. As our Infrastructure,Mining and Power business units expand, we expect our investment in workingcapital to increase toward a break even position.

 

•                  Incometaxes: As of January 3, 2003, we have remaining tax goodwill of approximately$87 million resulting from the acquisition of the Westinghouse Businesses and$618 million resulting from the acquisition of RE&C. The amortization ofthis tax goodwill is deductible over remaining periods of 11.2 and 12.5 years,respectively, resulting in annual tax deductions of approximately $50 millionnet of minority interest and application of limitations under the InternalRevenue Code. In effect, we will not pay cash taxes on the first $50 million offederal taxable income before amortization each year.

 

•                  Theamortization of the Senior Secured Revolving Credit Facility fee will continueat the rate of $1 million per month, resulting in non-cash interest expense.

 

•                  Forinformation regarding capital expenditures, disposals of equipment anddepreciation, see the discussions below.

 

•                  Substantiallyall of our unfunded pension and post-employment obligations relate to frozenbenefit plans. We currently estimate financial statement expense under theseplans will approximate $10 to $12 million and cash outlays will approximate $12to $14 million for 2003.

 

***Capital expenditures and depreciation***

 

Capitalexpenditures of $26.9 million during 2002 were lower than anticipated becausewe were not awarded new Infrastructure or Mining projects, which would normallyrequire significant up front expenditures for construction or mining 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 $20 to $25 million annually.

 

II-29

----

 

In the normalcourse of business, we sell a portion of our construction and mining equipmentfleet each year, depending on estimated future requirements. During 2002, webegan the process of selling construction equipment used on the Philippine damand hydropower project, and received proceeds of approximately $10 million. Wecurrently estimate that the sale of the remainder of this equipment willgenerate an additional $20 to $25 million during 2003. However, it is possiblethat we may elect to use this equipment if we are awarded a new project thatrequires this type of equipment.

 

Depreciationexpense for 2002 was $56.4 million, including $30.1 million relating to theequipment used on the Philippine project referred to above. Because thatproject is nearing completion and we are selling the equipment as it becomesavailable, we anticipate depreciation of this equipment will be approximately$20 million lower in 2003.

 

***Post-emergence financial condition and liquidity***

 

We expect to use cash to, among other things, satisfycontractual obligations, fund working capital requirements and make capitalexpenditures. For additional information on contractual obligations and capitalexpenditures, see “Contractual Obligations” below and “Capital Expenditures andDepreciation” above.

 

We believe that our cash flows from operations,existing cash and cash equivalents and available borrowings under our revolvingcredit facility will be sufficient to meet our reasonably foreseeable liquidityneeds.

 

In addition to the above sources of liquidity, we havea non-core asset held for sale (the Technology Center), which we expect willgenerate cash proceeds. The sale of this asset is expected to close duringfiscal year 2003.

 

In line with industry practice, we are often requiredto 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 abond is required for a particular project and we are unable to obtain anappropriate bond, we cannot pursue that project. We have an existing bondingfacility but, as is customary, the issuance of bonds under that facility is atthe surety’s sole discretion. Moreover, due to events that affect the insuranceand bonding markets generally, bonding may be more difficult to obtain in thefuture or may only be available at significant additional cost. While there canbe no assurance that bonds will continue to be available on reasonable terms,we believe that we have access to the bonding necessary to achieve ouroperating goals.

 

We continually evaluate alternative capitalstructures, and if an appropriate opportunity is available, we would considerinfusions of new equity. We may also, from time to time, pursue opportunitiesto complement existing operations through business combinations andparticipation in ventures, which may require additional financing andutilization of our capital resources.

 

***Contractual obligations***

 

As of January 3, 2003, we had the followingcontractual obligations:

 
| **Contractual obligations (in millions)** |   | **Long-term debt** |   | **Operating leases** |   | **Total** |   |
|-------------------------------------------|--------|--------------------|--------|----------------------|--------|-----------|--------|
| Payments due by period                    |   |               |   |                 |   |      |   |
| 2003                                      |   | $                  | — |                 | $      | 35.2      |   | $ | 35.2 |   |
| 2004                                      |   | —             |   | 29.7                 |   | 29.7      |   |
| 2005                                      |   | —             |   | 26.9                 |   | 26.9      |   |
| 2006                                      |   | —             |   | 25.9                 |   | 25.9      |   |
| 2007                                      |   | —             |   | 24.3                 |   | 24.3      |   |
| Thereafter                                |   | —             |   | 16.6                 |   | 16.6      |   |
| Total                                     |   | $                  | — |                 | $      | 158.6     |   | $ | 158.6 |   |

 

II-30

----

 

In addition, $272,120 of long-term debt, non-recourseto the parent companies, existed on our mining ventures at January 3, 2003.

 

In the normal course of business, we cause letters ofcredit and surety bonds to be issued generally in connection with contractperformance obligations that are not required to be reflected in the balancesheet. 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 3, 2003 for each of the next five yearsand thereafter. Although letters of credit under the Senior Secured RevolvingCredit Facility expire upon termination of the Credit Facility, thepresentation is prepared based on the expiration period of our contractualobligations with the customer or beneficiary. At January 3, 2003, $169.1 of theoutstanding letters of credit were issued under the Senior Secured RevolvingCredit Facility. We have pledged cash and cash equivalents as collateral forour reimbursement obligation with respect to $38.0 million in face amount ofspecified letters of credit that were outstanding at January 3, 2003. 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 $390million at January 3, 2003.

 
| **Other commercial commitments (in millions)** |   | **Letters of credit** |   | **Surety bonds** |   | **Total** |   |
|------------------------------------------------|--------|-----------------------|--------|------------------|--------|-----------|--------|
| Commitments expiring by period                 |   |                  |   |             |   |      |   |
| 2003                                           |   | $                     | 66.8   |             | $      | 961.2     |   | $ | 1,028.0 |   |
| 2004                                           |   | 12.3                  |   | 411.4            |   | 423.7     |   |
| 2005                                           |   | .8                    |   | 373.6            |   | 374.4     |   |
| 2006                                           |   | 1.5                   |   | —           |   | 1.5       |   |
| 2007                                           |   | .3                    |   | 556.3            |   | 556.6     |   |
| Thereafter                                     |   | 125.4                 |   | —           |   | 125.4     |   |
| Total other commercial commitments             |   | $                     | 207.1  |             | $      | 2,302.5   |   | $ | 2,509.6 |   |

 

***Guarantees***

 

We have guaranteed the indemnity obligations of WGSGrelating to the sale of EMD to Curtiss-Wright Corporation for the potentialoccurrence of specified events, including breaches of representations andwarranties and/or failure to perform certain covenants or agreements.Generally, the indemnification provisions expire within three years and arecapped at $20 million. In addition, the indemnity provisions relating toenvironmental conditions obligate WGSG to pay Curtiss-Wright Corporation up toa maximum $3.5 million for environmental losses they incur over $5 million.WGSG is also responsible for environmental losses that exceed $1.3 millionrelated to a specified parcel of the sold property. If WGSG is unable toperform its indemnity obligations, BNFL has agreed to indemnify us for 40% oflosses 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.

 

***Senior Secured Revolving Credit Facility***

 

The Senior Secured Revolving Credit Facility providesfor a senior secured facility in an amount up to $350 million in the ggregateof loans and other financial accommodations allocated pro rata between twofacilities as follows: a Tranche A facility in the amount of $208.3 million anda Tranche B facility in the amount of $141.7 million. The Senior SecuredRevolving Credit Facility may be increased up to a total of $375 million withthe approval of the lenders, and its scheduled termination date is July 24,2004.

 

The Senior Secured Revolving Credit Facility wasentered into (1) to replace approximately $32.8 million in letters of creditissued under the DIP Facility; (2) to retire our DIP Facility and repay any DIPFacility balance (of which there was none); (3) to replace or backstopapproximately $120.8 million in letters of credit issued under

 

II-31

----

 

our pre-petition RE&C Financing Facilities; (4) to make payments tothe pre-petition senior secured lenders and Mitsubishi Heavy Industriespursuant to our Plan of Reorganization; (5) to finance the costs ofrestructuring; and (6) for ongoing working capital, general corporate purposesand letter of credit issuance. Borrowings under the Credit Facility arerequired to be allocated between the two tranches on a proportional split basedupon the size of each tranche. The borrowing rate under the Credit Facility is,for Tranche A, the applicable LIBOR, which has a stated floor of 3%, plus anadditional margin of 5.5%, and for Tranche B, LIBOR plus an additional marginof 5.5%. Alternatively, we may choose the prime rate, plus an additional marginof 4.5% for Tranche A and 5.5% for Tranche B. As of January 3, 2003, theeffective LIBOR- and prime-based rates for Tranche A were 8.5% and 8.75%,respectively, and for Tranche B, 6.88% and 9.75%, respectively. The CreditFacility carries other fees, including commitment fees and letter of creditfees, normal and customary for such credit agreements. It contains 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 containsaffirmative and negative covenants limiting our ability and the ability ofcertain of our subsidiaries to incur debt or liens, provide guarantees, makeinvestment 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 3, 2003, there were no amounts borrowedunder our Credit Facility. As of January 3, 2003, we had issued financialletters of credit under the Credit Facility in the amount of $169.1 million,leaving borrowing capacity of $180.9 million under the Credit Facility.

 

Our Credit Facility extends through July 24, 2004. Ifwe obtain a new credit facility before the existing one expires, it will benecessary to write-off the then remaining unamortized balance of the up frontfees. At one year prior to expiration of the facility, the unamortized balancewould be approximately $12 million before taxes.

 

**ACCOUNTING STANDARDS**

 

***Adoption of accounting standards***

 

In June 2001, the FASB issued SFAS No. 141 and SFASNo. 142. SFAS No. 141, which is effective for acquisitions initiated after June30, 2001, prohibits the use of the pooling-of-interests method for businesscombinations and establishes the accounting and financial reportingrequirements for business combinations accounted for by the purchase method.Adoption of this statement had no effect on our financial statements. SFAS No.142 requires that an intangible asset that was or is acquired shall beinitially recognized and measured based on its fair value. The statement alsoprovides that goodwill shall not be amortized, but shall be tested forimpairment annually, or more frequently if circumstances indicate potentialimpairment, through a comparison of fair value to its carrying amount. SFAS No.142 became effective for us for our fiscal year beginning December 29, 2001.The adoption of this statement did not have a significant impact on thefinancial statements due to our adoption of fresh-start reporting on February1, 2002. See Note 4, “Reorganization Case and Fresh-start Reporting.” Duringour application of fresh-start reporting, we revalued all of our assets andliabilities to fair value on that date. At the date of adoption of thestatement (December 29, 2001), the net book value of goodwill was $174.9million (not including amounts included in assets held for sale).

 

SFAS No. 142 provides that prior year’s results shouldnot be restated. The following table presents our comparative operating resultsfor the respective periods reflecting the exclusion of goodwill amortizationexpense.

 

II-32

----

 
|                                                 |   | **Successor  Company**                      |   | **Predecessor  Company**                |   |
|------------------------------------------------------|--------|---------------------------------------------|--------|-----------------------------------------|--------|
| **(In millions)**                                    |   | **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** |   |
| Reported  income (loss) before extraordinary item    |   | $                                           | 37.7   |                                    | $      | (45.0 | ) | $ | (25.9 | ) | $ | (85.0 | ) | $ | (859.4 | ) |
| Goodwill  amortization, net of tax                   |   | —                                      |   | —                                  |   | 1.0 |   | 9.1 |   | 15.9 |   |
| Minority  interest                                   |   | —                                      |   | —                                  |   | (.3 | ) | (3.3 | ) | (3.4 | ) |
| Income  (loss) before extraordinary item as adjusted |   | $                                           | 37.7   |                                    | $      | (45.0 | ) | $ | (25.2 | ) | $ | (79.2 | ) | $ | (846.9 | ) |
|                                                 |   |                                        |   |                                    |   |   |   |   |   |   |   |
| Reported  net income (loss)                          |   | $                                           | 37.7   |                                    | $      | 522.2 |   | $ | (25.9 | ) | $ | (85.0 | ) | $ | (859.4 | ) |
| Goodwill  amortization, net of tax                   |   | —                                      |   | —                                  |   | 1.0 |   | 9.1 |   | 15.9 |   |
| Minority  interest                                   |   | —                                      |   | —                                  |   | (.3 | ) | (3.3 | ) | (3.4 | ) |
| Net  income (loss) as adjusted                       |   | $                                           | 37.7   |                                    | $      | 522.2 |   | $ | (25.2 | ) | $ | (79.2 | ) | $ | (846.9 | ) |

 

In July 2001, the FASB issued Statement No. 143, *Accountingfor Asset Retirement Obligations*(“SFAS No.**143”). Upon emergence frombankruptcy, we were required to early adopt SFAS No. 143 on February 1, 2002. Thisstatement addresses financial accounting and reporting for obligationsassociated with the retirement of tangible long-lived assets and the associatedasset retirement costs. The adoption of this statement did not have asignificant impact on our financial statements.

 

In August 2001, the FASB issued Statement No. 144, *Accountingfor the Impairment or Disposal of Long-Lived**Assets* (“SFAS No. 144”).SFAS No. 144, which replaces SFAS No. 121 and Accounting Principles BoardOpinion No. 30, became effective for us on February 1, 2002. This statementretains the requirements to (1) recognize an impairment loss only if thecarrying amount of a long-lived asset is not recoverable from its undiscountedcash flows, and (2) measure an impairment loss as the difference between thecarrying amount and fair value of the asset. This statement removes goodwillfrom its scope, eliminating the requirement to allocate goodwill to long-livedassets to be tested for impairment. SFAS No. 144 also requires that along-lived asset to be abandoned, exchanged for a similar productive asset ordistributed to owners in a spin-off, be considered held and used until it isdisposed of. The accounting model for long-lived assets to be disposed of bysale must be used for all long-lived assets, whether previously held and usedor newly acquired. Discontinued operations are no longer measured on a netrealizable value basis, and future operating losses are no longer recognizedbefore they occur. SFAS No. 144 also broadens the presentation of discontinuedoperations in the income statement to include a component of an entity (ratherthan a segment of a business). A component of an entity comprises operationsand cash flows that can be clearly distinguished, operationally and forfinancial reporting purposes, from the remainder of that entity. The adoptionof this statement did not have a significant effect on our operating results.

 

In June 2002, the FASB issued Statement No. 146, *Accountingfor Costs Associated with Exit or Disposal Activities* (“SFAS No.146”). SFAS No. 146 addresses financial accounting and reporting for costsassociated with exit or disposal activities and nullifies Emerging Issues TaskForce Issue No. 94-3. The adoption of SFAS No. 146 is effective for exit ordisposal activities that are initiated after December 31, 2002. The adoption ofSFAS No. 146 did  not have a significantimpact on our results of operations or financial position; however, it willchange the way we account for future exit or disposal activity.

 

In November 2002, the FASB issued Interpretation No.45, *Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others, an Interpretation of FASB Statements No.5, 57, and 107 and Recission of FASB Interpretation No. 34* (“FIN45”). FIN 45 clarifies the requirements of FASB Statement No. 5, *Accountingfor Contingencies*, relating to a guarantor’s accounting for, anddisclosure of, the issuance of specified types of guarantees. FIN 45 requiresthat upon issuance of a guarantee, the entity (i.e., the guarantor) mustrecognize a liability for the fair value of the obligation it assumes underthat guarantee. The disclosure provisions of FIN 45 are effective for financialstatements of interim or annual periods that end after December 15, 2002. FIN45’s provisions for initial recognition and measurement must be applied on

 

II-33

----

 

a prospective basis to guarantees issued or modified after December 31,2002, irrespective of the guarantor’s fiscal year end. The guarantor’s previousaccounting for guarantees that were issued before the date of FIN 45’s initialapplication may not be revised or restated to reflect the effect of therecognition and measurement provisions of FIN 45. We have guarantees that aresubject to the disclosure provisions of FIN 45. See Note 14, “Contingencies andCommitments.” The adoption of the prospective recognition and measurementaspects of FIN 45 is not expected to have a significant effect on our financialposition and results of operations.

 

In January 2003, the FASB issued Statement No. 148, *Accountingfor Stock-Based Compensation**- Transition andDisclosure* (“SFAS No. 148”). SFAS No. 148 amends SFAS No. 123 to providealternative methods of transition for a voluntary change to the fair valuebased method of accounting for stock-based employee compensation. In addition,SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to requireprominent disclosures in both annual and interim financial statements of themethod of accounting for stock-based employee compensation and the effect ofthe method used on reported results. SFAS No. 148 became effective for us inthe fourth quarter of 2002. We did not elect to change to the fair value basedmethod of accounting for stock-based employee compensation; and therefore,adoption of SFAS No. 148 only impacts our disclosures, not our financialresults.

 

***Recently issued accounting standards***

 

In January 2003, the FASB issued Interpretation No.46, *Consolidationof Variable Interest Entities* (“FIN 46”). FIN 46 clarifies theapplication of Accounting Research Bulletin No. 51, *Consolidated Financial Statements*,to certain entities in which equity investors do not have the characteristicsof a controlling financial interest or in which equity investors do not bearthe residual economic risks. The interpretation applies to variable interestentities created after January 31, 2003 and to variable interest entities inwhich an enterprise obtains an interest after that date. It applies in thefiscal year or interim period beginning after June 15, 2003 to variableinterest entities in which an enterprise holds a variable interest that wasacquired before February 1, 2003. We have determined that it is not reasonablypossible that we will be required to consolidate or disclose information abouta variable interest entity upon the effective date of FIN 46.

 

II-34

----

 

**ITEM 7A****.  QUANTITATIVEAND QUALITATIVE DISCLOSURE ABOUT MARKET RISK**

***(In millions)***

 

***Interest rate risk***

 

Our exposure to market risk for changes in interestrates relates primarily to our short-term investment portfolios and debtobligations. Our short-term investment portfolio consists primarily of highlyliquid instruments with maturities of one month or less. Substantially all cashand cash equivalents at January 3, 2003 of $171 million were held in short terminvestments classified as cash equivalents. Of total cash and cash equivalentsat January 3, 2003 of $171 million, $91 million was restricted for use on thenormal operations of our consolidated joint ventures, by projects havingcontractual cash restrictions and our self-insurance programs.

 

From time to time, we effect borrowings under bank creditfacilities or otherwise for general corporate purposes, including workingcapital requirements and capital expenditures. Borrowings under our 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 theworld. Our operations are, therefore, subject to volatility because of currencyfluctuations, inflation changes and changes in political and economicconditions in these countries. We are subject to foreign currency translationand exchange issues, primarily with regard to our mining venture, MIBRAG mbH,in Germany. At January 3, 2003 and November 30, 2001, the cumulativeadjustments for translation gains (losses), net of related income tax benefits,were $9.7 million and $16.2 million, respectively. While we endeavor to enterinto contracts with foreign customers with repayment terms in U.S. currency inorder to mitigate foreign exchange risk, our revenues and expenses aresometimes denominated in local currencies, and our results of operations may beaffected adversely as currency fluctuations affect pricing and operating costsor those of our competitors. We engage from time to time in hedging operations,including forward foreign exchange contracts, to reduce the exposure of ourcash flows to fluctuations in foreign currency rates. We do not engage inhedging for speculative investment reasons. We can give no assurances that ourhedging operations will eliminate or substantially reduce risks associated withfluctuating currencies.

 

II-35

----

 

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

 

**INDEX TOFINANCIAL STATEMENTS**

 

**WASHINGTONGROUP INTERNATIONAL, INC. AND SUBSIDIARIES**

 

Consolidated FinancialStatements and Financial Statement Schedule as of January 3, 2003, February 1,2002 and November 30, 2001, and for the eleven months ended January 3, 2003,the one month ended February 1, 2002, the one month ended December 28, 2001 andfor each of the two years in the period 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  |

 

II-36

----

 

**INDEPENDENT AUDITORS’ REPORT**

 

To the Board of Directorsand Stockholders of Washington Group International, Inc.

 

We have audited theaccompanying consolidated balance sheets of Washington Group International,Inc. and subsidiaries (the “Corporation”) as of January 3, 2003 and February 1,2002 (Successor Company balance sheets) and November 30, 2001 (PredecessorCompany balance sheet), and the related consolidated statements of operations,comprehensive income (loss), stockholders’ equity (deficit), and cash flows forthe eleven months ended January 3, 2003 (Successor Company operations), the onemonth ended February 1, 2002, the one month ended December 28, 2001, and eachof the two years in the period ended November 30, 2001 (Predecessor Company operations).Our audits also included the consolidated financial statement schedule listedin the Index at Item 8. These financial statements and financial statementschedule are the responsibility of the Corporation’s management. Ourresponsibility is to express an opinion on these financial statements andfinancial statement schedule based on our audits.

 

We conducted our auditsin accordance with auditing standards generally accepted in the United Statesof America. Those standards require that we plan and perform the audits toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

As discussed in Note 4 tothe financial statements, on December 21, 2001, the bankruptcy court entered anorder confirming the Plan of Reorganization which became effective after theclose of business on January 25, 2002. Accordingly, the accompanying financialstatements have been prepared in conformity with AICPA Statement of Position90-7, *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.

 

In our opinion, theSuccessor Company consolidated financial statements present fairly, in allmaterial respects, the financial position of Washington Group International,Inc. and subsidiaries as of January 3, 2003 and February 1, 2002, and theresults of their operations and their cash flows for the eleven months endedJanuary 3, 2003, in conformity with accounting principles generally accepted inthe United States of America. Further, in our opinion, the Predecessor Companyconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of the Predecessor Company as ofNovember 30, 2001, and the results of their operations and their cash flows forthe one month ended February 1, 2002, the one month ended December 28, 2001,and each of the two years in the period ended November 30, 2001, in conformitywith accounting principles generally accepted in the United States of America.Also, in our opinion, such consolidated financial statement schedule, whenconsidered in relation to the basic consolidated financial statements taken asa whole, presents fairly in all material respects the information set forththerein.

 

As discussed in Note 2 tothe financial statements, the Corporation changed its method of accounting forgoodwill and other intangible assets for periods after December 28, 2001 toconform to Statement of Financial Accounting Standards No. 142.

 

 
| /s/ DELOITTE &  TOUCHE LLP |   |
|--------------------------------|--------|
|                           |   |
|                           |   |
| Boise, Idaho                   |   |
| February 28, 2003              |   |

 

II-37

----

 

**CONSOLIDATED STATEMENTS OF OPERATIONS**

*(In thousands except per share data)*

 
|                                                                                                 |   | **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** |   | **Year ended  December 1,  2000** |   |
| Revenue                                                                                              |   | $                                             | 3,311,614 |                                      | $      | 349,912 |   | $ | 308,289 |   | $ | 4,041,615 |   | $ | 3,090,845 |   |
| Cost  of revenue                                                                                     |   | (3,162,578                                    | )         | (338,792                                  | )      | (308,087 | ) | (3,943,920 | ) | (3,044,587 | ) |
| Changes  to estimates at completion on acquired contracts (Note 3)                                   |   | —                                        |      | —                                    |   | — |   | — |   | (140,954 | ) |
| Total  cost of revenue                                                                               |   | (3,162,578                                    | )         | (338,792                                  | )      | (308,087 | ) | (3,943,920 | ) | (3,185,541 | ) |
| Gross  profit (loss)                                                                                 |   | 149,036                                       |      | 11,120                                    |   | 202 |   | 97,695 |   | (94,696 | ) |
| Equity  in income of mining ventures                                                                 |   | 27,342                                        |      | 3,109                                     |   | 1,258 |   | 17,890 |   | 13,080 |   |
| General  and administrative expenses                                                                 |   | (48,138                                       | )         | (4,180                                    | )      | (5,443 | ) | (56,878 | ) | (37,860 | ) |
| Goodwill  amortization                                                                               |   | —                                        |      | —                                    |   | (1,553 | ) | (14,635 | ) | (25,206 | ) |
| Integration  and merger costs (Note 3)                                                               |   | —                                        |      | —                                    |   | — |   | (18,858 | ) | (15,302 | ) |
| Impairment  of arbitration claim (Note 3)                                                            |   | —                                        |      | —                                    |   | — |   | — |   | (444,055 | ) |
| Impairment  of acquired assets (Note 3)                                                              |   | —                                        |      | —                                    |   | — |   | — |   | (747,491 | ) |
| Restructuring  charges (Note 5)                                                                      |   | —                                        |      | (625                                      | )      | (26,262 | ) | (6,963 | ) | — |   |
| Other  operating income                                                                              |   | 3,420                                         |      | —                                    |   | — |   | — |   | — |   |
| Operating  income (loss)                                                                             |   | 131,660                                       |      | 9,424                                     |   | (31,798 | ) | 18,251 |   | (1,351,530 | ) |
| Investment  income                                                                                   |   | 926                                           |      | 400                                       |   | 149 |   | 9,278 |   | 10,897 |   |
| Interest expense (a)                                                                                 |   | (26,784                                       | )         | (1,193                                    | )      | (603 | ) | (56,769 | ) | (38,413 | ) |
| Other  income (expense), net                                                                         |   | 1,874                                         |      | (563                                      | )      | (473 | ) | (10,494 | ) | (5,293 | ) |
| Income  (loss) before reorganization items, income taxes, minority interests and  extraordinary item |   | 107,676                                       |      | 8,068                                     |   | (32,725 | ) | (39,734 | ) | (1,384,339 | ) |
| Reorganization  items (Note 4)                                                                       |   | (3,174                                        | )         | (72,057                                   | )      | (8,148 | ) | (56,479 | ) | — |   |
| Income  tax (expense) benefit                                                                        |   | (46,217                                       | )         | 20,078                                    |   | 14,907 |   | 26,765 |   | 534,329 |   |
| Minority  interests in (income) loss of consolidated subsidiaries                                    |   | (20,584                                       | )         | (1,132                                    | )      | 56 |   | (15,528 | ) | (9,366 | ) |
| Income  (loss) before extraordinary item                                                             |   | 37,701                                        |      | (45,043                                   | )      | (25,910 | ) | (84,976 | ) | (859,376 | ) |
| Extraordinary  item - gain on debt  discharge, net of tax of $343,539 (Note 4)                       |   | —                                        |      | 567,193                                   |   | — |   | — |   | — |   |
| Net  income (loss)                                                                                   |   | $                                             | 37,701    |                                      | $      | 522,150 |   | $ | (25,910 | ) | $ | (84,976 | ) | $ | (859,376 | ) |
| Income  per share                                                                                    |   |                                          |      |                                      |   |   |   |   |   |   |   |
| Basic  and diluted                                                                                   |   | $                                             | 1.51      |                                      | — | (b) | — | (b) | — | (b) | — | (b) |
| Common  shares used to compute income per share:                                                     |   |                                          |      |                                      |   |   |   |   |   |   |   |
| Basic                                                                                                |   | 25,000                                        |      | —                                    | (b)    | — | (b) | — | (b) | — | (b) |
| Diluted                                                                                              |   | 25,005                                        |      | —                                    | (b)    | — | (b) | — | (b) | — | (b) |

 

*The accompanying notes are anintegral part of the consolidated 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 the yearended 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-38

----

 

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

*(In thousands)*

 
|                                                                    |   | **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** |   | **Year ended****December  1,****2000** |   |
| Net  income (loss)                                                      |   | $                                           | 37,701 |                                       | $      | 522,150 |   | $ | (25,910 | ) | $ | (84,976 | ) | $ | (859,376 | ) |
| Other  comprehensive income (loss),                                     |   |                                        |   |                                       |   |   |   |   |   |   |   |
| net  of tax:                                                            |   |                                        |   |                                       |   |   |   |   |   |   |   |
| Foreign  currency translation adjustments                               |   | 9,652                                       |   | 80                                         |   | 482 |   | 1,851 |   | (8,575 | ) |
| Unrealized  gains on marketable securities:                             |   |                                        |   |                                       |   |   |   |   |   |   |   |
| Unrealized  net holding gains arising during period                     |   | —                                      |   | —                                     |   | — |   | 474 |   | 238 |   |
| Less:  Reclassification adjustment for net gains realized in net income |   | —                                      |   | —                                     |   | — |   | (861 | ) | (116 | ) |
| Amounts  reclassified to net income in fresh-start reporting            |   | —                                      |   | 20,268                                     |   | — |   | — |   | — |   |
| Unrealized  loss on foreign exchange contracts                          |   | —                                      |   | —                                     |   | — |   | — |   | (1,589 | ) |
| 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                              |   | (603                                        | )      | —                                     |   | — |   | (4,630 | ) | 89 |   |
| Other  comprehensive income (loss), net of tax                          |   | 9,049                                       |   | 20,348                                     |   | 482 |   | (1,577 | ) | (9,953 | ) |
| Comprehensive  income (loss)                                            |   | $                                           | 46,750 |                                       | $      | 542,498 |   | $ | (25,428 | ) | $ | (86,553 | ) | $ | (869,329 | ) |

 

*The accompanying notes are anintegral part of the consolidated financial statements.*

 

II-39

----

 

**CONSOLIDATED BALANCE SHEETS**

*(In thousands except per share data)*

 
|                                                                       |   | **Successor  Company** |       | **Predecessor  Company** |       |
|----------------------------------------------------------------------------|--------|------------------------|------------|--------------------------|------------|
|                                                                       |   | **January 3,  2003**   |       | **February  1, 2002**    |       | **November  30, 2001** |   |
|                                                                       |   | **(Fresh-start)**      |       |
| **ASSETS**                                                                 |   |                   |       |                     |       |   |   |
|                                                                       |   |                   |       |                     |       |   |   |
| **Current  assets**                                                        |   |                   |       |                     |       |   |   |
| Cash  and cash equivalents                                                 |   | $                      | 171,192    |                     | $          | 128,201 |   | $ | 128,315 |   |
| Accounts  receivable, including retentions of $23,546, $33,822 and $45,609 |   | 261,925                |       | 350,898                  |       | 406,068 |   |
| Unbilled  receivables                                                      |   | 131,043                |       | 195,869                  |       | 197,339 |   |
| Investments  in and advances to construction joint ventures                |   | 23,271                 |       | 46,820                   |       | 54,723 |   |
| Deferred  income taxes                                                     |   | 74,223                 |       | 104,828                  |       | 193,346 |   |
| Assets  held for sale                                                      |   | 23,543                 |       | 187,819                  |       | 154,720 |   |
| Other                                                                      |   | 45,897                 |       | 57,975                   |       | 68,535 |   |
| Total  current assets                                                      |   | 731,094                |       | 1,072,410                |       | 1,203,046 |   |
|                                                                       |   |                   | ** ** |                     | ** ** |   | ** ** |
| **Investments and other assets**                                           |   |                   | ** ** |                     | ** ** |   | ** ** |
| Investments  in mining ventures                                            |   | 99,356                 |       | 68,700                   |       | 83,792 |   |
| Goodwill,  net of accumulated amortization of $31,965 in 2001              |   | 387,254                |       | 402,352                  |       | 176,108 |   |
| Deferred  income taxes                                                     |   | 51,219                 |       | 37,707                   |       | 463,489 |   |
| Other                                                                      |   | 27,210                 |       | 43,551                   |       | 42,967 |   |
| Total  investments and other assets                                        |   | 565,039                |       | 552,310                  |       | 766,356 |   |
|                                                                       |   |                   | ** ** |                     | ** ** |   | ** ** |
| **Property and equipment**(Note 1)                                         |   |                   | ** ** |                     | ** ** |   | ** ** |
| Construction  equipment                                                    |   | 124,099                |       | 124,341                  |       | 289,718 |   |
| Land  and improvements                                                     |   | 5,950                  |       | 5,746                    |       | 5,146 |   |
| Buildings  and improvements                                                |   | 12,377                 |       | 10,857                   |       | 23,286 |   |
| Equipment  and fixtures                                                    |   | 25,233                 |       | 17,708                   |       | 88,702 |   |
|                                                                       |   |                   |       |                     |       |   |   |
| Total  property and equipment                                              |   | 167,659                |       | 158,652                  |       | 406,852 |   |
| **Less  accumulated depreciation**                                         |   | (48,428                | )          | —                   |       | (235,859 | ) |
| Property  and equipment, net                                               |   | 119,231                |       | 158,652                  |       | 170,993 |   |
|                                                                       |   |                   |       |                     |       |   |   |
| Total  assets                                                              |   | $                      | 1,415,364  |                     | $          | 1,783,372 |   | $ | 2,140,395 |   |

 

*The accompanying notes are anintegral part of the consolidated financial statements.*

 

II-40

----

 
|                                                                                                  |   | **Successor  Company** |       | **Predecessor  Company** |       |
|-------------------------------------------------------------------------------------------------------|--------|------------------------|------------|--------------------------|------------|
|                                                                                                  |   | **January 3,  2003**   |       | **February  1, 2002**    |       | **November  30, 2001** |   |
|                                                                                                  |   | **(Fresh-start)**      |       |
| **LIABILITIES  AND STOCKHOLDERS’**                                                               |   |                   |       |                     |       |   |   |
| **EQUITY  (DEFICIT)**                                                                                 |   |                   |       |                     |       |   |   |
| **Current  liabilities**                                                                              |   |                   |       |                     |       |   |   |
| Accounts  payable and subcontracts payable, including retentions of $19,623, $17,164  and $11,751     |   | $                      | 165,618    |                     | $          | 227,638 |   | $ | 180,621 |   |
| Billings in excess of cost and estimated earnings on  uncompleted contracts                           |   | 202,600                |       | 365,439                  |       | 188,511 |   |
| Accrued salaries, wages and benefits, including  compensated absences of $43,580, $42,775 and $9,989  |   | 136,214                |       | 130,476                  |       | 70,793 |   |
| Other accrued liabilities                                                                             |   | 82,513                 |       | 130,258                  |       | 72,405 |   |
| Liabilities held for sale                                                                             |   | 8,167                  |       | 119,361                  |       | 114,736 |   |
| Total current liabilities                                                                             |   | 595,112                |       | 973,172                  |       | 627,066 | ** ** |
| **Non-current liabilities**                                                                           |   |                   | ** ** |                     | ** ** |   | ** ** |
| Long-term  debt                                                                                       |   | —                 |       | 40,000                   |       | — |   |
| Self-insurance  reserves                                                                              |   | 69,934                 |       | 46,536                   |       | 20,337 |   |
| Pension  and post-retirement benefit obligations                                                      |   | 97,453                 |       | 95,643                   |       | 39,723 |   |
| Total  non-current liabilities                                                                        |   | 167,387                |       | 182,179                  |       | 60,060 |   |
| **Liabilities  subject to compromise**   (Note 4)                                                |   | —                 |       | —                   |       | 1,928,219 |   |
| **Contingencies  and commitments**                                                                    |   |                   | ** ** |                     | ** ** |   | ** ** |
| **Minority interests**                                                                                |   | **56,115**             | ** ** | **78,021**               | ** ** | **76,515** | ** ** |
| **Stockholders’ equity (deficit)**                                                               |   |                   | ** ** |                     | ** ** |   | ** ** |
| Preferred  stock (Predecessor Company), par value $.01, 10,000 shares authorized                      |   | —                 |       | —                   |       | — |   |
| Common  stock (Predecessor Company), par value $.01, authorized 100,000 shares;  issued 54,486 shares |   | —                 |       | —                   |       | 545 |   |
| Preferred  stock (Successor Company), par value $.01, 10,000 shares authorized                        |   | —                 |       | —                   |       | — |   |
| Common  stock (Successor Company), par value $.01, authorized 100,000 shares; issued  25,000 shares   |   | 250                    |       | 250                      |       | — |   |
| Capital  in excess of par value                                                                       |   | 521,103                |       | 521,103                  |       | 250,118 |   |
| Stock  purchase warrants (Predecessor Company)                                                        |   | —                 |       | —                   |       | 6,550 |   |
| Stock  purchase warrants (Successor Company)                                                          |   | 28,647                 |       | 28,647                   |       | — |   |
| Retained  earnings (accumulated deficit)                                                              |   | 37,701                 |       | —                   |       | (764,656 | ) |
| Treasury  stock (Predecessor Company), 2,019 shares, at cost                                          |   | —                 |       | —                   |       | (23,192 | ) |
| Accumulated  other comprehensive income (loss)                                                        |   | 9,049                  |       | —                   |       | (20,830 | ) |
| Total  stockholders’ equity (deficit)                                                            |   | 596,750                |       | 550,000                  |       | (551,465 | ) |
| Total  liabilities and stockholders’ equity (deficit)                                            |   | $                      | 1,415,364  |                     | $          | 1,783,372 |   | $ | 2,140,395 |   |

 

II-41

----

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

*(In thousands)*

 
|                                                                                                                                 |   | **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** |   | **Year ended****December  1,  2000** |   |
| **Operating  activities**                                                                                                            |   |                                           |       |                                         |       |   |   |   |   |   |   |
| Net  income (loss)                                                                                                                   |   | $                                              | 37,701     |                                         | $          | 522,150 |   | $ | (25,910 | ) | $ | (84,976 | ) | $ | (859,376 | ) |
| Reorganization  items                                                                                                                |   | 3,174                                          |       | 36,979                                       |       | 8,148 |   | 56,479 |   | — |   |
| Adjustments  to reconcile net income (loss) to cash provided (used) by operating  activities:                                        |   |                                           |       |                                         |       |   |   |   |   |   |   |
| Impairment of assets:                                                                                                                |   |                                           |       |                                         |       |   |   |   |   |   |   |
| Acquired assets                                                                                                                      |   | —                                         |       | —                                       |       | — |   | — |   | 747,491 |   |
| Arbitration claim  receivable                                                                                                        |   | —                                         |       | —                                       |       | — |   | — |   | 444,055 |   |
| Changes to estimates at  completion on acquired contracts                                                                            |   | —                                         |       | —                                       |       | — |   | — |   | 140,954 |   |
| Reorganization items:                                                                                                                |   |                                           |       |                                         |       |   |   |   |   |   |   |
| Cash paid for  reorganization items                                                                                                  |   | (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                                                                                              |   | 50,742                                         |       | 5,612                                        |       | 5,292 |   | 74,397 |   | 48,029 |   |
| Amortization  of goodwill                                                                                                            |   | —                                         |       | —                                       |       | 1,553 |   | 14,635 |   | 25,206 |   |
| Amortization  of prepaid loan fees                                                                                                   |   | 11,091                                         |       | 624                                          |       | 354 |   | 20,715 |   | 1,776 |   |
| Normal  profit                                                                                                                       |   | (27,425                                        | )          | (3,518                                       | )          | (4,378 | ) | (87,200 | ) | (50,271 | ) |
| Deferred  income taxes                                                                                                               |   | 27,383                                         |       | (10,109                                      | )          | (13,282 | ) | (54,087 | ) | (546,401 | ) |
| Minority  interests in net income of consolidated subsidiaries, before income taxes                                                  |   | 33,510                                         |       | 2,094                                        |       | (187 | ) | 25,547 |   | 15,361 |   |
| Equity  in income of mining ventures less dividends received                                                                         |   | (15,717                                        | )          | (3,109                                       | )          | (1,058 | ) | 530 |   | (7,256 | ) |
| Self-insurance  reserves                                                                                                             |   | 20,611                                         |       | 7,921                                        |       | 2,540 |   | (24,667 | ) | 5,239 |   |
| Loss  (gain) on sale of assets, net                                                                                                  |   | (5,599                                         | )          | 227                                          |       | (262 | ) | (6,562 | ) | 501 |   |
| Gain  on foreign entity bankruptcies, including cash forfeited of $7,185                                                             |   | —                                         |       | —                                       |       | — |   | (41,729 | ) | — |   |
| Other                                                                                                                                |   | 8,857                                          |       | (7,635                                       | )          | (1,990 | ) | (9,834 | ) | (6,866 | ) |
| Changes  in other assets and liabilities (including assets and liabilities held for  sale), net of effects of business combinations: |   |                                           |       |                                         |       |   |   |   |   |   |   |
| Accounts  receivable and unbilled receivables                                                                                        |   | 150,644                                        |       | 41,883                                       |       | 13,994 |   | 167,033 |   | 134,381 |   |
| Investments  in and advances to construction joint ventures                                                                          |   | 14,936                                         |       | 4,138                                        |       | 3,765 |   | 970 |   | 830 |   |
| Other  current assets                                                                                                                |   | 15,607                                         |       | (5,212                                       | )          | 8,301 |   | (31,166 | ) | (10,859 | ) |
| Accounts  payable, accrued salaries, wages and benefits, other accrued liabilities and  subcontracts payable                         |   | (102,270                                       | )          | 20,027                                       |       | 29,288 |   | 21,363 |   | (170,018 | ) |
| Billings  in excess of cost and estimated earnings                                                                                   |   | (131,291                                       | )          | (52,821                                      | )          | (3,587 | ) | (234,574 | ) | 92,660 |   |
| Net  cash provided (used) by operating activities                                                                                    |   | 72,863                                         |       | 6,588                                        |       | 11,217 |   | (234,084 | ) | 5,436 |   |
| **Investing activities**                                                                                                             |   |                                           | ** ** |                                         | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Property  and equipment acquisitions                                                                                                 |   | (22,957                                        | )          | (3,903                                       | )          | (1,266 | ) | (37,018 | ) | (48,087 | ) |
| Property  and equipment disposals                                                                                                    |   | 19,326                                         |       | 2,339                                        |       | 434 |   | 26,178 |   | 22,086 |   |
| Purchases  of securities available for sale                                                                                          |   | —                                         |       | —                                       |       | — |   | (12,224 | ) | (28,523 | ) |
| Sales  and maturities of securities available for sale                                                                               |   | —                                         |       | —                                       |       | — |   | 51,347 |   | 31,700 |   |
| Purchase  of businesses, net of cash acquired of $15,790                                                                             |   | —                                         |       | —                                       |       | — |   | — |   | (160,130 | ) |
| Purchase  of equity investment                                                                                                       |   | —                                         |       | —                                       |       | — |   | (17,500 | ) | — |   |
| Sale  of business                                                                                                                    |   | 77,133                                         |       | —                                       |       | — |   | — |   | — |   |
| Net  cash provided (used) by investing activities                                                                                    |   | 73,502                                         |       | (1,564                                       | )          | (832 | ) | 10,783 |   | (182,954 | ) |
|                                                                                                                                 |   |                                           |       |                                         |       |   |   |   |   |   |   |
| **Financing activities**                                                                                                             |   |                                           | ** ** |                                         | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Proceeds  from senior notes, less discount of $2,124                                                                                 |   | —                                         |       | —                                       |       | — |   | — |   | 297,302 |   |
| Proceeds  from (payments on) senior secured credit facilities                                                                        |   | —                                         |       | (20,000                                      | )          | — |   | — |   | 400,000 |   |
| Proceeds  from debtor-in-possession financing                                                                                        |   | —                                         |       | —                                       |       | — |   | 16,000 |   | — |   |
| Repayment  of debtor-in-possession financing                                                                                         |   | —                                         |       | —                                       |       | — |   | (16,000 | ) | — |   |
| Net  proceeds from (payments on) long-term revolving line of credit                                                                  |   | —                                         |       | —                                       |       | — |   | (1,294 | ) | (100,000 | ) |
| Financing  and bonding fees                                                                                                          |   | —                                         |       | (34,749                                      | )          | — |   | (16,500 | ) | (28,762 | ) |
| Net  borrowings (repayments) from 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          |   | (63,374                                        | )          | (227                                         | )          | (547 | ) | (24,023 | ) | (51,099 | ) |
| Other  financing activities                                                                                                          |   | —                                         |       | —                                       |       | — |   | — |   | 1,035 |   |
| Net  cash provided (used) by financing activities                                                                                    |   | (103,374                                       | )          | (14,976                                      | )          | (547 | ) | (41,817 | ) | 518,476 |   |
| Increase  (decrease) in cash and cash equivalents                                                                                    |   | 42,991                                         |       | (9,952                                       | )          | 9,838 |   | (265,118 | ) | 340,958 |   |
| Cash  and cash equivalents at beginning of period                                                                                    |   | 128,201                                        |       | 138,153                                      |       | 128,315 |   | 393,433 |   | 52,475 |   |
| Cash  and cash equivalents at end of period                                                                                          |   | $                                              | 171,192    |                                         | $          | 128,201 |   | $ | 138,153 |   | $ | 128,315 |   | $ | 393,433 |   |

 

Supplementaldisclosure of cash flow information (Note 15)

*The accompanying notes are anintegral part of the consolidated financial statements.*

 

II-42

----

 

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

*(In thousands)*

 
|                                                                                   |   | **Shares of  Common stock** |   |         |   | **Capital  in**   |   | **Stock**                |   |                   |   |                   |   | **Accumulated**other |   |
|----------------------------------------------------------------------------------------|--------|-----------------------------|--------|--------------|--------|-------------------|--------|--------------------------|--------|------------------------|--------|------------------------|--------|----------------------|--------|
| **Period ended**                                                                       |   | **Issued**                  |   | **Treasury** |   | **Common  stock** |   | **excess of  par value** |   | **purchase  warrants** |   | **Retained  earnings** |   | **Treasury  stock**  |   | **comprehensive  income (loss)** |   |
| **December 3, 1999**                                                                   |   | 54,359                      |   | (2,009       | )      | $                 | 544    |                     | $      | 248,720                |   | $                      | 6,554  |                 | $      | 179,696 |   | $ | (23,124 | ) | $ | (9,300 | ) |
| Net loss                                                                               |   |                        |   |         |   |              |   |                     |   |                   |   | (859,376               | )      |                 |   |   |   |
| Shares issued under stock award plan                                                   |   | 127                         |   |         |   | 1                 |   | 1,169                    |   |                   |   |                   |   |                 |   |   |   |
| Stock purchase warrants converted to shares of  common stock                           |   |                        |   |         |   |              |   | 31                       |   | (4                     | )      |                   |   |                 |   |   |   |
| Compensation related to stock plans                                                    |   |                        |   |         |   |              |   | 192                      |   |                   |   |                   |   |                 |   |   |   |
| Shares acquired for stock award plan                                                   |   |                        |   | (10          | )      |              |   |                     |   |                   |   |                   |   | (68                  | )      |   |   |
| Foreign currency translation adjustments, net                                          |   |                        |   |         |   |              |   |                     |   |                   |   |                   |   |                 |   | (8,575 | ) |
| Change in unrealized gain (loss) on securities  available for sale, net                |   |                        |   |         |   |              |   |                     |   |                   |   |                   |   |                 |   | 122 |   |
| Unrealized loss on foreign exchange contracts                                          |   |                        |   |         |   |              |   |                     |   |                   |   |                   |   |                 |   | (1,589 | ) |
| Minimum pension liability adjustment, net                                              |   |                        |   |         |   |              |   |                     |   |                   |   |                   |   |                 |   | 89 |   |
| **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 (loss) on securities  available for sale, 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 for month ended February 1, 2002,  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                                                                |   |                        |   |         |   |              |   |                     |   |                   |   |                   |   |                 |   |   |   |
| comprehensive income                                                                   |   |                        |   |         |   |              |   |                     |   |                   |   | 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 |   |

 

*The accompanying notes are anintegral part of the consolidated financial statements.*

 

II-43

----

 

**WASHINGTON GROUP INTERNATIONAL, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

*(In thousands except per share data)*

 

The terms “we,” “us” and“our” as used in this annual report include Washington Group International,Inc. (“Washington Group”) and its consolidated subsidiaries unless otherwiseindicated. On May 14, 2001, Washington Group and several but not all of itssubsidiaries filed for Chapter 11 bankruptcy protection. On January 25, 2002,we emerged from bankruptcy protection. See Note 4, “Reorganization Case andFresh-start Reporting.”

 

**1.**              **SIGNIFICANT ACCOUNTING POLICIES**

 

***Business***

 

We were originallyincorporated in Delaware on April 28, 1993 under the name Kasler HoldingCompany. In April 1996, we changed our name to Washington Construction Group,Inc. On September 11, 1996, we purchased Morrison Knudsen Corporation, which werefer to as “Old MK,” and changed our name to Morrison Knudsen Corporation. OnSeptember 15, 2000, we changed our name to Washington Group International, Inc.

 

We are an internationalprovider of a broad range of design, engineering, construction, constructionmanagement, facilities and operations management, environmental remediation andmining services to diverse public and private sector clients, including (1) engineering,construction and operations and maintenance services in nuclear and fossilpower markets; (2) diverse engineering and construction and constructionmanagement services for the highway and bridge, airport and seaport, dam,tunnel, water resource, railway and commercial building markets; (3)engineering, design, procurement, construction and construction managementservices to industrial companies; (4) contract mining, technical andengineering services for the metals, precious metals, coal, minerals andminerals processes markets; (5) comprehensive nuclear and other environmentaland hazardous substance remediation services for governmental andprivate-sector clients and 6) weapons and chemical demilitarization programsfor governmental and private-sector clients. In providing these services, weenter into four basic types of contracts: fixed-price or lump-sum contractsproviding for a fixed price for all work to be performed, fixed-unit-pricecontracts providing for a fixed price for each unit of work to be performed,target-price contracts providing for an agreed upon price whereby we absorbcost escalations to the extent of our expected fee or profit and are reimbursedfor costs which continue to escalate beyond our expected fee and cost-type contractsproviding for reimbursement of costs plus a fee. Both anticipated income andeconomic risk are greater under fixed-price and fixed-unit-price contracts thanunder cost-type contracts. Engineering, construction management andenvironmental and hazardous substance remediation contracts are typicallyawarded pursuant to a cost-type contract.

 

We participate inconstruction joint ventures, often as sponsor and manager of projects, whichare formed for the sole purpose of bidding, negotiating and completing specificprojects. We participate in two incorporated mining ventures: WestmorelandResources, Inc., a coal mining company in Montana, and MIBRAG mbH, a companythat operates lignite coal mines and power plants in Germany. We alsoparticipate in two incorporated government contracting ventures, collectivelythe Westinghouse Government Services Group (“WGSG”). Our venture partner isBritish Nuclear Services, Inc. (“BNFL”). We hold a 60% interest and BNFL holdsa 40% interest. On July 7, 2000, we purchased from Raytheon Company(“Raytheon”) and Raytheon Engineers & Constructors International, Inc.(“RECI”) the capital stock of the subsidiaries of RECI and specified otherassets of RECI, and we assumed specified liabilities of RECI. The businessesthat we purchased, hereinafter called “RE&C,” provide engineering, design,procurement, construction, operation, maintenance and other services on aglobal basis. See Note 3, “Acquisition.”

 

***Basisof presentation***

 

The consolidatedfinancial statements include the accounts of Washington Group and all of itsmajority-owned subsidiaries and certain construction joint ventures.Investments in non-consolidated construction joint

 

II-44

----

 

ventures and mining ventures are accounted for by theequity method. For these non-consolidated construction joint ventures, ourproportionate share of revenue, cost of revenue and gross profit (loss) isincluded in the consolidated statements of operations, and equity in netearnings of our incorporated mining ventures is accounted for using the equitymethod. Intercompany accounts and transactions have been eliminated.

 

As of February 1, 2002,we adopted fresh-start reporting pursuant to the guidelines provided by theAmerican Institute of Certified Public Accountants Statement of Position 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 with assets, liabilities and a capitalstructure having carrying values as of February 1, 2002, and subsequent periodsare not comparable to prior periods. In the accompanying financial statementsand notes to financial statements, the periods presented through February 1,2002 have been designated “Predecessor Company,” and the periods endingsubsequent to February 1, 2002 have been designated “Successor Company.” Theaccompanying balance sheet at February 1, 2002 has been designated “SuccessorCompany.” See Note 4, “Reorganization Case and Fresh-start Reporting.”

 

Effective December 29,2001, we changed our fiscal year to the 52/53 weeks ending on the Fridayclosest to December 31. The change in reporting period has not materiallyaffected comparability between the reporting periods presented.

 

We have presentedconsolidated statements of operations, comprehensive income (loss) and cashflows for the one month ended December 28, 2001 in our accompanyingconsolidated financial statements. Unaudited operating results for the onemonth period ended December 29, 2000 follows:

 
| Total  revenue       |   | $       | 292,826 |   |
|----------------------|--------|---------|---------|--------|
| Gross  profit (loss) |   | (5,301  | )       |
| Operating  loss      |   | (12,155 | )       |
| Interest  expense    |   | (6,304  | )       |
| Income  tax benefit  |   | 5,465   |    |
| Net  loss            |   | (14,521 | )       |

 

***Revenuerecognition***

 

Revenue is generallyrecognized on the “percentage-of-completion” method for construction-typecontracts, and as work is performed and award and other fees are earned forcost-type and operation and maintenance-type contracts. There are various meansof determining revenue under the percentage-of-completion method. Most of ourfixed-price and target-price contracts use a cost-to-cost approach, whererevenue is earned in proportion to costs incurred divided by total expectedcosts to be incurred. However, if a project includes significant materials orequipment costs, we require that the percentage-of-completion method be basedon labor hours, labor dollars or some other appropriate approximation ofphysical completion rather than on a strict percentage of costs incurred. Forcertain long-term contracts involving mining and environmental and hazardoussubstance remediation, completion is measured on estimated physical completionor units of production.

 

Revenue recognition oncertain fixed-price and target-price construction contracts begins whenprogress is sufficient to estimate the probable outcome. We generally do notrecognize any profit on fixed-price or target-price contracts until the projectis at least 20% complete.

 

We have a number ofcontracts and subcontracts with various agencies of the U.S. government thatextend beyond one year and for which government funding has not yet beenapproved. All contracts with agencies of the U.S. government and somecommercial and foreign contracts are subject to unilateral termination at theoption of the customer. In the event of a termination, we would not receiveprojected revenues associated with the terminated portion of such contracts.

 

II-45

----

 

With respect to awardfees associated with U.S. government contracts, we recognize only an estimatedaward fee based on historical performance until the client has confirmed thefinal award fee. Performance-based incentive fees are recognized when actuallyawarded by the client.

 

Revenue recognition forconstruction and engineering contracts also depends on whether the contract orproject is determined to be an “at risk” or an “agency” relationship betweenthe client and us. Determination of the relationship is based on characteristicsof 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 in the incomestatement. For “agency” relationships, where we act as an agent for our client,only fee revenue is recognized, meaning that direct project costs and therelated reimbursement from the client are netted.

 

The use of thepercentage-of-completion method for revenue recognition requires that estimatesof progress towards completion must be developed to determine the amount ofrevenue and profit to recognize. Under the percentage-of-completion method,profit margins to be recognized are dependent upon the accuracy of a variety ofestimates, including engineering progress, materials quantities, achievement ofmilestones and other incentives, penalty provisions, labor productivity, costestimates and others. Such estimates are dependent upon various judgments wemake with respect to those factors, and some are difficult to accuratelydetermine until the project is significantly underway. 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.

 

***Provisions for estimated losses on uncompleted contracts***

 

Provisions for estimatedlosses on uncompleted contracts are made in the period in which such losses areidentified. The cumulative effect of revisions to contract revenue andestimated completion costs, including incentive awards, penalties, changeorders, claims and anticipated losses, is recorded in the accounting period inwhich the amounts are known and can be reasonably estimated. Such revisionscould occur at any time, and the effects could be material. The effects ofother changes to estimated contract profit or loss are recognized in the periodin which such revisions are identified. They can include such items as theeffects of change orders and claims (see also “Change orders and claims” inthis section), warranty claims, liquidated damages or other contractualpenalties, adjustments for audit findings on U.S. government contracts andcontract close-out settlements. Should such items result in reductions to orelimination of previously reported profits, they would be recognized by acharge against current period earnings. Such adjustments could be significant.

 

***Change orders and claims***

 

Change orders and claimsare common on construction contracts when changes occur once contractperformance is underway. These changes are to be documented and terms agreedwith the client before the work is performed. Also, costs may be incurred inaddition to amounts originally estimated under the assumption that the customerwill agree to pay for such additional costs. Change orders are included ontotal estimated contract revenue when it is probable that the change order willresult in a bona fide addition to contract value and can be reliably estimated.If it is probable that the change order will result in the contract priceexceeding the related costs incurred and that the excess over cost can bereliably estimated, and if realization is assured beyond a reasonable doubt, theoriginal contract price is adjusted to the probable revised contract amount asthe costs are recognized. Claims are included on total estimated contractrevenue, only to the extent that contract costs related to the claim have beenincurred, when it is probable that the claim will result in a bona fideaddition to contract value and can be reliably estimated. No profit isrecognized on claims until final settlement occurs. This can lead to asituation where losses are recognized when costs are incurred before clientagreement is obtained and subsequent income is recognized when signedagreements are negotiated.

 

II-46

----

 

***Normal profit***

 

Normal profit is anaccounting concept that results from the requirement that an acquiring companyrecord all contracts of an acquiree that are in-process at the date ofacquisition, including construction contracts, at fair value. As such, an assetfor favorable contracts or a liability for unfavorable contracts is recorded inpurchase accounting. These assets or liabilities are then reduced based onrevenues recorded over the remaining contract lives, effectively resulting inthe recognition of a reasonable or normal profit margin on contract activityperformed subsequent to the acquisition. Because of the acquisition of RE&Cand the below market profit status of many of the significant acquiredcontracts, we recorded significant liabilities in purchase accounting. Thereduction of these liabilities has a significant impact on our recorded netincome, but has no impact on our cash flows.

 

***Useof estimates***

 

The preparation of ourconsolidated financial statements in conformity with generally acceptedaccounting principles necessarily requires us to make estimates and assumptionsthat affect the reported amounts of assets and liabilities, the disclosure ofcontingent assets and liabilities at the balance sheet dates and the reportedamounts of revenue and costs during the reporting periods. Actual results coulddiffer from those estimates. On an ongoing basis, we review our estimates basedon information that is currently available. Changes in facts and circumstancesmay result in revised estimates.

 

***Classificationof current assets and liabilities***

 

We include in currentassets and liabilities amounts realizable and payable under contracts thatextend beyond one year. Accounts receivable at January 3, 2003, February 1,2002 and November 30, 2001 included approximately $3,189, $29,130 and $27,496,respectively, of contract retentions, which are not expected to be collectedwithin one year. At January 3, 2003, February 1, 2002 and November 30, 2001,accounts receivable included $14,101, $18,989 and $18,974, respectively, ofshort-term marketable securities jointly held with customers as contractretentions, the market value of which approximated the carrying amounts. Werecognize interest income from marketable securities as earned. Advances fromcustomers are non-interest bearing. Subcontracts payable, billings in excess ofcosts and estimated earnings on uncompleted contracts and estimated costs tocomplete long-term contracts each contain amounts that, depending on contractperformance, resolution of U.S. government contract audits, negotiations,change orders, claims or changes in facts and circumstances, may not requirepayment within one year.

 

***Cashand cash equivalents***

 

Cash and cash equivalentsconsist of liquid securities with remaining maturities of three months or lessat the date of acquisition that are readily convertible into known amounts ofcash. At January 3, 2003 cash and cash equivalents included amounts totaling$90,791 that were restricted for use on the normal operations of ourconsolidated construction joint ventures, by projects having contractual cashrestrictions and by our self-insurance programs. The comparable amounts atFebruary 1, 2002 and November 30, 2001 were $87,495 and $57,672, respectively.

 

***Unbilledreceivables***

 

Unbilled receivablesrepresent costs incurred under contracts in process that have not yet beeninvoiced to customers and arise from the use of the percentage-of-completionmethod of accounting, cost reimbursement-type contracts and the timing ofbillings. Substantially all unbilled receivables at January 3, 2003 areexpected to be billed and collected within one year.

 

II-47

----

 

***Creditrisk concentration***

 

By policy, we limit theamount of credit exposure to any one financial institution and placeinvestments with financial institutions evaluated as highly creditworthy.Concentrations of credit risk with respect to accounts receivable and unbilledreceivables are believed to be limited due to the number, diversification andcharacter of the obligors and our credit evaluation process. Typically, we havenot required collateral for such obligations, but we may place liens againstproperty, plant or equipment constructed if a default occurs. Historically, wehave not incurred any material credit-related losses.

 

***Goodwill***

 

Goodwill is now subjectto annual impairment tests, rather than being amortized as in periods previousto 2002, as promulgated under the Financial Accounting Standards Board (“FASB”)issued Statement No. 142, *Goodwill and Other Intangible Assets*(“SFAS No. 142”). See Note 2, “Accounting Standards.” Effective February 1,2002, in conjunction with fresh-start reporting, we used the purchase method ofaccounting to allocate our reorganization values to our net assets, with theexcess recorded as goodwill on the basis of estimate of fair value. See Note 4,“Reorganization Case and Fresh-start Reporting.” For income tax purposes, wehave tax deductible goodwill in excess of financial statement goodwill. Asgoodwill is deducted for income tax purposes, substantially all the resultingtax benefit reduces financial statement goodwill. We, therefore, expect ourcarrying value of goodwill to decline in the future.

 

***Property and equipment***

 

Property and equipment isstated at cost as of November 30, 2001 and estimated fair value as of February1, 2002. Subsequent major renewals and improvements are capitalized at cost,while maintenance 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 estimated earnings onuncompleted contracts***

 

Billings in excess ofcost and estimated earnings on uncompleted contracts represent amounts actuallybilled to clients, and perhaps collected, in excess of costs and profitsincurred on the project and, as such, is reflected as a liability. Also, inspecified business segments, we are sometimes able to negotiate substantialadvance payments as a contract condition. These advance payments are reflectedin billings 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.

 

***Self-insurance reserves***

 

Self-insurance reservesrepresent reserves established through a program under which we determine theextent to which we self-insure certain business risks. We carry substantialpremium-paid, traditional insurance for our various business risks; however, wedo self-insure the lower level deductibles for workers’ compensation andgeneral, automobile and professional liability. Most of this self-insurance ishandled through Broadway Insurance Company, a wholly-owned captive Bermudainsurance subsidiary. As such, we carry self-insurance reserves on our balancesheet that are reviewed annually by an independent actuary. The current portionof the self-insurance reserves is included in other accrued liabilities.

 

II-48

----

 

***Foreign currency translation***

 

The functionalcurrency for foreign operations is generally the local currency. Translation ofassets and liabilities to U.S. dollars is based on exchange rates at thebalance sheet date. Translation of revenue and expenses to U.S. dollars is basedon a weighted-average rate during the period. Translation gains or losses, netof income tax effects, are reported as a component of other comprehensiveincome (loss). Because of the short-term duration of certain construction andengineering projects, related translation gains or losses are recognizedcurrently. Gains or losses from foreign currency transactions are included inthe results of operations of the period in which the transaction is completed.

 

***Income taxes***

 

Deferred incometax 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 is established whenit is more likely than not that net deferred tax assets will not be realized.Tax credits are generally recognized in the year they arise.

 

***Income per share***

 

Basic income pershare is calculated on the weighted-average number of outstanding common sharesduring the applicable period. Diluted income per share is based on theweighted-average number of outstanding common shares plus the weighted-averagenumber of potential outstanding common shares. Income per share is computedseparately for each period presented.

 

For the elevenmonths ended January 3, 2003, all outstanding stock purchase warrants andsubstantially all 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, therefore, theeffect would be antidilutive.

 

Our emergence frombankruptcy in January 2002 resulted in the cancellation of all of our thenoutstanding capital stock, stock options and stock purchase warrants and theissuance of new shares of capital stock, stock purchase warrants and stockoptions. As such, we believe the presentation of income (loss) per share forthese canceled instruments is not meaningful. For a detailed discussion of ourbankruptcy proceedings and emergence from bankruptcy protection, see Note 4,“Reorganization Case and Fresh-start Reporting.”

 

***Stock-based compensation***

 

We have used theintrinsic value method to account for stock-based employee compensation underthe recognition and measurement principles of Accounting Principles Bulletin(“APB”) Opinion No. 25, *Accounting for Stock Issued to Employees*,and related interpretations for all periods presented. Our stock-based employeecompensation plans are described in Note 17, “Capital Stock, Stock PurchaseWarrants and Stock Compensation Plan.” The following table illustrates the proforma effect on net income (loss) and income per share if we had applied thefair value recognition provisions of the FASB Statement No. 123, *Accountingfor Stock-Based Compensation* (“SFAS No. 123”), to stock-basedemployee compensation.

 

II-49

----

 
|                                                                                                                  |   | **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** |   | **Year ended****December  1,  2000** |   |
| Net  income (loss) before extraordinary item                                                                          |   | $                                                | 37,701 |                                         | $      | (45,043 | ) | $ | (25,910 | ) | $ | (84,976 | ) | $ | (859,376 | ) |
| As  reported                                                                                                          |   |                                             |   |                                         |   |   |   |   |   |   |   |
| Deduct:  Total stock-based employee compensation expense determined under fair value  based method for all awards (1) |   | (25,888                                          | )      | 10,995                                       |   | (472 | ) | (6,750 | ) | (9,941 | ) |
| Add:  Compensation cost using intrinsic value method                                                                  |   | —                                           |   | —                                       |   | — |   | 4 |   | 192 |   |
| Tax  effects                                                                                                          |   | 10,104                                           |   | (4,291                                       | )      | 184 |   | 2,624 |   | 3,792 |   |
| Pro  forma net income (loss) before extraordinary item                                                                |   | $                                                | 21,917 |                                         | $      | (38,339 | ) | $ | (26,198 | ) | $ | (89,098 | ) | $ | (865,333 | ) |
| Net  income per share (2)                                                                                             |   |                                             |   |                                         |   |   |   |   |   |   |   |
| As  reported - basic and  diluted                                                                                     |   | $                                                | 1.51   |                                         | — |   | — |   | — |   | — |   |
| Pro  forma - basic and  diluted                                                                                       |   | .88                                              |   | —                                       |   | — |   | — |   | — |   |
|                                                                                                                  |   |                                             |   |                                         |   |   |   |   |   |   |   |
| Net  income (loss)                                                                                                    |   | $                                                | 37,701 |                                         | $      | 522,150 |   | $ | (25,910 | ) | $ | (84,976 | ) | $ | (859,376 | ) |
| As  reported                                                                                                          |   |                                             |   |                                         |   |   |   |   |   |   |   |
| Deduct:  Total stock-based employee compensation expense determined under fair value  based method for all awards (1) |   | (25,888                                          | )      | 10,995                                       |   | (472 | ) | (6,750 | ) | (9,941 | ) |
| Add:  Compensation cost using intrinsic value method                                                                  |   | —                                           |   | —                                       |   | — |   | 4 |   | 192 |   |
| Tax  effects                                                                                                          |   | 10,104                                           |   | (4,291                                       | )      | 184 |   | 2,624 |   | 3,792 |   |
| Pro  forma net income (loss)                                                                                          |   | $                                                | 21,917 |                                         | $      | 528,854 |   | $ | (26,198 | ) | $ | (89,098 | ) | $ | (865,333 | ) |
| Net  income per share (2)                                                                                             |   |                                             |   |                                         |   |   |   |   |   |   |   |
| As  reported - basic and  diluted                                                                                     |   | $                                                | 1.51   |                                         | — |   | — |   | — |   | — |   |
| Pro  forma - basic and  diluted                                                                                       |   | .88                                              |   | —                                       |   | — |   | — |   | — |   |

 

----

(1)          We present pro formacompensation cost as if all stock options granted are expected to vest, withpro forma recognition of actual forfeitures as they occur. Our emergence frombankruptcy in January 2002 and the resulting cancellation of all of our stockoptions therefore gave rise to compensation income on a pro forma basis for theone month ended February 1, 2002. Upon emergence from bankruptcy, we grantedoptions that immediately vested. Due to this vesting, a significant portion ofthe total pro forma compensation cost associated with these options ispresented on a pro forma basis during the eleven months ended January 3, 2003.

(2)          Net income per share isnot presented for the Predecessor Company periods, as it is not meaningfulbecause of the revised capital structure of the Successor Company.

 

See Note 17, “CapitalStock, Stock Purchase Warrants and Stock Compensation Plan” for a discussion ofthe assumptions used for the table above.

 

***Reclassifications***

 

Certain reclassificationshave been made to prior year financial statements to conform to the currentyear presentation.

 

**2.     ACCOUNTINGSTANDARDS**

 

***Adoption of accounting standards***

 

In June 2001, the FASBissued Statement No. 141, *Business Combinations* (“SFAS No. 141”),and SFAS No. 142. SFAS No. 141, which is effective for acquisitions initiatedafter June 30, 2001, prohibits the use of the

 

II-50

----

 

pooling-of-interests method for business combinations and establishesthe accounting and financial reporting requirements for business combinationsaccounted for by the purchase method. Adoption of this statement had no effecton our financial statements. SFAS No. 142 requires that an intangible assetthat was or is acquired shall be initially recognized and measured based on itsfair value. The statement also provides that goodwill shall not be amortized,but shall be tested for impairment annually, or more frequently ifcircumstances indicate potential impairment, through a comparison of fair valueto its carrying amount. SFAS No. 142 became effective for us for our fiscalyear beginning December 29, 2001. The adoption of this statement did not have asignificant impact on the financial statements due to our adoption offresh-start reporting on February 1, 2002. See Note 4, “Reorganization Case andFresh-start Reporting.” During our application of fresh-start reporting, werevalued all of our assets and liabilities to fair value on that date. At thedate we adopted this statement (December 29, 2001), the net book value ofgoodwill was $174,909 (not including amounts included in assets held for sale).

 

SFAS No. 142 providesthat prior year’s results should not be restated. The following table presentsour comparative operating results for the respective periods reflecting theexclusion of goodwill amortization expense.

 
|                                                 |   | **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** |   | **Year ended****December  1,  2000** |   |
| Reported  income (loss) before extraordinary item    |   | $                                                | 37,701 |                                         | $      | (45,043 | ) | $ | (25,910 | ) | $ | (84,976 | ) | $ | (859,376 | ) |
| Goodwill  amortization, net of tax                   |   | —                                           |   | —                                       |   | 962 |   | 9,097 |   | 15,904 |   |
| Minority  interest                                   |   | —                                           |   | —                                       |   | (278 | ) | (3,333 | ) | (3,452 | ) |
| Income  (loss) before extraordinary item as adjusted |   | $                                                | 37,701 |                                         | $      | (45,043 | ) | $ | (25,226 | ) | $ | (79,212 | ) | $ | (846,924 | ) |
|                                                 |   |                                             |   |                                         |   |   |   |   |   |   |   |
| Reported  net income (loss)                          |   | $                                                | 37,701 |                                         | $      | 522,150 |   | $ | (25,910 | ) | $ | (84,976 | ) | $ | (859,376 | ) |
| Goodwill  amortization, net of tax                   |   | —                                           |   | —                                       |   | 962 |   | 9,097 |   | 15,904 |   |
| Minority  interest                                   |   | —                                           |   | —                                       |   | (278 | ) | (3,333 | ) | (3,452 | ) |
| Net  income (loss) as adjusted                       |   | $                                                | 37,701 |                                         | $      | 522,150 |   | $ | (25,226 | ) | $ | (79,212 | ) | $ | (846,924 | ) |

 

In July 2001, the FASBissued Statement No. 143, *Accounting for Asset Retirement Obligations*(“SFASNo.**143”).Upon emergence from bankruptcy, we were required to early adopt SFAS No. 143 onFebruary 1, 2002. This statement addresses financial accounting and reportingfor obligations associated with the retirement of tangible long-lived assetsand the associated asset retirement costs. The adoption of this statement didnot have a significant impact on our financial statements.

 

In August 2001, the FASBissued Statement No. 144, *Accounting for the Impairment or Disposal ofLong-Lived**Assets* (“SFAS No. 144”). SFAS No. 144,which replaces SFAS No. 121 and APB No. 30, became effective for us on February1, 2002. This statement retains the requirements to (1) recognize an impairmentloss only if the carrying amount of a long-lived asset is not recoverable fromits undiscounted cash flows and (2) measure an impairment loss as thedifference between the carrying amount and fair value of the asset. Thisstatement removes goodwill from its scope, eliminating the requirement toallocate goodwill to long-lived assets to be tested for impairment. SFAS No.144 also requires that a long-lived asset to be abandoned, exchanged for asimilar productive asset or distributed to owners in a spin-off be consideredheld and used until it is disposed of. The accounting model for long-livedassets to be disposed of by sale must be used for all long-lived assets,whether previously held and used or newly acquired. Discontinued operations areno longer measured on a net realizable value basis, and future operating lossesare no longer recognized before they occur. SFAS No. 144 also broadens thepresentation of discontinued operations in the income statement to include acomponent of an entity (rather than a segment of a business). A component of anentity is comprised of operations and cash flows that can be clearlydistinguished, operationally and for financial reporting purposes, from the remainderof that entity. The adoption of this statement did not have a significanteffect on our operating results.

 

II-51

----

 

In June 2002, the FASBissued Statement No. 146, *Accounting for Costs Associated with Exit or DisposalActivities* (“SFAS No. 146”). SFAS No. 146 addresses financialaccounting and reporting for costs associated with exit or disposal activitiesand nullifies Emerging Issues Task Force Issue No. 94-3. The adoption of SFASNo. 146 is effective for exit or disposal activities that are initiated afterDecember 31, 2002. The adoption of SFAS No. 146 did not have a significantimpact on our results of operations or financial position; however, it willchange the way we account for future exit or disposal activity.

 

In November 2002, theFASB issued Interpretation No. 45, *Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees of Indebtedness of Others, anInterpretation of FASB Statements No. 5, 57, and 107 and Recission of FASBInterpretation No. 34* (“FIN 45”). FIN 45 clarifies the requirementsof FASB Statement No. 5, *Accounting for Contingencies*, relating toa guarantor’s accounting for, and disclosure of, the issuance of specifiedtypes of guarantees. FIN 45 requires that upon issuance of a guarantee, theentity (i.e., the guarantor) must recognize a liability for the fair value ofthe obligation it assumes under that guarantee. The disclosure provisions ofFIN 45 are effective for financial statements of interim or annual periods thatend after December 15, 2002. FIN 45’s provisions for initial recognition andmeasurement must be applied on a prospective basis to guarantees issued ormodified after December 31, 2002, irrespective of the guarantor’s fiscal yearend. The guarantor’s previous accounting for guarantees that were issued beforethe date of FIN 45’s initial application may not be revised or restated toreflect the effect of the recognition and measurement provisions of FIN 45. Wehave guarantees that are subject to the disclosure provisions of FIN 45. SeeNote 14, “Contingencies and Commitments.” The adoption of the prospectiverecognition and measurement aspects of FIN 45 is not expected to have asignificant effect on our financial position and results of operations.

 

In January 2003, the FASBissued Statement No. 148, *Accounting for Stock-Based Compensation**-Transition and Disclosure* (“SFAS No. 148”). SFAS No. 148 amends SFAS No.123 to provide alternative methods of transition for a voluntary change to thefair value based method of accounting for stock-based employee compensation. Inaddition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 torequire prominent disclosures in both annual and interim financial statementsof the method of accounting for stock-based employee compensation and theeffect of the method used on reported results. SFAS No. 148 became effectivefor us in the fourth quarter of 2002. We did not elect to change to the fairvalue based method of accounting for stock-based employee compensation.Therefore, adoption of SFAS No. 148 only impacts our disclosures, not ourfinancial results.

 

***Recently issued accounting standards***

 

In January 2003, the FASBissued Interpretation No. 46, *Consolidation of Variable Interest Entities*(“FIN 46”). FIN 46 clarifies the application of Accounting Research BulletinNo. 51, *ConsolidatedFinancial Statements*, to certain entities in which equity investorsdo not have the characteristics of a controlling financial interest or in whichequity investors do not bear the residual economic risks. The interpretationapplies to variable interest entities created after January 31, 2003 and tovariable interest entities in which an enterprise obtains an interest afterthat date. It applies in the fiscal year or interim period beginning after June15, 2003 to variable interest entities in which an enterprise holds a variableinterest that was acquired before February 1, 2003. We have determined that itis not reasonably possible that we will be required to consolidate or discloseinformation about a variable interest entity upon the effective date of FIN 46.

 

**3.     ACQUISITION**

 

The following discussiondescribes our acquisition of Raytheon Engineers & Constructors in 2000 andthe resulting issues and events, including the purchase price adjustmentprocess, the purchase price allocation, establishment of normal profitreserves, our severe near-term liquidity problems and filing for protectionunder Chapter 11 of the U.S. Bankruptcy Code, and impairment of assets andother charges related to the acquisition. These issues and events primarilypertain to our 2000 and 2001 financial statements.

*** ***

***II-52***

----

 

On July 7, 2000, pursuantto a stock purchase agreement dated April 14, 2000 (the “Stock PurchaseAgreement”), we purchased from Raytheon and RECI (collectively with Raytheon,the “Sellers”) RE&C, which provides engineering, design, procurement,construction, operation, maintenance and other services on a global basis. Wefinanced the acquisition by obtaining new senior secured facilities (the“RE&C Financing Facilities”) and issuing senior unsecured notes due July 1,2010 (the “Senior Unsecured Notes”). See Note 9, “Credit Facilities” for a moredetailed description of the RE&C Financing Facilities and the SeniorUnsecured Notes.

*** ***

The purchase price paidat the closing of the acquisition on July 7, 2000 was $53,000 in cash and theassumption of net liabilities originally estimated at $450,000. We alsoincurred acquisition costs of $7,705. The cash portion of the purchase pricepaid at closing was determined based upon a formula contained in the StockPurchase Agreement and represented the estimated amount of the AdjustedNon-Current Net Assets and Adjusted Net Working Capital (as the terms aredefined in the Stock Purchase Agreement) that we acquired, valued as of April30, 2000. The amounts of Adjusted Non-Current Net Assets and Adjusted NetWorking Capital were subject to post-closing finalization, including an auditby independent accountants, and other adjustments to the price paid at closing.In addition, the Stock Purchase Agreement contained a provision requiring us toeither pay the Sellers or to be paid by the Sellers, the net amount of cash theSellers either advanced to or withdrew from RE&C between April 30, 2000 andJuly 7, 2000. After closing, we paid the Sellers $84,400 representing the netamount of cash advanced or paid by the Sellers for the use or benefit ofRE&C between April 30, 2000 and July 7, 2000.

 

The Stock PurchaseAgreement provided that the Sellers would retain all non-restricted cash andcash equivalents held by RE&C at the close of business on April 30, 2000(“Cut-Off Date Cash Balances”). At closing, for purposes of administrativeconvenience, RE&C kept all cash held by it ($15,790), and we paid theSellers an additional $30,800 for the cash balances on April 30, 2000. Thatamount was subject to post-closing verification by us and adjustment in theevent it was not equal to the Cut-Off Date Cash Balances held by RE&C. Wesubsequently verified the amount and no adjustment was required. In total, wepaid net cash of $160,130 for the RE&C acquisition.

 

RECI retained, amongother assets, all of its interest in and rights with respect to some of theexisting contracts. In addition, the Stock Purchase Agreement provided that thecontracts related to four specified construction projects would be transferredto RECI, and RE&C would enter into subcontracts to perform, on acost-reimbursed basis, all of RECI’s obligations under the contracts.  Because the customer consents required totransfer the four contracts to RECI could not be obtained as of closing, weagreed to remain the contract party and continued to be directly obligated tothe customers and other third parties under the contracts relating to the fourprojects. Accordingly, we and the Sellers agreed that the Sellers would provideus with full indemnification with respect to any risks associated with thosecontracts, which arrangement accomplished the original intent of the StockPurchase Agreement. Under the Stock Purchase Agreement, we agreed that we wouldcomplete the four specified projects for the Sellers’ account and the Sellersagreed to reimburse our costs to do so and to share equally with us anypositive variance between actual costs and estimated costs. The Sellers alsoagreed to indemnify us against any losses, claims or liabilities under thecontracts relating to such projects, except losses, claims or liabilitiesresulting from our gross negligence or willful misconduct, against which wewould indemnify the Sellers.

 

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

 

As part of theacquisition of RE&C, we undertook a comprehensive review of existingcontracts that we acquired for the purpose of making a preliminary allocationof the acquisition price to the net assets acquired. As part of this review, weevaluated, among other matters, RECI’s estimates of the costs at completion ofthe long-term contracts that were underway as of July 7, 2000 (“AcquisitionDate EAC’s”). During this process, information came to our attention thatraised questions as to whether the Acquisition Date EAC’s needed to be 

 

II-53

----

 

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 thequarter ended September 1, 2000, we significantly decreased the carrying valueof the 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 in order toallow for a reasonable profit margin for completing the contracts, and a grossmargin or normal profit reserve of $233,135 was established and recorded inbillings in excess of cost and estimated earnings on uncompleted contracts.

 

Our review of theRE&C contracts and the purchase price allocation process continuedthereafter, and, based on the results of that review, we expected that, as aresult of the purchase price adjustment process, the purchase price of RE&Cwould be adjusted downward by a significant amount. Subsequent to the quarterended September 1, 2000, we completed the review and made additionaladjustments to the contracts we had acquired, resulting from a more accuratedetermination of the actual contract status at the acquisition date.

 

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

*** ***

***Normal profit reserve***

 
| ***July 7, 2000  balance***                                       |   | ***$***       | ***233,135*** | *** *** |
|-------------------------------------------------------------------|--------|---------------|---------------|--------------|
| ***Cost of revenue  (decrease)***                                 |   | ***(50,271*** | ***)***       |
| ***December 1, 2000  balance***                                   |   | ***182,864*** | *** ***  |
| ***Adjustments on  reformed and rejected contracts (see below)*** |   | ***(53,376*** | ***)***       |
| ***Cost of revenue  (decrease)***                                 |   | ***(87,200*** | ***)***       |
| ***November 30,  2001 balance***                                  |   | ***42,288***  | *** ***  |
| ***Cost of revenue  (decrease)***                                 |   | ***(4,378***  | ***)***       |
| ***December 28,  2001 balance***                                  |   | ***37,910***  | *** ***  |
| ***Increase from  fresh-start reporting***                        |   | ***9,101***   | *** ***  |
| ***Cost of revenue  (decrease)***                                 |   | ***(3,518***  | ***)***       |
| ***February 1,  2002 balance***                                   |   | ***43,493***  | *** ***  |
| ***Cost of revenue  (decrease)***                                 |   | ***(27,425*** | ***)***       |
| ***January 3, 2003  balance***                                    |   | ***$***       | ***16,068***  | *** *** |

*** ***

An audited RE&C April30, 2000 balance sheet was not delivered by Sellers, and therefore, on February27, 2001, we filed a lawsuit against the Sellers seeking specific performanceof the purchase price adjustment provisions of the Stock Purchase Agreement. OnMarch 8, 2001, we amended our complaint to also seek money damages formisstatements and omissions allegedly made by the Sellers. Our lawsuit seekingspecific 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.

 

During the spring of2000, in connection with the acquisition of RE&C, we received from theSellers audited RECI financial statements at December 31, 1999 and 1998 and foreach of the three years in the period ended December 31, 1999 and unauditedRECI financial statements as of and for the three months ended April 2, 2000and April 4, 1999. In accordance with federal securities law disclosurerequirements, on July 13, 2000, we filed those audited and unaudited financialstatements and our related unaudited pro forma condensed combined financialstatements as of and for the year ended December 3, 1999 and for the quarterended March 3, 2000 in a current report on Form 8-K. Subsequently, in ourcurrent report on Form 8-K filed March 8, 2001, we advised

 

II-54

----

 

that, for the reasons stated in such report, the foregoing audited andunaudited financial statements of RECI and our related unaudited pro formacondensed combined financial statements, which were derived therefrom, nolonger should be relied upon.

 

On March 2, 2001 weannounced that we faced severe near-term liquidity problems as a result of ouracquisition of RE&C. On March 9, 2001, because of those liquidity problems,we suspended work on two large construction projects located in Massachusettsthat were part of the acquisition. The Sellers had provided the customer with parentperformance guarantees on those two contracts, and the guarantees remained ineffect after closing. 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 in nature,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.

 

Upon our suspension ofwork, the Sellers undertook performance of those contracts pursuant to theoutstanding performance guarantees. We, however, were obligated under the StockPurchase Agreement to indemnify the Sellers for losses they incurred underthose guarantees. The Sellers also assumed obligations under other contracts,primarily in the RE&C power generation construction business unit, whichresulted in significant additional indemnification obligations by us to theSellers. As a result of costs they incurred to perform under the parentguarantees, the Sellers filed a claim against us in the bankruptcy process forapproximately $940,000. As further discussed below, this claim was ultimatelysettled without payment to the Sellers in connection with our emergence frombankruptcy protection. See Note 4, “Reorganization Case and Fresh-startReporting.” 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.

 

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

 

On December 21, 2001, thebankruptcy court 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 (the “EffectiveDate”).

 

During the pendency ofthe bankruptcy, we continued to negotiate with the Sellers a settlement of ouroutstanding litigation with respect to the RE&C acquisition. As a result ofthose negotiations, we reached a settlement regarding all issues and disputesbetween the parties, which settlement was incorporated into our Plan ofReorganization (the “Raytheon Settlement”).

 

Under the Raytheon Settlement, the Sellers agreedthat, with respect to their bankruptcy claim, the Sellers would be consideredunpaid, unsecured creditors having rights in the unsecured creditor class, butthat, upon completion of our Plan of 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 price adjustmentand binding arbitration process. We released all claims based on any actoccurring prior to the Effective Date of the Plan of Reorganization, includingall claims against the Sellers, their affiliates and directors, officers,employees, agents and specified professionals. The Sellers released all claimsbased on any act occurring prior to the Effective Date of our Plan ofReorganization, including any claims related to any contracts or projects notassumed by us during the bankruptcy cases, against us and our directors,officers, employees, agents and professionals.**No cash was exchanged as aresult of this settlement.

 

II-55

----

 

In addition, under a services agreement entered intoas a part of the Raytheon Settlement, the Sellers will direct the process forresolving pre-petition claims asserted against us in the bankruptcy caserelating to any contract or project that we rejected and that involved someform of support arrangement from the Sellers. We will assist the Sellers insettling or litigating various claims related to those rejected projects. Wewill also complete work as requested by the Sellers on those rejected projects,and will be reimbursed on a cost-reimbursable basis. The Sellers may, withrespect to the rejected projects described above, pursue or settle any of ourclaims against project owners, contractors or other third parties and willretain any resulting proceeds, except that for specified projects, recoveriesin excess of amounts paid by the Sellers will be returned to us.

 

While this settlementeliminated our ability to continue to seek to collect our arbitration claim, itwas necessary because the Sellers’ large unsecured claims in the bankruptcywere substantially impeding our Plan of Reorganization process. Without thissettlement, a successful emergence from Chapter 11 would have been delayed orimpossible.

 

We have made adjustmentsto the preliminary purchase price allocation of the RE&C acquisition priceto the net assets acquired that was included in the unaudited quarterlyinformation at September 1, 2000, including the following, as a result ofcompleting our review:

 

•                  We have made adjustments for amountsthat were recorded as part of and subsequent to the initial preliminarypurchase price allocation. These adjustments were made as a result ofadditional information we obtained that supported that some of the July 7, 2000balances were materially misstated based on generally accepted accountingprinciples and were, therefore, included in our purchase price adjustmentarbitration claim against the Sellers. In the lawsuits and purchase priceadjustment arbitration claim referred to above, we asserted that the Sellersshould have recorded these as adjustments in the RE&C financial statementsprior to the acquisition. The adjustments primarily relate to provisions foranticipated losses on fixed-price contracts that were not recorded in theRE&C financial statements prior to the acquisition. We recorded theseamounts as a $444,055 arbitration claim receivable from the Sellers. However,as noted above, under the terms of the Raytheon Settlement, we subsequentlyagreed to dismiss all litigation against the Sellers related to the acquisitionand to discontinue the purchase price adjustment and binding arbitrationprocess. Therefore, we wrote off the receivable from the Sellers as an assetimpairment during 2000.

 

•                  We also have made adjustments foritems that were identified subsequent to the initial purchase price allocationthat we believe were additional misstatements, based on additional informationwe obtained, but that were not included in the arbitration claim. Cost ofrevenue included adjustments to estimates at completion on contracts andincreases in self-insurance reserves. The impairment of assets was primarilyunrecoverable accounts receivable. These amounts totaled $144,481 and werecharged to operations in the three months ended December 1, 2000 as follows:

 
| Cost  of revenue      |   | $      | (140,954 | ) |
|-----------------------|--------|--------|----------|---|
| Impairment  of assets |   | (4,685 | )        |
| Other                 |   | 1,158  |     |
| Total                 |   | $      | (144,481 | ) |

 

Because we cannotdetermine the final impact of the matters discussed above on thepre-acquisition RE&C financial statements or the pro forma adjustments thatwould be appropriate for the year ended December 1, 2000, unaudited pro formaconsolidated results of operations set forth as if the acquisition of RE&Chad taken place on December 4, 1999 have not been presented.

 

We have accounted for theacquisition of RE&C as a purchase business combination. The results of ouroperations, financial position and cash flows include the operations ofRE&C on a consolidated basis from the July 7, 2000 acquisition date. Wehave made an allocation of the aggregate purchase price to the net assets we

 

II-56

----

 

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

 
| Working  capital                                          |   | $       | (958,636 | )      |
|-----------------------------------------------------------|--------|---------|----------|--------|
| Arbitration  claim receivable                             |   | 444,055 |     |
| Investments  and other assets                             |   | 42,633  |     |
| Property  and equipment                                   |   | 139,868 |     |
| Pension  and post-retirement benefit obligations          |   | (16,427 | )        |
| Deferred  income taxes                                    |   | (83,222 | )        |
| Other  non-current liabilities                            |   | (88,351 | )        |
| Goodwill                                                  |   | 680,210 |     |
| Total  acquisition costs, net of cash acquired of $15,790 |   | $       | 160,130  |   |

 

Of the 23 major RE&Cprojects that had significant contract adjustments discussed above, 14 are nowcomplete, 4 are still in process and 5 were eliminated in the insolvencyproceedings of Washington International B.V. See Note 4, “Reorganization Caseand Fresh-start Reporting -Washington International B.V.” The remaining contracts in process arecontinuing and are expected to be completed in 2003.

 

As a result of theforegoing events, and the substantial negative cash flows of RE&C, weanalyzed for impairment the assets acquired in the acquisition of RE&C,including goodwill. Based upon the results of our analysis, we have taken acharge against income during 2000 for the following impairments of acquiredassets:

 
| Goodwill,  net of accumulated amortization of $8,727                                     |   | $      | 671,483 |   |
|------------------------------------------------------------------------------------------|--------|--------|---------|--------|
| Indemnification  amounts receivable from the Sellers under the Stock Purchase Agreement: |   |   |    |
| Billed  and unbilled receivables on closed contracts                                     |   | 46,562 |    |
| Partial  indemnification of loss on government contract                                  |   | 25,115 |    |
| Reimbursement  for restructuring costs                                                   |   | 3,026  |    |
| Reimbursement  of legal fees                                                             |   | 1,305  |    |
| Impairment  of assets                                                                    |   | $      | 747,491 |   |

 

As a result of theacquisition, we incurred significant costs associated with the integration andmerger of the two companies. They consisted primarily of incremental costs forlegal, accounting, consulting and other fees, including business consulting,promotion and systems integration. For the years ended November 30, 2001 andDecember 1, 2000, those costs were $18,858 and $15,302, respectively.

 

**4. REORGANIZATION****CASE AND FRESH-START REPORTING**

 

***Reorganization case***

 

On May 14, 2001, becauseof severe near-term liquidity issues Washington Group and several, but not all,of its direct and indirect wholly-owned domestic subsidiaries (the “Debtors”)filed voluntary petitions to reorganize under Chapter 11 of the U.S. BankruptcyCode in the U.S. Bankruptcy Court for the District of Nevada. The variousindividual bankruptcy cases were administered jointly.

 

Under Chapter 11, certainclaims against a debtor in existence prior to the filing of a petition forrelief under the federal bankruptcy laws (“Pre-petition Claims”) are stayedwhile the debtor continues business operations as a debtor-in-possession. Eachof our Debtors in this case continued to operate its business and manage itsproperty as a debtor-in-possession during the pendency of the case. Subsequentto the filing date, additional Pre-petition Claims resulted from the rejectionof executory contracts, including leases, and from the resolution of claims forcontingencies and other disputed amounts. The Pre-petition Claims are reflectedin balance sheets as of dates between May 14, 2001 and February 1, 2002 as“liabilities subject to compromise.” Secured claims, primarily 

 

II-57

----

 

representing liens on the Debtors’ assets related to the RE&CFinancing Facilities, were also stayed during the pendency of the bankruptcy.

 

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

 

Our ability to continueas a going-concern during the pendency of the bankruptcy was dependent uponobtaining sufficient debtor-in-possession financing in order to continueoperations while in bankruptcy, the confirmation of a plan of reorganization bythe bankruptcy court, and resolution of disputes between the Sellers and us.See Note 3, “Acquisition” for a description of these disputes.

 

As of May 14, 2001, weobtained a Secured Super-Priority Debtor-in-Possession Revolving CreditFacility (the “DIP Facility”) with a commitment of $195,000 that was availableto provide both ongoing funding and to support letters of credit. On June 5,2001, the DIP Facility lenders approved an increase in the total commitmentfrom $195,000 to $220,000. See Note 9, “Credit Facilities -DIP Facility.” The DIP Facility was available and utilized as needed throughoutthe pendency of the bankruptcy, had no outstanding balance at November 30, 2001and was replaced by a secured $350,000 30-month revolving credit facility (the“Senior Secured Revolving Credit Facility” or the “Credit Facility”) enteredinto on January 25, 2002. For a detailed discussion of the Senior SecuredRevolving Facility, see Note 9, “Credit Facilities -Senior Secured Revolving Credit Facility.”

 

During the pendency ofthe bankruptcy, we continued to negotiate with the Sellers a settlement of ouroutstanding litigation with respect to the RE&C acquisition. As a result ofthose negotiations, we entered into the Raytheon Settlement. See Note 3,“Acquisition.”

 

On December 21, 2001, thebankruptcy court entered an order confirming the Plan of Reorganization.Substantially all liabilities of the Debtors as of the date of the bankruptcyfiling were subject to settlement under our Plan of Reorganization.

 

The Plan of Reorganizationbecame effective and the Debtors emerged from bankruptcy protection on theEffective Date. Our Plan of Reorganization provided for the following upon theEffective Date:

 

•                  All of our equity securities (commonstock, stock purchase warrants and stock options) existing prior to theEffective Date were canceled and extinguished.

 

•                  $570,000 of secured debt under theRE&C Financing Facilities was exchanged for $20,000 in cash and 20,000shares of the new common stock of reorganized Washington Group (“New CommonStock”) as discussed further below. See Note 9, “Credit Facilities.”

 

•                  We entered into a registration rightsagreement with each holder of a secured claim who received New Common Stock andrequested to be a party to such agreement.

 

•                  Vendor and subcontractor claimsdirectly related to contracts we assumed during bankruptcy or upon emergencefrom bankruptcy that were not paid as critical vendor payments were to be paidin cash in a cure amount equal to the total claim.

 

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

 

•                  Accounts payable and subcontractspayable that were not related to cure payments or Convenience Class Paymentswere discharged.

 

II-58

----

 

•                  The holders of $300,000 of SeniorUnsecured Notes and all other unsecured creditors were to receive a pro ratashare of 5,000 shares of the New Common Stock and a pro rata share of 8,520fully vested stock warrants to purchase additional shares of New Common Stock.The stock warrants expire if unexercised four years after the Effective Date. Areorganization plan committee has been established to evaluate and resolveobjections to disputed claims of unsecured creditors and to determine eachunsecured creditor’s pro rata share of shares and warrants. The warrantsconsist of three tranches as follows:

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

 

•                  Specified members of management anddesignated employees were granted stock options pursuant to a management optionplan. The management option plan provided for nonqualified stock option grants asof the Effective Date totaling 1,389 aggregate shares of the New Common Stockwith a term of 10 years and a strike price of $24.00 per share. In addition,another 1,389 shares of the New Common Stock may be granted after the EffectiveDate at strike prices to be established by our board of directors.

 

•                  The chairman of our board ofdirectors, Mr. Dennis R. Washington, was granted stock options to purchaseshares of New Common Stock in three tranches. The first tranche expires fiveyears after the Effective Date. The remaining tranches expire four years afterthe Effective Date. One-third of each tranche vested on the Effective Date,one-third of each tranche will vest on the first anniversary of the EffectiveDate and the final third of each tranche will vest on the second anniversary ofthe Effective Date. However, all options immediately vest if Mr. Washington isremoved from his position as chairman for reasons other than death ordisability or if we undergo a change of control. We also agreed with Mr. Washingtonthat our amended certificate of incorporation and bylaws would permit hisaccumulation of up to 40% of the fully diluted shares of New Common Stock inopen market or privately-negotiated transactions, including exercise of thestock options, and that we would take no action inconsistent with thoseprovisions. The number of shares and respective strike prices for each trancheare as follows:

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

 

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

 

•                  We filed an amended and restatedcertificate of incorporation and adopted amended and restated bylaws andestablished a new board of directors.

 

On January 25, 2002, weentered into the Senior Secured Revolving Credit Facility to fund our workingcapital requirements. See Note 9, “Credit Facilities.”

 

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

 

As a result of our filingfor protection under Chapter 11 of the U.S. Bankruptcy Code, the board ofdirectors of Washington International B.V., one of our wholly-ownedsubsidiaries located in The Hague, the Netherlands, (“BV”), determined that BVwould have insufficient funds to continue operations in the same manner as it hadprior to our bankruptcy filing. The determination was made based on theexisting financial condition of BV and the fact that our DIP Facility containedterms that prohibited the additional commitment of our resources for BVoperations.

 

II-59

----

 

On May 21, 2001, the BVboard of directors directed management to consider strategic restructuringalternatives including the filing of a petition for suspension of payment underDutch law. On May 29, 2001, the suspension of payment was granted and a trusteewas appointed pursuant to Dutch law. Under the joint management of the trusteeand the BV management, all payments to third parties were temporarily postponedwhile the trustee and management attempted to pursue strategic alternatives,including the sale of the business to various potentially interested parties.From the date of the trustee’s appointment through June 21, 2001, the trusteeand management gathered facts and attempted to sell the business to several interestedparties.

 

Following discussionswith the interested parties, it became clear that a sale of the business wasnot feasible.  On June 21, 2001, thetrustee transformed the suspension of payments to a procedure of insolvency anda curator was appointed to take over all management responsibilities and toliquidate the BV estate. The curator has been managing the estate since thatdate and we have cooperated and will continue to cooperate with the curator toresolve various intercompany issues, including third party intellectualproperty rights, foreign intercompany loans and other matters.

 

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

 

***Washington International, LLC***

 

Washington International, LLC, a Delaware limited liability company andwholly-owned subsidiary of Washington International Holding Limited, a UnitedKingdom wholly-owned subsidiary of Washington Group, filed for protection under the 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 UnitedKingdom. On December 5, 2001, Washington E&C Limited, also a United Kingdomwholly-owned subsidiary of Washington International Holding Limited, purchasedspecified contracts, constituting the ongoing business of WashingtonInternational, LLC, for $250. At that time, Washington International, LLCceased conducting business and on February 20, 2002, a “Winding Up” order wasmade under the insolvency laws of England and Wales against WashingtonInternational, LLC. Washington International, LLC is now under the control of aliquidator pursuant to the insolvency laws of England and Wales, and we nolonger have any control over its activities. Once the winding up process iscomplete, Washington International, LLC will be dissolved and will cease toexist. Creditors of Washington International, LLC will not receive any sharesof the New Common Stock or stock warrants to be distributed to the unsecuredcreditors of the Debtors.

 

Upon adoption of liquidation basis accounting in 2001, WashingtonInternational, LLC had assets of $9,208, liabilities of $12,155 and $364 offoreign currency translation losses, resulting in a net gain of $2,583, whichis included in reorganization items.

 

II-60

----

 

***Reorganization items***

 

Reorganization itemsconsisted of the following:

 
|                                                                    |   | **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** |   |
| Professional  fees and other expenses related to bankruptcy proceedings |   | $                                                | 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                                             |   | $                                                | 3,174  |                                         | $      | 72,057 |   | $ | 8,148 |   | $ | 56,479 |   |

 

***Liabilities subject to compromise***

 

At November 30, 2001,liabilities subject to compromise consisted of the following:

 
| Current  liabilities                                                        |   |      |      |
|-----------------------------------------------------------------------------|--------|-----------|-----------|
| Current  portion of long-term debt                                          |   | $         | 4,000     |   |
| Accounts  payable and subcontracts payable                                  |   | 66,989    |      |
| Billings  in excess of cost and estimated earnings on uncompleted contracts |   | 243,836   |      |
| Accrued  salaries, wages and benefits, including compensated absences       |   | 40,608    |      |
| Other  accrued liabilities                                                  |   | 509,249   |      |
| Total  current liabilities                                                  |   | 864,682   |      |
| Non-current  liabilities                                                    |   |      |      |
| Long-term  debt, less current portion                                       |   | 863,940   |      |
| Self-insurance  reserves                                                    |   | 105,023   |      |
| Pension  and post-retirement obligations                                    |   | 80,729    |      |
| Environmental  remediation obligations                                      |   | 3,975     |      |
| Other  non-current liabilities                                              |   | 9,870     |      |
| Total  non-current liabilities                                              |   | 1,063,537 |      |
| Total  liabilities subject to compromise                                    |   | $         | 1,928,219 |   |

 

During the pendency ofour bankruptcy proceedings, we ceased accruing interest on our long-term debt.Contractual interest expense not recorded during the one month ended February1, 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-start reporting***

 

As of February 1, 2002,we adopted fresh-start reporting pursuant to the guidance provided by theAmerican Institute of Certified Public Accountants Statement of Position 90-7 *FinancialReporting by Entities in Reorganization under the Bankruptcy Code.*In connection with the adoption of fresh-start reporting, a new entity has beencreated 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 theperiod ending subsequent to February 1, 2002 has been designated “SuccessorCompany.”

 

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

 

II-61

----

 

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

 

•                  Comparable public company analysis isgenerally a historic or backward-looking technique. It is premised on the ideathat the price an investor is willing to pay in the public markets forsecurities of similar publicly traded companies is a relevant measure todetermine what an investor is willing to pay today for a target company.Publicly traded companies were selected that were generally comparable to us.Criteria for selection included lines of business, business risks, growthprospects, maturity of the business, market presence and size and scale ofoperations.

 

•                  Discounted cash flow valuation is aforward-looking approach that relates the value of an asset or business to thepresent value of expected future cash flows to be generated by that asset orbusiness. The discount rate used to arrive at present values is a function ofthe risk inherent in estimated cash flows, with investors requiring higherrates of return for riskier assets and lower rates for assets with lessexpected risk.

 

•                  Precedent transaction analysisestimates value by examining public merger and acquisition transactions. Ananalysis of the disclosed purchase price as a multiple of various operatingstatistics reveals industry sales multiples for companies in similar lines ofbusiness. Merger and acquisition transactions in the engineering andconstruction sector and prices paid as a multiple of key operating statisticswere analyzed.

 

Different weights wereplaced on each of these analyses and judgments were made as to the relativesignificance of each in determining an indicated enterprise value range. Theweighted valuation methodologies resulted in an enterprise value range for theconsolidated businesses. The total enterprise value was determined by applyingvaluation metrics against the various risks and opportunities identified toeach business segment. Our reorganization value represented the value of thereorganized consolidated entity. This value was viewed as the fair value of ourcapital, comprising the value of long-term capital investment, including bothlong-term debt and equity, and the approximate amount a willing buyer wouldhave paid for our net assets immediately after the reorganization wascompleted.

 

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

 

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

 

II-62

----

 

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

 
|                                                                        |   | **Predecessor  Company  balance sheet  February 1, 2002** |      | **Debt  discharge** |   | **Fresh-start  adjustments** |   | **Successor  Company  balance sheet  February 1, 2002** |   |
|-----------------------------------------------------------------------------|--------|-----------------------------------------------------------|-----------|---------------------|--------|------------------------------|--------|---------------------------------------------------------|--------|
| **Current  assets**                                                         |   |                                                      |      |                |   |                         |   |                                                    |   |
| Cash  and cash equivalents                                                  |   | $                                                         | 147,450   |                | $      | (19,249                      | )(a)   | $                                                       | — |   | $ | 128,201 |   |
| Accounts  receivable                                                        |   | 351,316                                                   |      | —              |   | (418                         | )(h)   | 350,898                                                 |   |
| Deferred  income taxes                                                      |   | 104,828                                                   |      | —              |   | —                       |   | 104,828                                                 |   |
| Assets  held for sale                                                       |   | 154,237                                                   |      | —              |   | 33,582                       | (i)    | 187,819                                                 |   |
| Other                                                                       |   | 310,242                                                   |      | —              |   | (9,578                       | )(h)   | 300,664                                                 |   |
| Total  current assets                                                       |   | 1,068,073                                                 |      | (19,249             | )      | 23,586                       |   | 1,072,410                                               |   |
| **Non-current  assets**                                                     |   |                                                      |      |                |   |                         |   |                                                    |   |
| Investments  in mining ventures                                             |   | 88,968                                                    |      | —              |   | (20,268                      | )(h)   | 68,700                                                  |   |
| Goodwill,  Predecessor Company                                              |   | 174,909                                                   |      | —              |   | (174,909                     | )(f)   |                                                    |   |
| Goodwill,  Successor Company                                                |   | —                                                    |      | —              |   | 402,352                      | (g)    | 402,352                                                 |   |
| Deferred  income taxes                                                      |   | 575,012                                                   |      | (343,539            | )(b)   | (193,766                     | )(k)   | 37,707                                                  |   |
| Property  and equipment, net                                                |   | 161,241                                                   |      | —              |   | (2,589                       | )(h)   | 158,652                                                 |   |
| Other  assets                                                               |   | 39,156                                                    |      | 12,626              | (c)    | (8,231                       | )(h)   | 43,551                                                  |   |
| Total  non-current assets                                                   |   | 1,039,286                                                 |      | (330,913            | )      | 2,589                        |   | 710,962                                                 |   |
| Total  assets                                                               |   | $                                                         | 2,107,359 |                | $      | (350,162                     | )      | $                                                       | 26,175 |   | $ | 1,783,372 |   |
| **Current  liabilities**                                                    |   |                                                      |      |                |   |                         |   |                                                    |   |
| Accounts  payable and subcontracts payable                                  |   | $                                                         | 191,609   |                | $      | 35,960                       | (d)    | $                                                       | 69     | (h) | $ | 227,638 |   |
| Billings  in excess of cost and estimated earnings on uncompleted contracts |   | 162,453                                                   |      | 194,460             | (d)    | 8,526                        | (h)    | 365,439                                                 |   |
| Accrued  salaries, wages and benefits                                       |   | 88,220                                                    |      | 42,256              | (d)    | —                       |   | 130,476                                                 |   |
| Other  accrued liabilities                                                  |   | 112,314                                                   |      | 17,656              | (d)    | (228                         | )(h)   | 129,742                                                 |   |
| Liabilities  held for sale                                                  |   | 108,670                                                   |      | —              |   | 10,691                       | (i)    | 119,361                                                 |   |
| Income  taxes payable                                                       |   | 516                                                       |      | —              |   | —                       |   | 516                                                     |   |
| Total  current liabilities                                                  |   | 663,782                                                   |      | 290,332             |   | 19,058                       |   | 973,172                                                 |   |
| **Non-current  liabilities**                                                |   |                                                      |      |                |   |                         |   |                                                    |   |
| Revolving  credit facility                                                  |   | —                                                    |      | 40,000              | (a)    | —                       |   | 40,000                                                  |   |
| Self-insurance  reserves                                                    |   | 38,956                                                    |      | 7,580               | (d)    | —                       |   | 46,536                                                  |   |
| Pension  and post-retirement obligations                                    |   | 32,132                                                    |      | 75,633              | (d)    | (12,122                      | )(j)   | 95,643                                                  |   |
| Total  non-current liabilities                                              |   | 71,088                                                    |      | 123,213             |   | (12,122                      | )      | 182,179                                                 |   |
| **Liabilities  subject to compromise**                                      |   | 1,880,900                                                 |      | (1,880,900          | )(d)   | —                       |   | —                                                  |   |
| **Minority  interests**                                                     |   | 77,649                                                    |      | —              |   | 372                          | (h)    | 78,021                                                  |   |
| **Stockholders’  equity (deficit)**                                    |   |                                                      |      |                |   |                         |   |                                                    |   |
| Common  stock                                                               |   | 545                                                       |      | 250                 | (d)    | (545                         | )(l)   | 250                                                     |   |
| Capital  in excess of par value                                             |   | 250,118                                                   |      | 521,103             | (d)    | (250,118                     | )(l)   | 521,103                                                 |   |
| Stock  purchase warrants                                                    |   | 6,550                                                     |      | 28,647              | (d)    | (6,550                       | )(l)   | 28,647                                                  |   |
| Retained  earnings (accumulated deficit)                                    |   | (799,813                                                  | )         | 567,193             | (e)    | 232,620                      | (l)    | —                                                  |   |
| Treasury  stock                                                             |   | (23,192                                                   | )         | —              |   | 23,192                       | (l)    | —                                                  |   |
| Accumulated  other comprehensive income (loss)                              |   | (20,268                                                   | )         | —              |   | 20,268                       | (l)    | —                                                  |   |
| Total  stockholders’ equity (deficit)                                  |   | (586,060                                                  | )         | 1,117,193           |   | 18,867                       |   | 550,000                                                 |   |
| Total  liabilities and stockholders’ equity (deficit)                  |   | $                                                         | 2,107,359 |                | $      | (350,162                     | )      | $                                                       | 26,175 |   | $ | 1,783,372 |   |

 

II-63

----

 

----

Debt discharge:

(a)          Reflects $24,500 inpayments to creditors under the Plan of Reorganization and $34,749 in deferredfinancing costs for the Senior Secured Revolving Credit Facility. Theseemergence costs necessitated a $40,000 draw under the Senior Secured RevolvingCredit Facility.

(b)         Records the effect ofincome taxes on the gain from debt discharge. The discharge of liabilities inbankruptcy is a taxable event. The pre-tax gain reported for financialstatement purposes is $910,732. Our net operating loss carryforward, certaintax credit carryforwards and a portion of tax basis of goodwill and depreciableassets were utilized to offset the tax obligation arising on the discharge ofliabilities.

(c)          Reflects the write-offof $22,123 in fees on the RE&C Financing Facilities and the SeniorUnsecured Notes and the payment of $34,749 of deferred financing costs for theSenior Secured Revolving Credit Facility and deferred bonding fees.

(d)         Of the $1,880,900 ofliabilities subject to compromise:

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

•                  $926,288 inunsecured obligations were exchanged for 5,000 shares of New Common Stock and8,520 warrants. The unsecured obligations include $300,000 of Senior UnsecuredNotes and approximately $415,000 related to specified Power business unitprojects that were subject to guarantees by the Sellers. See Note 3,“Acquisition.”

•                  $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.

(e)          Reflects the gain ondebt discharge of $1,460,732, less the value of New Common Stock and warrantsissued of $550,000, net of income taxes of $343,539.

Fresh-start adjustments:

(f)            Reflects thereclassification of Predecessor Company goodwill.

(g)         Records goodwill forvalue in excess of amounts allocable to identifiable assets.

(h)         Records adjustments toreflect assets and liabilities at fair values.

(i)             Adjusts to reflectthe assets and liabilities of businesses held for sale at their estimatedrealizable values.

(j)             Adjusts pension planand post-employment obligations to recognize unrealized actuarial gains andlosses.

(k)          Reflects the eliminationof the deferred tax assets related to the remaining basis differences betweenbook and tax goodwill of the Predecessor Company. This goodwill will continueto be amortized by the Successor Company over the remaining tax amortizationperiod for tax purposes. Also records adjustments to deferred tax assets andliabilities resulting from the adjustments to reflect assets and liabilities atfair value.

(l)             Records the cancellationof Predecessor Company common stock and elimination of retained earnings.

 

II-64

----

 

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

 
| **Resolution of liabilities  subject to compromise**                        |   | **Predecessor  Company  liabilities subject  to compromise  February 1, 2002** |      | **Liabilities  compromised  (debt discharged)** |   | **Cash paid  at  emergence** |   | **Successor Company  liabilities not  compromised  February 1, 2002** |    |
|-----------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------|-----------|-------------------------------------------------|--------|------------------------------|--------|-----------------------------------------------------------------------|---------|
| **Current  liabilities**                                                    |   |                                                                           |      |                                            |   |                         |   |                                                                  |    |
| Accounts  payable and subcontracts payable                                  |   | $                                                                              | 63,827    |                                            | $      | (23,367                      | )      | $                                                                     | (4,500  | ) | $ | 35,960 |   |
| Billings  in excess of cost and estimated earnings on uncompleted contracts |   | 208,826                                                                        |      | (14,366                                         | )      | —                       |   | 194,460                                                               |    |
| Accrued  salaries, wages and benefits                                       |   | 42,441                                                                         |      | (185                                            | )      | —                       |   | 42,256                                                                |    |
| Other  accrued liabilities                                                  |   | 489,110                                                                        |      | (471,454                                        | )      | —                       |   | 17,656                                                                |    |
| Total  current liabilities                                                  |   | 804,204                                                                        |      | (509,372                                        | )      | (4,500                       | )      | 290,332                                                               |    |
| **Non-current  liabilities**                                                |   |                                                                           |      |                                            |   |                         |   |                                                                  |    |
| Long-term  debt, including accrued interest                                 |   | 888,899                                                                        |      | (868,899                                        | )      | (20,000                      | )      | —                                                                |    |
| Self-insurance  reserves                                                    |   | 97,036                                                                         |      | (89,456                                         | )      | —                       |   | 7,580                                                                 |    |
| Pension  and post-retirement obligations                                    |   | 77,781                                                                         |      | (2,148                                          | )      | —                       |   | 75,633                                                                |    |
| Environmental  liabilities                                                  |   | 3,970                                                                          |      | (3,970                                          | )      | —                       |   | —                                                                |    |
| Other  liabilities                                                          |   | 9,010                                                                          |      | (9,010                                          | )      | —                       |   | —                                                                |    |
| Total  non-current liabilities                                              |   | 1,076,696                                                                      |      | (973,483                                        | )      | (20,000                      | )      | 83,213                                                                |    |
| Total                                                                       |   | $                                                                              | 1,880,900 |                                            | $      | (1,482,855                   | )      | $                                                                     | (24,500 | ) | $ | 373,545 |   |

 

**5.****              RESTRUCTURINGCHARGES**

 

During the fourth quarterof 2001, we initiated restructuring actions to improve operationaleffectiveness and efficiency and reduce expenses globally relative toemployment levels and excess facilities consistent with the Plan ofReorganization. A liability was recorded for employee termination benefits,impairment charges and enhanced pension benefits. The severance costsrepresented expected reductions in work force for 687 employees representingmanagement, professional, administrative and operational overhead. Actualreductions in work force were 538 employees through November 30, 2001.Additional charges of $6,596 for 596 additional employee terminations and$19,666 for facility closure costs were accrued in December 2001. DuringJanuary 2002, charges of $625 for employee terminations were accrued. As partof the 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.A review of our restructuring plan during the eleven months ended January 3,2003 indicated that work force reductions were essentially complete. Theremaining liability at January 3, 2003 represents facility closure costs.

 

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

 

II-65

----

 

The following presentsrestructuring charges accrued and costs incurred:

 
|                                                |   | **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** |   | **Year ended****December  1,  2000** |   |
| Accrued  liability at beginning of  period     |   | $                                                | 24,718 |                                         | $      | 44,072 |   | $ | 17,921 |   | $ | 24,331 |   | $ | — |   |
| Liability  recorded in RE&C acquisition         |   | —                                           |   | —                                       |   | — |   | — |   | 28,264 |   |
| 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 |   | (12,731                                          | )      | (5,824                                       | )      | (111 | ) | (13,373 | ) | (3,933 | ) |
| Liabilities  discharged in bankruptcy               |   | —                                           |   | (14,155                                      | )      | — |   | — |   | — |   |
| Accrued  restructuring liability at end of period   |   | $                                                | 11,987 |                                         | $      | 24,718 |   | $ | 44,072 |   | $ | 17,921 |   | $ | 24,331 |   |

 

**6.     VENTURES**

 

***Construction joint ventures***

 

We participate in jointventures that are formed to bid, negotiate and complete specific projects. Wegenerally participate in joint ventures as the sponsor and manager of projects.The size, scope and duration of joint-venture projects vary among periods. Thetables below represent the financial information of our unconsolidatedconstruction joint ventures where we generally hold a 50% or less ownershipinterest.

 
| **Combined financial position of**             |   | **Successor  Company** |    | **Predecessor  Company** |   |
|------------------------------------------------|--------|------------------------|---------|--------------------------|--------|
| **unconsolidated construction joint ventures** |   | **January 3,  2003**   |    | **February  1, 2002**    |   | **November  30, 2001** |   |
|                                           |   |                   |    | **(Fresh-start)**        |   |   |   |
| Current  assets                                |   | $                      | 273,719 |                     | $      | 269,763 |   | $ | 281,449 |   |
| Property  and equipment, net                   |   | 8,194                  |    | 20,845                   |   | 21,502 |   |
| Current  liabilities                           |   | (246,873               | )       | (199,672                 | )      | (179,067 | ) |
| Net  assets                                    |   | $                      | 35,040  |                     | $      | 90,936 |   | $ | 123,884 |   |

 
|                                                                              |   | **Successor Company**                            |    | **Predecessor Company**                      |   |
|-----------------------------------------------------------------------------------|--------|--------------------------------------------------|---------|----------------------------------------------|--------|
| **Combined results of operations of  unconsolidated construction joint ventures** |   | **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** |   |
| Revenue                                                                           |   | $                                                | 596,965 |                                         | $      | 43,751 |   | $ | 42,632 |   | $ | 557,209 |   | $ | 701,580 |   |
| Cost  of revenue                                                                  |   | (574,175                                         | )       | (42,436                                      | )      | (40,563 | ) | (537,327 | ) | (682,235 | ) |
| Gross  profit                                                                     |   | $                                                | 22,790  |                                         | $      | 1,315 |   | $ | 2,069 |   | $ | 19,882 |   | $ | 19,345 |   |

 
|                                                                                                          |   | **Successor Company**                            |    | **Predecessor Company**                      |   |
|---------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------|---------|----------------------------------------------|--------|
| **Washington Group’s****share  of results of operations of  unconsolidated construction joint ventures** |   | **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** |   |
| Revenue                                                                                                       |   | $                                                | 236,701 |                                         | $      | 17,790 |   | $ | 16,327 |   | $ | 210,904 |   | $ | 240,690 |   |
| Cost  of revenue                                                                                              |   | (229,383                                         | )       | (17,387                                      | )      | (15,653 | ) | (205,871 | ) | (231,636 | ) |
| Gross  profit                                                                                                 |   | $                                                | 7,318   |                                         | $      | 403 |   | $ | 674 |   | $ | 5,033 |   | $ | 9,054 |   |

 

II-66

----

 

***Mining ventures:***

 

At January 3, 2003, weheld ownership interests in two incorporated mining ventures, MIBRAG mbH (50%)and Westmoreland Resources, Inc. (“Westmoreland Resources”) (20%) which areaccounted for under the equity method. We provide contract mining services to theseventures. Effective March 28, 2001, we increased our ownership interest inMIBRAG mbH from 33% to 50% by purchasing the additional interests forapproximately $17,500, which was funded through the reinvestment of dividenddistributions from MIBRAG mbH.

 
| **Combined financial position of   mining ventures** |                 | **Successor  Company** |                  | **Predecessor  Company** |                   |
|------------------------------------------------------|----------------------|------------------------|-----------------------|--------------------------|------------------------|
|                                                 | **January 3,  2003** |                   | **February  1, 2002** |                     | **November  30, 2001** |   |
|                                                 |                 |                   |                  | **(Fresh-start)**        |                   |   |   |
| Current  assets                                      |                 | $                      | 201,779               |                     | $                      | 145,827 |   | $ | 175,403 |   |
| Non-current  assets                                  |                 | 538,880                |                  | 125,927                  |                   | 147,639 |   |
| Property  and equipment, net                         |                 | 450,604                |                  | 381,161                  |                   | 483,662 |   |
| Current  liabilities                                 |                 | (50,365                | )                     | (51,397                  | )                      | (78,792 | ) |
| Long-term  debt, non-recourse to parents             |                 | (272,120               | )                     | (226,431                 | )                      | (262,998 | ) |
| Other  non-current liabilities                       |                 | (662,454               | )                     | (220,412                 | )                      | (247,144 | ) |
| Net  assets                                          |                 | $                      | 206,324               |                     | $                      | 154,675 |   | $ | 217,770 |   |

 
|                                                   |   | **Successor Company**                            |    | **Predecessor Company**                      |   |
|--------------------------------------------------------|--------|--------------------------------------------------|---------|----------------------------------------------|--------|
| **Combined results of operations of  mining ventures** |   | **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** |   |
| Revenue                                                |   | $                                                | 296,335 |                                         | $      | 28,403 |   | $ | 25,465 |   | $ | 315,261 |   | $ | 284,241 |   |
| Costs  and expenses                                    |   | (240,358                                         | )       | (21,508                                      | )      | (22,827 | ) | (276,249 | ) | (243,448 | ) |
| Net  income                                            |   | $                                                | 55,977  |                                         | $      | 6,895 |   | $ | 2,638 |   | $ | 39,012 |   | $ | 40,793 |   |

 

In the fourth quarter of2002, MIBRAG mbH successfully negotiated amendments to the original agreementon transportation credit matters that had been entered into with the Germangovernment in 1993. As a result of those negotiations, MIBRAG mbH recognized$13,000 in operating income, 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 agreementreplacing annual payments to be received by MIBRAG mbH over approximately 19years from the German government with a one-time, up-front payment totalingapproximately $383,000, which was recorded as deferred income. MIBRAG mbH alsocapitalized approximately $392,000 for coal transportation and mining rightsacquired through the settlement agreement. Both the deferred revenue and therights will be amortized over approximately 19 years.

 

**7.     SALEOF BUSINESS AND BUSINESSES HELD FOR SALE**

 

In November 2001, we andBNFL agreed to pursue the sale of the Electro-Mechanical Division (“EMD”) ofWGSG. EMD designs and manufactures components for the U.S. Navy, nuclear powerutilities and other industries. On October 28, 2002, we sold EMD to asubsidiary of Curtiss-Wright Corporation. Curtiss-Wright Corporation agreed topay $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. Operating results for EMDare included as part of the Energy & Environment business unit in Note 13,“Operating Segment, Geographic and Customer Information.”

 

During 2001, we electedto pursue the sale of the process technology development portion of ourpetroleum and chemical business (the “Technology Center”). We are indiscussions with potential buyers, and anticipate that a sale will be completedduring the first quarter of 2003. Operating results for the Technology Centerare included 

 

II-67

----

 

as part of the Industrial/Process business unit in Note 13, “OperatingSegment, Geographic and Customer Information.”

 

For financial reportingpurposes, the assets and liabilities of businesses held for sale have beenclassified as “Assets held for sale” and “Liabilities held for sale” in theConsolidated Balance Sheets. The table below provides detail of the assets andliabilities of EMD and the Technology Center as of November 30, 2001 andFebruary 1, 2002, and for the Technology Center only as of January 3, 2003.

 
|                                                                        |   | **Successor  Company** |   | **Predecessor  Company** |   |
|-----------------------------------------------------------------------------|--------|------------------------|--------|--------------------------|--------|
|                                                                        |   | **January 3,  2003**   |   | **February  1, 2002**    |   | **November  30, 2001** |   |
|                                                                        |   |                   |   | **(Fresh-start)**        |   |   |   |
| **ASSETS**                                                                  |   |                   |   |                     |   |   |   |
| Accounts  receivable and unbilled receivables                               |   | $                      | 8,198  |                     | $      | 26,088 |   | $ | 25,742 |   |
| Inventories                                                                 |   | —                 |   | 23,151                   |   | 25,029 |   |
| Goodwill                                                                    |   | 13,782                 |   | 107,949                  |   | 74,368 |   |
| Property  and equipment, net of accumulated depreciation                    |   | 485                    |   | 29,978                   |   | 28,700 |   |
| Other  assets                                                               |   | 1,078                  |   | 653                      |   | 881 |   |
| **Total  assets held for sale**                                             |   | $                      | 23,543 |                     | $      | 187,819 |   | $ | 154,720 |   |
|                                                                        |   |                   |   |                     |   |   |   |
| **LIABILITIES**                                                             |   |                   |   |                     |   |   |   |
| Accounts  payable and subcontracts payable                                  |   | $                      | 840    |                     | $      | 8,033 |   | $ | 11,426 |   |
| Billings  in excess of cost and estimated earnings on uncompleted contracts |   | 4,351                  |   | 39,795                   |   | 43,036 |   |
| Accrued  salaries, wages and benefits, including compensated absences       |   | —                 |   | 6,809                    |   | 5,788 |   |
| Other  accrued liabilities                                                  |   | —                 |   | 851                      |   | 458 |   |
| Pension  and post-retirement benefit obligations                            |   | —                 |   | 55,154                   |   | 45,238 |   |
| Self-insurance  reserves                                                    |   | —                 |   | 2,785                    |   | 2,843 |   |
| Other  liabilities                                                          |   | 2,976                  |   | 5,934                    |   | 5,947 |   |
| **Total  liabilities held for sale**                                        |   | $                      | 8,167  |                     | $      | 119,361 |   | $ | 114,736 |   |

 

Operating results ofbusinesses held for sale are as follows (including results for EMD throughOctober 28, 2002, the date of sale):

 
|                               |   | **Successor Company**                            |    | **Predecessor Company**                      |   |
|------------------------------------|--------|--------------------------------------------------|---------|----------------------------------------------|--------|
| **Combined results of operations** |   | **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** |   |
| Revenue                            |   | $                                                | 150,086 |                                         | $      | 17,088 |   | $ | 16,413 |   | $ | 171,876 |   | $ | 125,396 |   |
| Net  income (loss)                 |   | 7,333                                            |    | 960                                          |   | 22 |   | (231 | ) | 3,342 |   |
|                                    |        |                                                  |         |                                              |        |  |  |  |  |  |  |  |  |  |  |  |

 

**8.     GOODWILL**

 

The followingtable reflects the changes in the carrying value of goodwill from December 28,2001 to January 3, 2003. During the month ended February 1, 2002, we eliminatedPredecessor Company goodwill in fresh-start reporting and established goodwillof the Successor Company. See Note 4, “Reorganization Case and Fresh-startReporting.” During the eleven months ended January 3, 2003, we increaseddeferred tax assets and reduced goodwill as a result of amortization of theexcess of tax deductible goodwill over financial statement goodwill inaccordance with the provisions of Financial Accounting Standards BoardStatement No. 109, *Accounting for Income Taxes*.

 

II-68

----

 
| **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  statement goodwill |   | (257      | )      | (4,461                   | )      | (1,971             | )      | —     |   | (1,668      | )      | (6,741                         | )      | —                   |   | (15,098   | )      |
| Balance  at January 3, 2003                                                                           |   | $         | 6,589  |                     | $      | 114,427            |   | $          | 50,568 |        | $      | —                         |   | $                        | 42,776 |      | $      | 172,894 |   | $ | — |   | $ | 387,254 |   |

 

There was no goodwillidentified for impairment during our annual review of goodwill for the elevenmonths ended January 3, 2003.

 

**9.     CREDITFACILITIES**

 

On July 7, 2000, in orderto finance the acquisition of RE&C, refinance existing revolving creditfacilities, fund working capital requirements and pay related fees andexpenses, we (1) obtained the RE&C Financing Facilities, providing for anaggregate of $1,000,000 of term loans and revolving borrowing capacity and (2)issued and sold $300,000 aggregate principal amount of Senior Unsecured Notes.The terms of the RE&C Financing Facilities and Senior Unsecured Notes arebriefly summarized below.

 

***RE&C Financing Facilities***

 

The RE&C FinancingFacilities provided for, on the terms and subject to the conditions stated inthe RE&C Financing Facilities: (1) two senior secured term loan facilitiesin an aggregate principal amount of up to $500,000, including a multi-drawTranche A term loan facility in an aggregate principal amount of $100,000 thatmatured July 7, 2005 and a Tranche B term loan facility in an aggregateprincipal amount of $400,000 that matured July 7, 2007, and (2) a five-yearsenior secured revolving credit facility in an aggregate principal amount of upto $500,000, all of which was available for letters of credit. Initialborrowings under the RE&C Financing Facilities totaled $400,000,representing the full amount available under the Tranche B term loan facility.On October 5, 2000, we terminated the Tranche A term loan facility to eliminateongoing related commitment fees.

 

***Senior Unsecured Notes***

 

The Senior UnsecuredNotes were unsecured senior obligations that were to mature on July 1, 2010.Interest on the Senior Unsecured Notes was payable semiannually in arrears onJanuary 1 and July 1, commencing January 1, 2001. The Senior Unsecured Noteswere sold in a private offering to qualified institutional buyers. Under aregistration rights agreement for the benefit of the holders of the SeniorUnsecured Notes, we were required to offer to exchange the Senior UnsecuredNotes for new Senior Unsecured Notes that were registered under the SecuritiesAct of 1933. The Senior Unsecured Notes provided for additional interest to theextent and for the period that the registration process was not completedwithin the specified periods. The Senior Unsecured Notes accrued interest at arate of 11% per annum through September 20, 2000, and were then adjusted to11.5% per annum. They were scheduled to continue at that rate until we fullycomplied with the registration requirements of the registration rightsagreement, subject to a further increase in interest rate of .5% per annum fromand after December 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. The Senior Unsecured Notesranked senior to any future subordinated

 

II-69

----

 

indebtedness we might have incurred. The Senior Unsecured Notes wereguaranteed on a senior basis by certain of our subsidiaries.

 

***Bankruptcy discharge***

 

As discussed in Note 4,“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 fileda voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code.See Note 4, “Reorganization Case and Fresh-start Reporting.” On the same day,we entered into the DIP Facility with some of our subsidiaries as guarantors,for a commitment of $195,000 with the ability to increase the total commitmentto $350,000. On June 5, 2001 the DIP Facility lenders approved an increase inthe total commitment from $195,000 to $220,000. The DIP Facility was to be used(1) to finance the costs of restructuring and (2) for ongoing working capital,general corporate purposes and letter of credit issuance. The borrowing rateunder the DIP Facility was the prime rate, plus an additional margin of 4.0%.The effective interest rate was 11.0% as of May 2001. The DIP Facility carriedother fees, including commitment fees and letter of credit fees, normal andcustomary for such credit agreements. As of January 24, 2002, we had nooutstanding debt and $32,800 of outstanding letters of credit under the DIPFacility. As discussed below, the DIP Facility was replaced by the SeniorSecured Revolving Credit Facility on January 25, 2002.

 

***Senior Secured Revolving Credit Facility***

 

In connection with ouremergence from bankruptcy protection on January 25, 2002, we entered into theSenior Secured Revolving Credit Facility, providing for an aggregate of$350,000 of revolving borrowing and letter of credit capacity. The Senior SecuredRevolving Credit Facility provides for an amount up to $350,000 in theaggregate of loans and other financial accommodations allocated pro ratabetween two facilities as follows: a Tranche A facility in the amount of$208,350 and a Tranche B facility in the amount of $141,650. The scheduledtermination date for the Senior Secured Revolving Credit Facility is thirtymonths from January 24, 2002, and it may be increased up to a total of $375,000with the approval of the lenders.

 

The Senior Secured RevolvingCredit Facility was entered into (1) to replace approximately $32,800 inletters of credit issued under the DIP Facility; (2) to retire our DIP Facilityand repay any DIP Facility balance (of which there was none); (3) to replace orbackstop approximately $120,842 in letters of credit issued under ourpre-petition RE&C Financing Facilities; (4) to make payments to thepre-petition senior secured lenders and Mitsubishi Heavy Industries pursuant toour Plan of Reorganization; (5) to finance the costs of restructuring; and (6)for ongoing working capital, general corporate purposes and letter of creditissuance. Borrowings under the Credit Facility are required to be allocatedbetween the two tranches on a proportional split based upon the size of each tranche.The initial borrowing rate under the Senior Secured Revolving Credit Facilityis, for Tranche A, the applicable LIBOR, which has a stated floor of 3%, plusan additional margin of 5.5%, and for Tranche B, LIBOR plus an additionalmargin of 5.5%. Alternatively, we may choose the prime rate, plus an additionalmargin of 4.5% for Tranche A and 5.5% for Tranche B. As of January 3, 2003, theeffective LIBOR- and prime-based rates for Tranche A were 8.5% and 8.75%,respectively, and for Tranche B, 6.88% and 9.75%, respectively. The SeniorSecured Revolving Credit Facility carries other fees, including commitment feesand letter of credit fees, normal and customary for such credit agreements. TheSenior Secured Revolving Credit Facility contains affirmative, negative andfinancial covenants, including minimum net worth, capital expenditures,maintenance of certain financial and operating ratios, and specified events ofdefault which are typical for a credit agreement governing credit facilities ofthe size, type and tenor of the Senior Secured Revolving Credit Facility. TheSenior Secured Credit Facility also contains affirmative and negative covenantslimiting our ability and the ability of certain of our subsidiaries to incurdebt or liens, provide guarantees, make investments and pay dividends. Therewere no amounts borrowed or outstanding under the Senior Secured RevolvingCredit Facility at January 3, 2003. Also at January 3, 2003, the borrowingcapacity net of outstanding letters of credit was $180,989.

 

II-70

----

 

**10.  TAXESON INCOME**

 

The components of theU.S. federal, state and foreign income tax expense (benefit) were as follows:

 
|                          |   | **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** |   | **Year ended****December  1,  2000** |   |
| Currently  payable            |   |                                             |   |                                         |   |   |   |   |   |   |   |
| U.S.  federal                 |   | $                                                | — |                                         | $      | — |   | $ | — |   | $ | — |   | $ | — |   |
| State                         |   | 1,660                                            |   | (129                                         | )      | 20 |   | 649 |   | 222 |   |
| Foreign                       |   | 4,158                                            |   | 361                                          |   | 899 |   | 4,967 |   | 3,723 |   |
| Current                       |   | 5,818                                            |   | 232                                          |   | 919 |   | 5,616 |   | 3,945 |   |
| Deferred                      |   |                                             |   |                                         |   |   |   |   |   |   |   |
| U.S.  federal                 |   | 36,107                                           |   | (19,178                                      | )      | (13,173 | ) | (23,917 | ) | (450,778 | ) |
| State                         |   | 3,900                                            |   | (1,246                                       | )      | (2,467 | ) | (8,728 | ) | (88,081 | ) |
| Foreign                       |   | 392                                              |   | 114                                          |   | (186 | ) | 264 |   | 585 |   |
| Deferred                      |   | 40,399                                           |   | (20,310                                      | )      | (15,826 | ) | (32,381 | ) | (538,274 | ) |
| Income  tax expense (benefit) |   | $                                                | 46,217 |                                         | $      | (20,078 | ) | $ | (14,907 | ) | $ | (26,765 | ) | $ | (534,329 | ) |

 

The components of thedeferred tax assets and liabilities and the related valuation allowances wereas follows:

 
|                                    |   | **Successor  Company** |    | **Predecessor  Company** |   |
|-----------------------------------------|--------|------------------------|---------|--------------------------|--------|
| **Deferred tax assets and liabilities** |   | **January 3,  2003**   |    | **February  1, 2002**    |   | **November  30, 2001** |   |
|                                    |   |                   |    | **(Fresh-start)**        |   |   |   |
| Deferred  tax assets                    |   |                   |    |                     |   |   |   |
| Goodwill                                |   | $                      | 26,204  |                     | $      | — |   | $ | 244,561 |   |
| Employee  benefit plans                 |   | 37,637                 |    | 36,494                   |   | 51,049 |   |
| Estimated  loss accruals                |   | 50,694                 |    | 80,372                   |   | 163,952 |   |
| Revenue  recognition                    |   | —                 |    | 1,634                    |   | 2,257 |   |
| Depreciation                            |   | 298                    |    | —                   |   | — |   |
| Alternative  minimum tax                |   | —                 |    | —                   |   | 18,802 |   |
| Foreign  tax credit                     |   | 12,210                 |    | 12,037                   |   | 11,149 |   |
| Joint  ventures                         |   | 9,097                  |    | 13,599                   |   | 5,985 |   |
| Self-insurance  reserves                |   | 34,336                 |    | 32,462                   |   | 49,753 |   |
| Loss  carryforwards                     |   | 48,512                 |    | 45,252                   |   | 186,117 |   |
| Valuation  allowance                    |   | (48,512                | )       | (45,252                  | )      | (44,675 | ) |
| Total  deferred tax assets              |   | 170,476                |    | 176,598                  |   | 688,950 |   |
| Deferred  tax liabilities               |   |                   |    |                     |   |   |   |
| Depreciation                            |   | —                 |    | (9,100                   | )      | (6,431 | ) |
| Investment  in affiliates               |   | (21,382                | )       | (9,718                   | )      | (14,835 | ) |
| Revenue  recognition                    |   | (6,804                 | )       | —                   |   | — |   |
| Other,  net                             |   | (16,848                | )       | (15,245                  | )      | (10,849 | ) |
| Total  deferred tax liabilities         |   | (45,034                | )       | (34,063                  | )      | (32,115 | ) |
| Total  deferred tax assets, net         |   | $                      | 125,442 |                     | $      | 142,535 |   | $ | 656,835 |   |

 

At January 3, 2003, wehad foreign net operating loss (“NOL”) carryforwards of approximately $159,801.The foreign NOL’s primarily consist of losses incurred on two constructionprojects in the United Kingdom which were acquired as part of the RE&Cacquisition. We also had $12,210 of foreign tax credits which currently have noexpiration date.

 

II-71

----

 

The $26,204 increase inthe goodwill component of deferred tax assets at January 3, 2003 is due totiming differences related to the emergence from bankruptcy. Post fresh-startoperations resulted in retaining additional tax goodwill that is amortized fortax purposes over the remaining period of 12.5 years.

 

The $48,512 valuationallowance reduces the deferred tax assets associated with the foreign NOLcarryforwards to a level which we believe will, more likely than not, berealized based on estimated future taxable income. The increase of $3,260 inthe valuation allowance at January 3, 2003 reflects the uncertainty regardingthe future utilization of current year foreign net operating losses.

 

Years prior to 1994 areclosed to examination for federal tax purposes. We believe that adequateprovision has been made for probable tax assessments for all open tax years.

 

Income tax expense(benefit) differed from income taxes at the U.S. federal statutory tax rate of35.0% as follows:

 
|                 |   | **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** |   | **Year ended****December  1,  2000** |   |
| Federal  tax rate    |   | 35.0                                             | %      | 35.0                                         | %      | 35.0 | % | 35.0 | % | 35.0 | % |
| State  tax           |   | 3.5                                              |   | 2.8                                          |   | 3.9 |   | 5.5 |   | 4.1 |   |
| Nondeductible  items |   | 3.0                                              |   | .4                                           |   | (3.1 | ) | (14.4 | ) | (.1 | ) |
| Foreign  tax         |   | 2.7                                              |   | —                                       |   | — |   | (1.3 | ) | (.5 | ) |
| Goodwill             |   | —                                           |   | —                                       |   | .7 |   | 3.0 |   | .1 |   |
| Effective  tax rate  |   | 44.2                                             |   | 38.2                                         |   | 36.5 |   | 27.8 |   | 38.6 |   |

 

State taxes, net offederal benefit, include the impact of the cumulative effect of the state taxrate changes caused by changes in our state apportionment factors that had acorresponding impact on our deferred state tax assets and liabilities. Foreigntaxes include a benefit for current year losses in certain foreignjurisdictions. A full valuation allowance has been placed against the resultingforeign NOL’s. Nondeductible items were principally comprised of nondeductiblereorganization expenses, net of previously capitalized expenses from an earlierreorganization, and the nondeductible portion of meals and entertainmentexpenses.

 

Income (loss) beforereorganization items, income taxes, minority interests and extraordinary itemis comprised of the following:

 
|                                                                                                 |   | **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** |   | **Year ended****December  1,  2000** |   |
| U.S.  source                                                                                         |   | $                                                | 60,059  |                                         | $      | 4,648 |   | $ | (35,485 | ) | $ | (156,471 | ) | $ | (1,361,729 | ) |
| Foreign  source                                                                                      |   | 47,617                                           |    | 3,420                                        |   | 2,760 |   | 116,737 |   | (22,610 | ) |
| Income  (loss) before reorganization items, income taxes, minority interests and  extraordinary item |   | $                                                | 107,676 |                                         | $      | 8,068 |   | $ | (32,725 | ) | $ | (39,734 | ) | $ | (1,384,339 | ) |

 

**11.  BENEFITPLANS**

 

***Pension plans and supplemental retirement plans***

 

Through the RE&Cacquisition, we assumed sponsorship of contributory defined benefit pensionplans which covered employees of legal entities in the Netherlands and theUnited Kingdom. We made actuarially computed contributions, as necessary, basedon local standards in the respective countries to adequately fund benefits for 

 

II-72

----

 

these plans. In 2001, the legal entities sponsoring the pension plansin the Netherlands and the United Kingdom filed for bankruptcy, the plans weretransferred to independent trustees and the related liabilities wereextinguished. See Note 4, “Reorganization Case and Fresh-start Reporting.”

 

Through an acquisition in1999, we assumed sponsorship of contributory defined benefit pension planswhich cover employees of WGSG. We make actuarially computed liabilitycalculations for financial reporting purposes and make contributions asnecessary to adequately fund benefits for these plans. Plan assets are investedin a WGSG master pension trust that invests primarily in publicly traded commonstocks, bonds, government securities and cash equivalents. At November 30, 2001and February 1, 2002, the portion of the net unfunded obligation expected to besold was reclassified as part of liabilities held for sale. This net obligationwas transferred to the buyer as part of the sale of EMD on October 28, 2002.See Note 7, “Sale of Business and Businesses Held for Sale.”

 

We have an unfundedsupplemental retirement plan for key executives of WGSG providing for periodicpayments upon retirement. Benefits from this plan are based on salary and yearsof service and are reduced by benefits earned from certain other pension plansin which the executives participate. Benefits from this plan were frozeneffective July 1, 2001, resulting in a curtailment gain of $4,382. At November30, 2001 and February 1, 2002, the portion of the net unfunded obligationexpected to be sold was reclassified as part of liabilities held for sale. Thisnet obligation was transferred to the buyer as part of the sale of EMD onOctober 28, 2002. See Note 7, “Sale of Business and Businesses Held for Sale.”

 

We have assumed thenonqualified pension liabilities for approximately 60 employees and formeremployees of Old MK. In addition, we have an unfunded pension liability forformer non-employee directors of Old MK. Participants do not accrue any servicecosts under the plans.

 

The actuarial assumptionsused to determine pension benefit obligations for the U.S. plans are asfollows:

 
|                       |   | **Successor  Company** |   | **Predecessor  Company** |   |
|----------------------------|--------|------------------------|--------|--------------------------|--------|
| **Pension benefits**       |   | **January 3,  2003**   |   | **February  1, 2002**    |   | **November  30, 2001** |   |
|                       |   |                   |   | **(Fresh-start)**        |   |   |   |
| Discount  rate             |   | 6.8                    | %      | 7.3                      | %      | 7.0 | % |
| Compensation  increases    |   | 4.0                    | %      | 4.0                      | %      | 4.0 | % |
| Expected  return on assets |   | 9.0                    | %      | 9.0                      | %      | 9.0 | % |

 

Experience gains andlosses, as well as the effects of changes in actuarial assumptions and planprovisions, are amortized over the average future service period of employees.

 

The components of netpension costs for the U.S. plans are as follows:

 
|                                |   | **Successor Company**                            |   | **Predecessor Company**                      |   |
|-------------------------------------|--------|--------------------------------------------------|--------|----------------------------------------------|--------|
| **Pension benefits**                |   | **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** |   |
| Service  cost                       |   | $                                                | 4,503  |                                         | $      | 369 |   | $ | 369 |   | $ | 4,717 |   | $ | 4,121 |   |
| Interest  cost                      |   | 9,111                                            |   | 854                                          |   | 854 |   | 11,369 |   | 10,597 |   |
| Expected  return on assets          |   | (6,214                                           | )      | (600                                         | )      | (600 | ) | (7,947 | ) | (6,979 | ) |
| Recognized  net actuarial gain      |   | 11                                               |   | 13                                           |   | 13 |   | — |   | (2,063 | ) |
| Amortization  of prior service cost |   | —                                           |   | —                                       |   | — |   | 21 |   | 21 |   |
| Net  periodic pension cost          |   | $                                                | 7,411  |                                         | $      | 636 |   | $ | 636 |   | $ | 8,160 |   | $ | 5,697 |   |

 

II-73

----

 

Reconciliation ofbeginning and ending balances of benefit obligations and fair value of planassets and the funded status of the U.S. pension plans are as follows:

 
|                                       |   | **Successor  Company** |    | **Predecessor  Company** |   |
|--------------------------------------------|--------|------------------------|---------|--------------------------|--------|
| **Pension benefits**                       |   | **January 3,  2003**   |    | **February  1, 2002**    |   | **November  30, 2001** |   |
|                                       |   |                   |    | **(Fresh-start)**        |   |   |   |
| Benefit  obligation at beginning of period |   | $                      | 161,738 |                     | $      | 173,985 |   | $ | 149,712 |   |
| Service  cost                              |   | 4,503                  |    | 738                      |   | 4,717 |   |
| Interest  cost                             |   | 9,111                  |    | 1,708                    |   | 11,369 |   |
| Participant  contributions                 |   | 841                    |    | 185                      |   | 903 |   |
| Benefit  payments                          |   | (7,548                 | )       | (2,336                   | )      | (10,939 | ) |
| Actuarial  (gain) loss                     |   | 9,478                  |    | (12,542                  | )      | 22,605 |   |
| Divestiture  - sale of EMD                 |   | (115,504               | )       | —                   |   | — |   |
| Amendments                                 |   | —                 |    | —                   |   | (4,382 | ) |
| Benefit  obligation at end of period       |   | $                      | 62,619  |                     | $      | 161,738 |   | $ | 173,985 |   |

 
|                                              |   | **Successor  Company** |   | **Predecessor  Company** |   |
|---------------------------------------------------|--------|------------------------|--------|--------------------------|--------|
| **Pension benefits**                              |   | **January 3,  2003**   |   | **February  1, 2002**    |   | **November  30, 2001** |   |
|                                              |   |                   |   | **(Fresh-start)**        |   |   |   |
| Fair  value of plan assets at beginning of period |   | $                      | 92,137 |                     | $      | 90,131 |   | $ | 86,320 |   |
| Actual  return on plan assets                     |   | (10,000                | )      | 3,100                    |   | (2,891 | ) |
| Company  contributions                            |   | 6,922                  |   | 1,057                    |   | 16,738 |   |
| Participant  contributions                        |   | 841                    |   | 185                      |   | 903 |   |
| Benefit  payments                                 |   | (7,548                 | )      | (2,336                   | )      | (10,939 | ) |
| Divestiture  - sale of EMD                        |   | (72,732                | )      | —                   |   | — |   |
| Fair  value of plan assets at end of period       |   | $                      | 9,620  |                     | $      | 92,137 |   | $ | 90,131 |   |

 
|                                                        |   | **Successor  Company** |    | **Predecessor  Company** |   |
|-------------------------------------------------------------|--------|------------------------|---------|--------------------------|--------|
| **Pension benefits**                                        |   | **January 3,  2003**   |    | **February  1, 2002**    |   | **November  30, 2001** |   |
|                                                        |   |                   |    | **(Fresh-start)**        |   |   |   |
| Funded  status (obligations less fair value of plan assets) |   | $                      | (52,999 | )                        | $      | (69,601 | ) | $ | (83,854 | ) |
| Unrecognized  net actuarial loss                            |   | 4,353                  |    | —                   |   | 26,649 |   |
| Unrecognized  net transition amount                         |   | —                 |    | —                   |   | 213 |   |
| Accrued  benefit cost                                       |   | $                      | (48,646 | )                        | $      | (69,601 | ) | $ | (56,992 | ) |

 

Amounts recognized in thebalance sheet for the U.S. pension plans are as follows:

 
|                                           |   | **Successor  Company** |    | **Predecessor  Company** |   |
|------------------------------------------------|--------|------------------------|---------|--------------------------|--------|
| **Pension benefits**                           |   | **January 3,  2003**   |    | **February  1, 2002**    |   | **November  30, 2001** |   |
|                                           |   |                   |    | **(Fresh-start)**        |   |   |   |
| Accrued  benefit liability                     |   | $                      | (49,907 | )                        | $      | (45,533 | ) | $ | (35,257 | ) |
| Liabilities  subject to compromise             |   | —                 |    | —                   |   | (12,550 | ) |
| Accumulated  other comprehensive loss          |   | 992                    |    | —                   |   | 7,578 |   |
| Minority  interest in other comprehensive loss |   | 269                    |    | —                   |   | 4,757 |   |
| Liabilities  held for sale                     |   | —                 |    | (24,068                  | )      | (21,520 | ) |
| Net  amount recognized                         |   | $                      | (48,646 | )                        | $      | (69,601 | ) | $ | (56,992 | ) |

 

II-74

----

 

At January 3, 2003, thebenefit obligation for each pension benefit plan disclosed above exceeded thefair value of plan assets. Upon our emergence from bankruptcy, we appliedfresh-start reporting that required the elimination of all unrecognized amountsas described above. See Note 4, “Reorganization Case and Fresh-start Reporting”for disclosure of the effect of the elimination.

 

***Post-retirement health care plans***

 

We are the sponsors of anunfunded plan to provide certain health care benefits for employees of Old MKwho retired before July 1, 1993, including their surviving spouses anddependent children. Employees who retired after July 1, 1993 are noteligible for subsidized post-retirement health care benefits. The plan wasamended in past years, and we reserve the right to amend or terminate the post-retirementhealth care benefits currently provided under the plan and may increaseretirees’ cash contributions at any time.

 

We provide benefits undercompany sponsored retiree health care and life insurance plans forsubstantially all employees of WGSG. At November 30, 2001 and February 1, 2002,the portion of the net unfunded obligation expected to be sold was reclassifiedas part of liabilities held for sale. This net obligation was transferred tothe buyer as part of the sale of EMD on October 28, 2002. See Note 7, “Sale ofBusiness and Businesses Held for Sale.” We also provide benefits under companysponsored retiree health care plans to approximately 100 retired employees andprovide a life insurance plan for substantially all retirees of RE&C. Theretiree health care plans require retiree contributions and contain other costsharing features. The retiree life insurance plans provide basic coverage on anoncontributory basis.

 

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

 
|                         |   | **Successor  Company** |   | **Predecessor  Company** |   |
|------------------------------|--------|------------------------|--------|--------------------------|--------|
| **Post-retirement benefits** |   | **January 3,  2003**   |   | **February  1, 2002**    |   | **November  30, 2001** |   |
|                         |   |                   |   | **(Fresh-start)**        |   |   |   |
| Discount  rate               |   | 6.8                    | %      | 7.3                      | %      | 7.0 | % |

 

Experience gains andlosses, as well as the effects of changes in actuarial assumptions and planprovisions, are amortized over the average future service period of employees.

 

The components of netpost-retirement costs are as follows:

 
|                                  |   | **Successor Company**                       |   | **Predecessor Company**                 |   |
|---------------------------------------|--------|---------------------------------------------|--------|-----------------------------------------|--------|
| **Post-retirement benefits**          |   | **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** |   |
| Service  cost                         |   | $                                           | 1,216  |                                    | $      | 25 |   | $ | 25 |   | $ | 701 |   | $ | 392 |   |
| Interest  cost                        |   | 4,623                                       |   | 292                                     |   | 292 |   | 5,523 |   | 4,693 |   |
| Recognized  net actuarial gain        |   | —                                      |   | (31                                     | )      | (30 | ) | — |   | (1,238 | ) |
| Amortization  of prior service credit |   | —                                      |   | (32                                     | )      | (33 | ) | (2,087 | ) | (391 | ) |
| Settlement                            |   | —                                      |   | —                                  |   | — |   | (391 | ) | — |   |
| Net  periodic pension cost            |   | $                                           | 5,839  |                                    | $      | 254 |   | $ | 254 |   | $ | 3,746 |   | $ | 3,456 |   |

 

II-75

----

 

Reconciliation ofbeginning and ending balances of post-retirement benefit obligations and fairvalue of plan assets and the funded status are as follows:

 
|                                       |   | **Successor  Company** |   | **Predecessor  Company** |   |
|--------------------------------------------|--------|------------------------|--------|--------------------------|--------|
| **Post-retirement benefits**               |   | **January 3,  2003**   |   | **February  1, 2002**    |   | **November  30, 2001** |   |
|                                       |   |                   |   | **(Fresh-start)**        |   |   |   |
| Benefit  obligation at beginning of period |   | $                      | 77,395 |                     | $      | 82,054 |   | $ | 74,433 |   |
| Service  cost                              |   | 1,216                  |   | 50                       |   | 701 |   |
| Interest  cost                             |   | 4,623                  |   | 584                      |   | 5,523 |   |
| Participant  contributions                 |   | 1,066                  |   | 175                      |   | 1,013 |   |
| Benefit  payments                          |   | (7,131                 | )      | (1,097                   | )      | (7,145 | ) |
| Actuarial  (gain) loss                     |   | 4,449                  |   | (4,371                   | )      | 7,529 |   |
| Divestiture  - sale of EMD                 |   | (33,439                | )      | —                   |   | — |   |
| Benefit  obligation at end of period       |   | $                      | 48,179 |                     | $      | 77,395 |   | $ | 82,054 |   |

 
|                                              |   | **Successor  Company** |   | **Predecessor  Company** |   |
|---------------------------------------------------|--------|------------------------|--------|--------------------------|--------|
| **Post-retirement benefits**                      |   | **January 3,  2003**   |   | **February  1, 2002**    |   | **November  30, 2001** |   |
|                                              |   |                   |   | **(Fresh-start)**        |   |   |   |
| Fair  value of plan assets at beginning of period |   | $                      | — |                     | $      | — |   | $ | — |   |
| Company  contributions                            |   | 6,065                  |   | 923                      |   | 6,132 |   |
| Participant  contributions                        |   | 1,066                  |   | 174                      |   | 1,013 |   |
| Benefit  payments                                 |   | (7,131                 | )      | (1,097                   | )      | (7,145 | ) |
| Fair  value of plan assets at end of period       |   | $                      | — |                     | $      | — |   | $ | — |   |

 
|                                                        |   | **Successor  Company** |    | **Predecessor  Company** |   |
|-------------------------------------------------------------|--------|------------------------|---------|--------------------------|--------|
| **Post-retirement benefits**                                |   | **January 3,  2003**   |    | **February  1, 2002**    |   | **November  30, 2001** |   |
|                                                        |   |                   |    | **(Fresh-start)**        |   |   |   |
| Funded  status (obligations less fair value of plan assets) |   | $                      | (48,179 | )                        | $      | (77,395 | ) | $ | (82,054 | ) |
| Unrecognized  net actuarial (gain) loss                     |   | 2,217                  |    | —                   |   | (6,856 | ) |
| Unrecognized  prior service credit                          |   | —                 |    | —                   |   | (3,127 | ) |
| Accrued  benefit cost                                       |   | $                      | (45,962 | )                        | $      | (77,395 | ) | $ | (92,037 | ) |

 

Amounts recognized in thebalance sheet for the post-retirement plans are as follows:

 
|                               |   | **Successor  Company** |    | **Predecessor  Company** |   |
|------------------------------------|--------|------------------------|---------|--------------------------|--------|
| **Post-retirement benefits**       |   | **January 3,  2003**   |    | **February  1, 2002**    |   | **November  30, 2001** |   |
|                               |   |                   |    | **(Fresh-start)**        |   |   |   |
| Accrued  benefit liability         |   | $                      | (45,962 | )                        | $      | (46,516 | ) | $ | (3,583 | ) |
| Liabilities  subject to compromise |   | —                 |    | —                   |   | (64,944 | ) |
| Liabilities  held for sale         |   | —                 |    | (30,879                  | )      | (23,510 | ) |
| Net  amount recognized             |   | $                      | (45,962 | )                        | $      | (77,395 | ) | $ | (92,037 | ) |

 

Upon our emergence frombankruptcy, we applied fresh-start reporting that required the elimination ofall unrecognized amounts as described above. See Note 4, “Reorganization Caseand Fresh-start Reporting” for disclosure of the effect of the elimination.

 

An annual rate increaseof 11.5% in the per capita cost of health care benefits was assumed, graduallydeclining to 5.5% in the year 2006 and continuing thereafter at that rate overthe projected payout period of the benefits. The health care cost trend rateassumption has a significant effect on the accumulated projected benefitobligation. The effect of a 1% change in this assumption would be as follows:

 

II-76

----

 
|                                                |   | **Successor  Company** |   | **Predecessor  Company** |   |
|-----------------------------------------------------|--------|------------------------|--------|--------------------------|--------|
| **Post-retirement benefits**                        |   | **January 3,  2003**   |   | **February  1, 2002**    |   | **November  30, 2001** |   |
|                                                |   |                   |   | **(Fresh-start)**        |   |   |   |
| Effect  on total of service and interest cost       |   |                   |   |                     |   |   |   |
| 1%  point increase                                  |   | $                      | 697    |                     | $      | 49 |   | $ | 438 |   |
| 1%  point decrease                                  |   | (550                   | )      | (41                      | )      | (411 | ) |
| Effect  on accumulated projected benefit obligation |   |                   |   |                     |   |   |   |
| 1%  point increase                                  |   | 3,667                  |   | 6,201                    |   | 5,009 |   |
| 1%  point decrease                                  |   | (3,068                 | )      | (5,120                   | )      | (4,840 | ) |
|                                                     |        |                        |        |                          |        |  |  |  |  |  |

 

***Other retirement plans***

 

We sponsor a number ofdefined contribution retirement plans. Participation in these plans isavailable 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 hour dependingon the provisions of each plan. The net cost of these plans was $29,643 in theeleven months ended January 3, 2003, $2,557 for the month ended February 1,2002, $2,631 for the month ended December 28, 2001, $36,368 in 2001 and $24,310in 2000.

 

***Multiemployer pension plans***

 

We participate in andmake contributions to numerous construction-industry multiemployer pensionplans. Generally, the plans provide defined benefits to substantially allemployees 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 $89,242 in the eleven months endedJanuary 3, 2003, $6,479 for the month ended February 1, 2002, $5,710 for themonth ended December 28, 2001, $42,452 in 2001 and $30,420 in 2000. During theeleven months ended January 3, 2003, the net cost of the multiemployer pensionplans included cost incurred by us on several large projects performed underthe Raytheon Settlement which were funded on a cost reimbursable basis.

 

**12.  TRANSACTIONSWITH AFFILIATES**

 

We purchased goods andservices from the chairman of our board of directors, who was also ourpresident and chief executive officer, as follows:

 
|                                         |   | **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** |   | **Year ended  December 1,  2000** |   |
| Capital  expenditures                        |   | $                                           | 258    |                                    | $      | 17 |   | $ | 55 |   | $ | 299 |   | $ | 1,201 |   |
| Lease  and maintenance of corporate aircraft |   | 1,934                                       |   | 149                                     |   | 199 |   | 3,370 |   | 4,555 |   |
| Parts,  rentals, overhauls and repairs       |   | 731                                         |   | 111                                     |   | 17 |   | 1,436 |   | 5,100 |   |
| Administrative  support services             |   | 21                                          |   | —                                  |   | 9 |   | 250 |   | 178 |   |
|                                              |        |                                             |        |                                         |        |  |  |  |  |  |  |  |  |  |  |  |

 

II-77

----

 

We mined and soldballast, sold an aircraft and realized gains on sales of equipment toaffiliates of the chairman of our board of directors as follows:

 
|                                         |   | **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** |   | **Year ended  December 1,  2000** |   |
| Ballast  sales                               |   | $                                           | 2,383  |                                    | $      | 8 |   | $ | — |   | $ | 1,931 |   | $ | 450 |   |
| Sale  of construction equipment and aircraft |   | —                                      |   | —                                  |   | — |   | 630 |   | 6,500 |   |
| Gain  on sales of equipment, net             |   | —                                      |   | —                                  |   | — |   | 314 |   | — |   |
|                                              |        |                                             |        |                                         |        |  |  |  |  |  |  |  |  |  |  |  |

 

Insurance, surety bonds,financial advisory services and construction materials were purchased by usfrom firms owned by or affiliated with persons who were members of our board ofdirectors at the time of purchase as follows:

 
|                          |   | **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** |   | **Year ended  December 1,  2000** |   |
| Insurance  premiums paid, net |   | $                                           | — |                                    | $      | — |   | $ | — |   | $ | 17,333 |   | $ | 11,879 |   |
| Insurance  fees               |   | —                                      |   | —                                  |   | — |   | 1,048 |   | 1,250 |   |
| Financial  advisory services  |   | —                                      |   | 700                                     |   | — |   | 536 |   | 4,311 |   |
| Construction  materials       |   | 1,879                                       |   | —                                  |   | — |   | — |   | — |   |
|                               |        |                                             |        |                                         |        |  |  |  |  |  |  |  |  |  |  |  |

 

From time to time, weengaged Relational Advisors LLC, an investment advisory and consulting firmformerly known as Batchelder & Partners, Inc. (“BPI”), of which a principalof the firm is a member of our board of directors, to act as our financialadvisor pursuant to written engagement agreements. In March 2001, we enteredinto an agreement with BPI pursuant to which we were to pay a monthly retainerof $100; however, retainer fees subsequent to our entering into Chapter 11reorganization on May 14, 2001 were not paid. Under our Plan of Reorganization,the agreement was assumed and retainer fees were brought current after theEffective Date of the Plan of Reorganization. With our consent and the consentof BPI, all retainer agreements between the two parties expired on theEffective Date.

 

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

 

We operate through sixbusiness units, each of which comprised a separate reportable business segment:Power, Infrastructure, Mining, Industrial/Process, Defense and Energy &Environment. The reportable segments were separately managed, served differentmarkets and customers and differed in their expertise, technology and resourcesnecessary to perform their services. The presentation of business unitinformation for the periods prior to 2002 have been reclassified to conform tothe presentation for the one month ended February 1, 2002 and the eleven monthsended January 3, 2003.

 

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.

 

Infrastructure providesdiverse engineering and construction and construction management services forhighways and bridges, airports and seaports, tunnels and tube tunnels, railroadand transit lines, water storage and transport, water treatment, sitedevelopment and hydroelectric facilities. The business unit generally performsas a general contractor or as a joint venture partner with other contractors ondomestic and international projects.

 

II-78

----

 

Mining providescontract-mining, engineering, resource evaluation, geologic modeling, mineplanning, simulation modeling, equipment selection, production scheduling andoperations 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.

 

Defense provides acomplete range of technical services to the U.S. Department of Defense, includingoperations and management services, environmental and chemical demilitarizationservices, waste handling and storage, architectural engineering services andengineering, procurement and construction services for the 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 & Environment also provides safetymanagement consulting and waste and environmental technology and engineeredproducts, including radioactive waste containers and technical supportservices.

 

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 income in mining ventures.Segment operating income is total segment revenue reduced by segment cost ofrevenue, goodwill amortization, integration and merger costs and restructuringcosts.

 
|                                                |   | **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** |   | **Year ended  December 1,  2000** |   |
| **Revenue**                                         |   |                                        |      |                                    |   |   |   |   |   |   |   |
| Power                                               |   | $                                           | 920,068   |                                    | $      | 85,551 |   | $ | 67,487 |   | $ | 839,434 |   | $ | 480,748 |   |
| Infrastructure                                      |   | 692,107                                     |      | 79,924                                  |   | 71,784 |   | 940,334 |   | 699,802 |   |
| Mining                                              |   | 63,227                                      |      | 5,326                                   |   | 4,172 |   | 92,237 |   | 98,075 |   |
| Industrial/Process                                  |   | 574,468                                     |      | 64,271                                  |   | 65,730 |   | 957,156 |   | 762,136 |   |
| Defense                                             |   | 494,981                                     |      | 62,107                                  |   | 56,358 |   | 582,447 |   | 364,533 |   |
| Energy &  Environment                           |   | 560,355                                     |      | 50,357                                  |   | 41,544 |   | 598,180 |   | 633,280 |   |
| Intersegment,  eliminations and other               |   | 6,408                                       |      | 2,376                                   |   | 1,214 |   | 31,827 |   | 52,271 |   |
| Total revenues                                      |   | $                                           | 3,311,614 |                                    | $      | 349,912 |   | $ | 308,289 |   | $ | 4,041,615 |   | $ | 3,090,845 |   |
| **Gross profit (loss)**                             |   |                                        |      |                                    |   |   |   |   |   |   |   |
| Power                                               |   | $                                           | 23,886    |                                    | $      | 199 |   | $ | 1,049 |   | $ | (8,136 | ) | $ | (49,196 | ) |
| Infrastructure                                      |   | 14,758                                      |      | 3,028                                   |   | 3,355 |   | 24,468 |   | (15,989 | ) |
| Mining                                              |   | 1,805                                       |      | 100                                     |   | (624 | ) | 9,909 |   | 16,140 |   |
| Industrial/Process                                  |   | 3,536                                       |      | 631                                     |   | (1,984 | ) | (3,462 | ) | (1,003 | ) |
| Defense                                             |   | 42,140                                      |      | 1,956                                   |   | 1,977 |   | 28,119 |   | (75,840 | ) |
| Energy &  Environment                           |   | 74,411                                      |      | 5,568                                   |   | 325 |   | 68,496 |   | 39,144 |   |
| Intersegment and  other unallocated operating costs |   | (11,500                                     | )         | (362                                    | )      | (3,896 | ) | (21,699 | ) | (7,952 | ) |
| Total gross  profit (loss)                          |   | $                                           | 149,036   |                                    | $      | 11,120 |   | $ | 202 |   | $ | 97,695 |   | $ | (94,696 | ) |
| Equity in income  of mining ventures                |   | $                                           | 27,342    |                                    | $      | 3,109 |   | $ | 1,258 |   | $ | 17,890 |   | $ | 13,080 |   |

 

II-80

----

 
|                                                             |   | **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** |   | **Year ended  December 1,  2000** |   |
| **Operating income (loss)**                                      |   |                                       |    |                                    |   |   |   |   |   |   |   |
| Power                                                            |   | $                                          | 23,886  |                                    | $      | 199 |   | $ | (6,755 | ) | $ | (8,273 | ) | $ | (49,196 | ) |
| Infrastructure                                                   |   | 14,758                                     |    | 3,028                                   |   | 2,334 |   | 24,430 |   | (16,039 | ) |
| Mining                                                           |   | 29,147                                     |    | 3,209                                   |   | 611 |   | 27,528 |   | 28,355 |   |
| Industrial/Process                                               |   | 3,536                                      |    | 631                                     |   | (13,961 | ) | (6,274 | ) | (834 | ) |
| Defense                                                          |   | 42,140                                     |    | 1,956                                   |   | 1,928 |   | 28,061 |   | (75,840 | ) |
| Energy &  Environment                                        |   | 77,831                                     |    | 5,568                                   |   | (4,906 | ) | 54,772 |   | 24,955 |   |
| Intersegment,  impairments and other unallocated operating costs |   | (59,638                                    | )       | (5,167                                  | )      | (11,049 | ) | (101,993 | ) | (1,262,931 | ) |
| Total operating  income (loss)                                   |   | $                                          | 131,660 |                                    | $      | 9,424 |   | $ | (31,798 | ) | $ | 18,251 |   | $ | (1,351,530 | ) |

 
|                      |   | **Successor  Company** |      | **Predecessor  Company** |   |
|---------------------------|--------|------------------------|-----------|--------------------------|--------|
| **Assets as of**          |   | **January 3,  2003**   |      | **February  1, 2002**    |   | **November  30,2001** |   |
|                      |   |                   |      | **(Fresh-start)**        |   |   |   |
| Power                     |   | $                      | 47,991    |                     | $      | 119,694 |   | $ | 115,206 |   |
| Infrastructure            |   | 263,463                |      | 366,907                  |   | 381,556 |   |
| Mining                    |   | 133,998                |      | 103,099                  |   | 132,583 |   |
| Industrial/Process        |   | 116,700                |      | 130,903                  |   | 153,599 |   |
| Defense                   |   | 68,849                 |      | 97,085                   |   | 71,646 |   |
| Energy &  Environment |   | 265,968                |      | 420,492                  |   | 433,598 |   |
| Corporate and  other(a)   |   | 518,395                |      | 545,192                  |   | 852,207 |   |
| Total assets              |   | $                      | 1,415,364 |                     | $      | 1,783,372 |   | $ | 2,140,395 |   |

 

----

(a)   Assets of corporate and other principallyconsist of goodwill and deferred tax assets.

 
|                        |   | **Successor Company**                            |   | **Predecessor Company**                      |   |
|-----------------------------|--------|--------------------------------------------------|--------|----------------------------------------------|--------|
| **Capital  expenditures**   |   | **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** |   |
| Power                       |   | $                                                | 269    |                                         | $      | 15 |   | $ | 57 |   | $ | 229 |   | $ | 284 |   |
| Infrastructure              |   | 3,424                                            |   | 296                                          |   | 361 |   | 15,460 |   | 26,074 |   |
| Mining                      |   | 2,972                                            |   | 58                                           |   | 372 |   | 2,574 |   | 6,426 |   |
| Industrial/Process          |   | 3,286                                            |   | 657                                          |   | 320 |   | 1,199 |   | 5,481 |   |
| Defense                     |   | 113                                              |   | —                                       |   | — |   | — |   | 193 |   |
| Energy &  Environment   |   | 5,321                                            |   | 1,474                                        |   | 156 |   | 12,024 |   | 7,624 |   |
| Corporate and  other        |   | 7,572                                            |   | 1,403                                        |   | — |   | 5,532 |   | 2,005 |   |
| Total capital  expenditures |   | $                                                | 22,957 |                                         | $      | 3,903 |   | $ | 1,266 |   | $ | 37,018 |   | $ | 48,087 |   |

 

II-81

----

 
|                                       |   | **Successor Company**                            |   | **Predecessor  Company**                     |   |
|--------------------------------------------|--------|--------------------------------------------------|--------|----------------------------------------------|--------|
| **Depreciation and goodwill amortization** |   | **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** |   |
| Power                                      |   | $                                                | 137    |                                         | $      | 12 |   | $ | 279 |   | $ | 2,947 |   | $ | 1,394 |   |
| Infrastructure                             |   | 34,505                                           |   | 2,971                                        |   | 3,272 |   | 42,650 |   | 24,135 |   |
| Mining                                     |   | 6,269                                            |   | 586                                          |   | 583 |   | 6,048 |   | 7,020 |   |
| Industrial/Process                         |   | 2,780                                            |   | 270                                          |   | 664 |   | 5,593 |   | 5,766 |   |
| Defense                                    |   | 137                                              |   | 14                                           |   | 14 |   | 38 |   | 93 |   |
| Energy &  Environment                  |   | 1,214                                            |   | 172                                          |   | 1,375 |   | 21,197 |   | 20,391 |   |
| Corporate and  other                       |   | 5,700                                            |   | 1,587                                        |   | 658 |   | 10,514 |   | 14,436 |   |
| Total  depreciation and amortization       |   | $                                                | 50,742 |                                         | $      | 5,612 |   | $ | 6,845 |   | $ | 88,987 |   | $ | 73,235 |   |

 

***Investment in equity method investees***

 

At January 3,2003, February 1, 2002 and November 30, 2001, we had $99,356, $68,700 and$83,792, respectively, in investments accounted for by the equity method. Theseinvestments were held and reported as part of the Mining business unit.

 

***Geographic areas***

 

Geographic dataregarding our revenue is shown below. Geographical disclosures of long-livedassets were impracticable.

 
|                |   | **Successor  Company**                           |      | **Predecessor  Company**                     |   |
|---------------------|--------|--------------------------------------------------|-----------|----------------------------------------------|--------|
| **Geographic data** |   | **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** |   |
| Revenue             |   |                                             |      |                                         |   |   |   |   |   |   |   |
| United States       |   | $                                                | 3,044,201 |                                         | $      | 321,885 |   | $ | 271,152 |   | $ | 3,416,522 |   | $ | 2,683,609 |   |
| International       |   | 267,413                                          |      | 28,027                                       |   | 37,137 |   | 625,093 |   | 407,236 |   |
| Total revenue       |   | $                                                | 3,311,614 |                                         | $      | 349,912 |   | $ | 308,289 |   | $ | 4,041,615 |   | $ | 3,090,845 |   |

 

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

 

***Major customers***

 

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

 
|                        |   | **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** |   | **Year ended****December  1,  2000** |   |
| U.S. Department  of Energy  |   | $                                                | 315,687 |                                         | $      | 26,938 |   | $ | 17,726 |   | $ | 398,300 |   | $ | 426,265 |   |
| U.S. Department  of Defense |   | 748,656                                          |    | 84,745                                       |   | 77,380 |   | 813,606 |   | 482,206 |   |
| Raytheon Company            |   | 513,247                                          |    | 44,058                                       |   | 31,024 |   | 42,540 |   | — |   |
|                             |        |                                                  |         |                                              |        |  |  |  |  |  |  |  |  |  |  |  |

 

II-82

----

 

**14.  CONTINGENCIESAND COMMITMENTS**

 

***Summitville environmental matters***

 

From July 1985 to June1989, Industrial Constructors Corp. (“ICC”), one of our wholly-ownedsubsidiaries, performed various contract mining and construction services atthe Summitville mine near Del Norte, Colorado. In 1996, the United States andthe State of Colorado commenced an action under the Comprehensive EnvironmentalResponse, Compensation and Liability Act in the U.S. District Court for theDistrict of Colorado against Mr. Robert Friedland, a PRP, to recover theresponse costs incurred and to be incurred at the Summitville Mine SuperfundSite (the “Site”). In October 1999, the United States and the State of Coloradoamended their complaints to add claims against ICC and other parties.

 

In December 2001, we enteredinto settlement agreements with the United States, the State of Colorado andMr. Friedland. As a result, the United States and the State of Colorado weredeemed to have a general unsecured claim against us in the amount of $20,288 inthe bankruptcy proceedings, and Mr. Friedland obtained a settlement in theamount of $15,000. In connection with the bankruptcy proceedings, the generalunsecured claim of the United States and the State of Colorado was dischargedon the Effective Date pursuant to our Plan of Reorganization. Mr. Friedland hasbeen assigned the right to proceed against insurance carriers under specifiedinsurance policies by which we were insured with respect to claims for defense,contribution or indemnity relating to the Site and to the actions brought bythe United States and the State of Colorado. Mr. Friedland has agreed toproceed directly against the insurance carriers and will not enforce or seekthe payment of the settlement by us. As a result of this settlement, werecorded a liability of $20,288 at December 1, 2000.

 

***Contract related matters***

 

We have contractswith 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 2001, 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 1995 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.

 

***Letters of 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 3, 2003, February 1, 2002and November 30, 2001, $207,110, $176,019 and $177,247, respectively, in faceamount of letters of credit were outstanding. We have pledged cash and cashequivalents as collateral for our reimbursement obligations with respect to$38,000 in face amount of specified letters of credit that were outstanding atJanuary 3, 2003. At January 3, 2003, $169,011 of the outstanding letters ofcredit were issued under the Senior Secured Revolving Credit Facility.

 

***Long-term leases***

 

Total rental andlong-term lease payments for real estate and equipment charged to operationswere $53,488 in the eleven months ended January 3, 2003, $5,235 for the monthended February 1, 2002, $6,352 for the month ended December 28, 2001, $74,718in 2001 and $85,520 in 2000. Future minimum rental payments under operatingleases, some of which contain renewal or escalation clauses, with remainingnoncancelable terms in excess of one year at January 3, 2003 were as follows:

 

II-83

----

 
| **Year ending**    |   | **Real  estate** |    | **Equipment** |   | **Total** |   |
|--------------------|--------|------------------|---------|---------------|--------|-----------|--------|
| January 2, 2004    |   | $                | 30,741  |          | $      | 4,432     |   | $ | 35,173 |   |
| December 31,  2004 |   | 28,014           |    | 1,709         |   | 29,723    |   |
| December 30,  2005 |   | 25,559           |    | 1,350         |   | 26,909    |   |
| December 29,  2006 |   | 24,634           |    | 1,222         |   | 25,856    |   |
| December 28,  2007 |   | 23,221           |    | 1,095         |   | 24,316    |   |
| Thereafter         |   | 16,500           |    | 80            |   | 16,580    |   |
| Totals             |   | $                | 148,669 |          | $      | 9,888     |   | $ | 158,557 |   |

 

***Guarantees***

 

We have guaranteedthe indemnity obligations of WGSG 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 expirewithin three years and are capped at $20,000. In addition, the indemnityprovisions relating to environmental conditions obligate WGSG to payCurtiss-Wright Corporation up to a maximum $3,500 for environmental losses theyincur over $5,000. WGSG is also responsible for environmental losses thatexceed $1,300 related to a specified parcel of the sold property. If WGSG isunable to perform its 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.

 

***Other***

 

In May 1998,Leucadia National Corporation (“Leucadia”) filed an action against us and someof our officers and directors in the U.S. District Court for the District ofUtah. The complaint alleged fraud in the sale of shares of MK Gold Corporation(“MK Gold”) by Old MK to Leucadia and sought rescission of the sale andrestitution of $22,500. Leucadia contended that we knew or believed that anon-competition agreement between us and MK Gold was unenforceable and failedto disclose that belief to Leucadia. The non-competition agreement was thesubject of separate litigation between MK Gold and us. MK Gold was seekingalleged damages of up to $10,000. On January 5, 1999, the two cases wereconsolidated for trial. In April 2001, we entered into a settlement agreementwith Leucadia and MK Gold and, as a result, (1) the litigation was dismissedand the parties granted one another mutual releases; (2) we paid to MK Gold$1,500; (3) we issued a promissory note to MK Gold for $10,000 and (4) weagreed to extend the term of the non-competition agreement through 2006. Thesettlement was reflected as a cost in 2000. In our bankruptcy proceedings, thenon-competition agreement and the extension thereof contained in the settlementagreement were rejected and terminated and amounts due to MK Gold under thepromissory note were treated as a general unsecured claim and were dischargedon the Effective Date pursuant to our Plan of Reorganization.

 

In September 2001,Westmoreland Resources, a mining venture in which we hold a 20% ownershipinterest and to which we provide contract mining services, asserted claimsagainst us in our bankruptcy proceedings. In addition, Westmoreland Resourcesclaimed that (1) we had been overpaid under various mining contracts over asix-year period, (2) we likely would be obligated to reimburse WestmorelandResources for a portion of past due royalties that may be imposed againstWestmoreland Resources by the U.S. government and the Crow Indian Tribe, (3) weare obligated to pay for repairs to mining equipment (a dragline tub) owned byWestmoreland Resources and (4) Westmoreland Resources is entitled to adequateassurances about whether we would be able to perform final reclamation at theend of mining operations on the properties leased by Westmoreland Resources.Westmoreland Resources also asserted that they are overpaying us for contractmining services we currently provide them. In December 2002, the bankruptcycourt approved a settlement agreement addressing all claims in litigationbetween us and Westmoreland Resources. As part of the settlement, we paidWestmoreland Resources an amount in satisfaction of the claim relating to thedragline tub. All of the claims were dismissed with prejudice, except the claimrelating to the alleged royalties, which was dismissed without prejudice.

 

II-84

----

 

Some current andformer officers, employees and directors of Washington Group were nameddefendants in an action filed by two former participants in the Old MK 401(k)Plan and Employee Stock Ownership Plan in the U.S. District Court for theDistrict of Idaho. The complaint alleges, among other things, that the defendantsbreached certain fiduciary duties. On July 12, 2000, the court deniedplaintiffs’ motion to reconsider a prior summary judgment in favor of specifieddefendants and granted summary judgment with respect to specified otherdefendants. As a result, Washington Group and all current and former officers,employees and directors have been dismissed from the action. The court alsocertified the case as a class action. The remaining defendants in thisproceeding are the two plan committees and two companies (to which we hadindemnification obligations that were discharged in our bankruptcy proceedings)involved in administration of the plans.

 

From the spring of1996 through the spring of 2001, we were the environmental remediationcontractor for the U.S. Army Corps of Engineers (the “Corps”) with respect toremediation at the Tar Creek Superfund site at a former mining area innortheast 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.

 

In about 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 of approximately $4,500 to end the dispute with the Authority. As partof the settlement, the Authority also agreed to assign to the prime contractorany claims it had against us arising from the defective work. Thereafter, theprime contractor sued the Authority alleging claims for betterment, sued usalleging negligent inspection and sued a number of other parties.

 

Although theultimate outcome of the matters discussed in the three preceding paragraphscannot be predicted with certainty, we believe that the outcome of theseactions, individually or collectively, will not have a material adverse impacton our financial position, results of operations or cash flows.

 

In addition to theforegoing, 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.

 

II-85

----

 

**15.  SUPPLEMENTALCASH FLOW INFORMATION**

 
|                                                                                                           |   | **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** |   | **Year ended****December  1,  2000** |   |
| *Supplemental cash flow information*                                                                           |   |                                             |   |                                         |   |   |   |   |   |   |   |
| Interest paid                                                                                                  |   | $                                                | 15,874 |                                         | $      | 451 |   | $ | 7 |   | $ | 31,975 |   | $ | 20,376 |   |
| Income taxes  paid, net                                                                                        |   | 2,646                                            |   | 975                                          |   | 304 |   | 7,125 |   | 8,816 |   |
| *Supplemental non-cash investing  activities*                                                                  |   |                                             |   |                                         |   |   |   |   |   |   |   |
| Adjustment to  investment in foreign subsidiaries for cumulative translation adjustments,  net of income taxes |   | $                                                | 9,652  |                                         | $      | 80 |   | $ | 482 |   | $ | 1,851 |   | $ | (8,575 | ) |
| Business  combinations:                                                                                        |   |                                             |   |                                         |   |   |   |   |   |   |   |
| Fair value of  assets                                                                                          |   | $                                                | — |                                         | $      | — |   | $ | — |   | $ | — |   | $ | 1,651,653 |   |
| Liabilities  assumed                                                                                           |   | —                                           |   | —                                       |   | — |   | — |   | (1,491,523 | ) |
| Total cash paid,  including acquisition costsof $7,705                                                         |   | $                                                | — |                                         | $      | — |   | $ | — |   | $ | — |   | $ | 160,130 |   |

 

**16.  COMPREHENSIVEINCOME (LOSS)**

 

Comprehensiveincome (loss) for the periods ended January 3, 2003, February 1, 2002, December28, 2001, November 30, 2001 and December 1, 2000 was as follows:

 
| **For eleven months ended January 3, 2003**                      |   | **Before-tax  amount** |   | **Tax  (expense)  or benefit** |   | **Net-of-tax  amount** |   |
|------------------------------------------------------------------|--------|------------------------|--------|--------------------------------|--------|------------------------|--------|
| 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 |   |

 
| **For one month ended February 1, 2002**                     |   | **Before-tax  amount** |   | **Tax  (expense)  or benefit** |   | **Net-of-tax  amount** |   |
|--------------------------------------------------------------|--------|------------------------|--------|--------------------------------|--------|------------------------|--------|
| 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 |   |

** **
| **For one month ended December 28, 2001** |   | **Before-tax  amount** |   | **Tax  (expense)  or benefit** |   | **Net-of-tax  amount** |   |
|-------------------------------------------|--------|------------------------|--------|--------------------------------|--------|------------------------|--------|
| Foreign currency  translation adjustments |   | $                      | 748    |                           | $      | (266                   | )      | $ | 482 |   |
| Other  comprehensive income               |   | $                      | 748    |                           | $      | (266                   | )      | $ | 482 |   |

 

II-86

----

 
| **For year ended November 30, 2001**                                    |   | **Before-tax  amount** |   | **Tax  (expense)  or benefit** |   | **Net-of-tax  amount** |   |
|-------------------------------------------------------------------------|--------|------------------------|--------|--------------------------------|--------|------------------------|--------|
| 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 | ) |

 
| **For year ended December 1, 2000**                                     |   | **Before-tax  amount** |    | **Tax  (expense)  or benefit** |   | **Net-of-tax  amount** |   |
|-------------------------------------------------------------------------|--------|------------------------|---------|--------------------------------|--------|------------------------|--------|
| Foreign currency  translation adjustments                               |   | $                      | (12,113 | )                              | $      | 3,538                  |   | $ | (8,575 | ) |
| Unrealized gains  on marketable securities:                             |   |                   |    |                           |   |                   |   |
| Unrealized net  holding gains arising during period                     |   | 398                    |    | (160                           | )      | 238                    |   |
| Less:  Reclassification adjustment for net gains realized in net income |   | (194                   | )       | 78                             |   | (116                   | )      |
| Net unrealized  gains                                                   |   | 204                    |    | (82                            | )      | 122                    |   |
| Unrealized loss  on foreign exchange contracts                          |   | (2,601                 | )       | 1,012                          |   | (1,589                 | )      |
| Minimum pension  liability adjustment, net of minority interests        |   | 146                    |    | (57                            | )      | 89                     |   |
| Other  comprehensive loss                                               |   | $                      | (14,364 | )                              | $      | 4,411                  |   | $ | (9,953 | ) |

 

The accumulatedbalances related to each component of other comprehensive income (loss) were asfollows:

 
|                               |   | **Foreign  currency  items** |   | **Unrealized  gains (losses)  on securities** |   | **Net  derivative  activity** |   | **Minimum  pension  liability  adjustment** |   | **Accumulated  Other  comprehensive  income (loss)** |   |
|------------------------------------|--------|------------------------------|--------|-----------------------------------------------|--------|-------------------------------|--------|---------------------------------------------|--------|------------------------------------------------------|--------|
| Balance at  December 3, 1999       |   | $                            | (9,476 | )                                             | $      | 265                           |   | $                                           | — |                                                 | $      | (89 | ) | $ | (9,300 | ) |
| Other  comprehensive income (loss) |   | (8,575                       | )      | 122                                           |   | (1,589                        | )      | 89                                          |   | (9,953                                               | )      |
| 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 |   |

 

II-87

----

 

**17.  CAPITALSTOCK, STOCK PURCHASE WARRANTS AND STOCK COMPENSATION PLAN**

 

As discussed inNote 4, “Reorganization Case and Fresh-start Reporting,” our Plan ofReorganization canceled all of the then outstanding shares of capital stock,stock purchase warrants and stock options as of January 25, 2002, and newcapital stock, stock purchase warrants and stock options were issued.

 

***Capital stock***

 

Pursuant to ourcertificate of incorporation, we have the authority to issue 100,000 shares ofcommon stock and 10,000 shares of preferred stock. Preferred stock could 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.

 

***Stock purchase warrants***

 

At January 3,2003, we had outstanding new stock purchase warrants giving rights to acquire8,520 shares of our common stock. The warrants were issued in three series asfollows:

 

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 the abovewarrants will expire in January 2006.

 

***Stock compensation 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. Additional sharesof common stock available each year for grants under the 1994 Plan were equalto 3% of the outstanding shares as of the first day of such year. Exerciseprices for nonqualified stock options were determined by our board ofdirectors. Exercise prices for ISOs were equal to the fair market value of ourcommon stock at the date of grant. Stock options extended for and vested overperiods of up to ten years as determined by our board of directors. Our boardof directors could accelerate the vesting period after award of an option. Thenumber of shares available for grant of ISOs could not exceed 2,900 shares, andno individual could be granted stock options or restricted stock awards formore than 5,000 shares over any three-year period.

 

Non-employeedirectors could elect to forego receipt in cash of certain fees earned duringany year in return for an option with a grant price equal to 80% of the fairmarket value of our common stock, vesting quarterly during the year with a termperiod of up to ten years as determined by our board of directors. Non-employeedirectors elected options for 95 and 85 shares in lieu of fees earned in 2001and 2000, respectively.

 

On April 11, 1997,our stockholders adopted the 1997 Stock Option and Incentive Plan forNon-employee Directors (the “1997 Plan”) which provided for grants in the formof nonqualified stock options and restricted stock awards. Grant prices pershare for stock options were at fair market value at the date of grant. Thenumber of shares available for grant as options and restricted stock awards was500 shares, of which no more than 100 shares could be awarded as restricted.Grants of nonqualified stock options and restricted stock awards to thenon-employee directors under the 1997 Plan did not preclude grants under the 1994Plan. Options were subject to terms and conditions determined by our board ofdirectors and had a term not exceeding ten years from the date of grant.

 

As of January 25,2002, all outstanding grants under the 1994 Plan and 1997 Plan were canceled.

 

II-88

----

 

Washington GroupInternational, Inc.’s Equity and Performance Incentive Plan (the “2002 Plan”)became effective January 25, 2002 upon our emergence from bankruptcy. Under the2002 Plan, our board of directors may approve the award of option rights,appreciation rights, performance units, performance shares, restricted shares,deferred shares or other awards to directors, officers and key employees for usand our subsidiaries. Our common shares available to the 2002 Plan shall notexceed 5,952 shares. Awards are subject to terms and conditions determined byour board of directors. As of January 3, 2003, only option rights have beenawarded under the 2002 Plan.

 

Specified membersof management, designated employees and our board of directors were grantednonqualified stock options pursuant to a management option plan to purchase anaggregate total of 1,819 shares of the new common stock, subject to dilution,with a term of ten years and strike prices determined at the market price onthe dates of award ranging from $13.40 to $24.00 per share. One-third of thestock options vested on the date of grant, one-third will vest on the firstanniversary of the date of grant and the final third will vest on the second anniversaryof the date of grant. The vesting period for future grants will be determinedby our board of directors.

 

The chairman ofour board of directors, Mr. Dennis R. Washington, was granted stock options topurchase shares of the new common stock in three tranches. The first trancheexpires five years after the Effective Date. The remaining tranches expire fouryears after the Effective Date. One-third of each tranche vested on theEffective Date, an additional one-third of each tranche vested on the firstanniversary of the Effective Date and the final third of each tranche will veston the second anniversary of the Effective Date. However, all optionsimmediately vest if Mr. Washington is removed from his position as chairman forreasons other than death or disability or if we undergo a change of control.The number of shares and respective strike prices for each tranche are asfollows:

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

 

Option activityunder our stock plans is summarized as follows:

 
| **Number of options**                          |   | **Outstanding  at beginning** |   | **Granted** |   | **Canceled** |   | **Exercised** |   | **Outstanding  at end** |   |
|------------------------------------------------|--------|-------------------------------|--------|-------------|--------|--------------|--------|---------------|--------|-------------------------|--------|
| **Successor Company**                          |   |                          |   |        |   |         |   |          |   |                    |   |
| 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                   |   |
| Year ended  December 1, 2000                   |   | 4,824                         |   | 3,427       |   | (480         | )      | (133          | )      | 7,638                   |   |

 

II-89

----

** **
| **Number of options**                          |   | **Outstanding  at beginning** |   | **Granted** |   | **Canceled** |   | **Exercised** |   | **Outstanding  at end** |   |
|------------------------------------------------|--------|-------------------------------|--------|-------------|--------|--------------|--------|---------------|--------|-------------------------|--------|
| **Weighted-average  exercise price**           |   |                          |   |        |   |         |   |          |   |                    |   |
| **Successor Company**                          |   |                          |   |        |   |         |   |          |   |                    |   |
| 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                    |   |
| Year ended  December 1, 2000                   |   | 9.78                          |   | 7.32        |   | 9.30         |   | 8.58          |   | 8.73                    |   |
|                                                |        |                               |        |             |        |              |        |               |        |                         |        |  |  |  |  |  |

 
| **Number of options**                          |   | **Exercisable  at end of period** |   | **Shares  available  for grant** |   |
|------------------------------------------------|--------|-----------------------------------|--------|----------------------------------|--------|
| **Successor Company**                          |   |                              |   |                             |   |
| January 3, 2003                                |   | 1,688                             |   | 919                              |   |
| Options issued  upon emergence from bankruptcy |   | 1,486                             |   | 1,535                            |   |
| **Predecessor Company**                        |   |                              |   |                             |   |
| February 1, 2002                               |   | —                            |   | —                           |   |
| December 28,  2001                             |   | 2,450                             |   | 2,689                            |   |
| November 30,  2001                             |   | 2,476                             |   | 2,663                            |   |
| December 1, 2000                               |   | 1,516                             |   | 2,442                            |   |

** **
| **Weighted-average  exercise price**           |   | **Exercisable  at end** |   |
|------------------------------------------------|--------|-------------------------|--------|
| **Successor Company**                          |   |                    |   |
| 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                    |   |
| December 1, 2000                               |   | 8.81                    |   |
|                                                |        |                         |        |  |

 

***Long-term incentive program***

 

On February 14,2003, we adopted a Long-term Incentive Program (“LTIP”) designed to providelong-term incentives to executives to increase stockholder value. The LTIPutilizes vesting periods to encourage participating executives to continue inour employ by linking a portion of compensation to stockholder returns andthereby also acting as a retention device.

 

The LTIP consistsof (1) nonqualified stock options issued through fixed-price grants, the sizeand timing of which will be determined by the board of directors, and (2) performanceunit awards, which will be awarded annually and will mature three years fromthe date of award. The performance unit awards will represent a multiple ofsalary. The value of each performance unit will be calculated at the end of thethree-year performance period to which it relates, based on performance resultsrelative to predetermined corporate financial goals. At the end of eachthree-year period, the value of mature performance units will be paid either incash or common stock, provided the threshold performance metrics have beenachieved.

 

On February 14,2003, our board of directors approved the grant of 577 nonqualified stockoptions and 384 performance units. Certain aspects of the plan implementationare subject to shareholder approval.

 

II-90

----

 

***Stock-based compensation***

 

We adopted thedisclosure-only provisions of the Financial Accounting Standards BoardStatement No. 123 *Accounting for Stock-Based Compensation* (“SFAS No. 123”)issued in October 1995. Accordingly, compensation cost has been recorded basedonly on the intrinsic value of the options granted. No compensation cost wasrecognized for the eleven months ended January 3, 2003, one month endedFebruary 1, 2002 and one month ended December 28, 2001. We recognized $4 and$192 of compensation cost in 2001 and 2000, 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 asdescribed in Note 1, “Significant Accounting Policies.”

 

The Black-Scholesoption valuation model was used to estimate the fair value of the options forpurposes of the pro forma presentation set forth in Note 1, “SignificantAccounting Policies.”

 

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

 
|                                               |   | **Successor Company**                         |   | **Predecessor Company**               |   |
|----------------------------------------------------|--------|-----------------------------------------------|--------|---------------------------------------|--------|
|                                               |   | **Eleven  months ended****January  3,  2003** |   | **Year ended****November  30,  2001** |   | **Year ended****December  1,  2000** |   |
| Average expected  life (years)                     |   | 5                                             |   | 7                                     |   | 7 |   |
| Expected  volatility                               |   | 42.3                                          | %      | 40.7                                  | %      | 40.2 | % |
| Risk-free  interest rate                           |   | 5.04                                          | %      | 5.7                                   | %      | 6.1 | % |
| Weighted-average  fair value:                      |   |                                          |   |                                  |   |   |   |
| Exercise price  greater than market price at grant |   | $                                             | 8.00   |                                  | $      | — |   | $ | — |   |
| Exercise price  equal to market price at grant     |   | 8.65                                          |   | 3.71                                  |   | 2.99 |   |
| Exercise price  less than market price at grant    |   | —                                        |   | 4.44                                  |   | 3.67 |   |
|                                                    |        |                                               |        |                                       |        |  |  |  |  |  |

 

The assumptionsused in the Black-Scholes option valuation model are highly subjective,particularly as to stock price volatility of the underlying stock, and canmaterially affect the resulting valuation.

 

The followingtable summarizes information regarding options that were outstanding at January3, 2003:

 
|             |   | **Options  outstanding** |   | **Options  exercisable**             |   |
|------------------|--------|--------------------------|--------|--------------------------------------|--------|
| **Price range**  |   | **Number**               |   | **Weighted-average  exercise price** |   | **Weighted-average  remaining  contractual life** |   | **Number** |   | **Weighted-average  exercise price** |   |
| Below $21.00     |   | 440                      |   | $                                    | 17.80  |   | 9.50 |   | 147 |   | $ | 17.80 |   |
| $21.00 -  $31.74 |   | 3,640                    |   | 25.88                                |   | 5.60 |   | 1,224 |   | 25.86 |   |
| Above $31.74     |   | 953                      |   | 33.51                                |   | 3.06 |   | 317 |   | 33.51 |   |
|                  |        |                          |        |                                      |        |  |  |  |  |  |  |  |  |

 

***Stockholder rights plan***

 

On June 21, 2002,our board of directors adopted a stockholder rights plan under which we willissue one right for each outstanding share of our common stock. The rightsexpire in 2012 unless they are earlier redeemed, exchanged or amended by theboard of directors. The board also adopted a Three-Year Independent DirectorEvaluation (“TIDE”) policy with respect to the plan. Under the TIDE policy, acommittee comprised solely of independent directors will review the plan atleast once every three years to determine whether to modify the plan in lightof all relevant factors.

 

The rights willinitially trade together with our common stock and will not be exercisable until10 days 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

 

II-91

----

 

our common stock.Once exercisable, each right would separate from the common stock and beseparately 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 redeem therights 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 are notconsidered to be common stock equivalents because there is no indication thatany event will occur that would cause them to become exercisable.

 

**18. FINANCIAL INSTRUMENTS**

 

The estimated fairvalues of financial instruments at January 3, 2003, February 1, 2002 andNovember 30, 2001 were determined by us, using available market information andvaluation methodologies believed to be appropriate. However, judgment isnecessary in interpreting market data to develop the estimates of fair values.Accordingly, the estimates presented herein are not necessarily indicative ofthe amounts that we could realize in a current market exchange. The use ofdifferent market assumptions and/or estimation methodologies could have amaterial effect on the estimated fair value amounts.

 

The carryingamounts and estimated fair values of certain financial instruments at January3, 2003, February 1, 2002 and November 30, 2001 were as follows:

 
|                       |   | **Successor  Company** |   | **Predecessor  Company**             |   |
|----------------------------|--------|------------------------|--------|--------------------------------------|--------|
|                       |   | **January 3, 2003**    |   | **February  1, 2002  (Fresh-start)** |   | **November 30, 2001** |   |
|                       |   | **Carrying  amount**   |   | **Fair  value**                      |   | **Carrying  amount** |   | **Fair  value** |   | **Carrying  amount** |   | **Fair  value** |   |
| **Financial  assets**      |   |                   |   |                                 |   |   |   |   |   |   |   |   |   |
| Customer retentions        |   | $                      | 23,546 |                                 | $      | 22,733 |   | $ | 33,822 |   | $ | 32,341 |   | $ | 45,609 |   | $ | 43,184 |   |
| **Financial  liabilities** |   |                   |   |                                 |   |   |   |   |   |   |   |   |   |
| Subcontract retentions     |   | 19,623                 |   | 18,946                               |   | 17,164 |   | 16,412 |   | 11,751 |   | 11,126 |   |
|                            |        |                        |        |                                      |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The fair value ofother financial instruments, including those included in assets and liabilitiesheld for sale, was comprised of (1) cash and cash equivalents, accountsreceivable excluding customer retentions, unbilled receivables and accounts andsubcontracts payable excluding retentions which approximate cost because of theimmediate or short-term maturity and (2) customer retentions, subcontractretentions and customer advances estimated by discounting expected cash flowsat rates currently available to us for instruments with similar risks andmaturities. As discussed in Note 4, “Reorganization Case and Fresh-startReporting,” a significant amount of our liabilities, including all of ouroutstanding debt, were liabilities subject to compromise at November 30, 2001.As such, fair values for these liabilities are not meaningful.

 

II-92

----

 

**QUARTERLYFINANCIAL DATA**

*(In millions except per share data)*
| **UNAUDITED** |
|---------------|

Selected quarterlyfinancial data for the years ended January 3, 2003 and November 30, 2001 ispresented below.

 
|                                       |   | **Predecessor Company**   |       | **Successor Company**  |       |
|--------------------------------------------|--------|---------------------------|------------|------------------------|------------|
| **Quarters ended**                         |   | **February  1,  2002(a)** |       | **March 29,  2002(b)** |       | **June 28,  2002** | ** ** | **September  27,  2002** | ** ** | **January 3,  2003** | ** ** |
| Revenue(d)                                 |   | $                         | 349.9      |                   | $          | 607.0 |   | $ | 960.5 |   | $ | 903.7 |   | $ | 840.4 |   |
| Gross profit(d)                            |   | 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 |   |
|                                       |   |                      | ** ** |                   | ** ** |   | ** ** |   | ** ** |   | ** ** |
|                                            |        |                           |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |

 
|                     |   | **Predecessor  Company** | ** ** |
|--------------------------|--------|--------------------------|------------|
| **2001 Quarters ended**  |   | **March 2**              | ** ** | **June 1** | ** ** | **August 31** | ** ** | **November  30** | ** ** |
| Revenue(d)               |   | $                        | 1,015.2    |   | 954.1 |   | 981.4 |   | 1,090.9 |   |
| Gross profit(d)          |   | 42.1                     |       | 23.6 |   | 13.8 |   | 18.2 |   |
| Reorganization  items    |   | —                   |       | 8.9 |   | (30.5 | ) | (34.9 | ) |
| Net income               |   | (2.4                     | )          | (10.1 | ) | (32.4 | ) | (40.1 | ) |
| Income (loss)  per share |   | —                   | (c)        | — | (c) | — | (c) | — | (c) |
| Market price             |   |                     |       |   |   |   |   |   |   |
| High                     |   | 12.30                    |       | 2.79 |   | .40 |   | .25 |   |
| Low                      |   | 1.37                     |       | .91 |   | .06 |   | .03 |   |
|                          |        |                          |            |  |  |  |  |  |  |  |

## ** **

----

## **(a)   One month ended February 1, 2002.**

(b)   Two monthsended March 29, 2002.

(c)          Net income (loss) pershare is not presented for this period, as it is not meaningful because of therevised capital structure of the Successor Company.

(d)         Revenue and gross profit,as previously reported in our quarterly reports on Form 10-Q for the respectiveperiods, have been reclassified to conform to the presentation of equity inincome of mining ventures in this report on Form 10-K. Previously, equity inincome of mining ventures had been reported as a component of total revenue.

 

II-93

----

 

**ITEM9****. ****                 CHANGE IN ANDDISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

During the fiscalyear ended January 3, 2003, there were no changes in, or disagreements with,accountants on accounting and financial disclosure matters.

 

II-94

----

 

**PART III**

 

**ITEM 10****.****                DIRECTORS AND EXECUTIVE OFFICERS OFTHE REGISTRANT**

 

The informationcalled for by this Item will be set forth under the captions “Directors” and****“ExecutiveOfficers” in our definitive proxy statement for our annual meeting ofstockholders, to be filed not later than April 9, 2003, and is incorporatedherein by this reference.

 

**ITEM 11****.****                EXECUTIVE COMPENSATION**

 

The informationcalled for by this Item will be set forth under the caption “Report of theCompensation Committee on Executive Compensation for 2002” in our definitiveproxy statement for our annual meeting of stockholders, to be filed not laterthan April 9, 2003, and is incorporated herein by this reference.

 

**ITEM 12****.****                SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS AND MANAGEMENT**

 

***Securities authorized for issuance under equity compensationplans***

 
|                                                        |   | **(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     |   | 5,033,000                                                                                           | (1)    | $                                                                                  | 26.62  |                                                                                                                                                 | 919,000 |   |
| Equity compensation plans not approved by security  holders |   | —                                                                                              |   | —                                                                             |   | —                                                                                                                                               |    |
| Total                                                       |   | 5,033,000                                                                                           |   | $                                                                                  | 26.62  |                                                                                                                                                 | 919,000 |   |

 

----

(1)          Our Equity andPerformance Incentive Plan was adopted and approved as a part of our Plan ofReorganization. Under Delaware law, approval of the Plan of Reorganization bythe bankruptcy court is the equivalent of unanimous shareholder approval.

 

**ITEM 13****.****                CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS**

 

The informationcalled for by this Item will be set forth under the caption “CertainRelationships and Related Transactions” in our definitive proxy statement forour annual meeting of stockholders, to be filed not later than April 9, 2003,and is incorporated herein by this reference.

 

**ITEM 14****.       CONTROLS AND PROCEDURES**

 

***Evaluation of our Disclosure Controls and disclosure ofchanges to Internal Controls.***

 

We maintain a setof 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. Within the 90-day period prior to the filing of this report,an evaluation was carried out under the supervision and with the participationof our management, including the Chief Executive Officer (“CEO”) and

 

III-1

----

 

Chief Financial Officer (“CFO”), of the effectiveness of our disclosurecontrols and procedures. Based on that evaluation, the CEO and CFO haveconcluded that our disclosure controls and procedures are effective.

 

***CEO and CFO certificates***

 

Immediatelyfollowing the Signatures section of this report on Form 10-K, there are twocertifications, one each by the CEO and the CFO. They are required underSection 302 of the Sarbanes-Oxley Act of 2002 (the “Section 302 Certifications”).This Item 14, *Controls and Procedures,* is referred to in the Section 302Certifications and should be read in conjunction with the Section 302Certifications.

 

***Disclosure controls***

 

“DisclosureControls” are procedures that are designed to ensure that information requiredto be disclosed in our reports filed under the Securities Exchange Act of 1934,such as this report on Form 10-K, is recorded, processed, summarized andreported within the time periods specified in the SEC rules and forms.Disclosure Controls are also designed to ensure that information required to bedisclosed is accumulated and communicated to our management, including our CEOand CFO, as appropriate to allow timely decisions regarding disclosure.

 

***Internal controls***

 

“Internal Controls”are procedures that are designed to provide reasonable assurance that (1) ourtransactions are properly authorized, recorded and reported and (2) our assetsare safeguarded against unauthorized or improper use, so that our financialstatements may be prepared in accordance with generally accepted accountingprinciples.

 

***Limitations on the effectiveness of controls***

 

Our management,including the CEO and CFO, do not expect that our Disclosure Controls and/orour Internal Controls will prevent or detect all error or fraud. A system ofcontrols is able to provide only reasonable, not complete, assurance that thecontrol objectives are being met, no matter how extensive those control systemsmay be. Also, control systems must be established within the opposing forces ofrisk and resources, (i.e., the benefits of a control system must be consideredrelative to its costs). Because of these inherent limitations that exist in allcontrol systems, no evaluation of Disclosure Controls and/or Internal Controlscan provide absolute assurance that all errors or fraud, if any, have beendetected. The inherent limitations in control systems include various human andsystem factors that may include errors in judgment or interpretation regardingevents or circumstances or inadvertent error. Additionally, controls can becircumvented by the acts of a single person, by collusion on the part of two ormore people or by management override of the control. Over time, controls canalso become ineffective as conditions, circumstances, policies, technologies,level of compliance and people change. Because of such inherent limitations, inany cost-effective control system over financial information, misstatements mayoccur due to error or fraud and may not be detected.

 

***Scope of evaluation of Disclosure Controls***

 

The evaluation ofour 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 CEO andCFO in their evaluation of Disclosure Controls. In the course of the evaluationof Disclosure Controls, we reviewed the controls that are in place to record,process, summarize and report, on a timely basis, matters that requiredisclosure in our reports filed under the Securities Exchange Act of 1934. Wealso considered the adequacy of the items disclosed in this report on Form10-K.

 

III-2

----

 

***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 ensure that material information relating toWashington Group and its consolidated subsidiaries is made known to management,including the CEO and CFO, so that required disclosures have been included inthis report on Form 10-K.

 

We have alsoreviewed our system of Internal Controls and our CEO and CFO have concludedthat subsequent to the date of their evaluation, there have been no significantchanges in our Internal Controls or in other factors that could significantlyaffect Internal Controls.

 

III-3

----

 

**PART IV**

 

**ITEM 15****.       EXHIBITS, FINANCIAL STATEMENT SCHEDULEAND REPORTS ON FORM 8-K**

 

(a)   *Documents filed as a part of this Form 10-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 eleven months ended January 3, 2003 (Successor Company  operations), the one month ended February 1, 2002, the one month ended  December 28, 2001, and each of the two years in the period ended November 30,  2001 (Predecessor Company operations)                          |
|   |   |                                                                                                                                                                                                                                                                                                                         |
|   |   | Consolidated Statements  of Comprehensive Income (Loss) for the eleven months ended January 3, 2003  (Successor Company operations), the one month ended February 1, 2002, the one  month ended December 28, 2001, and each of the two years in the period ended  November 30, 2001 (Predecessor Company operations)         |
|   |   |                                                                                                                                                                                                                                                                                                                         |
|   |   | Consolidated Balance  Sheets at January 3, 2003, February 1, 2002 (Successor Company balance  sheets) and November 30, 2001 (Predecessor Company balance sheet)                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                         |
|   |   | Consolidated Statements  of Cash Flows for the eleven months ended January 3, 2003 (Successor Company  operations), the one month ended February 1, 2002, the one month ended  December 28, 2001, and each of the two years in the period ended November 30,  2001 (Predecessor Company operations)                          |
|   |   |                                                                                                                                                                                                                                                                                                                         |
|   |   | Consolidated Statements  of Stockholders’ Equity (Deficit) for the eleven months ended January 3, 2003  (Successor Company operations), the one month ended February 1, 2002, the one  month ended December 28, 2001, and each of the two years in the period ended  November 30, 2001 (Predecessor Company operations) |
|   |   |                                                                                                                                                                                                                                                                                                                         |
|   |   | 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 October 25, 2002, we filed a current report on  Form 8-K dated October 24, 2002 reporting that Thomas H. Zarges had been  named Chief Operating Officer following the retirement from full time service  of Charles R. Oliver. Louis E. Pardi replaced Thomas Zarges as president of  our Power business unit. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                              |
|   |   | On October 29, 2002, we filed a current report on  Form 8-K dated October 28, 2002 reporting that on October 28, 2002, we sold  the Electro-Mechanical Division of our Westinghouse Government Services  subsidiary to Curtiss-Wright Corporation.                                                                |
|   |   |                                                                                                                                                                                                                                                                                                              |
|   |   | On November 22, 2002, we filed a current report on  Form 8-K dated November 21, 2002 reporting that Earl L. Ward had been named  Vice President and Treasurer, replacing Frank S. Finlayson who had been named  Senior Vice President - Project  Development.                                                     |
|   |   |                                                                                                                                                                                                                                                                                                              |
|   |   | On December 23, 2002, we filed a current report on  Form 8-K dated December 23, 2002 reporting that we had filed an application  with the NASDAQ Stock Market to list our securities on the NASDAQ National  Market®.                                                                                        |

 

IV-2

----

 

**SIGNATURES**

 

Pursuant to the requirementsof Section 13 or 15(d) of the Securities Exchange Act of 1934, we have dulycaused this Form 10-K to be signed on our behalf by the undersigned, thereuntoduly authorized on March 12, 2003.

 

Washington GroupInternational, Inc.

 
| By     | /s/  George H.  Juetten                                             |   |
|--------|--------------------------------------------------------------------------|--------|
|   | George H. Juetten, Executive Vice President and  Chief Financial Officer |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this Form 10-K has beensigned below on March 12, 2003 by the following persons on our behalf in thecapacities indicated.

 

 
|                               |   | 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)                        |
|                               |   |                                                  |
|                               |   | Senior Vice President  and Controller                 |
| /s/ Reed N. Brimhall               |   | (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 signing his name hereto, does hereby sign this Form 10-K on behalf of eachof the above-named officers and directors of Washington Group International,Inc., pursuant to powers of attorney executed on behalf of each such officerand director.

 
| By     | /s/  Craig G.  Taylor        |   |
|--------|-----------------------------------|--------|
|   | Craig G. Taylor, Attorney-in-fact |

 

----

 

**CERTIFICATION****OFPRINCIPAL EXECUTIVE OFFICER OF**

**WASHINGTON GROUP INTERNATIONAL, INC.**

**PURSUANT TO SECTION 302 OF THESARBANES-OXLEY ACT OF 2002**

 

I, Stephen G.Hanks, certify that:

 

1.     I have reviewed this annual report on Form10-K of Washington Group International, Inc.;

 

2.     Based on my knowledge, this annual reportdoes not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this annual report;

 

3.     Based on my knowledge, the consolidatedfinancial statements, and other financial information included in this annual report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of and for the periods presentedin this annual report;

 

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

 

a.               designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this annual report is being prepared;

 

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

 

c.               presentedin this annual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

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

 

a.               allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b.              anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.     The registrant’s other certifying officersand I have indicated in this annual report whether there were significantchanges in internal controls or in other factors that could significantlyaffect internal controls subsequent to the date of our most recent evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

 
| March 12, 2003 |                                  |
|----------------|---------------------------------------|
|           |                                  |
|           |                                  |
|           | /s/ Stephen G. Hanks                  |
|           | Stephen G. Hanks                      |
|           | President and Chief Executive Officer |

 

----

 

**CERTIFICATION OF PRINCIPAL FINANCIALOFFICER OF**

**WASHINGTON GROUP INTERNATIONAL, INC.**

**PURSUANT TO SECTION 302 OF THESARBANES-OXLEY ACT OF 2002**

 

I, George H.Juetten, certify that:

 

1.     I have reviewed this annual report on Form10-K of Washington Group International, Inc.;

 

2.     Based on my knowledge, this annual reportdoes not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this annual report;

 

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

 

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

 

a.               designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this annual report is being prepared;

 

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

 

c.               presentedin this annual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

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

 

a.               allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b.              anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.     The registrant’s other certifying officersand I have indicated in this annual report whether there were significantchanges in internal controls or in other factors that could significantlyaffect internal controls subsequent to the date of our most recent evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

 
| March 12, 2003 |                                                 |
|----------------|------------------------------------------------------|
|           |                                                 |
|           |                                                 |
|           | /s/ George H. Juetten                                |
|           | George H. Juetten                                    |
|           | Executive Vice President and Chief Financial Officer |

 

----

 

**WASHINGTON GROUP INTERNATIONAL, INC.**

**SCHEDULEII****.  VALUATION,QUALIFYING AND RESERVE ACCOUNTS**

***(In thousands)***

 

**Allowance for Doubtful AccountsReceivables Deducted in the Balance Sheet from Accounts Receivable**

 
| **Period  Ended**                    |   | **Balance at  Beginning  of Period** |   | **Provisions  Charged to  Operations** |   | **Other** |   | **Deductions** |   | **Balance at  End of  Period** |   |
|--------------------------------------|--------|--------------------------------------|--------|----------------------------------------|--------|-----------|--------|----------------|--------|--------------------------------|--------|
| **Predecessor Company**              |   |                                 |   |                                   |   |      |   |           |   |                           |   |
| Year ended  December 1, 2000         |   | $                                    | (5,133 | )                                      | $      | (10,298   | )      | $              | — |                           | $      | 161 |   | $ | (15,270 | ) |
| 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                        | )      |
|                                      |        |                                      |        |                                        |        |           |        |                |        |                                |        |  |  |  |  |  |

 

**Deferred Income Tax Asset ValuationAllowance Deducted in the Balance Sheet**

**from Deferred Income Tax Asset**

 
| **Period  Ended**                    |   | **Balance at  Beginning  of Period** |    | **Provisions  Charged to  Operations** |   | **Other** |   | **Deductions** |    | **Balance at  End of  Period** |   |
|--------------------------------------|--------|--------------------------------------|---------|----------------------------------------|--------|-----------|--------|----------------|---------|--------------------------------|--------|
| **Predecessor Company**              |   |                                 |    |                                   |   |      |   |           |    |                           |   |
| Year ended  December 1, 2000         |   | $                                    | (41,987 | )                                      | $      | (31,241   | )      | $              | (12,023 | )(2)                           | $      | 40,666 | (1) | $ | (44,585 | ) |
| 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                        | )      |
|                                      |        |                                      |         |                                        |        |           |        |                |         |                                |        |  |  |  |  |  |

 

**Estimated Costs to Complete Long-TermContracts Included in the Balance Sheet**

**in Billings in Excess of Cost andEstimated Earnings on Uncompleted Contracts**

 
| **Period  Ended**                    |   | **Balance at  Beginning  of Period** |    | **Provisions  Charged to  Operations** |   | **Other** |   | **Deductions** |   | **Balance at  End of  Period** |   |
|--------------------------------------|--------|--------------------------------------|---------|----------------------------------------|--------|-----------|--------|----------------|--------|--------------------------------|--------|
| **Predecessor Company**              |   |                                 |    |                                   |   |      |   |           |   |                           |   |
| Year ended  December 1, 2000         |   | $                                    | (31,947 | )                                      | $      | (78,676   | )      | $              | — |                           | $      | 29,028 |   | $ | (81,595 | ) |
| Year ended  November 30, 2001        |   | (81,595                              | )       | (104,123                               | )      | 13,441    | (3)    | 82,893         |   | (89,384                        | )      |
| One month ended  December 28, 2001   |   | (89,384                              | )       | (4,537                                 | )      | —    |   | 6,083          |   | (87,838                        | )      |
| One month ended  February 1, 2002    |   | (87,838                              | )       | (3,740                                 | )      | —    |   | 10,021         |   | (81,557                        | )      |
| **Successor Company**                |   |                                 |    |                                   |   |      |   |           |   |                           |   |
| Eleven months  ended January 3, 2003 |   | (81,557                              | )       | (54,750                                | )      | —    |   | 60,147         |   | (76,160                        | )      |
|                                      |        |                                      |         |                                        |        |           |        |                |        |                                |        |  |  |  |  |  |

 

S-1

----

 

**Provision for Future Losses on JointVenture Contracts Deducted in the Balance Sheet**

**from Investments in and Advances toJoint Ventures**

 
| **Period  Ended**                    |   | **Balance at  Beginning  of Period** |   | **Provisions  Charged to  Operations** |   | **Other** |   | **Deductions** |   | **Balance at  End of  Period** |   |
|--------------------------------------|--------|--------------------------------------|--------|----------------------------------------|--------|-----------|--------|----------------|--------|--------------------------------|--------|
| **Predecessor Company**              |   |                                 |   |                                   |   |      |   |           |   |                           |   |
| Year ended  December 1, 2000         |   | $                                    | (6,256 | )                                      | $      | (2,235    | )      | $              | 367    |                           | $      | 5,889 |   | $ | (2,235 | ) |
| Year ended  November 30, 2001        |   | (2,235                               | )      | (12,909                                | )      | —    |   | 2,116          |   | (13,028                        | )      |
| One month ended  December 28, 2001   |   | (13,028                              | )      | —                                 |   | —    |   | 225            |   | (12,803                        | )      |
| One month ended  February 1, 2002    |   | (12,803                              | )      | (649                                   | )      | —    |   | 919            |   | (12,533                        | )      |
| **Successor Company**                |   |                                 |   |                                   |   |      |   |           |   |                           |   |
| Eleven months  ended January 3, 2003 |   | (12,533                              | )      | (7,143                                 | )      | —    |   | 1,485          |   | (18,191                        | )      |
|                                      |        |                                      |        |                                        |        |           |        |                |        |                                |        |  |  |  |  |  |

 

----

(1)          Change in valuationallowance related to estimates of the future realization of acquired deductibletemporary differences that have been treated as a reduction of goodwill.

(2)          Value of foreign netoperating losses acquired in acquisition of RE&C.

(3)          Represents amounttransferred to liabilities held for sale.

 

S-2

----

 

**WASHINGTON GROUP INTERNATIONAL, INC.**

**EXHIBIT INDEX**

 

**Copies of exhibits will be suppliedupon request. 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”) (filed as  Exhibit 2 to Washington Group’s Form 10-Q Quarterly Report for the quarter  ended March 3, 2000 and incorporated herein by reference). |
|                |   |                                                                                                                                                                                                                                                                                                                                                                    |
| 2.2.1               |   | Second Amended Joint Plan of Reorganization of  Washington Group, et. al. (filed as Exhibit 99.1 to Washington Group’s Form  8-K Current Report filed on August 2, 2001 and incorporated herein by  reference).                                                                                                                                                    |
|                |   |                                                                                                                                                                                                                                                                                                                                                                    |
| 2.2.2               |   | Modification to Second Amended Joint Plan of  Reorganization of Washington Group, et. al. (filed as Exhibit 99.1 to  Washington Group’s Form 8-K Current Report filed on August 31, 2001 and  incorporated herein by reference).                                                                                                                                   |
|                |   |                                                                                                                                                                                                                                                                                                                                                                    |
| 2.2.3               |   | Second modification to Second Amended Joint Plan of  Reorganization of Washington Group, et. al. (filed as Exhibit 2.3 to  Washington Group’s Form 8-K Current Report filed on January 4, 2002 and  incorporated herein by reference).                                                                                                                             |
|                |   |                                                                                                                                                                                                                                                                                                                                                                    |
| 2.2.4               |   | Third Modification to Second Amended Joint Plan of  Reorganization of Washington Group, et. al. (filed as Exhibit 2.4 to  Washington Group’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 (filed as Exhibit 3.1 to Washington Group’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  (filed as Exhibit 3.2 to Washington Group’s Form 8-K Current Report filed on  February 8, 2002 and incorporated herein by reference).                                                                                                                                                                             |
|                |   |                                                                                                                                                                                                                                                                                                                                                                    |
| 4.1                 |   | Specimen certificate of Washington Group’s common  stock (filed as Exhibit 4.1 to Washington Group’s Form 10-Q Quarterly Report  for quarter ended June 28, 2002 and incorporated herein by reference).                                                                                                                                                       |
|                |   |                                                                                                                                                                                                                                                                                                                                                                    |
| 4.2                 |   | Specimen certificate of Washington Group’s Tranche A  Warrants (filed as Exhibit 4.2 to Washington Group’s Form 10-Q Quarterly  Report for quarter ended June 28, 2002 and incorporated herein by reference).                                                                                                                                                 |
|                |   |                                                                                                                                                                                                                                                                                                                                                                    |
| 4.3                 |   | Specimen certificate of Washington Group’s Tranche B  Warrants (filed as Exhibit 4.3 to Washington Group’s Form 10-Q Quarterly Report  for quarter ended June 28, 2002 and incorporated herein by reference).                                                                                                                                                 |
|                |   |                                                                                                                                                                                                                                                                                                                                                                    |
| 4.4                 |   | Specimen certificate of Washington Group’s Tranche C  Warrants (filed as Exhibit 4.4 to Washington Group’s Form 10-Q Quarterly  Report for 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 and Wells Fargo Bank Minnesota, National  Association, as warrant agent (filed as Exhibit 4.3 to Washington Group’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 and certain parties identified therein (filed as  Exhibit 4.2 to Washington Group’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, by and  between Washington Group and Wells Fargo Bank Minnesota, National Association,  as rights agent (filed as Exhibit 4.1 to Washington Group’s Registration  Statement on Form 8-A filed on June 24, 2002 and incorporated herein by  reference).                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.1.1 |   | Credit Agreement dated as of January 24, 2002, among  Washington Group, 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’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’s Credit Agreement dated as of January 24, 2002,  among Washington Group, 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’s Form 10-Q Quarterly  Report for 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, certain subsidiaries of Washington Group  identified therein and Credit Suisse First Boston, as administrative agent  (filed as Exhibit 10.2 to Washington Group’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, Lambique  Beheer BV and Ergon Overseas Holdings Limited (filed as Exhibit 10.6 to  Washington Group’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’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’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’s wholly-owned subsidiary, Washington Group International,  Inc., an Ohio corporation, and BNFL USA Group, Inc. (filed as Exhibit 10.3 to  Washington Group’s Form 10-Q Quarterly Report for quarter ended February 26,  1999 and incorporated herein by reference.)                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 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’s  Form 8-K/A Amended Current Report filed on November 1, 2002 and incorporated  herein by reference)                                                                                                                                                                                                               |

 

E-2

----

 
| 10.8     |   | Trust and Disbursing Agreement dated as of January  25, 2002, among Washington Group, the Official Unsecured Creditors’ Committee  and Wells Fargo Bank Minnesota, National Association, as disbursing agent  (filed as Exhibit 10.4 to Washington Group’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, Raytheon Company and Raytheon Engineers &  Constructors International, Inc. (filed as Exhibit 10.5 to Washington Group’s  Form 8-K Current Report filed on February 8, 2002 and incorporated herein by  reference).                                                       |
|     |   |                                                                                                                                                                                                                                                                                                                                                           |
| 10.10.1  |   | Washington Group International, Inc. Equity and  Performance Incentive Plan (filed as Exhibit 10.7 to Washington Group’s Form  8-K Current Report filed on February 8, 2002 and incorporated herein by  reference). #                                                                                                                                     |
|     |   |                                                                                                                                                                                                                                                                                                                                                           |
| 10.10.2* |   | Amendment No. 1 to Washington Group International,  Inc. Equity and Performance Incentive Plan (pending shareholder approval). #                                                                                                                                                                                                                               |
|     |   |                                                                                                                                                                                                                                                                                                                                                           |
| 10.11    |   | Washington Group International, Inc. Equity and  Performance Incentive Plan -  California (filed as Exhibit 10.8 to Washington Group’s Form 8-K Current  Report filed on February 8, 2002 and incorporated herein by reference). #                                                                                                                        |
|     |   |                                                                                                                                                                                                                                                                                                                                                           |
| 10.12    |   | Description of Washington Group’s additional  retention and incentive arrangements (filed as Exhibit 10.9 to Washington Group’s  Form 10-Q Quarterly Report for quarter ended March 29, 2002 and incorporated  herein by reference). #                                                                                                               |
|     |   |                                                                                                                                                                                                                                                                                                                                                           |
| 10.13    |   | Letter Agreement dated as of November 15, 2001,  between Washington Group and Dennis R. Washington (filed as Exhibit 10.9 to  Washington Group’s Form 8-K Current Report filed on February 8, 2002 and  incorporated herein by reference). #                                                                                                              |
|     |   |                                                                                                                                                                                                                                                                                                                                                           |
| 10.14    |   | Form of Indemnification Agreement (filed as Exhibit  10.10 to Washington Group’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 has entered into such agreements is filed  herewith. # *                                           |
|     |   |                                                                                                                                                                                                                                                                                                                                                           |
| 10.15    |   | Washington Group Key Executive Disability Insurance  Plan (filed as Exhibit 10.12 to Old MK’s Form 10-K Annual Report for year  ended December 31, 1992 and incorporated herein by reference). #                                                                                                                                                          |
|     |   |                                                                                                                                                                                                                                                                                                                                                           |
| 10.16    |   | Washington Group Executive Life Insurance Plan  (filed as Exhibit 10.13 to Old MK’s Form 10-K Annual Report for year ended  December 31, 1992 and incorporated herein by reference). #                                                                                                                                                                    |
|     |   |                                                                                                                                                                                                                                                                                                                                                           |
| 10.17.1  |   | Washington Group’s Retention Agreement with Stephen  G. Hanks dated as of March 20, 2001 (filed as Exhibit 10.20 to Washington  Group’s Form 10-K Annual Report for fiscal year ended November 30, 2001 and  incorporated herein by reference). #                                                                                                    |
|     |   |                                                                                                                                                                                                                                                                                                                                                           |
| 10.17.2* |   | Amendment to Washington Group’s Retention Agreement  with Stephen G. Hanks. #                                                                                                                                                                                                                                                                             |
|     |   |                                                                                                                                                                                                                                                                                                                                                           |
| 10.18.1  |   | Form of Washington Group’s Retention Agreement  (filed as Exhibit 10.21 to Washington Group’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 has entered into such agreements is filed  herewith.*           |

 

E-3

----

 
| 10.18.2* |   | Form of Amendment to Washington Group’s Retention  Agreement and schedule listing Executive Officers with whom Washington Group  has entered into such amendments. #                                                                               |
|----------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|     |   |                                                                                                                                                                                                                                                    |
| 10.19    |   | Washington Group’s letter agreement with Thomas H.  Zarges dated as of March 7, 2001 (filed as Exhibit 10.23 to Washington  Group’s Form 10-K Annual Report for fiscal year ended November 30, 2001 and  incorporated herein by reference). # |
|     |   |                                                                                                                                                                                                                                                    |
| 10.20*   |   | Description of Washington Group Short-Term Incentive  Plan adopted on November 9, 2002. #                                                                                                                                                               |
|     |   |                                                                                                                                                                                                                                                    |
| 10.21*   |   | Description of Washington Group Restoration Plan  adopted on November 9, 2002. #                                                                                                                                                                        |
|     |   |                                                                                                                                                                                                                                                    |
| 10.22*   |   | Description of Washington Group Voluntary Deferred  Compensation Plan adopted on November 9, 2002. #                                                                                                                                                    |
|     |   |                                                                                                                                                                                                                                                    |
| 10.23*   |   | Description of Washington Group Executive Financial  Counseling Program adopted on February 14, 2003. #                                                                                                                                                 |
|     |   |                                                                                                                                                                                                                                                    |
| 21.*     |   | Subsidiaries of Washington Group.                                                                                                                                                                                                                       |
|     |   |                                                                                                                                                                                                                                                    |
| 24.*     |   | Powers of Attorney.                                                                                                                                                                                                                                     |
|     |   |                                                                                                                                                                                                                                                    |
| 99.1*    |   | Certification pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                |

 

----

#      Management contract or compensatory plan

*      Filed herewith

 

E-4

----