WASHINGTON GROUP INTERNATIONAL INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K
ANNUAL REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Fiscal Year Ended

DECEMBER 1, 2000

Commission File Number 1-12054

WASHINGTON GROUP INTERNATIONAL, INC.

A Delaware Corporation
IRS Employer Identification No. 33-0565601

720 PARK BOULEVARD, BOISE, IDAHO 83712
208 / 386-5000

- --------------------------------------------------------------------------------
SECURITIES REGISTERED AND NUMBER OF SHARES OF
REGISTRANT'S COMMON STOCK OUTSTANDING
At December 1, 2000, 52,467,733 shares of the registrant's $.01 par value common
stock were outstanding, and such common stock was listed on the New York Stock
Exchange and registered under Section 12(b) of the Securities Exchange Act of
1934 (the "Exchange Act"). On May 14, 2001, the New York Stock Exchange
suspended trading of such common stock, and on July 6, 2001 such common stock
was delisted by the New York Stock Exchange. Upon such delisting, the common
stock was traded in the over-the-counter market and was registered under Section
12(g) of the Exchange Act. Pursuant to the Second Amended Joint Plan of
Reorganization of Washington Group International, Inc., et al., as modified and
confirmed, on January 25, 2002, all of the registrant's existing equity
securities, including such common stock, were canceled and extinguished, and new
common stock was issued. At May 31, 2002, 25,000,000 shares of the registrant's
$.01 par value common stock were outstanding; such common stock is traded in the
over-the-counter market and is registered under 12(g) of the Exchange Act.

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

DISCLOSURE PURSUANT TO ITEM 405 OF REGULATION S-K
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Annual Report on Form 10-K or any
amendment to this Annual Report on Form 10-K. /X/

AGGREGATE MARKET VALUE OF COMMON STOCK HELD BY NONAFFILIATES
At December 1, 2000, the aggregate market value of the registrant's common stock
held by nonaffiliates of the registrant, based on the New York Stock Exchange
closing price on December 1, 2000, was approximately $273,640,483. Shares having
an aggregate market value of $172,335,247 are assumed to be held by affiliates
of the registrant on such date for purposes of this calculation. The aggregate
market value of the registrant's common stock held by nonaffiliates of the
registrant, based on the quotation service over-the-counter closing bid price on
May 31, 2002, as reported by the Pink Sheets(R) quotation service was
approximately $576,250,000. There were no shares held by affiliates on such
date.

DOCUMENTS INCORPORATED BY REFERENCE
None.

WASHINGTON GROUP INTERNATIONAL, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 1, 2000

TABLE OF CONTENTS

NOTE REGARDING FORWARD-LOOKING INFORMATION

THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS. YOU CAN IDENTIFY
FORWARD-LOOKING STATEMENTS BY THE USE OF TERMINOLOGY SUCH AS "MAY," "WILL,"
"ANTICIPATE," "BELIEVE," "ESTIMATE," "EXPECT," "FUTURE," "INTEND," "PLAN,"
"COULD," "SHOULD," "POTENTIAL," OR "CONTINUE," OR THE NEGATIVE OR OTHER
VARIATIONS THEREOF, AS WELL AS OTHER STATEMENTS REGARDING MATTERS THAT ARE NOT
HISTORICAL FACT. THESE FORWARD-LOOKING STATEMENTS INCLUDE, AMONG OTHERS,
STATEMENTS CONCERNING:

o OUR BUSINESS STRATEGY AND COMPETITIVE ADVANTAGES

o OUR EXPECTATIONS AS TO POTENTIAL REVENUES FROM DESIGNATED MARKETS OR
CUSTOMERS

o OUR EXPECTATIONS AS TO PROFITS, CASH FLOWS, RETURN ON INVESTED CAPITAL
AND NET INCOME

o OUR EXPECTATIONS AS TO NEW WORK AND BACKLOG

o THE MARKETS FOR OUR SERVICES AND PRODUCTS

o OUR ANTICIPATED CAPITAL EXPENDITURES AND FUNDING REQUIREMENTS

FORWARD-LOOKING STATEMENTS ARE ONLY PREDICTIONS. THESE FORWARD-LOOKING
STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES, INCLUDING, AMONG OTHERS, THE
RISKS AND UNCERTAINTIES IDENTIFIED IN THIS REPORT OR OTHER OPERATIONAL,
BUSINESS, INDUSTRY, MARKET, LEGAL AND REGULATORY DEVELOPMENTS, WHICH COULD CAUSE
ACTUAL EVENTS OR RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY
THE STATEMENTS. THE MOST IMPORTANT FACTORS THAT COULD PREVENT US FROM ACHIEVING
THE EXPECTATIONS EXPRESSED INCLUDE, BUT ARE NOT LIMITED TO, OUR FAILURE TO:

o SATISFY THE RESTRICTIVE COVENANTS IMPOSED BY OUR INDEBTEDNESS

o RAISE SUFFICIENT WORKING CAPITAL ON ACCEPTABLE TERMS AND ON A TIMELY
BASIS

o MAINTAIN RELATIONSHIPS WITH KEY CUSTOMERS, PARTNERS, SURETIES AND
SUPPLIERS

o MANAGE AND AVOID DELAYS OR COST OVERRUNS IN EXISTING CONTRACTS

o SUCCESSFULLY BID FOR, AND ENTER INTO, NEW CONTRACTS ON SATISFACTORY
TERMS

o SUCCESSFULLY NEGOTIATE CLAIMS AND CHANGE ORDERS

o MANAGE AND MAINTAIN OUR OPERATIONS AND FINANCIAL PERFORMANCE AND THE
OPERATIONS AND FINANCIAL PERFORMANCE OF OUR CURRENT AND FUTURE OPERATING
SUBSIDIARIES AND JOINT VENTURES

o NEGOTIATE ACCEPTABLE COLLECTIVE BARGAINING AGREEMENTS WITH ANY
APPLICABLE UNIONS

o RESPOND TO COMPETITORS IN OUR EXISTING AND PLANNED MARKETS

o RESPOND EFFECTIVELY TO REGULATORY, LEGISLATIVE AND JUDICIAL
DEVELOPMENTS, INCLUDING ANY LEGAL OR REGULATORY PROCEEDINGS, AFFECTING
OUR EXISTING CONTRACTS, INCLUDING CONTRACTS CONCERNING ENVIRONMENTAL
REMEDIATION AND RESTORATION

o OBTAIN AND MAINTAIN ANY REQUIRED GOVERNMENTAL AUTHORIZATIONS,
FRANCHISES AND PERMITS, ALL IN A TIMELY MANNER, AT REASONABLE COSTS AND
ON SATISFACTORY TERMS AND CONDITIONS

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o SUCCESSFULLY IMPLEMENT OUR PLAN OF REORGANIZATION, AS MODIFIED AND
CONFIRMED

SOME OTHER FACTORS THAT MAY AFFECT OUR BUSINESSES, FINANCIAL POSITION OR
RESULTS OF OPERATIONS INCLUDE:

o ACCIDENTS AND CONDITIONS, INCLUDING INDUSTRIAL ACCIDENTS, LABOR
DISPUTES, GEOLOGICAL CONDITIONS, ENVIRONMENTAL HAZARDS, WEATHER AND
OTHER NATURAL PHENOMENA

o SPECIAL RISKS OF INTERNATIONAL OPERATIONS, INCLUDING UNCERTAIN
POLITICAL AND ECONOMIC ENVIRONMENTS, POTENTIAL INCOMPATIBILITIES WITH
FOREIGN JOINT VENTURE PARTNERS, FOREIGN CURRENCY FLUCTUATIONS AND
CONTROLS, CIVIL DISTURBANCES AND LABOR ISSUES

o SPECIAL RISKS OF CONTRACTS WITH THE GOVERNMENT, INCLUDING THE FAILURE
OF APPLICABLE GOVERNING AUTHORITIES TO TAKE NECESSARY ACTIONS TO SECURE
OR MAINTAIN FUNDING FOR PARTICULAR PROJECTS WITH US, THE UNILATERAL
TERMINATION OF CONTRACTS BY THE GOVERNMENT AND BEING REQUIRED TO
REIMBURSE THE GOVERNMENT FOR FUNDS PREVIOUSLY RECEIVED

o MAINTENANCE OF GOVERNMENT-COMPLIANT COST SYSTEMS

SUBSEQUENT EVENTS

The deadline to timely file this report was March 1, 2001. On March 2,
2001, we filed a Form 12b-25, which delayed the deadline to file this report
until March 16, 2001 and disclosed that we faced severe near-term liquidity
problems, were in default under certain covenants of our senior secured credit
facilities and were unable to secure performance bonds necessary to obtain new
projects. We also announced that, if we were unable to obtain additional sources
of cash, we may seek protection from our creditors under the U.S. Bankruptcy
Code. On March 8, 2001, we announced that, as a result of a rigorous review of
projects acquired in connection with our acquisition of the capital stock of
certain subsidiaries of Raytheon Engineers & Constructors International, Inc.
("RECI") from RECI and Raytheon Company ("Raytheon" and, together with RECI, the
"Sellers"), we believed that certain historical financial statements and
unaudited pro forma condensed combined financial statements, which were
previously filed as exhibits to a current report on Form 8-K filed July 13,
2000, should not be relied upon. For a more detailed discussion, see our current
report on Form 8-K filed March 8, 2001, and for additional discussion of the
transactions with the Sellers and their consequences, see "The Raytheon
Transaction" in Item 1 of this report. The businesses that we purchased,
hereinafter called "RE&C", provide engineering, design, procurement,
construction, operation, maintenance and other services on a worldwide basis. On
March 16, 2001, we filed a current report on Form 8-K, which stated that,
despite our best efforts to timely file this report, we would delay filing this
report until we would be able to accurately reflect the impact of our severe
near-term liquidity problems in the financial statements and related disclosures
to be included in this report. For a more detailed discussion, see our current
report on Form 8-K filed March 16, 2001.

On May 14, 2001, Washington Group International, Inc. and several but not
all of its direct and indirect subsidiaries filed voluntary petitions to
reorganize under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy
Court for the District of Nevada (Case No. BK-N-01-31627). The various legal
entities that filed for bankruptcy are collectively referred to hereafter as the
"Debtors." The individual bankruptcy cases were administered jointly. Each of
the Debtors continued to operate its business and manage its property as a
debtor-in-possession pursuant to sections 1107 and 1108 of the U.S. Bankruptcy
Code during the pendency of the cases. For a more detailed discussion, see our
current report on Form 8-K filed May 29, 2001.

Prior to May 14, 2001, our common stock was listed on the New York Stock
Exchange and traded under the ticker symbol "WNG." On May 14, 2001, the exchange
suspended trading of our common stock and on July 6, 2001 our common stock was
delisted by the exchange.

Shortly after the commencement of the bankruptcy cases, the committee
representing our secured lenders and Dennis R. Washington began negotiations
regarding Mr. Washington's continued involvement with us during the

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bankruptcy cases and after our emergence from bankruptcy protection. The
result of these negotiations was an agreement, embodied in our Plan of
Reorganization (as defined below), providing that in exchange for Mr.
Washington's agreement to render ongoing services to us and to remain as
chairman of our board of directors, Mr. Washington would be granted options
to purchase shares of our common stock to be issued in connection with our
emergence from bankruptcy protection. For a more detailed discussion, see our
current report on Form 8-K filed January 4, 2002.

Following the commencement of the bankruptcy cases, PricewaterhouseCoopers
LLP informed us that it had concluded that it was not a "disinterested person"
with respect to the Debtors, and could not file an affidavit of
disinterestedness before the bankruptcy court in order to continue to serve as
independent public accountants of the Debtors during the pendency of the
bankruptcy cases. In addition, PricewaterhouseCoopers LLP notified us that it
could give no assurance that it would be able to act as our independent public
accountants following the Debtors' emergence from bankruptcy protection. As a
result, on October 3, 2001, we dismissed PricewaterhouseCoopers LLP and selected
Deloitte & Touche LLP as our independent public accountants. For a more detailed
discussion, see our current report on Form 8-K filed October 3, 2001.

On December 21, 2001, the U.S. Bankruptcy Court for the District of Nevada
entered an order confirming the Second Amended Joint Plan of Reorganization of
Washington Group International, Inc., et al., as modified (the "Plan of
Reorganization"). For a more detailed discussion, see our current report on Form
8-K filed January 4, 2002.

On January 25, 2002 (the "Effective Date"), the Debtors emerged from
bankruptcy protection pursuant to our Plan of Reorganization. We also entered
into a $350 million, 30-month revolving credit facility to fund our working
capital requirements and obtained bonding capacity to take on new projects.
Under the Plan of Reorganization, on the Effective Date, all our equity
securities existing prior to the Effective Date were canceled and extinguished,
we issued an aggregate 25,000,000 shares of our $.01 par value common stock, we
issued warrants to purchase an additional aggregate 8,520,424 shares of common
stock, we filed an amended and restated certificate of incorporation and adopted
amended and restated bylaws, we adopted new stock option plans and granted
options under those plans for an aggregate 4,613,000 shares of common stock,
including options granted to Dennis R. Washington to purchase an aggregate
3,224,100 shares of common stock, and we entered into various other agreements.
For a more detailed discussion, see our current report on Form 8-K filed
February 8, 2002.

Also on the Effective Date, our board of directors was replaced by an
interim board of directors pursuant to the Plan of Reorganization. This interim
board of directors consisted of David H. Batchelder, H. Peter Boger, Robert A.
Del Genio, Joel A. Glodowski, Stephen G. Hanks, Samuel "Skip" Victor, Dennis R.
Washington and four vacancies. Pursuant to the Plan of Reorganization, the
interim board of directors was replaced upon designation of the members of the
initial board of directors on March 14, 2002 and April 9, 2002; these
designations became effective on March 25, 2002 and April 19, 2002,
respectively. The board of directors currently consists of Dennis R. Washington,
David H. Batchelder, Michael R. D'Appolonia, William J. "Bud" Flanagan, C. Scott
Greer, Stephen G. Hanks, William H. Mallender, Michael P. Monaco, Cordell Reed,
Bettina M. Whyte and Dennis K. Williams. For a more detailed discussion, see our
current reports on Form 8-K filed April 3, 2002 and April 26, 2002.

During the pendency of the bankruptcy cases, we continued negotiations with
the Sellers in respect of certain disputes related to the purchase price of
RE&C. As a result of these negotiations, we reached a settlement regarding the
issues and disputes between the parties, which settlement was incorporated into
our Plan of Reorganization (the "Raytheon Settlement").

Under the Raytheon Settlement, the Sellers waived any rights to
distributions under the Plan of Reorganization arising from the claims they had
asserted against the Debtors, and the Debtors agreed to dismiss the fraudulent
conveyance adversary proceeding they filed with the bankruptcy court and the
pending state court litigation against the Sellers related to our purchase of
certain of the businesses of RECI, including a purchase

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price adjustment process and a pending arbitration. We released all claims
based on any act occurring prior to the Effective Date of the Plan of
Reorganization, including all claims against the Sellers, their affiliates
and their directors, officers, employees, agents and specified professionals.
The Sellers released all claims based on any act occurring prior to the
Effective Date, including any claims related to any contracts or projects not
assumed by the Debtors during the bankruptcy cases, against us and our
directors, officers, employees, agents and professionals.

Under a services agreement entered into as a part of the Raytheon
Settlement, the Sellers will direct the process for resolving pre-petition
claims asserted against the Debtors in the bankruptcy cases relating to any
contract or project that was rejected by the Debtors and that involved some form
of support arrangement from the Sellers. We agreed to assist the Sellers in
settling or litigating various claims related to those rejected projects. We
will also complete work as requested by the Sellers on those rejected projects,
and the Sellers will reimburse us on a cost-plus basis. The Sellers have the
right to pursue or settle any claims of the Debtors against project owners,
contractors or other third parties with respect to those rejected projects and
will retain any resulting proceeds, except that for some projects, recoveries in
excess of amounts paid by the Sellers will be returned to us.

Our new common stock currently trades in the over-the-counter market and is
quoted on the Pink Sheets(R) quotation service under the ticker symbol "WGII."

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

Beginning on December 29, 2001, we changed the operating units of our
business. The process technology development portion of our petroleum and
chemicals business is being held for sale; the remainder of the Petroleum &
Chemicals operating unit has been combined with the Industrial/Process operating
unit. Infrastructure & Mining has been split into two operating units:
"Infrastructure" and "Mining." The Government operating unit has been split into
two operating units: "Defense" and "Energy & Environment."

On January 25, 2002, we completed our reorganization and emerged from
bankruptcy. We accounted for the reorganization using fresh-start reporting
effective February 1, 2002. Accordingly, all assets and liabilities at the
Effective Date were restated to reflect their reorganization value, which
approximates fair value at the date of reorganization.

We have not filed our quarterly reports on Form 10-Q for the quarters ended
March 2, 2001, June 1, 2001 and August 31, 2001 and did not timely file our
annual report on Form 10-K for our fiscal year ended November 30, 2001 because
we needed additional time to prepare and file the financial statements and
related disclosures required to be included in those reports.

These events are discussed in greater detail in Note 3, "Acquisitions" and
Note 4, "Reorganization Case and Fresh-start Reporting" of the Notes to
Consolidated Financial Statements in Item 8 of this report and in our annual
report on Form 10-K for the fiscal year ended November 30, 2001, which is being
filed contemporaneously with this report.

PART I

ITEM 1. BUSINESS

Unless otherwise indicated, the terms "we," "us" and "our" refer to
Washington Group International, Inc. ("WGI") and its consolidated subsidiaries,
and references to 2001 are references to our fiscal year ended November 30,
2001. References to 2000 are references to our fiscal year ended December 1,
2000, references to 1999 are references to our fiscal year ended December 3,
1999, and references to 1998 are references to our fiscal year ended November
30, 1998.

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Except as otherwise indicated, the information in this report is presented
as of and for the periods ended December 1, 2000 and does not reflect our
reorganization, which occurred after our fiscal year ended November 30, 2001, or
the impact of our reorganization. Thus, although much of the information in this
report is stated in the present tense, unless otherwise indicated, that
information is not or may not be representative of our current business,
properties, legal proceedings or financial position. Because of the material
impact of the reorganization on our business and financial statements, the
information in this report is of limited relevance and does not include, except
by reference to our subsequent filings with the Securities and Exchange
Commission under the Securities Exchange Act of 1934 that are identified in this
report, the information that is required for an understanding of our current
business, financial condition, prospects and outlook. Accordingly, this report
should be read in conjunction with the various reports we have filed with the
Securities and Exchange Commission under the Securities Exchange Act of 1934
since November 30, 2001 and, in particular, our quarterly report on Form 10-Q
for the quarter ended March 29, 2002, and our annual report on Form 10-K for the
fiscal year ended November 30, 2001, which are being filed contemporaneously
with this report.

Our principal executive offices are located at 720 Park Boulevard, Boise,
Idaho 83712. Our telephone number is (208) 386-5000. Our website address is
http://www.wgint.com. The information on our website is not incorporated into,
and is not part of, this report.

GENERAL

We are an international provider of a broad range of design, engineering,
construction, construction management, facilities and operations management,
environmental remediation and mining services. We offer our various services
separately or as part of an integrated package throughout the life cycle of a
customer's project:

o In providing engineering and design services, we are involved in the
conceptualization and planning stages of projects that are part of our
customers' overall capital programs. We develop the physical designs
and determine the technical specifications. We also devise project
configurations to maximize both construction and operating efficiency.

o As a contractor, we are responsible for the construction and completion
of each contract in accordance with its specifications and contracting
terms (primarily schedule and total cost). In this capacity, we often
manage the procurement of materials, subcontractors and craft labor.
Depending on the project, we may function as the primary contractor or
as a subcontractor to another firm.

o On some projects, we function as a construction manager, engaged by the
customer to oversee another contractor's compliance with design
specifications and contracting terms.

o Under operations and maintenance contracts, we provide repair,
renovation, predictive and preventive services to customer facilities
worldwide. We also offer other "light" facility services, such as
cleaning and grounds keeping. In addition, we provide inventory and
product logistics for manufacturing plants, information technology
support, equipment servicing and tooling changeover support.

On some projects, particularly those of significant size and requiring
specialized technology or know-how, we partner with other firms, both to
increase our opportunity to win the contract and to manage development and
execution risk. Partners may include specialized process engineering firms,
other contractors or equipment manufacturers. These partnerships may be
structured as joint ventures or consortia, with each participating firm having
an economic interest relative to the scope of its work.

We enter into three basic types of contracts with our customers:

o Under a "fixed-price" contract, we provide the customer a total project
or per-unit cost, subject to project circumstances and changes in
scope. We commonly refer to contracts under which the total project
cost is determined up front as "lump-sum" contracts. Plant and facility
construction projects are typically

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awarded on a lump-sum basis. We follow strict guidelines in bidding
for and entering into fixed-price contracts.

o Under a "fixed-unit-price" contract, the customer pays us for labor,
overhead, equipment rentals or other costs at fixed rates as each unit
of work is performed. Large infrastructure projects are typically
awarded on a fixed-price per-unit basis.

o Under a "cost-type" contract, a customer reimburses us for the costs
that we incur (primarily materials, labor, overhead and subcontractor
services), plus a predetermined fee. The fee portion of the contract
may equal a percentage of the costs incurred or may be based on the
achievement of specific performance incentives. The fee portion may
also be subject to a maximum. Engineering, construction management and
environmental and hazardous substance remediation contracts, including
most of our work for U.S. government customers, are typically awarded
pursuant to a cost-type contract.

Many fixed-price contracts require the contractor to provide a surety bond
to its customer. This general industry practice provides indemnification to the
customer if the contractor fails to perform its obligations. Surety companies
consider factors such as capitalization, available working capital, past
performance and management expertise to determine the amount of bonds they are
willing to issue to a particular engineering and construction firm.

BACKGROUND

We were originally incorporated in Delaware on April 28, 1993 under the
name Kasler Holding Company. In April 1996, we changed our name to Washington
Construction Group, Inc. On September 11, 1996, we purchased Morrison Knudsen
Corporation, which we refer to as "Old MK," and changed our name to Morrison
Knudsen Corporation. On September 15, 2000, we changed our name to Washington
Group International, Inc.

Our purchase of Old MK was structured as a merger with and into us and was
an integral part of the reorganization of Old MK under a plan of reorganization
that Old MK filed in the U.S. Bankruptcy Court for the District of Delaware. We
have no remaining obligations under that plan of reorganization.

On March 22, 1999, we and BNFL Nuclear Services, Inc. ("BNFL") acquired the
government and environmental services businesses of CBS Corporation (now Viacom,
Inc.). We refer to these businesses as the "Westinghouse Businesses." The
Westinghouse Businesses currently constitute our Westinghouse Government
Services Group, which is a part of our Government operating unit.

THE RAYTHEON TRANSACTION

On July 7, 2000, pursuant to a stock purchase agreement dated April 14,
2000 (the "Stock Purchase Agreement"), we purchased from the Sellers the capital
stock of the subsidiaries of RECI and specified other assets of RECI and we
assumed specified liabilities of RECI. The businesses that we purchased provide
engineering, design, procurement, construction, operation, maintenance and other
services on a worldwide basis. We financed the acquisition by obtaining new
senior secured credit facilities (the "RE&C Financing Facilities") and issuing
senior unsecured notes due July 1, 2010 (the "Senior Unsecured Notes"). See Note
8, "Credit Facilities - RE&C Financing Facilities" and "Credit Facilities -
Senior Unsecured Notes" of the Notes to Consolidated Financial Statements in
Item 8 of this report for a more detailed description of the RE&C Financing
Facilities and the Senior Unsecured Notes.

The purchase price paid at the closing of the acquisition on July 7, 2000
was $53 million in cash and the assumption of net liabilities originally
estimated at $450 million. We also incurred acquisition costs of $7.7 million.
The cash portion of the purchase price paid at closing was determined based upon
a formula contained in the Stock Purchase Agreement and represented the
estimated amount of the Adjusted Non-Current Net Assets and Adjusted Net Working
Capital (as the terms are defined in the Stock Purchase Agreement) that we
acquired,

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valued as of April 30, 2000. The amounts of Adjusted Non-Current Net Assets
and Adjusted Net Working Capital were subject to post-closing finalization,
including an audit by independent accountants, and other adjustments to the
price paid at closing. In addition, the Stock Purchase Agreement contained a
provision requiring us either to pay the Sellers or to be paid by the
Sellers, the net amount of cash the Sellers either advanced to or withdrew
from RE&C between April 30, 2000 and July 7, 2000. After closing we paid the
Sellers $84.4 million representing the net amount of cash advanced or paid by
the Sellers for the use or benefit of RE&C between April 30, 2000 and July 7,
2000.

The Stock Purchase Agreement provided that the Sellers would retain all
non-restricted cash and cash equivalents held by RE&C at the close of business
on April 30, 2000 ("Cut-Off Date Cash Balances"). At closing, for purposes of
administrative convenience, RE&C kept all cash held by it ($15.8 million), and
we paid the Sellers an additional $30.8 million for the cash balances on April
30, 2000. That amount was subject to post-closing verification by us and
adjustment in the event it was not equal to the Cut-Off Date Cash Balances held
by RE&C. We subsequently verified the amount and no adjustment was required.

RECI retained, among other assets, all of its interest in and rights with
respect to some of the existing contracts. In addition, the Stock Purchase
Agreement provided that the contracts related to four specified construction
projects would be transferred to RECI, and RE&C would enter into subcontracts to
perform, on a cost-reimbursed basis, all of RECI's obligations under those
contracts. Because the customer consents required to transfer the four contracts
to RECI could not be obtained as of closing, we agreed to remain the contract
party and continued to be directly obligated to the customers and other third
parties under the contracts relating to the four projects. Accordingly, we and
the Sellers agreed that the Sellers would provide us with full indemnification
with respect to any risks associated with those contracts, which arrangement
accomplished the original intent of the Stock Purchase Agreement. Under the
Stock Purchase Agreement we agreed that we would complete the four specified
projects for the Sellers' account and the Sellers agreed to reimburse our costs
to do so and to share equally with us any positive variance between actual costs
and estimated costs. The Sellers also agreed to indemnify us against any losses,
claims or liabilities under the contracts relating to such projects, except
losses, claims or liabilities resulting from our gross negligence or willful
misconduct, against which we would indemnify the Sellers.

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

As part of the acquisition of RE&C, we undertook a comprehensive review of
existing contracts that we acquired for the purpose of making a preliminary
allocation of the acquisition price to the net assets acquired. As part of this
review, we evaluated, among other matters, RECI's estimates of the cost at
completion of the long-term contracts that were underway as of July 7, 2000
("Acquisition Date EAC's"). During this process, information came to our
attention that raised questions as to whether the Acquisition Date EAC's needed
to be adjusted significantly. Our review process involved the analysis of an
extensive amount of supporting data, including analysis of numerous, large
construction projects in various stages of completion. Based on the information
available at the time of the review, the preliminary results of this review
indicated that the Acquisition Date EAC's of numerous long-term contracts
required substantial adjustment. The adjustments resulted in contract losses or
lower than market rate margins. As a result, in our report on Form 10-Q for the
quarter ended September 1, 2000, we significantly decreased the carrying value
of the net assets acquired and increased the goodwill associated with the
transaction. Because many of the contracts we acquired contained either
unrecorded losses or lower than market rate margins, these contracts were
adjusted to their estimated fair value at the July 7, 2000 acquisition date in
order to allow for a reasonable profit margin for completing the contracts, and
a gross margin or normal profit reserve of $233.1 million was established and
recorded in billings in excess of cost and estimated earnings on uncompleted
contracts.

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Our review of the RE&C contracts and the purchase price allocation process
continued thereafter, and, based on the results of that review, we expected
that, as a result of the purchase price adjustment process, the purchase price
of RE&C would be adjusted downward by a significant amount. Subsequent to the
quarter ended September 1, 2000, we completed the review and made additional
adjustments to the contracts we had acquired, resulting from a more accurate
determination of the actual contract status at the acquisition date.

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

An audited RE&C April 30, 2000 balance sheet was not delivered by Sellers,
and therefore on February 27, 2001 we filed a lawsuit against the Sellers
seeking specific performance of the purchase price adjustment provisions of the
Stock Purchase Agreement. On March 8, 2001, we amended our complaint to also
seek money damages for misstatements and omissions allegedly made by the
Sellers. Our lawsuit seeking specific performance was successful, and we and the
Sellers thereafter commenced arbitration proceedings before an independent
accountant approved by the court to determine the purchase price adjustment. A
significant arbitration claim was ultimately filed against the Sellers, as
discussed below.

During the spring of 2000, in connection with the acquisition of RE&C, we
received from the Sellers audited RECI financial statements at December 31, 1999
and 1998 and for each of the three years in the period ended December 31, 1999
and unaudited RECI financial statements as of and for the three months ended
April 2, 2000 and April 4, 1999. In accordance with federal securities law
disclosure requirements, we filed on July 13, 2000 those audited and unaudited
financial statements and our related unaudited pro forma condensed combined
financial statements as of and for the year ended December 3, 1999 and for the
quarter ended March 3, 2000 in a current report on Form 8-K. In our current
report on Form 8-K filed March 8, 2001, we advised that, for the reasons stated
in such report, the foregoing audited and unaudited financial statements of
RECI, and our related unaudited pro forma condensed combined financial
statements, which were derived therefrom, no longer should be relied upon.

On March 2, 2001 we announced that we faced severe near-term liquidity
problems as a result of our acquisition of RE&C. On March 9, 2001, because of
those liquidity problems, we suspended work on two large construction projects
located in Massachusetts that were part of the acquisition. The Sellers had
provided the customer with parent performance guarantees on those two contracts
and the guarantees remained in effect after closing. Those performance
guarantees required the Sellers to complete the work on the contracts in the
event RE&C (owned by us as of July 7, 2000) did not complete them. The contracts
were fixed-price in nature and our review of cost estimates indicated that there
were substantial unrecognized future costs in excess of future contract revenues
that were not reflected in RECI's Acquisition Date EAC's.

Upon our suspension of work, the Sellers undertook performance of those
contracts pursuant to the outstanding performance guarantees. We, however, were
obligated under the Stock Purchase Agreement to indemnify the Sellers for losses
they incurred under those guarantees. The Sellers also assumed obligations under
other contracts, primarily in the RE&C power generation construction business
unit, which resulted in significant additional indemnification obligations by us
to the Sellers. As a result of costs they incurred to perform under the parent
guarantees, the Sellers filed a claim against us in the bankruptcy process for
approximately $940 million.

I-8

As further discussed below, this claim was ultimately settled without payment
to the Sellers in connection with the completion of our Plan of
Reorganization. See Note 4, "Reorganization Case and Fresh-start Reporting"
of the Notes to Consolidated Financial Statements in Item 8 of this report.

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

During the pendency of the bankruptcy we continued to negotiate with the
Sellers a settlement of our outstanding litigation with respect to the RE&C
acquisition. As a result of those negotiations, we entered into the Raytheon
Settlement.

Under the Raytheon Settlement, the Sellers agreed that, with respect to
their bankruptcy claim, the Sellers would be considered unpaid, unsecured
creditors having rights in the unsecured creditor class, but that, upon
completion of our Plan of Reorganization, they would waive any rights to receive
any distributions to be given to unsecured creditors with allowed claims. In
exchange, we agreed to dismiss all litigation against the Sellers related to the
acquisition and to discontinue the purchase price adjustment and binding
arbitration process. We released all claims based on any act occurring prior to
the Effective Date of our Plan of Reorganization, including all claims against
the Sellers, their affiliates and their directors, officers, employees, agents
and specified professionals. The Sellers released all claims based on any act
occurring prior to the Effective Date of our Plan of Reorganization, including
any claims related to any contracts or projects not assumed by us during the
bankruptcy cases, against us and our directors, officers, employees, agents and
professionals. No cash was exchanged as a result of this settlement.

In addition, under a services agreement that is a part of the Raytheon
Settlement, the Sellers will direct the process for resolving pre-petition
claims asserted against us in the bankruptcy case relating to any contract or
project that was rejected by us and that involved some form of support
arrangement from the Sellers. We will assist the Sellers in settling or
litigating various claims related to those rejected projects. We will also
complete work as requested by the Sellers on those rejected projects, and will
be reimbursed on a cost-reimbursable contracting basis. The Sellers may, with
respect to the rejected projects described above, pursue or settle any of our
claims against project owners, contractors or other third parties and will
retain any resulting proceeds, except that for specified projects, recoveries in
excess of amounts paid by the Sellers will be returned to us.

While this settlement eliminated our ability to continue to seek to collect
our arbitration claim, it was necessary because the Sellers' large unsecured
claims in the bankruptcy were substantially impeding our Plan of Reorganization
process. Without this settlement, a successful emergence from Chapter 11 would
have been delayed or impossible.

We have made adjustments to the preliminary purchase price allocation of
the RE&C acquisition price to the net assets acquired that was included in the
unaudited quarterly information at September 1, 2000, including the following,
as a result of completing our review:

o We have made adjustments for amounts that were recorded as part of
and subsequent to the initial preliminary purchase price
allocation, as a result of additional information we obtained that
supported that some of the July 7, 2000 balances were materially
misstated based on generally accepted accounting principles and
were, therefore, included in our purchase price adjustment
arbitration claim against the Sellers. In the lawsuits and purchase
price adjustment arbitration claim referred to above, we asserted
that the Sellers should have recorded these as adjustments in the
RE&C financial statements prior to the acquisition. The adjustments
primarily relate to provisions for anticipated losses on
fixed-price contracts that were not recorded in the RE&C financial
statements prior to the acquisition. We recorded these amounts as
a $444.1 million arbitration claim receivable from the Sellers.
However, as noted above,

I-9

under the terms of the Raytheon Settlement, we subsequently agreed to
dismiss all litigation against the Sellers related to the acquisition
and to discontinue the purchase price adjustment and binding
arbitration process. Therefore, we wrote off the receivable from the
Sellers as an asset impairment during the fourth quarter of 2000.

o Also, we have made adjustments for items that were identified
subsequent to the initial purchase price allocation that we believed
were additional misstatements, based on additional information that we
obtained, but that were not included in the arbitration claim. Cost of
revenue included adjustments to estimates at completion on contracts
and increases in self-insurance reserves The impairment of assets was
primarily unrecoverable accounts receivable. These amounts totaled
$144.5 million and were charged to operations in the fourth quarter of
2000, as follows:

Because we cannot determine the final impact of the matters discussed above
on the pre-acquisition RE&C financial statements or the pro forma adjustments
that would be appropriate for the years ended December 1, 2000 and December 3,
1999, unaudited pro forma consolidated results of operations as if the
acquisition of RE&C had taken place on December 1, 1998 have not been presented.

We have accounted for the acquisition of RE&C as a purchase business
combination. The results of our operations, financial position and cash flows
include the operations of RE&C on a consolidated basis from the July 7, 2000
acquisition date. We have made an allocation of the aggregate purchase price to
the net assets we acquired, with the remainder recorded as goodwill, on the
basis of estimates of fair values after adjustments for the arbitration claim
against the Sellers and adjustments charged to operations, as follows:

Of the 23 major RE&C projects that had significant contract adjustments
discussed above, 7 are now complete and 5 were eliminated in the insolvency
proceedings of Washington International B.V. See Note 4, "Reorganization Case
and Fresh-start Reporting - Washington International B.V." of the Notes to
Consolidated Financial Statements in Item 8 of this report. Of the remaining
projects, 6 have undergone reformation of the contracts to terms and conditions
that permitted us to continue working on the original project and 5 are
continuing under the original terms and conditions. Most of the projects will be
completed by the end of 2002, and the remaining projects in 2003.

As a result of the foregoing events and the substantial negative cash flows
of RE&C, we analyzed for impairment the assets acquired in the acquisition of
RE&C, including the goodwill. Based upon the results of our analysis, we have
taken a charge against income during the quarter ended December 1, 2000 for the
following impairments of acquired assets:

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OPERATING UNITS

During the fiscal quarter ended September 1, 2000, we reorganized our
business to operate through five operating units, each of which comprises a
separate reportable business segment: Power, Infrastructure & Mining,
Industrial/Process, Government and Petroleum & Chemicals.

POWER

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

o general engineering and design;
o power generation planning;
o siting and licensing;
o environmental permitting and engineering;
o plant construction, expansion, refurbishment, retrofit and
modification, including the construction of new power plants,
distribution and transmission systems and energy storage
facilities, the installation of flue-gas cleaning systems in
coal-fired power plants and the replacement of steam generators
in nuclear power plants;
o decontamination and decommissioning of nuclear power plants; and
o operations and maintenance, including renewal and repair, supply
and logistics management and maintenance and modification services
at several nuclear power plants.

INFRASTRUCTURE & MINING

Our Infrastructure & Mining operating unit provides diverse engineering and
construction and construction management services for highways and bridges,
airports and seaports, tunnels and tube tunnels, railroad and transit lines,
water storage and transport, water treatment, site development, mine operations
and hydroelectric facilities. It also provides contract mining, engineering and
other technical services to the international fossil fuel and mineral markets.
The operating unit generally performs as a general contractor or as a joint
venture partner with other contractors on domestic and international projects.

Infrastructure & Mining serves both private and public sector customers
through four major divisions:

o HEAVY CIVIL: This division provides services both as a general
contractor and in a design-build capacity. Heavy Civil primarily
targets domestic heavy infrastructure projects in the transportation,
marine and water resources markets, including highways, bridges,
tunnels, railroad and commuter rail systems, airport and seaport
facilities, dams, wastewater treatment facilities and pipelines. It
also provides site development at mine, industrial, various commercial
and recreational sites.

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o INTERNATIONAL CONSTRUCTION: This division constructs heavy
infrastructure projects, with a current focus on water resource,
wastewater management and telecommunications projects in the Middle
East and various other regions of the world.

o INFRASTRUCTURE PROGRAMS: This division provides civil design and
project-management services throughout the United States.
Infrastructure Programs specializes in the engineering, design and
construction/program management of highway, bridge, railroad, airport
and water resource infrastructure projects.

o MINING: This division provides contract mining services internationally
to the fossil fuel and industrial mineral markets. Mining also offers a
full range of technical and engineering services, including resource
evaluation, geologic modeling, mine planning and development,
environmental permitting, equipment selection, and remediation. Mining
holds ownership interests in two mining ventures: MIBRAG mbH (33% at
December 1, 2000 and increased to 50% effective March 28, 2001) and
Westmoreland Resources, Inc. (20%). See Note 6, "Ventures" of the Notes
to Consolidated Financial Statements in Item 8 of this report.

INDUSTRIAL/PROCESS

The Industrial/Process operating unit provides services in each stage of a
project's life cycle, including engineering, design, procurement, construction
and total facilities management. Industrial/Process' total facilities management
services include inventory and supply chain management, shutdown and turnaround
management and other maintenance, operations and logistics management services.
Industrial/Process serves companies in the following markets:

o general manufacturing;
o pharmaceutical and biotechnology;
o institutional buildings;
o food and consumer products;
o automotive;
o aerospace;
o telecommunications;
o pulp and paper industries;
o process; and
o metals processing.

GOVERNMENT

Our Government operating unit primarily provides technical services to U.S.
government customers in the national defense, nonproliferation, environmental
cleanup, nuclear waste management and hazardous material stabilization markets.
Its services span the entire life cycle of its customers' needs - from design,
construction and operation of facilities through their eventual decontamination,
decommissioning and final environmental remediation. Through its
Electro-Mechanical Division, the operating unit designs and manufactures pumps,
valves, generators and propulsion units for the U.S. Navy's nuclear-powered
fleet. Almost all of this operating unit's revenues are from contracts with the
federal government, with the Department of Defense and the Department of Energy
accounting for about 81% of its revenues.

The Government operating unit also provides products and services to
commercial clients, including:

o the design and manufacture of components for nuclear power facilities;
o the design and manufacture of engineered canisters to ship and store
spent nuclear fuel; and

I-12

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

PETROLEUM & CHEMICALS

The Petroleum & Chemicals operating unit provides a wide range of services
to petroleum and chemical markets worldwide, including the commodity-organic
chemicals, polymers, Fischer-Tropsch chemistry, fertilizers, oleochemicals,
petroleum processing, lube oil processing and natural gas processing markets.
The operating unit offers engineering, procurement, construction and operations
and maintenance services for diverse projects, including upstream petroleum
processing and refining plants, natural gas processing plants, plants that
convert coal to synthetic fuels, underground gas storage facilities and plants
that produce a wide array of products ranging from industrial commodities to
specialty chemicals. Petroleum & Chemicals also develops and licenses technology
used in the production of petrochemicals. The operating unit provides technology
for the ethylbenzene, styrene, cumene, phosphoric acid, paraxylene and purified
terephthalic acid markets, among others.

For financial information about our operating units and additional
disclosures, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Operating Segment Results" in Item 7 of this report
and Note 12, "Operating Segment, Geographic and Customer Information" of the
Notes to Consolidated Financial Statements in Item 8 of this report.

GOVERNMENT CONTRACTS AND BACKLOG

Government contracts are a significant part of our business. For example,
the U.S. government accounted for 27% of our consolidated operating revenues in
2000. Allowable costs under U.S. government contracts are subject to audit by
the government. To the extent that these audits result in determinations that
costs claimed as reimbursable are not allowable costs or were not allocated in
accordance with federal regulations, we could be required to reimburse the
government for amounts previously received. We also have a number of U.S.
government contracts which extend beyond one year and for which government
funding has not yet been approved. All U.S. government contracts and some
foreign contracts are subject to unilateral termination at the option of the
customer.

Backlog represents the total value of all awarded contracts that have not
been completed and will be recognized as revenues over the life of the project
or over the construction period. Backlog includes our proportionate share of
construction joint venture contracts and the uncompleted portions of mining
service contracts and ventures for the next five years. Backlog for government
contracts include only two years' worth of the portions of such contracts that
are currently funded or which we are highly confident will be funded.

Backlog at December 1, 2000 totaled $5.7 billion compared with December 3,
1999 backlog of $3.3 billion. Approximately $3.3 billion of the backlog at
December 1, 2000 is attributable to contracts related to the RE&C businesses
acquired in fiscal 2000. Approximately $1.3 billion of the backlog at December
1, 2000 was comprised of U.S. government contracts that are subject to
termination by the government, $460 million of which had not been funded.
Terminations for the convenience of the government generally provide for
recovery of contract costs and related earnings.

Although backlog reflects business that we consider to be firm,
cancellations or scope adjustments may occur. We have adjusted backlog to
reflect project cancellations, deferrals and revisions in scope and cost, both
upward and downward known at the reporting date; however, future contract
cancellations or modifications may reduce backlog and future revenues.

I-13

During 2001, we reversed previously recorded backlog of $1,020.6 million.
This reversal was principally due to the suspension of work on two large
construction projects located in Massachusetts that were part of the RE&C
acquisition. See Note 3, "Acquisitions - Acquisition of Raytheon Engineers &
Constructors" of the Notes to Consolidated Financial Statements in Item 8 of
this report.

COMPETITION

We are engaged in highly competitive businesses in which customer contracts
are typically awarded through competitive bidding processes. We compete based
primarily on price, reputation and reliability with other general and specialty
contractors, both foreign and domestic. Success or failure in our lines of
business is, in large measure, based upon the ability to compete successfully
for contracts and to provide the engineering, planning, procurement, management
and project financing skills required to complete them in a timely and
cost-efficient manner. We compete with other general and specialty contractors,
both foreign and domestic, including large international contractors and small
local contractors. Some competitors have greater financial and other resources
than us, which, in some instances, could give them a competitive advantage over
us.

EMPLOYEES

Our total worldwide employment varies widely with the volume, type and
scope of operations under way at any given time. At December 1, 2000, we
employed over 34,000 employees. Approximately 15% of the employees are covered
either by one of our regional collective bargaining agreements, which expire
between June 2001 and September 2006, or by a project specific collective
bargaining agreement, each of which expires upon completion of the relevant
project.

RAW MATERIALS

We can purchase much of the raw materials and components necessary to
operate our businesses from numerous sources. We do not foresee any
unavailability of raw materials or components that would have a material adverse
effect on our businesses in the foreseeable future.

ENVIRONMENTAL MATTERS

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

We are subject to risks of liability under federal, state and local
environmental laws and regulations, as well as common law. These laws and
regulations and the risk of attendant litigation can cause significant delays to
a project and add significantly to its cost. Violations of these laws and
regulations could subject us to civil and criminal penalties and other
liabilities, including liabilities for property damage, costs of investigation
and

I-14

cleanup of hazardous or toxic substances on property currently or previously
owned by us or arising out of our current and past remediation, waste management
and contract mining activities.

For additional information regarding environmental matters, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Environmental Contingency" in Item 7 of this report and Note 13,
"Contingencies and Commitments - Summitville environmental matters" and
"Contingencies and Commitments - Other environmental matters" of the Notes to
Consolidated Financial Statements in Item 8 of this report.

ITEM 2. PROPERTIES

We do not own significant real property for operations other than certain
land and improvements in Highland and Petaluma, California and Cheswick,
Pennsylvania. Our principal administrative office facilities located in Boise,
Idaho, Cleveland, Ohio, Aiken, South Carolina, Denver, Colorado and Princeton,
New Jersey, are leased under long-term, noncancelable leases expiring in 2003,
2010, 2003, 2005 and 2013, respectively. At December 1, 2000, we owned more than
7,300 units of heavy and light mobile construction, environmental remediation
and contract mining equipment. We consider our construction, environmental
remediation and mining equipment and leased administrative and engineering
facilities to be well maintained and suitable for our current operations.

Our principal facilities at December 1, 2000 were:

I-15

* Operating unit: 1 - Industrial Process
2 - Government Services
3 - Infrastructure & Mining
4 - Power
5 - Petroleum & Chemicals
6 - Corporate

ITEM 3. LEGAL PROCEEDINGS

We are a defendant in various lawsuits resulting from allegations that
third parties sustained injuries and damage from the inhalation of asbestos
fibers contained in materials used in construction projects. In addition, based
on proofs of claims filed with the court during the pendency of our bankruptcy
proceedings, we are aware of other potential asbestos claims against us. We
believe that we have substantial third party insurance coverage for a
significant portion of these existing and potential claims and remaining amounts
will not have an adverse material impact on our financial position, results of
operations or cash flows.

While we expect that additional asbestos claims will be filed against us in
the future, we have no basis for estimating the number of claims or individual
or cumulative settlement amounts and, accordingly, no provision has been made
for future claims. We believe, however, that the outcome of these actions,
individually and collectively, will not have a material adverse impact on our
financial position, results of operations or cash flows.

I-16

We also incorporate by reference the information regarding legal
proceedings set forth under the caption "Other" in Note 13, "Contingencies and
Commitments" of the Notes to Consolidated Financial Statements in Item 8 of this
report.

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

We submitted one matter to a vote of our stockholders during the fourth
quarter of 2000. On September 15, 2000, we called a special meeting of
stockholders to approve our name change from Morrison Knudsen Corporation to
Washington Group International, Inc. The stockholders voted on no other matter
during the meeting. The number of votes cast for the name change was 48,031,334,
the number of votes withheld or against was 4,252,942 and the number of
abstentions from the vote was 105,208. Our name change became effective on
September 15, 2000.

I-17

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS

MARKET INFORMATION

Prior to September 18, 2000, our common stock traded on the New York Stock
Exchange under the ticker symbol "MK," and, after that date, under the ticker
symbol "WNG." At the close of business on December 1, 2000, we had 52,467,733
shares of common stock issued and outstanding.

The New York Stock Exchange composite high and low sales prices of our
common stock traded on the New York Stock Exchange for each quarterly period
within 1999 and 2000 are set forth under the caption "Quarterly Financial Data"
in Item 7 of this report. We incorporate that information by reference in
response to this Item 5.

HOLDERS

The number of record holders of our voting common stock at December 1, 2000
was approximately 1,305. This number does not include beneficial owners of our
common stock held in the name of a nominee.

DIVIDENDS

We have not paid a cash dividend since the first quarter of fiscal 1994.
Our indenture and credit facilities place restrictions on dividend payments. See
Note 8, "Credit Facilities" of the Notes to Consolidated Financial Statements in
Item 8 of this report.

RECENT SALES OF UNREGISTERED EQUITY SECURITIES

We did not sell any unregistered equity securities during 2000.

II-1

ITEM 6. SELECTED FINANCIAL DATA
(IN MILLIONS, EXCEPT PER SHARE DATA)

(a) On July 7, 2000, we acquired RE&C from the Sellers in a transaction
accounted for as a purchase. See Items 1 and 7 of this report and Note 3,
"Acquisitions - Acquisition of Raytheon Engineers & Constructors" of the
Notes to Consolidated Financial Statements in Item 8 of this report.

(b) On March 22, 1999, we acquired a majority economic interest in the
government and environmental services businesses of CBS Corporation (now
Viacom, Inc.) in a transaction accounted for as a purchase. See Item 1 of
this report and Note 3, "Acquisitions - Acquisition of Westinghouse
Businesses" of the Notes to Consolidated Financial Statements in Item 8 of
this report.

(c) On September 11, 1996, we acquired Old MK in a transaction accounted for as
a purchase. See Item 1 of this report.

(d) Gross profit (loss) during the year ended December 1, 2000 includes the
impact of adjustments of $141.0 million to the preliminary allocation of
the RE&C purchase price to the net assets acquired for items that we
believe were additional misstatements, based on additional information we
obtained, but that were not included in the arbitration claim, including
adjustments to estimates at completion on contracts and increases in
self-insurance reserves. See Note 3, "Acquisitions - Acquisition of
Raytheon Engineers & Constructors" of the Notes to Consolidated Financial
Statements in Item 8 of this report.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

CONSOLIDATED OPERATIONS

OVERVIEW

The acquisition of RE&C on July 7, 2000 significantly increased our size in
terms of revenues and backlog. As a result, the historical information presented
in this Form 10-K does not purport to represent what our results of operations,
financial position or cash flows would have been for the historical periods
presented had we in fact owned RE&C for those periods, and is not indicative of
the results of operations, financial position or cash flows we may report in the
future.

WGI is a global engineering and construction company serving clients
through five operating units: Power, Infrastructure & Mining,
Industrial/Process, Government and Petroleum & Chemicals. See "Business -
Operating Units" in Item I of this report for a thorough description of the
segments.

We are subject to numerous factors that impact our ability to win new work.
The Power segment is dependent on the domestic demand for new power generating
facilities and the modification of existing power facilities. Infrastructure &
Mining is impacted by the availability of public sector funding for
transportation projects and availability of bonding. The Industrial/Process
segment is impacted in general by the growth prospects in the U.S. economy and
more directly by the capital spending plans of its large customer base. The
Government unit is almost entirely dependent on the spending levels of the U.S.
government, in particular, the Departments of Energy and Defense. Petroleum &
Chemicals is affected by the capital spending of oil and gas companies and
chemical producers.

II-3

The following are our most significant accounting terms and policies:

NEW WORK BOOKINGS represent the monetary value of a contract entered into
with clients that are binding on both parties and reflect the revenue expected
to be recognized from that contract.

BACKLOG represents the total accumulation of new work bookings less the
amount of revenue recognized to-date on contracts at a specific point in time;
therefore, it comprises the total value of awarded contracts that are not
complete and the revenue that is expected to be reflected over the remaining
life of the projects in process. Backlog is the key predictor of future earnings
potential. Although backlog reflects business that is considered to be firm,
cancellations or scope adjustments may occur. We have adjusted backlog to
reflect project cancellations, deferrals and revisions in scope and cost, both
upward and downward known at the reporting date; however, future contract
cancellations or modifications may reduce backlog and future revenues. We have a
significant number of clients that consistently extend or add to the scope of
existing contracts. We do not include any estimate of this ongoing work in
backlog.

There are three unique aspects of our approach to new work bookings and
backlog:

o GOVERNMENT CONTRACTS - Most of our government contracts cover several
years. However, they are subject to annual appropriations by Congress. To
account for the risk that future amounts may not be appropriated, we only
include the most immediate two years of forecast revenue in our backlog.
Therefore, as time passes and appropriations occur, additional new work
bookings are recorded on existing government contracts.

o MINING CONTRACTS - Mining contracts are entered into for varying periods of
time up to the life of the resource. For new work bookings and backlog
purposes, we limit the amount recorded to five years. Similarly to
government contracts, as time passes, we recognize additional new work
bookings as commitments for that future work are firmed up.

o The amount of new work and related backlog recognized depends on whether
the contract or project is determined to be an "at-risk" or "agency"
relationship between the client and us. Determination of the relationship
is based on characteristics of the contract or the relationship with the
client. For "at-risk" relationships, the expected gross revenue is included
in new work and backlog, while in relationships where we act as an agent
for our client, only the expected net fee revenue is included in new work
and backlog.

REVENUE RECOGNITION is generally measured on the "percentage-of-completion"
method for construction-type contracts, on the "units performed" method for
fixed-unit-price contracts and as work is performed and award and other fees are
earned for cost-type and operation and maintenance type contracts. There are
various means of determining revenue under the percentage-of-completion method.
Most of our fixed-price contracts use a cost-to-cost approach, where revenue is
earned in proportion to costs incurred divided by total expected costs to be
incurred. However, if a project includes significant materials or equipment
costs, we require that the percentage-of-completion method be based on labor
hours, labor dollars or some other appropriate approximation of physical
completion rather than on a strict percentage of costs incurred. Also, we
generally do not recognize any profit on fixed-price contracts until the project
is at least 20% complete.

With respect to award fees associated with U.S. government contracts, we
recognize an estimated award fee based on historical performance until the
client has confirmed the final award fee at year-end. This approach can result
in significant amounts of profit recognition in the fourth quarter on projects
in our Government operating unit. Performance-based incentive fees are
recognized when actually awarded by the client.

Revenue recognition for construction and engineering contracts also depends
on whether the contract or project is determined to be an "at risk" or an
"agency" relationship between the client and us. Determination of the
relationship is based on characteristics of the contract or the relationship
with the client. For "at risk" relationships, the gross revenue and the costs of
goods, services, payroll, benefits, non-income tax, and other costs are
recognized in the income statement. For "agency" relationships, where we act as
an agent for our client, only

II-4

fee revenue is recognized, meaning that direct project costs and the related
reimbursement from the client have been netted.

JOINT VENTURES AND EQUITY INVESTMENTS are utilized when certain contracts
are executed jointly through partnerships and joint ventures with unrelated
third parties.

o JOINT VENTURES - Much of our work on large construction projects is
performed through joint ventures with one or more partners. The
accounting treatment depends on our ownership percentage of the joint
venture. For those where the ownership exceeds 50% or we control the
joint venture by contract terms or other means, the assets, liabilities
and results of operations of the joint venture are fully consolidated
in our financial statements and the minority interests of third parties
are separately deducted in our financial statements. For those where
the ownership is 50% or less, we report our pro rata portion of revenue
and costs but the balance sheet reflects only our net percentage
investment in the project.

o PARTIALLY-OWNED SUBSIDIARY COMPANIES - Again, the accounting treatment
depends on our ownership percentage of the subsidiary company. For
those where the ownership exceeds 50%, the assets, liabilities and
results of operations of the subsidiary company are fully consolidated
in our financial statements and the minority interests of third parties
are separately deducted in our financial statements. However, where the
ownership is 50% or less, we reflect our proportion of the net income
in the results of operations as equity in earnings of mining ventures
and our investment on the balance sheet as our net percentage
investment in the subsidiary company.

NORMAL PROFIT is an accounting concept that results from the requirement
that an acquiring company record at fair value all contracts, including
construction contracts, of an acquiree in process at the date of the
acquisition. As such, an asset for favorable contracts or a liability for
unfavorable contracts is recorded in purchase accounting. These assets or
liabilities are then reduced based on revenues recorded over the remaining
contract lives effectively resulting in the recognition of a reasonable or
normal profit margin on contract activity performed by us subsequent to the
acquisition. Because of the acquisition of RE&C and the below market profit
status of many of the significant acquired contracts, we recorded significant
liabilities in purchase accounting. The reduction of these liabilities has a
significant impact on our recorded net income but has no impact on our cash
flows.

CHANGE ORDERS AND CLAIMS are common on construction contracts when changes
occur once contract performance is underway. These changes are to be documented
and terms agreed with the client before the work is performed. Also, costs may
be incurred in addition to amounts originally estimated under the assumption
that the customer will agree to pay for such additional costs. Change orders are
included in total estimated contract revenue when it is probable that the change
order will result in a bona fide addition to contract value and can be reliably
estimated. If it is probable that the change order will result in the contract
price exceeding the related costs incurred, that the excess over cost can be
reliably estimated and if realization is assured beyond a reasonable doubt, the
original contract price is adjusted to the probable revised contract amount as
the costs are recognized. Claims are included in total estimated contract
revenue, only to the extent that contract costs related to the claim have been
incurred, when it is probable that the claim will result in a bona fide addition
to contract value and can be reliably estimated. No profit is recognized on
claims until final settlement occurs. This can lead to a situation where losses
are recognized when costs are incurred before client agreement is obtained and
subsequent income recognized when signed agreements are negotiated.

ACCOUNTS RECEIVABLE generally carry the same meaning as in any other
business and represent amounts billed to clients that have not been paid. One
unusual item is client retention. On large fixed-price construction contracts,
contract provisions may allow the client to withhold from 5% to 10% of invoices
until the project is completed, which may be several months or years. Retention
is recorded as a receivable and is separately disclosed in the financial
statements.

II-5

UNBILLED RECEIVABLES is comprised of costs incurred on projects, together
with any profit recognized on projects using the percentage-of-completion
method, and represents work performed but pursuant to contract terms we are
either not yet able to bill the client, or the invoice was not recorded before
the accounting period cut-off occurred.

BILLINGS IN EXCESS OF COST AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
represents amounts actually billed to clients, and perhaps collected, in excess
of costs and profits incurred on the project and as such, is reflected as a
liability. Also, in specified business segments, we are able to negotiate
substantial advance payments as a contract condition. Those advance payments are
reflected in billings in excess of cost and estimated earnings on uncompleted
contracts.

ESTIMATE AT COMPLETION is a financial forecast of a project that indicates
the best current estimate of total revenues and profits at the point in time
when the project is completed. If a project estimate at completion indicates
that a project will incur a loss, a provision for the entire loss on the
contract is recognized at that time.

ESTIMATED COSTS TO COMPLETE LONG-TERM CONTRACTS is comprised of provisions
for losses on contracts, reclamation reserves on mining contracts, reserves for
punch-list costs and demobilization and warranty costs on contracts that have
achieved substantial completion and reserves for audit and contract closing
adjustments on U.S. government contracts.

GENERAL AND ADMINISTRATIVE EXPENSES include executive salaries and
corporate headquarters functions such as legal services, human resources, and
finance and accounting.

SELF-INSURANCE RESERVES represent reserves established through a program
under which we determine the extent to which we self-insure certain business
risks. We carry substantial premium-paid, traditional insurance for our various
business risks, however, we do self-insure the lower level deductibles for
workers' compensation and general and auto liability. Most of this is handled
through Broadway Insurance Company, a wholly-owned captive Bermuda insurance
subsidiary. As such, we carry self-insurance reserves on our balance sheet that
are reviewed annually by an independent actuary. The current portion of the
self-insurance reserves is included in other accrued liabilities.

MINORITY INTEREST reflects the equity investment by third parties in
certain subsidiary companies and joint ventures that we have consolidated in our
financial statements.

GOVERNMENT CONTRACT COSTS are incurred under certain of our contracts,
primarily in the Government operating unit. We have contracts with the U.S.
government that contain provisions requiring compliance with the U.S. Federal
Acquisition Regulation and U.S. Cost Accounting Standards. The allowable costs
we charge to those contracts are subject to adjustments upon audit and
negotiation by various agencies of the U.S. government. Audits and negotiations
of indirect costs are substantially complete through 1999. Audits of 2000
indirect costs are in progress. We are also in the process of preparing cost
impact statements as required under the U.S. Cost Accounting Standards for 1999
through 2001, which are subject to audit and negotiation. We have also prepared
and submitted to the U.S. government cost impact statements for 1989 through
1995 for which we believe no adjustments are necessary. We believe that the
results of the indirect cost audits and negotiations and the cost impact
statements will not result in a material change to our financial position,
results of operations or cash flows.

PENSION AND POST-RETIREMENT BENEFIT PLANS include certain plans for which
we assumed sponsorship through the Westinghouse acquisition, including
contributory defined benefit pension plans, which cover employees of the
Westinghouse Government Services Group ("WGSG"). We make actuarially computed
contributions as necessary to adequately fund benefits for these plans. We are
also the sponsors of an unfunded plan to provide health care benefits for
employees of WGSG who retired before July 1, 1993, including their surviving
spouses and dependent children. We also provide benefits under company-sponsored
retiree health care and life insurance plans for substantially all employees of
WGSG. We also provide benefits under company-sponsored retiree health care to
approximately 260 retired employees and provide a life insurance plan for
substantially all retirees of

II-6

RE&C. The retiree health care plans require retiree contributions and contain
other cost sharing features. The retiree life insurance plan provides basic
coverage on a noncontributory basis.

2000 COMPARED TO 1999

REVENUE AND GROSS PROFIT

Revenue for the year ended December 1, 2000 increased 35% to $3,103.9
million compared to $2,304.4 million for the comparable period in 1999. The
increase is due to the inclusion of the post-acquisition results of RE&C,
acquired on July 7, 2000, and a full year of results of the Westinghouse
Businesses, acquired on March 22, 1999. Revenue for the quarter ended December
1, 2000 increased 53% or $358.7 million over the comparable period in 1999, also
due to the consolidation of results of RE&C.

Cost of revenue for the year ended December 1, 2000 includes $141 million
in charges for items related to the acquisition of RE&C that were identified
subsequent to the initial purchase price allocation based on additional
information we obtained, but that were not included in the arbitration claim.
See Note 3, "Acquisitions - Acquisition of Raytheon Engineers & Constructors,"
of the Notes to Consolidated Financial Statements in Item 8 of this report.
These amounts are comprised of the following:

Exclusive of the $141.0 million in charges discussed above, gross profit
for the year ended December 1, 2000 decreased 52% to $59.4 million from the
previous year primarily due to incremental losses of $47.3 million on three
large fixed-price contracts acquired in the RE&C acquisition. These losses
resulted from events that arose after the acquisition. In addition, our
Infrastructure & Mining operating unit recognized approximately $12.1 million
in losses on seven domestic projects and a $4.9 million loss on an
international water distribution project. Our Government operating unit
recognized a $10.2 million loss on an environmental remediation project.
Lastly, a $20.3 million reserve was established for the settlement of the
Summitville environmental matters. See Note 13, "Contingencies and
Commitments - Summitville environmental matters" of the Notes to Consolidated
Financial Statements in Item 8 of this report. Our gross profit for the
quarter and year ended December 1, 2000 included $25.7 and $50.2 million,
respectively, for the recognition of normal profit on contracts related to
the acquisition of RE&C. The recognition of normal profit had no impact on
our cash flows. There was no normal profit in 1999.

Substantially all of the above noted losses and provisions were recorded
in the quarter ended December 1, 2000, causing the $90 million decline from
the gross profit recognized in the previous year's fourth quarter.

Our gross margins often vary between periods due to inherent risks and
rewards of fixed-price contracts causing unexpected gains and losses on
contracts. Gross margins may also vary between periods due to changes in the
mix and timing of contracts executed by us, which contain various risk and
profit profiles and are subject to uncertainties inherent in the estimation
process. During 2000, these profit margin fluctuations were over shadowed by
the impact of losses recognized on projects obtained in the acquisition of
RE&C.

At December 1, 2000, backlog of $5,659.4 million was comprised of
$1,365.7 million (24%) of revenue from cost-type contracts and $4,293.7
million (76%) of revenue from fixed-price and fixed-unit-price contracts and
the uncompleted portions of mining service contracts and ventures. During
2001, we reversed previously recorded backlog of $1,020.6 million. This
reversal was principally due to the suspension of work on two large
construction projects located in Massachusetts that were part of the RE&C
acquisition. See Note 3, "Acquisitions - Acquisition of Raytheon Engineers &
Constructors" of the Notes to Consolidated Financial Statements in Item 8 of
this report.

II-7

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses for the quarter and year ended
December 1, 2000 increased $6.6 million and $11.8 million, respectively,
compared to 1999. The increase for the quarter and year is due to the general
and administrative costs supporting RE&C businesses.

GOODWILL AMORTIZATION

Amortization of goodwill for the year ended December 1, 2000 increased
$12.6 million over the comparable period of 1999. The increase is due to the
full year of amortization (over a period of 20 years) of goodwill arising
from the acquisition of the Westinghouse Businesses, which amortization began
on March 22, 1999, the date of the acquisition, and the amortization of
goodwill of $8.7 million arising from the acquisition of RE&C, which
amortization began on July 7, 2000, the date of the acquisition. The annual
amortization of the Westinghouse goodwill is currently estimated at $13.7
million through 2001. See "Impairment of acquired assets" below for the
impairment of goodwill associated with the RE&C acquisition.

In connection with the acquisition of Old MK, we allocated the purchase
price of Old MK to the assets and liabilities assumed, including
preacquisition contingencies, on the basis of estimated fair values at
September 11, 1996. During the fourth quarter of 2000, we reevaluated the
likelihood of the future realization of the tax benefits of net operating
loss ("NOL") carryforwards relating to Old MK and concluded, based on
available evidence, including the utilization of NOL's upon emergence from
bankruptcy in 2002, that it was more likely than not that the tax benefits
previously reserved would be realized. This conclusion resulted in a $44.3
million increase in deferred tax assets and a corresponding decrease in
recorded goodwill at December 1, 2000. With this adjustment, the goodwill
related to Old MK was completely eliminated which reduced annual goodwill
amortization by $1.2 million through 2001.

INTEGRATION AND MERGER COSTS

As a result of the acquisition of RE&C on July 7, 2000, we incurred
significant costs associated with the integration and merger of the two
companies. During the quarter and year ended December 1, 2000, those costs
were $5.2 million and $15.3 million, respectively. They consisted primarily
of legal, accounting, consulting and other fees. There were no such costs in
1999.

IMPAIRMENT OF ACQUIRED ASSETS

During the fourth quarter of 2000, we recognized asset impairment losses
of $444.1 million and $747.5 million for our inability to collect our
purchase price adjustment from the Sellers and for impairment of goodwill and
other assets acquired as a part of the RE&C transaction, respectively. There
were no such costs in 1999.

INVESTMENT INCOME

Investment income for the quarter and year ended December 1, 2000
increased $4.4 million and $7.5 million, respectively, as a result of
investment income from excess funds derived from the financing for the
acquisition of RE&C.

INTEREST EXPENSE

Interest expense includes three components: amortization of fees associated
with our lines of credit, fees on letters of credit, and interest expense.
Interest expense for the quarter and year ended December 1, 2000 increased $17.8
million and $30.8 million, respectively, over the comparable period of 1999,
which reflects the increase in borrowings, the increase in borrowing rates, and
credit line fees related to the acquisition of RE&C.

II-8

OTHER INCOME (EXPENSE), NET

Other income (expense) was $(6.6) million and $(5.3) million,
respectively, for the quarter and year ended December 1, 2000 compared to
$(.7) million and $9.7 million, respectively, for the comparable periods in
1999. Other income (expense) for the quarter and year ended December 1, 2000
includes a charge of $6.2 million related to the settlement of the MK Gold
Corporation litigation. Other income of $9.7 million for the year ended
December 3, 1999 included $8.7 million of gain from the sale of two non-core
subsidiaries.

INCOME TAX EXPENSE (BENEFIT)

The effective tax rate for the quarter and year ended December 1, 2000
was a 38.6% benefit compared to a 37% expense in the comparable periods of
1999. State taxes, including the impact of adjusting prior year's state tax
attributes for current year changes in apportionment factors, account for
4.1% of the 2000 effective tax rate. Foreign taxes, net of federal benefit,
reflect both the value of the benefit from foreign net operating losses and
the expense of current foreign tax liability in those jurisdictions where net
income was reported. A valuation allowance was established in 2000 against
the benefit for foreign net operating losses incurred that year to reflect
the expected future utilization of those losses on a more likely than not
basis.

Cash tax payments for 2002 and later years are anticipated to be
substantially less than the related tax liability reported in the financial
statements. The NOL carryover for federal and state income taxes will be
substantially utilized after 2002 as a result of the cancellation of debt
income in the bankruptcy restructuring. However, the recognition of loss
reserves and deferred deductions and the amortization of goodwill for tax
reporting purposes will cause the taxable income reported on future federal
and state tax returns to be substantially less than pre-tax income reported
on the financial statements. Goodwill, for tax purposes, has a remaining life
of 13.5 years at the beginning of 2002, and annual amortization is expected
to be at least $40 million.

MINORITY INTERESTS

Minority interests in the income of consolidated subsidiaries for the
quarter and year ended December 1, 2000 increased to $2.9 million and $9.4
million, respectively, compared to $2.5 million and $8.8 million,
respectively, for the comparable periods of 1999 due to an increase in income
from the Westinghouse Businesses, which were acquired on March 22, 1999.
Minority interests consist of the 40% minority interest of BNFL in the income
of WGSG and a 35% minority interest in the income of Safe Sites of Colorado,
LLC, a subsidiary of WGSG.

1999 COMPARED TO 1998

REVENUE AND GROSS PROFIT

Revenue for the quarter and year ended December 3, 1999 increased 22% to
$674.8 million and 21% to $2,304.4 million, respectively, compared to $554.3
million and $1,907.9 million for the comparable periods in 1998. These
increases were principally due to the acquisition of the Westinghouse
Businesses and the concurrent formation of WGSG in March 1999.

Gross profit for the quarter and year ended December 3, 1999 increased
$9.2 million and $23.1 million, respectively, over the comparable periods of
1998. The increase in gross profit was primarily due to the inclusion of the
earnings of WGSG in our consolidated results of operations beginning March
1999. Gross profit as a percent of revenue was 5.8% and 5.4%, respectively,
for the quarter and year ended December 3, 1999 compared to 4.3% and 5.3% for
the comparable periods of 1998. The gross profit percentage increase in 1999
over 1998 was primarily due to WGSG whose operations generally have
relatively higher profit margins. In addition, the gross margins for the
fourth quarter of 1999 include significant performance-based incentive and
award fees earned on WGSG contracts.

Our gross margins often vary between periods due to inherent risks and
rewards on fixed-price contracts causing unexpected gains and losses on
contracts. Gross margins may also vary between periods due to changes

II-9

in the mix and timing of contracts executed by us, which contain various risk
and profit profiles and are subject to uncertainties inherent in the
estimation process.

At December 3, 1999, backlog of $2,819.7 million was comprised of
$1,413.4 million (50%) of revenue from cost-type contracts and $1,406.3
million (50%) of revenue from fixed-price contracts and our share of revenue
from mining ventures.

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses for the year ended December 3, 1999
increased $1.8 million compared to 1998 due to additional compensation
expenses related to a key executive retirement, a key executive recruitment
and increased information system costs.

GOODWILL AMORTIZATION

Amortization of goodwill for the quarter and year ended December 3, 1999
increased $3.3 million and $9.0 million, respectively, over the comparable
periods of 1998 due to the amortization (over a period of 20 years) of
goodwill arising from the Westinghouse Businesses acquisition.

In connection with the acquisition of Old MK, we allocated the purchase
price of Old MK to the assets acquired and liabilities assumed, including
preacquisition contingencies, on the basis of estimated fair values at
September 11, 1996. During the fourth quarter of 1998, we reevaluated the
likelihood of the future realization of the tax benefits of deductible
temporary differences and NOL carryforwards relating to Old MK and concluded,
based on available evidence, that it is more likely than not that a portion
of the tax benefits previously reserved would be realized. This conclusion
resulted in a $20 million increase in deferred tax assets and a corresponding
decrease in recorded goodwill at November 30, 1998. The decrease in goodwill
reduced annual goodwill amortization by $.5 million. As a result of the
Westinghouse Businesses acquisition in the second quarter of 1999 and related
projections of additional future income, we reevaluated the likelihood of the
future realization of the tax benefits relating to Old MK. This reevaluation
resulted in an additional $50 million increase in deferred tax assets and a
corresponding decrease in recorded goodwill. The 1999 adjustment to goodwill
reduces annual goodwill amortization by $1.3 million.

INVESTMENT INCOME

Investment income for the quarter and year ended December 3, 1999
declined as a result of less cash available for investment in the corporate
short-term asset management account due primarily to working capital
requirements. Additionally, investment income for the year ended November 30,
1998 included interest recognized on claims for U.S. federal income tax
refunds r