SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For quarter ended September 27, 1996
OR
TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ____________________
Commission file number 1-9037
------
International Technology Corporation
(Exact name of registrant as specified in its charter)
Delaware 33-0001212
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
23456 Hawthorne Boulevard, Torrance, California 90505
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 378-9933
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes .X. No....
At October 31, 1996 the registrant had issued and outstanding an
aggregate of 36,250,511 shares of its common stock.
1
<PAGE>
INTERNATIONAL TECHNOLOGY CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR QUARTER ENDED SEPTEMBER 27, 1996
PART I. FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets
as of September 27, 1996 (unaudited) and
March 29, 1996. 3
Condensed Consolidated Statements of Operations
for the Fiscal Quarter and Two Fiscal Quarters ended
September 27, 1996 and September 29, 1995 (unaudited). 4
Condensed Consolidated Statements of Cash Flows
for the Two Fiscal Quarters ended September 27, 1996
and September 29, 1995 (unaudited). 5
Notes to Condensed Consolidated Financial
Statements (unaudited). 6-8
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition. 9-17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 18
Item 6. Exhibits and Reports on Form 8-K. 19
Signatures. 21
2
<PAGE>
PART I
Item 1. Financial Statements.
INTERNATIONAL TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
September 27, March 29,
1996 1996
------------ ---------
(Unaudited)
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 29,976 $ 24,493
Receivables, net 110,615 126,832
Prepaid expenses and other current assets 3,857 4,315
Deferred income taxes 12,149 12,149
------- -------
Total current assets 156,597 167,789
Property, plant and equipment, at cost:
Land and land improvements 1,330 1,783
Buildings and leasehold improvements 9,690 10,961
Machinery and equipment 142,386 144,218
------- -------
153,406 156,962
Less accumulated depreciation and
amortization 105,604 101,201
------- -------
Net property, plant and equipment 47,802 55,761
Investment in Quanterra 13,925 12,975
Other assets 44,083 37,084
Long-term assets of discontinued operations 40,048 41,705
------- -------
Total assets $302,455 $315,314
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 31,186 $ 27,091
Accrued liabilities 35,221 32,157
Billings in excess of revenues 546 2,044
Short-term debt, including current portion of
long-term debt 232 97
Net current liabilities of discontinued
operations 17,528 17,226
------- -------
Total current liabilities 84,713 78,615
Long-term debt 65,392 65,611
Long-term accrued liabilities of discontinued
operations 17,069 24,771
Other long-term accrued liabilities 6,806 5,452
Commitments and contingencies
Stockholders' equity:
Preferred stock, $100 par value; 180,000
shares authorized; 24,000 shares issued
and outstanding 2,400 2,400
Common stock, $1 par value; 100,000,000 shares
authorized; 36,252,130 and 36,598,207 shares
issued and outstanding, respectively 36,252 36,598
Treasury stock, at cost (27,811 shares) (84) (84)
Additional paid-in capital 170,445 169,958
Deficit (80,538) (68,007)
------- -------
Total stockholders' equity 128,475 140,865
------- -------
Total liabilities and stockholders' equity $302,455 $315,314
======= =======
See accompanying notes.
3
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INTERNATIONAL TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal quarter ended Two fiscal quarters ended
--------------------------- ---------------------------
September 27, September 29, September 27, September 29,
1996 1995 1996 1995
------------- ------------ ------------- ------------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues $ 92,490 $106,259 $173,906 $206,551
Cost and expenses:
Cost of revenues 83,351 91,085 156,988 174,433
Selling, general and
administrative expenses 8,633 10,016 17,713 20,039
Restructuring charge 8,403 - 8,403 -
------- ------- ------- -------
Operating income (loss) (7,897) 5,158 (9,198) 12,079
Equity in net loss of Quanterra - (866) - (1,821)
Other income - 1,090 - 1,090
Interest, net (1,303) (1,652) (2,659) (3,643)
------- ------- ------- -------
Income (loss) before income taxes (9,200) 3,730 (11,857) 7,705
(Provision) benefit for
income taxes 310 (1,375) 1,426 (3,005)
------- ------- ------- -------
Net income (loss) (8,890) 2,355 (10,431) 4,700
Less preferred stock dividends (1,050) (1,050) (2,100) (2,100)
------- ------- ------- -------
Net income (loss) applicable
to common stock $ (9,940) $ 1,305 $(12,531) $ 2,600
======= ======= ======= =======
Net income (loss) per share $ (.27) $ .04 $ (.34) $ .07
======= ======= ======= =======
</TABLE>
See accompanying notes.
4
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INTERNATIONAL TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Two fiscal quarters ended
------------------------------
September 27, September 29,
1996 1995
------------- -------------
(Unaudited)
Cash flows from operating activities:
Net income (loss) $(10,431) $ 4,700
Adjustments to reconcile net income
(loss) to net cash provided by operating
activities:
Equity in net loss of Quanterra - 1,821
Gain from Motco settlement - (9,090)
Writedown of equipment - 8,000
Depreciation and amortization 7,868 6,814
Deferred income taxes (1,644) 2,145
Changes in assets and liabilities, net of
effects from acquisitions and dispositions
of businesses:
Decrease (increase) in receivables, net 16,217 (1,302)
Decrease in prepaid expenses and other
current assets 458 742
Increase in accounts payable 4,095 3,298
Increase (decrease) in accrued liabilities 3,064 (4,870)
Decrease in billings in excess of revenues (1,498) (665)
Increase (decrease) in other long-term
accrued liabilities 1,354 (231)
------- -------
Net cash provided by operating activities 19,483 11,362
Cash flows from investing activities:
Proceeds from Motco settlement - 41,100
Capital expenditures (1,584) (3,073)
Investment in Quanterra (950) -
Restricted cash (4,187) -
Other, net 628 (1,623)
Investment activities of discontinued
operations (5,743) (5,854)
------- -------
Net cash (used for) provided by investing
activities (11,836) 30,550
Cash flows from financing activities:
Repayments of long-term borrowings (84) (60,520)
Long-term borrowings - 29,500
Dividends paid on preferred stock (2,100) (2,100)
Repurchases of common stock - (740)
Issuances of common stock 20 838
------- -------
Net cash used for financing activities (2,164) (33,022)
------- -------
Net increase in cash and cash equivalents 5,483 8,890
Cash and cash equivalents at beginning of period 24,493 6,547
------- -------
Cash and cash equivalents at end of period $ 29,976 $ 15,437
======= =======
See accompanying notes.
5
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INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The condensed consolidated financial statements included herein have
been prepared by International Technology Corporation (Company or
IT), without audit, and include all adjustments of a normal,
recurring nature which are, in the opinion of management, necessary
for a fair presentation of the results of operations for the fiscal
quarter and two fiscal quarters ended September 27, 1996, pursuant to
the rules of the Securities and Exchange Commission. The Company's
fiscal year includes four thirteen-week fiscal quarters with the
fourth quarter ending on the last Friday in March. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations although the Company believes that the disclosures in
such financial statements are adequate to make the information
presented not misleading.
These condensed consolidated financial statements should be read in
conjunction with the Company's Annual Report on Form 10-K for the
fiscal year ended March 29, 1996. The results of operations for the
fiscal periods ended September 27, 1996 are not necessarily
indicative of the results for the full fiscal year.
2. For the two fiscal quarters ended September 27, 1996, the Company had
an effective income tax benefit rate of 12.0%. The related income
tax benefit from the pre-tax loss for the current two fiscal quarters
is net of a $3,168,000 tax charge reflected in the second quarter
resulting from the increase in IT's deferred tax valuation allowance
based on the Company's assessment of the uncertainty as to when it
will generate a sufficient level of future earnings to realize the
deferred tax asset created by the second quarter restructuring charge
(see Note 4). If the above tax charge had not been reflected in the
second quarter, the Company's effective income tax rate would have
been 38%, which exceeds the 34% federal statutory rate primarily due
to state income taxes and nondeductible expenses.
For the second fiscal quarter and the two fiscal quarters ended
September 29, 1995, the Company had effective income tax rates of 37%
and 39%, respectively, both of which exceed the 34% federal statutory
rate primarily due to state income taxes and nondeductible expenses.
3. Net income (loss) per common share is computed by dividing net income
(loss) applicable to common stock by the weighted average number of
outstanding common shares and common share equivalents during each
period as follows:
Average common and common
Fiscal quarter ended equivalent shares outstanding
-------------------- -----------------------------
September 27, 1996 36,405,068
September 29, 1995 35,993,068
Average common and common
Two fiscal quarters ended equivalent shares outstanding
------------------------- -----------------------------
September 27, 1996 36,503,452
September 29, 1995 35,875,657
Common stock equivalents relate to dilutive stock options using the
treasury stock method. For all periods presented, the computation of
net income (loss) per share, assuming conversion into common shares
of the Company's Preferred Stock, is antidilutive.
4. In conjunction with the corporate restructuring to position the
Company for growth and diversification which was initiated in the
second quarter of the current fiscal year, the Company incurred a
pre-tax restructuring charge of $8,403,000. The restructuring charge
6
<PAGE>
INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
included $3,400,000 of costs for severance, $4,100,000 of costs for
closing and reducing the size of a number of the Company's offices,
and $900,000 of costs for other related items. At September 27, 1996,
$7,135,000 of the charge remained to be paid.
5. In December 1987, the Company's Board of Directors adopted a
strategic restructuring program which included a formal plan to
divest the transportation, treatment and disposal operations through
sale of some facilities and closure of certain other facilities. As
of September 27, 1996, two of the Company's inactive disposal sites
have been formally closed and the other two are in the process of
closure. In connection with the plan of divestiture, from December
1987 through March 31, 1996, the Company recorded a provision for
loss on disposition of transportation, treatment and disposal
discontinued operations (including the initial provision and three
subsequent adjustments) in the amount of $160,192,000, net of income
tax benefit of $32,879,000. The adjustments principally related to a
writeoff of the contingent purchase price from the earlier sale of
certain assets, increased closure costs principally due to delays in
the regulatory approval process, and costs related to certain waste
disposal sites where IT has been named a potentially responsible
party (PRP). At September 27, 1996, the Company's condensed
consolidated balance sheet included accrued liabilities of
$34,597,000 to complete the closure and related post-closure of its
inactive disposal sites and related matters.
The provision for loss on disposition of transportation, treatment
and disposal discontinued operations is based on various assumptions
and estimates. The adequacy of the provision for loss has been
currently evaluated in light of developments since the adoption of
the divestiture plan and management believes the provision, as
adjusted, is reasonable; however, the ultimate effect of the
divestiture on the consolidated financial condition of the Company is
dependent upon future events, the outcome of which cannot be
determined at this time. Outcomes significantly different from those
used to estimate the provision for loss could result in a material
adverse effect on the consolidated financial condition of the
Company.
6. For information regarding legal proceedings of the Company's
continuing operations, please see the note "Commitments and
contingencies" in the Notes to Consolidated Financial Statements in
the Company's Annual Report on Form 10-K for the fiscal year ended
March 29, 1996; current developments regarding continuing operations'
legal proceedings are discussed in Part II of this filing. See
Management's Discussion and Analysis of Results of Operations and
Financial Condition - Financial Condition - Transportation, Treatment
and Disposal Discontinued Operations for information regarding the
legal proceedings of the discontinued operations of the Company.
7. Unbilled receivables of $19,340,000 at September 27, 1996
($20,945,000 at March 29, 1996) are included in accounts receivable.
Unbilled receivables typically represent amounts earned under the
Company's contracts but not yet billable according to the contract
terms, which usually consider the passage of time, achievement of
certain milestones, negotiation of change orders or completion of the
project.
Included in unbilled receivables at September 27 and March 29, 1996
is approximately $8,500,000 of claims related to the federal
government-funded Helen Kramer project, which the government has
recently advised the Company is subject to a continuing
investigation. Possible remedies which the government could pursue
include penalties and forfeiture of all or part of the Company's
claims. The Company is preparing further responses to the
government's contentions.
8. In March 1995, the FASB issued Statement of Financial Accounting
Standards No. 121 (SFAS No. 121), "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which
requires impairment losses to be recorded on long-lived assets used
in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. SFAS No. 121 also addresses
the accounting for long-lived assets that are expected to be disposed
7
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INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
of. The Company has adopted SFAS No. 121 in the first quarter of
fiscal year 1997 which did not result in any material impact on the
results of operations or financial position of the Company. Long-term
assets of discontinued operations are accounted for under APB Opinion
No. 30, "Reporting the Results of Operations," and are not subject to
SFAS No. 121.
9. On February 6, 1996, the Company announced that it had retained an
investment banking firm and a consultant to advise it on ways to
actively participate in the current environmental management industry
consolidation, with the ultimate goal of maximizing shareholder
value. As a result of this effort, on August 29, 1996, the Company
announced that it had signed a definitive agreement with The Carlyle
Group (Carlyle), a merchant banking firm based in Washington, DC,
which will invest $45,000,000 in a new issue of convertible preferred
stock of IT. The funds will be used by IT to finance future business
acquisitions, as well as for working capital and general corporate
purposes. See the Company's proxy statement dated as of October
30, 1996 for additional detailed information regarding the proposed
Carlyle investment.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition.
INTERNATIONAL TECHNOLOGY CORPORATION
FOR QUARTER ENDED SEPTEMBER 27, 1996
RESULTS OF OPERATIONS
Overview
- --------
The Company's services are provided to a broad array of governmental and
commercial entities predominantly in the U.S. market. Additionally, the
Company pursues selected international business opportunities on a
project-specific basis. The Company's business strategy is to provide its
environmental services on a full-service basis, particularly by focusing
on its capabilities to manage complex environmental issues from the
initial assessment of the level and extent of contamination through the
design, engineering and execution of a solution which minimizes the
client's total cost.
Revenues
- --------
The Company experienced a 13% decrease in revenues from $106,259,000 in
the second quarter of fiscal year 1996 to $92,490,000 in the second
quarter of fiscal year 1997. Revenues for the first two quarters of
fiscal year 1997 were $173,906,000, which were 15.8% lower than the
$206,551,000 of revenues for the corresponding period of the prior fiscal
year. The declines in revenues primarily reflect weak demand throughout
the industry, combined with ongoing delays in the funding of major
existing U.S. Department of Defense contracts. Although revenues are
expected to increase from second quarter levels over time, the impact of
the difficult industry-wide trends is expected to cause the Company to
continue to have revenues in the near future which are lower than the
level of one year ago.
The following table shows, for the second fiscal quarter and the two
fiscal quarters ended September 27, 1996 and September 29, 1995, the
Company's revenues attributable to federal, state and local governmental
contracts as a percentage of the Company's consolidated revenues:
<TABLE>
<CAPTION>
Fiscal quarter ended Two fiscal quarters ended
----------------------------- -----------------------------
September 27, September 29, September 27, September 29,
Source 1996 1995 1996 1995
- ------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Federal government:
U.S. Department of Defense (DOD) . . 43% 53% 44% 52%
U.S. Department of Energy (DOE). . . 15 10 15 10
Other federal agencies . . . . . . . 5 3 4 4
--- --- --- ---
63 66 63 66
State and local governments. . . . . . 6 3 6 4
--- --- --- ---
Total. . . . . . . . . . . . . . . . . 69% 70% 69% 70%
=== === === ===
</TABLE>
For the comparable first two quarters of fiscal years 1997 and 1996, the
portion of the Company's revenues derived from the DOD decreased from 52%
in the prior year to 44% in the current year primarily due to delays in
the funding of the Company's major indefinite delivery order programs over
the past several quarters. The Company expects to continue to derive a
substantial portion of its revenues from these contracts, which are
primarily related to remedial action work. Additionally, an expected
transition by the DOE over the next several years to emphasize remediation
over studies is expected to be positive for the Company based on the
Company's favorable experience in winning and executing similar work for
the DOD, the Company's experience with the DOE related to its past
9
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INTERNATIONAL TECHNOLOGY CORPORATION
RESULTS OF OPERATIONS (CONTINUED)
performance of DOE studies and recent contract awards for such work. The
Company believes this trend is reflected in the increase in the Company's
DOE revenues in the first two quarters of this fiscal year.
The Company's revenues from commercial clients declined in both the second
quarter and the first two quarters of fiscal year 1997 compared to the
prior year periods. The Company believes this is partly due to commercial
clients delaying certain work until final Congressional action is taken on
the reauthorization of the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 (CERCLA). Funding authority under
CERCLA lapsed on December 31, 1995, and it is uncertain when
reauthorization will occur or what the details of the legislation,
including retroactive liability, cleanup standards, and remedy selection,
may include. Uncertainty regarding possible Congressional rollbacks of
environmental regulation and enforcement have led commercial clients to
delay projects as well, although there are indications that significant
rollbacks are less likely than previously believed. Contemplated changes
in regulations could decrease the demand for certain of the Company's
services, as customers anticipate and adjust to the new regulations.
However, the proposed legislation could also result in increased demand
for certain of the Company's services if regulatory changes decrease the
cost of remediation projects or result in more funds being spent for
actual remediation. The ultimate impact of the proposed changes will
depend upon a number of factors, including the overall strength of the
U.S. economy and customers' views on the cost effectiveness of remedies
available under the changed regulations.
A significant portion of IT's revenues (approximately 9% and 11% in the
second quarter and first two quarters, respectively, of fiscal year 1997)
continue to be derived from large, complex thermal remediation contracts
utilizing the Company's Hybrid Thermal Treatment System (HTTS)
incineration technology. Incineration as an allowable remedy under CERCLA
continues to come under legislative and regulatory pressures. If policies
were implemented or regulations were changed such that the Company was
unable to permit and use thermal treatment on remediation projects due to
either regulatory or market factors, the Company would have to find
alternative uses for its HTTS equipment. If alternative uses, such as
foreign installations, were not found or were uneconomical, there could be
a negative effect to the Company due to impairment of HTTS assets as well
as lost project opportunities. The Company's backlog of contracts which
utilize HTTS equipment was approximately $12,400,000 at September 27,
1996. The Company is actively pursuing other contract opportunities which
utilize HTTS equipment. At September 27, 1996, IT's HTTS equipment had a
net book value of approximately $12,800,000.
The Company's total contract backlog at September 27, 1996 was
approximately $1,197,000,000, of which approximately $810,000,000 is
future project work the Company estimates it will receive (based on
historical experience) under existing governmental indefinite delivery
order (IDO) programs which provide for a general undefined scope of work.
Revenues from backlog and IDO contracts are expected to be earned over the
next one to five years. Continued funding of existing backlog could be
negatively impacted in the future due to reductions in current and future
federal government environmental restoration budgets.
Gross Margin
- ------------
Gross margin percentage for the second quarter of fiscal year 1997
declined to 9.9% of revenues from 14.3% of revenues for the corresponding
period of the prior fiscal year. In the current quarter, gross margin was
adversely impacted by lower pricing due to competitive industry
conditions, by a shift in revenue mix toward larger projects and programs
which involve more subcontracting and carry a lower margin on gross
revenues, and by the lower level of the Company's revenues as certain
overhead cost elements are fixed in the short term. The Company expects
gross margin to improve from the second quarter level as overhead costs
are reduced due to organizational streamlining resulting from the recent
corporate restructuring (see Restructuring Charge); however, competitive
pricing is expected to continue to adversely affect gross margin.
10
<PAGE>
INTERNATIONAL TECHNOLOGY CORPORATION
RESULTS OF OPERATIONS (CONTINUED)
For the first two quarters of fiscal year 1997, gross margin of 9.7% of
revenues declined from 15.5% of revenues in the corresponding period of
the prior fiscal year, generally for the same reasons noted above related
to the second fiscal quarter.
Selling, General and Administrative Expenses
- --------------------------------------------
For the second fiscal quarter ended September 27, 1996, selling, general
and administrative expenses of $8,633,000 were $1,383,000 or 13.8% lower
than the second quarter of the prior fiscal year. Selling, general and
administrative expenses of $17,713,000 for the first two quarters of
fiscal year 1997 were $2,326,000 lower than the level for the
corresponding period of the prior fiscal year. Selling, general and
administrative expenses declined during the second quarter of fiscal year
1997 partly due to the initial impact of the corporate restructuring (see
Restructuring Charge) initiated in such quarter and are expected to
decline further in the third fiscal quarter ending December 27, 1996 due
to the full-quarter impact of the restructuring.
Restructuring Charge
- --------------------
In conjunction with the corporate restructuring to position the Company
for growth and diversification which was initiated in the second quarter
of the current fiscal year, the Company incurred a pre-tax restructuring
charge of $8,403,000. The restructuring charge included $3,400,000 of
costs for severance, $4,100,000 of costs for closing and reducing the size
of a number of the Company's offices, and $900,000 of costs for other
related items. At September 27, 1996, $7,135,000 of the charge remained to
be paid. The restructuring charge was taken in conjunction with an
organizational realignment which is expected to enable the Company to
operate more efficiently and cost-effectively in the future.
Interest, Net
- -------------
For the second quarter and first two quarters of fiscal year 1997, net
interest expense represented 1.4% of revenues and 1.5% of revenues,
respectively, compared to the 1.6% of revenues and 1.8% of revenues,
respectively, reported in the second quarter and first two quarters of
fiscal year 1996. In the current fiscal year, the lower net interest
expense levels compared to a year ago are due principally to an increased
level of cash and cash equivalents generating more interest income.
Income Taxes
- ------------
For the two fiscal quarters ended September 27, 1996, the Company had an
effective income tax benefit rate of 12.0%. The related income tax
benefit from the pre-tax loss for the current two fiscal quarters is net
of a $3,168,000 tax charge reflected in the second quarter resulting from
the increase in IT's deferred tax valuation allowance based on the
Company's assessment of the uncertainty as to when it will generate a
sufficient level of future earnings to realize the deferred tax asset
created by the second quarter restructuring charge (see Restructuring
Charge). If the above tax charge had not been reflected in the second
quarter, the Company's effective income tax rate would have been 38%,
which exceeds the 34% federal statutory rate primarily due to state income
taxes and nondeductible expenses.
For the second fiscal quarter and the two fiscal quarters ended September
29, 1995, the Company had effective income tax rates of 37% and 39%,
respectively, both of which exceed the 34% federal statutory rate
primarily due to state income taxes and nondeductible expenses.
The Company's future tax rate is subject to the full realization of its
deferred tax asset of $34,120,000 (net of a valuation allowance of
$8,754,000). Realization of the tax asset is expected by management to
occur principally as closure expenditures related to the Company's
inactive disposal sites (see Note 5 to Condensed Consolidated Financial
Statements) over the next several years are deductible in the year the
expenditures are made and upon the ultimate disposition of the Company's
19% interest in Quanterra (see Management's Discussion and Analysis of
Results of Operations and Financial Condition - Financial Condition), but
is subject to the Company having a sufficient level of future taxable
income and taxable capital gains. The Company evaluates the adequacy of
the valuation allowance and the realizability of the deferred tax asset
on an ongoing basis.
11
<PAGE>
INTERNATIONAL TECHNOLOGY CORPORATION
FINANCIAL CONDITION
Working capital of $71,884,000 at September 27, 1996 decreased
by $17,290,000 or 19.4% from $89,174,000 at March 29, 1996 due principally
to a net reduction in receivables reflecting the Company's lower
revenue level. Consequently, the current ratio at September 27, 1996
decreased to 1.85:1 from 2.13:1 at March 29, 1996.
Cash provided by operating activities for the first two quarters of fiscal
year 1997 totaled $19,483,000 compared to $11,362,000 provided by
operating activities in the corresponding first two quarters of the prior
fiscal year. During the current period, the increase in cash provided by
operating activities is principally due to the reduction in receivables
discussed above with respect to the decline in working capital during
fiscal year 1997. Additionally, capital expenditures of $1,584,000 for
the current two fiscal quarters were $1,489,000 lower than the $3,073,000
reported for the corresponding period of the prior fiscal year principally
due to a lower level of capital requirements reflecting the lower revenue
level during fiscal year 1997. Management believes capital expenditures
for fiscal year 1997 will be similar to the $4,696,000 level of fiscal
year 1996, excluding any business acquisitions or strategic investments
which might be made by the Company.
The Company's shareholder agreements relating to Quanterra (an
environmental analytical services business 81% owned by an affiliate of
Corning Incorporated and 19% owned by IT) contain certain provisions which
have affected and, in the future, could affect liquidity. IT was required
by these agreements to contribute $2,500,000 to Quanterra in October 1995
and an additional $2,500,000 to Quanterra in January 1996. In connection
with a recapitalization of Quanterra in January 1996, the Company
committed to contribute up to an additional $2,500,000 to Quanterra (of
which $475,000 was paid in each of March, April and July 1996) and has the
option to contribute more in order to maintain its 19% interest. Due to
the operating losses which Quanterra has been incurring and the
requirement to contribute additional capital to Quanterra, the
Company will continue to evaluate the ultimate recoverability of its
investment in Quanterra, which is carried at $13,925,000 on the September
27, 1996 condensed consolidated balance sheet. As a result of Quanterra's
continuing operating losses, the Company will assess the value of its
investment in Quanterra on an ongoing basis and will recognize any
impairment in value should it occur.
The Company's lending arrangements, consisting of $65,000,000 of senior
secured notes and a $60,000,000 bank line of credit, contain various
financial ratio and net worth covenants. In addition, the facilities
contain certain other restrictive covenants, including prohibitions on the
payment of cash dividends on common stock (and, if the Company is in
default under the facilities, on the preferred stock), and on the
repurchase of stock other than to fund IT's compensation plans,
limitations on capital expenditures, the incurrence of other debt and the
purchase or sale of assets and a negative pledge on substantially all of
the Company's assets not pledged to the facilities. In anticipation of
the loss reported by the Company for its current first fiscal quarter, the
Company, prior to June 28, 1996, obtained a waiver of certain covenants
which allowed it to maintain compliance with the lending arrangements as
of the end of the first quarter of fiscal year 1997. As a result of the
short-term nature of the waiver, the $65,000,000 of senior secured notes
were classified as a current liability at June 28, 1996.
The Company has recently negotiated amendments to its lending arrangements
which are intended to avoid future covenant defaults and provide enhanced
flexibility in the Company's operations in conjunction with the Carlyle
investment (see below). The modifications enable the Company to again
classify its senior secured notes as long-term debt. Among other things,
the changes modify certain financial covenants, permit the Carlyle
investment and the payment of dividends on such investment, increase the
Company's allowable debt and permit proceeds from borrowings to be used to
finance acquisitions in certain circumstances, and increase the cost of
the senior secured notes and credit line based upon certain leverage
thresholds.
In aggregate, at September 27, 1996, letters of credit totaling
approximately $25,500,000 related to the Company's insurance program,
financial assurance requirements and bonding requirements were outstanding
against the Company's bank line of credit. There were no borrowings under
the credit line. Due to the significant reduction in the Company's
12
<PAGE>
INTERNATIONAL TECHNOLOGY CORPORATION
FINANCIAL CONDITION (CONTINUED)
accounts receivable (which are the principal collateral to the lending
arrangements) during the six months ended September 27, 1996 related to
the reduction in revenue, the Company posted $4,187,000 of cash as
additional collateral to its lending arrangements, and there was no
availability under the line of credit. Excluding this cash collateral,
the Company had invested cash of approximately $23,500,000 at September
27, 1996.
On February 6, 1996, the Company announced that it had retained an
investment banking firm and a consultant to advise it on ways to actively
participate in the current environmental management industry
consolidation, with the ultimate goal of maximizing shareholder value. As
a result of this effort, on August 29, 1996, the Company announced that it
had signed a definitive agreement with The Carlyle Group (Carlyle), a
merchant banking firm based in Washington, DC, which will invest
$45,000,000 in a new issue of convertible preferred stock of IT. The
funds will be used by IT to finance future business acquisitions, as well
as for working capital and general corporate purposes.
The preferred stock will be convertible into 22,500,000 IT common shares
at a conversion price of $2.00 per share. The Carlyle investment also
includes five-year warrants to purchase 5,000,000 IT common shares at an
exercise price of $3.00 per share. The conversion price of the preferred
stock and the exercise price of the warrants are subject to change in
certain circumstances including in the event that holders of the Company's
existing 7% Cumulative Convertible Exchangeable Preferred Stock exercise
a special conversion right enabling them to convert to common shares at a
special conversion price of the higher of the market value of the common
stock or $3.17 per share. The convertible preferred stock will pay zero
dividends in year one, a 3% preferred stock in-kind in year two, and a 6%
annual cash dividend thereafter. There is no mandatory redemption
provision; the Company has an option to redeem the convertible preferred
stock beginning in the eighth year after the closing. See the Company's
proxy statement dated as of October 30, 1996 for additional detailed
information regarding the proposed Carlyle investment.
In connection with the Carlyle investment, all but three of the present IT
directors will be replaced by four directors designated by Carlyle and
Carlyle will have the right to designate a majority of the directors for
five years. The Carlyle investment is subject to approval by the
Company's common shareholders at a shareholder meeting scheduled for
November 20, 1996, as well as to certain customary closing conditions.
The Company continues to have significant cash requirements, including
working capital, capital expenditures, expenditures for the closure of its
inactive disposal sites and PRP matters (see Transportation, Treatment and
Disposal Discontinued Operations below), dividend obligations on the
depositary shares and contingent liabilities. The recent decline in the
Company's business combined with these significant cash requirements has
reduced and is expected to further reduce the Company's cash position
without giving effect to the proposed Carlyle investment; however, subject
to the anticipated progressive recovery of the Company's business during
the remainder of fiscal year 1997, the Company's liquidity position is
expected to be sufficient to meet the foreseeable requirements. In the
event the anticipated recovery does not develop, the Company could
encounter severe liquidity constraints. The completion of the Carlyle
investment will provide additional cash to address these requirements, as
well as to fund the expansion and diversification of the Company's
business through both internal growth and acquisitions.
Transportation, Treatment and Disposal Discontinued Operations
- --------------------------------------------------------------
With regard to the Company's transportation, treatment and disposal
discontinued operations, the Company has previously completed closure of
its Montezuma Hills and Benson Ridge facilities and is pursuing closure of
its inactive Panoche and Vine Hill Complex facilities. On November 17,
1995, the California EPA, Department of Toxic Substances Control (DTSC)
approved the final closure plan and post-closure plan for the Vine Hill
Complex facility. The approved final closure plan provides for
solidification and capping of waste sludges and installation of
underground barriers and groundwater control systems. Substantial
remediation has already been completed over both the past year since
approval of the plan and over the prior several years based upon interim
approvals by DTSC, and the final closure is scheduled to be completed in
fiscal year 1998.
13
<PAGE>
INTERNATIONAL TECHNOLOGY CORPORATION
FINANCIAL CONDITION (CONTINUED)
On June 28, 1996, DTSC released a Draft Environmental Impact Report (DEIR)
and Draft Closure Plan for public comment for the Panoche facility. The
DEIR evaluates the Company's preferred closure plan as well as several
alternative plans and states that the Company's preferred closure plan is
the environmentally superior alternative. The alternative plans involve
excavation and on-site relocation of substantial quantities of waste
materials in addition to landfill capping and groundwater controls which
are common to all alternatives. If selected, the alternative plans would
extend the closure construction schedule and increase the cost of closure.
The DEIR and Draft Closure Plan were subject to a 90-day comment period
which ended September 30, 1996, during which interested parties presented
comments including some supporting alternative plans. DTSC, after
considering all comments received, will approve a final closure plan and
certify the final EIR. The Company expects the plan and all necessary
permits to be approved during fiscal year 1997 or early fiscal year 1998.
Closure construction for the Company's preferred plan is scheduled to be
completed within three years of approval of the plan. If DTSC were to
approve an alternative plan or fail to timely approve any plan or if
implementation of any plan is delayed by litigation or appeals, the
Company's cost to close the site would increase, which could have a
material adverse impact on the consolidated financial condition of the
Company.
Closure construction was completed for the Montezuma Hills and Benson
Ridge facilities in December 1991 and December 1992, respectively. Upon
completion of closure construction, the Company is required to perform
post-closure monitoring and maintenance of its disposal facilities for at
least 30 years. Operation of the facilities in the closure and
post-closure periods is subject to numerous federal, state and local
regulations. The Company may be required to perform unexpected
remediation work at the facilities in the future or to pay penalties for
alleged noncompliance with regulatory permit conditions.
Regulations of the DTSC and the United States Environmental Protection
Agency (USEPA) require that owners and operators of hazardous waste
treatment, storage and disposal facilities provide financial assurance for
closure and post-closure costs of those facilities. The Company has
provided such financial assurance equal to its estimate for closure
costs at March 1, 1996, which could be subject to increase at a later time
as a result of regulatory requirements, in the form of a corporate
guarantee of approximately $14,900,000, letters of credit totaling
approximately $6,700,000 and a trust fund containing approximately
$11,900,000, and has purchased annuities which will ultimately mature over
the next 30 years to pay for its estimates of post-closure costs.
Closure and post-closure costs are incurred over a significant number
of years and are subject to a number of variables including, among others,
completion of negotiations regarding specific site closure and
post-closure plans with DTSC, USEPA, the California State Water Resources
Control Board, the California Air Resources Board, Regional Water Quality
Control Boards (RWQCBs), Air Quality Management Districts, various other
state authorities and certain applicable local regulatory agencies. Such
closure costs are comprised principally of engineering, design and
construction costs and of caretaker and monitoring costs during closure.
The Company has estimated the impact of closure and post-closure costs in
the provision for loss on disposition of transportation, treatment and
disposal discontinued operations; however, closure and post-closure costs
could be higher than estimated if regulatory agencies were to require
closure and/or post-closure procedures significantly different than those
in the plans developed by the Company or if there are additional delays in
the closure plan approval process. Certain revisions to the closure
procedures could also result in impairment of the residual land values
attributed to certain of the sites.
The carrying value of the long-term assets of transportation, treatment
and disposal discontinued operations of $40,048,000 at September 27, 1996
is principally comprised of residual land at the inactive disposal
facilities (a substantial component of which is adjacent to those
facilities and was never used for waste disposal) and assumes that sales
will occur at current market prices estimated by the Company based on
certain assumptions (entitlements, development agreements, etc.), taking
into account market value information provided by independent real estate
appraisers. The Company has an agreement with a real estate developer to
develop some of this property as part of a larger development in the local
area involving a group of developers. The entitlement process has been
delayed pending approval of the Company's closure plan for its adjacent
disposal facility and local community review of growth strategy. If the
14
<PAGE>
INTERNATIONAL TECHNOLOGY CORPORATION
FINANCIAL CONDITION (CONTINUED)
developers' plans change or the developers are unable to obtain
entitlements as planned, the carrying value of this property could be
significantly impaired. With regard to this property or any of the other
residual land, there is no assurance as to the timing of sales or the
Company's ability to ultimately liquidate the land for the sale prices
assumed. If the assumptions used to determine such prices are not
realized, the value of the land could be materially different from the
current carrying value.
In June 1986, USEPA notified a number of entities, including the Company,
that they were PRPs under CERCLA with respect to the Operating Industries,
Inc. (OII) Superfund site in Monterey Park, California, and as such, faced
joint and several liability for the cost to investigate and clean up this
site. Subsequently, USEPA alleged that the Company had generated
approximately 2% by volume of the hazardous wastes disposed of at the site
and that the Company's share of certain past costs totaled not less than
$8,500,000. Between October 1994 and May 1995, the Company was served
with summons and complaints in two lawsuits (National Railroad Passenger
Corporation, et al. v. Harshaw Filtrol, U.S.D.C., Central District,
California, Case No. CV 94-2861 WMB (GHKx) and National Railroad Passenger
Corporation v. ACF United, U.S.D.C., Central District, California, Case
No. CV 95-2050 LGB (RMBx)) brought by members of a group of PRPs (the
Steering Committee), which sought from the Company at least $2,700,000 for
costs incurred by Steering Committee members pursuant to the first three
settlements (partial consent decrees) negotiated between the USEPA and the
Steering Committee. (The Company has not been named as a defendant in any
of the several personal injury and property damage lawsuits brought by
area residents.)
In October 1995, the Company and the USEPA agreed to a settlement of the
Company's alleged liability for response costs incurred by the USEPA
pursuant to the first three partial consent decrees entered into in
connection with the OII site. The settlement with USEPA, in the form of
a consent decree (the Fifth Partial Consent Decree), was approved by the
U.S. District Court on July 10, 1996. Pursuant to the settlement, the
Company has paid $2,500,000 through September 27, 1996 and will pay to the
USEPA an additional approximately $2,900,000 within the next six months,
which amounts had been previously accrued by the Company. Additionally,
the Company has received from the USEPA contribution protection and
a covenant not to sue as to the matters addressed in the Fifth Partial
Consent Decree. While resolving the Company's alleged liability for
response costs incurred by the USEPA pursuant to the first three partial
consent decrees, the settlement does not include any costs for future or
final OII remedies. In September 1996, the USEPA released a final record
of decision selecting the final remedy for the site. Response costs for
the final remedy are estimated by USEPA to be approximately $161,800,000.
The Company believes that this estimate does not take into account the
benefits of certain work to be performed under the previous consent
decrees and therefore substantially overstates the remaining cost.
In April 1996, the Company and the Steering Committee reached a
settlement of the Harshaw Filtrol and the ACF United lawsuits, pursuant to
which the Company will pay $250,000 in settlement of the Steering
Committee's claims. The Company and the Steering Committee also agreed,
as a part of the settlement, to cooperate and share on a pro-rata basis
certain response and other defense costs with respect to certain
groundwater cleanup actions which may be a part of the final remedy for
the site. The Company and the Steering Committee have not agreed to share
all costs related to the final remedy at the site, inasmuch as the
Steering Committee claims that pursuant to earlier consent decrees it is
excused from paying for or performing certain actions which may be
required as a part of any final remedy and for which the Company and other
persons who settled with USEPA pursuant to the Fifth Partial Consent
Decree may be liable. The Company does not agree with these claims. The
Company's agreement with the Steering Committee to cooperate and share
costs with respect to certain groundwater cleanup actions may be
terminated voluntarily by either party, including in the event of a
dispute as to the parties' respective obligations to pay for or perform
the final remedy for the site.
Should the costs of the final remedy be greater than expected, or should
the Company be forced to assume a disproportionate share of the costs of
the final remedy (whether because of differences in the protections
obtained by the Steering Committee and the Company under the various
consent decrees, or otherwise), the cost to the Company of concluding this
matter could materially increase.
15
<PAGE>
INTERNATIONAL TECHNOLOGY CORPORATION
FINANCIAL CONDITION (CONTINUED)
In September 1987, the Company was served with a Remedial Action Order
(RAO) issued by the DTSC, concerning the GBF Pittsburg landfill site near
Antioch, California, a site which had been proposed by the USEPA to be
added to the National Priorities List under CERCLA. IT and 17 other firms
and individuals were characterized as responsible parties in the RAO and
directed to undertake investigation and potential remediation of the site
which consists of two contiguous parcels. From the 1960's through 1974,
a predecessor to IT Corporation operated a portion of one parcel as a
liquid hazardous waste site. The activity ceased in 1974, and the
disposal facility was closed pursuant to a closure plan approved
by the appropriate RWQCB. Both of the parcels were then operated by other
parties as a municipal and industrial waste site (overlying the former
liquid hazardous waste site) and, until 1991, continued to accept
municipal waste. Water quality samples from monitoring wells in the
vicinity of the site were analyzed by the property owner in August 1986
and indicated the presence of volatile organics and heavy metals along the
periphery of the site.
Additional PRPs, consisting primarily of known waste generators, were
subsequently served with an amended RAO by the DTSC. IT and other PRPs
(the PRP group) are participating to further investigate the nature and
extent of any subsurface contamination beneath the site and beyond its
borders. The PRP group has submitted Remedial Investigation and
Feasibility Study (RI/FS) reports to the DTSC. The studies indicate that
groundwater quality impact is not affecting drinking water supplies and is
not attributable solely to the portion of the site previously operated by
IT's predecessor.
In July 1993, the Company, along with the other PRPs at the site, was
issued a revised RAO and Imminent and Substantial Endangerment Order that,
although it appears primarily to restate previous RAOs, also directs all
previously named PRPs to undertake specific additional tasks including the
closure of the municipal landfill.
In November 1995, the DTSC, by letter, required the PRP group to submit
for public comment and DTSC approval a draft Remedial Action Plan (RAP)
describing a remedial alternative not supported by the PRP group. The PRP
group disputed the timing and content of the draft RAP as required by DTSC
as not justified by the RI/FS process, but in January 1996 submitted a
draft RAP discussing a number of remedial alternatives. In October 1996
the DTSC completed and released for public review and comment a draft RAP
selecting DTSC's preferred alternative of actively pumping and treating
groundwater from both the alleged source points of contamination and the
allegedly contaminated groundwater plume emanating from the site, which
DTSC estimated to cost between $18,300,000 to $32,600,000, depending upon
whether certain options for discharge of produced waters are available.
The PRP group continues to believe that its preferred alternative of
continued limited site monitoring, which was estimated to cost
approximately $4,100,000, is appropriate. As part of the draft RAP, the
DTSC also advised the PRP group of its position that both the group and
the current owner/operators are responsible for paying the future closure
and postclosure costs of the adjoining municipal landfill, which have been
estimated at approximately $4,200,000.
As a part of the draft RAP that the PRP group submitted in January 1996,
the group asserted that other PRPs at the site (principally, the current
and past owner/operators of the site) were responsible for approximately
85% of the site's remediation costs, and that the PRP group was
responsible for no more than approximately 15% of such costs. The Company
has paid approximately 50% of the PRP group's costs to-date on an interim
basis. The current owner/operators claimed in response that the Company
and other members of the PRP group were responsible for at least 89% of
the site's remediation costs and that they were responsible for only a
small percentage of such costs. They also demanded indemnity from the
Company pursuant to the lease agreement under which IT Corporation's
predecessor operated the site, which demand the Company has rejected. In
the draft RAP released in October 1996 the DTSC released a draft
non-binding allocation suggesting that the Company is responsible for 15%
of the site's response costs, that the generators and others who are part
of the PRP group are responsible for 35% of such costs and that the
current owner/operators are responsible for 30% of such costs. Although
the DTSC's allocation of responsibility is not binding except in very
limited circumstances, the PRP group continues to believe that the current
owner/operators should pay a larger portion of the site's response costs
and the Company is continuing to attempt to cooperate with the generators
and other members of the PRP group. The draft RAP is subject to public
comment, after which the DTSC will release a final RAP. The PRP group is
evaluating its potential remedies with respect to the draft RAP.
16
<PAGE>
INTERNATIONAL TECHNOLOGY CORPORATION
FINANCIAL CONDITION (CONTINUED)
The PRP group has initiated litigation against the current owner/operators
of the site and other non-cooperating PRPs to cause them to bear their
proportionate share of site remedial costs. The current owner/operators
of the site have not cooperated with the PRP group in its efforts to study
and characterize the site, except for limited cooperation which was
offered shortly after the September 1987 RAO. The current owner/operators
are expected to vigorously defend the PRP group's litigation, and the
outcome of the litigation cannot be determined at this time.
Failure of the PRP group to effect a satisfactory resolution with respect
to the choice of appropriate remedial alternatives or to obtain an
appropriate contribution towards site remedial costs from the current
owner/operators of the site and other non-cooperating PRPs, could
substantially increase the cost to the Company of remediating the site,
which would have a material adverse effect on the Company's consolidated
financial condition.
In March 1995, IT was notified by the DTSC that it was among 13 companies
identified as potentially responsible for costs associated with
investigation and cleanup of the Environmental Protection Corporation
(EPC) site known as the Eastside Facility near Bakersfield, California.
The DTSC notice letter states that IT is believed to have arranged for
disposal of hazardous substances at the Eastside Facility during the
period between 1972 and 1985 when it was permitted and operated
as a land treatment facility.
IT transported various waste streams both generated by IT and on behalf of
its customers to the Eastside Facility at various times during that
facility's operations and it was a minority shareholder in EPC for a
period of its operations. In its March 1995 letter, the DTSC directed IT
and the other parties which were notified to form a group and to respond
to a proposed administrative order directing them to characterize the
facility and undertake any appropriate remedial action to deal with
any releases or threatened releases identified. In January 1996, the PRP
group (of which the Company is a member) and the DTSC entered into an
agreement for the performance of a RI/FS for the site, as well as for cost
sharing for the RI/FS among the group and the DTSC. IT is cooperating
with other group members to perform the work outlined in the agreement.
Because of the early stage of the matter, IT has no estimate of its
potential costs associated with the remediation of the Eastside Facility.
The provision for loss on disposition of transportation, treatment and
disposal discontinued operations is based on various assumptions and
estimates, including those discussed above. Management believes that the
provision, as adjusted, is reasonable; however, the ultimate effect of the
divestiture on the consolidated financial condition of the Company is
dependent upon future events, the outcome of which cannot be determined at
this time. Outcomes significantly different from those used to estimate
the provision for loss could result in a material adverse effect on the
consolidated financial condition of the Company.
FORWARD LOOKING STATEMENTS
All statements in the preceding discussion that are not historical are
forward looking statements. Such statements are subject to certain risks
and uncertainties that could cause actual results to differ materially
from those expressed in any of the forward looking statements. Such risks
and uncertainties include, but are not limited to, additional delays in
federal budget authorization and in the funding of federal government
contracts, ongoing regulatory uncertainties which affect both governmental
and commercial clients, industrywide market factors, liabilities and
regulatory developments related to the Company's discontinued operations,
negotiations with lenders, the effects of the Company's restructuring, the
completion of the Carlyle transaction, and financial and liquidity trends.
17
<PAGE>
PART II
INTERNATIONAL TECHNOLOGY CORPORATION
Item 1. Legal Proceedings.
The continuing operations litigation to which the Company is a
party is more fully discussed in the note "Commitments and
contingencies" in the Notes to Consolidated Financial Statements
in the Company's Annual Report on Form 10-K for the fiscal year
ended March 29, 1996 and in the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended June 28, 1996. For
current developments in the Helen Kramer matter, please see
Note 7 to the Condensed Consolidated Financial Statements in
this report. See also Management's Discussion and Analysis of
Results of Operations and Financial Condition - Financial
Condition - Transportation, Treatment and Disposal Discontinued
Operations for information regarding litigation related to the
discontinued operations of the Company.
18
<PAGE>
INTERNATIONAL TECHNOLOGY CORPORATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. These exhibits are numbered in accordance with the
Exhibit Table of Item 601 of Regulation S-K.
Exhibit No. Description
---------- ------------------------------------------------
4(i) 7. Form of Certificate of Designations,
Preferences and Relative, Participating,
Optional and Other Special Rights and
Qualifications, Limitations and
Restrictions Thereof of Cumulative
Convertible Participating Preferred Stock
of International Technology Corporation.*
10(ii) 16. Form of Securities Purchase Agreement
dated as of August 28, 1996 between
International Technology Corporation and
Certain Purchasers Identified Therein.*
17. Consent and Waiver, dated as of August 30,
1996, by The Chase Manhattan Bank, The
First National Bank of Boston, Societe
Generale, John Hancock Mutual Life
Insurance Company, John Hancock Life
Insurance Company of America, Allstate
Life Insurance Company, The Mutual Life
Insurance Company of New York and Mony
Life Insurance Company of America.*
18. Consent, dated as of August 31, 1996, by
The Chase Manhattan Bank, The First
National Bank of Boston, Societe Generale,
John Hancock Mutual Life Insurance
Company, John Hancock Life Insurance
Company of America, Allstate Life
Insurance Company, The Mutual Life
Insurance Company of New York and Mony
Life Insurance Company of America.*
19. Consent and Waiver, dated as of October 4,
1996 to the Credit Agreement and the Note
Purchase Agreement, both dated October 24,
1995, among IT Corporation and the Several
Lenders from Time to Time Parties to the
Credit Agreement and the respective
Purchasers under the Note Purchase
Agreement.
20. Consent and Waiver, dated as of October
18, 1996 to the Credit Agreement and the
Note Purchase Agreement, both dated
October 24, 1995, among IT Corporation and
the Several Lenders from Time to Time
Parties to the Credit Agreement and the
respective Purchasers under the Note
Purchase Agreement.
21. Second Amendment, dated as of October 30,
1996 to the Credit Agreement and the Note
Purchase Agreement, both dated October 24,
1995, among IT Corporation and the Several
Lenders from Time to Time Parties to the
Credit Agreement and the respective
Purchasers under the Note Purchase
Agreement.
19
<PAGE>
INTERNATIONAL TECHNOLOGY CORPORATION
Exhibit No. Description
---------- -------------------------------------------------
10(iii) 19. Separation Agreement dated as of September
30, 1996 between International Technology
Corporation and Eric Schwartz.*
27 1. Financial Data Schedule for the quarter
ended September 27, 1996.
*Previously filed as an Exhibit to the Company's current
report on Form 8-K, dated September 20, 1996.
(b) Reports on Form 8-K.
Current report on Form 8-K, dated September 20, 1996,
reporting under Item 5, "Other Events," related to the
execution of a Securities Purchase Agreement dated August
28, 1996 by and between the Company and certain Purchasers
affiliated with The Carlyle Group, and other matters.
20
<PAGE>
INTERNATIONAL TECHNOLOGY CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERNATIONAL TECHNOLOGY CORPORATION
(Registrant)
ANTHONY J. DELUCA November 12, 1996
-------------------------------------------- -----------------
Anthony J. DeLuca
President and Acting Chief Executive Officer
and Duly Authorized Officer
PHILIP H. OCKELMANN November 12, 1996
-------------------------------------------- -----------------
Philip H. Ockelmann
Vice President, Finance, Treasurer
and Principal Accounting Officer
21
<PAGE>
EXHIBIT 10(ii) 19.
-----------------
CONFORMED COPY
WAIVER, dated as of October 4, 1996 (this "Waiver"), to (i) the
Credit Agreement, dated as of October 24, 1995 (as amended, supplemented
or otherwise modified from time to time, the "Credit Agreement"), among IT
CORPORATION, a California corporation (the "Borrower"), the several banks
and other financial institutions from time to time parties thereto (the
"Lenders") and The Chase Manhattan Bank (formerly known as Chemical Bank),
a New York banking corporation, as administrative agent for the Lenders
thereunder (in such capacity, the "Agent") and (ii) the several Note
Purchase Agreements, each dated as of October 24, 1995 (collectively, the
"Note Agreements"), between the Borrower and the respective Purchasers
thereunder.
W I T N E S S E T H :
WHEREAS, the parties hereto wish to waive certain provisions of
the Credit Agreement and the Note Agreements on the terms set forth
herein;
NOW, THEREFORE, in consideration of the premise contained
herein, the parties hereto agree as follows:
1. Defined Terms. Unless otherwise defined herein,
capitalized terms used herein shall have the meanings ascribed to them in
the Credit Agreement and the Note Agreements (collectively, the
"Agreements").
2. Limited Waiver; Limitation on Loans. (a) Subject to the
provisions of paragraph 2(f) hereof, compliance with Section 2 of Schedule
III is hereby waived to the extent, and only to the extent, that such
non-compliance results from the inclusion of the Senior Notes as Current
Liabilities, solely for the purpose of calculating the Current Ratio as at
each of June 28, 1996 and September 27, 1996.
(b) Subject to the provisions of paragraph 2(f) hereof,
compliance with Section 4 of Schedule III of the Agreements is hereby
waived to the extent, and only to the extent, that Consolidated Net Worth
of the Parent as at September 27, 1996 is less than the amount thereof
required pursuant to such Section 4 provided that such Consolidated Net
Worth as at such date is not less than $120,000,000.
(c) Subject to the provisions of paragraph 2(f) hereof,
compliance with Section 5(a) of Schedule III of the Agreements is hereby
waived to the extent, and only to the extent, that the ratio of (i) EBIT
for the nine-month period ending June 28, 1996 to (ii) the sum of (A)
Interest Expense for such period plus (B) all dividends on Preferred Stock
paid during such period is less than 1.50 to 1.00, provided that such
ratio is not less than 0.65 to 1.00.
(d) Subject to the provisions of paragraph 2(f) hereof,
compliance with Section 5(a) of Schedule III of the Agreements is hereby
waived to the extent, and only to the extent, that the ratio of (i) EBIT
for the four quarters ending September 27, 1996 to (ii) the sum of (A)
Interest Expense for such period plus (B) all dividends on Preferred Stock
paid during such period is less than 1.50 to 1.00, provided that such
ratio is not less than 0.50 to 1.00.
(e) Subject to the provisions of paragraph 2(f) hereof,
compliance with Section 5(b) of Schedule III of the Agreements is hereby
waived to the extent, and only to the extent, that the ratio of (i) (A)
EBIT for the nine-month period ending June 28, 1996 or (B) EBIT for the
<PAGE>
2
four quarters ending September 27, 1996 to (ii) the sum of (A) Interest
Expense net of interest income for such period plus (B) all dividends on
Preferred Stock paid during such period is less than 2.00 to 1.00,
provided that such ratio is not less than 0.65 to 1.00.
(f) Notwithstanding any of the foregoing, the waivers described
in paragraphs 2(a), (b), (c), (d) and (e) hereof shall only be effective
through and including October 18, 1996, and any Event of Default that
would have existed and been continuing but for the effect of this Waiver
shall be reinstated and shall thereafter continue to constitute an Event
of Default unless further expressly waived in writing in accordance with
the Credit Agreement and the Note Agreements.
(g) Notwithstanding anything in the Credit Agreement to the
contrary, during the period from the date hereof to and including October
18, 1996, no Loans may be made or requested under the Credit Agreement.
During such period, the Commitments thereunder shall only be available for
the issuance of Letters of Credit, subject to all the other provisions of
the Credit Agreement and to the extent available to be issued in
accordance with the Credit Agreement.
3. Effective Date. This Waiver will become effective as of
the date hereof upon its execution by the Agent and the Majority Creditors
and its acknowledgment by the Borrower.
4. Representations and Warranties; No Default. On and as of
the date hereof, and after giving effect to this Waiver, the Borrower
confirms, reaffirms and restates that the representations and warranties
set forth in Section 4 of the Credit Agreement, in the other Loan
Documents (as defined in the Credit Agreement) and in the Note Agreements
are true and correct in all material respects, provided that the
references to the Credit Agreement or the Note Agreements therein shall be
deemed to be references to this Waiver and to the Credit Agreement or the
Note Agreements, as the case may be, as amended by this Waiver.
5. Limited Waiver. Except as expressly waived herein, the
Credit Agreement and each of the Note Agreements shall continue to be, and
shall remain, in full force and effect. This Waiver shall not be deemed
to be a waiver of, or consent to, or a modification or amendment of, any
other term or condition of the Credit Agreement, any other Loan Document,
any of the Note Agreements or any Senior Note or to prejudice any other
right or rights which the Lenders may now have or may have in the future
under or in connection with any thereof or any of the instruments or
agreements referred to therein, as the same may be amended from time to
time.
6. GOVERNING LAW. THIS WAIVER SHALL BE GOVERNED BY, AND
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF
NEW YORK.
7. Counterparts. This Waiver may be executed by the parties
hereto in any number of separate counterparts and all of said counterparts
taken together shall be deemed to constitute one and the same instrument.
<PAGE>
3
IN WITNESS HEREOF, the parties hereto have caused this Waiver to
be duly executed and delivered by their properly and duly authorized
officers as of the day and year first above written.
THE CHASE MANHATTAN BANK,
as Administrative Agent and as a Lender
By: /s/ John T. Zeller
-------------------------
Title: Vice President
THE FIRST NATIONAL BANK OF BOSTON
By: /s/ J. Lee Harper
-------------------------
Title: Vice President
SOCIETE GENERALE
By:
-------------------------
Title: First Vice President
JOHN HANCOCK MUTUAL LIFE INSURANCE
COMPANY
By: /s/ Stephen J. Blewitt
-------------------------
Title: Investment Officer
JOHN HANCOCK LIFE INSURANCE
COMPANY OF AMERICA
By: /s/ Willma J. Davis
-------------------------
Title: Vice President
<PAGE>
4
ALLSTATE LIFE INSURANCE COMPANY
By:
-------------------------
Title:
By:
-------------------------
Title:
THE MUTUAL LIFE INSURANCE COMPANY
OF NEW YORK
By: /s/ William D. Goodwin
-------------------------
Title: Senior Managing Director
MONY LIFE INSURANCE COMPANY OF
AMERICA
By: /s/ William D. Goodwin
-------------------------
Title: Senior Vice President
ACKNOWLEDGED AND AGREED:
IT CORPORATION
By:
-------------------------
Title: Vice President
EXHIBIT 10(ii) 20.
-----------------
CONFORMED COPY
WAIVER, dated as of October 18, 1996 (this "Waiver"), to (i) the
Credit Agreement, dated as of October 24, 1995 (as amended, supplemented
or otherwise modified from time to time, the "Credit Agreement"), among IT
CORPORATION, a California corporation (the "Borrower"), the several banks
and other financial institutions from time to time parties thereto (the
"Lenders") and The Chase Manhattan Bank (formerly known as Chemical Bank),
a New York banking corporation, as administrative agent for the Lenders
thereunder (in such capacity, the "Agent") and (ii) the several Note
Purchase Agreements, each dated as of October 24, 1995 (collectively, the
"Note Agreements"), between the Borrower and the respective Purchasers
thereunder.
W I T N E S S E T H :
WHEREAS, the parties hereto wish to waive certain provisions of
the Credit Agreement and the Note Agreements on the terms set forth
herein;
NOW, THEREFORE, in consideration of the premise contained
herein, the parties hereto agree as follows:
1. Defined Terms. Unless otherwise defined herein,
capitalized terms used herein shall have the meanings ascribed to them in
the Credit Agreement and the Note Agreements (collectively, the
"Agreements").
2. Limited Waiver; Limitation on Loans. (a) Subject to the
provisions of paragraph 2(f) hereof, compliance with Section 2 of Schedule
III is hereby waived to the extent, and only to the extent, that such
non-compliance results from the inclusion of the Senior Notes as Current
Liabilities, solely for the purpose of calculating the Current Ratio as at
each of June 28, 1996 and September 27, 1996.
(b) Subject to the provisions of paragraph 2(f) hereof,
compliance with Section 4 of Schedule III of the Agreements is hereby
waived to the extent, and only to the extent, that Consolidated Net Worth
of the Parent as at September 27, 1996 is less than the amount thereof
required pursuant to such Section 4 provided that such Consolidated Net
Worth as at such date is not less than $120,000,000.
(c) Subject to the provisions of paragraph 2(f) hereof,
compliance with Section 5(a) of Schedule III of the Agreements is hereby
waived to the extent, and only to the extent, that the ratio of (i) EBIT
for the nine-month period ending June 28, 1996 to (ii) the sum of (A)
Interest Expense for such period plus (B) all dividends on Preferred Stock
paid during such period is less than 1.50 to 1.00, provided that such
ratio is not less than 0.65 to 1.00.
(d) Subject to the provisions of paragraph 2(f) hereof,
compliance with Section 5(a) of Schedule III of the Agreements is hereby
waived to the extent, and only to the extent, that the ratio of (i) EBIT
for the four quarters ending September 27, 1996 to (ii) the sum of (A)
Interest Expense for such period plus (B) all dividends on Preferred Stock
paid during such period is less than 1.50 to 1.00, provided that such
ratio is not less than 0.50 to 1.00.
(e) Subject to the provisions of paragraph 2(f) hereof,
compliance with Section 5(b) of Schedule III of the Agreements is hereby
waived to the extent, and only to the extent, that the ratio of (i) (A)
EBIT for the nine-month period ending June 28, 1996 or (B) EBIT for the
<PAGE>
2
four quarters ending September 27, 1996 to (ii) the sum of (A) Interest
Expense net of interest income for such period plus (B) all dividends on
Preferred Stock paid during such period is less than 2.00 to 1.00,
provided that such ratio is not less than 0.65 to 1.00.
(f) Notwithstanding any of the foregoing, the waivers described
in paragraphs 2(a), (b), (c), (d) and (e) hereof shall only be effective
through and including November 1, 1996, and any Event of Default that
would have existed and been continuing but for the effect of this Waiver
shall be reinstated and shall thereafter continue to constitute an Event
of Default unless further expressly waived in writing in accordance with
the Credit Agreement and the Note Agreements.
(g) Notwithstanding anything in the Credit Agreement to the
contrary, during the period from the date hereof to and including November
1, 1996, no Loans may be made or requested under the Credit Agreement.
During such period, the Commitments thereunder shall only be available for
the issuance of Letters of Credit, subject to all the other provisions of
the Credit Agreement and to the extent available to be issued in
accordance with the Credit Agreement.
3. Effective Date. This Waiver will become effective as of
the date hereof upon its execution by the Agent and the Majority Creditors
and its acknowledgment by the Borrower.
4. Representations and Warranties; No Default. On and as of
the date hereof, and after giving effect to this Waiver, the Borrower
confirms, reaffirms and restates that the representations and warranties
set forth in Section 4 of the Credit Agreement, in the other Loan
Documents (as defined in the Credit Agreement) and in the Note Agreements
are true and correct in all material respects, provided that the
references to the Credit Agreement or the Note Agreements therein shall be
deemed to be references to this Waiver and to the Credit Agreement or the
Note Agreements, as the case may be, as amended by this Waiver.
5. Limited Waiver. Except as expressly waived herein, the
Credit Agreement and each of the Note Agreements shall continue to be, and
shall remain, in full force and effect. This Waiver shall not be deemed
to be a waiver of, or consent to, or a modification or amendment of, any
other term or condition of the Credit Agreement, any other Loan Document,
any of the Note Agreements or any Senior Note or to prejudice any other
right or rights which the Lenders may now have or may have in the future
under or in connection with any thereof or any of the instruments or
agreements referred to therein, as the same may be amended from time to
time.
6. GOVERNING LAW. THIS WAIVER SHALL BE GOVERNED BY, AND
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF
NEW YORK.
7. Counterparts. This Waiver may be executed by the parties
hereto in any number of separate counterparts and all of said counterparts
taken together shall be deemed to constitute one and the same instrument.
<PAGE>
3
IN WITNESS HEREOF, the parties hereto have caused this Waiver to
be duly executed and delivered by their properly and duly authorized
officers as of the day and year first above written.
THE CHASE MANHATTAN BANK,
as Administrative Agent and as a Lender
By: /s/ John T. Zeller
-------------------------
Title: Vice President
THE FIRST NATIONAL BANK OF BOSTON
By: /s/ J. Lee Harper
-------------------------
Title: Vice President
SOCIETE GENERALE
By:
-------------------------
Title: First Vice President
JOHN HANCOCK MUTUAL LIFE INSURANCE
COMPANY
By: /s/ Stephen J. Blewitt
-------------------------
Title: Investment Officer
JOHN HANCOCK LIFE INSURANCE
COMPANY OF AMERICA
By: /s/ Willma J. Davis
-------------------------
Title: Vice President
<PAGE>
4
ALLSTATE LIFE INSURANCE COMPANY
By:
-------------------------
Title:
By:
-------------------------
Title:
THE MUTUAL LIFE INSURANCE COMPANY
OF NEW YORK
By: /s/ William D. Goodwin
-------------------------
Title: Senior Managing Director
MONY LIFE INSURANCE COMPANY OF
AMERICA
By: /s/ William D. Goodwin
-------------------------
Title: Senior Vice President
ACKNOWLEDGED AND AGREED:
IT CORPORATION
By:
-------------------------
Title: Vice President
EXHIBIT 10(ii) 21.
-----------------
CONFORMED COPY
SECOND AMENDMENT TO
CREDIT AGREEMENT,
MASTER COLLATERAL AND INTERCREDITOR AGREEMENT AND
NOTE PURCHASE AGREEMENTS
AMENDMENT AND CONSENT, dated as of October 30, 1996 (the
"Amendment"), to (i) the Credit Agreement, dated as of October 24, 1995,
as amended by Amendment No. 1 to Credit Agreement, dated as of January 5,
1996 (as amended, supplemented or otherwise modified from time to time,
the "Agreement") among IT CORPORATION, a California corporation (the
"Borrower"), the several banks and other financial institutions from time
to time parties thereto (the "Lenders") and The Chase Manhattan Bank
(formerly known as Chemical Bank), as administrative agent for the Lenders
(in such capacity, the "Agent"), (ii) the Master Collateral and
Intercreditor Agreement, dated as of October 24, 1995 (as amended,
supplemented or otherwise modified from time to time, the "Intercreditor
Agreement"), among the Lenders and the holders of the outstanding Senior
Notes (collectively, the "Participating Creditors") and The Chase
Manhattan Bank (formerly known as Chemical Bank), as collateral agent for
the Participating Creditors and (iii) the several Note Purchase
Agreements, each dated as of October 24, 1995, as amended by Amendment No.
1 to Note Purchase Agreements, dated as of January 5, 1996 (as amended,
supplemented or otherwise modified from time to time, collectively, the
"Note Agreements") between the Borrower and the respective Purchasers
party thereto (the Agreement, the Intercreditor Agreement and the Note
Agreements, collectively, the "Agreements").
W I T N E S S E T H :
WHEREAS, the parties hereto wish to amend or waive certain
provisions of the Agreements on the terms set forth herein;
NOW, THEREFORE, in consideration of the premise contained
herein, the parties hereto agree as follows:
1. Defined Terms. Unless otherwise defined herein,
capitalized terms used herein shall have the meanings ascribed to them in
the Agreements as amended hereby.
2. Consent. Notwithstanding anything to the contrary
contained in the Loan Documents (as defined in the Credit Agreement), the
Note Agreements, the Senior Notes or the Intercreditor Agreement, the
parties hereto hereby agree that the Carlyle Transaction shall not
constitute a Change of Control under the Agreements, provided that the
aggregate net cash proceeds received by the Borrower upon consummation of
the Carlyle Transaction is at least $40,000,000.00.
3. Amendment to Section 1.1 of the Credit Agreement
(Definitions). The definition of "Applicable Margin" is hereby amended by
<PAGE>
2
(i) deleting the word "and" before the word "(b)" and substituting
therefor "," and (ii) deleting the clause beginning"; and provided,
further," and substituting therefor the following to read in its entirety:
"(c) in addition, for each day from the Second
Amendment Effective Date to and including June 30, 1997, an
additional 0.75% shall be added to the applicable rate per
annum for any outstanding Alternate Base Rate Loans or
Eurodollar Loans in clauses (a) or (b) above; and
(d) in addition, for each day of each calendar quarter
following the calendar quarter ending June 30, 1997, the
applicable rate set forth below opposite the Leverage Ratio
(in each case calculated as of the last day of the
Borrower's fiscal quarter ending on or about the beginning
of such calendar quarter and based upon the Borrower's
financial statement for such fiscal quarter delivered to the
Lenders pursuant to Section 21 of Schedule III) shall be
added to the applicable rate per annum for any outstanding
Alternate Base Rate Loans or Eurodollar Loans in clauses (a)
or (b) above:
Leverage Ratio
--------------
< 2.99 None
-
3.00 < 3.49 + 0.25%
-
3.50 < 3.99 + 0.50%
-
4.00 < 4.49 + 0.75%
-
4.50 < 4.99 + 1.00%
-
> 5.00 + 1.25%".
-
4. Amendment to Subsection 4.3 of the Credit Agreement
(Purpose of Loans). Subsection 4.3 is hereby amended by:
(i) deleting the word "and" appearing at the end of
clause (iii);
(ii) deleting the period at the end of clause (iv)
thereof and substituting the word "; and" in lieu thereof;
and
(iii) inserting a new clause at the end thereof to read
in its entirety "(v) Investments, subject to the limitations
contained in Section 13 of Schedule II.".
5. Amendment to Schedule I (Uniform Definitions). (a)
Schedule I is hereby amended by adding in the appropriate alphabetical
order the following new definitions:
"'Carlyle 6% Preferred Stock' shall mean the 6%
convertible participating preferred stock issued by the
Parent, $100.00 par value per share, which are convertible
into shares of the Parent's common stock."
<PAGE>
3
"'Carlyle Transaction' shall mean the acquisition of
(i) up to 45,000 shares of Carlyle 6% Preferred Stock (and
the distribution of additional shares of Carlyle 6%
Preferred Stock as a dividend on the Carlyle 6% Preferred
Stock, to be distributed at a rate of 3% for a period not
exceeding one year during the second year after the date of
issue) and (ii) warrants to purchase 5,000,000 shares of
common stock, $1.00 par value per share, of the Parent and
the exercise of such warrants, in each case, by certain
limited partnerships of which TC Group, L.L.C. is the
general partner, pursuant to the Securities Purchase
Agreement (without any material amendments or waivers to the
terms thereof, including, without limitation, the
Certificate of Designation, attached as Exhibit A thereto)."
"'Leverage Ratio' shall mean, on the last day of any
fiscal quarter, the ratio of (i) an amount equal to the
average month-end Total Debt for each month ended in such
fiscal quarter to (ii) EBITDA for the period of four
consecutive fiscal quarters ending on such day."
"'Second Amendment' shall mean the Second Amendment to
the Credit Agreement, the Master Collateral and
Intercreditor Agreement and the Note Purchase Agreements,
dated as of October 30, 1996, by and among the Borrower, the
Agent, the Lenders and the Noteholders."
"'Second Amendment Effective Date' shall mean the date
upon which (i) the Second Amendment is (a) executed by the
Borrower, the Majority Creditors, the Agent and each
Noteholder and (b) acknowledged by the Borrower, the Parent,
IT-Tulsa Holdings, Inc., IT Hanford, Inc., Universal
Professional Insurance Company, Gradient Corporation, Zentox
Corporation, (ii) the Agent receives a non-refundable
amendment fee in the amount equal to $300,000.00 (the
"Amendment Fees") for the ratable benefit of each Lender, in
immediately available funds and (iii) each Noteholder
receives its ratable share (based on such Lender's
percentage of the outstanding principal amount of the Senior
Notes) of a non-refundable fee in the aggregate amount of
$325,000.00 (each, a "Noteholder's Fee") in immediately
available funds."
"'Securities Purchase Agreement' shall mean the
Securities Purchase Agreement, dated as of August 28, 1996,
by and among the Parent and certain limited partnerships of
which TC Group, L.L.C. is the general partner."
(b) The definition of "Capital Expenditures" is hereby amended
by (i) deleting the word "," following the words "and equipment" and
substituting therefor the words ", other than in connection with
acquisitions of assets comprising a business unit or Capital Stock of any
Person, and" and (ii) deleting the clause (c) in its entirety.
(c) The definition of "Consolidated Net Worth" is hereby
amended by deleting it in its entirety and substituting therefor the
following new definition in its entirety:
"shall mean, without duplication, (a) the capital stock (but
excluding treasury stock and capital stock subscribed but
unissued and preferred stock of the Parent or any of its
<PAGE>
4
Subsidiaries redeemable prior to October 31, 2003) and
surplus accounts of the Parent and its Restricted
Subsidiaries appearing on a consolidated balance sheet of
the Parent and its Restricted Subsidiaries prepared in
accordance with GAAP, provided that the investment in
Quanterra represented in such accounts and surplus shall be
included only to the extent of such investment existing at
the Second Amendment Effective Date at all times valued at
its book value (such amount on the Second Amendment
Effective Date being $13,925,000.00) plus the book value of
up to $3,575,000.00 of additional investment in Quanterra,
plus (b) non-cash charges arising from the writing off of
the asset values for deferred taxes and the investment in
Quanterra in an amount no greater than $30,000,000.00,
provided to the extent that the non-cash charges referred to
in this clause (b) are less than $30,000,000.00, any other
non-cash charges in an amount no greater than $5,000,000.00,
in any case taken during the period from the Second
Amendment Effective Date to and including the fiscal year
ending on or before March 31, 1998 minus (c) Restricted
Investments, and minus:
(d)(i) (A) the net book amount of all assets,
after deducting any reserves applicable thereto, which
would be treated as intangibles under GAAP, including,
without limitation, such items as good will,
trademarks, trade names, service marks, brand names,
copyrights, patents and licenses, and rights with
respect to the foregoing, unamortized debt discount and
expense (other than the capitalized expenses related to
the Credit Agreement and the Note Agreements and
amendments and waivers thereto up to and including the
Second Amendment, but not any subsequent amendments,
refinancings or waivers relating thereto),
organizational expenses and the excess of cost of
purchased Subsidiaries over equity in the net assets
thereof at the date of acquisition (collectively,
"Intangible Assets") reflected on the Parent's
consolidated balance sheet up to and including
September 27, 1996, and, (B) either (1) only 50% of any
Intangible Assets acquired after September 27, 1996,
subject to the consummation of the Carlyle Transaction
or (2) 100% of any Intangible Assets acquired after
September 27, 1996 if the Carlyle Transaction is not
consummated;
(ii) any write-up in the book value of any asset
on the books of the Parent or any Restricted Subsidiary
resulting from a revaluation thereof subsequent to the
Closing Date;
(iii) the amounts, if any, at which any shares of
stock of the Parent or any Restricted Subsidiary appear
on the asset side of such balance sheet; and
(iv) all deferred charges (other than deferred
taxes and prepaid expenses).".
(d) The definition of "Guaranty" is hereby amended by inserting
at the end thereof the following sentence in its entirety:
<PAGE>
5
"For clarification purposes, all Debt of a Permitted Joint
Venture guaranteed by the Parent or any of its Restricted
Subsidiaries or which is recourse to the Parent or any of
its Restricted Subsidiaries, as the case may be, shall be a
Guaranty.".
(e) The definition of "Make-Whole Amount" is hereby amended by
deleting the definition of "Remaining Scheduled Payments" thereto in its
entirety and substituting in lieu thereof the following new definition in
its entirety:
"'Remaining Scheduled Payments' means, with respect to
the Called Principal of any Senior Note, all payments of
such Called Principal and interest thereon (assuming for
such purposes that interest (computed on the basis on a 360-
day year of twelve 30-day months) shall be deemed to accrue
at a rate of 8.67% per annum, payable semi-annually on each
April 30 and October 30) that would be due after the
Settlement Date with respect to such Called Principal if no
payment of such Called Principal were made prior to its
scheduled due date, provided that if such Settlement Date is
not a date on which interest payments are due to be made
under the terms of the Senior Notes, then the amount of the
next succeeding scheduled interest payment will be reduced
by the amount of interest accrued to such Settlement Date
and required to be paid on such Settlement Date pursuant to
Section 7 or 10 of the Note Agreements.".
(f) The definition of "Permitted Joint Ventures" is hereby
amended by (i) deleting clause (ii) in its entirety and renumbering the
subsequent clauses accordingly and (ii) deleting the word "$15,000,000"
in clause (iii) thereto and substituting therefor the word "$20,000,000".
(g) The definition of "Senior Notes" is hereby amended by
deleting it in its entirety and substituting in lieu therefor the
following new definition in its entirety:
"'Senior Notes' shall mean $65,000,000 aggregate
principal amount of the Company's Guaranteed Senior Secured
Notes due October 30, 2003 (including any such notes issued
in substitution therefor pursuant to Section 11 of the Note
Agreements or pursuant to the Second Amendment) originally
issued pursuant to the Note Agreements, to be substantially
in the form of the Senior Note set out in Exhibit A to the
Note Agreements, with such changes therefrom, if any, as may
be approved by the Noteholders and the Company.".
6. Amendment to Schedule II (Uniform Representations
and Warranties).
(a) Section 5 is hereby amended by (i) deleting the words
"March 31, 1995" and substituting therefor the words "June 28, 1996" and
(ii) inserting immediately after the words "Exchangeable Preferred Stock"
in clause (c) thereto the words "and the Carlyle 6% Preferred Stock.".
<PAGE>
6
(b) Section 13 is hereby amended by (i) deleting the word "and"
following the words "other existing Debt" and substituting therefor ","
and (ii) deleting the period at the end thereof and substituting therefor
the following new clause in its entirety:
"and, subject to the consummation of the Carlyle
Transaction, to make Investments, provided that with respect
to any Investment made with the proceeds of any Loan (i)
such Investment shall not be made on or before September 30,
1997, (ii) the aggregate amount of Loans used by the Company
for such Investments shall not exceed $20,000,000.00 for any
consecutive four-quarter period, (iii) such Investments
shall not be an acquisition that has not been approved by
the Board of Directors of the Person being acquired, (iv)
such Investments shall not be of an entity organized under
the laws of any jurisdiction other than the United States of
America or any state thereof or Canada, (v) such Investments
(whether pursuant to a single transaction or a series of
related transactions) shall not be made for consideration
greater than $10,000,000.00 unless EBITDA minus capital
expenditures (each as defined under GAAP) for the Person
being acquired shall be positive in the aggregate for no
less than two fiscal years immediately preceding such
purchase, (vi) after giving effect to such Loans, the
Available Commitment of all Lenders is at least $5,000,000
and (vii) Borrowing Base excess on a pro forma basis after
taking into account the inclusion of such assets being
acquired shall be at least $20,000,000.00 until September
30, 1998, and at least $15,000,000.00 thereafter.".
7. Amendment to Schedule III (Uniform Covenants). (a)
Subsection 1(a)(v) is hereby amended by inserting at the end thereof the
following in its entirety:
", and, subject to the consummation of the Carlyle
Transaction, an additional amount of Debt comprised of
unsecured debt incurred or assumed in connection with any
acquisition not prohibited hereunder in an aggregate
principal amount outstanding not to exceed (A)
$10,000,000.00 or (B) from and after the first date on which
the ratio of Total Debt to EBITDA, as calculated pursuant to
clause (viii) hereof, as at the last day of the most recent
fiscal quarter for which financial statements have been
delivered hereunder is less than 3.50:1.00,
$20,000,000.00.".
(b) Section 3 is hereby amended by deleting it in its entirety
and substituting therefor the following in its entirety:
"The Parent will not, as at the end of each fiscal
quarter, permit the Leverage Ratio to be greater than the
ratios specified below for the fiscal quarters ending in the
periods specified below:
Period Ratio
------ -----
Beginning September 28, 1996
through and including March 28, 1997 7.00:1.00
Beginning March 29, 1997
through and including December 26, 1997 6.00:1.00
<PAGE>
7
Beginning December 27, 1997
through and including June 26, 1998 5.00:1.00
Beginning June 27, 1998
through and including December 25, 1998 4.50:1.00
Beginning December 26, 1998
through and including December 31, 1999 4.00:1.00
Thereafter 3.50:1.00".
(c) Section 4 is hereby amended by deleting it in its entirety
and substituting therefor the following new paragraph in its entirety:
"The Parent will not, as at the end of any fiscal
quarter beginning with the fiscal quarter commencing on
September 28, 1996, permit Consolidated Net Worth to be less
than the sum of (a) $112,400,000, plus (b) 50% of the
cumulative Net Income (without reduction for loss during any
fiscal quarter) for all fiscal quarters ending after
September 27, 1996, plus (c) 50% of (i) the net cash
proceeds from the sale or issuance of any of the Parent's
common stock directly or through the conversion of
convertible debt and (ii) any cash proceeds received from
the exercise of any warrants and rights to purchase the
Parent's common stock, plus (d) 60% of the net cash proceeds
from the issuance and sale of any Carlyle 6% Preferred
Stock.".
(d) Section 5 is hereby amended by deleting it in its entirety
and substituting therefor the following in its entirety:
"The Parent will not, as at the end of each fiscal
quarter specified below, permit the ratio of (i) EBIT for
the period specified below, to (ii) an amount equal to (A)
Interest Expense for such period minus any fees paid
pursuant Section 13 of to the Second Amendment amortized or
required to be amortized in the determination of Net Income
for such period, plus (B) all cash dividends on Preferred
Stock paid during such period, including, without
limitation, all cash dividends paid on Carlyle 6% Preferred
Stock during such period, plus (C) on and after March 26,
1999, the current maturities of long term debt, to be less
than the ratios specified below:
Fiscal Quarter Ending Ratio
--------------------- -----
Quarter Ended March 28, 1997 0.75:1.00
Two Quarter Period
Ended June 27, 1997 1.00:1.00
Three Quarter Period
Ended September 26, 1997 1.00:1.00
Four Quarter Period
Ended December 26, 1997 1.25:1.00
Four Quarter Periods
Ended March 27, 1998
and June 26, 1998 1.50:1.00
Four Quarter Period
Ended September 25, 1998 1.75:1.00
<PAGE>
8
Rolling Four Quarter Periods
Ended December 25, 1998
and thereafter 2.00:1.00".
(e) Section 6(b) is hereby amended by inserting immediately
after the word "35%" the clause "(or, in the case of the Carlyle
Transaction, 20%)".
(f) Section 7(g) is hereby amended by (i) deleting the
word "$15,000,000" and substituting therefor the word "$20,000,000" and
(ii) inserting at the end of Section 7(g) the following in its entirety:
", provided that no such Permitted Joint Venture may owe or
incur any Debt with recourse against the Parent or its
Restricted Subsidiaries, as the case may be, nor shall the
Parent or any of its Restricted Subsidiaries guarantee such
Debt of a Permitted Joint Venture, unless such Debt or
guarantee is permitted to be made by Section 1
hereunder.".
(g) Section 7 is hereby amended by (i) deleting the period at
the end of clause (k) thereto and substituting therefor the word "," and
(ii) inserting the following new clause in its entirety at the margin:
", provided that with respect to any Investment pursuant to
this Section 7, (A) the Agent shall have the option to
perform an audit of assets directly or indirectly being
acquired thereby, at the Borrower's expense, prior to the
inclusion in the Borrowing Base of such assets if the value
of such assets is less than 10% of the Borrowing Base for
the immediately preceding month and (B) the Agent shall
perform an audit of assets directly or indirectly being
acquired thereby, at the Borrower's expense, prior to such
assets inclusion in the Borrowing Base if the value of such
assets is (i) equal to or greater than 10% of the Borrowing
Base for any single acquisition or (ii) equal to or greater
than 25% of the Borrowing Base in the aggregate for the
immediately preceding four quarters (it being understood
that the foregoing proviso is not intended to limit or
restrict any other inspection or evaluation rights of the
Agent set forth in the Loan Documents).".
(h) Section 8(c) is hereby amended by (i) deleting the word
"or" appearing before the word "(ii)" and substituting therefor the word
"," and (ii) inserting at the end of Section 8(c) the following new
clause (iii) "or (iii) to enable the Parent to pay dividends on the
Carlyle 6% Preferred Stock, provided that at no time shall the dividend
rate per annum on the Carlyle 6% Preferred Stock exceed 6%".
(i) Section 8 is hereby further amended by:
(i) deleting the word "or" at the end of clause
(d)(ii)(D) thereto;
(ii) deleting the word "." at the end of clause (f)
thereto and substituting therefor the words "; or"; and
<PAGE>
9
(iii) inserting the following new paragraph (g) in its
entirety:
"(g) so long as no Default or Event of Default
shall have occurred and is continuing, the Company may
redeem its capital stock out of the net cash proceeds
of the issuance of any other new capital stock,
provided that the new capital stock being issued is (i)
either pari passu or junior in right to receive
dividends and (ii) has no additional or improved
economic terms than the capital stock being redeemed
and that such redemption and issuance occur within a
reasonable period of time.".
(j) Schedule III is hereby further amended by adding the
following new Section 27 in its entirety:
"Section 27. Use of Proceeds of Senior Notes.
Neither the Parent or any of its Affiliates will, directly
or indirectly, use any of the proceeds of the sale of the
Senior Notes for the purpose, whether immediate, incidently
or ultimate, of buying a "margin stock" or of maintaining,
reducing or retiring any indebtedness originally incurred to
purchase a stock that is currently a "margin stock", or for
any other purpose which might constitute this transaction a
"purpose credit", in each case within the meaning of
Regulation G of the Board of Governors of the Federal
Reserve System (12 C.F.R. 207, as amended) or Regulation U
of such Board (12 C.F.R. 221, as amended), or otherwise take
or permit to be taken any action which would involve a
violation of such Regulation G or Regulation U or of
Regulation T (12 C.F.R. 220, as amended) or Regulation X (12
C.F.R. 224, as amended) or any other regulation of such
Board. No indebtedness being reduced or retired out of the
proceeds of the sale of the Senior Notes was incurred for
the purpose of purchasing or carrying any such "margin
stock", and neither the Company or any of its Affiliates
owns or has any intention of acquiring such "margin
stock".".
8. Limited Waiver. Compliance with Sections 2, 4 and 5 of
Schedule III is hereby waived for the quarters ended June 28, 1996 and
September 27, 1996.
9. Amendment to Section 1 of the Note Agreements. Section 1
of each Note Agreement is hereby amended by deleting it in its entirety
and substituting therefor the following paragraph in its entirety:
"SECTION 1. AUTHORIZATION OF SENIOR NOTES.
The Company will authorize the issue and sale of
$65,000,000 aggregate principal amount of its 8.67%
Guaranteed Senior Secured Notes due October 30, 2003
(including any such notes issued in substitution therefor
pursuant to Section 11 or pursuant to the Second Amendment),
to be substantially in the form of the Senior Note set out
in Exhibit A, with such changes therefrom, if any, as may be
approved by you and the Company. Certain capitalized terms
used in this Agreement are defined in Schedule I; references
<PAGE>
10
to a "Schedule" or an "Exhibit" are, unless otherwise
specified, to a Schedule or an Exhibit attached to this
Agreement.
The Senior Notes will be guaranteed by the Parent and
the Subsidiary Guarantors pursuant to the Guarantees and
will be secured as provided in the Security Documents.".
10. Amendment to Section 8 of the Note Agreements. Section 8
of each Note Agreement is hereby amended by deleting it in its entirety
and substituting therefor the following paragraph in its entirety:
"SECTION 8. COVENANTS OF THE COMPANY
The Company covenants that from the date of this
Agreement through the Closing and thereafter so long as any
of the Senior Notes are outstanding, (a) it will observe and
comply with the "Uniform Covenants" set forth in Schedule
III, which Schedule III is incorporated herein as if set
forth herein in full, and (b) commencing on the Second
Amendment Effective Date, the Company will pay interest on
the unpaid balance of the principal amount of the Senior
Notes outstanding until the unpaid balance shall become due
and payable (whether at stated maturity or at a date fixed
for prepayment or by declaration or otherwise) at the rate
calculated below (the "Rate"), in cash, on each April 30 and
October 30 after the Second Amendment Effective Date, and
with interest on any overdue principal (including any
overdue prepayment of principal) and premium, if any, and
(to the extent permitted by law) on any overdue interest, at
the Rate plus 2.00%, payable semi-annually as aforesaid or,
at the option of the holder of its respective Senior Note,
on demand.
The interest shall be calculated by the Company on a
daily basis (each such day, a "Determination Date") based on
the principal amount of the Senior Notes outstanding on such
Determination Date. Daily interest shall be calculated,
based on actual days elapsed in a 365-day year, at a rate
per annum equal to 9.42% for the period commencing on the
Second Amendment Effective Date to and including June 30,
1997, and for each day of each calendar quarter following
the calendar quarter ending June 30, 1997, at a rate per
annum equal to the sum of (i) 8.67% plus (ii) the applicable
rate set forth below opposite the Leverage Ratio (in each
case calculated as of the last day of the Company's fiscal
quarter ending on or about the beginning of such calendar
quarter and based upon the Company's financial statement for
such fiscal quarter delivered to the Noteholders pursuant to
Section 21 of Schedule III):
Leverage Ratio Rate
-------------- ----
< 2.99 None
-
3.00 < 3.49 0.25%
-
3.50 < 3.99 0.50%
-
<PAGE>
11
4.00 < 4.49 0.75%
-
4.50 < 4.99 1.00%
-
> 5.00 1.25%
-
The Senior Notes are hereby amended to the extent of the
foregoing provisions, and, within 10 Business Days of the
Second Amendment Effective Date, the Company shall issue and
deliver to the Noteholders revised Senior Notes, in form and
substance satisfactory to the holders of the Senior Notes
reflecting the payment of interest specified above and shall
obtain for such notes a Private Placement Number issued by
Standard & Poor's CUSIP Service Bureau (in cooperation with
the Securities Valuation Office of the National Association
of Insurance Commissions). Each such revised Senior Note,
shall be a "Senior Note".".
11. Amendment to the Intercreditor Agreement. The
Intercreditor Agreement is hereby amended by deleting the words "(the
"Senior Notes")" in clause (B) thereto.
12. Representations and Warranties. On and as of the date
hereof, the Borrower hereby represents and warrants that after giving
effect to the waivers and amendments contained herein, no Default or Event
of Default has occurred or is continuing.
13. Fees. The Borrower shall pay (i) to the Agent, a
non-refundable amendment fee in the amount equal to $300,000.00 (the
"Amendment Fee") for the ratable benefit of each Lender, in immediately
available funds and (ii) to each Noteholder, its ratable share (based on
such Noteholder's percentage of the outstanding principal amount of the
Senior Notes) of a non-refundable fee in the aggregate amount of
$325,000.00 (each, a "Noteholder's Fee") in immediately available funds.
14. Effective Date. This Amendment will become effective on
the Second Amendment Effective Date.
15. Continued Effect. Except as expressly amended as provided
for herein, the Agreements shall continue to be, and shall remain, in full
force and effect in accordance with its terms. This Amendment shall be
limited solely for the purposes and to the extent expressly set forth
herein and nothing herein express or implied shall constitute an
amendment, supplement, modification or waiver to or of any other term,
provision or condition of the Agreements.
16. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW
YORK.
<PAGE>
12
17. Counterparts. This Amendment may be executed by the
parties hereto in any number of separate counterparts and all of said
counterparts taken together shall be deemed to constitute one and the same
instrument.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed and delivered by their properly and
duly authorized officers as of the day and year first above written.
IT CORPORATION
By: /s/ Philip H. Ockelmann
-------------------------
Title: VP, Finance & Treasurer
THE CHASE MANHATTAN BANK (formerly
known as Chemical Bank), as
Administrative Agent and as a Lender
By: /s/ John T. Zeller
-------------------------
Title: Vice President
SOCIETE GENERALE
By: /s/ David Brunson
-------------------------
Title: First Vice President
THE FIRST NATIONAL BANK OF BOSTON
By: /s/ J. Lee Harper
-------------------------
Title: Vice President
JOHN HANCOCK MUTUAL LIFE INSURANCE
COMPANY
By: /s/ Stephen J. Blewitt
-------------------------
Title: Investment Officer
<PAGE>
JOHN HANCOCK LIFE INSURANCE
COMPANY OF AMERICA
By: /s/ Willma J. Davis
-------------------------
Title: Vice President
ALLSTATE LIFE INSURANCE COMPANY
By: /s/ Charles D. Mires
-------------------------
Title: Vice President
By: /s/ Ronald C. Mendel
-------------------------
Title: Senior Investment Manager
THE MUTUAL LIFE INSURANCE COMPANY
OF NEW YORK
By: /s/ Suzanne E. Walton
-------------------------
Title: Managing Director
MONY LIFE INSURANCE COMPANY OF
AMERICA
By: /s/ Suzanne E. Walton
-------------------------
Title: Authorized Agent
<PAGE>
The undersigned hereby acknowledge and affirm their respective obligations
pursuant to the Security Agreements and the Guarantees as of the day and
year first above written.
INTERNATIONAL TECHNOLOGY
CORPORATION
By: /s/ Philip H. Ockelmann
-------------------------
Title: VP, Finance & Treasurer
IT CORPORATION
By: /s/ Philip H. Ockelmann
-------------------------
Title: VP, Finance & Treasurer
IT-TULSA HOLDINGS, INC.
By: /s/ Philip H. Ockelmann
-------------------------
Title: Treasurer
IT HANFORD, INC.
By: /s/ Philip H. Ockelmann
-------------------------
Title: Assistant Treasurer
UNIVERSAL PROFESSIONAL INSURANCE
COMPANY
By: /s/ Philip H. Ockelmann
-------------------------
Title: Treasurer
GRADIENT CORPORATION
By: /s/ Philip H. Ockelmann
-------------------------
Title: Assistant Treasurer
<PAGE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM the Company's
Condensed Consolidated Balance Sheet as of September 27, 1996, and its
Condensed Consolidated Statement of Operations for the Second Fiscal Quarter
Ended September 27, 1996, which were filed with the SEC on November 8, 1996 on
Form 10-Q for the quarter ended September 27, 1996 (commission file number
1-9037) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> QTR-2
<FISCAL-YEAR-END> MAR-28-1997
<PERIOD-END> SEP-27-1996
<CASH> 29976
<SECURITIES> 0
<RECEIVABLES> 110078
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 156597
<PP&E> 153406
<DEPRECIATION> 105604
<TOTAL-ASSETS> 302455
<CURRENT-LIABILITIES> 84713
<BONDS> 65392
<COMMON> 36252
0
2400
<OTHER-SE> 89823
<TOTAL-LIABILITY-AND-EQUITY> 302455
<SALES> 0
<TOTAL-REVENUES> 92490
<CGS> 0
<TOTAL-COSTS> 91984
<OTHER-EXPENSES> 8403
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1303
<INCOME-PRETAX> (9200)
<INCOME-TAX> (310)
<INCOME-CONTINUING> (8890)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8890)
<EPS-PRIMARY> (.27)
<EPS-DILUTED> 0
</TABLE>
