<PAGE>
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF
1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[X] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to
(S)240.14a-11(c) or (S)240.14a-12
INTERNATIONAL TECHNOLOGY CORPORATION
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
(NAME OF PERSON(S) FILING PROXY STATEMENT, IF OTHER THAN THE REGISTRANT)
Payment of Filing Fee (Check the appropriate box):
[X] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
[_] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
Notes:
<PAGE>
INTERNATIONAL TECHNOLOGY CORPORATION
23456 HAWTHORNE BOULEVARD
TORRANCE, CALIFORNIA 90505
NOTICE OF 1996 ANNUAL MEETING OF STOCKHOLDERS
The 1996 Annual Meeting of Stockholders (the "Annual Meeting") of
International Technology Corporation (the "Company") will be held at the
Holiday Inn Crowne Plaza, located at 300 North Harbor Drive, Redondo Beach,
California 90277-2552, on Wednesday, November 6, 1996, at 9:00 a.m. Pacific
Standard time, for the following purposes:
Proposal 1: To consider and vote upon the issuance and sale of (i) 45,000
shares of Cumulative Convertible Participating Preferred Stock,
par value $100 per share, of the Company ("Convertible Preferred
Stock") and (ii) warrants to purchase 5,000,000 shares of Common
Stock, $1.00 par value per share, of the Company to certain
investors affiliated with The Carlyle Group (collectively,
"Carlyle"), at an aggregate price of $45,000,000 (the
"Investment") on the terms and subject to the conditions set
forth in that certain Securities Purchase Agreement, dated
August 28, 1996, between the Company and Carlyle; and a related
amendment to the Company's Certificate of Incorporation (the
"Certificate") to (a) effect a one-for-four reverse stock split
(the "Reverse Stock Split") pursuant to which each four shares
of Common Stock will be exchanged for one share of Common Stock
(except as otherwise indicated, all share and per share
information in this Proxy Statement is presented without giving
effect to the Reverse Stock Split) and (b) reduce the par value
of the Company's Common Stock from $1.00 per share to $.01 per
share;
Proposal 2: To elect three directors to hold office until the 1999 Annual
Meeting of Stockholders and until their successors are elected
and qualified;
Proposal 3: To consider and vote upon the approval of the Company's 1996
Stock Incentive Plan;
Proposal 4: To consider and vote upon amendments to the Certificate to: (i)
eliminate the provisions of the Certificate that provide for
cumulative voting with respect to the election of directors; and
(ii) eliminate the provisions of the Certificate that provide
for a classified board of directors; and
To transact such other business as may properly come before the
Annual Meeting.
Proposal 4 will not be implemented unless Proposal 1 is approved.
Holders of record of the Company's Common Stock at the close of business on
September 27, 1996 are entitled to notice of and to vote at the Annual Meeting
and at any adjournment(s) or postponement(s) thereof. A list of stockholders
entitled to vote at the Annual Meeting will be open to examination by any
stockholder for any purpose germane to the Annual Meeting, during ordinary
business hours, from October 27, 1996 until November 6, 1996 at the Company's
executive offices located at 23456 Hawthorne Boulevard, Torrance, California.
Each stockholder is requested to sign and date the enclosed proxy card and
to return it without delay in the enclosed postage-paid envelope. Any
stockholder present at the Annual Meeting may withdraw the proxy and vote
personally on each matter brought before the Annual Meeting.
By Order of the Board of Directors,
_____________________________________
Secretary
October , 1996
Torrance, California
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY OF MATTERS TO BE CONSIDERED...................................... 2
RECOMMENDATION OF THE BOARD OF DIRECTORS OF THE COMPANY.................. 2
PROPOSAL 1--PROPOSED CARLYLE INVESTMENT.................................. 3
Summary of Proposed Carlyle Investment................................. 3
Capitalization......................................................... 6
Price Range for the Company's Common Stock and Related Stockholder
Matters............................................................... 7
Use of Proceeds........................................................ 7
Events Leading to the Carlyle Investment............................... 7
Board of Directors' Recommendations.................................... 8
Opinion of Financial Advisor........................................... 10
Dissenters' Rights and Preemptive Rights............................... 13
Impact of the Transaction on the Company and Existing Stockholders;
Certain Considerations................................................ 13
The Securities Purchase Agreement...................................... 15
Interest of Certain Persons in the Investment.......................... 25
Reverse Stock Split and Reduction of Par Value......................... 25
Vote Required for Approval of the Investment Proposal.................. 27
PROPOSAL 2--ELECTION OF DIRECTORS........................................ 28
Board of Directors following Investment................................ 28
Election of Directors at the Annual Meeting............................ 29
Background of the Nominees, Proposed Convertible Preferred Stock
Directors and Current Directors....................................... 29
Cumulative Voting and Nominations...................................... 31
Meetings of the Board of Directors and Committees...................... 31
Compensation of Directors.............................................. 32
PROPOSAL 3--APPROVAL OF THE 1996 STOCK INCENTIVE PLAN.................... 34
Objectives of the Plan................................................. 34
1996 Stock Incentive Plan.............................................. 34
Awards To Employees, Directors and Consultants......................... 35
Non-employee Director Options.......................................... 35
Plan Duration.......................................................... 35
Amendments............................................................. 36
Tax Treatment.......................................................... 36
Board Recommendation................................................... 37
PROPOSAL 4--APPROVAL OF THE ELIMINATION OF CUMULATIVE VOTING AND
ELIMINATION OF CLASSIFIED BOARD OF DIRECTORS PROPOSAL................... 38
Proposed Amendments to Certificate of Incorporation.................... 38
Further Information.................................................... 38
Vote Required for Approval of the Elimination of Cumulative Voting and
Elimination of Classified Board of Directors Proposal................. 39
BENEFICIAL OWNERSHIP OF SHARES........................................... 40
EXECUTIVE COMPENSATION................................................... 42
Summary Compensation Table............................................. 42
Stock Option Grants In Last Fiscal Year................................ 44
Aggregated Option Exercises During Last Fiscal Year And Option Values
At End Of Last Fiscal Year............................................ 44
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION........... 45
Compensation Program Objectives........................................ 45
Base Salary............................................................ 45
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Total Annual Cash Compensation (base salary plus bonus)............... 46
The Incentive Compensation "Bonus" Plan............................... 46
Long Term Incentive Compensation Program.............................. 47
Total Direct Compensation (total annual cash compensation plus the
annualized value of long-term incentives)............................ 47
Section 162(m) of the Internal Revenue Code........................... 48
Compensation of Chief Executive Officer............................... 48
STOCK PRICE PERFORMANCE GRAPH........................................... 49
CERTAIN TRANSACTIONS.................................................... 50
INDEPENDENT AUDITOR..................................................... 53
STOCKHOLDER PROPOSALS................................................... 53
ANNUAL REPORT........................................................... 54
FORM 10-K ANNUAL REPORT................................................. 54
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE......................... 54
GENERAL AND OTHER MATTERS............................................... 54
APPENDICES.............................................................. 55
APPENDIX I--DLJ FAIRNESS OPINION........................................ I-1
APPENDIX II--QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED
JUNE 28, 1996.......................................................... II-1
APPENDIX III--CERTIFICATE OF DESIGNATIONS OF CONVERTIBLE PREFERRED
STOCK.................................................................. III-1
APPENDIX IV--AMENDMENT TO CERTIFICATE OF INCORPORATION EFFECTING A ONE-
FOR-FOUR REVERSE STOCK SPLIT AND REDUCING THE PAR VALUE OF SHARES OF
COMMON STOCK........................................................... IV-1
APPENDIX V--AMENDMENT TO CERTIFICATE OF INCORPORATION ELIMINATING
CUMULATIVE VOTING AND AMENDMENT TO CERTIFICATE OF INCORPORATION
ELIMINATING THE CLASSIFIED BOARD OF DIRECTORS.......................... V-1
APPENDIX VI--1996 STOCK INCENTIVE PLAN.................................. VI-1
</TABLE>
ii
<PAGE>
INTERNATIONAL TECHNOLOGY CORPORATION
23456 HAWTHORNE BOULEVARD
TORRANCE, CALIFORNIA 90505
----------------
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
NOVEMBER 6, 1996
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of International Technology Corporation, a
Delaware corporation (the "Company"), for use at the 1996 Annual Meeting of
Stockholders of the Company to be held at 9:00 a.m. Pacific Standard time, on
Wednesday, November 6, 1996, at the Holiday Inn Crowne Plaza, located at 300
North Harbor Drive, Redondo Beach, California 90277-2552, and at any
adjournment(s) or postponement(s) thereof (the "Annual Meeting"). It is
anticipated that this Proxy Statement, together with the proxy and the 1996
Annual Report to Stockholders, will first be mailed to the Company's
stockholders on or about October 16, 1996.
VOTING AT THE MEETING
The close of business on September 27, 1996 has been fixed as the record
date for determination of holders of the Company's Common Stock, $1.00 par
value (the "Common Stock"), entitled to notice of and to vote at the Annual
Meeting. On that date, there were outstanding and entitled to vote shares
of Common Stock. The presence, either in person or by proxy, of persons
entitled to cast a majority of such votes constitutes a quorum for the
transaction of business at the Annual Meeting.
Stockholders are entitled to one vote per share on all matters submitted for
consideration at the Annual Meeting, subject to cumulative voting rights in
the election of directors (see "Election of Directors"). With regard to the
election of directors, votes may be cast in favor of or withheld from
nominees. Votes that are withheld will be excluded entirely from the vote and
will have no effect. Abstentions may be specified on all proposals other than
the election of directors. Abstentions and broker non-votes on returned
proxies are counted as shares present in the determination of whether the
shares of stock represented at the Annual Meeting constitute a quorum. Each
proposal is tabulated separately. Abstentions are counted in tabulations of
the votes cast on proposals presented to the stockholders, whereas broker non-
votes are not counted for purposes of determining whether a proposal has been
approved.
A person giving the enclosed proxy has the power to revoke it at any time
before it is exercised by (i) attending the Annual Meeting and voting in
person, (ii) duly executing and delivering a proxy for the Annual Meeting
bearing a later date, or (iii) delivering written notice of revocation to the
Secretary of the Company prior to use of the enclosed proxy at the Annual
Meeting.
1
<PAGE>
SUMMARY OF MATTERS TO BE CONSIDERED
The following is a summary of the proposals contained in this Proxy
Statement. The summary is not intended to be complete and is qualified in its
entirety by the more detailed information appearing elsewhere in this Proxy
Statement and the Appendices hereto. Stockholders are urged to read this Proxy
Statement and the Appendices to this Proxy Statement in its and their
entirety.
. Proposal 1. Carlyle Investment. Stockholders are being asked to consider and
approve a cash investment of $45,000,000 in the Company by certain investors
affiliated with The Carlyle Group (collectively, "Carlyle"). In
consideration of its investment, Carlyle will receive 45,000 shares of newly
issued Cumulative Convertible Participating Preferred Stock, par value $100
per share (the "Convertible Preferred Stock"), and warrants (the "Warrants")
to purchase up to 5,000,000 shares of the Company's Common Stock at a price
of $3.00 per share. Initially, the holders of this Convertible Preferred
Stock will own approximately 38% of the voting power of the Company (42%
assuming exercise of the Warrants). Carlyle will also have the right to
elect a majority of the Company's Board of Directors until the fifth
anniversary of the closing of the Investment. Information relating to the
conversion, redemption and dividends with respect to the Convertible
Preferred Stock is set forth below under "Proposal 1--Proposed Carlyle
Investment." To accommodate the Carlyle Investment, the Company's
Certificate of Incorporation (the "Certificate") will be amended to effect a
one-for-four reverse stock split (the "Reverse Stock Split") pursuant to
which each four shares of Common Stock will be exchanged for one share of
Common Stock and to reduce the par value of the shares of Common Stock from
$1.00 per share to $.01 per share. Approval of a majority of the outstanding
shares of Common Stock will be required for this proposal.
. Proposal 2. Election of Directors. At the Annual Meeting, Stockholders will
elect three directors to hold office until the 1999 Annual Meeting of
Stockholders and until their successors are elected and qualified. If the
Investment is approved, the Board will initially consist of seven directors
and Carlyle will have the right to designate a majority of the Board (four
of seven directors) for a period of five years from the closing of the
Investment. All of the directors other than Anthony J. DeLuca, E. Martin
Gibson and James C. McGill, have advised the Company that they will resign
from the Board of Directors, effective upon the consummation of the
Investment.
. Proposal 3. 1996 Stock Incentive Plan. Stockholders are being asked to
consider and approve the 1996 Stock Incentive Plan in order to allow the
Company to attract, motivate and retain qualified professionals and
employees with stock-based incentives. Authority to grant new awards under
the Company's prior stock incentive plan, the 1991 Stock Incentive Plan (the
"1991 Plan"), expired as of March 31, 1996. Approval of a majority of the
outstanding shares of Common Stock will be required for this proposal.
. Proposal 4. Election of Directors for Annual Terms and Deletion of
Cumulative Voting. Stockholders are being asked to consider and approve an
amendment to the Certificate to delete the provision related to a classified
board of directors, and an amendment to the Certificate to remove the
provisions related to cumulative voting for directors. Approval of two-
thirds of the outstanding shares will be required for this proposal, which
will be implemented only if the Carlyle Investment is completed.
. Other Business. In addition to the foregoing, stockholders will be asked to
transact such other business as may properly come before the Annual Meeting
and any postponement(s) or adjournment(s) thereof.
RECOMMENDATION OF THE BOARD OF DIRECTORS OF THE COMPANY
THE BOARD OF DIRECTORS OF THE COMPANY HAS UNANIMOUSLY APPROVED EACH OF THE
PROPOSALS AND UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE
APPROVAL OF EACH OF THE INVESTMENT, THE ELECTION OF DIRECTORS, THE 1996 STOCK
INCENTIVE PLAN, AND THE ELIMINATION OF CUMULATIVE VOTING AND THE ELIMINATION
OF THE CLASSIFIED BOARD OF DIRECTORS.
2
<PAGE>
PROPOSAL 1
Proposed Carlyle Investment
SUMMARY OF PROPOSED CARLYLE INVESTMENT
The following is a brief summary of the main provisions of the proposed
Investment. This summary is not intended to be complete and is qualified in
its entirety by the more detailed information appearing elsewhere in this
Proxy Statement and the Appendices hereto.
Overview. This proxy statement relates to a proposal for significant
investment (referred to herein as the "Carlyle Investment" or "Investment") in
the Company by certain investors affiliated with The Carlyle Group
(collectively, "Carlyle") which management considers critical to the Company's
ability to build profitability and shareholder values. The Carlyle Investment
will provide significant funds and operating flexibility to enable the Company
to take advantage of opportunities for expansion and diversification of its
business through the acquisition of other companies in the environmental
consulting, engineering and remediation industry in order to create long-term
value for its stockholders. As of June 28, 1996, the Company was unable to
comply with certain financial covenants in its $65,000,000 senior secured
notes and $60,000,000 bank line of credit. The Company has received temporary
waivers of such covenants which have now been extended through October 4,
1996. Management believes that the Carlyle Investment will enhance its ability
to negotiate amendments to the foregoing credit agreements which may enable it
to avoid future covenant defaults and provide enhanced flexibility in its
operations. The Carlyle Investment will also provide additional liquidity
which will help the Company to avert future severe liquidity constraints in
the event the recovery of the Company's business from recent periods does not
develop as the Company has anticipated. If this proposal is approved, Carlyle
will make a cash investment of $45,000,000 in the Company in exchange for
shares of newly issued Cumulative Convertible Participating Preferred Stock,
par value $100 per share (the "Convertible Preferred Stock"), and warrants
(the "Warrants") to purchase 5,000,000 additional shares of Common Stock, par
value $1.00 per share, of the Company (the "Common Stock"). Initially, the
holders of the Convertible Preferred Stock will own approximately 38% of the
voting power of the Company (42% assuming exercise of the Warrants).
The initial conversion price of the Convertible Preferred Stock will be
$2.00 per share and the initial exercise price of the Warrants will be $3.00
per share. The conversion price and exercise price could be reduced to as low
as $1.45 and $2.18, respectively, if all shares of the Company's existing 7%
Cumulative Convertible Exchangeable Preferred Stock (the "7% Preferred Stock")
were converted into Common Stock at an assumed special conversion price of
$3.17. The special conversion price will be in effect for a period of 45 days
following notice to holders after completion of the Investment, with the
actual special conversion price to be the higher of $3.17 or the market price
of the Common Stock at the beginning of such period. In such event, the number
of shares of Common Stock issuable upon conversion of the Convertible
Preferred Stock could be as much as 31,929,843. See "Impact of the Transaction
on the Company and Existing Stockholders; Certain Considerations--Special
Conversion Price of 7% Preferred Stock."
The Carlyle Group. The Carlyle Group is a Washington D.C. based private
merchant bank that has sponsored more than $5 billion of mergers, acquisitions
and other corporate investments and has made numerous successful investments.
The Company believes that association with Carlyle as a major investor in the
Company will enhance the Company's credibility and standing in its industry,
and will provide the Company's stockholders the opportunity to benefit from
Carlyle's sponsorship, support and financial strength. Most importantly, the
Company's management believes that Carlyle's interests will be closely aligned
with the interests of the Company's public stockholders.
Dividend Rights and Conversion. The Convertible Preferred Stock will be
entitled to cumulative annual dividends. No dividends will be payable in the
first year. Thereafter, dividends will be payable quarterly in kind for one
year at the rate of 3% per annum and in cash thereafter at the rate of 6% per
annum. In addition, the Convertible Preferred Stock will have the right to
participate in any dividends paid with respect to the Common Stock, on the
basis of the number of shares of Common Stock into which it may be converted,
as described below.
3
<PAGE>
Holders of the Convertible Preferred Stock will have the right, at their
option at any time, to convert such shares of Convertible Preferred Stock into
shares of Common Stock at an initial conversion price of $2.00 per share
(which is approximately equal to trading prices for the Company's Common Stock
on the New York Stock Exchange (the "NYSE") prior to announcement of the
Investment). The conversion price of the Convertible Preferred Stock (a) could
be reduced by reason of the conversion of shares of the 7% Preferred Stock at
a special conversion price or as a result of certain other anti-dilution
provisions described under "The Securities Purchase Agreement--Description of
Convertible Preferred Stock," and (b) will be reduced to one-half of the then-
current conversion price per share after the eighth anniversary of the closing
of the Investment if the Convertible Preferred Stock has not earlier been
redeemed or converted. The Convertible Preferred Stock will be entitled to a
liquidation preference equal to $1,000 per share.
Convertible Preferred Stock Voting Rights. For five years from the
consummation of the Investment (the "Five-Year Period"), holders of the
Convertible Preferred Stock will be entitled to elect a majority of the
Company's Board of Directors, provided that Carlyle continues to own at least
20% of the voting power of the Company. The Company's Board will consist of an
odd number of directors and initially will consist of seven directors, of whom
four will be elected by the Convertible Preferred Stock and remaining three
will be elected by the Common Stock. Initially, at least two of the directors
elected by the holders of the Common Stock will be persons who have no
employment or other relationship with the Company or Carlyle, other than their
positions as directors of the Company. During the Five-Year Period, holders of
the Convertible Preferred Stock will not participate in elections of the
remaining directors ("Non-Preferred Stock Directors") and those directors
elected by the holders of the Convertible Preferred Stock will not have the
right to vote on the election of any director to fill a vacancy among the Non-
Preferred Stock Directors. At the end of the Five-Year Period, provided that
Carlyle continues to own at least 20% of the voting power of the Company,
holders of the Convertible Preferred Stock will be entitled to elect the
largest number of directors which is a minority of the directors of the
Company and to vote with the Common Stock (as a single class) on the election
of the remaining directors. Additionally, the holders of the Convertible
Preferred Stock, provided they still have the right to elect at least a
minority of the directors, will have the right (voting as a class with holders
of the 7% Preferred Stock and any other parity stock) to elect two directors
to the Board in the event the Company shall fail to make payment of dividends
on the Convertible Preferred Stock for six dividend periods.
In addition, regardless of the aggregate amount of voting power they own,
holders of the Convertible Preferred Stock will always have the right (i) to
vote with the Common Stock (as a single class) on all matters other than the
election of directors, with the Convertible Preferred Stock having the number
of votes equal to the number of shares of Common Stock into which it might be
converted and (ii) voting as a separate class, to approve certain major
corporate transactions. Additional information about the Convertible Preferred
Stock voting rights is discussed below under "--The Securities Purchase
Agreement--Description of Convertible Preferred Stock--Voting Rights."
Special Provisions for the Protection of Public Stockholders. The
transaction documents contain provisions for the protection of those
stockholders not affiliated with Carlyle, including: (i) a requirement that
actions in connection with the Company's rights under the Carlyle agreements
(such as any claims for indemnity) shall be determined by a majority of the
Non-Preferred Stock Directors; (ii) a similar requirement for approval by a
majority of the Non-Preferred Stock Directors of certain determinations in
connection with the anti-dilution provisions of the Convertible Preferred
Stock and Warrants; (iii) a requirement that transactions or contracts between
the Company and Carlyle (or its affiliates) must be approved by a majority of
the Non-Preferred Stock Directors; (iv) a requirement for approval by a
majority of the Non-Preferred Stock Directors for any acquisition of
additional shares of capital stock of the Company by Carlyle or its affiliates
if such acquisition would result in Carlyle and its affiliates holding 75% or
more of the general voting power of the Company; and (v) an additional
requirement for approval by holders of a majority of the Company's Common
Stock, not including Carlyle, for any "going private" transaction within the
meaning of SEC Rule 13e-3 under the Exchange Act.
Redemption. The Company will be entitled, at its option (as determined by a
majority of the Non-Preferred Stock Directors), to redeem all of the
Convertible Preferred Stock at its liquidation preference of $1,000 per share
plus accumulated and unpaid dividends on or after the seventh anniversary of
the closing date of the Investment.
4
<PAGE>
Registration Rights. Carlyle will have piggyback and demand registration
rights with respect to the Common Stock issuable upon conversion of the
Convertible Preferred Stock and/or exercise of the Warrants.
Reverse Stock Split and Reduction in Par Value. In order to enable the
Company to reserve the appropriate number of shares of Common Stock for
issuance pursuant to the Investment while retaining a sufficient number of
shares for other corporate purposes, to allow for the conversion of the
Convertible Preferred Stock and exercise of the Warrants, and to enhance the
liquidity of the Common Stock it has been proposed that the Company's
Certificate of Incorporation be amended to effect a one-for-four reverse stock
split pursuant to which each four shares of Common Stock will be exchanged for
one share of Common Stock and to reduce the par value from $1.00 to $.01 per
share. If all shares were issued that are potentially subject to issuance by
reason of the Investment, exercise of all outstanding stock options,
conversion of outstanding convertible securities and the proposed 1996 Stock
Incentive Plan, the total number of shares outstanding would be 100,007,321.
After giving effect to the proposed Reverse Stock Split, such number would be
25,001,830. Except as otherwise indicated, all share and per share information
in this Proxy Statement is presented without giving effect to the Reverse
Stock Split. As of June 28, 1996, the Company had outstanding 36,601,778
shares of Common Stock; 6,548,700 additional shares are reserved for issuance
upon the exercise of outstanding options and 10,273,920 shares are reserved
for issuance upon conversion of the 7% Preferred Stock. As described under "--
Special Conversion Price of Outstanding 7% Preferred Stock," the number of
shares required for issuance upon conversion of the 7% Preferred Stock could
be increased to 18,927,000 by reason of the Investment. 23,175,000 shares will
be required for conversion of the Convertible Preferred Stock (including
shares issuable as in-kind dividends), 5,000,000 shares for issuance upon
exercise of the Warrants and 1,000,000 shares for issuance pursuant to the
proposed 1996 Stock Incentive Plan. As described under "--Special Conversion
Price of Outstanding 7% Preferred Stock," the number of shares of Common Stock
issuable upon conversion of the Convertible Preferred Stock could be increased
to as much as 31,929,843 if all shares of 7% Preferred Stock were converted to
Common Stock at the special conversion price.
This Amendment will not be implemented if the Investment is not completed.
5
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at June 28,
1996 and as adjusted to give effect to the Investment, the addition of the
estimated net proceeds therefrom to cash (see "Use of Proceeds") and the
reclassification of $65,000,000 of 8.67% Senior Secured Notes from short-term
debt to long-term debt (assuming certain modifications are made to the
Company's credit agreements). For additional financial information about the
Company please refer to the Company's 1996 Annual Report (enclosed with this
Proxy Statement and incorporated herein by reference) and its Quarterly Report
on Form 10-Q for the quarter ended June 28, 1996, attached as Appendix II
hereto and incorporated herein by reference.
<TABLE>
<CAPTION>
JUNE 28, 1996
---------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash.................................................... $ 25,104 $ 66,104(1)
======== ========
Short-term debt, including current portion of long term
debt:
8.67% Senior Secured Notes(2)......................... $ 65,000 $ --
Other................................................. 259 259
-------- --------
Total short-term debt, including current portion of
long-term debt..................................... $ 65,259 $ 259
======== ========
Long-term debt:
8.67% Senior Secured Notes due 2003(2)................ $ -- $ 65,000
Other................................................. 392 392
-------- --------
Total long-term debt................................ 392 65,392
-------- --------
Stockholders' equity:
Preferred stock, $100 par value, 180,000 shares autho-
rized:
7% Cumulative Convertible Exchangeable Preferred
Stock, $100 par value; 24,000 shares issued and
outstanding......................................... 2,400 2,400
Cumulative Convertible Preferred Stock, $100 par
value; 45,000 shares to be issued................... -- 4,500
Common stock, $1.00 par value; 100,000,000 shares au-
thorized:
36,601,778 shares issued and outstanding(3).......... 36,602 36,602
Treasury stock, at cost (27,811 shares)................ (84) (84)
Additional paid-in capital............................. 170,069 206,569
Deficit................................................ (70,598) (70,598)
-------- --------
Total stockholders' equity.......................... 138,389 179,389
-------- --------
Total capitalization.................................... $138,781 $244,781
======== ========
</TABLE>
- - - --------
(1) Includes $45,000,000 of proceeds from the Carlyle Investment less an
estimated $4,000,000 of related offering costs.
(2) 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
through August 1996 (which was later extended through October 4, 1996) of
certain covenants in its lending arrangements which allowed it to
maintain compliance with those arrangements as of the end of the first
quarter of fiscal year 1997. Due to the short-term nature of the waiver,
the Company's $65,000,000 senior secured notes, which otherwise would
have been classified as long-term, were classified as current in the June
28, 1996 consolidated balance sheet. The Company is negotiating an
amendment to its lending arrangement in conjunction with the Carlyle
transaction which it expects will allow such debt to be classified as
long-term upon completion of the Investment. Note: this paragraph will be
updated to reflect the status of discussions with the lenders which will
commence in September.
(3) Does not include approximately 6,548,700 shares of Common Stock issuable
upon exercise of outstanding stock options under the Company's stock
incentive plans or 10,273,920 shares reserved for issuance upon conversion
of the 7% Preferred Stock.
6
<PAGE>
PRICE RANGE FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is listed on the NYSE and Pacific Stock Exchange
under the symbol ITX. The following table sets forth the high and low sale
prices of the Common Stock, as reported by the NYSE for the periods indicated.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
------------- ------ -----
<S> <C> <C>
June 30, 1994............................................... $3 1/4 $ 2
September 30, 1994.......................................... 3 7/8 2 3/8
December 31, 1994........................................... 4 1/2 2 3/4
March 31, 1995.............................................. 3 1/4 2 1/4
June 30, 1995............................................... 3 3/8 2 3/8
September 29, 1995.......................................... 3 7/8 2 3/4
December 29, 1995........................................... 3 3/8 2 1/4
March 29, 1996.............................................. 2 3/4 2
June 28, 1996............................................... 2 3/4 2
September 27, 1996 (through September 6, 1996).............. 2 7/8 1 7/8
</TABLE>
On September 6, 1996, the closing sale price of the Common Stock on the NYSE
was $2 7/8 per share. On that date, there were 2,128 stockholders of record.
The high and low sales price of the Common Stock on the NYSE on August 28,
1996, the date preceding the public announcement of the proposed Investment
was $2 and $1 7/8, respectively.
The Company has not paid a cash dividend on its Common Stock for the three
years ended March 29, 1996. The Company has no present intention to pay cash
dividends on its Common Stock for the foreseeable future in order to retain
all earnings for investment in the Company's business. The Company's credit
agreements prohibit cash dividends on Common Stock.
USE OF PROCEEDS
The net proceeds to the Company from the Carlyle Investment are estimated to
be approximately $41,000,000, after the deduction of the expenses of the
Investment transactions, which are expected to total approximately $4,000,000.
Such proceeds will be used for acquisitions, working capital and other
corporate purposes.
EVENTS LEADING TO THE CARLYLE INVESTMENT
In light of the Company's stock performance in recent years, and continuing
difficult operating conditions in its industry (as noted in the Company's
Quarterly Report on Form 10-Q for the quarter ended June 28, 1996, included as
Appendix II to this Proxy Statement), on February 6, 1996 the Company
announced that it had retained Donaldson, Lufkin & Jenrette Securities
Corporation ("DLJ") and The Environmental Financial Consulting Group ("EFCG")
to assist it in exploring strategic alternatives. Among the Company's
important objectives was to take advantage of opportunities for consolidation
in the current environmental consulting, engineering and remediation industry.
The Company announced that all opportunities would be actively explored,
including mergers, acquisitions and strategic and financial alliances.
From February through May 1996, the Company's representatives communicated
with 96 corporations and financial investors regarding their interest in a
potential transaction. Of the 96 persons contacted, 18 entered into a
confidentiality agreement and were furnished non-public information concerning
the Company. The Company's representatives had numerous discussions with these
18 persons and by mid May it appeared that only four had a possible interest
in proceeding with a transaction. Following a presentation by DLJ and EFCG of
the strategic review process undertaken and communications to date, on May 15
the Board of Directors authorized DLJ to seek preliminary, non-binding
indications of interest from the remaining interested parties for
consideration by the Board of Directors at a meeting on June 27, 1996.
7
<PAGE>
At the June 27 Board of Directors meeting, Carlyle was the only party to
submit such an indication of interest. Among the principal reasons given by
other parties for their decision not to proceed were the following:
(i) perceived risks of further negative developments in the environmental
consulting, engineering and remediation industry;
(ii) the Company's material exposure to environmental liabilities
relating to its discontinued operations;
(iii) the Company's significant current and future cash requirements;
(iv) heavy dependence by the Company on federal government contracts;
(v) the recent decline in the Company's operating performance and
operating losses;
(vi) the availability of alternative acquisition opportunities in the
environmental consulting, engineering and remediation industry; and
(vii) risks associated with contractor liability issues in the
environmental consulting, engineering and remediation industry.
Following a complete review of the process which had been undertaken to
date, the Board of Directors authorized management, with the assistance of
DLJ, to enter into negotiations with Carlyle to establish specific terms for a
potential Carlyle transaction. Between June 28 and July 19, 1996, there were
extensive discussions and negotiations concerning the Carlyle proposal. The
Company was represented in these, and subsequent, discussions and negotiations
by its Chairman, E. Martin Gibson, its President and Acting Chief Executive
Officer, Anthony J. DeLuca (who was appointed to such position following the
resignation of Robert B. Sheh as of July 1, 1996), representatives of DLJ and
outside legal counsel.
A meeting of the Board of Directors was held July 22, 1996, at which a
report was made on the status of negotiations and a full discussion of the
principal terms of the proposed investment occurred. Following further
discussions and negotiations between Carlyle and the Company, the proposed
transaction was unanimously approved by the Board of Directors on August 8,
1996. At the August 8 meeting, the Board of Directors received a further
report on the progress of the negotiations and the detailed terms of the
proposed transaction, and the oral opinion of DLJ that the consideration to be
received by the Company is fair to the Company from a financial point of view.
From August 8, 1996 to August 28, 1996 definitive documentation for the
terms of the transaction was negotiated; and further discussions occurred
between the Company's representatives, Carlyle and representatives of the NYSE
concerning the corporate governance provisions of the proposed transaction and
their compliance with the rules of the NYSE. Upon satisfactory resolution of
these discussions, the definitive agreements were signed on August 28, 1996.
BOARD OF DIRECTORS' RECOMMENDATIONS
The Board of Directors has unanimously approved the Investment and believes
that it is in the best interests of the Company and its stockholders. The
Board of Directors, in approving the Carlyle Investment and recommending
stockholder approval, considered a number of factors, including, without
limitation, the following:
(i) The Carlyle Investment will provide significant funds and operating
flexibility to enable the Company to take advantage of opportunities for
expansion and diversification of its business through the acquisition of
other companies in the environmental consulting, engineering and
remediation industry in order to create long-term value for its
stockholders.
(ii) At present, the Company is not in a position to comply with certain
financial covenants in its $65,000,000 senior secured notes and $60,000,000
bank line of credit agreements. Management believes that upon completion of
the Carlyle Investment, the Company will be in a position to comply with
these requirements, and that the Company would be in a position to obtain
further amendments to certain of
8
<PAGE>
the covenants that will provide the Company greater flexibility to consider
expansion and diversification of its business through acquisitions and
otherwise. If, on the other hand, the Carlyle Investment is not completed
the Company will be required to seek long term relief from those financial
covenants from its lenders which, if obtained, would likely involve
increased borrowing costs and stringent limitations on its ability to
operate its business and to consider growth opportunities.(/1/)
(iii) Because of the Company's present inability to comply with covenants
in its bank credit facility, its only significant sources of liquidity are
cash flow from operations and invested cash of approximately $19,000,000.
However the Company continues to have significant cash requirements,
including working capital, capital expenditures, closure costs relating to
its inactive disposal sites and environmental cleanup costs related to
discontinued operations, 7% Preferred Stock dividend obligations and
contingent liabilities. In the event the anticipated recovery in the
Company's business does not develop during the remainder of fiscal year
1997, the Company could encounter severe liquidity constraints. Proceeds
from the Carlyle Investment will provide a valuable cushion against any
such contingency. The Company's severe credit and liquidity constraints
could have other major business implications: (a) the Company's bonding
availability could be substantially reduced, which could limit its ability
to bid on and perform new contract work, (b) the lack of operating
flexibility caused by near-term cash pressures could negatively impact the
Company's competitiveness and (c) the combination of reduced bonding
capacity and lack of operating flexibility could result in loss of market
share.
(iv) The Company's financial advisor has given its opinion that the
consideration to be received by the Company pursuant to the Purchase
Agreement is fair to the Company from a financial point of view. See "--
Opinion of Financial Advisor."
(v) The terms and conditions of the Carlyle Investment are structured in
a manner which the Board of Directors believes is favorable to the Company.
The Convertible Preferred Stock to be issued will require no cash for the
payment of dividends for two years to accommodate the Company's significant
cash requirements during this period.
(vi) Based upon the Company's lengthy exploration of strategic
alternatives, and the advice of the Company's financial advisor, the Board
of Directors does not believe that there is any alternative transaction
which would be more advantageous to stockholders than the proposed Carlyle
Investment.
(vii) The Board of Directors believes that there are material potential
advantages to the Company and its stockholders from the Company's
association with Carlyle. Carlyle is an investment group whose commitment
to the Company and majority representation on the Board of Directors should
add to investor interest in the Company's Common Stock and confidence that
management will be responsive to investor interests. In addition, while
there is no legal obligation to do so, it will be in the interests of
Carlyle, as the Company's largest stockholder, to make available to the
Company the resources and expertise of Carlyle personnel in matters
involving capital markets, government contracting and regulation and
acquisitions and strategic alliances.
Based upon all of the factors mentioned above, and the Board of Directors'
evaluation of the Company's prospects as an ongoing business without the
Carlyle Investment, the Board of Directors concluded that the prospects for
enhancing stockholder value will be materially increased by the Carlyle
Investment.
In view of the variety of factors considered by the Board in connection with
its evaluation of the Investment, the Board of Directors did not qualify or
otherwise assign relative weights to the individual factors considered in
reaching its determination and recommendations set forth herein. Neither the
Board nor any individual director articulated the consideration of, or
otherwise identified, any one factor or group of factors as more significant
than any other in reaching the determination or recommendation set forth
herein.
THE BOARD OF DIRECTORS BELIEVES THAT THE PROPOSED CARLYLE INVESTMENT IS FAIR
TO, AND IN THE BEST INTERESTS OF, THE COMPANY AND ITS STOCKHOLDERS AND
UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF THE COMPANY VOTE "FOR"
APPROVAL OF THE INVESTMENT.
- - - --------
(1) Note: this paragraph will be updated to reflect the status of discussions
with the lenders which will commence in September.
9
<PAGE>
OPINION OF FINANCIAL ADVISOR
In its role as financial advisor to the Company, DLJ was asked by the
Company to render an opinion to the Board of Directors of the Company as to
the fairness to the Company, from a financial point of view, of the
consideration to be received by the Company pursuant to the terms of the
Securities Purchase Agreement dated August 28, 1996, between the Company and
Carlyle (the "Purchase Agreement"). On August 8, 1996, DLJ delivered its oral
opinion to the Board of Directors of the Company (subsequently confirmed in a
written opinion to the Board of Directors of the Company, dated September ,
1996 (the "DLJ Opinion")), that, as of the date of the DLJ Opinion, and based
upon and subject to the assumptions, limitations and qualifications set forth
in such opinion, the consideration to be received by the Company pursuant to
the Purchase Agreement is fair to the Company from a financial point of view.
THE FULL TEXT OF THE DLJ OPINION IS ATTACHED HERETO AS APPENDIX I. THE DLJ
OPINION SHOULD BE READ CAREFULLY IN ITS ENTIRETY FOR ASSUMPTIONS MADE, MATTERS
CONSIDERED AND LIMITS OF THE REVIEW AND PROCEDURES FOLLOWED BY DLJ IN
CONNECTION WITH SUCH OPINION.
The Board selected DLJ as its financial advisor because it is a nationally
recognized investment banking firm that has substantial experience in the
environmental consulting, engineering and remediation industry and is familiar
with the Company and its business. As part of its investment banking business,
DLJ is regularly engaged in the valuation of businesses and securities in
connection with mergers, acquisitions, underwritings, sales and distributions
of listed and unlisted securities, private placements and valuations for
estate, corporate and other purposes.
The DLJ Opinion was prepared for the Company's Board of Directors and is
directed only to the fairness of the transaction to the Company from a
financial point of view and does not constitute a recommendation to any
stockholder as to how such stockholder should vote at the Annual Meeting. The
DLJ Opinion does not constitute an opinion as to the price at which the Common
Stock will actually trade at any time. No restrictions or limitations were
imposed by the Company upon DLJ with respect to the investigations made or the
procedures followed by DLJ in rendering its opinion.
In arriving at its opinion, DLJ reviewed the Purchase Agreement and the
exhibits thereto including the Certificate of Designations relating to the
Preferred Stock, the form of Warrant Agreement (the "Warrant Agreement") and
the form of Registration Rights Agreement (the "Registration Rights Agreement"
and, (together with the Warrant Agreement, the "Ancillary Agreements")) to be
entered into upon the consummation of the Investment by and among the Company
and Carlyle. DLJ also reviewed financial and other information that was
publicly available or furnished to it by the Company including information
provided during discussions with the Company's management. Included in the
information provided during discussions with the Company's management were
financial projections of the Company for the period beginning July 1, 1996 and
ending March 31, 2001, prepared by the management of the Company. In addition,
DLJ compared certain financial and securities data of the Company with various
other companies that DLJ deemed relevant, reviewed the historical stock prices
and trading volumes of the Common Stock and the 7% Preferred Stock of the
Company, and conducted such other financial studies, analyses and
investigations as DLJ deemed appropriate for purposes of its opinion. DLJ also
considered alternative financing sources available to the Company and DLJ
examined the terms of certain investments by private investors in public
companies.
In rendering its opinion, DLJ relied upon and assumed the accuracy,
completeness and fairness of all of the financial and other information that
was available to it from public sources, that was provided to it by the
Company or that was otherwise reviewed by it. DLJ did not make any independent
evaluation of the assets or liabilities of the Company, nor did DLJ
independently verify the information reviewed by it. DLJ also assumed that the
financial projections supplied to it were reasonably prepared by management of
the Company. DLJ did
10
<PAGE>
not perform any procedures or analysis regarding potential environmental
liabilities of the Company, nor did it consider the impact of changes in the
regulatory environment in which the Company operates.
The DLJ Opinion was necessarily based on economic, market, financial and
other conditions as they existed on, and on the information made available to
it as of, the date of its opinion. It should be understood that, although
subsequent developments may affect its opinion, DLJ does not have any
obligations to update, revise or reaffirm the DLJ Opinion. The DLJ Opinion
does not address the relative merits of the proposed transaction and other
business strategies being considered by the Company's Board of Directors, nor
does it address the Board's decision to proceed with the proposed transaction.
The following is a summary of certain factors considered and financial
analyses performed by DLJ in connection with the DLJ Opinion that were
included in a presentation to the Board of Directors of the Company on August
8, 1996.
Analysis of Certain Other Publicly Traded Companies. To provide contextual
data and comparative market information, DLJ compared selected historical
share price, earnings and operating and financial ratios for the Company to
the corresponding data and ratios of certain other companies whose securities
are publicly traded (collectively, the "Comparable Companies"). The Comparable
Companies were chosen because they possess general business, operating and
financial characteristics representative of companies in the industry in which
the Company operates. The Comparable Companies consisted of: Dames & Moore,
Inc., EMCON, Harding-Lawson Associates Group, Inc., ICF Kaiser International,
Inc., OHM Corporation, Sevenson Environmental Services, Inc., TRC Companies,
Inc., and Roy F. Weston, Inc. Such data and ratios included Enterprise Value
("Enterprise Value" is defined as the product of the stock price and total
shares outstanding ("Equity Value") plus Net Debt ("Net Debt" is defined as
total debt (including liabilities of discontinued operations) plus preferred
stock less cash and cash equivalents)) as a multiple of gross revenues,
earnings before interest, taxes, depreciation and amortization ("EBITDA") and
earnings before interest and taxes ("EBIT") for the latest reported twelve
months ("LTM"). In addition, DLJ examined the ratios of Equity Value to LTM
net income, 1996 estimated net income and 1997 estimated net income and
current book value for the Comparable Companies and compared such ratios with
those of the Company.
Applying the median multiples obtained for the Comparable Companies to the
operating data for the Company, this analysis indicated a range of implied
Enterprise Values for the Company of $82.8 million to $152.7 million; a range
of implied Equity Values for the Company of $15.3 million to $72.9 million;
and a range of implied prices per share from $0.42 to $1.99 with an average of
$0.99. The implied Equity Values and per share prices exclude the impact of
values which are less than zero.
Transaction Analysis. DLJ reviewed publicly available information for 13
selected transactions involving the combination of selected environmental
consulting, engineering and remediation companies. The 13 transactions
reviewed (the "Comparative Transactions") were: (i) Fluor Daniel,
Inc./Groundwater Technology, Inc.; (ii) EMCON/Organic Waste Technologies,
Inc.; (iii) Tyco International Ltd./Earth Technology Corporation; (iv) Tetra
Tech, Inc./PRC Environmental Management, Inc.; (v) OHM Corporation/Rust
International, Inc.; (vi) Dames & Moore, Inc./Walk, Haydel & Associates, Inc.;
(vii) Dames & Moore, Inc./O'Brien-Kreitzberg & Associates, Inc.; (viii) Earth
Technology Corporation/HazWaste Industries, Inc.; (ix) Canonie Environmental
Services Corporation/Riedal Environmental Services, Inc.; (x) Foster Wheeler
Corporation/Enserch Environmental Corporation; (xi) Earth Technology
Corporation/Summit Environmental Group, Inc.; (xii) TRC Companies,
Inc./Environmental Solutions, Inc.; and (xiii) Heidemij N.V./Geraghty &
Miller, Inc. The 13 transactions selected are not intended to represent the
complete list of environmental consulting, engineering and remediation
transactions which have occurred during the last three years; rather they
include only transactions involving combinations of companies with operating
characteristics, size or financial performance characteristics which DLJ
believed to be comparable to those of the Company. DLJ reviewed the Enterprise
Value of such transactions as a multiple of LTM gross revenue, LTM EBITDA and
LTM EBIT and the Equity Value as a multiple of LTM net income.
Applying the median multiples obtained for the Comparative Transactions to
the operating data for the Company, this analysis indicated a range of implied
Enterprise Values for the Company of $201.3 million to
11
<PAGE>
$212.0 million; a range of implied Equity Values for the Company of $64.0
million to $74.6 million; and a range of implied prices per share ranging from
$1.75 to $2.04 with an average of $1.89. The implied Equity Values and per
share prices exclude the impact of values which are less than zero. In its
presentation to the Board, DLJ noted that the value of this analysis was
somewhat limited in its view because such analysis was based on publicly
available historical information, whereas prices paid in transactions in the
environmental consulting and engineering industry are generally based on
future financial expectations, for which data is unavailable.
Stock Trading History. To provide contextual data and comparative market
data, DLJ examined the history of the trading prices for the Common Stock for
the latest twelve-month period ended August 5, 1996. DLJ also reviewed the
daily closing prices of the Common Stock and compared the closing stock prices
with an index consisting of the Comparable Companies. This information was
presented solely to provide the Board with background information regarding
the stock prices of the Company over the period indicated. DLJ noted the high
and low prices for the Common Stock over the twelve-month period ended August
5, 1996 was $3.88 and $1.88, respectively.
Discounted Cash Flow Analysis. DLJ also performed a discounted cash flow
analysis of the Company. In conducting its analysis, DLJ relied on certain
assumptions, financial projections and other information provided by the
Company. Using the information set forth in the Company projections, DLJ
calculated the estimated "Free Cash Flow" based on projected unleveraged
operating income adjusted for: (i) taxes; (ii) certain projected non-cash
items (i.e., depreciation and amortization); (iii) projected changes in non-
cash working capital; and (iv) projected capital expenditures. DLJ analyzed
the Company forecast and discounted the stream of cash flows using discount
rates ranging from 11% to 13%. To estimate the residual value of the Company
at the end of the forecast period, DLJ applied a range of terminal EBITDA
multiples of 4.5 to 5.5. DLJ then aggregated the present value of the free
cash flows and residual value to derive a range of implied per share equity
values for the Company. Based on this analysis, DLJ calculated Equity Values
for the Company ranging from $24.1 million to $65.1 million and per share
prices of $0.66 to $1.78, with a midpoint per share price of $1.20.
The summary set forth above does not purport to be a complete description of
the analyses performed by DLJ. The preparation of a fairness opinion involves
various determinations as to the most appropriate and relevant methods of
financial analysis and the application of these methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
summary description. Each of the analyses conducted by DLJ was carried out in
order to provide a different perspective on the transaction and add to the
total mix of information available. DLJ did not form a conclusion as to
whether any individual analysis, considered in isolation, supported or failed
to support an opinion as to fairness. Rather, in reaching its conclusion, DLJ
considered the results of the analyses in light of each other and ultimately
reached its opinion based on the results of all analyses taken as a whole. DLJ
did not place particular reliance or weight on any individual analysis, but
instead concluded that its analyses, taken as a whole, supported its
determination. Accordingly, notwithstanding the separate factors summarized
above, DLJ believes that its analyses must be considered as a whole and that
selecting portions of its analysis and the factors considered by it, without
considering all analyses and factors, could create an incomplete or misleading
view of the evaluation process underlying its opinions. In performing its
analyses, DLJ made numerous assumptions with respect to industry performance,
business and economic conditions and other matters. The analyses performed by
DLJ are not necessarily indicative of actual values or future results, which
may be significantly more or less favorable than suggested by such analyses.
Pursuant to the terms of an engagement letter dated February 1, 1996, the
Company has agreed to pay DLJ a fee equal to 1.20% (of which $600,000 is due
upon delivery of the DLJ Opinion) of the aggregate amount of consideration
received by the Company or its stockholders, plus the amount of any debt
assumed or repaid, preferred stock redeemed or remaining outstanding, and
short and long-term liabilities of discontinued operations assumed in
connection with the transaction, to be paid upon consummation of the
transaction. The Company has also agreed to reimburse DLJ promptly for all
out-of-pocket expenses (including the reasonable fees and out-of-pocket
expenses of counsel) incurred by DLJ in connection with its engagement, and to
indemnify DLJ and certain related persons against certain liabilities in
connection with its engagement, including liabilities under the federal
securities laws. The terms of the arrangement with DLJ, which DLJ and the
Company believe are
12
<PAGE>
customary in transactions of this nature, were negotiated at arm's length
between the Company and DLJ and the Board was aware of such arrangement,
including the fact that a significant portion of the aggregate fee payable to
DLJ is contingent upon consummation of the transaction.
In the ordinary course of business, DLJ may actively trade the securities of
the Company for its own account and for the accounts of its customers and,
accordingly, may at any time hold a long or short position in such securities.
DLJ has provided financial advisory and investment banking services to the
Company in the past, including the placement on behalf of the Company of its
8.67% Senior Notes due 2003 and related services for which DLJ received usual
and customary fees.
DISSENTERS' RIGHTS AND PREEMPTIVE RIGHTS
Stockholders have no dissenters' rights or preemptive rights in connection
with the issuance of the Convertible Preferred Stock or the Warrants.
IMPACT OF THE TRANSACTION ON THE COMPANY AND EXISTING STOCKHOLDERS; CERTAIN
CONSIDERATIONS
While the Board of Directors is of the opinion that the proposed Carlyle
Investment is fair to, and its approval is advisable and in the best interests
of, the Company and its stockholders, stockholders should consider the
following possible effects in evaluating the Investment Proposal.
Impact on Voting and Other Rights of Stockholders; Impact on Future Share
Issuances
As described in more detail above under "--Summary of Proposed Investment--
Convertible Preferred Stock Voting Rights," the Investment would give the
holders of the Convertible Preferred Stock the right to elect a majority of
the Company's Board of Directors for the Five-Year Period, provided that
Carlyle continues to own at least 20% of the voting power of the Company.
Thus, during the Five-Year Period, holders of Common Stock of the Company will
be entitled to elect only a minority of the Board of Directors. After the
Five-Year Period, provided that Carlyle continues to own at least 20% of the
voting power of the Company, holders of Convertible Preferred Stock will have
the right to elect the largest number of directors which is a minority of the
directors of the Company.
Aside from the foregoing, approval of the holders of the Convertible
Preferred Stock will be required: (i) to approve the creation of additional
classes or series of preferred stock on a parity with or prior to the
Convertible Preferred Stock, any increase in the number of shares of
Convertible Preferred Stock, any amendment to the Certificate of Incorporation
that would adversely affect the rights of the Convertible Preferred Stock, or
any reorganization, recapitalization, sale of substantially all assets or
merger of the corporation, if such transaction would adversely affect the
rights of the Convertible Preferred Stock; and (ii) to approve the payment of
dividends on any junior stock. In addition, holders of the Convertible
Preferred Stock (voting as a class with holders of the Company's already
outstanding 7% Preferred Stock and any parity stock that may be issued with
similar rights in the future), will have the right to elect two additional
directors in the event of a default in the payment of preferred dividends for
six quarterly periods.
Diminished Ability to Sell the Company and to Raise Additional Preferred
Equity Capital
As a result of Carlyle's substantial ownership interest in the Company's
securities, it may be more difficult for a third party to acquire control of
the Company without Carlyle's approval. In addition, the consent of at least a
majority of the outstanding shares of Convertible Preferred Stock, voting
separately as a class, will be required for approval of certain corporate
transactions including the merger or consolidation of the Company or the sale
of substantially all of its assets. See "The Securities Purchase Agreement--
Description of Convertible Preferred Stock--Voting Rights."
13
<PAGE>
Effect on Dividends and Distributions to Common Stockholders
After giving effect to expenses of the Investment, the sale of the
Convertible Preferred Stock and the Warrant to Carlyle would increase the
Company's capital by approximately $41,000,000. No dividends will be payable
on the Convertible Preferred Stock in the first year. Thereafter, dividends
will be payable quarterly in kind for one year at the rate of 3% and in cash
thereafter at the rate of 6% per annum. Additionally, although the first two
years' dividends to be paid are at a rate of 0% and 3%, respectively, for
earnings per share calculation purposes, dividends will be imputed at a rate
of approximately 6% per annum as required by SEC Staff Accounting Bulletin No.
78 "Increasing Rate Preferred Stock." All dividends payable must be paid, or
declared (and a sum of money sufficient for payment set apart), prior to the
payment of any dividends on the Common Stock. In addition, if dividends are
paid on the Common Stock (which requires the approval of holders of 67% of the
Convertible Preferred Stock) there must also be paid to holders of the
Convertible Preferred Stock the amount of dividends that would have been
payable if such shares had been fully converted into Common Stock. In the
event of any voluntary or involuntary liquidation, dissolution or other
winding up of the affairs of the Company, before any payment or distribution
of assets may be made to the holders of Common Stock, the holders of
Convertible Preferred Stock must be paid the full liquidation preference
($1,000 per share) plus all dividends accrued and unpaid.
Special Conversion Price of Outstanding 7% Preferred Stock
The consummation of the Carlyle Investment may trigger the right of the
holders of the Company's outstanding 7% Preferred Stock to convert into a
greater number of shares of Common Stock than that which they are otherwise
entitled. The 7% Preferred Stock does not trade on the NYSE. Instead, the 7%
Preferred Stock trades through and is represented by Depositary Shares, each
representing 1/100 of a share of the 7% Preferred Stock. The 7% Preferred
Stock is currently convertible into a number of shares of Common Stock
determined by dividing the liquidation price of the 7% Preferred Stock ($2,500
per share) by the conversion price (currently $5.84 per share). At this price
each share of 7% Preferred Stock would convert into approximately 428.08
shares of Common Stock (each Depositary Share would convert into 4.2808 shares
of Common Stock). The terms of the 7% Preferred Stock provide that if any
person or group shall beneficially own at least 50% of the total voting power
of all classes of capital stock of the Company entitled to vote generally in
the election of directors of the Company, each holder of the 7% Preferred
Stock shall have the right, at the holder's option, for a period of 45 days
after the mailing of a notice by the Company, to convert all, but not less
than all, of such holder's shares of 7% Preferred Stock into Common Stock at a
special conversion price of the higher of the market value of one share of
Common Stock or $3.17 per share. Because Carlyle will have the right to elect
a majority of the Board of Directors, based on the advice of counsel, the
Company believes that the special conversion price may be triggered by the
Investment. Thus, if the market value of the Common Stock is at or below $3.17
per share, one share of 7% Preferred Stock would become, as a result of the
Investment, convertible into 788.64 shares of Common Stock (each Depository
Share would convert into 7.8864 shares of Common Stock). Such number of shares
may have a market value in excess of the then-current market value of the 7%
Preferred Stock, leading some or all holders of the 7% Preferred Stock to
exercise their special conversion right. The Company intends to mail such
notice not later than 30 days following completion of the Investment.
The Convertible Preferred Stock and the Warrants provide for an adjustment
to the conversion price and exercise price, respectively, and the number of
shares of Common Stock issuable upon exercise of the Convertible Preferred
Stock, in the event that any shares of 7% Preferred Stock are converted into
Common Stock at the special conversion price. If all shares of 7% Preferred
Stock were converted at a special conversion rice of $3.17 per share, the
conversion price of the Convertible Preferred Stock would be reduced from
$2.00 to $1.45 and the number of shares of Common Stock issuable upon
conversion of the Convertible Preferred Stock (including shares issuable as
in-kind dividends) would be increased from 23,175,000 to 31,929,843. Under
such circumstances, the exercise price of the Warrants would be reduced from
$3.00 to $2.18. In such event, the shares of Common Stock issuable upon
conversion of the Convertible Preferred Stock would represent approximately
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% of the shares outstanding, on an "as converted" basis; and upon exercise
of the Warrants the total shares so issued would represent approximately %
of the shares outstanding, on such basis.
THE SECURITIES PURCHASE AGREEMENT
The following summary of the material provisions of the Securities Purchase
Agreement by and among the Company and Carlyle, dated August 28, 1996 (the
"Purchase Agreement") is not intended to be complete and is subject to, and
qualified in its entirety by reference to, all of the provisions of such
agreement, a copy of which was filed as an exhibit to the Company's Current
Report on Form 8-K dated September , 1996 and is incorporated herein by
reference. Stockholders are urged to read the Purchase Agreement in its
entirety.
Issuance and Sale of Convertible Preferred Stock and Warrants
Pursuant to the Purchase Agreement, the Company will sell, and certain
investors affiliated with The Carlyle Group (collectively, "Carlyle") will
purchase, 45,000 shares of newly issued Convertible Preferred Stock of the
Company and the Warrants to purchase 5,000,000 shares of Common Stock of the
Company for an aggregate purchase price of $45,000,000.
Certain Representations and Warranties
Under the Purchase Agreement, the Company has made certain representations
and warranties to Carlyle as to the Company and its subsidiaries, including
(i) due corporate organization and qualification to do business; (ii) the
capital structure of the Company; (iii) the due authorization and issuance of
the Convertible Preferred Stock and the Warrants and the shares of Common
Stock issuable upon conversion or exchange thereof, respectively; (iv) the due
authorization, execution, delivery and performance of the Purchase Agreement
and related agreements and their enforceability; (v) no conflict with or
violation of the Company's Certificate of Incorporation or bylaws, any of the
Company's material agreements and applicable law; (vi) required consents from
governmental authorities or other third parties; (vii) the capital structure
of the Company's subsidiaries; (viii) employee benefits plans; (ix) the
reports and other documents filed by the Company with the SEC and the accuracy
of the information contained therein; (x) the absence of undisclosed
liabilities and guarantees, (xi) absence of certain changes to the Company's
business, financial condition or capitalization; (xii) compliance with laws;
(xiii) pending and threatened litigation, (xiv) accuracy of all
representations and warranties and good faith basis for financial projections,
(xv) taxes; (xvi) environmental matters; (xvii) insurance; (xviii) title to
assets; (xix) condition of tangible assets, (xx) contracts, (xxi) books and
records; (xxii) labor matters; (xxiii) payments to government authorities;
(xxiv) the accuracy of the information contained in this Proxy Statement;
(xxv) Board recommendation of the Investment; (xxvi) intellectual property;
(xxvii) recent securities offerings, (xxviii) absence of other agreements to
sell assets or the Company, (xxix) financial advisors and brokers and (xxx)
absence of required approval of the holders of the Company's 7% Preferred
Stock.
Under the Purchase Agreement, each Carlyle-affiliated purchaser has made
certain representations and warranties to the Company as to (i) its due
organization and qualification to do business; (ii) its due authorization,
execution, delivery and performance of the Purchase Agreement and related
agreements and their enforceability; (iii) no conflict with or violation of
the applicable governing instruments of each purchaser, any agreements and
applicable law; (iv) required consents from governmental authorities or other
third parties; (v) investment intent; (vi) accuracy of written material
supplied by Carlyle for this proxy statement; and (vii) absence of brokers or
finders.
Certain Covenants
General. The Purchase Agreement contains various covenants regarding the
Investment. It requires that the Company take action necessary to call and
hold the Annual Meeting as promptly as practicable to consider and vote upon
the Investment and the ancillary related proposals including the proposed
amendments to the Company's Certificate of Incorporation. The Purchase
Agreement provides that, subject to its fiduciary duties,
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the Board of Directors of the Company shall (i) recommend to the stockholders
that they vote in favor of all matters necessary to effectuate the Investment,
(ii) use its reasonable best efforts to solicit from the stockholders proxies
in favor of such adoption and approval and (iii) take all other action
reasonably necessary to secure a favorable vote of the stockholders. The
Company must also use its reasonable best efforts to obtain a statement from
its executive officers and directors who own voting stock of the Company that
such persons intend to vote all shares of voting stock owned by them in favor
of the transactions contemplated by the Purchase Agreement at the Annual
Meeting.
SEC Filings and Blue Sky Laws. The Company has also agreed, pursuant to the
Purchase Agreement, to use it reasonable best efforts to promptly prepare and
file with the SEC any documents or materials, including a proxy statement
pertaining to the issuance of the Convertible Preferred Stock and Warrants and
the Annual Meeting and to have the proxy materials cleared by the SEC.
Additionally, the Company must take such action as may be required under
applicable state securities or blue sky laws in connection with the issuance of
the Convertible Preferred Stock and Warrants or the shares of Common Stock
issuable pursuant thereto.
NYSE Confirmation. The Company further agreed to use its best efforts and
take all action necessary to obtain the confirmation of the NYSE that the
transactions contemplated by the Purchase Agreement (including the proposed
amendments to the Company's Certificate of Incorporation) will not violate
Section 313 of the NYSE's Listed Company Manual.
Business in Ordinary Course. Pursuant to the Purchase Agreement, the Company
has agreed that, prior to the closing date of the Investment (the "Closing
Date"), the Company will conduct its business in the ordinary course and, among
other things, will not, without the consent of Carlyle (i) amend its
Certificate of Incorporation or bylaws; split, combine, or reclassify any
shares of its capital stock; adopt resolutions authorizing a liquidation,
dissolution, merger, consolidation, restructuring, recapitalization, or other
reorganization of the Company's capital structure or of any subsidiary; or make
any other material changes in its or any subsidiary's capital structure; (ii)
except in the ordinary course and consistent with past practice, incur any
material liability or obligation, become liable or responsible for the material
obligations of any other person (other than wholly-owned subsidiaries), or pay,
discharge or satisfy any material claims, liabilities or obligations, other
than as is consistent with past practice provided that the Company shall not
enter into any settlement or compromise of any litigation or claims involving
liability in excess of $1,000,000 without the prior consent of Carlyle; (iii)
incur any indebtedness for borrowed money other than revolving debt and letters
of credit under the Company's bank credit facility and up to an aggregate of
$2,000,000 of debt for capital assets; (iv) make any loans or advances to any
person, other than advances to employees in the ordinary course of business and
transactions among or between the Company and its subsidiaries with respect to
cash management conducted in the ordinary course of business; (v) declare or
pay any dividend (other than dividends to be paid by any subsidiary to the
Company or another subsidiary in the ordinary course of business or to holders
of the 7% Preferred Stock) or make any other distributions; (vi) issue, sell,
or deliver any of its capital stock or other securities other than pursuant to
stock options issued and outstanding as of the date of the Purchase Agreement
or purchase any of its capital stock, employee or director stock options or
debt securities; (vii) subject any of its assets or properties to certain
encumbrances other than as permitted under the Company's bank credit facility;
(viii) other than in the ordinary course of business and sales of non-core
assets of up to $3,000,000 in the aggregate, sell, lease, transfer, or
otherwise dispose of any assets, or waive, release, grant, or transfer any
rights of value; (ix) acquire (by merger, consolidation, acquisition of stock
or assets or otherwise) any corporation, partnership or other business
organization or division thereof, create or make any investment in any
subsidiary (other than a wholly-owned subsidiary); or make any other investment
or expenditure of a capital nature, other than in any amounts already included
in the capital expenditure budget for the Company and its subsidiaries for the
fiscal year ended March 28, 1997, as previously provided to and approved by
Carlyle; (x) enter into, adopt, or amend or terminate any collective bargaining
agreement or any employee benefit plan, approve or implement any employment
severance arrangements (other than in accordance with past practice) or retain
or discharge any officers and executive management personnel; authorize or
enter into any employment, severance, consulting services or other agreement
with any officers and executive management personnel or any of their
affiliates; or change the
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compensation or benefits provided to any director, officer, or employee as of
March 29, 1996 other than arrangements previously disclosed to Carlyle; (xi)
enter into any contract, agreement or lease involving total value or
consideration or liability in excess of $50,000,000 or other commitment (not
including cost reimbursable contracts) which other commitment involves any
material risk of loss to the business, assets, properties, or financial
position of the Company and its subsidiaries; or except as otherwise provided
in the Purchase Agreement, amend, modify, or change in any materially adverse
respect any of the agreements pertaining to existing indebtedness or any other
existing contract, agreement, lease involving total value or consideration or
liability in excess of $50,000,000, or other commitment which is material to
the business, assets, properties, or financial position of the Company and its
subsidiaries, taken as a whole; (xii) enter into any speculative or commodity
swaps, hedges or other derivatives transactions or purchase any securities for
investment purposes, other than in connection with cash management of the
Company; (xiii) grant any option or preferential right to purchase or enter
into agreements that could adversely affect the marketability of any material
asset of the Company or any subsidiary.
Press Releases; Financial Statements; Access; Notification. The Company and
Carlyle agreed not to issue press releases with respect to the Purchase
Agreement without the consent of the other. The Company also agreed to provide
Carlyle, prior to the Closing Date, with certain interim financial statements
and with access to the Company and Company information. Additionally, the
Company and Carlyle agreed to notify the other of any event which would be
likely to cause any representation or warranty to be materially untrue or
inaccurate, and of any material failure to comply with or satisfy any covenant,
condition or agreement to be complied with under the Purchase Agreement.
No Solicitation. Under the Purchase Agreement, prior to the Closing Date,
neither the Company, its affiliates or any officers, directors and employees
thereof shall solicit or initiate any discussions, submissions of proposals or
offers, provide information to, or otherwise cooperate in any way with any
corporation or other person other than Carlyle concerning any alternative
transaction, except to the extent that the Board of Directors determines in
good faith that such action is required for the Board to comply with its
fiduciary duties. In such case, the Board must provide specified written notice
to Carlyle prior to furnishing any information to such other party and obtain a
confidentiality agreement from the other party.
Miscellaneous. The Purchase Agreement also requires that (i) the Company and
Carlyle will file any applicable notices and reports pursuant to the Hart-
Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"),
and (ii) the Company will use its best efforts to enter into employment
agreements with certain senior executives of the Company on or prior to the
Closing Date (see "Certain Transactions--Employment Agreements"), (iii) the
Company adopt an amendment to the Company's Non-Employee Directors Retirement
Plan and obtain the consent of affected beneficiaries under such Plan, (iv) the
Company shall use its best efforts to obtain waivers from each non-employee
director of all rights to the acceleration of vesting requirements under any
non-employee director non-qualified option agreement under the 1991 Plan, (v)
the Board of Directors shall take all action necessary to ensure that the
acquisition of the Convertible Preferred Stock and Warrants by Carlyle shall
not result in the acceleration or creation of any rights of any person to
benefits under any employee plan other than the outstanding options under the
Company's 1983 Stock Incentive Plan (the "1983 Plan"), and options granted to
non-employee directors under the 1991 Plan and the Non-Employee Directors
Retirement Plan, (vi) the Company shall use its best efforts to enter into an
amendment to its bank credit agreements which will, among other things, (x)
modify current covenants, (y) increase capital expenditure limits and (z)
confirm that consummating the Investment and related transactions will not
conflict with or breach the bank credit agreements, (vii) if the Company is
notified by government contracting authorities that the Company may not
participate in bidding or performing work under a government contract based on
the degree of foreign ownership, control or influence over the Company, Carlyle
will use all reasonable efforts to cooperate with the Company in attempting to
appeal or overturn such a decision (this obligation shall not obligate Carlyle
to take any action which results in an impairment of the economic or tax
benefits of their investment in the Company) and (viii) by the Closing Date,
the Company shall have ensured that each person serving on the Board on and
after the Closing Date will receive the same liability insurance coverage as
such a member as the directors
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of the Company received as of the date of the Purchase Agreement, and that such
policies will be in full force and effect in accordance with their terms as of
the Closing Date.
Conditions Precedent
Conditions to Both Parties' Obligations. The Purchase Agreement provides that
the respective obligations of the Company and Carlyle to consummate the
transactions contemplated by the Purchase Agreement are subject to the
fulfillment prior to or on the Closing Date of certain conditions precedent, or
the waiver thereof including the following: (i) no governmental or other
proceedings or litigation restraining the consummation of the transactions
contemplated by the Purchase Agreement, (ii) approval by the Company's
stockholders, (iii) the consent of the Company's lenders, (iv) expiration of
any waiting periods under the HSR Act, if applicable, and (v) the NYSE shall
have informed the Company that the transactions contemplated hereby will not
violate Section 313 of the NYSE Listed Company Manual and shall not have
indicated any intention to delist the Company's Common Stock.
Conditions to Carlyle's Obligations. The Purchase Agreement provides that the
obligations of Carlyle to consummate the transactions contemplated by the
Purchase Agreement are subject to the fulfillment prior to or on the Closing
Date of certain conditions precedent, or the waiver thereof by Carlyle
including the following: (i) the representations and warranties of the Company
shall be true and correct in all material respects as of the Closing Date as
though made on and as of the Closing Date; (ii) the Company and its
subsidiaries shall have performed and complied in all material respects with
all agreements and conditions contained in the Purchase Agreement required to
be performed or complied with by the Company or its subsidiaries prior to or at
the Closing; (iii) the Company shall have received or obtained all required
consents, approvals, permits and waivers from governmental entities and other
parties required to consummate the transactions contemplated by the Purchase
Agreement, except where the failure to do so does not have a material adverse
effect upon the Company or Carlyle; (iv) Carlyle shall have received a legal
opinion from counsel to the Company with respect to certain matters; (v) since
the date of the Purchase Agreement, there shall not have been any material
adverse effect on the Company; (vi) all actions shall have been taken by the
Company, its stockholders and Board of Directors so that, immediately upon
Carlyle's purchase of the Convertible Preferred Stock and Warrants, the Board
of Directors of the Company comprises seven directors and Carlyle may, by
execution and delivery of a written consent, elect four members of the Board of
Directors of the Company effective as of the Closing Date; (vii) the
Certificate of Incorporation and/or Bylaws of the Company will have been
amended on or prior to the Closing Date in a form acceptable to Carlyle in
order to effectuate the transactions contemplated by the Purchase Agreement and
none of the provisions of the Certificate of Incorporation or Bylaws shall
prohibit or restrict the authority of the Board of Directors of the Company by
action of a majority of its members, from amending the Bylaws; (viii) the
Company shall have delivered to Carlyle certificates, executed by the President
and Acting Chief Executive Officer and the Secretary of the Company, dated the
Closing Date, as to certain matters; (ix) the Company shall have provided to
Carlyle a copy of certain insurance policies and schedules evidencing that each
person serving on the Board on and after the Closing Date shall receive the
same liability coverage as a member of the Board as the Company's directors
received as of the date of the Purchase Agreement and that such policies are in
full force and effect; (x) the average of the daily high and low sales price
for a share of Common Stock on the NYSE for each ten (10) NYSE trading day
period commencing on the date of the Purchase Agreement and ending prior to the
Closing Date shall be greater than or equal to $1.75; (xi) the Company and
certain executives shall have entered into the employment agreements
contemplated by the Purchase Agreement; (xii) the Company shall have obtained
waivers from the Company's directors with respect to foregoing accelerated
benefits under the Non-Employee Directors' Retirement Plan and any option
agreements for such directors under the 1991 Stock Incentive Plan; (xiii) the
Company shall have entered into certain specified amendments to its bank credit
agreements (see "Summary of Proposed Carlyle Investment--Credit Agreement
Amendment").
Conditions to the Company's Obligations. The obligations of the Company to
consummate the transactions contemplated by the Purchase Agreement are subject
to the fulfillment prior to or on the Closing Date of certain conditions
precedent reciprocal to the conditions contained in paragraphs (i), (ii),
(iii), (iv), (viii), and (x).
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Termination
The Purchase Agreement may be terminated (i) by the mutual written consent of
the Company and Carlyle; (ii) by the Company or Carlyle if (a) the Closing
shall not have occurred on or before December 31, 1996, provided that such
provision shall not be available to either party if the other party has the
right to terminate the agreement due to a material breach by such other party
after an adequate opportunity to cure or (b) holders of the Common Stock of the
Company fail to approve the Investment Proposal and the consummation of
transactions contemplated by the Purchase Agreement; (iii) by Carlyle, if the
Company shall have breached in any material respect any of its representations
or warranties, or the covenants or agreement contained in the Purchase
Agreement, which breach is not cured by the Company, (iv) by the Company if
Carlyle shall have breached in any material respect any of the representations
or warranties, or covenants or agreements, contained in the Purchase Agreement,
which breach is not cured, (v) by either party if at any time prior to the
Closing Date, the Board of Directors of the Company has entered into a
definitive agreement, in the exercise of its fiduciary obligation, with respect
to an alternative transaction, or (vi) by either party if at any time prior to
the Closing Date, the average of the daily high and low sales price for a share
of Common Stock on the NYSE for any ten (10) NYSE trading day period commencing
on or after the date of the Purchase Agreement and ending prior to the Closing
Date shall be less than $1.75.
If the Purchase Agreement is terminated as provided above, each party will
redeliver all documents and work papers of any other party, the fees and
expense provisions remain in effect, and such termination shall be without
liability or further obligation of either the Company or Carlyle to the other
party to the Purchase Agreement, except that no such termination shall relieve
any party from liability or a prior breach of the Purchase Agreement.
Minority Protections
The Purchase Agreement provides that during any period in which Carlyle
beneficially owns shares of capital stock of the Company having 20% or more of
the votes that may be cast generally at annual or special meetings of
stockholders (i) any contract or transaction between the Company and any
affiliate of Carlyle shall be voidable by the Company unless the Board in good
faith authorizes the contract or transaction by the affirmative vote of a
majority of the Non-Preferred Stock Directors, (ii) any acquisition of capital
stock of the Company by any affiliate of Carlyle, the result of which shall
cause one or more affiliates of Carlyle to beneficially own, in the aggregate,
shares of capital stock of the Company having 75% or more of the votes that may
be cast generally at annual or special meetings of stockholders shall be
subject to the prior approval of the Non-Preferred Stock Directors, provided
that for purposes of (i) and (ii), the Non-Preferred Stock Directors may be
counted in determining the presence of a quorum at the relevant meeting of the
Board of Directors; and (iii) no Carlyle affiliate shall consummate any "going
private" transaction (within the meaning of Rule 13e-3 under the Exchange Act)
without the prior approval of the Board (by the affirmative vote of a majority
of Non-Preferred Stock Directors) and a majority of the shares of Common Stock
held by persons other than Carlyle affiliates.
Indemnification
All representations and warranties of the Company and Carlyle contained in
the Purchase Agreement shall survive the consummation of the transactions
contemplated by the Purchase Agreement for a period of 18 months from the
Closing Date; provided that there shall be no termination with respect to any
representation or warranty as to which a bona fide claim has been asserted
prior to such expiration date.
The Purchase Agreement provides that the Company will indemnify, defend and
hold harmless Carlyle, and its affiliates, directors, officers, advisors,
employees and agents to the fullest extent lawful from and against all demands,
losses, damages, penalties, claims, liabilities, obligations, actions, causes
of action and reasonable expenses ("Losses") arising out of the Purchase
Agreement the related transactions or arising by reason of or resulting from
the breach of any representation, warranty, covenant or agreement of the
Company contained in the Purchase Agreement for the period for which such
representation or warranty survives; provided, however, that the Company shall
not have any liability to indemnify Carlyle with respect to Losses arising from
the bad faith or gross negligence of the Carlyle indemnified party.
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The Purchase Agreement provides that Carlyle will indemnify, defend and hold
harmless the Company, its affiliates, directors, officers, advisors, employees
and agents from and against all Losses arising out of the breach of any
representation, warranty, covenant or agreement of Carlyle contained in the
Purchase Agreement for the period for which such representation or warranty
survives; provided, however that Carlyle shall not have any liability to
indemnify the Company with respect to Losses arising from the bad faith or
gross negligence of the Company indemnified party.
The Purchase Agreement provides that no claim may be made against an
indemnifying party for indemnification until the aggregate dollar amount of all
Losses exceeds $1,500,000 and the indemnification obligations of the respective
parties shall be effective only until the dollar amount paid in respect of the
Losses indemnified against aggregates to an amount equal to $45,000,000.
Expenses of the Transaction
The Company shall be responsible for the payment of all expenses incurred by
the Company in connection with the transactions contemplated by the Purchase
Agreement, regardless of whether such transactions close, including, without
limitation, all fees and expenses incurred in connection with this Proxy
Statement and the fees and expenses of the Company's legal counsel and all
third party consultants engaged by the Company to assist in the transactions.
On the Closing Date, the Company shall reimburse Carlyle for reasonable
expenses incurred by Carlyle including fees and expenses of legal counsel,
accountants, consultants and travel expenses and similar expenses incurred in
connection with transactions contemplated by the Purchase Agreement in an
amount not to exceed $900,000 (the "Carlyle Transaction Expenses"). In the
event that the Agreement is terminated (other than due to a material breach of
Carlyle or the Company's entering into an agreement for an alternate
transaction pursuant to the Board's fiduciary duties), the Company shall pay
the Carlyle Transaction Expenses as described above. If the Purchase Agreement
is terminated because the Company enters into an alternative transaction or the
transactions are not consummated for any reason other than a breach by Carlyle
and if thereafter the Company successfully closes an alternative transaction
other than to an affiliate of the Company, on or prior to June 30, 1997, the
Company shall pay to Carlyle the greater of (i) three percent of the proceeds
of such sale of equity securities or (ii) the Carlyle Transaction Expenses. In
addition, if the closing of the Investment does not occur for any reason and
the Company successfully closes at a later date an acquisition as to which
Carlyle has provided significant advisory services, the Company shall pay
Carlyle a standard investment banking fee and reimburse Carlyle for the Carlyle
Transaction Expenses.
Description of Convertible Preferred Stock
The following summary of the material terms of the Convertible Preferred
Stock does not purport to be complete and is subject to, and qualified in its
entirety by reference to, all of the provisions of (including the definitions
of certain terms defined in) the Certificate of Designations, Preferences and
Relative, Participating, Optional and Other Special Rights and Qualifications,
Limitations and Restrictions thereof of Cumulative Convertible Participating
Preferred Stock (the "Certificate of Designations"), a copy of which is
attached as Appendix III to this Proxy Statement.
Dividends. Holders of Convertible Preferred Stock will be entitled to
receive, when and as declared by the Board of Directors out of funds legally
available therefor, cumulative annual dividends. Dividends will be payable
quarterly in arrears on , , , and of each year (a "Dividend Payment
Date"), commencing on the second anniversary of the closing of the Investment
and for shares paid as PIK Dividends (as defined), as described below,
commencing on the first Dividend Payment Date after such shares are issued.
Dividends on the Convertible Preferred Stock payable during the period
beginning on the first Dividend Payment Date on or following the first
anniversary of the closing of the Investment and ending on the first Dividend
Payment Date on or following the second anniversary of the closing of the
Investment, shall be paid in fully paid and nonassessable shares of Convertible
Preferred Stock (such dividends paid in kind being herein called "PIK
Dividends"). Dividends on the Convertible Preferred Stock payable thereafter
shall be paid in cash. In addition, if dividends are paid on the Common Stock
(which requires the approval of two-thirds of the
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Convertible Preferred Stock) there must also be paid to holders of the
Convertible Preferred Stock the amount of dividends that would have been
payable if such shares had been fully converted into Common Stock immediately
prior to the record date for such dividend.
The dividends payable shall be at the "Applicable Dividend Rate" which is
defined to mean the following per annum percentages of liquidation preference:
(i) zero percent with respect to dividends payable on the first four Dividend
Payment Dates following the closing of the Investment, (ii) three percent with
respect to dividends payable on the fifth through eighth Dividend Payment Dates
following the closing of the Investment, and (iii) six percent with respect to
dividends payable thereafter. PIK Dividends shall be paid by delivering to the
record holders of Convertible Preferred Stock a number of shares of Convertible
Preferred Stock determined by dividing the total amount of the cash dividend
which otherwise would be payable on the Dividend Record Date to such holders
(rounded to the nearest whole cent) by the liquidation preference ($1,000 per
share).
Ranking and Liquidation. The Convertible Preferred Stock will rank on a
parity with the Company's 7% Preferred Stock and senior to the Common Stock as
to payment of dividends, redemption payments and distributions and upon
liquidation, dissolution or winding up of the Company. In the event of any such
liquidation, dissolution or winding up, each holder of a share of Convertible
Preferred Stock will be entitled to receive, before any distribution to the
holders of Common Stock, a liquidation preference equal to the liquidation
preference of such shares, plus all accrued and unpaid dividends thereon.
Conversion. A holder of shares of Convertible Preferred Stock shall have the
right, at the holder's option, to convert all or a portion of its shares into
shares of Common Stock at any time before the close of business on the business
day preceding the Redemption Date (See "--Redemption" below). For the purposes
of conversion, each share of Convertible Preferred Stock shall be valued at the
liquidation preference plus all accrued and unpaid dividends through the
Conversion Date, which shall be divided by the Conversion Price in effect on
the Conversion Date to determine the number of shares issuable upon conversion.
The Conversion Price is defined to mean initially $2.00 and thereafter be
subject to adjustment from time to time, provided however, that on the eighth
anniversary of the closing of the Investment, the Conversion Price shall be
adjusted to equal one half of the then-current conversion price per share of
Common Stock, subject thereafter to further adjustment. The Certificate of
Designations provides for customary adjustments to the conversion price and
number of shares issuable upon conversion in the event of certain dividends and
distributions to holders of Common Stock, stock splits, combinations, sales of
Common Stock at less than market value and mergers, tender offers and similar
transactions. In addition, the Certificate of Designations provides for an
adjustment to the conversion price and number of shares issuable upon
conversion in the event shares of 7% Preferred Stock are converted into Common
Stock at the special conversion price following the closing. See "--Impact of
the Transaction on the Company and Existing Stockholders; Certain
Considerations--Special Conversion Price of Outstanding 7% Preferred Stock"
above.
Immediately following such conversion, the rights of the holders of converted
Convertible Preferred Stock shall cease and the persons entitled to receive the
Common Stock upon the conversion of Convertible Preferred Stock shall be
treated as the owners of such Common Stock. The Company is required to maintain
a reserve of authorized but unissued shares of Common Stock to permit the
conversion of the Convertible Preferred Stock in full.
Redemption. The Company will be entitled, at its option (as determined by a
majority of the Non-Preferred Stock Directors of the Board of Directors), to
redeem all, but not less than all, of the outstanding shares of Convertible
Preferred Stock at any time after , 2003. The redemption price upon any
redemption will be equal to the Liquidation Preference per share, plus an
amount equal to the dollar amount of all accrued and unpaid cumulative
dividends through the redemption date.
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Voting Rights. Holders of Convertible Preferred Stock will generally have the
right to vote (on an as-converted basis) as a single class with the holders of
Common Stock, together with all other classes and series of stock of the
Company that are entitled to vote as a single class with the Common Stock, on
all matters coming before the Company's stockholders, except (i) matters for
which class voting is required by law or under the Company's Certificate of
Incorporation, including the Certificate of Designations and (ii) with respect
to the election of the Non-Preferred Stock Directors during the period
beginning on the closing date of the Investment and ending on the fifth
anniversary thereof (the "Five Year Period"). In any vote with respect to which
Convertible Preferred Stock shall vote with the holders of Common Stock as a
single class, each share of Convertible Preferred Stock shall entitle the
holder thereof to cast the number of votes equal to the number which could be
cast in such vote by a holder of the number of shares of Common Stock into
which such share of Convertible Preferred Stock is convertible on the date of
such vote.
With respect to any matter for which class voting is required by law or under
the Company's Certificate of Incorporation, except as otherwise described
herein, the holders of Convertible Preferred Stock will vote as a class and
each holder shall be entitled to one vote for each share held.
The following matters will require the approval of the holders of at least a
majority of the issued and outstanding shares of Convertible Preferred Stock,
voting together as a separate class:
(i) the creation, authorization or issuance (including on conversion or
exchange of any convertible or exchangeable securities or by
reclassification) of any class or series of shares ranking on a parity with
or prior to the Convertible Preferred Stock either as to dividends or
redemption or upon voluntary or involuntary liquidation, dissolution or
winding up;
(ii) the increase in the authorized shares of, or issue (including on
conversion or exchange of any convertible or exchangeable securities or by
reclassification) any shares of Convertible Preferred Stock, except for the
issuance of PIK Dividends in accordance with the Certificate of
Designations;
(iii) the amendment, alteration, waiver of the application of, or repeal
(whether by merger, consolidation or otherwise) any provision of the
Company's Certificate of Incorporation, the entering into of any agreement
or taking of any other corporate action which in any manner would alter,
change, or otherwise adversely affect the powers, rights or preferences of
the Convertible Preferred Stock;
(iv) the reorganization, recapitalization, liquidation, dissolution or
winding up of the Company, or the sale, lease, conveyance or exchange of
all or substantially all of the assets, property or business of the
Company, or the merger or consolidation of the Company with or into any
other corporation, if such transaction in any manner would alter, change or
otherwise adversely affect the powers, rights, or preferences of the
Convertible Preferred Stock; or
(v) any action which would cause a dividend or other distribution to be
deemed to be received by the holders of the Convertible Preferred Stock for
federal income tax purposes unless such dividend or other distribution is
actually received by such holders.
Approval of the holders of at least two-thirds of the Convertible Preferred
Stock will be required for the payment of any dividend on the Common Stock or
any other junior stock of the Corporation.
For so long as Carlyle continues to beneficially own shares of capital stock
having 20% or more of the votes that may be cast at annual or special meetings
of stockholders, then the number of directors comprising the Company's Board of
Directors shall be an odd number and the holders of the Convertible Preferred
Stock will have the exclusive right, voting separately as a class, to elect (i)
during the Five-Year Period, the smallest number of directors that constitutes
a majority of the Board and (ii) subsequent to the Five-Year Period, the
greatest number of directors that constitutes a minority of the Board of
Directors (each such director, a "Convertible Preferred Stock Director") at any
special meeting of stockholders called for such purpose, at any annual meeting
and in any written consent pursuant to Delaware law. So long as the Convertible
Preferred Stock has the right to elect Convertible Preferred Stock Directors
pursuant to the foregoing, then (i) during the Five-Year Period the holders of
Common Stock shall have the exclusive right to elect the Non-Preferred Stock
Directors and
22
<PAGE>
(ii) subsequent to the Five-Year Period, each share of Convertible Preferred
Stock will entitle the holder thereof to vote, together with the Common Stock
as a single class for the election of Non-Preferred Stock Directors. After such
time as Carlyle ceases collectively to beneficially own capital stock having
20% or more of the votes that may be cast at annual or special meetings of
stockholders, then the rights of the holders of Convertible Preferred Stock to
elect Convertible Preferred Stock Directors shall cease and the holders of
Convertible Preferred Stock shall thereupon and thereafter vote for the
election of all directors together with the holders of the Common Stock voting
as a single class.
The Convertible Preferred Stock Directors elected as provided in the
Certificate of Designations shall serve until the next annual meeting or until
their respective successors shall be elected and shall qualify. The Convertible
Preferred Stock Directors may be removed with or without cause, and may be
removed only by a vote or consent of the holders of a majority of the
outstanding shares of Convertible Preferred Stock, voting separately as a
class. Vacancies among the Convertible Preferred Stock Directors will be filled
by a majority vote of the remaining Convertible Preferred Stock Directors or by
the holders of a majority of Convertible Preferred Stock. Upon any termination
of the right of the holders of the Convertible Preferred Stock to elect
Convertible Preferred Stock Directors, the Convertible Preferred Stock
Directors then serving may continue to hold office for the remainder of their
term. Only Non-Preferred Stock Directors shall have the right to vote in the
election of any person to fill any vacancy created by the death, resignation,
retirement, disqualification or removal from office of a Non-Preferred Stock
Director and all such rights will be exercised by a majority of the Non-
Preferred Stock Directors. The foregoing provision may not be amended without
(x) the affirmative vote of the holders of a majority of the outstanding shares
of Common Stock and (y) the affirmative vote of the holders of a majority of
the outstanding shares of Convertible Preferred Stock.
In the event that the Convertible Preferred Stock no longer has the right to
elect Convertible Preferred Stock Directors as described above and dividends
payable on the Convertible Preferred Stock at the time outstanding shall be
cumulatively in arrears for six Dividend Periods (whether or not consecutive),
then the holders of the Convertible Preferred Stock shall have the right,
voting as a class with other parity stock, to elect two directors at the
Company's next annual meeting and at each subsequent annual meeting of
stockholders. Such right to elect two directors shall continue until all
dividends accumulated on such stock have been paid or funds have been set aside
for such payment.
Mergers and Similar Transactions. In the event that the Company is a party to
any merger or consolidation in which any class or series of the Common Stock is
reclassified, converted, exchanged or canceled, or in case of any sale or
transfer of all or substantially all of the assets of the Company each share of
Convertible Preferred Stock then outstanding will, without the consent of such
holder, become convertible only into the kind and amount of securities, cash
and other property receivable upon such consolidation, merger, sale or transfer
by a holder of the number of shares of Common Stock (and other securities, if
applicable) into which such Convertible Preferred Stock was convertible
immediately prior thereto (assuming such holder of Common Stock (and other
securities, if applicable) failed to exercise any rights or election and that
such Convertible Preferred Stock was then convertible).
Certain Covenants of the Company. The Certificate of Designations contains
customary covenants regarding reservation of shares for issuance upon
conversion, compliance with laws regarding registration of securities,
maintaining eligibility of the Common Stock for trading, payment of certain
taxes, preparation of financial statements and other matters.
Listing. The Company does not intend to list the Convertible Preferred Stock
for trading on the NYSE or any other exchange.
Description of the Warrant
Pursuant to a Warrant Agreement to be entered into upon the closing of the
Investment, the Company shall issue and sell to Carlyle, or its designees, the
Warrants to purchase up to an aggregate of 5,000,000 shares of
23
<PAGE>
Common Stock of the Company. The Warrants shall have a term of five years and
will be exercisable in full or in part from time to time by means of payment
of the Exercise Price ($3.00 per share of Common Stock) in cash or by the
election of the holder of the Warrant to receive the shares issuable upon
exercise of the Warrants (the "Warrant Shares") on a net basis (based on the
fair market value of the Common Stock at the time). The Warrant Agreement
provides for customary adjustments to the exercise price in the event of
certain dividends and distributions to holders of Common Stock, stock splits,
combinations, sales of Common Stock at less than market value and mergers,
tender offers and similar transactions. Such provisions are consistent with
the similar provisions of the Certificate of Designations.
The Warrant Agreement also provides for customary provisions with respect
to, among other things, payment of taxes, reservation of Warrant Shares,
mutilated or missing Warrant certificates, listing of Warrant Shares for
trading on the appropriate stock exchange, preparation of financial
statements, and notices to holders of Warrants.
Regulatory Filings and Approvals
Under the HSR Act and the rules promulgated thereunder, certain
transactions, including certain of the transactions contemplated by the
Purchase Agreement, may not be consummated unless certain information has been
furnished to the Federal Trade Commission (the "FTC") and the Antitrust
Division of the Justice Department (the "Antitrust Division") and certain
waiting period requirements have been satisfied. In the event that, as a
result of the Investment, any of the Carlyle entities purchasing the
Convertible Preferred Stock and Warrants in the Investment would hold voting
securities of the Company with a value in excess of $15,000,000 or 15% of the
voting securities of the Company, then, in the event that no exemption from
the reporting requirement and waiting period of the HSR Act were available,
each such entity and the Company will be required to file Notification Report
Forms with the FTC and the Antitrust Division and to observe the applicable
waiting period prior to consummating the Investment. Notwithstanding the
termination of the HSR Act waiting period, if applicable, at any time before
or after the consummation of the transactions contemplated by the Purchase
Agreement, any person may take action under the antitrust laws, including
seeking to enjoin the consummation of the transactions contemplated by the
Purchase Agreement or seeking the divestiture by Carlyle of all or any part of
the securities received by it pursuant to the Purchase Agreement. There can be
no assurance that a challenge to the transactions contemplated by the Purchase
Agreement on antitrust grounds will not be made or that, if such a challenge
is made, it would not be successful.
Registration Rights
As of the Closing Date, the Convertible Preferred Stock and the Warrants
will not be listed on the NYSE or any other national securities exchange and
the issuance of the Convertible Preferred Stock and the Warrants will not be
registered with the SEC and therefore they will be restricted securities. On
the Closing Date, the Purchase Agreement provides that the Company shall enter
into a Registration Rights Agreement with Carlyle (the "Registration Rights
Agreement"), pursuant to which Carlyle or its transferee (a "Holder") will be
entitled to certain additional rights with respect to the registration under
the Securities Act of shares of Common Stock issuable upon conversion of the
Convertible Preferred Stock or the exercise of the Warrants (or certain
securities issuable with respect to such Common Stock by way of a stock
dividend or stock split or in connection with a combination of shares,
recapitalization, merger, consolidation or reorganization) ("Registrable
Shares").
The Registration Rights Agreement provides for demand and piggyback
registration rights. Holders of at least 20% of the then outstanding
Registrable Securities may demand registrations of the Registrable Securities
up to five times, provided that the proposed public offering price of such
Registrable Securities is at least $5,000,000. Additionally, the Company is
not required to file a demand registration statement if such demand is made
within six months after the effective date of the Company's most recent Common
Stock registration statement unless at holders of 50% of the Registrable
Securities make such demand. Generally, the Company bears the expense of the
first four such demand registration statements and the Holders who participate
in the fifth bear the expense thereof. The Holders have the right to select
the managing underwriter of any underwritten
24
<PAGE>
public offering covered by a demand registration, subject to approval of a
majority of the Non-Preferred Stock Directors of the Company's Board of
Directors.
The Registration Rights Agreement also provides for unlimited "piggyback"
registration rights. That is, in the event the Company proposes to register
the sale for cash of any of its securities under the Securities Act for its
own account or for the account of any other person, the Holders will be
entitled to include Registrable Shares in any such registration, subject to
the right of the managing underwriter of any such offering in certain
circumstances to exclude some or all of such Registrable Shares from such
registration. The Company bears the expense of any piggyback registrations.
The Registration Rights Agreement also includes (i) customary indemnification
and contribution provisions among the Company and the Holders, (ii) a
provision allowing the Company postpone filing or the declaration of
effectiveness of, or to require Holders to suspend sales of securities under,
an applicable registration statement for up to an aggregate of 60 days if the
applicable prospectus contains a misstatement or if there exists material non-
public information the disclosure of which would be materially harmful to the
Company.
INTEREST OF CERTAIN PERSONS IN THE INVESTMENT
In connection with the Investment, certain executive officers of the Company
will enter into employment agreements with the Company. See "Certain
Transactions--Employment Agreements."
REVERSE STOCK SPLIT AND REDUCTION OF PAR VALUE
To accommodate the Investment, an amendment to the Company's Certificate of
Incorporation is proposed to effect a reverse stock split pursuant to which
each four shares of Common Stock will be exchanged for one share of Common
Stock (the "Reverse Stock Split") and to decrease the par value of all shares
of Common Stock from $1.00 per share to $.01 per share. If all shares were
issued that are potentially subject to issuance by reason of the Investment,
exercise of all outstanding stock options, conversion of outstanding
convertible securities and the proposed 1996 Stock Incentive Plan, the total
number of shares outstanding would be 100,007,321. After giving effect to the
proposed Reverse Stock Split, such number would be 25,001,830.
As of June 28, 1996, the Company had outstanding 36,601,778 shares of Common
Stock; 6,548,700 additional shares are reserved for issuance upon the exercise
of outstanding options and 10,273,920 shares upon conversion of the 7%
Preferred Stock. As described above under "--Special Conversion Price of
Outstanding 7% Preferred Stock," the number of shares required for issuance
upon conversion of the 7% Preferred Stock could be increased to 18,927,000 by
reason of the Investment. 23,175,000 shares will be required for conversion of
the Convertible Preferred Stock (including shares issuable as PIK dividends),
5,000,000 shares for issuance upon exercise of the Warrants and
1,000,000 shares for issuance pursuant to the proposed 1996 Stock Incentive
Plan. As described above under "--Special Conversion Price of Outstanding 7%
Preferred Stock", the number of shares of Common Stock issuable upon
conversion of the Convertible Preferred Stock could be increased to as much as
31,929,843 if all shares of 7% Preferred Stock were converted to Common Stock
at the special conversion price. As a result, the Company desires to effect
the Reserve Stock Split to allow it to reserve for issuance the appropriate
number of shares in the Investment while retaining a sufficient number of
shares for other corporate purposes. Except for minor differences resulting
from the aggregation and sale of fractional shares, as described below, the
Reverse Stock Split will not affect any stockholder's percentage ownership
interest in the Company or of the outstanding Common Stock. Following the
Reverse Stock Split, the total number of shares of Common Stock outstanding
would be reduced from approximately to approximately .
Purpose and Effect of Proposed Amendment
In addition to accommodating the Investment, the Board believes that the
Reverse Stock Split is advantageous to the Company and its stockholders as a
means of the enhancing liquidity and marketability of the Common Stock. The
Board believes that the current low per share market price of the Common Stock
may
25
<PAGE>
impair the acceptability of the Company's equity securities to the financial
community and the investing public. Although, theoretically, the number of
shares outstanding should not affect an investor's decision to own shares of
Common Stock as an investment, in practice many investors may regard lower-
priced stock as unduly speculative in nature and may therefore avoid
investment in such stocks. In addition, the Board believes that the current
market prices for the Common Stock may reduce the effective marketability of
the Company's equity securities because of the potential reluctance of many
leading brokerage firms to recommend lower-priced stocks to their clients.
Furthermore, certain brokerage house policies and practices may tend to
discourage individual brokers with those firms from dealing in lower-priced
stocks, and some brokerage houses will not permit clients to carry lower-
priced stocks on a margin basis. Finally, the structure of trading commissions
also tends to have an adverse impact on holders of lower-priced stocks because
the brokerage commission on a sale of lower-priced stock generally represents
a higher percentage of the sales price than the commission on a relatively
higher-priced issue.
Although there can be no assurance that the market price per share of Common
Stock will increase proportionately to the decrease in the number of
outstanding shares following the Reverse Stock Split, the Reverse Stock Split
is intended to result in a price level for the Common Stock that will increase
investor and broker interest. It is impossible to predict the market's
reaction to any reverse stock split or, in this case, to separate that
reaction from the market's reaction to the proposed Investment as a whole.
However, the Company would expect that immediately after the Reverse Stock
Split each share of Common Stock would be valued at a price approximately four
times greater than without the split.
A holder of Common Stock will be entitled to receive a whole number of
shares plus a fraction of a share if the number of shares of Common Stock held
by him prior to the Reverse Stock Split is not evenly divisible by four.
However, no certificates or scrip representing fractional shares of Common
Stock will be issued. In lieu of any fractional shares, the transfer agent of
the Common Stock on behalf of all persons otherwise entitled to receive
fractional shares (including individual beneficial owners of shares held by a
nominee holder) will, promptly following the effective time of the Reverse
Stock Split, aggregate such fractional shares and sell the resulting whole
shares of Common Stock for the accounts of those persons in open market
transactions on the NYSE. Those persons will thereafter be entitled to receive
their allocable portion of the net proceeds of the sale thereof upon surrender
of their Common Stock certificates as described below.
There were 2,128 stockholders of record of the Common Stock as of September
6, 1996. The Reverse Stock Split is not expected to cause a significant change
in the number of record holders of the Common Stock. The Company has no plans
for the cancellation or purchase of shares of Common Stock from holders of a
nominal number of shares following the Reverse Stock Split, and has no present
intention to take the Company private through the Reverse Stock Split or
otherwise.
As of , 1996, there were outstanding options to purchase an aggregate of
of Common Stock under the Company's 1991 Stock Option Plan and other
stock incentive plans. All of such outstanding options include provisions for
adjustment in the number of shares covered thereby and the exercise price
therefor in the event of a reverse stock split. If the Reverse Stock Split is
approved and effected, there would be reserved for issuance upon exercise of
all outstanding options a total of approximately of Common Stock. Each
of the outstanding options would thereafter evidence the right to purchase
one-fourth of the number of shares of Common Stock previously covered thereby,
and the exercise price per share would be four times the previous exercise
price.
If the Reverse Stock Split is approved as part of the Investment, the
Company will file an amendment to the Company's Certificate of Incorporation
with the Secretary of State of the State of Delaware. The Company will notify
holders of Common Stock of the effectiveness of the Reverse Stock Split and
will furnish the holders of record of shares of Common Stock at the close of
business on such effective date with a letter of transmittal for use in
exchanging certificates. The holders of Common Stock will be required to
promptly mail their certificates representing shares of Common Stock to the
transfer agent, in order that new certificates giving effect to the Reverse
Stock Split may be issued and the proceeds of the sale of any fractional
shares may be distributed.
26
<PAGE>
Commencing with the effective date of the Reverse Stock Split, previously
outstanding certificates representing shares of Common Stock will be deemed
for all purposes to represent one-fourth of the number of shares previously
represented thereby (subject to the treatment of fractional interests as
described above).
Except as otherwise indicated, all share and per share information in this
Proxy Statement is presented without giving effect to the Reverse Stock Split.
Additionally, the Board believes that changing the par value of the Common
Stock to $.01 per share is in the best interests of the Company and its
stockholders to ensure the Company's ability to adjust the conversion or
exercise price of outstanding securities, in accordance with their terms, in
the future.
VOTE REQUIRED FOR APPROVAL OF THE INVESTMENT PROPOSAL
The affirmative vote of a majority of the outstanding shares of Common Stock
entitled to vote is required to approve Proposal 1.
27
<PAGE>
PROPOSAL 2
ELECTION OF DIRECTORS
BOARD OF DIRECTORS FOLLOWING THE INVESTMENT
Upon completion of the Investment, the Board of Directors of the Company
will consist of seven directors, of whom four will be elected by Carlyle, as
holder of the Convertible Preferred Stock, acting by written consent without a
meeting. As described below under "--Election of Directors at the Annual
Meeting," stockholders will elect three directors at the Annual Meeting. Until
completion of the Investment (and thereafter if the Investment is not
completed), the Board of Directors of the Company will consist of nine
directors, including the three directors elected by the stockholders at the
Annual Meeting (see "--Current Board of Directors" below). All of such
directors, other than Anthony J. DeLuca, E. Martin Gibson and James C. McGill,
have advised the Company that they will resign upon completion of the
Investment.
Under the Company's current Certificate of Incorporation, the directors of
the Company serve for three-year terms which are staggered to provide for the
election of approximately one-third of the Board members each year. See
"Proposal 4--Elimination of Cumulative Voting and Classified Board of
Directors." Whether or not the Certificate of Incorporation is amended as set
forth under Proposal 4, the four directors elected by holders of the
Convertible Preferred Stock will serve for annual terms.
The names of the directors who will remain on the Board of Directors
following completion of the Investment (assuming that Mr. McGill is reelected
as a director at the Annual Meeting) and the directors proposed to be selected
by Carlyle, and their respective terms if Proposal 4 (with respect to
elimination of classified terms) is not adopted, are set forth in the
following table. If Proposal 4 is adopted then, following the completion of
the Investment, all directors will serve one year terms.
Board of Directors Upon Completion of the Investment:
<TABLE>
<CAPTION>
DIRECTOR OF
TERM TO THE COMPANY
NAME AGE CURRENT POSITION EXPIRE(1) SINCE
---- --- ---------------- --------- -----------
<S> <C> <C> <C> <C>
PRESENT DIRECTORS OF THE COMPANY:
Anthony J. DeLuca........ 49 Director, President and 1997 1996
Acting Chief Executive
Officer
E. Martin Gibson(2)(3)... 58 Director and Chairman of 1998 1994
the Board (non-officer
position)(4)
James C. McGill(3)(5).... 52 Director 1999 1990
PROPOSED CONVERTIBLE PREFERRED STOCK DIRECTORS:
[to come] 1997 n/a
1997 n/a
1997 n/a
1997 n/a
</TABLE>
- - - --------
(1) Terms set forth are current terms of each director. If the Investment is
consummated, each director will stand for re-election every year. Thus,
the terms of each of the directors would expire in 1997.
(2)Member of Compensation Committee.
(3)Member of Nominating Committee.
(4) Mr. Gibson will remain a member of the Board but will resign as Chairman
of the Board upon consummation of the Investment.
(5) Member of Audit Committee.
28
<PAGE>
ELECTION OF DIRECTORS AT THE ANNUAL MEETING
At the Annual Meeting, stockholders will elect three directors to hold
office until the 1999 Annual Meeting of Stockholders and until their
successors are elected and qualified. All of the directors, other than Messrs.
DeLuca, Gibson and McGill have advised the Company that they will resign from
the Board of Directors, effective upon completion of the Investment.
The names of the nominees for election as directors at the Annual Meeting
and the present directors whose terms of office do not expire in 1996 are set
forth in the following table. The Company has no reason to believe that any
nominee for election will not be able to serve as a director. However, should
any nominee become unavailable to serve, the proxies solicited hereby may be
voted for election of such other person as may be nominated by the Board of
Directors.
Present Board of Directors including Nominees for Re-election:
<TABLE>
<CAPTION>
DIRECTOR OF
TERM TO THE COMPANY
NAME AGE POSITION EXPIRE SINCE
---- --- -------- ------- -----------
<S> <C> <C> <C> <C>
NOMINEES FOR TERMS EXPIRING IN 1999:
Kirby L. Cramer(1)......... 50 Director 1999 1995
James C. McGill(2)(3)...... 52 Director 1999 1990
W. Scott Martin(3)......... 46 Director 1999 1994
DIRECTORS WHOSE TERMS EXPIRE AFTER 1996 AND
WHO ARE NOT CURRENTLY NOMINEES FOR
RE-ELECTION:
Ralph S. Cunningham(1)(2).. 55 Director 1997 1981
Donald S. Burns(2)(3)...... 71 Director 1997 1989
Anthony J. DeLuca.......... 49 Director, President and 1997 1996
Acting Chief Executive
Officer
Henry E. Riggs(3).......... 61 Director 1998 1995
Jack O. Vance(1)........... 71 Director 1998 1987
E. Martin Gibson(1)(2)..... 58 Director and Chairman of 1998 1994
the Board (non-officer
position)
</TABLE>
- - - --------
(1) Member of Compensation Committee.
(2) Member of Nominating Committee.
(3) Member of Audit Committee.
If Proposal 4 (with respect to eliminating classified terms) is approved and
if the Investment is completed, all of the directors will serve for one year
terms.
BACKGROUND OF THE NOMINEES, PROPOSED CONVERTIBLE PREFERRED STOCK DIRECTORS AND
CURRENT DIRECTORS
Mr. DeLuca was named President and Acting Chief Executive Officer and a
director of the Company as of July 1, 1996. Prior thereto, Mr. DeLuca had been
Senior Vice President and Chief Financial Officer of the Company since March
1990. Before joining the Company, Mr. DeLuca had been a senior partner at the
public accounting firm Ernst & Young LLP.
29
<PAGE>
Mr. Gibson became a director of the Company on October 11, 1994 and was
elected Chairman of the Board of Directors, a non-officer, non-employee
position, on April 6, 1995. From 1990 until December 1994, Mr. Gibson served
as Chairman of Corning Life Sciences, Inc., a subsidiary of Corning
Incorporated. Mr. Gibson served in various other senior management capacities
with Corning Incorporated during his 32 year career there, including as a
Senior Vice President and General Manager of Corning Medical and Scientific
Division from 1980 until 1983, and as Group President of Corning Consumer
Products and Laboratory Sciences from 1983 until 1990. From 1983 to 1994, Mr.
Gibson served on the Board of Directors of Corning Incorporated. Mr. Gibson
also serves on the Boards of Directors of Hardinge, Inc. and NovaCare, Inc.
Mr. McGill is currently, and has been for at least five years, a private
investor. He served as Chairman of McGill Environmental Systems, Inc. from
1970 to 1987. Mr. McGill serves on the Board of Trustees of the University of
Tulsa and on the Boards of Directors of four private corporations that are
engaged in tax consulting, health care, pipeline construction and golf.
[BIOGRAPHIES FOR CONVERTIBLE PREFERRED STOCK DIRECTORS TO BE INSERTED IN
FINAL PROXY]
Mr. Burns has been Chairman, President and Chief Executive Officer of
Prestige Holdings, Ltd., a property management and business consulting firm,
since 1978. Mr. Burns serves on the Boards of Directors of ESI Corporation and
International Rectifier Corporation.
Mr. Cramer became a director of the Company on November 2, 1995. He is the
Chairman Emeritus of Hazleton Laboratories Corporation, a contract biological
and chemical research laboratory, which was acquired by Corning Incorporated
in 1987. He is also Chairman of Northwestern Trust Company and is the
President of Keystone Capital Company, an investment company. Mr. Cramer is a
member of the University of Washington Foundation and also is Chairman of the
Advisory Board of the University of Washington School of Business
Administration. He is the past President and Trustee Emeritus of the Darden
School Foundation of the University of Virginia. In addition, Mr. Cramer
serves on the Boards of Directors of Immunex Corporation, Unilab Corporation,
The Commerce Bank of Washington, N.A., Northwestern Trust Company, Landec
Corporation, Advanced Technology Laboratories and Applied Bioscience
International.
Since May 1, 1995, Dr. Cunningham has served as President and Chief
Executive Officer of CITGO Petroleum Corporation. From May 1994 to May 1995,
he served as the Vice Chairman of the Board of Huntsman Corporation and
Huntsman Specialty Chemicals Corporation. Prior to joining Huntsman in 1994 he
served as the President of Texaco Chemical Company from 1990 to 1994 when
Texaco Chemical Company was acquired by Huntsman Corporation in 1994. From
1989 to 1990, he was Chairman and Chief Executive Officer of Clark Oil
Refining Corporation. In 1980, he joined Tenneco Oil Processing and Marketing
as Executive Vice President and served as President of that company from 1982
to 1989. Dr. Cunningham served as the Company's Chairman of the Board of
Directors from May 5, 1994 to January 5, 1995. Such position was a non-
officer, non-employee position. Dr. Cunningham serves as a director of
Viridan, Inc. (formerly Sherritt, Inc.), Enterprise Products Company, Huntsman
Corporation, CITGO Petroleum Corporation and Bank of Oklahoma.
Mr. Martin has been President of the Tulsa Loan Production Office of the
First Bank & Trust Company, Wagoner, Oklahoma, since September 1994. He was
the President, Chief Executive Officer and a member of the Board of Directors
of WestStar Bank in Tulsa, Oklahoma, from 1984 until September 1994. He has
also served as a member of the Boards of Directors of First Bank & Trust
Company, Wagoner, Oklahoma, since 1974; of First Bank of Chandler, Chandler,
Oklahoma, since 1977; and of First National Bank, Burkburnett, Texas, since
1983.
Mr. Riggs became a director of the Company on November 2, 1995. He has been
the President of Harvey Mudd College in Claremont, California since August 1,
1988. He was Vice President for Development of Stanford University from 1983
to 1988, and was Chairman of the Stanford University Department of Industrial
Engineering and Engineering Management from 1978 to 1982. He is currently a
director of several mutual funds managed by The Capital Group.
30
<PAGE>
Mr. Vance was a director of McKinsey & Company from 1960 until he retired on
December 31, 1989. He currently serves as Managing Director of Management
Research, Inc., a management consulting firm. Mr. Vance also serves as a
member of the Boards of Directors of International Rectifier Corporation, The
Olson Company, Vencor, Inc., ESCORP, University Restaurant Group, FCG
Enterprises, Inc. and Semtech Corporation.
All of the nominees named above who are to be elected by holders of the
Company's Common Stock at the Annual Meeting were selected by the full board
of directors in view of the pendency of the Investment; and no recommendations
were made by the Nominating Committee. Messrs. DeLuca, Gibson and McGill were
selected by the full Board of Directors to continue as directors following the
Investment, in view of the offices held by Messrs. DeLuca and Gibson, as
President and Acting Chief Executive Officer and Chairman, respectively, and
in view of Mr. McGill's substantial investment in Common Stock of the Company.
CUMULATIVE VOTING AND NOMINATIONS
Under the Company's current Certificate of Incorporation, stockholders are
entitled to cumulate voting rights in the election of directors. Under
cumulative voting, each stockholder is entitled to a number of votes equal to
the number of directors to be elected multiplied by the number of shares of
Common Stock the stockholder is entitled to vote. Such votes may be cast for
one nominee or distributed among two or more candidates. The candidates for
election receiving the highest number of affirmative votes of the shares
entitled to vote for them up to the number of directors to be elected by those
shares will be elected.
No stockholder shall be entitled to cumulate votes for a candidate unless
such candidate's name has been placed in nomination prior to the voting. In
voting by proxy, a stockholder is conferring upon the proxyholders the
discretionary authority to cumulate votes in electing directors. If any person
is properly nominated for director other than the nominees set forth in the
table above, the persons named in the accompanying proxy may vote at their
discretion cumulatively for less than all the nominees set forth.
Under the Company's Bylaws, in order to be effective, nominations for
election as a director must be submitted to the Secretary of the Company not
later than sixty days in advance of the Annual Meeting or, if later, the
fifteenth day following the first public disclosure of the date of the Annual
Meeting. Any such notice of nomination must set forth: (i) the name and
address of the stockholder who intends to make the nomination and of the
person or persons to be nominated; (ii) a representation that the stockholder
is a holder of record of Common Stock of the Company entitled to vote at the
Annual Meeting and intends to appear in person or by proxy at the Annual
Meeting and nominate the person or persons specified in the notice; (iii) a
description of all arrangements or understandings between the stockholder and
each nominee and any other person or persons (naming such person or persons)
pursuant to which the nomination or nominations are to be made by the
stockholder, (iv) such other information regarding each nominee proposed by
such stockholder as would be required to be included in a proxy statement
filed pursuant to the rules and regulations of the SEC had the nominee been
nominated, or intended to be nominated, by the Board of Directors; and (v) the
consent of each nominee to serve as director of the Company if so elected. In
addition, a stockholder making such a nomination must promptly provide any
other information reasonably requested by the Company.
MEETINGS OF THE BOARD OF DIRECTORS AND COMMITTEES
During the period April 1, 1995 through March 29, 1996, the end of the
Company's last fiscal year, the Company's Board of Directors held nine
meetings. During such fiscal year, each director attended 75% or more of the
aggregate of (i) the total number of meetings of the Board of Directors (held
during the period for which he has been a director) and (ii) the total number
of meetings held by all committees of the Board on which he served (during the
period that he served).
The Company's Audit Committee held six meetings from April 1, 1995 through
March 29, 1996. The Audit Committee makes recommendations to the Board of
Directors concerning the selection of the Company's independent auditors and
reviews with the independent auditors the scope and results of the annual
audit. The members of the Audit Committee are set forth in the table above.
31
<PAGE>
The Company's Compensation Committee held nine meetings from April 1, 1995
through March 29, 1996. The Compensation Committee reviews salaries, bonuses
and other aspects of executive compensation and administers the Company's 1991
Plan, which provided for the granting of stock incentive awards to employees
and directors of the Company until the Plan expired on March 31, 1996. The
members of the Compensation Committee are set forth in the table above.
The Company's Nominating Committee held four meetings from April 1, 1995
through March 29, 1996. The members of the Nominating Committee are set forth
in the table above.
COMPENSATION OF DIRECTORS
Retainer Fees. Non-employee directors receive a retainer fee of $5,000 per
quarter, $1,000 for each Board or committee meeting attended, $500 for each
telephonic Board or committee meeting attended (reduced from $1,000
previously), $500 per day for travel on business days and reimbursement of air
travel and other expenses incurred in connection with attending Board or
committee meetings. Committee chairmen receive $1,500 for each committee
meeting attended and $750 for each telephonic committee meeting attended
(reduced from $1,500 previously). The fees paid for meeting attendance are
limited to no more than one committee meeting for all committee meetings held
in tandem with a Board meeting, regardless of the actual number of committee
meetings attended. Additionally, in order to more closely align the
compensation of the Board members with the interests of Company's
stockholders, effective with the third quarter of fiscal year 1996, the
quarterly retainer fee payable to each director for the third quarter of each
fiscal year is paid in the form of shares of Common Stock, rather than in
cash. Such shares are purchased by the Company in the open market and reissued
to directors.
Chairman of the Board. Mr. E. Martin Gibson was elected on April 6, 1995 as
Chairman of the Board, which is a non-officer, non-employee position. In lieu
of the non-employee director fees described above, Mr. Gibson receives
compensation at the rate of $120,000 per year. Mr. Gibson serves as a member
or ex-officio member of all committees of the Board and spends significant
time on Company matters. Mr. Gibson will resign as Chairman of the Board upon
the Consummation of the Investment, if approved.
Stock Options. Prior to expiration of the 1991 Plan on March 31, 1996, each
non-employee director also received automatic grants of nonqualified stock
options under the 1991 Plan, to purchase 20,000 shares of Common Stock upon
his initial election as a director plus options to purchase an additional
10,000 shares of Common Stock at each subsequent annual meeting after having
served at least six months. Because the 1991 Plan has expired, no additional
awards may be made including option grants to the non-employee directors. The
non-employee director options that are outstanding have an exercise price
equal to the fair market value of Common Stock at the date of grant; become
exercisable in installments of 25% on each of the first four anniversaries of
the date of grant; have a five year term; and terminate when the holder ceases
to be a director unless due to death, disability or retirement. All such
grants were subject to the limitation that a non-employee director may not
hold, at any time, nonqualified stock options to purchase a number of shares
that, when added to all shares previously purchased by such director under the
1983 Plan or 1991 Plan, exceeds 50,000 shares. The Company has proposed that
stockholders adopt a 1996 Stock Incentive Plan. See Proposal 3.
Retirement Plan. Under the Company's current retirement plan for non-
employee directors, non-employee directors qualify for five years of
retirement payments if on retirement (i) they have five years of Board service
(in which case payments would begin at age 70, or upon retirement if the
director is between 70 and 73 when he retires) or (ii) they have ten years of
Board service (in which case payments would begin at age 65, or upon
retirement if the director is between 65 and 73 when he retires). However,
directors who served or have served continuously from December 4, 1984 to
retirement are not subject to such requirements and have qualified for the
retirement plan, provided that they retire at the conclusion of the annual
meeting following the date they reach age 75 unless the Board otherwise
provides. In the event of an eligible director's death, the director's
beneficiary will be entitled to receive a lump sum payment of the amount that
would otherwise have been payable to the director, less any amounts previously
paid under the plan. In the event of a director's disability or a change of
control (as defined in the plan) pursuant to which a director elects not to
remain on the Board, the service and
32
<PAGE>
age requirements are waived. Payment will be made in the normal manner upon
disability or in a lump sum if a director elects not to remain on the Board in
the event of a change of control. As described below, under the current
retirement plan the Carlyle Investment would constitute such a change in
control. The annual retirement amount is equal to the retainer fee and the
meeting and committee fees paid for a normal schedule of meetings during a
fiscal year (or the actual schedule of meetings during the 12-month period
prior to such director's retirement, if such schedule would result in higher
retirement benefits), as determined in accordance with the Board's retirement
plan. Additionally, former employees of the Company become eligible to
participate in the plan once they have completed five years of service as a
non-employee director.
Pursuant to the terms of the Retirement Plan, the consummation of the
Carlyle Investment would cause the payment of certain benefits payable to non-
employee directors of the Company who do not elect to remain on the Board of
Directors following such a change in control to be accelerated to a lump sum
payment. The Company and the non-employee directors of the Company who will
not remain on the board following the closing of the Investment have agreed to
amend the Retirement Plan, effective upon the consummation of the Carlyle
Investment, such that the vested benefits otherwise payable to each director
as a lump sum will be paid over a five-year period and that directors whose
benefits have not vested prior to the closing of the Investment will have such
benefits vest partially under the plan pro rata based on their years of
service. In addition, such amendment provides that Messrs. Gibson and McGill
will be paid amounts under the Retirement Plan, in lieu of any benefits that
may become payable to them under the plan in the future, notwithstanding the
fact that it is anticipated that they will remain on the Board following the
Carlyle Investment. Each of the non-employee directors of the Company has
acknowledged and agreed to a waiver of the right to receive the accelerated
lump sum payment. The payments to be received by non-employee directors are
significantly less than such waived lump sum payments. Pursuant to the plan as
amended, the directors would receive the following payments as of October 31,
1996:
<TABLE>
<CAPTION>
DIRECTOR AGE YEARS OF SERVICE(1) VESTED BENEFIT ANNUAL PAYMENT(2)
-------- --- ------------------- -------------- -----------------
<S> <C> <C> <C> <C>
Jack O. Vance......... 71 9 $ 200,000 $ 40,000
Donald S. Burns....... 71 7 200,000 40,000
Ralph S. Cunningham... 56 13 200,000 40,000
James C. McGill....... 52 6 200,000 40,000
W. Scott Martin....... 46 2 80,000 16,000
E. Martin Gibson...... 58 2 80,000 16,000
Kirby L. Cramer....... 60 1 40,000 8,000
Henry E. Riggs........ 61 1 40,000 8,000
---------- --------
TOTAL............... $1,040,000 $208,000
========== ========
</TABLE>
- - - --------
(1) Directors with five years of service have qualified for the full vested
benefit of $200,000. The benefit for directors with less than five years
service has been prorated.
(2) Benefits will be paid in equal monthly installments over five years.
33
<PAGE>
PROPOSAL 3
APPROVAL OF THE 1996 STOCK INCENTIVE PLAN
OBJECTIVES OF THE PLAN
The principal objectives of the proposed 1996 Stock Incentive Plan are
summarized below and then discussed in detail:
i.Motivate and retain qualified professionals in a highly competitive
industry.
ii.Recruit and attract new technical and professional talent.
iii.Preserve cash for growth.
iv.Tie the interests of key employees, directors and consultants to those
of stockholders.
v.Maintain a competitive total compensation package.
The success of the Company in the highly competitive environmental
consulting, engineering and remediation industry depends in large part upon
its ability to attract, motivate, and retain a large number of engineers,
scientists and other environmental professionals with specialized technical
training and experience. The continued volatility in the environmental
consulting, engineering and remediation industry has created a shortage of
qualified professionals and produced intense competition to recruit and
attract those professionals. The Company believes that an increasingly
important factor affecting an environmental consulting, engineering and
remediation company's ability to motivate and retain its current professional
staff, and to attract additional qualified environmental professionals, is its
ability to offer compensation packages that make significant use of stock-
based incentives.
The Company's authority to grant awards under its 1991 Plan expired on March
31, 1996.
With the assistance of independent outside compensation consulting experts,
the Company has reviewed its compensation practices in comparison to
competitors, general industry and the Company's strategic objectives. As a
result, the Company has developed a long-term compensation strategy which
makes use of stock-based incentives in lieu of cash payments to tie the
interests of management and key professional employees to those of
stockholders.
To increase the aggregate number of shares available for stock-based
incentive employees and for non-employee directors and to provide greater
flexibility in the type of incentives that may be awarded to employees, the
Board of Directors approved the 1996 Stock Incentive Plan (the "1996 Plan") on
September , 1996 and is submitting it to the stockholders for their
adoption at the Annual Meeting. The following description of the 1996 Plan is
qualified in its entirety by reference to the full text of such plan, a copy
of which is attached as Appendix VI to this Proxy Statement.
1996 STOCK INCENTIVE PLAN
The purpose of the 1996 Plan is to enable the Company and its subsidiaries
to attract, retain and motivate employees by providing for or increasing their
proprietary interests in the Company, and to attract non-employee directors
and further align their interests with those of the stockholders by providing
for or increasing their proprietary interests in the Company. Every employee
of the Company or any of its subsidiaries is eligible to be considered for the
grant of awards under the 1996 Plan.
The maximum number of shares of Common Stock that may be issued pursuant to
awards granted under the 1996 Plan is 1,000,000 (approximately % of the
number of shares of Common Stock outstanding on September , 1996);
provided, however, that on April 1 of each of the years 1997, 1998, 1999, 2000
and 2001, such maximum number will be increased by a number equal to 2% of the
number of shares of Common Stock issued and outstanding on each of such dates.
34
<PAGE>
The 1996 Plan will be administered by one or more committees of the Board
(any such committee, the "Committee"). Subject to the provisions of the 1996
Plan, the Committee will have full and final authority to adopt, amend and
rescind rules and regulations relating to the 1996 Plan, select the employees
to whom awards will be granted thereunder, to grant such awards, and to
determine the terms and conditions of such awards and the number of shares to
be issued pursuant thereto.
AWARDS TO EMPLOYEES, DIRECTORS AND CONSULTANTS
The 1996 Plan authorizes the Committee to enter into any type of arrangement
with any person who is an employee, director or consultant of the Company or
any of its subsidiaries or affiliates (an "Eligible Person") that, by its
terms, involves or might involve the issuance of Common Stock or any other
security or benefit with a value derived from the value of Common Stock.
Awards are not restricted to any specified form or structure and may include,
without limitation, sales or bonuses of stock, restricted stock, stock
options, stock purchase warrants, other rights to acquire stock, securities
convertible into or redeemable for stock, stock appreciation rights, limited
stock appreciation rights, phantom stock, dividend equivalents, performance
units or performance shares. An award may consist of one such security or
benefit, or two or more of them in tandem or in the alternative.
An award granted under the 1996 Plan to an Eligible Person may include a
provision accelerating the receipt of benefits upon the occurrence of
specified events, such as the achievement of performance goals, the exercise
or settlement of a previous award, the satisfaction of an event or condition
within the control of the employee or within the control of others, an
acquisition of a specified percentage of the voting power of the Company, a
change of control of the Company or a dissolution, liquidation, merger,
reclassification, sale of substantially all of the property and assets of the
Company or other significant corporate transaction. Any stock option granted
to an Eligible Person may be a tax-benefited incentive stock option or a
nonqualified stock option that is not tax-benefited. See "Tax Treatment"
below.
An award to an Eligible Person may permit the Eligible Person to pay all or
part of the purchase price of the shares or other property issuable pursuant
to an award, and/or to pay all or part of such Eligible Person's tax
withholding obligation with respect to such issuance, by (i) delivering cash,
(ii) delivering other property acceptable to the Committee, (iii) delivering
previously owned shares of capital stock of the Company or other property,
(iv) reducing the amount of shares or other property otherwise issuable
pursuant to the award or (v) delivering a promissory note, the terms and
conditions of which will be determined by the Committee. If an option granted
to an Eligible Person permitted the Eligible Person to pay for the shares
issuable pursuant thereto with previously owned shares, the Eligible Person
would be able to exercise the option in successive transactions, starting with
a relatively small number of shares and, by a series of exercises using shares
acquired from each such transaction to pay the purchase price of the shares
acquired in the following transaction, to exercise an option for a large
number of shares with no more investment than the original share or shares
delivered.
NON-EMPLOYEE DIRECTOR OPTIONS
The 1991 Plan provided that each person who became a non-employee director
of the Company would automatically be granted an option to purchase 20,000
shares of Common Stock, upon the date of such person's initial election as a
director of the Company or, if such person became a non-employee director by
ceasing to be an employee, upon the last business day of the fiscal year of
the Company during which such person ceased to be an employee and further
provided for annual options to each non-employee director to purchase 10,000
shares of Common Stock. The 1996 Plan does not contain such automatic grant
features. Instead, the Company is not required to make grants to non-employee
directors and the grant of such options is discretionary. The Company expects
to use such options selectively to attract and incentivize qualified non-
employee directors and to pay such directors' retainer and meeting fees.
PLAN DURATION
The 1996 Plan will become effective upon its adoption by the Company's
stockholders. Awards may not be granted under the 1996 Plan after the fifth
anniversary of the effective date of the 1996 Plan. Although any award
35
<PAGE>
that was duly granted on or prior to such date may thereafter be exercised or
settled in accordance with its terms, no shares of Common Stock may be issued
pursuant to any award after the fifteenth anniversary of the effective date of
the 1996 Plan.
AMENDMENTS
The Board of Directors may amend, alter or discontinue the 1996 Plan at any
time and in any manner, provided that the action may not deprive the recipient
of a previously granted award or any rights thereunder without consent,
provided that no consent shall be required if the Committee determines that
such amendment or alteration is not reasonably likely to significantly
diminish the benefits provided under the award or that any such diminishment
has been adequately compensated. Notwithstanding the foregoing, if an
amendment to the 1996 Plan would affect the awards' compliance with any law,
rule or regulation, and if the Committee determines it is necessary for the
awards to so comply, the amendment shall be approved by the Company's
stockholders to the extent required for compliance with such law, rule or
regulation.
TAX TREATMENT
The following is a description of the federal income tax treatment that will
generally apply to awards made under the 1996 Plan. Such an award may,
depending on the conditions applicable to the award, be taxable as an option,
an award of restricted or unrestricted stock, an award which is payable in
cash, or otherwise.
Pursuant to the 1996 Plan, participants may be granted options which are
intended to qualify as incentive stock options ("Incentive Options") under the
provisions of Section 422 of the Internal Revenue Code (the "Code").
Generally, the optionee is not taxed and the Company is not entitled to a
deduction on the grant or exercise of an Incentive Option. However, if the
optionee sells the shares acquired upon the exercise of an Incentive Option at
any time within (i) one year after the date of exercise of the Incentive
Option or (ii) two years after the date of grant of the Incentive Option, then
the optionee will recognize ordinary income in an amount equal to the excess,
if any, of the lesser of the sale price or the fair market value on the date
of exercise over the exercise price of the Incentive Option. The Company will
generally be entitled to a deduction in an amount equal to the amount of
ordinary income recognized by the optionee. The 1996 Plan provides that the
maximum number of shares of Common Stock that may be issued pursuant to
Incentive Options, in the aggregate, is 5,000,000 shares.
The grant of an option or other similar right to acquire stock that does not
qualify for treatment as an Incentive Option is generally not a taxable event
for the optionee. Upon exercise of the option, the optionee will generally
recognize ordinary income in an amount equal to the excess of the fair market
value of the stock acquired upon exercise (determined as of the date of
exercise) over the exercise price of such option, and the Company will be
entitled to a deduction equal to such amount.
Special rules will apply, however, if the optionee is subject to Section
16(b) of the Exchange Act and during any period of time (the "Section 16(b)
Period"), a sale of the stock acquired upon exercise of the option could
subject such optionee to suit under Section 16(b). In such case, the optionee
will not recognize ordinary income, and the Company will not be entitled to a
deduction, until the expiration of the Section 16(b) Period.
Upon such expiration, the optionee will recognize ordinary income, and the
Company will be entitled to a deduction, equal to the excess of the fair
market value of the stock (determined as of the expiration of the Section
16(b) Period) over the option exercise price. As described below, such an
optionee may elect under Code Section 83(b) to recognize ordinary income on
the date of exercise, in which case the Company would be entitled to a
deduction at that time equal to amount of the ordinary income recognized.
Awards to employees under the 1996 Plan may also include stock sales, stock
bonuses or other grants of stock. Stock issued pursuant to these awards may be
subject to certain restrictions. Pursuant to Section 83 of the Code, stock
sold or granted under the 1996 Plan will give rise to taxable income at the
earliest time at which such stock is not subject to a substantial risk of
forfeiture or is freely transferable for purposes of Section 83. At
36
<PAGE>
that time, the holder will recognize ordinary income equal to the excess of
the fair market value of the shares (determined as of such time) over the
purchase price, and the Company will be entitled to a deduction equal to such
amount. If the holder of the stock is a person subject to Section 16(b) and if
the sale of the stock at a profit could subject such person to suit under
Section 16(b), income will be recognized in accordance with the rules
described above regarding stock issued to such persons upon the exercise of an
option, unless the holder makes an election under Section 83(b) to recognize
income on the date the stock is issued.
Awards may be granted to employees under the 1996 Plan that do not fall
clearly into the categories described above. The federal income tax treatment
of these awards will depend upon the specific terms of such awards. The
Company will generally be required to withhold applicable taxes with respect
to any ordinary income recognized by a participant in connection with awards
made under the 1996 Plan.
The terms of the agreements pursuant to which specific awards are made to
employees under the 1996 Plan may provide for accelerated vesting or payment
of an award in connection with a change in ownership or control of the
Company. In that event, and depending upon the individual circumstances of the
recipient employee, certain amounts with respect to such awards may constitute
"excess parachute payments" under the golden parachute provisions of the Code.
Pursuant to these provisions, an employee will be subject to a 20% excise tax
on any "excess parachute payment" and the Company will be denied any deduction
with respect to such excess parachute payment.
BOARD RECOMMENDATION
For the reasons set forth under "General" above, the Board of Directors
believes that it is in the best interests of the Company and its stockholders
to adopt the 1996 Plan in order to help attract, retain and motivate qualified
employees and non-employee directors. A majority of the votes cast at the
Annual Meeting is necessary for the approval of this proposal.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE APPROVAL OF THE 1996
STOCK INCENTIVE PLAN DESCRIBED ABOVE. PROXIES SOLICITED BY THE BOARD OF
DIRECTORS WILL BE SO VOTED UNLESS STOCKHOLDERS SPECIFY OTHERWISE.
THE PROPOSAL WITH RESPECT TO THE APPROVAL OF THE 1996 STOCK INCENTIVE PLAN
WILL BE VOTED UPON BY THE STOCKHOLDERS SEPARATELY FROM PROPOSALS ONE, TWO AND
FOUR. THE IMPLEMENTATION OF PROPOSALS ONE, TWO AND FOUR IS NOT CONDITIONED
UPON APPROVAL OF THE APPROVAL OF THE 1996 STOCK INCENTIVE PLAN BY THE
STOCKHOLDERS OF THE COMPANY.
37
<PAGE>
PROPOSAL 4
APPROVAL OF THE ELIMINATION OF CUMULATIVE VOTING AND
ELIMINATION OF CLASSIFIED BOARD OF DIRECTORS PROPOSAL
The stockholders are being asked to approve at the Annual Meeting amendments
to the Company's Certificate of Incorporation to eliminate cumulative voting
in future elections of directors and to eliminate the classified board of
directors.
Cumulative voting is presently permitted by Article NINTH of the Company's
Certificate of Incorporation and its effects are described above under
Proposal 2 "Election of Directors." Under Delaware law, stockholders do not
have cumulative voting rights in the election of directors unless the
company's certificate of incorporation specifically provides such rights.
Article SEVENTH of the Company's Certificate of Incorporation currently
provides for three classes of directors with one-third of the directors
elected annually to three-year terms (a "classified board"). This provision
was designed to help assure continuity of Company policies and make management
changes more gradual. This provision also was designed to ensure that upon any
significant shift in share ownership of the Company, which is accompanied by
an attempt to "take over" the Company upon the terms the Board might deem not
to be in best interests of all stockholders, the entire Board could not be
replaced in one year allowing the Board of Directors adequate time to review
and respond to unsolicited third-party proposal.
PROPOSED AMENDMENTS TO CERTIFICATE OF INCORPORATION
The amendments to the Company's Certificate of Incorporation to eliminate
cumulative voting and the classified board of directors shall be in
substantially the form of proposed revised Article SEVENTH and Article NINTH
set forth in Appendices V and VI to this Proxy Statement.
FURTHER INFORMATION
Description of Operation of Cumulative Voting
Cumulative voting entitles each stockholder to cast a number of votes that
is equal to the number of voting shares held by such shareholder multiplied by
the total number of directors to be elected, and to cast all such votes for
one nominee or distribute the votes among up to as many candidates as there
are positions to be filled. See "Proposal 2 Election of Directors" above.
Without cumulative voting, a stockholder group or group of stockholders must
hold a majority of the voting shares to cause the election of one or more
nominees. Cumulative voting enables a minority stockholder or group of
stockholders holding a relatively small number of shares to elect a
representative or representatives to the Board. For example, in the election
of six directors, with cumulative voting, a stockholder or stockholders
holding greater than one-seventh (approximately 14.3%) of the voting shares is
guaranteed the ability to elect one director.
Effect of and Reasons for the Amendments
Given the restructuring of the Company's Board of Directors to be
implemented in connection with the Investment (see "Election of Directors--
Board of Directors Following the Investment"), the Board of Directors believes
that neither the Company's current classified board of directors nor
cumulative voting will be in the best interest of the holders of the Company's
Common Stock upon consummation of the Investment. The proposed amendments, if
adopted, will enable the holders of the Company's Common Stock to vote each
year on the election of directors (other than the directors elected each year
by the Convertible Preferred Stock voting as a separate class). The
elimination of cumulative voting will make it more difficult for a minority
stockholder to obtain representation on the Board of Directors without the
concurrence of a holder of a majority of the shares of Common Stock. In
addition, the elimination of cumulative voting will prevent the holders of
Convertible Preferred Stock from utilizing cumulative voting to elect a
majority of the Board of Directors after the lapsing of the Five-Year Period.
38
<PAGE>
VOTE REQUIRED FOR APPROVAL OF THE ELIMINATION OF CUMULATIVE VOTING AND
ELIMINATION OF CLASSIFIED BOARD OF DIRECTORS PROPOSAL
The affirmative vote of the holders of not less than two-thirds of shares of
the Company's Common Stock outstanding as of the Record Date will be required
to approve the proposed amendments.
BOARD RECOMMENDATION. THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS
VOTE "FOR" APPROVAL OF THE ELIMINATION OF CUMULATIVE VOTING AND THE ELIMINATION
OF CLASSIFIED BOARD OF DIRECTORS PROPOSAL. PROXIES SOLICITED BY THE BOARD OF
DIRECTORS WILL BE SO VOTED UNLESS STOCKHOLDERS SPECIFY OTHERWISE.
IF PROPOSAL ONE IS NOT APPROVED, THE PROPOSAL WITH RESPECT TO THE ELIMINATION
OF CUMULATIVE VOTING AND THE ELIMINATION OF THE CLASSIFIED BOARD OF DIRECTORS
WILL NOT BE IMPLEMENTED.
39
<PAGE>
BENEFICIAL OWNERSHIP OF SHARES
The following table sets forth information as of September 27, 1996 with
respect to beneficial ownership of (i) the Company's Common Stock and (ii) the
Company's Depositary Shares, each representing 1/100 of a share of 7%
Preferred Stock by (a) each person known by the Company to be the beneficial
owner of 5% or more of the outstanding Common Stock or Depositary Shares, (b)
each director and nominee, (c) the named officers listed in the following
Summary Compensation Table (the "Named Officers"), and (d) all directors and
persons serving as executive officers as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
AMOUNT AND NATURE OF PERCENT OF COMMON OF BENEFICIAL PERCENT OF
BENEFICIAL OWNERSHIP OF STOCK BENEFICIALLY OWNERSHIP OF DEPOSITARY SHARES
NAME AND ADDRESS COMMON STOCK(1)(2) OWNED(2) DEPOSITARY SHARES BENEFICIALLY OWNED
- - - ---------------- ----------------------- ------------------ ----------------- ------------------
<S> <C> <C> <C> <C>
Wisconsin Investment
Board(3)............... 3,551,800 9.93% -- --
Dimensional Fund
Advisors Inc.(4)....... 1,884,300 5.27 -- --
Donald S. Burns......... 26,481 * -- --
Kirby L. Cramer......... 43,808 * 10,000 *
Ralph S. Cunningham..... 16,981 * -- --
E. Martin Gibson........ 28,904 * 5,000 *
W. Scott Martin......... 48,981(5) * -- --
James C. McGill......... 93,614(6) * 1,000 *
Henry E. Riggs.......... 20,000 * -- --
Robert B. Sheh(7)....... 428,002 1.17 5,000 *
Jack O. Vance........... 18,331(8) * -- --
Anthony J. DeLuca....... 315,257 * -- --
James R. Mahoney........ 233,547 * -- --
Raymond J. Pompe........ 160,802 * -- --
Eric Schwartz(9)........ 141,635 * 1,200 *
All directors and
executive officers as a
group (15 persons)..... % *
</TABLE>
- - - --------
* Less than 1%
(1) The number of shares of the Common Stock beneficially owned includes
shares of the Common Stock in which the persons set forth in the table
have either investment or voting power. Unless otherwise indicated, all of
such interests are owned directly, and the indicated person or entity has
sole voting and investment power, subject to community property laws where
applicable. The number of shares beneficially owned also includes shares
that the following individuals have the right to acquire within sixty days
of September 27, 1996 upon exercise of stock options (and conversion of
Depositary Shares in the case of Messrs. Cramer, Gibson, McGill, Sheh and
Schwartz) in the following amounts: (i) 25,000 shares as to Mr. Burns,
(ii) 0 shares upon exercise of options and 42,808 shares upon conversion
of Depositary Shares as to Mr. Cramer, (iii) 12,500 shares as to Dr.
Cunningham, (iv) 7,500 shares upon exercise of options and 21,404 shares
upon conversion of the Depositary Shares as to Mr. Gibson, (v) 12,500
shares as to Mr. Martin, (vi) 25,000 shares upon exercise of options and
4,281 shares upon conversion of the Depositary Shares as to Mr. McGill,
(vii) 0 shares as to Mr. Riggs, (viii) 362,500 shares upon exercise of
options and 21,404 shares upon conversion of Depositary Shares as to Mr.
Sheh, (ix) 15,000 shares as to Mr. Vance, (x) 132,000 shares as to Mr.
DeLuca, (xi) 110,000 shares as to Mr. Mahoney, (xii) 43,000 shares as to
Mr. Pompe; and (xiii) 92,500 shares upon exercise of options and 5,136
shares upon conversion of Depositary Shares as to Mr. Schwartz.
(2) For the purposes of determining the number of shares of Common Stock
beneficially owned as well as the percentage of outstanding Common Stock
held by each person or group set forth in the table, the number of
40
<PAGE>
shares is divided by the sum of the number of outstanding shares of the
Common Stock on , 1996 plus (i) the number of shares of Common Stock
subject to options exercisable currently or within 60 days of September 27,
1996 by such person or group, and/or (ii) shares of Common Stock into which
persons who hold Depositary Shares or other securities may convert the
Preferred Stock represented by such Depositary Shares (or otherwise obtain
Common Stock), in accordance with Rule 13d-3(d)(1) under the Securities
Exchange Act of 1934, as amended ("Rule 13d-3(d)(1)").
(3) Such information is derived solely from a Schedule 13G filed by such
beneficial owner with the SEC dated February 7, 1996. The address of the
Wisconsin Investment Board set forth in its Form 13G is P.O. Box 7842,
Madison, Wisconsin 53707.
(4) Such information is derived solely from a Schedule 13G dated February 7,
1996 filed by such beneficial owner with the SEC. The address of
Dimensional Fund Advisors Inc. set forth in its Form 13G is 1299 Ocean
Avenue, 11th Floor, Santa Monica, California 90401.
(5) Includes 5,000 shares owned by Martcon, Inc., a company owned by Mr.
Martin. Mr. Martin disclaims beneficial ownership of such shares.
(6) Includes 4,000 shares of Common Stock and 1,000 Depositary Shares
(convertible into 4,281 shares of Common Stock) owned by Mr. McGill's wife,
as to which Mr. McGill has no voting or dispositive power, and 5,000 shares
owned by McGill Resources, Inc., a company owned by Mr. McGill. Mr. McGill
disclaims beneficial ownership of all such shares.
(7) Mr. Sheh resigned as President and Chief Executive Officer and a director
of the Company effective July 1, 1996, but will be treated as an employee
of the Company through June 26, 1998. See "Certain Transactions--Sheh
Agreement."
(8) Includes 300 shares owned by Mr. Vance as a custodian under the California
Uniform Gifts to Minors Act. Mr. Vance disclaims beneficial ownership of
such shares.
(9) Mr. Schwartz resigned his officer positions effective as of July 30, 1996.
See "Certain Transactions--Schwartz Agreement."
41
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the annual, long-term compensation and other
compensation for services in all capacities to the Company for the fiscal
years 1996, 1995 and 1994 of those persons who were, as of March 29, 1996, the
Chief Executive Officer and the other four most highly compensated executive
officers of the Company (the "Named Officers").
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-----------------------
ANNUAL COMPENSATION AWARDS
---------------------------------- -----------------------
OTHER ANNUAL RESTRICTED SECURITIES ALL OTHER
NAME AND COMPEN- STOCK UNDERLYING COMPEN-
PRINCIPAL POSITION YEAR SALARY($) BONUS($)(5) SATION($)(6) AWARDS($)(7) OPTIONS(#) SATION($)(8)
------------------ ---- --------- ----------- ------------ ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Robert B. Sheh(1)....... 1996 $450,000 $ 26,578 $ 0 $475,000 0 $ 52,100
President and 1995 450,000 225,000 0 74,993 150,000 34,519
Chief Executive Officer 1994 450,000 0 175,449 0 50,000 103,219
Anthony J. DeLuca(2)....
Senior Vice President 1996 270,400 12,776 0 296,875 0 17,732
and Chief Financial 1995 270,400 108,160 0 173,550 77,000 16,519
Officer 1994 268,667 0 0 0 22,000 34,759
James R. Mahoney........ 1996 260,000 12,285 0 118,750 0 28,579
Senior Vice President, 1995 256,925 104,000 0 172,163 77,000 20,330
Technical Operations 1994 232,834 0 5,630 0 22,000 32,420
and
Corporate Development
Eric Schwartz(3)........ 1996 250,000 11,813 0 268,750 0 17,575
Senior Vice President, 1995 250,000 100,000 0 33,330 77,000 11,488
Law and Administration 1994 245,834 0 0 0 22,000 2,828
General Counsel and
Secretary
Raymond J. Pompe(4)..... 1996 206,691 9,923 0 118,750 0 16,250
Senior Vice President, 1995 192,992 57,000 0 156,498 35,000 11,328
Project Operations 1994 165,692 0 0 0 18,000 8,423
</TABLE>
- - - --------
(1) Mr. Sheh resigned as President and Chief Executive Officer and a director
of the Company as of July 1, 1996, but will be treated as an employee of
the Company through June 26, 1998. See "Certain Transactions--Sheh
Agreement."
(2) As of July 1, 1996, Mr. DeLuca was named President and Acting Chief
Executive Officer and a director of the Company.
(3) Mr. Schwartz resigned his officer positions effective as of July 30, 1996.
See "Certain Transactions--Schwartz Agreement."
(4) Mr. Pompe, who joined the Company on September 1, 1988, was promoted to
the position of Senior Vice President, Project Operations in March 1995.
(5) Bonus amounts are reported in the fiscal year they are earned or accrued,
even though the actual cash payment for the fourth quarter may be made in
the next fiscal year. All bonus amounts reported for fiscal year 1995
include all cash bonus amounts paid, earned or accrued for the fiscal year
even though the actual cash payment for the fourth quarter were actually
paid in fiscal year 1996. In lieu of additional cash, each Named Officer
also received an award of restricted stock in fiscal year 1996
attributable to the fiscal year 1995 incentive compensation plan. The
value of such restricted stock awards is reported in this table under
Restricted Stock Awards in 1995. The total value of bonuses, including the
aforementioned restricted stock awards, earned in fiscal year 1995, by
each of the Named Officers are as follows: Mr. Sheh, $299,993; Mr. DeLuca,
$144,210; Mr. Mahoney, $138,663; Mr. Schwartz, $133,330; and Mr. Pompe,
$75,998.
42
<PAGE>
(6) The dollar value of perquisites and other personal benefits, if any, for
each of the Named Officers, except Mr. Sheh and Mr. Mahoney in 1994 was
less than the reporting thresholds established by the SEC. The amount
shown for Mr. Sheh in fiscal year 1994 includes (i) $58,171 for a tax
gross up on the relocation expenses reported under Other Annual
Compensation, and (ii) $95,794 for club memberships; all in accordance
with terms of agreements between the Company and Mr. Sheh. Of the $95,794
reported for club memberships, $25,000 was a one-time non-refundable
admission fee and $59,400 is a membership fee. Mr. Sheh was permitted to
retain such membership upon his resignation as President and Chief
Executive Officer. See "Certain Transactions--Sheh Agreement." The amount
shown for Mr. Mahoney for fiscal year 1994 is a tax gross up on relocation
expenses reported under Other Annual Compensation; all in accordance with
the terms of agreements between the Company and Mr. Mahoney.
(7) 50,000 shares of restricted stock were awarded to each of Messrs. DeLuca,
Mahoney and Pompe on March 2, 1995, with a fair market value of $2.75 per
share on the date of grant. The shares vest in 20% increments over five
years provided that Messrs. Mahoney, DeLuca and Pompe remain employed by
the Company on the vesting dates. 50,000 shares of restricted stock were
awarded to Mr. Schwartz on June 1, 1995, with a fair market value of $3.00
per share on the date of the grant. In lieu of cash, each Named Officer
received awards of restricted stock in connection with a fiscal year 1995
incentive compensation plan. A total of 63,371 shares of restricted stock
were awarded to the Named Officers on July 5, 1995 with a fair market
value of $3.125 per share. The shares awarded were as follows: Mr. Sheh,
23,998 shares; Mr. DeLuca, 11,536 shares; Mr. Mahoney, 11,092 shares; Mr.
Schwartz, 10,666 shares; and Mr. Pompe, 6,079 shares. The restrictions on
the shares will lapse three years from the date of award provided that
each Named Officer remains employed by the Company at that date. On March
28, 1996, the following number of restricted shares were issued to the
Named Officers, with a fair market value of $2.375 per share on the date
of grant: Mr. Sheh, 200,000 shares (which shares were returned to the
Company pursuant to Mr. Sheh's separation agreement with the Company (see
"Certain Transactions--Sheh Agreement")); Mr. DeLuca, 125,000 shares; Mr.
Mahoney, 50,000 shares; Mr. Schwartz, 50,000 shares; and Mr. Pompe, 50,000
shares. The restrictions on the shares will lapse upon the earlier of: (i)
attainment of an average $4.00 or greater price of the Company's Common
Stock for any period of sixty consecutive calendar days; (ii) four years
from the date of issuance of the restricted shares; or (iii) upon death,
disability or retirement of the holder or a change of control (as
defined).
(8) For 1994, the amount shown for Mr. Sheh includes $83,679 in moving
expenses in accordance with the terms of an agreement between the Company
and Mr. Sheh, $10,000 for partial principal forgiveness on a relocation
loan to purchase a residence and $9,540 of life insurance premiums in
excess of $50,000. The amount shown for Mr. DeLuca includes $23,400 paid
for accrued but unused vacation, $1,925 of life insurance premiums in
excess of $50,000 and $9,434 for the Company's contribution to the
Company's Retirement Plan, a defined contribution plan. Plan participants
are fully vested in the plan following six years of service. The amount
shown for Mr. Mahoney includes $13,091 in previously unreimbursed moving
expenses in connection with his relocation to Southern California, $10,000
for partial principal forgiveness on a relocation loan to purchase a
residence, $9,119 for the Company's contribution to the Company's
Retirement Plan and $210 of life insurance premiums in excess of $50,000.
The amounts shown for Messrs. Pompe and Schwartz include $1,878 and
$2,828, respectively, of life insurance premiums in excess of $50,000. For
1995, the amount shown for Mr. Sheh includes $6,572 for the Company's
contribution to the Company's Retirement Plan, $10,000 for partial
principal forgiveness on a relocation loan to purchase a residence and
$17,947 of life insurance premiums in excess of $50,000. The amount shown
for Mr. DeLuca includes $6,608 for the Company's contribution to the
Company's Retirement Plan, $5,200 paid for accrued but unused vacation and
$4,711 of life insurance premiums in excess of $50,000. The amount shown
for Mr. Mahoney includes $6,599 for the Company's contribution to the
Company's Retirement Plan, $3,731 of life insurance premiums in excess of
$50,000 and $10,000 for partial principal forgiveness on a relocation loan
to purchase a residence. The amounts shown for Mr. Schwartz and Mr. Pompe
represent $4,916 and $4,711, respectively, of life insurance premiums in
excess of $50,000 and the Company's contributions to
43
<PAGE>
the Company's Retirement Plan. For 1996, the amount shown for Mr. Sheh
includes $9,003 for the Company's fixed and 401(k) Company matching
contributions to the Company's Retirement Plan, $10,000 for partial
forgiveness on a relocation loan to purchase a principal residence and
$20,034 of life insurance premiums in excess of $50,000. The amounts shown
for Messrs. DeLuca, Schwartz and Pompe represent $5,798, $5,177 and $5,706,
respectively, of life insurance premiums in excess of $50,000 and the
Company's contributions to the Company's Retirement Plan for the Company's
fixed and 401(k) Company matching contributions. The amount shown for Mr.
Mahoney includes $7,498 for the Company's contributions to the Company's
Retirement Plan for the Company's fixed and 401(k) Company matching
contributions, $10,000 for partial forgiveness on a relocation loan to
purchase a principal residence and $5,990 of life insurance premiums in
excess of $50,000. Although required to be reported as income, the Named
Officers pay the cost for all life insurance premiums for coverage in
excess of one and one-half times their salary, as do all salaried
employees. In addition, each of the Named Officers received in fiscal year
1996 a contribution to the Company's Restoration Plan, a non-qualified
supplemental retirement plan, as follows: Mr. Sheh, $13,063; Mr. DeLuca,
$5,475; Mr. Mahoney, $5,091; Mr. Schwartz, $4,722; and Mr. Pompe, $3,334.
STOCK OPTION GRANTS IN LAST FISCAL YEAR
No stock options were granted to any of the Named Officers during the last
fiscal year. No stock appreciation rights ("SARs") were granted during the
last fiscal year or at any time under either the 1983 Stock Incentive Plan
(the "1983 Plan") or the 1991 Stock Incentive Plan (the "1991 Plan").
AGGREGATED OPTION EXERCISES DURING LAST FISCAL YEAR AND OPTION VALUES AT END
OF LAST FISCAL YEAR
The following table provides information with respect to the exercise of
stock options during the fiscal year ended March 29, 1996 by the Named
Officers, and with respect to unexercised "in-the-money" stock options
outstanding as of March 29, 1996. In-the-money stock options are options for
which the exercise price is less than the market price of the underlying stock
at the end of the fiscal year. No executive officer or any other employee of
the Company held or exercised any SARs at any time during fiscal year 1996.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT FISCAL YEAR END IN-THE-MONEY OPTIONS AT
ACQUIRED (IN SHARES) FISCAL YEAR END($)(2)
ON VALUE ---------------------------- -------------------------
NAME EXERCISE REALIZED($) EXERCISABLE UNEXERCISABLE(3) EXERCISABLE UNEXERCISABLE
---- -------- ----------- ----------- ---------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Robert B. Sheh(1)....... 0 $ 0 250,000 200,000 $ 0 $ 0
Anthony J. DeLuca....... 0 0 107,250 78,750 0 0
James R. Mahoney........ 0 0 85,250 76,750 0 0
Eric Schwartz(4)........ 0 0 67,750 81,250 0 0
Raymond J. Pompe........ 0 0 36,020 43,250 0 0
</TABLE>
- - - --------
(1) Mr. Sheh resigned as President and Chief Executive Officer and a director
of the Company as of July 1, 1996, but will be treated as an employee of
the Company through June 26, 1998. See "Certain Transactions--Sheh
Agreement."
(2) Represents the difference between the $2.50 closing market price of the
Company's Common Stock at March 29, 1996, minus the exercise price of the
options.
(3) Messrs. DeLuca, Mahoney and Pompe's options with respect to 7,500 shares,
6,000 shares and 6,000 shares, respectively, have vested as a result of
the passage of time but may not be exercised unless the Company's stock
price increases to certain predetermined levels. Because this condition
has not been satisfied and the options therefore are not vested, such
options are not included in the foregoing "Beneficial Ownership of Shares"
table.
(4) Mr. Schwartz resigned as his officer positions effective as of July 30,
1996. See "Certain Transactions--Schwartz Agreement."
44
<PAGE>
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors is composed of four
non-employee directors. No member of the Compensation Committee is a former or
current officer or associate of the Company or its subsidiaries and there are
no Compensation Committee interlocks. The Compensation Committee reviews
management compensation levels and evaluates management performance and
related matters. The Compensation Committee also administers the Company's
various management incentive plans, including the 1991 Plan. This report
relates to the fiscal year ended March 29, 1996.
To assist the Compensation Committee in performing these functions, the
Compensation Committee retains the services of nationally known independent
consulting firms specializing in executive compensation issues. Since 1987,
these services have been provided primarily by Towers Perrin, which advises
the Committee as to executive compensation and its relationship to achieving
the Company's goals. In doing so, Towers Perrin prepares and reviews for the
Compensation Committee surveys and other materials describing the compensation
practices of other companies, including those in the environmental consulting,
engineering and remediation industry, and considers other factors which Towers
Perrin and the Committee deem relevant.
COMPENSATION PROGRAM OBJECTIVES
The Compensation Committee has developed and implemented compensation
strategies, plans and programs which are designed to attract, retain, and
motivate key management and to align the financial interests of the Company's
executive officers with those of stockholders. The Company's management
compensation programs are designed to provide:
(i) Base salary levels that are competitive with those of engineering,
environmental services, and general industry companies;
(ii) Competitive total annual cash compensation delivered through annual
incentive compensation that varies in a consistent and predictable manner
with the financial performance of the Company; and
(iii) Long-term incentive compensation that focuses management efforts on
building stockholder value through attainment of longer-term financial and
strategic goals, and encourages management stock ownership.
A substantial portion of an executive officer's compensation is "at risk"
with annual and long-term incentives, at target levels, intended generally to
provide between 40% to 60% of total compensation. In designing and
administering its management compensation program, the Company attempts to
achieve an appropriate balance among the various elements of compensation,
each of which is discussed in greater detail below.
In fiscal year 1996, the Compensation Committee initiated several actions to
further align management and stockholder interests, including the linking of a
larger portion of management's incentive compensation, both annual incentive
bonus and long-term incentive, to the value of the Company's Common Stock.
The Company's management compensation program and the Committee's actions
are discussed in greater detail below.
BASE SALARY
As a guideline, base salary for the Company is targeted at the sixtieth
percentile level of comparable engineering and environmental services and
other companies with similar revenues or numbers of employees in order to
attract and retain key talent in this highly competitive industry. To meet
this objective, the Company, with the assistance of compensation consulting
firms, reviews compensation survey data from (i) large engineering companies
from which it recruits and with which it competes for human resources,
(ii) environmental services companies with which it competes, including some
that are and some that are not in
45
<PAGE>
the peer group index in the Five-Year Stock Price Performance Graph included
in this Proxy Statement; and (iii) other companies in general industry with
similar revenues or numbers of employees. The Company's salary plan for
executive officers is approved, on an annual basis, by the Compensation
Committee and considers individual performance, the Company's overall
financial performance and competitive practice. Annual performance reviews and
formal merit increase guidelines determine individual salary increases.
The Compensation Committee completed an annual review of officer based pay
levels in fiscal year 1996. The Committee, upon Management's recommendations,
did not grant annual salary increases to the Named Officers other than Mr.
Pompe because the compensation policy was to increase the "at risk"
compensation under the annual and long-term incentive plans and the salaries
of the Named Officers were determined to be within competitive norms. A salary
increase of 10.5% was granted to Mr. Pompe to reflect his promotion and
increased responsibilities related to an organizational realignment effected
in fiscal year 1996.
TOTAL ANNUAL CASH COMPENSATION (BASE SALARY PLUS BONUS)
As a guideline, total annual cash compensation is set at the sixtieth
percentile of comparable engineering and environmental service and other
companies when annual objectives and targets are achieved. Upper quartile cash
compensation can be earned only if business results significantly exceed
Company objectives.
THE INCENTIVE COMPENSATION "BONUS" PLAN
The Incentive Compensation "Bonus" Plan is designed to reward executive
officers and other key employees, on an annual basis, for their contributions
to corporate and business unit/division objectives, and for individual
performance. Each eligible employee's award is expressed as a percentage of
the individual's base salary for such fiscal year. The incentive bonus targets
equate to the Company's annual budget objectives as approved by the Board of
Directors. If the Company's performance exceeds budget, the maximum bonus
payable to participants would be 150% of the target. This compensation
structure is based on the Compensation Committee's policy that increasing
amounts of compensation should be "at risk" for those employees with greater
influence on stockholder value. Company objectives are measured by performance
criteria that relate to both individual and Company performance. The
Compensation Committee believes that these performance criteria have a high
degree of correlation to the price of the Company's Common Stock over time.
Company objectives are expressed in specific financial targets that are
established as part of the annual budgeting process, which includes a review
of performance of a comparable group of environmental consulting, engineering
and remediation companies.
The incentive bonus targets for fiscal 1996 adopted under the Incentive
Compensation "Bonus" Plan were intended to provide an incentive to key
management to build upon the improved financial performance realized in fiscal
year 1995. The Committee selected both operating income and earnings per
share, weighted equally, as the key financial measures for fiscal year 1996
and specific financial targets were established both on an annual and
quarterly basis under the plan. The financial targets for 1996 were increased
from those of 1995. Incentive bonus target awards under the 1996 incentive
compensation program ranged from 10% of salary for certain key employees to
50% of salary for the Chief Executive Officer. Incentive bonus awards would
begin to be earned when the Company achieved 75% of any quarterly objective
and amounts up to 75% of the annual target bonus incentives would be paid in
quarterly installments. The residual 25% of the incentive bonus funds accrued
would be eligible for distribution at the end of the fiscal year contingent on
the performance of the individual and the individual's business unit. An
incentive amount equivalent to 25% of the incentive earned could be paid in
cash or stock at the discretion of the Committee. For the six most senior
executives, including the five Named Officers, the financial measures were
modified to also require the Company's stock price to increase to emphasize
share price appreciation and stockholder value.
The minimum financial target relating to operating income was achieved in
the first quarter of the fiscal year. Financial targets were not achieved in
the subsequent three quarters or for the fiscal year. The distribution of all
incentive awards was determined, at the Committee's discretion, according to
an assessment of Company
46
<PAGE>
and individual performance in relation to pre-established objectives. Cash
incentive awards were paid to 142 participants. The total incentive awards
earned by the 11 officers (including the Named Officers) was $98,251. The
total awards earned by the Named Officers under the plan for fiscal 1996 were
as follows: Mr. Sheh, $26,578; Mr. DeLuca, $12,776; Mr. Mahoney, $12,285; Mr.
Schwartz, $11,813 and Mr. Pompe, $9,923. These were only incurred because of
the first quarter's achievement of the minimum financial target. No incentives
were awarded for the next three quarters of the fiscal year.
LONG TERM INCENTIVE COMPENSATION PROGRAM
Prior to the expiration of the 1991 Plan on March 31, 1996, the Company's
long-term incentive program consisted of the 1991 Plan. At the time the 1991
Plan expired, there were 502,205 shares remaining available for grant, none of
which were or will be granted. The Compensation Committee has initiated a
review of various long-term incentive alternatives to ensure the Company has a
long-term incentive program that is competitive with comparable engineering,
environmental services and other companies and will enable the Company to
acquire and retain key management talent.
The 1991 Plan authorized the granting of various stock-based incentive
awards to officers and key employees of the Company and its subsidiaries.
During fiscal year 1996, the Compensation Committee considered the
desirability of granting stock-based awards to officers and other key
employees under the 1991 Plan. In determining the grant of awards to officers
and other key employees, the Compensation Committee considered, among other
things, the ability of the individual to influence stockholder value, personal
performance and prior option grants. The 1991 Plan gave the Compensation
Committee the flexibility to provide longer-term incentive awards in a variety
of forms to further align the long-term interest of the Company's management
with those of its stockholders.
During fiscal year 1996, the senior management of the Company was
responsible for a number of significant events including: settlement of major
litigation; refinancing of senior debt; the recapitalization of the Company's
investment in Quanterra and major cost reductions. In recognition of these
significant accomplishments of the senior management group in fiscal year 1996
and to encourage an increased focus on share price appreciation, the
Compensation Committee, with input from independent compensation consultants,
awarded performance-based restricted stock to the five Named Officers. A total
of 475,000 shares were granted which will vest upon the earlier of: (i)
attainment of an average per share price of $4.00 or greater of the Common
Stock for any period of sixty consecutive calendar days; (ii) four years from
the date of issuance; or (iii) death, disability or retirement of the holder
or a change of control, as defined. The stock grants for the five Named
Officers were as follows: Mr. Sheh, 200,000 shares (which shares were
relinquished to the Company pursuant to Mr. Sheh's separation agreement with
the Company (see "Certain Transactions--Sheh Agreement")); Mr. DeLuca, 125,000
shares and 50,000 shares each for Messrs. Mahoney, Pompe and Schwartz.
In June 1995, Mr. Schwartz was awarded an additional 50,000 shares of
restricted stock as a result of his additional responsibilities following the
Company's organization realignment and his efforts toward the settlement of a
significant legal proceeding (Motco).
TOTAL DIRECT COMPENSATION (TOTAL ANNUAL CASH COMPENSATION PLUS THE ANNUALIZED
VALUE OF LONG-TERM INCENTIVES)
As a guideline, total direct compensation, through incentive awards to
executive officers under the 1991 Plan, is set between the fiftieth percentile
and the upper quartile of comparable environmental consulting, engineering and
remediation and other companies, when the Company's long-term goals to
increase stockholder value are achieved or exceeded.
47
<PAGE>
SECTION 162(M) OF THE INTERNAL REVENUE CODE
As of January 1, 1994, the Internal Revenue Code of 1986 was amended to
eliminate the deductibility of certain compensation in excess of $1,000,000.
Compensation awarded under a "performance-based" compensation program which
has been approved by stockholders is exempted from the deduction limitation.
The Compensation Committee expects to consider the impact of Section 162(m) on
"performance-based" compensation programs adopted in the future and intends to
develop a formal policy regarding Section 162(m).
COMPENSATION OF CHIEF EXECUTIVE OFFICER
Mr. Sheh's annual salary for fiscal year 1996 was $450,000 and remained at
that rate since he was hired, except for a temporary salary reduction
applicable to all senior executives in fiscal year 1993. Mr. Sheh resigned as
President and Chief Executive Officer and a director of the Company as of July
1, 1996, but remains an employee of the Company through June 26, 1998. See
"Certain Transactions--Sheh Agreement." The Committee assessed the
competitiveness of Mr. Sheh's salary for fiscal year 1996 using several
compensation data sources. Mr. Sheh's salary was considered to be within the
competitive range of the sixtieth percentile of salaries paid by engineering
and environmental services companies. No bonus payments were made to Mr. Sheh
for fiscal year 1996 except for the payment of $26,578 with respect to the
first quarter of fiscal year 1996. In consideration of the competitive data,
the incentive opportunities under the incentive compensation bonus plan and
the performance-based stock awards, Mr. Sheh's salary was not increased during
fiscal year 1996.
As part of the grant of an aggregate of 475,000 shares to Named Officers
described above, Mr. Sheh was granted 200,000 shares of performance-based
stock in March 1996 under the 1991 Plan. The shares were granted to link Mr.
Sheh's total compensation opportunity to increases in stockholder value and in
recognition of his role in the accomplishments of the Company in fiscal year
1996, described above under the caption "Long Term Incentive Compensation
Program." The shares were returned to the Company pursuant to Mr. Sheh's
separation agreement with the Company. See "Certain Transactions--Sheh
Agreement." Mr. Sheh resigned as President and Chief Executive Officer and a
director of the Company as of July 1, 1996, but remains an employee of the
Company through June 26, 1998.
THE COMPENSATION COMMITTEE
Jack O. Vance, Chairman
Kirby L. Cramer
Ralph S. Cunningham
E. Martin Gibson
48
<PAGE>
STOCK PRICE PERFORMANCE GRAPH
The following graph sets forth the Company's cumulative total stockholder
return on its Common Stock as compared to the S&P 500 Index and the Smith
Barney ("SB") Hazardous Waste Index on March 31 of each listed year. The graph
covers the period from March 31, 1991 through March 29, 1996. Several senior
executives, including Mr. Sheh, joined the Company in fiscal year 1993 or
thereafter.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
AMONG INTERNATIONAL TECHNOLOGY CORPORATION, S&P 500 INDEX, AND
SB HAZARDOUS WASTE INDEX (1)
PERFORMANCE GRAPH APPEARS HERE
<TABLE>
<CAPTION>
Measurement Period INT'L TECH- S&P SB HAZARDOUS
(Fiscal Year Covered) NOLOGY CORP. 500 INDEX WASTE INDEX(1)
- - - ------------------- ------------ --------- --------------
<S> <C> <C> <C>
Measurement Pt- 3/31/91 $100 $100 $100
FYE 3/31/92 $57 $112 $79
FYE 3/31/93 $54 $128 $68
FYE 3/31/94 $28 $129 $55
FYE 3/31/95 $22 $150 $50
FYE 3/31/96 $23 $197 $50
</TABLE>
- - - --------
(1) Assumes $100 invested on March 31, 1991 in the Company's Common Stock, the
S&P 500 Index, and the SB Hazardous Waste Index, and assumes the
reinvestment of all dividends.
THIS GRAPH REPRESENTS HISTORICAL STOCK PRICE PERFORMANCE AND IS NOT
NECESSARILY INDICATIVE OF ANY FUTURE STOCK PRICE PERFORMANCE.
THE FOREGOING REPORT OF THE COMPENSATION COMMITTEE AND THE PERFORMANCE GRAPH
THAT APPEARS IMMEDIATELY AFTER SUCH REPORT SHALL NOT BE DEEMED TO BE SOLICITING
MATERIAL OR TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE
SECURITIES ACT OR THE EXCHANGE ACT OR INCORPORATED BY REFERENCE IN ANY DOCUMENT
SO FILED.
49
<PAGE>
CERTAIN TRANSACTIONS
Executive Agreements. In connection with his employment as Chief Executive
Officer, Mr. Sheh and the Company entered into an agreement dated July 15,
1992. The agreement was intended to specify annual stock option grants and a
minimum level of base pay for Mr. Sheh, as well as to address certain other
matters. Pursuant to the agreement, Mr. Sheh's annual base salary was $450,000
subject to merit increases and the agreement provides the opportunity to
participate in the Company's Incentive Bonus Plan with a bonus of up to 50% of
base salary at target levels. Pursuant to the agreement, Mr. Sheh received
stock options covering 250,000 shares of Common Stock upon joining the Company
and was entitled to receive a minimum specified number of stock options during
the first three years of his employment. The agreement provided for certain
insurance and other benefits. The agreement also provided that if Mr. Sheh was
terminated for "cause," he would be entitled to receive one year of base
salary and bonuses.
Employment Agreements. In connection with the proposed Carlyle Investment,
each of Anthony J. DeLuca, Franklin E. Coffman, James R. Mahoney and Raymond
J. Pompe will enter into an employment agreement with the Company effective
upon the closing of the Investment for a term of three years, unless
terminated. The employment agreements of each of Messrs. DeLuca and Mahoney
will replace in their entirety their respective severance benefit agreements
with the Company. See "--Severance Benefit Agreements" below.
The employment agreements provide for initial base salaries at the rates in
effect at the present time. Salaries shall be subject to annual upward
adjustment at the discretion of the Compensation Committee of the Board of
Directors (the "Compensation Committee"). Salaries shall be subject to
reduction only in connection with action taken by the Board of Directors for
all management employees. Each of the employment agreements will provide for a
short-term incentive compensation plan to be administered by the Compensation
Committee. The Company shall also maintain long-term incentive plans to be
administered by the Compensation Committee, which will make awards, primarily
of stock options, based on appropriate performance criteria. The annual awards
will be at the discretion of the Compensation Committee but will generally
target long-term incentive opportunities. The Company will have "good reason"
to terminate Messrs. DeLuca, Coffman, Mahoney or Pompe if such persons fail to
meet certain management forecasts for two fiscal years.
The Company will provide loans to Messrs. DeLuca, Coffman, Mahoney and Pompe
to allow them to make substantial purchases of the Company's Common Stock in
the open market. Within three months of the closing of the Investment, the
agreements provide that Mr. DeLuca will purchase between $100,000 and $125,000
worth of Common Stock and each of Messrs. Coffman, Mahoney and Pompe will
purchase between $75,000 and $100,000 worth of Common Stock. In connection
with the short-term compensation plan described above, the Company may provide
for forgiveness of a certain portion of the loan principle and interest if
previously agreed to targets are met or exceeded. The loans shall bear
interest and be repayable at mutually agreeable terms. The employment
agreements also provide for reimbursement for business expenses and vacation
and other benefits consistent with existing Company policies and practices.
Additionally, as part of their employment agreements, each of Messrs.
DeLuca, Coffman, Mahoney and Pompe will be bound by non-compete provisions
with the Company if they terminate their employment by resignation.
Severance Benefit Agreements. The Company currently maintains change in
control severance benefit agreements (the "Severance Agreements") with certain
executive officers. The Severance Agreements generally have a two-year term.
The persons with whom the Company has entered into Severance Agreements are
Anthony J. DeLuca and James R. Mahoney expiring on April 2, 1998 and September
15, 1997, respectively. If the Carlyle
Investment is consummated, Messrs. DeLuca and Mahoney will enter into
employment agreements with the Company, which employment agreements will
replace in their entirety Mr. DeLuca's and Mr. Mahoney's respective Severance
Agreements (see "--Employment Agreements" above).
The Severance Agreements provide, upon the occurrence of certain events, for
the payment of lump sum cash compensation equal to 2.99 times the executive
officer's annual base salary and the highest aggregate cash bonus paid to the
executive officer in the preceding three fiscal years (subject to reduction in
certain
50
<PAGE>
circumstances, including the limitation that the Company's aggregate severance
liability shall not exceed 5% of the Company's market capitalization (as
defined in the Severance Agreements). The Company is obligated to pay such
compensation to the executive officer if a change in control of the Company as
defined in the Severance Agreements occurs and the officer's employment
subsequently is terminated by the Company or by the officer for specified
reasons. The Severance Agreements also provide that the Company will arrange
in such event to provide the officer for two years with disability, life,
accident and health insurance substantially similar to those insurance
benefits being received by the officer at the time of the termination of
employment. The Severance Agreements generally have a two-year term if no
change in control of the Company occurs. If there is a change in control of
the Company, the Severance Agreements remain in effect for three years from
the date of the change in control if it has not been approved by the Board of
Directors and for two years if the change in control has been approved by the
Board of Directors. If the Severance Agreements had been triggered as of July
1, 1996, the lump sum cash compensation payable to Messrs. DeLuca and Mahoney
would have been $ and $ , respectively.
The purpose of the Severance Agreements is to continue to attract and retain
well-qualified executives and key personnel who are an integral part of the
management of the Company and whose performance is considered critical to the
future success of the Company. To this end, the Severance Agreements are
intended to protect the continued employment of such executives and key
personnel which would be at risk in the event of a change in control and to
provide an incentive to such executives and key personnel to remain in the
employ of the Company, notwithstanding the uncertainty in job security caused
by an actual or threatened change in control.
Sheh Agreement. Mr. Robert B. Sheh resigned as President and Chief Executive
Officer and a director of the Company as of July 1, 1996. Pursuant to the
terms of an agreement between the Company and Mr. Sheh, Mr. Sheh will continue
to be treated as an employee of the Company until June 26, 1998, but will have
no further duties or responsibilities to the Company. Pursuant to the
agreement, until June 26, 1998, Mr. Sheh will continue to be paid $450,000 per
annum and will receive a car allowance of $5,850 per annum. Mr. Sheh will also
receive a one-time payment of $40,300 for accrued but unused vacation.
Additionally, a relocation loan made by the Company to Mr. Sheh with an
outstanding principal amount of $150,000 was forgiven. Mr. Sheh will retain a
club membership in his name for which the Company has previously paid
admission and membership fees. Mr. Sheh remains eligible for certain insurance
benefits and is entitled to certain other benefits until the earlier of June
26, 1998 or the date on which Mr. Sheh becomes a full-time employee of another
company. Under the agreement, 23,998 shares of restricted Common Stock awarded
to Mr. Sheh in July 1995 will become fully vested on June 26, 1998, and
options to purchase a total of 450,000 shares of Common Stock will continue to
vest in accordance with the terms of the applicable stock option agreements
and will become fully vested on April 27, 1998. Finally, 200,000 shares of
restricted stock awarded to Mr. Sheh in March 1996 were returned to the
Company.
Schwartz Agreement. Mr. Eric Schwartz resigned his officer positions of
Senior Vice President--Law and Administration, General Counsel and Secretary
effective as of July 30, 1996. The Company and Mr. Schwartz are currently in
the process of negotiating final documentation with respect to his separation
from the Company.
Hart Agreement. Mr. Larry M. Hart resigned as Senior Vice President and
Chief Operating Officer of the Company effective as of October 1, 1995.
Pursuant to the terms of an agreement between the Company and Mr. Hart, Mr.
Hart will remain an employee of the Company until the earlier of his
resignation of employment, his obtaining full-time, permanent employment with
another company, or November 1, 1996. Pursuant to the agreement, the Company
paid Mr. Hart an aggregate of $535,770 in salary and severance payments.
Additionally, a relocation loan made by the Company to Mr. Hart remains
outstanding, with no interest accruing or payable from October 1, 1995 until
September 30, 1996. The loan will become due and payable upon the earlier of
the sale of the principal residence purchased with the relocation loan or
October 1, 1997. Additionally, pursuant to the agreement, Mr. Hart remains
eligible for certain insurance benefits, until the termination of his
employment and is entitled to certain other benefits. Finally, under the
agreement, 15,998 shares of restricted Common Stock and options to purchase a
total of 280,000 shares of Common Stock will become fully vested upon Mr.
Hart's termination of his employment.
51
<PAGE>
Relocation Loans. In certain circumstances, the Company has granted and may
in the future grant interest-free loans to executive officers, officers and
certain other employees principally for real estate purchases in connection
with company-initiated transfers to a new location. All loans are approved by
the Compensation Committee and are secured by the principal residence of the
individual. Mr. James R. Mahoney, Senior Vice President, entered into a
relocation loan arrangement with the Company with an original principal amount
of $200,000 and secured by a deed of trust on his respective personal
residence. The loan will remain interest free so long as Mr. Mahoney remains
an employee. Beginning December 31, 1991 and on each December 31st thereafter
until the due date of the loan, 5% of the original principal amount (to a
maximum of 50% of the original principal amount) was scheduled to be forgiven
by the Company, provided Mr. Mahoney remains employed by the Company. The loan
to Mr. Mahoney is due and payable on December 31, 2000. Additionally, Mr.
Mahoney has agreed to repay the remaining 50% of the original principal amount
in installments related to the issuance of awards under the Company's
incentive compensation plan. Since no bonuses were awarded or paid under the
Company's incentive compensation plan during fiscal years 1993 and 1994, Mr.
Mahoney was not required to make any installment payments to the Company in
those years. During the fiscal year ended March 29, 1996, (i) Mr. Mahoney
repaid $7,549 of the loan, and (ii) the maximum amount owed by Mr. Mahoney to
the Company under the loan was $150,000. As of March 29, 1996, the principal
amount outstanding for Mr. Mahoney's loan was $132,451.
Indemnification. The General Corporation Law of the State of Delaware, the
state of incorporation of the Company, and the Bylaws of the Company provide
for indemnification of directors and officers. Section 145 of the Delaware
General Corporation Law provides generally that a person sued as a director,
officer, employee or agent of a corporation may be indemnified by the
corporation for reasonable expenses, including attorneys' fees, if, in cases
other than actions brought by or in the right of the corporation, he or she
has acted in good faith and in a manner he or she reasonably believed to be
in, or not opposed to, the best interests of the corporation (and in the case
of a criminal proceeding, had no reasonable cause to believe that his or her
conduct was unlawful). Section 145 provides that no indemnification for any
claim or matter may be made, in the case of an action brought by or in the
right of the corporation, if the person has been adjudged to be liable, unless
the Court of Chancery or other court determines that indemnity is fair and
reasonable despite the adjudication of liability. Indemnification is mandatory
in the case of a director, officer, employee or agent who has been successful
on the merits, or otherwise, in defense of a suit against him or her. The
determination of whether a director, officer,
employee or agent should be indemnified must be made by a majority of
disinterested directors, independent legal counsel or the stockholders.
Directors and officers of the Company are covered under policies of
directors' and officers' liability insurance. The directors and all officers
serving the Company as Senior Vice President or in a higher position are
parties to Indemnity Agreements (the "Indemnity Agreements"). The Indemnity
Agreements provide indemnification for the directors and covered officers in
the event the directors' and officers' liability insurance does not cover a
particular claim for indemnification or if such a claim or claims exceed the
limits of such coverage. The Indemnity Agreements are generally intended to
provide indemnification for any amounts a director or covered officer is
legally obligated to pay because of claims arising out of the director's or
officer's service to the Company.
Additionally, in 1987 the Company's Certificate of Incorporation was amended
with the approval of stockholders to provide that its directors are not to be
liable to the Company or its stockholders for monetary damages for breach of
fiduciary duty to the fullest extent permitted by law. This provision is
intended to allow the Company's directors the benefit of the Delaware General
Corporation Law which provides that directors of Delaware corporations may be
relieved of monetary liabilities for breach of their fiduciary duty of care,
except under certain circumstances, including breach of the director's duty of
loyalty, acts or omissions not in good faith or involving intentional
misconduct or a knowing violation of law or any transaction from which the
director derived an improper personal benefit.
Compliance with Securities Reporting Requirements. Section 16(a) of the
Exchange Act requires directors, certain officers of the Company and persons
holding more than 10% of the Company's Common Stock to file reports concerning
their ownership of Common Stock by dates established under the Exchange Act
and also
52
<PAGE>
requires that the Company disclose in this Proxy Statement any noncompliance
with those requirements during fiscal year 1996. Based solely upon a review of
reports delivered to the Company, all Section 16(a) filing requirements were
satisfied, except that (i) Mr. Murray Hutchison, who resigned from the Board
of Directors in July 1995, filed one late report with respect to three
transactions during October 1995 involving the sale of an aggregate of 23,480
shares of Common Stock in the aggregate, and (ii) Mr. James C. McGill filed
one late report with respect to his wife's inheritance of 1,000 Depositary
Shares. Mr. McGill disclaims beneficial ownership of such Depositary Shares.
INDEPENDENT AUDITOR
Ernst & Young LLP was the Company's independent auditor for the year ended
March 29, 1996 and has been selected as the auditor for the current fiscal
year, as recommended by the Audit Committee. A representative of that firm is
expected to be at the Annual Meeting and will have an opportunity to make a
statement, if desired. The representative will also be available to respond to
appropriate questions from stockholders.
STOCKHOLDER PROPOSALS
Any eligible stockholder (as defined below) of the Company wishing to have a
proposal considered for inclusion in the Company's 1997 proxy solicitation
materials must set forth such proposal in writing and file it with the
Secretary of the Company on or before , 1997. The Board of Directors of
the Company will review any proposals from eligible stockholders which it
receives by that date and, with advice of counsel, will determine whether any
such proposal will be included in its 1997 proxy solicitation materials under
applicable SEC proxy rules. An eligible stockholder is one who is the record
or beneficial owner of at least 1% or $1,000 in market value of securities
entitled to be voted at that annual meeting and has held such securities for
at least one year and who shall continue to own such securities through the
date on which the annual meeting is held.
53
<PAGE>
ANNUAL REPORT
The Company's 1996 Annual Report to Stockholders is being mailed to
stockholders together with this Proxy Statement. Stockholders are referred to
the report for financial and other information about the Company, and such
information is incorporated in this Proxy Statement by reference and is part
of the proxy soliciting material.
FORM 10-K ANNUAL REPORT
The Company will provide to any stockholder, without charge, a copy of its
Annual Report on Form 10-K for the fiscal year ended March 29, 1996, including
financial statements, filed with the SEC, upon the request of any such
stockholder. Requests should be directed to International Technology
Corporation, Attention: Investor Relations Department, 23456 Hawthorne
Boulevard, Torrance, California 90505, 310-378-9933.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company hereby incorporates by reference in this Proxy Statement its
Annual Report on Form 10-K for the fiscal year ended March 29, 1996 (as
amended by Amendment No. 1 on Form 10-K/A dated July 29, 1996), the Quarterly
Report on Form 10-Q for the quarter ended June 28, 1996, which Quarterly
Report is attached hereto as Appendix II, and the Company's Current Report on
Form 8-K dated September , 1996.
GENERAL AND OTHER MATTERS
The Company will bear the cost of this solicitation of proxies, including
expenses in connection with preparing, assembling and mailing the proxy
solicitation materials and the charges and expenses of brokerage firms and
others for forwarding solicitation materials to beneficial owners. The Company
has engaged D.F. King & Co., Inc. ("D.F. King") to assist in the solicitation
of proxies, for which D.F. King will be paid a management fee of $7,000 plus
out-of-pocket expenses, which fee and expenses are expected to be in excess of
$20,000. In addition to solicitation by mail, proxies may be solicited
personally or by telephone or telegraph by D.F. King, as well as by directors,
officers or employees of the Company, who will receive no additional
compensation for such services.
As of the date of this Proxy Statement, there are no other matters to be
brought before the Annual Meeting. Pursuant to the Company's Bylaws, in order
to present business at the Annual Meeting other than that proposed by the
Board, a stockholder must give written notice to the Secretary of the Company
not later than sixty days in advance of the Annual Meeting or, if later, the
fifteenth day following the first public disclosure of the date of the Annual
Meeting. Any such notice must set forth as to each matter the stockholder
proposes to bring before the meeting: (i) a brief description of the business
desired to be brought before the meeting and the reasons for conducting such
business at the meeting; (ii) the name and address, as they appear on the
Company's books, of the stockholder proposing such business; (iii) the class,
series and number of shares of the Company that are beneficially owned by the
stockholder, and (iv) any material interest of the stockholder in such
business. In addition, a stockholder making any such proposal must promptly
provide any information reasonably requested by the Company. Should any other
matters come before the Annual Meeting, action may be taken thereon pursuant
to the proxies in the form enclosed, which confer discretionary authority on
the persons named therein or their substitutes with respect to such matters.
By Order of the Board of Directors,
_____________________________________
Secretary
October , 1996
Torrance, California
54
<PAGE>
APPENDICES
<TABLE>
<C> <S>
Appendix I Opinion of Donaldson, Lufkin & Jenrette Securities Corporation
International Technology Corporation Form 10-Q for Quarter Ended
Appendix II June 28, 1996
Appendix III Proposed Certificate of Designations of Preferred Stock
Appendix IV Proposed Amendment to Certificate of Incorporation Effecting a
One-for-Four Reverse Stock Split and Reducing the Par Value of
Shares of Common Stock
Appendix V Proposed Amendments to Certificate of Incorporation Eliminating
Cumulative Voting and Eliminating a Classified Board of Directors
Appendix VI 1996 Stock Incentive Plan
</TABLE>
55
<PAGE>
APPENDIX I
DLJ FAIRNESS OPINION
September , 1996
Board of Directors
International Technology Corporation
23456 Hawthorne Boulevard
Torrance, CA 90505
Members of the Board:
You have requested our opinion as to the fairness from a financial point of
view to International Technology Corporation (the "Company") of the
Consideration (as defined below) to be received by the Company pursuant to the
transactions contemplated by the Securities Purchase Agreement (the
"Agreement"), dated as of August 28, 1996, by and between the Company and
Carlyle Partners II, L.P., Carlyle Partners III, L.P., Carlyle International
Partners II L.P., Carlyle International Partners III L.P. and CIS
International Partners (collectively, the "Investors").
Pursuant to the Agreement, the Investors will purchase (i) an aggregate of
450,000 shares of Cumulative Convertible Participating Preferred Stock (the
"Preferred Stock"), $100 par value per share, of the Company and (ii) warrants
to purchase 5,000,000 shares of common stock, par value $1.00 per share (the
"Common Stock"), of the Company at a purchase price per share of $3.00 for
aggregate consideration (the "Consideration") of $45 million (together, the
"Proposed Transaction"). Pursuant to the Certificate of Designations relating
to the Preferred Stock (the "Certificate of Designations") and subject to the
conditions set forth therein, each share of Preferred Stock shall be
convertible at the option of the holder thereof into shares of Common Stock at
a price of $2.00 per share, subject to certain adjustments, and the holders of
the Preferred Stock shall be entitled to elect a majority of the Board of
Directors of the Company following completion of the Proposed Transaction for
five years. The terms and conditions of the Proposed Transaction are set forth
in more detail in the Agreement, the Certificate of Designations and the
Ancillary Agreements. Certain capitalized terms used herein shall have the
meaning ascribed in the Agreement.
In arriving at our opinion, we have reviewed the Agreement and the exhibits
thereto, including the Certificate of Designations and the Ancillary
Agreements. We have also reviewed financial and other information that was
publicly available or furnished to us by the Company, including information
provided during discussions with the Company's management. Included in the
information provided during discussions with the Company's management were
financial projections of the Company for the period beginning July 1, 1996 and
ending March 31, 2001, prepared by the management of the Company. In addition,
we have compared certain financial and securities data of the Company with
various other companies that we deemed relevant, reviewed the historical stock
prices and trading volumes of the Common Stock and the 7% Cumulative
Convertible Exchangeable Preferred Stock, par value $100 per share, of the
Company, reviewed prices paid in certain business combinations and certain
investments by private investors in public companies and conducted such other
financial studies, analyses and investigations as we deemed appropriate for
purposes of this opinion.
In rendering our opinion, we have relied upon and assumed the accuracy,
completeness and fairness of the financial and other information that was
available to us from public sources, that was provided to us by the Company or
its representatives, or that was otherwise reviewed by us. With respect to the
financial projections of the Company, we have assumed that such projections
have been reasonably prepared on a basis reflecting the best currently
available estimates and judgments of the management of the Company as to the
future operating and financial performance of the Company. We have not assumed
any responsibility for making any independent evaluation of the Company's
assets or liabilities or for making any independent verification of any of the
information reviewed by us. We have relied as to all legal matters on advice
of counsel to the Company.
I-1
<PAGE>
Our opinion is necessarily based upon economic, market, financial and other
conditions as they exist on, and on the information made available to us as
of, the date of this letter. It should be understood that, although subsequent
developments may affect this opinion, we do not have any obligation to update,
revise or reaffirm this opinion. We are expressing no opinion as to the prices
at which the Common Stock will actually trade at any time. Our opinion does
not address the relative merits of the Proposed Transaction and other business
strategies being considered by the Company's Board of Directors, nor does it
constitute a recommendation to any member of the Board as to whether to
recommend the Proposed Transaction to stockholders of the Company nor to any
stockholder as to how such stockholder should vote on the Proposed
Transaction.
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), as part of its
investment banking services, is regularly engaged in the valuation of
businesses and securities in connection with mergers, acquisitions,
underwritings, sales and distributions of listed and unlisted securities,
private placements and valuations for estate, corporate and other purposes.
DLJ has performed investment banking and other services for the Company in the
past and has been compensated for such services. Such investment banking
services include the placement on behalf of the Company of its 8.67% Senior
Notes due 2003. In the ordinary course of business, we actively trade in the
debt and equity securities of the Company for our own account and for the
accounts of our customers and, accordingly, may at any time hold a long or
short position in such securities.
Based upon the foregoing and such other factors as we deem relevant, we are
of the opinion that the Consideration to be received by the Company is fair to
the Company from a financial point of view.
Very truly yours,
Donaldson, Lufkin & Jenrette
Securities Corporation
By: _________________________________
I-2
<PAGE>
APPENDIX II
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
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 JUNE 28, 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 July 31, 1996 the registrant had issued and outstanding an aggregate of
36,602,401 shares of its common stock.
II-1
<PAGE>
INTERNATIONAL TECHNOLOGY CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR QUARTER ENDED JUNE 28, 1996
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
-----
<C> <S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 28, 1996
(unaudited) and
March 29, 1996............................................. 3
Condensed Consolidated Statements of Operations for the
First Fiscal Quarter ended June 28, 1996 and June 30, 1995
(unaudited)................................................ 4
Condensed Consolidated Statements of Cash Flows for the
First Fiscal Quarter ended June 28, 1996 and June 30, 1995
(unaudited)................................................ 5
Notes to Condensed Consolidated Financial Statements
(unaudited)................................................ 6-7
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition......................... 8-16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 17
Item 6. Exhibits and Reports on Form 8-K............................ 18
Signatures.................................................. 19
</TABLE>
II-2
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS.
INTERNATIONAL TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 28, MARCH 29,
1996 1996
----------- ---------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 25,104 $ 24,493
Restricted cash........................................ 3,977 --
Receivables, net....................................... 112,847 126,832
Prepaid expenses and other current assets.............. 4,638 4,315
Deferred income taxes.................................. 12,149 12,149
-------- --------
Total current assets................................. 158,715 167,789
Property, plant and equipment, at cost:
Land and land improvements............................. 1,780 1,783
Buildings and leasehold improvements................... 10,955 10,961
Machinery and equipment................................ 144,695 144,218
-------- --------
157,430 156,962
Less accumulated depreciation and amortization....... 104,559 101,201
-------- --------
Net property, plant and equipment.................. 52,871 55,761
Investment in Quanterra.................................. 13,450 12,975
Other assets............................................. 38,017 37,084
Long-term assets of discontinued operations.............. 41,705 41,705
-------- --------
Total assets......................................... $304,758 $315,314
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................... $ 23,322 $ 27,091
Accrued liabilities.................................... 31,279 32,157
Billings in excess of revenues......................... 1,062 2,044
Short-term debt, including current portion of long-term
debt.................................................. 65,259 97
Net current liabilities of discontinued operations..... 17,094 17,226
-------- --------
Total current liabilities............................ 138,016 78,615
Long-term debt........................................... 392 65,611
Long-term accrued liabilities of discontinued opera-
tions................................................... 22,610 24,771
Other long-term accrued liabilities...................... 5,351 5,452
Commitments and contingencies............................
Stockholders' equity:
Preferred stock, $100 par value; 180,000 shares autho-
rized; 24,000 shares issued and outstanding........... 2,400 2,400
Common stock, $1 par value; 100,000,000 shares autho-
rized; 36,601,778 and 36,598,207 shares issued and
outstanding, respectively............................. 36,602 36,598
Treasury stock, at cost (27,811 shares)................ (84) (84)
Additional paid-in capital............................. 170,069 169,958
Deficit................................................ (70,598) (68,007)
-------- --------
Total stockholders' equity........................... 138,389 140,865
-------- --------
Total liabilities and stockholders' equity............. $304,758 $315,314
======== ========
</TABLE>
See accompanying notes.
II-3
<PAGE>
INTERNATIONAL TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FIRST FISCAL QUARTER ENDED
----------------------------
JUNE 28, JUNE 30,
1996 1995
------------- -------------
(UNAUDITED)
<S> <C> <C>
Revenues........................................... $ 81,416 $ 100,292
Cost and expenses:
Cost of revenues................................. 73,637 83,348
Selling, general and administrative expenses..... 9,080 10,023
------------ -------------
Operating income (loss)............................ (1,301) 6,921
Equity in net loss of Quanterra.................... -- (955)
Interest, net...................................... (1,356) (1,991)
------------ -------------
Income (loss) before income taxes.................. (2,657) 3,975
(Provision) benefit for income taxes............... 1,116 (1,630)
------------ -------------
Net income (loss).................................. (1,541) 2,345
Less preferred stock dividends..................... (1,050) (1,050)
------------ -------------
Net income (loss) applicable to common stock....... $ (2,591) $ 1,295
============ =============
Net income (loss) per share........................ $ (.07) $ .04
============ =============
</TABLE>
See accompanying notes.
II-4
<PAGE>
INTERNATIONAL TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FIRST FISCAL QUARTER
ENDED
----------------------
JUNE 28, JUNE 30,
1996 1995
---------- ----------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)..................................... $ (1,541) $ 2,345
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Equity in net loss of Quanterra..................... -- 955
Depreciation and amortization....................... 4,027 3,874
Deferred income taxes............................... (1,225) 1,554
Changes in assets and liabilities, net of effects from
acquisitions and dispositions of businesses:
Decrease (increase) in receivables, net............. 13,985 (1,951)
Increase in prepaid expenses and other current as-
sets............................................... (323) (537)
(Decrease) increase in accounts payable............. (3,769) 813
Decrease in accrued liabilities..................... (878) (5)
Decrease in billings in excess of revenues.......... (982) (1,822)
Decrease in other long-term accrued liabilities..... (101) (171)
--------- ----------
Net cash provided by operating activities............. 9,193 5,055
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.................................. (592) (1,868)
Investment in Quanterra............................... (475) --
Restricted cash....................................... (3,977) --
Other, net............................................ (148) (574)
Investment activities of discontinued operations...... (2,293) (2,522)
--------- ----------
Net cash used for investing activities................ (7,485) (4,964)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term borrowings.................... (57) (10,933)
Long-term borrowings.................................. -- 13,000
Dividends paid on preferred stock..................... (1,050) (1,050)
Repurchases of common stock........................... -- (740)
Issuances of common stock............................. 10 150
--------- ----------
Net cash (used for) provided by financing activities.. (1,097) 427
--------- ----------
Net increase in cash and cash equivalents............... 611 518
Cash and cash equivalents at beginning of period........ 24,493 6,547
--------- ----------
Cash and cash equivalents at end of period.............. $ 25,104 $ 7,065
========= ==========
</TABLE>
See accompanying notes.
II-5
<PAGE>
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 first fiscal quarter ended June 28, 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 period ended
June 28, 1996 are not necessarily indicative of the results for the full
fiscal year.
2. For the first fiscal quarters ended June 28, 1996 and June 30, 1995, the
Company had an effective income tax benefit rate of 42% and an income tax rate
of 41%, 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:
<TABLE>
<CAPTION>
AVERAGE COMMON AND COMMON
FISCAL QUARTER ENDED EQUIVALENT SHARES OUTSTANDING
-------------------- -----------------------------
<S> <C>
June 28, 1996............................... 36,601,836
June 30, 1995............................... 35,758,245
</TABLE>
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 anticipation of the loss reported by the Company for its current first
fiscal quarter, the Company, prior to June 28, 1996, obtained a waiver through
August 1996 of certain covenants in its lending arrangements which allows it
to maintain compliance with those arrangements as of the end of the first
quarter of fiscal year 1997. In connection with this waiver, the Company has
agreed to restrict the usage of its credit line to letters of credit during
the period of the waiver. The Company is negotiating with its lenders
additional modifications to the lending arrangement which will be required
upon the expiration of the waiver. In the event such modifications are not
obtained, there would be a material adverse effect on the consolidated
financial condition of the Company. Additionally, due to the short-term nature
of the waiver, the Company's $65,000,000 senior secured notes, which otherwise
would have been classified as long-term, have been classified as current in
the June 28, 1996 condensed consolidated balance sheet.
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 June 28, 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
II-6
<PAGE>
INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 June 28, 1996, the Company's condensed consolidated balance sheet
included accrued liabilities of $39,704,000 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 for information regarding the legal
proceedings of the discontinued operations of the Company.
7. Unbilled receivables of $21,063,000 at June 28, 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 June 28 and March 29, 1996 is
approximately $8,500,000 of claims related to the Helen Kramer project, which
is subject to a governmental investigation.
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 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.
II-7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
INTERNATIONAL TECHNOLOGY CORPORATION
FOR QUARTER ENDED JUNE 28, 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 an 18.8% decrease in revenues from $100,292,000 in
the first quarter of fiscal year 1996 to $81,416,000 in the first quarter of
fiscal year 1997, primarily reflecting 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 progressively
from the first quarter level over the course of the year, the impact of the
difficult industry-wide trends is expected to cause the Company to continue to
show a year-to-year decline in revenues in its second fiscal quarter and
possibly beyond.
The following table shows, for the first fiscal quarters ended June 28, 1996
and June 30, 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
-------------------------
JUNE 28, JUNE 30,
SOURCE 1996 1995
------ ---------- ----------
<S> <C> <C>
Federal government:
U.S. Department of Defense (DOD)............ 46% 50%
U.S. Department of Energy (DOE)............. 14 12
Other federal agencies...................... 2 4
---------- ----------
62 66
State and local governments................... 6 4
---------- ----------
Total......................................... 68% 70%
========== ==========
</TABLE>
The portion of the Company's revenues derived from the DOD decreased from
52% to 46% 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 type of 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
performance of DOE studies and recent contract awards for such work.
The Company's revenues from commercial clients declined in the first quarter
of fiscal year 1997 compared to the prior year period. 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
II-8
<PAGE>
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 recent 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 14% in the first
quarter of fiscal year 1997) continue to be derived from large, complex
thermal remediation contracts utilizing the Company's Hybrid Thermal Treatment
System(R) (HTTS(R)) 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 $14,000,000 at June 28, 1996. The Company is
actively pursuing other contract opportunities which utilize HTTS equipment.
At June 28, 1996, IT's HTTS equipment had a net book value of approximately
$14,000,000.
The Company's total contract backlog at June 28, 1996 was approximately
$1,196,000,000, of which approximately $815,000,000 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. Backlog increased
during the current first fiscal quarter due principally to the $325,000,000
award to IT in May 1996 of the Savannah Total Environmental Restoration
Contract IDO Program by the U.S. Army Corps of Engineers. 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 first quarter of fiscal year 1997 declined
to 9.6% of revenues from 16.9% of revenues for the corresponding period of the
prior fiscal year. In the current quarter, gross margin was adversely impacted
by the declining level of revenues as certain overhead cost elements are fixed
in the short term, by lower staff utilization, and by lower pricing due to
competitive industry conditions. The Company expects gross margin to improve
from the first quarter level upon the anticipated progressive revenue increase
noted above as fixed overhead costs are reduced due to organizational
streamlining and spread over higher revenues and as staff utilization
improves, but competitive pricing is expected to continue to adversely affect
gross margin.
Selling, General and Administrative Expenses
Selling, general and administrative expenses of $9,080,000 for the first
quarter of fiscal year 1997 were $943,000 or 9.4% lower than the prior year
level, principally due to continued management attention to expenses. Selling,
general and administrative expenses increased from 10.0% to 11.1% of revenues
due to the lower revenue level. Selling, general and administrative expenses
are expected to decline due to cost savings resulting from the reduction of a
number of significantly compensated positions occurring in the second fiscal
quarter. As a result, the Company anticipates taking a special charge during
that quarter, reflecting severance and other associated costs.
II-9
<PAGE>
Interest, Net
For the first quarter of fiscal year 1997, net interest expense represented
1.7% of revenues compared to the 2.0% of revenues reported in the first
quarter of fiscal year 1996. The lower first quarter net interest expense
level compared to a year ago is due principally to an increased level of cash
and cash equivalents generating more interest income.
Income Taxes
For the first fiscal quarters ended June 28, 1996 and June 30, 1995, the
Company had an effective income tax benefit rate of 42% and an income tax rate
of 41%, 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 $33,701,000 (net of a valuation allowance of
$4,869,000). 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 tax 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 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.
II-10
<PAGE>
INTERNATIONAL TECHNOLOGY CORPORATION
FINANCIAL CONDITION
Working capital of $20,699,000 at June 28, 1996 decreased by $68,475,000 or
76.8% from $89,174,000 at March 29, 1996 due principally to the classification
of the Company's $65,000,000 of senior secured notes as current in the June
28, 1996 condensed consolidated balance sheet (see Note 4 to Condensed
Consolidated Financial Statements). Consequently, the current ratio at June
28, 1996 decreased to 1.15:1 from 2.13:1 at March 29, 1996.
Cash provided by operating activities for the first quarter of fiscal year
1997 totaled $9,193,000, compared to $5,055,000 provided by operating
activities in the corresponding first quarter of the prior fiscal year. During
the current period, the increase in cash provided by operating activities is
principally due to a net reduction in receivables reflecting the significantly
lower revenue level. Additionally, capital expenditures of $592,000 for the
current first fiscal quarter were $1,276,000 lower than the $1,868,000
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 the quarter. Management believes capital expenditures for fiscal year
1997 will increase slightly from the $4,696,000 level of fiscal year 1996,
excluding any business acquisitions or strategic investments which might be
made by the Company.
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 the past
several years based upon interim approvals by DTSC, and the final closure is
scheduled to be completed in fiscal year 1998.
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 are subject to a 90-day public comment period during which the
Company expects interested parties to support alternative plans. After the
completion of the public comment period, 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. Closure construction for the Company's preferred plan is
scheduled to be completed within three years of approval of the plan. Although
not anticipated, if DTSC were to approve an alternative plan or fail to timely
approve any plan, 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
II-11
<PAGE>
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
$11,500,000, 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 $41,705,000 at June 28, 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 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 made an initial payment of
$1,000,000 in July 1996 and will pay to the USEPA approximately $4,400,000 in
three additional installments within one year, which amounts had been
previously accrued by the Company. Additionally, the Company has received from
the USEPA contribution protection and a covenant not
II-12
<PAGE>
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. The USEPA has released
a feasibility study and proposed the final remedy for the site. Selection of
the final remedy is subject to public notice and comment. Response costs for
the final remedy are estimated by USEPA to range from $96,000,000 to
$115,000,000 for the USEPA's preferred alternative to $234,000,000 for the
most expensive alternative.
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.
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 its November 1995 letter, the DTSC
estimated that the costs of the remedial alternatives to range from
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<PAGE>
approximately $4,100,000 for the PRP group's preferred alternative to between
$18,300,000 to $32,600,000 for DTSC's favored alternative depending upon
whether certain options for discharge of produced waters were available. The
options range from continued limited site monitoring to actively pumping and
treating groundwater from both the alleged source points of contamination and
the allegedly contaminated groundwater plume emanating from the site. The DTSC
has advised the PRP group that it has reviewed the group's data and arguments,
and nevertheless intends to complete and release for public review and comment
by the second quarter of fiscal year 1997 a draft RAP selecting DTSC's
preferred alternative. The PRP group received this draft RAP on June 26, 1996
and submitted its comments in late July 1996. The PRP group is evaluating its
potential remedies with respect to the DTSC's action.
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 current owner/operators recently
submitted to DTSC their own proposal in which they claim that the Company and
other members of the PRP group are responsible for at least 89% of the site's
remediation costs and that they are responsible for only a small percentage of
the site's remediation costs, and have demanded indemnity from the Company
pursuant to the lease agreement under which IT Corporation's predecessor
operated the site. The DTSC has not adopted either allocation. The Company has
paid approximately 50% of the PRP group's costs to-date on an interim basis.
The PRP group is initiating 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.
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<PAGE>
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 $13,450,000 on the June
28, 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 through
August 1996 of certain covenants which allows it to maintain compliance with
the lending arrangements as of the end of the first quarter of fiscal year
1997. (See Note 4 to Condensed Consolidated Financial Statements.) The Company
is negotiating with its lenders additional modifications to the lending
arrangement which will be required subsequent to the expiration of the waiver.
In the event such modifications are not obtained, there would be a material
adverse effect on the consolidated financial condition of the Company.
In aggregate, at June 28, 1996, letters of credit totaling approximately
$29,000,000 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 accounts receivable (which are the
principal collateral to the lending arrangements) during the three months
ended June 28, 1996 related to the reduction in revenue, the Company posted
$3,977,000 of cash as additional collateral to its lending arrangements during
the quarter, and there was no availability under the line of credit. Excluding
this cash collateral, the Company had invested cash of approximately
$21,000,000 at June 28, 1996.
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 (which are expected to increase from
recent levels over the next several years), 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 combined cash position
and availability under its bank line; 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.
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. This ongoing effort is
directed toward responding to the challenges facing the environmental industry
and seeking to reposition IT to create a platform which provides competitive
advantage in its existing businesses and facilitates the exploitation of new
and existing markets. The Company's chairman and its president and acting
chief executive officer are jointly and
II-15
<PAGE>
actively leading this effort and all opportunities have been and are being
aggressively explored, including possible mergers, acquisitions, opportunities
for capital infusion, and strategic alliances. There can be no assurance,
however, that any transaction will occur or what the timing of any such
transaction may be.
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,
and financial and liquidity trends.
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<PAGE>
PART II
INTERNATIONAL TECHNOLOGY CORPORATION
ITEM 1. LEGAL PROCEEDINGS.
The following matter and other continuing operations litigation to which the
Company is a party are 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.
See also Management's Discussion and Analysis of Results of Operations and
Financial Condition--Financial Condition for information regarding litigation
related to the discontinued operations of the Company.
Class Action Lawsuit
Pursuant to the tentative settlement of the litigation, the Company paid
$3,000,000 into an escrow account on July 23, 1996, such amount plus accrued
interest thereon to be released to plaintiffs upon completion of the
settlement and approval by the class and the court.
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<PAGE>
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.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <C> <S>
10(ii) 15. Consent and Waiver, dated as of June 27, 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.
27 Financial Data Schedule for the quarter ended June 28,
1. 1996.
</TABLE>
(b) Reports on Form 8-K.
Current report on Form 8-K, dated June 27, 1996, reporting under Item 5,
"Other Events," related to a press release, dated July 2, 1996, announcing the
appointment of a new president and acting chief executive officer for the
Company.
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<PAGE>
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 August 12, 1996
_____________________________________
ANTHONY J. DELUCA
PRESIDENT AND ACTING CHIEF
EXECUTIVE OFFICER AND DULY
AUTHORIZED OFFICER
Philip H. Ockelmann August 12, 1996
_____________________________________
PHILIP H. OCKELMANN
VICE PRESIDENT, FINANCE, TREASURER
AND PRINCIPAL ACCOUNTING OFFICER
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<PAGE>
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
----------------
PURSUANT TO SECTION 151 OF THE
GENERAL CORPORATION LAW OF THE STATE OF DELAWARE
----------------
The Undersigned, being, respectively, the President and Secretary of
International Technology Corporation, a Delaware corporation (the
"Corporation") do hereby certify that pursuant to the authority contained in
Article Fourth of its Certificate of Incorporation, as amended, (the
"Certificate of Incorporation") and in accordance with the provisions of
Section 151(g) of the General Corporation Law of the State of Delaware, the
Board of Directors of the Corporation at a meeting duly called and held on
, 1996 adopted the following resolution, which resolution remains in full
force and effect on the date hereof:
Resolved, that there is hereby established a series of authorized preferred
stock, having a par value of $100 per share, which series shall be designated
as "Cumulative Convertible Participating Preferred Stock" (the "Convertible
Preferred Stock"), shall consist of 46,375 shares and shall have the following
voting powers, preferences and relative, participating, optional and other
special rights, and qualifications, limitations and restrictions thereof as
follows:
1. Certain Definitions.
Unless the context otherwise requires, the terms defined in this paragraph 1
shall have, for all purposes of this resolution, the meanings herein specified
(with terms defined in the singular having comparable meanings when used in
the plural).
"Affiliate" means (i) with respect to any Person, any other Person that
directly or indirectly controls or manages, is controlled or managed by, or is
under common control or management with such Person, whether through the
ownership of equity interests, by contract or otherwise; and (ii) with respect
to an individual, in addition to any Person specified in clause (i), the
spouse, any parent or any child of such individual and any trust for the
benefit of such individual's spouse, parent or child.
"Applicable Dividend Rate" means the following per annum percentages of
Liquidation Preference: (i) zero percent (0%) with respect to dividends
payable on the first four Dividend Payment Dates following the Initial
Issuance Date, (ii) three percent (3%) with respect to dividends payable on
the fifth through eighth Dividend Payment Dates following the Initial Issuance
Date, and (iii) six percent (6%) with respect to dividends payable thereafter.
"Business Day" means a day other than a Saturday or Sunday or any federal,
New York or California holiday.
III-1
<PAGE>
"Carlyle Affiliate" means, at any time, any of Carlyle Partners II, L.P., a
Delaware limited partnership, Carlyle Partners III, L.P., a Delaware limited
partnership, Carlyle International Partners II, L.P. a Cayman Islands limited
partnership, Carlyle International Partners III, L.P., a Cayman Islands
limited partnership, C/S International Partners, a Cayman Islands limited
partnership, and any of their Affiliates at such time, including, but not
limited to, The Carlyle Group, L.P., TC Group LLC and their respective
affiliates.
"Commission" means the United States Securities and Exchange Commission.
"Common Equity" means all shares now or hereafter authorized of any class of
common stock of the Corporation, including the Common Stock, and any other
stock of the Corporation, howsoever designated, authorized after the Initial
Issue Date, which has the right (subject always to prior rights of any class
or series of preferred stock) to participate in the distribution of the assets
and earnings of the Corporation without limit as to per share amount.
"Common Stock" means the common stock, par value $1.00 per share, of the
Corporation.
"Conversion Date" shall have the meaning set forth in subparagraph 5(b)
below.
"Conversion Price" shall initially mean $2.00 and thereafter shall be
subject to adjustment from time to time pursuant to the terms of paragraph 5
below, provided, however, that on the eighth anniversary of the Initial Issue
Date, the Conversion Price shall be adjusted to equal one half of the then
current Conversion Price per share of Common Stock, subject thereafter to
further adjustment pursuant to paragraph 5 below.
"Convertible Exchangeable Preferred Stock" means the 7% Cumulative
Convertible Exchangeable Preferred Stock, $100 par value per share, of the
Corporation.
"Convertible Exchangeable Preferred Stock Certificate of Designation" means
the Certificate of Designation of the 7% Cumulative Convertible Exchangeable
Preferred Stock, $100 par value per share, of the Corporation.
"Convertible Preferred Stock" has the meaning set forth in paragraph 2
below.
"Current Market Price" means, for a share of Common Stock on any date, the
average of Quoted Prices for thirty (30) consecutive Trading Days commencing
forty-five (45) Trading Days before the date in question.
"Director" means a member of the Corporation's Board of Directors.
"Dividend Payment Date" has the meaning set forth in subparagraph 3(c)
below.
"Dividend Period" means the period from, and including, the Initial Issue
Date to, but not including, the first Dividend Payment Date and thereafter,
each quarterly period from, and including, each Dividend Payment Date to, but
not including, the next Dividend Payment Date.
"Five Year Period" means the period commencing on the Initial Issue Date and
ending on the fifth anniversary of the Initial Issue Date.
"Initial Issue Date" means the date that shares of Convertible Preferred
Stock are first issued by the Corporation.
"Junior Stock" means Common Equity, and any class or series of stock of the
Corporation authorized after the Initial Issue Date which is not entitled to
receive any dividends in any Dividend Period unless all dividends required to
have been paid or declared and set apart for payment on the Cumulative
Preferred Stock and any other Parity Stock shall have been so paid or declared
and set apart for payment, and for purposes of paragraph 4 below, shall mean
Common Equity and any class or series of stock of the Corporation authorized
after the
III-2
<PAGE>
Initial Issue Date which is not entitled to receive any assets upon
liquidation, dissolution or winding up of the affairs of the Corporation until
the Convertible Preferred Stock and any other Parity Stock shall have received
the entire amount to which such stock is entitled upon such liquidation,
dissolution or winding up.
"Liquidation Preference" shall mean $1,000 per share.
"Market Capitalization" means, as of any date, the product of the Current
Market Price of the Common Stock as of such date multiplied by the number of
shares of Common Stock outstanding as of such date.
"Non-Preferred Stock Director" means a Director of the Corporation other
than a Preferred Stock Director.
"Parity Stock" means, for purposes of paragraph 3 below, the Convertible
Exchangeable Preferred Stock, and any other class or series of stock of the
Corporation authorized after the Initial Issue Date which is entitled to
receive payment of dividends on a parity with the Convertible Preferred Stock
without preference or priority of one over the other and, for purposes of
paragraph 4 below, shall mean the Convertible Exchangeable Preferred Stock and
any class or series of stock of the Corporation authorized after the Initial
Issue Date which is entitled to receive assets upon liquidation, dissolution
or winding up of the affairs of the Corporation on a parity with the
Convertible Preferred Stock without preference or priority of one over the
other.
"Person" means any individual, corporation, association, partnership, joint
venture, limited liability company, trust, estate or other entity or
corporation.
"PIK Dividends" has the meaning set forth in subparagraph 3(b) below.
"Preferred Stock Director" has the meaning set forth in paragraph 7(d)
below.
"Quoted Price" means, with respect to Common Stock, the last reported sales
price for Common Stock as reported by the National Association of Securities
Dealers, Inc. Automatic Quotations System--National Market System, or, if the
Common Stock is listed or admitted for trading on a securities exchange, the
last reported sales price of the Common Stock on the principal exchange on
which the Common Stock is listed or admitted for trading (which shall be for
consolidated trading if applicable to such exchange), or if not so reported or
listed or admitted for trading, the last reported bid price of the applicable
security in the over-the-counter market. In the event that the Quoted Price
cannot be determined as aforesaid, the Board of Directors (by a vote of the
majority of the Non-Preferred Stock Directors), of the Corporation shall
determine the Quoted Price on the basis of such quotations as it in good faith
considers appropriate. Such determination may be challenged in good faith by
holders of a majority of the shares of Convertible Preferred Stock then
outstanding, and any dispute shall be resolved at the Corporation's cost, by
the determination of an investment banking firm of recognized national
standing selected by the Corporation and acceptable to such holders of
Convertible Preferred Stock, which determination shall be made in good faith
and be conclusive absent manifest error; provided, however, that in the event
that the determination of the Quoted Price by the investment banking firm
deviates by no more than 5% from the Company's determination of the Quoted
Price, then the cost to the Corporation of the retention of the investment
banking firm shall be borne by the holders of the Convertible Preferred Stock
challenging the Corporation's determination.
"Record Date" means the date designated by the Board of Directors of the
Corporation at the time a dividend is declared; provided, however, that such
Record Date shall not be more than sixty (60) days nor less than ten (10) days
prior to the respective Dividend Payment Date or such other date designated by
the Board of Directors for the payment of dividends.
"Redemption Date" means any date fixed by the Corporation pursuant to
subparagraph 6(b) for redemption of the Convertible Preferred Stock.
"Redemption Price" means a price per share equal to the Liquidation
Preference per share, plus an amount equal to all cumulative dividends accrued
and unpaid on such share to the Redemption Date.
III-3
<PAGE>
"Rights" means any rights, options or warrants entitling a holder thereof to
substitute for or purchase any share of Common Stock of the Corporation.
"Trading Day" means, with respect to any security, any day on which any
market in which the applicable security is then traded and in which a Quoted
Price may be ascertained is open for business.
2. Number of Shares and Designation. 46,375 shares of the preferred stock,
$100 par value per share, of the Corporation are hereby constituted as a
series of the preferred stock designated as Cumulative Convertible
Participating Preferred Stock (the "Convertible Preferred Stock").
3. Dividends.
(a) The record holders of Convertible Preferred Stock shall be entitled to
receive dividends, when, as and if declared by the Board of Directors of the
Corporation, out of funds legally available for payment of dividends. Such
dividends shall be payable by the Corporation at the Applicable Dividend Rate.
(b) Dividends on the Convertible Preferred Stock payable during the period
beginning on the first Dividend Payment Date on or following the first
anniversary of the Initial Issue Date and ending on the first Dividend Payment
Date on or following the second anniversary of the Initial Issue Date, shall
be paid in fully paid and nonassessable shares of Convertible Preferred Stock
(such dividends paid in kind being herein called "PIK Dividends"). Dividends
on the Convertible Preferred Stock payable thereafter shall be paid in cash.
Dividends of additional shares of Convertible Preferred Stock shall be paid by
delivering to the record holders of Convertible Preferred Stock a number of
shares of Convertible Preferred Stock determined by dividing the total amount
of the cash dividend which otherwise would be payable on the Dividend Payment
Date to such holders (rounded to the nearest whole cent) by the Liquidation
Preference. The issuance of any such PIK Dividend in such amount shall
constitute full payment of such dividend. The Corporation shall not issue
fractional shares of Convertible Preferred Stock to which holders may become
entitled pursuant to this subparagraph, but in lieu thereof, the Corporation
shall deliver its check in an amount equal to the applicable fraction of the
Liquidation Preference. Any additional shares of Convertible Preferred Stock
issued pursuant to this paragraph shall be governed by this resolution and
shall be subject in all respects, except as to the date of issuance and date
from which dividends accrue and cumulate as set forth below, to the same terms
as the shares of Convertible Preferred Stock originally issued hereunder.
(c) Dividends on shares of Convertible Preferred Stock shall accrue and be
cumulative from and including the Initial Issue Date to and including the date
on which such shares shall have been converted into Common Stock or redeemed
pursuant to paragraph 6 hereof. Such dividends shall accrue whether or not
there shall be (at the time such dividend becomes payable or at any other
time) profits, surplus or other funds of the Corporation legally available for
the payment of dividends. Dividends shall be payable quarterly in arrears when
and as declared by the Board of Directors of the Corporation on , , ,
and of each year [NOTE: THE FOREGOING DATES WILL BE AT QUARTERLY INTERVALS
FROM THE CLOSING DATE] (a "Dividend Payment Date"), commencing on , 1997,
and for shares paid as PIK Dividends, commencing on the first Dividend Payment
Date after such shares are issued. If any Dividend Payment Date occurs on a
day that is not a Business Day, any accrued dividends otherwise payable on
such Dividend Payment Date shall be paid on the next succeeding Business Day.
The amount of dividends payable on Convertible Preferred Stock for each full
Dividend Period shall be computed by dividing by four (4) the annual dividend
at the Applicable Dividend Rate set forth in subparagraph 3(a) above.
Dividends shall be paid to the holders of record of the Convertible Preferred
Stock as their names shall appear on the share register of the Corporation on
the Record Date for such dividend. Dividends payable in any Dividend Period
which is less than a full Dividend Period in length will be computed on the
basis of a ninety (90) day quarterly period and actual days elapsed in such
Dividend Period. Dividends on account of arrears for any past Dividend Periods
may be declared and paid at any time to holders of record on the Record Date
therefor. For any Dividend Period in which dividends are not paid in full on
the Dividend Payment Date first succeeding the end of such Dividend Period,
then on such Dividend Payment Date such accrued and unpaid dividends shall be
added (solely for the purpose of calculating
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<PAGE>
dividends payable on the Convertible Preferred Stock) to the Liquidation
Preference of the Convertible Preferred Stock effective at the beginning of
the Dividend Period succeeding the Dividend Period as to which such dividends
were not paid and shall thereafter accrue additional dividends in respect
thereof at the rate set forth in subparagraph 3(a) above until such accrued
and unpaid dividends have been paid in full.
(d) So long as any shares of Convertible Preferred Stock shall be
outstanding, the Corporation shall not declare, pay or set apart for payment
on any Junior Stock any dividends whatsoever, whether in cash, property or
otherwise (other than dividends payable in shares of the class or series upon
which such dividends are declared or paid, or payable in shares of Common
Stock with respect to Junior Stock other than Common Stock, together with cash
in lieu of fractional shares), nor shall the Corporation make any distribution
on any Junior Stock, nor shall any Junior Stock be purchased, redeemed or
otherwise acquired by the Corporation or any of its subsidiaries of which it
owns not less than a majority of the outstanding voting power (except as
currently required pursuant to the terms of the Corporation's 401(k) plan,
Non-Employee Directors Retirement Plan or any other similar plan or program
for employees and/or directors, whether now existing or hereafter created,
that provides for actions that would not otherwise be permitted under this
subparagraph (d)) nor shall any monies be paid or made available for a sinking
fund for the purchase or redemption of any Junior Stock, unless (i) all
dividends to which the holders of Convertible Preferred Stock shall have been
entitled for all previous Dividend Periods shall have been paid or declared
and a sum of money or PIK Dividends, as applicable (as provided in
subparagraph 3(b)) sufficient for the payment thereof has been set apart and
(ii) the holders of at least sixty-seven percent (67%) of all of the
outstanding shares of Convertible Preferred Stock have given their consent to
the payment of such dividends (given in person or by proxy, either by written
consent pursuant to Section 228 of the Delaware General Corporation Law or by
a vote at a special meeting of stockholders called for such purpose or at any
annual meeting of stockholders, with the holders of Convertible Preferred
Stock voting as a class and with each share of Convertible Preferred Stock
having one vote). In addition, in the event that the Corporation declares or
pays any dividend or other distribution on the Common Stock (other than a
dividend payable solely in shares of Common Stock), the Corporation shall, at
the time of such declaration and payment, declare and pay a dividend or other
distribution on the Convertible Preferred Stock consisting of the dividend or
distribution that would have been payable on the shares of Common Stock had
the Cumulative Preferred Stock been converted into Common Stock immediately
prior to the date on the record date for such dividend or distribution, or, if
no such record was taken, the date as of which the record holders of Common
Stock entitled to such dividend or distribution were determined. Any such
dividend or distribution declared, or required to be declared or to be paid,
on the Cumulative Preferred Stock shall be deemed to have "accrued" on the
Preferred Stock for all purposes of this Paragraph 3 and shall remain an
"accrued dividend" on the Cumulative Preferred Stock for all purposes of this
Section until paid.
(e) In the event that full dividends are not paid or made available to the
holders of all outstanding shares of Convertible Preferred Stock and of any
Parity Stock and funds available for payment of dividends shall be
insufficient to permit payment in full to holders of all such stock of the
full preferential amounts to which they are then entitled, then the entire
amount available for payment of dividends shall be distributed ratably among
all such holders of Convertible Preferred Stock and of any Parity Stock in
proportion to the full amount to which they would otherwise be respectively
entitled.
(f) Notwithstanding anything contained herein to the contrary, no dividends
on shares of Convertible Preferred Stock shall be declared by the Board of
Directors of the Corporation or paid or set apart for payment by the
Corporation at such time as the terms and provisions of any agreement of the
Corporation, including any agreement relating to its indebtedness, prohibits
such declaration, payment or setting apart for payment or provides that such
declaration, payment or setting apart for payment would constitute a breach
thereof or a default thereunder, or if such declaration or payment shall be
restricted or prohibited by law.
4. Distributions Upon Liquidation, Dissolution or Winding Up.
(a) In the event of any voluntary or involuntary liquidation, dissolution or
other winding up of the affairs of the Corporation (in connection with the
bankruptcy or insolvency of the Corporation or otherwise), before
III-5
<PAGE>
any payment or distribution of the assets of the Corporation (whether capital
or surplus) shall be made to or set apart for the holders of Junior Stock, the
holders of Convertible Preferred Stock shall be entitled to be paid out of the
assets of the Corporation in cash or property at its fair market value as
determined by the Board of Directors of the Corporation an amount per share
equal to the Liquidation Preference plus an amount equal to all dividends
accrued and unpaid thereon to the date of such liquidation or dissolution or
such other winding up. Except as provided in this paragraph, holders of
Convertible Preferred Stock shall not be entitled to any distribution in the
event of liquidation, dissolution or winding up of the affairs of the
Corporation.
(b) If, upon any such liquidation, dissolution or other winding up of the
affairs of the Corporation, the assets of the Corporation shall be
insufficient to permit the payment in full of the Liquidation Preference per
share plus an amount equal to all dividends accrued and unpaid on the
Convertible Preferred Stock and the full liquidating payments on all Parity
Stock, then the assets of the Corporation or the proceeds thereof shall be
ratably distributed among the holders of Convertible Preferred Stock and of
any Parity Stock in proportion to the full amounts to which they would
otherwise be entitled if all amounts payable thereon were paid in full.
Neither the consolidation or merger of the Corporation into or with another
corporation or corporations, nor the sale, lease, transfer or conveyance of
all or substantially all of the assets of the Corporation to another
corporation or any other entity for cash, securities or other property shall
be deemed a liquidation, dissolution or winding up of the affairs of the
Corporation within the meaning of this paragraph 4.
(c) Written notice of any liquidation, dissolution or winding up of the
Corporation, stating the payment date or dates when and the place where the
amounts distributable in such circumstances shall be payable, shall be given
by first class mail, postage prepaid, not less than 30 days prior to any
payment date stated therein, to the holders of record of the shares of
Convertible Preferred stock at their address as the same shall appear in the
records of the Corporation.
5. Conversion Rights.
(a) A holder of shares of Convertible Preferred Stock shall have the right,
at such holder's option, to convert all or any portion of its shares of
Convertible Preferred Stock into Common Stock at any time before the close of
business on the Business Day preceding the Redemption Date (unless the
Corporation shall default in payment of the Redemption Price, in which case,
the right of conversion shall be reinstated). For the purposes of conversion,
each share of Convertible Preferred Stock shall be valued at the Liquidation
Preference plus all accrued and unpaid dividends through the Conversion Date,
which shall be divided by the Conversion Price in effect on the Conversion
Date to determine the number of shares issuable upon conversion. Immediately
following such conversion, the rights of the holders of converted Convertible
Preferred Stock shall cease and the persons entitled to receive the Common
Stock upon the conversion of Convertible Stock shall be treated for all
purposes as having become the owners of such Common Stock.
(b) To convert Convertible Preferred Stock, a holder must (i) surrender the
certificate or certificates evidencing the shares of Convertible Preferred
Stock to be converted, duly endorsed in a form satisfactory to the
Corporation, at the office of the Corporation or transfer agent for the
Convertible Preferred Stock, if any, (ii) notify the Corporation at such
office that he elects to convert Convertible Preferred Stock, and the number
of shares he wishes to convert, (iii) state in writing the name or names in
which he wishes the certificate or certificates for shares of Common Stock to
be issued, and (iv) pay any transfer or similar tax if required (provided,
however, that no such payment shall be required if the Common Stock issuable
upon conversion is to be issued in the name of the converting holder of
Convertible Preferred Stock). In the case of lost or destroyed certificates
evidencing ownership of shares of Convertible Preferred Stock to be
surrendered for conversion, the holder shall submit proof of loss or
destruction, and such indemnity as shall be reasonably required by the
Corporation. In the event that a holder fails to notify the Corporation of the
number of shares of Convertible Preferred Stock which he wishes to convert, he
shall be deemed to have elected to convert all shares represented by the
certificate or certificates surrendered for conversion. The date on which the
holder satisfies all those requirements is the "Conversion Date." As soon as
practicable after the Conversion Date, the Corporation shall deliver or shall
deliver through its transfer agent a certificate for the number of full shares
of Common Stock
III-6
<PAGE>
issuable upon the conversion, a check for any fractional share and a new
certificate representing the unconverted portion, if any, of the shares of
Convertible Preferred Stock represented by the certificate or certificates
surrendered for conversion. The person in whose name the Common Stock
certificate is registered shall be treated as the stockholder of record on and
after the Conversion Date. All shares of Common Stock issuable upon conversion
of the Convertible Preferred Stock shall be fully paid and nonassessable and
shall rank pari passu with the other shares of Common Stock outstanding from
time to time. In the case of Convertible Preferred Stock that has been
converted after any Record Date but before the next succeeding Dividend
Payment Date, dividends that are payable on such Dividend Payment Date shall
be payable on such Dividend Payment Date notwithstanding such conversion, and
such dividends shall be paid to the holder of such Convertible Preferred Stock
on such Record Date (and shall not constitute "accrued and unpaid dividends"
for purposes of paragraph 5(a)). No other payment or adjustment for dividends,
or for any dividends in respect of shares of Common Stock shall be made upon
conversion. Holders of Common Stock issued upon conversion shall not be
entitled to receive any dividend payable to holders of Common Stock as of any
record time before the close of business on the Conversion Date. If a holder
of Convertible Preferred Stock converts more than one share at a time the
number of full shares of Common Stock issuable upon conversion shall be based
on the total value of all shares of Convertible Preferred Stock converted.
(c) The Corporation shall not issue a fractional share of Common Stock upon
conversion of Convertible Preferred Stock. Instead, the Corporation shall
deliver a check for an amount equal to the value of the fractional share. The
value of a fraction of a share is determined by multiplying the Current Market
Price of the Common Stock as of the Conversion Date by the fraction, rounded
to the nearest cent.
(d) A holder delivering Convertible Preferred Stock for conversion will not
be required to pay any taxes or duties in respect of the issue or delivery of
Common Stock on conversion but will be required to pay any tax or duty that
may be payable in respect of any transfer involved in the issue or delivery of
the shares of Common Stock. Certificates representing shares of Common Stock
will not be issued or delivered unless all taxes and duties, if any, payable
by the holder have been paid.
(e) The Corporation has reserved and shall continue to reserve out of its
authorized but unissued Common Stock or its Common Stock held in treasury
enough shares of Common Stock to permit the conversion of the Convertible
Preferred Stock in full. All shares of Common Stock which may be issued upon
conversion of Convertible Preferred Stock shall be fully paid and
nonassessable. The Corporation will use its best efforts to comply with all
securities laws regulating the offer and delivery of shares of Common Stock
upon conversion of Convertible Preferred Stock and will use its best efforts
to list such shares on each national securities exchange on which the Common
Stock is listed.
(f) If the Corporation:
(i) pays a dividend or makes a distribution on its Common Stock in shares
of its Common Equity;
(ii) subdivides its outstanding shares of Common Stock into a greater
number of shares;
(iii) combines its outstanding shares of Common Stock into a smaller
number of shares; or
(iv) issues by reclassification of its Common Stock any shares of its
capital stock;
then the Conversion Price and the number and kind of shares of capital stock
of the Company issuable upon conversion (as in effect immediately prior to
such action) shall be proportionately adjusted so that the holder of
Convertible Preferred Stock thereafter converted may receive for the same
aggregate Conversion Price the aggregate number and kind of shares of capital
stock of the Corporation that he would have owned immediately following such
action if he had converted Convertible Preferred Stock immediately prior to
such action. The adjustment shall become effective immediately after the
record date in the case of dividend or distribution and immediately after the
effective date of a subdivision, combination or reclassification. Such
adjustment shall be
III-7
<PAGE>
made successively whenever any event listed above shall occur. If, after an
adjustment referred to in clauses (i) through (iv) above, a holder of
Convertible Preferred Stock upon conversion of it may receive shares of two or
more classes of capital stock of the Corporation, the Corporation shall
determine the allocation of the Conversion Price between the classes of
capital stock. After such allocation, the conversion rights and the Conversion
Price with respect to each class of capital stock shall thereafter be subject
to adjustment on terms comparable to those applicable to Common Stock in this
subparagraph 5(f).
(g) If the Corporation distributes any Rights to all holders of its Common
Stock entitling them to purchase shares of Common Stock at a price per share
less than the Current Market Price per share on the date of distribution of
such Rights, the Conversion Price shall be adjusted in accordance with the
formula:
NXP
C' = C X O + M
O + N
where:
C'= the adjusted Conversion Price.
C= the then current Conversion Price.
O= the number of shares of Common Stock outstanding on the record date.
N= the number of additional shares of Common Stock offered.
P= the offering price per share of the additional shares of Common Stock.
M= the Current Market Price per share of Common Stock on the record date.
The adjustment shall be made successively whenever any such Rights are issued
and shall become effective immediately after the record date for the
determination of stockholders entitled to receive such Rights. If at the end
of the period during which such Rights are exercisable, not all Rights shall
have been exercised, the Conversion Price shall be immediately readjusted to
what it would have been if "N" in the above formula had been the number of
shares actually issued.
(h) If the Corporation distributes to all holders of shares of its Common
Stock (i) any shares of any class of capital stock of the Corporation other
than its Common Equity, (ii) any evidence of indebtedness or other securities
of the Corporation or any subsidiary of the Corporation, or (iii) cash or any
other assets of the Corporation (including securities, but excluding (x) those
dividends, Rights and distributions referred to above in subparagraphs 5(f)
and 5(g) and in subparagraphs 5(i) and 5(j), (y) dividends and distributions
paid exclusively in cash and (z) distributions upon mergers or consolidations
to which paragraph 5(m) applies), the Conversion Price shall be adjusted in
accordance with the formula:
C' = C X M - F
M
where:
C'= the adjusted Conversion Price.
C= the then current Conversion Price.
M= the Current Market Price per share of Common Stock on the record date
mentioned below.
F= the fair market value on the record date of the capital stock,
indebtedness, other securities, cash or assets distributed per share of
Common Stock.
The adjustment shall be made successively whenever any such distribution is
made and shall become effective immediately after the record date for the
determination of stockholders entitled to receive the distribution.
III-8
<PAGE>
(i) If the Corporation issues shares of Common Stock for a consideration per
share less than the Current Market Price per share on the date the Corporation
issues such additional shares, the Conversion Price shall be adjusted in
accordance with the formula:
P
C' = C X O + M
A
where:
C'= the adjusted Conversion Price.
C= the then current Conversion Price.
O= the number of shares of Common Stock outstanding immediately prior to
the issuance of such additional shares.
P= the aggregate consideration received for the issuance of such additional
shares.
M= the Current Market Price per share on the date of issuance of such
additional shares.
A= the number of shares of Common Stock outstanding immediately after the
issuance of such additional shares.
The adjustment shall be made successively whenever any such issuance is
made, and shall become effective immediately after such issuance. This
subparagraph 5(i) does not apply to (i) any transaction or issuance described
in subparagraphs 5(f), 5(g) or 5(h) above or subparagraph 5(j) below, (ii) the
conversion of Convertible Preferred Stock or Convertible Exchangeable
Preferred Stock, or the exercises of the warrants to purchase Common Stock
issued to Carlyle Affiliates on the Initial Issue Date, or the conversion,
exchange or exercise of other securities whose issuance was the subject of an
adjustment pursuant to subparagraph 5(g) or 5(h) above or subparagraph 5(j)
below, (iii) Common Stock issued to the Corporation's employees under bona
fide employee benefit plans adopted by the Board of Directors of the
Corporation and approved by the holders of Common Stock when required by law,
if such Common Stock would otherwise by covered by this subparagraph 5(i), but
only to the extent that (x) such shares are issued pursuant to employee stock
options with an exercise price not less than the Current Market Price on the
date of issuance of such option or (y) the aggregate number of shares
otherwise excluded hereby (together with the aggregate number of shares
issuable upon conversion, exchange or exercise of the securities excluded by
clause (iii) of subparagraph 5(j) below) and issued after the Initial Issue
Date do not exceed 5% of the Common Stock outstanding at the time of any such
issuance, (iv) Common Stock issued to acquire, or in the acquisition of, all
or any portion of a business as a going concern, in an arm's-length
transaction between the Corporation and an unaffiliated third party, whether
such acquisition shall be effected by purchase of assets, exchange of
securities, merger, consolidation or otherwise, or (v) Common Stock issued in
a bona fide public offering pursuant to a firm commitment underwriting.
(j) If the Corporation issues any Rights (other than Convertible Preferred
Stock or securities issued in transactions described in subparagraph 5(g) or
5(h) above) and for a consideration per share of Common Stock initially
deliverable upon conversion, exchange or exercise of such Rights that is less
than the Current Market Price per share on the date of issuance of such
Rights, the Conversion Price shall be adjusted in accordance with the formula:
P
C' = C X O + M
O + D
where:
C'= the adjusted Conversion Price.
C= the then current Conversion Price.
O= the number of shares of Common Stock outstanding immediately prior to
the issuance of such Rights.
III-9
<PAGE>
P= the aggregate consideration received for the issuance of such Rights.
M= the Current Market Price per share of Common Stock on the date of
issuance of such Rights.
D= the maximum number of shares deliverable upon conversion or in exchange
for or upon exercise of such Rights at the initial conversion, exchange
or exercise rate.
The adjustment shall be made successively whenever any such issuance is made,
and shall become effective immediately after such issuance. If all of the
Common Stock deliverable upon conversion, exchange or exercise of such Rights
has not been issued when such Rights are no longer outstanding, then the
Conversion Price shall promptly be readjusted to the Conversion Price that
would then be in effect had the adjustment upon the issuance of such Rights
been made on the basis of the actual number of shares of Common Stock issued
upon conversion, exchange or exercise of such Rights. This subparagraph 5(j)
does not apply to (i) the issuance of any such securities to acquire, or in the
acquisition of, all or any portion of a business as a going concern, in an
arm's-length transaction between the Corporation and an unaffiliated third
party, whether such acquisition shall be effected by purchase of assets,
exchange of securities, merger, consolidation or otherwise, (ii) the issuance
of any such securities in a bona fide public offering pursuant to a firm
commitment underwriting, (iii) the issuance of any such securities to the
Corporation's employees under bona fide employee benefit plans adopted by the
Board of Directors of the Corporation and approved by the holders of Common
Stock when required by law, if such securities would otherwise be covered by
this subparagraph 5(j) (but only to the extent that the aggregate number of
shares issuable upon the conversion, exchange or exercise of the aggregate
number of securities excluded hereby (together with the aggregate number of
shares excluded by clause (iii)(y) of subparagraph 5(i) above) and issued after
the Initial Issue Date shall not exceed 5% of the Common Stock outstanding at
the time of any such issuance), or (iv) shares issued as PIK Dividends.
(k) In case the Corporation or any of its subsidiaries shall, by dividend or
otherwise, make distributions exclusively in cash (excluding any cash that is
distributed upon a merger or consolidation to which Section 5(m) applies or as
part of a distribution covered by Section 5(h)) to all the holders of Common
Stock in an aggregate amount that, combined together with (i) the aggregate
amount of all other such all-cash distributions to all holders of its Common
Stock made within the 12 months preceding the date of payment of such
distribution and in respect of which no adjustment pursuant to this Section
5(k) or Section 5(l) has been made and (ii) the aggregate of any cash plus the
fair market value of other consideration payable in respect of any tender or
exchange offer or other stock repurchase program by the Corporation or any of
its subsidiaries for all or any portion of the Common Stock concluded within
the 12 months preceding the date of payment of such distribution and in respect
of which no adjustment pursuant to this Section 5(k) or Section 5(l) has been
made exceeds 12.5% of the Corporation's Market Capitalization on the record
date for such distribution then, and in each such case, immediately after the
close of business on such date of such determination, the Conversion Price
shall be adjusted in accordance with the formula:
C' = C x M - E
-----
M
where:
C'=the adjusted Conversion Price.
C= the then current Conversion Price.
M= the Current Market Price per share of Common Stock on the date fixed for
determination times the number of shares of Common Stock outstanding on
such date.
E= the total amount of cash to be distributed at such time to holders of
Common Stock.
(l) In the case of the consummation of a tender offer, exchange offer (other
than an odd-lot offer) or other stock repurchase program made by the
Corporation or any subsidiary thereof for all or any portion of the Common
Stock involving the payment by the Corporation or such subsidiary of an
aggregate consideration that, together with (i) any cash or other consideration
payable in a tender offer, exchange offer or other stock repurchase program by
the Corporation or any of its subsidiaries for Common Stock consummated within
III-10
<PAGE>
12 months preceding the consummation of such tender offer, exchange offer or
other stock repurchase program (the "Expiration Time") in respect of which no
adjustment has been made pursuant to this paragraph 5(l) or Section 5(k) and
(ii) the aggregate amount of all such all-cash distributions referred to in
Section 5(k) above to all holders of Common Stock within the 12 months
preceding such Expiration Time in respect of which no adjustments have been
made, exceeds 12.5% of the Corporation's Market Capitalization as of the
Trading Day next succeeding the Expiration Time, the Conversion Price shall be
reduced in accordance with the formula:
C' = C x M - E
-----
N
where:
C'= the adjusted Conversion Price.
C = the then current Conversion Price.
M = the Current Market Price per share of Common Stock on the Trading Day
next succeeding the Expiration Time times the number of shares of Common
Stock outstanding at the Expiration Time (including any tendered,
exchanged or purchased shares).
N = the Current Market Price per share of Common Stock on the Trading Day
next succeeding the Expiration Time times the number of shares of the
Common Stock outstanding at the Expiration Time, less any shares
purchased in such tender offer, exchange offer or other stock repurchase
program.
E = the fair market value of the aggregate consideration payable to
stockholders upon consummation of such tender offer, exchange offer or
other stock repurchase program.
The reduction shall become effective immediately prior to the opening of
business on the day following the Expiration Time.
(m) In case of any consolidation, amalgamation, arrangement or merger of the
Corporation with or into another Person or any merger of another Person with
or into the Corporation (other than a transaction to which paragraph 5(f)
applies), or in case of any sale or transfer of all or substantially all of
the assets of the Corporation, each share of Convertible Preferred Stock then
outstanding will, without the consent of the holder of any Convertible
Preferred Stock, become convertible only into the kind and amount of
securities, cash and other property receivable upon such consolidation,
merger, sale or transfer by a holder of the number of shares of Common Stock
(and other securities, if applicable) into which such Convertible Preferred
Stock was convertible immediately prior thereto (assuming such holder of
Common Stock (and other securities, if applicable) failed to exercise any
rights of election and that such Convertible Preferred Stock was then
convertible). Concurrently with the consummation of such transaction, the
corporation formed by or surviving any such consolidation or merger if other
than the Company, or the person to which such sale or conveyance shall have
been made, shall enter into a supplemental agreement so providing and further
providing for adjustments which shall be as equivalent as may be practicable
to the adjustments provided for in this Section.
(n) In addition, in the event that any other transaction or event occurs as
to which the foregoing adjustment provisions are not strictly applicable but
the failure to make any adjustment would adversely affect the conversion
rights represented by the Convertible Preferred Stock in accordance with the
essential intent and principles of such provisions, then, in each such case,
either (i) the Corporation shall appoint an investment banking firm of
recognized national standing, or any other financial expert that does not (or
whose directors, officers, employees, affiliates or stockholders do not) have
a direct or material indirect financial interest in the Corporation or any of
subsidiaries, who has not been, and, at the time it is called upon to give
independent financial advice to the Corporation, is not (and none of its
directors, officers, employees, affiliates or stockholders are) a promoter,
director or officer of the Corporation or any of its subsidiaries, which will
give their opinion upon or (ii) the Board of Directors (by a majority of the
Non-Preferred Stock Directors) shall determine, consistent with such
directors' fiduciary duties to the Corporation's stockholders, the adjustment,
if any, on a basis consistent with the essential intent and principles
established in the foregoing conversion price adjustment provisions, necessary
to preserve, without dilution, the conversion rights represented by the
Convertible Preferred
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<PAGE>
Stock. Upon receipt of such opinion or determination, the Corporation shall
promptly mail a copy thereof to the holders of the Convertible Preferred Stock
and will make the adjustments described therein.
(o) For purposes of any computation respecting consideration received
pursuant to a transaction described or contemplated by this paragraph 5, the
following shall apply:
(i) in case of the issuance of shares of Common Stock for cash, the
consideration shall be the amount of such cash, provided that in no case
shall any deduction be made for any commissions, discounts or other
expenses incurred by the Corporation for any underwriting of the issue or
otherwise in connection therewith;
(ii) in the case of the issuance of shares of Common Stock for a
consideration in whole or in part other than cash, the consideration other
than cash shall be deemed to be the fair market value thereof (irrespective
of the accounting treatment thereof);
(iii) whenever this Certificate of Designation calls for the
determination of "fair market value," such fair market value shall be
determined in good faith by the Board of Directors (by a majority of the
Non-Preferred Stock Directors) as evidenced by a written resolution
thereof, and subject to the provisions of subparagraph 5(v) below; and
(iv) in the case of the issuance of Rights, the aggregate consideration
received therefor shall be deemed to be the consideration received by the
Corporation for the issuance of such Rights plus the additional minimum
consideration, if any, to be received by the Corporation upon the
conversion or exchange or exercise thereof (the consideration in each case
to be determined in the same manner as provided in clauses (i) and (ii) of
this subparagraph 5(o)).
(p) No adjustment in the Conversion Price shall be required unless such
adjustment would require an increase or decrease of at least 1% in the
Conversion Price. Any adjustments which by reason of this subparagraph (p) are
not required to be made shall be carried forward and taken into account in any
subsequent adjustment. All calculations under this paragraph 5 shall be made
to the nearest cent or to the nearest 1/100th of a share, as the case may be.
(q) No adjustment in the Conversion Price need be made under this paragraph
5 for (i) rights to purchase Common Stock pursuant to a Corporation plan for
reinvestment of dividends or interest, or (ii) any change in the par value or
no par value of the Common Stock. The Corporation shall take no action that
would cause any adjustment under this paragraph 5 that would reduce the
Conversion Price below the par value of the Common Stock. If an adjustment is
made to the Conversion Price upon the establishment of a record date for a
distribution subject to subparagraphs 5(g) or 5(h) above and if such
distribution is subsequently canceled, the Conversion Price then in effect
shall be readjusted, effective as of the date when the Board of Directors of
the Corporation determines to cancel such distribution, to the Conversion
Price which would have been in effect if such record date had not been fixed.
No adjustment in the Conversion Price need be made under subparagraphs 5(h),
5(k) and 5(l) above if the Corporation issues or distributes to each holder of
Convertible Preferred Stock the shares of capital stock, evidences of
indebtedness, other securities of the Corporation or any subsidiary of the
Corporation, assets, Rights or cash, referred to in those subparagraphs that
each holder would have been entitled to receive had Convertible Preferred
Stock been converted into Common Stock prior to the happening of such event or
the record date with respect thereto.
(r) Whenever the Conversion Price is adjusted, the Corporation shall
promptly mail to holders of Convertible Preferred Stock, first class, postage
prepaid, a notice of the adjustment and a certificate from the Corporation's
independent public accountants briefly stating the facts requiring the
adjustment and the manner of computing it. Subject to subparagraph 5(v) below,
the certificate shall be conclusive evidence that the adjustment is correct.
(s) The Corporation from time to time may, by a vote of the Board of
Directors (by a majority of the Non-Preferred Stock Directors) reduce the
Conversion Price by any amount for any period of time if the period is at
least twenty (20) Business Days and if the reduction is irrevocable during the
period, but in no event may the
III-12
<PAGE>
Conversion Price be less than the par value of a share of Common Stock.
Whenever the Conversion Price is so reduced, the Corporation shall mail to
holders of Convertible Preferred Stock a notice of the reduction. The
Corporation shall mail the notice first class, postage prepaid, at least 20
days before the date the reduction in the Conversion Price is to take effect.
The notice shall state the reduced Conversion Price and the period it will be
in effect. A reduction of the Conversion Price pursuant to this subparagraph
5(s) does not change or adjust the Conversion Price otherwise in effect for
purposes of subparagraphs 5(f), 5(g), 5(h), 5(i), 5(j), 5(k) and 5(l) above.
(t) If:
(i) the Corporation takes any action that would require an adjustment in
the Conversion Price pursuant to subparagraph 5(g) or 5(h) above, or clause
(iv) of subparagraph 5(f) above;
(ii) the Corporation consolidates or merges with, or transfers all or
substantially all of its assets to, another corporation, and stockholders
of the Corporation must approve the transaction; or
(iii) there is a dissolution or liquidation of the Corporation;
a holder of Convertible Preferred Stock may want to convert such stock into
shares of Common Stock prior to the record date for or the effective date of
the transaction so that he may receive the Rights, assets or securities which
a holder of shares of Common Stock on that date may receive. Therefore, the
Corporation shall mail to such holders a notice, first class, postage prepaid,
stating the proposed record or effective date, as the case may be. The
Corporation shall mail such notice at least twenty (20) days before such date.
Failure to mail the notice or any defect in such notice shall not affect the
validity of any transaction referred to in clause (i), (ii) or (iii) of this
subparagraph 5(t).
(u) In any case in which this paragraph 5 shall require that an adjustment
as a result of any event become effective from and after a record date, the
Corporation may elect to defer until after the occurrence of the event
triggering the adjustment (i) the issuance to the holder of any shares of
Convertible Preferred Stock converted after such record date and before the
occurrence of such event of the additional shares of Common Stock or other
capital stock issuable upon such conversion over and above the shares issuable
on the basis of the Conversion Price in effect immediately prior to adjustment
and (ii) a check for any remaining fractional shares of Common Stock as
provided in subparagraph 5(c) above; provided, however, that the Company shall
deliver to such holder a due bill or other appropriate instrument evidencing
such holder's right to receive such additional shares and cash upon the
occurrence of the event requiring the adjustment.
(v) Except as provided in the immediately following sentence, any
determination that the Corporation or its Board of Directors (including by a
majority of the Non-Preferred Stock Directors) must make pursuant to this
paragraph 5 shall be conclusive. Whenever the Corporation or its Board of
Directors (including by a majority of the Non-Preferred Stock Directors) shall
be required to make a determination under this paragraph 5, such determination
shall be made in good faith and may be challenged in good faith by the holders
of a majority of the shares of Convertible Preferred Stock then outstanding
(with any shares held by the Corporation or any of its Affiliates not being
considered to be outstanding for purposes of this Certificate of Designation),
and any dispute shall be resolved, at the Corporation's expense, by an
investment banking firm of recognized national standing selected by the
Corporation and acceptable to such holders of Convertible Preferred Stock;
provided, however, that in the event the determination by such investment
banking firm deviates by no more than 5% from the Corporation's determination,
then the cost to the Corporation of the retention of the investment banking
firm shall be borne by the holders of the Convertible Preferred Stock
challenging the Corporation's determination.
(w) All shares of Convertible Preferred Stock converted pursuant to this
paragraph 5 shall be retired and shall be restored to the status of authorized
and unissued shares of preferred stock, without designation as to series and
may thereafter be reissued as shares of any series of preferred stock other
than Convertible Preferred Stock.
(x) In the event that all holders of Convertible Exchangeable Preferred
Stock shall not have waived their rights that accrue pursuant to Section 8 of
the Convertible Exchangeable Preferred Stock Certificate of
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<PAGE>
Designations as a result of the Company's issuance of Convertible Preferred
Stock on the Initial Issuance Date, then (i) the Company shall send to the
holders of the Convertible Exchangeable Preferred Stock not providing such
waiver, as promptly as possible following the Closing Date, the Special
Conversion Notice (as defined in the Convertible Exchangeable Preferred Stock
Certificate of Designation) and (ii) upon expiration of the forty-five (45)
day period following the provision of such Special Conversion Notice, the
Conversion Price shall be adjusted in accordance with the following formula to
adjust for the effects of the conversion of Convertible Exchangeable Preferred
Stock at the Special Conversion Price (as defined in the Convertible
Exchangeable Preferred Stock Certificate of Designation):
C' = C x (O/(O + P - ((D/0.135)/x)))
where:
C'= the adjusted Conversion Price.
C = the then current Conversion Price.
O = the number of shares of Common Stock outstanding immediately prior to
the conversion of shares of Convertible Exchangeable Preferred Stock
into Common Stock at the Special Conversion Price.
P = the number of shares of Common Stock issued upon conversion of shares of
Convertible Exchangeable Preferred Stock at the Special Conversion
Price.
D = the amount of annual dividends payable on the shares of Convertible
Exchangeable Preferred Stock converted into Common Stock at the Special
Conversion Price.
X = the regular Conversion Price of the Convertible Exchangeable Preferred
Stock (i.e., $5.84).
6. Redemption by the Corporation.
(a) The Convertible Preferred Stock may be redeemed in whole, but not in
part, at any time after , 2003 at the option of the Corporation, as
determined by the Board of Directors (by a majority of the Non-Preferred Stock
Directors), at the Redemption Price. If the Redemption Date is on or after a
Record Date and on or before the related Dividend Payment Date, the dividend
payable shall be paid to the holder in whose name the Convertible Preferred
Stock is registered at the close of business on such record date.
(b) Notice of any redemption shall be sent by or on behalf of the
Corporation not more than sixty (60) days nor less than thirty (30) days prior
to the Redemption Date, by first class mail, postage prepaid, to all holders
of record of the Convertible Preferred Stock at their respective last
addresses as they shall appear on the books of the Corporation; provided,
however, that no failure to give such notice or any defect therein or in the
mailing thereof shall affect the validity of the proceedings for the
redemption of any shares of Convertible Preferred Stock except as to the
holder to whom the Corporation has failed to give notice or except as to the
holder to whom notice was defective. In addition to any information required
by law or by the applicable rules of any exchange upon which Convertible
Preferred Stock may be listed or admitted to trading, such notice shall state:
(i) the Redemption Date; (ii) the Redemption Price; (iii) the place or places
in the United States where certificates for such shares are to be surrendered
for payment of the Redemption Price; (iv) that dividends on the shares to be
redeemed will cease to accrue on the Redemption Date; (v) the Conversion
Price; (viii) that Convertible Preferred Stock called for redemption may be
converted at any time before the close of business on the Redemption Date; and
(vi) that holders of Convertible Preferred Stock must satisfy the requirements
of paragraph 5 above if such holders desire to convert such shares. Upon the
mailing of any such notices of redemption, the Corporation shall become
obligated to redeem at the time of redemption specified thereon all shares
called for redemption.
(c) If notice has been mailed in accordance with subparagraph 6(b) above and
provided that on or before the Redemption Date specified in such notice, all
funds necessary for such redemption shall have been set aside by the
Corporation, separate and apart from its other funds in trust for the pro rata
benefit of the holders of the shares so called for redemption, so as to be,
and to continue to be available therefor, then, from and after the Redemption
Date, dividends on the shares of the Convertible Preferred Stock so called for
redemption shall cease
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<PAGE>
to accrue, and said shares shall no longer be deemed to be outstanding and
shall not have the status of shares of Convertible Preferred Stock, and all
rights of the holders thereof as shareholders of the Corporation (except the
right to receive from the Corporation the Redemption Price) shall cease. Upon
surrender, in accordance with said notice, of the certificates for any shares
so redeemed (properly endorsed or assigned for transfer, if the Corporation
shall so require and the notice shall so state), such shares shall be redeemed
by the Corporation at the Redemption Price.
(d) Any funds deposited with a bank or trust corporation for the purpose of
redeeming Convertible Preferred Stock shall be irrevocable except that:
(i) the Corporation shall be entitled to receive from such bank or trust
corporation the interest or other earnings, if any, earned on any money so
deposited in trust, and the holders of any shares redeemed shall have no
claim to such interest or other earnings; and
(ii) any balance of monies so deposited by the Corporation and unclaimed
by the holders of the Convertible Preferred Stock entitled thereto at the
expiration of two (2) years from the applicable Redemption Date shall be
repaid, together with any interest or other earnings earned thereon, to the
Corporation, and after any such repayment, the holders of the shares
entitled to the funds so repaid to the Corporation shall look only to the
Corporation for payment without interest or other earnings.
(e) No Convertible Preferred Stock may be redeemed except with funds legally
available for the payment of the Redemption Price.
(f) All shares of Convertible Preferred Stock redeemed pursuant to this
paragraph 6 shall be retired and shall be restored to the status of authorized
and unissued shares of preferred stock, without designation as to series and
may thereafter be reissued as shares of any series of preferred stock other
than shares of Convertible Preferred Stock.
7. Voting Rights.
In addition to any voting rights provided by law, the holders of shares of
Convertible Preferred Stock shall have the following voting rights:
(a) So long as any shares of the Convertible Preferred Stock remain
outstanding, each share of Convertible Preferred Stock shall entitle the
holder thereof to vote on all matters voted on by holders of Common Stock
(except during the Five Year Period with respect to the election of the Non-
Preferred Stock Directors), voting together with the Common Stock as a single
class (together with all other classes and series of stock of the Corporation
that are entitled to vote as a single class with the Common Stock) at all
meetings of the stockholders of the Corporation. In any vote with respect to
which the Convertible Preferred Stock shall vote with the holders of Common
Stock as a single class together with all other classes and series of stock of
the Corporation that are entitled to vote as a single class with the Common
Stock, each share of Convertible Preferred Stock shall entitle the holder
thereof to cast the number of votes equal to the number of votes which could
be cast in such vote by a holder of the number of shares of Common Stock into
which such share of Convertible Preferred Stock is convertible on the date of
such vote. Such voting right of the holders of the Convertible Preferred Stock
may be exercised at any annual meeting of stockholders, any special meeting of
stockholders, or by written consent of the minimum number of shares required
to take such action pursuant to Section 228 of the Delaware General
Corporation Law.
(b) On any matter on which the holders of Convertible Preferred Stock are
entitled by law or under the Certificate of Incorporation to vote separately
as a class, each such holder shall be entitled to one vote for each share
held, and such matter shall be determined by a majority of the votes cast
unless Delaware law or this Certificate of Designations requires approval by a
higher percentage.
(c) During such time as any shares of Convertible Preferred Stock are
outstanding, the Corporation will not, without the affirmative vote or consent
of the holders of at least a majority of the issued and outstanding
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<PAGE>
shares of Convertible Preferred Stock voting together as a separate class, (i)
create, authorize or issue (including on conversion or exchange of any
convertible or exchangeable securities or by reclassification) any class or
series of shares ranking on a parity with or prior to the Convertible
Preferred Stock, either as to dividends or redemption or upon voluntary or
involuntary liquidation, dissolution or winding up, (ii) increase the
authorized shares of, or issue (including on conversion or exchange of any
convertible or exchangeable securities or by reclassification) any shares of
Convertible Preferred Stock, except for the issuance of PIK Dividends in
accordance with Section 3(b), (iii) amend, alter, waive the application of, or
repeal (whether by merger, consolidation or otherwise) any provision of the
Certificate of Incorporation of the Corporation, enter into any agreement or
take any other corporate action which in any manner would alter, change, or
otherwise adversely affect the powers, rights or preferences of the
Convertible Preferred Stock, (iv) effect the reorganization, recapitalization,
liquidation, dissolution or winding up of the Corporation, or the sale, lease,
conveyance or exchange of all or substantially all of the assets, property or
business of the Corporation, or the merger or consolidation of the Corporation
with or into any other corporation, if such transaction in any manner would
alter, change or otherwise adversely affect the powers, rights, or preferences
of the Convertible Preferred Stock or (v) take any action which would cause a
dividend or other distribution to be deemed to be received by the holders of
the Convertible Preferred Stock for federal income tax purposes unless such
dividend or other distribution is actually received by such holders.
(d) Unless and until Carlyle Affiliates cease collectively to beneficially
own shares of capital stock having 20% or more of the votes that may be cast
generally at annual or special meetings of stockholders, then the number of
Directors comprising the Board of Directors shall at all times be an odd
number, and the holders of Convertible Preferred Stock, voting separately as a
class, shall have the exclusive right to elect (i) during the Five Year
Period, the smallest number of Directors that constitutes a majority of the
Board of Directors and (ii) subsequent to the Five Year Period, the greatest
number of Directors that constitutes a minority of the Board of Directors
(each such Director, a "Preferred Stock Director") at any special meeting of
stockholders called for such purpose, at each annual meeting of stockholders
and in any written consent of stockholders pursuant to Section 228 of the
Delaware General Corporation Law. So long as the holders of the Convertible
Preferred Stock have the right to elect Preferred Stock Directors pursuant to
the preceding sentence, then (i) during the Five Year Period, the holders of
the Common Stock, voting separately as a class, will have the exclusive right
(subject to the rights of the holders of Convertible Exchangeable Preferred
Stock pursuant to Section 10 of the Convertible Exchangeable Preferred Stock
Certificate of Designations) to elect the Non-Preferred Stock Directors and
(ii) subsequent to the Five Year Period (subject to the rights of the holders
of Convertible Exchangeable Preferred Stock pursuant to Section 10 of the
Convertible Exchangeable Preferred Stock Certificate of Designations) each
share of Convertible Preferred Stock shall entitle the holder thereof to vote,
together with the Common Stock as a single class (together with all other
classes and series of stock of the Corporation that are entitled to vote as a
single class with the Common Stock) for the election of the Non-Preferred
Stock Directors at any such meeting and in any written consent of stockholders
pursuant to Section 228 of the Delaware General Corporation Law. From and
after the date on which Carlyle Affiliates cease collectively to beneficially
own shares of capital stock having 20% or more of the votes that may be cast
generally at annual or special meetings of stockholders, the right of the
holders of the Convertible Preferred Stock to elect the Preferred Stock
Directors shall terminate in the manner set forth in subparagraph 7(e) and
each share of Convertible Preferred Stock shall thereafter entitle the holder
thereof to vote together with the Common Stock as a single class (together
with all other classes and series of stock of the Corporation that are
entitled to vote as a single class with the Common Stock) for the election of
all directors of the Corporation as provided in subparagraph 7(a) (subject to
the provisions of subparagraph 7(f) below and Section 10 of the Convertible
Exchangeable Preferred Stock Certification of Designations).
(e) The Preferred Stock Directors elected as provided herein shall serve
until the next annual meeting or until their respective successors shall be
elected and shall qualify. Any Preferred Stock Director may be removed with or
without cause by, and shall not be removed other than by, the vote of the
holders of a majority of the outstanding shares of Convertible Preferred
Stock, voting separately as a class, at a meeting called for such purpose or
by written consent in accordance with Section 228 of the Delaware General
Corporation Law. If the
III-16
<PAGE>
office of any Preferred Stock Director becomes vacant by reason of death,
resignation, retirement, disqualification or removal from office or otherwise,
the remaining Preferred Stock Directors, by majority vote, may elect a
successor, or, alternatively, the holders of a majority of the outstanding
shares of Convertible Preferred Stock, voting separately as a class, at a
meeting called for such purpose or by written consent in accordance with
Section 228 of the Delaware General Corporation Law may elect a successor. Any
such successor shall hold office for the unexpired term in respect of which
such vacancy occurred. Upon any termination of the right of the holders of
Convertible Preferred Stock to vote for and elect Preferred Stock Directors as
herein provided, the Preferred Stock Directors then serving on the Board of
Directors may continue to hold their office for the remainder of their term.
Only Non-Preferred Stock Directors shall have the right to vote in the
election of any person to fill any vacancy created by the death, resignation,
retirement, disqualification or removal from office or otherwise of any Non-
Preferred Stock Director and all such rights with respect to the Non-Preferred
Stock Directors shall be exercised for and on behalf of the Board of Directors
by a majority of the Non-Preferred Stock Directors. This subparagraph (e) may
not be amended without (x) the affirmative vote of the holders of a majority
of the outstanding shares of Common Stock and (y) the affirmative vote of the
holders of a majority of the outstanding shares of Convertible Preferred
Stock.
(f) (i) Whenever, at any time or times when the Convertible Preferred Stock
is no longer entitled to elect Preferred Stock Directors pursuant to
subparagraph 7(d), dividends payable on the shares of Preferred Stock at the
time outstanding shall be cumulatively in arrears for six Dividend Periods
(whether or not consecutive), the holders of Convertible Preferred Stock shall
have the exclusive right, voting separately as a class with holders of shares
of any Parity Stock upon which like voting rights have been conferred and are
exercisable (the Convertible Preferred Stock and any such Parity Stock,
collectively for purposes of this subparagraph 7(f), the "Defaulted Preferred
Stock"), to elect two Directors at the Corporation's next annual meeting of
stockholders and at each subsequent annual meeting of stockholders; provided,
however, that if such voting rights shall become vested more than 90 days or
less than 20 days before the date prescribed for the annual meeting of
stockholders, thereupon the holders of the shares of Defaulted Preferred Stock
shall be entitled to exercise their voting rights at a special meeting of the
holders of shares of Defaulted Preferred Stock as set forth in clauses (ii)
and (iii) of this subparagraph 7(f). At elections for such Directors, each
holder of Preferred Stock shall be entitled to one hundred votes for each
share held (the holders of shares of any other series of Defaulted Preferred
Stock ranking on such a parity being entitled to such number of votes, if any,
for each share of stock held as may be granted to them). Upon the vesting of
such right of the holders of Defaulted Preferred Stock, the maximum authorized
number of members of the Board of Directors shall automatically be increased
by two and the two vacancies so created shall be filled by vote of the holders
of outstanding Defaulted Preferred Stock as hereinafter set forth. The right
of holders of Defaulted Preferred Stock, voting separately as a class without
regard to series, to elect members of the Board of Directors as aforesaid
shall continue until such time as all dividends accumulated on Defaulted
Preferred Stock shall have been paid or declared and funds set aside for
payment in full, at which time such right shall terminate, except as herein or
by law expressly provided, subject to revesting in the event of each and every
subsequent default of the character above mentioned.
(ii) Whenever such voting right shall have vested, such right may be
exercised initially either at a special meeting of the holders of shares of
Defaulted Preferred Stock called as hereinafter provided, or at any annual
meeting of stockholders held for the purpose of electing Directors, and
thereafter at such meetings or by the written consent of such holders pursuant
to Section 228 of the General Corporation Law of the State of Delaware.
(iii) At any time when such voting right shall have vested in the holders of
shares of Defaulted Preferred Stock entitled to vote thereon, and if such
right shall not already have been initially exercised, an officer of the
Corporation shall, upon the written request of holders of record of 10% of the
voting power represented by the shares of such Defaulted Preferred Stock then
outstanding, addressed to the Treasurer of the Corporation, call a special
meeting of holders of shares of such Defaulted Preferred Stock. Such meeting
shall be held at the earliest practicable date upon the notice required for
annual meetings of stockholders at the place for holding annual meetings of
stockholders of the Corporation or, if none, at a place designated by the
Treasurer of the Corporation. If such meeting shall not be called by the
proper officers of the Corporation within 30 days after the personal
III-17
<PAGE>
service of such written request upon the Treasurer of the Corporation, or
within 30 days after mailing the same within the United States, by registered
mail, addressed to the Treasurer of the Corporation at its principal office
(such mailing to be evidenced by the registry receipt issued by the postal
authorities), then the holders of record of 10% of the voting power
represented by the shares of Defaulted Preferred Stock then outstanding may
designate in writing any person to call such meeting at the expense of the
Corporation, and such meeting may be called by such person so designated upon
the notice required for annual meetings of stockholders and shall be held at
the same place as is elsewhere provided in this paragraph. Any holder of
shares of Defaulted Preferred Stock then outstanding that would be entitled to
vote at such meeting shall have access to the stock books of the Corporation
for the purpose of causing a meeting of stockholders to be called pursuant to
the provisions of this paragraph. Notwithstanding the provisions of this
paragraph, however, no such special meeting shall be called or held during a
period within 45 days immediately preceding the date fixed for the next annual
meeting of stockholders.
(iv) The directors elected pursuant to this subparagraph 7(f) shall serve
until the earlier of (i) the next annual meeting or until their respective
successors shall be elected and shall qualify or (ii) until such time as all
dividends accumulated on Defaulted Preferred Stock shall have been paid or
declared and funds set aside for payment in full; any Director elected by the
holders of Defaulted Preferred Stock may be removed by, and shall not be
removed otherwise than by, the vote of the holders of a majority of the voting
power of the outstanding shares of the Defaulted Preferred Stock who were
entitled to participate in such election of directors, voting as a separate
class, at a meeting called for such purpose or by written consent as permitted
by law and the Certificate of Incorporation and Bylaws of the Corporation. If
the office of any Director elected by the holders of Defaulted Preferred
Stock, voting as a class, becomes vacant by reason of death, resignation,
retirement, disqualification or removal from office or otherwise, the
remaining Director elected by the holders of Defaulted Preferred Stock, voting
as a class, may choose a successor who shall hold office for the unexpired
term in respect of which such vacancy occurred. Upon any termination of the
right of the holders of Defaulted Preferred Stock to vote for directors as
herein provided, the term of office of all Directors then in office elected by
the holders of Defaulted Preferred Stock, voting as a class, shall terminate
immediately. Whenever the terms of office of the Directors elected by the
holders of Defaulted Preferred Stock, voting as a class, shall so terminate
and the special voting powers vested in the holders of Defaulted Preferred
Stock shall have expired, the number of Directors shall be such number as may
be provided for in the Bylaws or Certificate of Incorporation irrespective of
any increase made pursuant to the provisions of this subparagraph 7(f).
8. Exclusion of Other Rights. Except as may otherwise be required by law,
the shares of Convertible Preferred Stock shall not have any voting powers,
preferences and relative, participating, optional or other special rights,
other than those specifically set forth in this resolution (as such resolution
may be amended from time to time) and in the Certificate of Incorporation. The
shares of Convertible Preferred Stock shall have no preemptive or subscription
rights in respect of any securities of the Corporation.
9. Financial Statements.
(a) Whether or not required by the rules and regulations of the Commission,
so long as any shares of Convertible Preferred Stock are outstanding, the
Corporation shall furnish to the holders of Convertible Preferred Stock (i)
all quarterly and annual financial information that would be required to be
contained in a filing with the Commission on Forms 10-Q and 10-K if the
Corporation were required to file such Forms, including "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and,
with respect to the annual information only, a report thereon by the
Corporation's certified independent accountants and (ii) all current reports
that would be required to be filed with the Commission on Form 8-K if the
Corporation were required to file such reports. In addition, whether or not
required by the rules and regulations of the Commission, the Corporation shall
file a copy of all such information and reports with the Commission for public
availability (unless the Commission will not accept such a filing) and make
such information available to securities analysts and prospective investors
upon request. In addition, for so long as any Convertible Preferred Stock
remains outstanding, the Corporation shall furnish to the holders and to
securities analysts and prospective investors, upon their request, the
information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act.
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<PAGE>
(b) The Corporation shall, so long as any of the shares of Convertible
Preferred Stock are outstanding, deliver to the holders of Convertible
Preferred Stock, forthwith upon any Executive Officer of the Corporation
becoming aware of any default under this Certificate of Designations, an
Officers' Certificate specifying such default and what action the Corporation
is taking or proposes to take with respect thereto.
10. Ranking. With regard to rights to receive dividends, redemption payments
and distributions upon liquidation, dissolution or winding up of the
Corporation, the Convertible Preferred Stock shall rank pari passu with any
Parity Stock and senior to the Common Stock and any other equity securities or
other securities into which any convertible indebtedness is convertible which
are issued by the Corporation after the date of this Certificate of
Designations. The Convertible Preferred Stock shall not be subject to the
creation of capital stock senior with regards to the right to receive
dividends, redemption payments and distribution upon liquidation, dissolution
or winding up of the Corporation.
11. Modification and Waiver.
(a) Except as otherwise provided above, the terms of this Certificate of
Designations may be amended and the rights hereunder may be waived with the
consent of holders of a majority of the shares of the Convertible Preferred
Stock then outstanding, provided, that no such modification or waiver shall
change the dividend rights or the terms for conversion of the Convertible
Preferred Stock without the consent of each holder of Convertible Preferred
Stock.
(b) The Convertible Preferred Stock shall also be subject to the
miscellaneous provisions regarding the Corporation's preferred stock set forth
in the Certificate of Incorporation, as amended.
12. Headings of Subdivisions. The headings of the various subdivisions
hereof are for convenience of reference only and shall not affect the
interpretation of any of the provisions hereof.
13. Severability of Provisions. If any voting powers, preferences and
relative, participating, optional and other special rights of the Convertible
Preferred Stock and qualifications, limitations and restrictions thereof set
forth in this resolution (as such resolution may be amended from time to time)
is invalid, unlawful or incapable of being enforced by reason of any rule of
law or public policy, all other voting powers, preferences and relative,
participating, optional and other special rights of the Convertible Preferred
Stock and any qualifications, limitations and restrictions thereof set forth
in this resolution (as so amended) which can be given effect without the
invalid, unlawful or unenforceable voting powers, preferences and relative,
participating, optional and other special rights of the Convertible Preferred
Stock or qualifications, limitations and restrictions thereof shall,
nevertheless, remain in full force and effect, and no voting powers,
preferences and relative, participating, optional or other special rights of
the Convertible Preferred Stock or qualifications, limitations and
restrictions thereof herein set forth shall be deemed dependent upon any other
such voting powers, preferences and relative, participating, optional or other
special rights of Convertible Preferred Stock or qualifications, limitations
and restrictions thereof unless so expressed herein.
14. Record Holders. The Corporation and the transfer agent for the
Convertible Preferred Stock may deem and treat the record holder of any shares
of Preferred Stock as the true and lawful owner thereof for all purposes, and
neither the Company nor the transfer agent shall be affected by any notice to
the contrary.
15. Notice. Except as may otherwise be provided for herein, all notices
referred to herein shall be in writing, and all notices hereunder shall be
deemed to have been given upon receipt, in the case of a notice of conversion
given to the Corporation as contemplated in Section 5(b) hereof, or, in all
other cases, upon the earlier of receipt of such notice or three Business Days
after the mailing of such notice if sent by registered mail (unless first-
class mail shall be specifically permitted for such notice under the terms of
this Certificate) with postage prepaid, addressed: if to the Corporation, to
its offices at 23456 Hawthorne Boulevard, Torrance, California 90505
Attention: Secretary or to an agent of the Corporation designated as permitted
by this Certificate, or, if to any holder of the Convertible Preferred Stock,
to such holder at the address of such holder of the Convertible
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<PAGE>
Preferred Stock as listed in the stock record books of the Corporation (which
may include the records of any transfer agent for the Preferred Stock); or to
such other address as the Company or holder, as the case may be, shall have
designated by notice similarly given.
In Witness Whereof, the Corporation has caused this certificate to be duly
executed by [Name and Title of Officer] and attested by [Name of Secretary]
its secretary, this day of , 199 .
International Technology Corporation
By: _________________________________
Attest: Name: _____________________________
Title: ____________________________
By: _________________________________
Name: _____________________________
Secretary
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<PAGE>
APPENDIX IV
AMENDMENT TO CERTIFICATE OF INCORPORATION
EFFECTING A ONE-FOR-FOUR REVERSE STOCK SPLIT
AND REDUCING THE PAR VALUE OF SHARES OF COMMON STOCK
EXISTING ARTICLE FOURTH OF THE CERTIFICATE OF INCORPORATION:
FOURTH: The corporation shall be authorized to issue two classes of shares
of stock to be designated, respectively, "Preferred Stock" and "Common Stock";
the total number of shares which the Corporation shall have authority to issue
is 100,180,000; the total number of shares of Preferred Stock shall be 180,000
and each such share shall have a par value of one hundred dollars ($100.00);
and the total number of shares of Common Stock shall be 100,000,000 and each
such share shall have a par value of one dollar ($1.00).
Shares of Preferred Stock may be issued from time to time in one or more
series. The Board of Directors is hereby authorized to fix the voting rights,
designations, powers, preferences and the relative, participating, optional or
other rights, if any, and the qualifications, limitations or restrictions
thereof, of any wholly unissued series of Preferred Stock, and to fix the
number of shares constituting such series, and to increase or decrease the
number of shares of any such series (but not below the number of shares
thereof then outstanding).
THE FIRST PARAGRAPH OF ARTICLE FOURTH OF THE CERTIFICATE OF INCORPORATION
SHALL BE AMENDED TO READ IN FULL AS FOLLOWS:
FOURTH: The corporation shall be authorized to issue two classes of shares
of stock to be designated, respectively, "Preferred Stock" and "Common Stock";
the total number of shares which the Corporation shall have authority to issue
is 100,180,000; the total number of shares of Preferred Stock shall be 180,000
and each such share shall have a par value of one hundred dollars ($100.00);
and the total number of shares of Common Stock shall be 100,000,000 and each
such share shall have a par value of one cent ($.01).
On the effective date of this Amendment, the number of outstanding shares of
Common Stock of the corporation shall be reduced so that each four (4) shares
of Common Stock issued and outstanding be automatically combined and changed
into one share of Common Stock (the "Reverse Stock Split"). No fractions of
shares will be issued, and, as of the effective date of this Amendment,
stockholders otherwise entitled to receive fractions of shares shall have no
further interest as a stockholder in respect of such fractions of shares. The
corporation will pay in cash the fair value, as determined by the Board of
Directors, of fractions of shares which otherwise would result from the
Reverse Stock Split.
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<PAGE>
APPENDIX V
AMENDMENT TO CERTIFICATE OF INCORPORATION
ELIMINATING CUMULATIVE VOTING
EXISTING ARTICLE NINTH OF THE CERTIFICATE OF INCORPORATION:
NINTH: At all elections of directors of the Corporation, a holder of any
class or series of stock the entitled to vote in such election shall be
entitled to as many votes as shall equal the number of votes which (except for
this Article as to cumulative voting) he would be entitled to cast for the
election of directors with respect to his shares of stock multiplied by the
number of directors to be elected in the election in which his class or series
of stock is entitled to vote, and each stockholder may cast all of such votes
for a single nominee for directors or may distribute them among the number to
be voted for, or for any two or more of them as he may see fit.
ARTICLE NINTH OF THE CERTIFICATE OF INCORPORATION SHALL BE AMENDED TO READ IN
FULL AS FOLLOWS:
NINTH: There shall be no right with respect to shares of stock of this
corporation to cumulate votes in the election of directors.
AMENDMENT TO CERTIFICATE OF INCORPORATION
ELIMINATING THE CLASSIFIED BOARD OF DIRECTORS
EXISTING ARTICLE SEVENTH OF THE CERTIFICATE OF INCORPORATION:
SEVENTH: The Board of Directors shall be and is divided into three classes,
Class I, Class II and Class III. Such classes shall be as nearly equal in
number of directors as possible. Each director shall serve for a term ending
on the third annual meeting following the annual meeting at which such
director was elected; provided, however, that the directors first elected to
Class I shall serve for a term ending on the annual meeting next following the
end of the calendar year 1983; that the directors first elected to Class II
shall serve for a term ending on the second annual meeting next following the
end of the calendar year 1983; and that the directors first elected to Class
III shall serve for a term ending on the third annual meeting next following
the end of the calendar year 1983. The foregoing notwithstanding, each
director shall serve until his successor shall have been duly elected and
qualified, unless he shall resign, become disqualified, disabled or shall
otherwise be removed. A director shall be subject to removal without cause by
the vote of the holders of not less than two-thirds of the total voting power
of all outstanding shares of voting stock of the Corporation.
At each annual election, the directors chosen to succeed those whose terms
then expire shall be of the same class as the directors they succeed, unless,
by reason of any intervening changes in the authorized number of directors,
the Board shall designate one or more directorships whose term then expires as
directorships of another class in order more nearly to achieve equality of
number of directors among the classes.
Notwithstanding the rule that the three classes shall be as nearly equal in
number of directors as possible, in the event of any change in the authorized
number of directors, each director then continuing to serve as such shall
nevertheless continue as a director of the class of which he is a member until
the expiration of his current term, or his prior death, resignation or
removal. If any newly created directorship may, consistently with the rule
that the three classes shall be as nearly equal in number of directors as
possible, be allocated to one of two or more classes, the Board shall allocate
it to that of the available classes whose term of office in due to expire at
the earliest date following such allocation.
ARTICLE SEVENTH OF THE CERTIFICATE OF INCORPORATION SHALL BE DELETED AND THE
REMAINING ARTICLES OF THE CERTIFICATE WOULD BE RENUMBERED ACCORDINGLY.
V-1
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APPENDIX VI
1996 STOCK INCENTIVE PLAN
INTERNATIONAL TECHNOLOGY CORPORATION
1996 STOCK INCENTIVE PLAN
Section 1. Pupose of Plan
The purpose of this 1996 Stock Incentive Plan ("Plan") of International
Technology Corporation, a Delaware corporation (the "Company"), is to enable
the Company to attract, retain and motivate its employees and non-employee
directors by providing for or increasing the proprietary interests of such
employees and non-employee directors in the Company, and to enable the Company
to attract, retain and motivate its non-employee directors and further align
their interest with those of the shareholders of the Company by providing for
or increasing the proprietary interest of such directors in the Company.
Section 2. Persons Eligible Under Plan
Any person who is an employee or director of the Company or any of its
subsidiaries, consultants or affiliates (an "Eligible Person") shall be
eligible to be considered for the grant of Awards (as hereinafter defined)
hereunder.
Section 3. Awards
(a) The Committee (as hereinafter defined), on behalf of the Company, is
authorized under this Plan to enter into any type of arrangement with an
Eligible Person that is not inconsistent with the provisions of this Plan and
that, by its terms, involves or might involve the issuance of (i) shares of
Common Stock, one dollar ($1.00) par value, of the Company or of any other
class of security of the Company which is convertible into shares of the
Company's Common Stock ("Shares") or (ii) a right or interest with an exercise
or conversion privilege at a price related to the Shares or with a value
derived from the value of the Shares, which right or interest may, but need
not, constitute a "Derivative Security," as such term is defined in Rule 16a-1
promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), as such Rule may be amended from time to time. The entering
into of any such arrangement is referred to herein as the "grant" of an
"Award."
(b) Awards are not restricted to any specified form or structure and may
include, without limitation, sales or bonuses of stock, restricted stock,
stock options, stock purchase warrants, other rights to acquire stock,
securities convertible into or redeemable for stock, stock appreciation
rights, limited stock appreciation rights, phantom stock, dividend
equivalents, performance units or performance shares, and an Award may consist
of one such security or benefit, or two or more of them in tandem or in the
alternative. The terms upon which an Award is granted shall be evidenced by a
written agreement executed by the Company and the Eligible Person to whom such
Award is granted.
(c) Subject to paragraph (d)(ii) below, Awards may be issued, and Shares may
be issued pursuant to an Award, for any lawful consideration as determined by
the Committee, including, without limitation, services rendered by the
Eligible Person.
(d) Subject to the provisions of this Plan, the Committee, in its sole and
absolute discretion, shall determine all of the terms and conditions of each
Award granted under this Plan, which terms and conditions may (but need not)
include, among other things:
(i) provisions permitting the Committee to allow or require the recipient
of such Award, including any Eligible Person who is a director or officer
of the Company, or permitting any such recipient the right, to pay the
purchase price of the Shares or other property issuable pursuant to such
Award, and/or such recipient's tax withholding obligation with respect to
such issuance, in whole or in part, by any one or more of the following
means:
VI-1
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(A) the delivery of cash;
(B) the delivery of other property deemed acceptable by the
Committee;
(C) the delivery of previously owned shares of capital stock of the
Company (including "pyramiding") or other property;
(D) a reduction in the amount of Shares or other property otherwise
issuable pursuant to such Award; or
(E) the delivery of a promissory note of the Eligible Person or of a
third party, the terms and conditions of which shall be determined by
the Committee;
(ii) provisions specifying the exercise or settlement price for any
option, stock appreciation right or similar Award, or specifying the method
by which such price is determined, provided that the exercise or settlement
price of any option, stock appreciation right or similar Award that is
intended to qualify as "performance based compensation" for purposes of
Section 162(m) of the Internal Revenue Code of 1986, as amended (the
"Code") provided that such price shall be not less than the fair market
value of a Share on the date such Award is granted;
(iii) provisions relating to the exercisability and/or vesting of Awards,
lapse and non-lapse restrictions upon the Shares obtained or obtainable
under Awards or under the Plan and the termination, expiration and/or
forfeiture of Awards;
(iv) provisions conditioning or accelerating the grant of an Award or the
receipt of benefits pursuant to such Award, either automatically or in the
discretion of the Committee, upon the occurrence of specified events,
including, without limitation, the achievement of performance goals, the
exercise or settlement of a previous Award, the satisfaction of an event or
condition within the control of the recipient of the Award or within the
control of others, a change of control of the Company, an acquisition of a
specified percentage of the voting power of the Company, the dissolution or
liquidation of the Company, a sale of substantially all of the property and
assets of the Company or an event of the type described in Section 7
hereof;
(v) provisions required in order for such Award to qualify (A) as an
incentive stock option under Section 422 of the Code (an "Incentive Stock
Option"), (B) as "performance based compensation" under Section 162(m) of
the Code, and/or (C) for an exemption from Section 16 of the Exchange Act;
and/or
(vi) provisions restricting the transferability of Awards or Shares
issued under Awards.
(e) Unless otherwise provided by the Committee, the terms of any stock
option granted under the Plan shall provide:
(i) that the term of such option shall be ten years from the date of
grant;
(ii) that if the Eligible Person to whom such option was granted (the
"Participant") ceases to be an Eligible Person for any reason other than
death, disability, or retirement the option shall not thereafter become
exercisable to an extent greater than it could have been exercised on the
date the Participant's status as an Eligible Person ceased, and that on the
death or disability of a Participant the option shall become fully
exercisable;
(iii) that (a) upon the retirement of the Participant the option shall
fully vest and shall expire on the expiration date set forth in the option
agreement; (b) upon the death or disability of the Participant the option
shall fully vest and shall expire one year from the termination of the
Participant's employment, (c) upon a termination for cause of the
Participant no unvested portion of the option shall thereafter vest and the
option shall expire one month from the termination of Participant's
employment, and (d) upon the Participant's cessation to be an Eligible
Person for any reason other than the foregoing, no unvested portion of the
option shall thereafter vest and the option shall expire ninety (90) days
after the termination of Participant's employment; and
VI-2
<PAGE>
(iv) that the option shall not be assignable or otherwise transferable
except by will or by the laws of descent and distribution or pursuant to a
domestic relations order, and during the lifetime of the Participant, the
option shall be exercisable only by the Participant or the transferee under
a domestic relations order.
(f) The exercise price of any stock option granted under the Plan shall not
be less than 100% of the market value of a share of Common Stock on the date
the option is granted;
(g) The Committee may establish the performance criteria and level of
achievement versus these criteria which shall determine the target and maximum
amount payable under an Award, which criteria may be based on financial
performance and/or personal performance evaluations. Notwithstanding anything
to the contrary herein, the performance criteria for any Award that is
intended by the Committee to satisfy the requirements for "performance-based
compensation" under Code Section 162(m) shall be a measure based on one or
more Qualifying Performance Criteria (as defined below) selected by the
Committee and specified at the time the Award is granted. The Committee shall
certify the extent to which any Qualifying Performance Criteria has been
satisfied prior to payment or settlement of any Award that is intended by the
Committee to satisfy the requirements for "performance-based compensation"
under Code Section 162(m). For purposes of this Plan, the term "Qualifying
Performance Criteria" shall mean any one or more of the following performance
criteria, either individually, alternatively or in any combination, applied to
either the Company as a whole or to a business unit or subsidiary, either
individually, alternatively or in any combination, and measured either on an
absolute basis or relative to a pre-established target, to previous years'
results or to a designated comparison group, in each case as specified by the
Committee in the Award: (i) cash flow, (ii) earnings per share (including
earnings before interest, taxes and amortization), (iii) stock price, (iv)
return on equity, (v) total stockholder return, (vi) return on capital, (vii)
return on assets or net assets, (viii) revenue, (ix) income or net income, (x)
operating income or net operating income, (xi) operating profit or net
operating profit, (xii) operating margin, (xiii) return on operating revenue,
and (xiv) market share.
Section 4. Stock Subject to Plan
(a) Subject to adjustment as provided in Section 7 hereof, at any time, the
aggregate number of Shares issued and issuable pursuant to all Awards
(including all Incentive Stock Options) granted under this Plan shall not
exceed 1,000,000, provided, however, that on April 1 of each of the years
1997, 1998, 1999, 2000 and 2001, such maximum number shall be increased by a
number equal to two percent (2%) of the number of Common Shares issued and
outstanding on each of such dates (with respect to any date, such maximum
number shall be referred to herein as the "Share Limitation"). Such maximum
number does not include the number of Shares subject to the unexercised
portion of any Incentive Stock Option granted under this Plan that expires or
is terminated.
(b) Subject to adjustment as provided in Section 7 hereof, the aggregate
number of Shares subject to Awards granted during any calendar year to any one
Eligible Person (including the number of shares involved in Awards having a
value derived from the value of Shares) shall not exceed 5,000,000.
(c) The aggregate number of Shares issued under this Plan at any time shall
equal only the number of shares actually issued upon exercise or settlement of
an Award and not settled in cash or returned to the Company upon forfeiture of
an Award or in payment or satisfaction of the purchase price, exercise price
or tax withholding obligation of an Award.
Section 5. Nature and Duration of Plan
(a) This Plan is intended to constitute an unfunded arrangement for a select
group of management or other key employees.
(b) No Awards shall be made under this Plan after the fifth anniversary of
the Effective Date of the Plan (as provided in Section 9). Although Shares may
be issued after the fifth anniversary of the Effective Date pursuant to Awards
made prior to such date, no Shares shall be issued under this Plan after the
fifteenth anniversary of the Effective Date.
VI-3
<PAGE>
Section 6. Administration of Plan
(a) This Plan shall be administered by one or more committees of the Board
(any such committee, the "Committee"). If no persons are designated by the
Board to serve on the Committee, the Plan shall be administered by the Board
and all references herein to the Committee shall refer to the Board. The Board
shall have the discretion to appoint, add, remove or replace members of the
Committee, and shall have the sole authority to fill vacancies on the
Committee. Unless otherwise provided by the Board: (i) with respect to any
Award for which such is necessary and desired for such Award to be exempted by
Rule 16b-3 of the Exchange Act, the Committee shall consist of the Board of
directors or of two or more directors each of whom is a "non-employee
director" (as such term is defined in Rule 16b-3 promulgated under the
Exchange Act, as such Rule may be amended from time to time), (ii) with
respect to any Award that is intended to qualify as "performance based
compensation" under Section 162(m) of the Code, the Committee shall consist of
two or more directors, each of whom is an "outside director" (as such term is
defined under Section 162(m) of the Code), and (iii) with respect to any other
Award, the Committee shall consist of one or more directors (any of whom also
may be an employee who has been granted or is eligible to be granted Awards
under the Plan).
(b) Subject to the provisions of this Plan, the Committee shall be
authorized and empowered to do all things necessary or desirable in connection
with the administration of this Plan with respect to the Awards over which
such Committee has authority, including, without limitation, the following:
(i) adopt, amend and rescind rules and regulations relating to this Plan;
(ii) determine which persons are Eligible Persons and to which of such
Eligible Persons, if any, and when Awards shall be granted hereunder;
(iii) grant Awards to Eligible Persons and determine the terms and
conditions thereof, including the number of Shares subject thereto and the
circumstances under which Awards become exercisable or vested or are
forfeited or expire, which terms may but need not be conditioned upon the
passage of time, continued employment, the satisfaction of performance
criteria, the occurrence of certain events (including events which the
Board or the Committee determine constitute a change of control), or other
factors;
(iv) at any time cancel an Award, with or without the consent of the
holder thereof, and grant a new Award to such holder in lieu thereof, which
new Award may be the same or a different type of Award, may be for a
greater or lesser number of Shares, may have a higher or lower exercise or
settlement price and otherwise may have similar or dissimilar terms to the
cancelled Award;
(v) determine whether, and the extent to which adjustments are required
pursuant to Section 7 hereof; and
(vi) interpret and construe any terms and conditions of, and define any
terms used in, this Plan, any rules and regulations under the Plan and/or
any Award granted under this Plan.
All decisions, determinations, and interpretations of the Committee shall be
final and conclusive upon any Eligible Person to whom an Award has been
granted and to any other person holding an Award.
(c) The Committee may, in the terms of an Award or otherwise, temporarily
suspend the exercisability of an Award and/or the issuance of Shares under an
Award if the Committee determines that securities law or other considerations
so warrant.
Section 7. Adjustments
If the outstanding securities of the class then subject to this Plan are
increased, decreased or exchanged for or converted into cash, property or a
different number or kind of shares or securities, or if cash, property or
shares or securities are distributed in respect of such outstanding
securities, in either case as a result of a reorganization, merger,
consolidation, recapitalization, restructuring, reclassification, dividend
(other than a regular, quarterly
VI-4
<PAGE>
cash dividend) or other distribution, stock split, reverse stock split, spin-
off or the like, or if substantially all of the property and assets of the
Company are sold, then, unless the terms of such transaction shall provide
otherwise, the Committee shall make appropriate and proportionate adjustments
in (i) the number and type of shares or other securities or cash or other
property that may be acquired pursuant to Awards theretofore granted under
this Plan other than Incentive Stock Options and the exercise or settlement
price of such Awards, and (ii) the maximum number and type of shares or other
securities that may be issued pursuant to such Awards thereafter granted under
this Plan; provided, however, that notwithstanding the foregoing, (A) such
aggregate number of Shares shall be subject to adjustment under this Section 7
only to the extent that such will not affect the status of any Award intended
to qualify as "performance based compensation" under Section 162(m) of the
Code; and (B) the maximum number and type of shares or other securities that
may be acquired pursuant to Incentive Stock Options theretofore granted under
this Plan and that may be subject to Incentive Stock Options thereafter
granted under this Plan (which need not correspond to the maximum number and
type of shares or other securities that may be issued pursuant to such Awards
thereafter granted under this Plan) shall be determined under this Section 7
in a manner consistent with the requirements for Incentive Stock Options.
Section 8. Amendment and Termination of Plan
The Board may amend, alter or discontinue the Plan or any agreement
evidencing an Award made under the Plan, but no amendment or alteration shall
be made which would impair the rights of any Award holder, without such
holder's consent, under any Award theretofore granted, provided that no such
consent shall be required if the Committee determines in its sole discretion
and prior to the date of any change of control (as defined, if applicable, in
the agreement evidencing such Award) that such amendment or alteration is not
reasonably likely to significantly diminish the benefits provided under such
Award, or that any such diminishment has been adequately compensated. The
Committee may determine whether or not any amendment to a previously granted
Award is, for purposes of the Plan, deemed to be a cancellation and new grant
of the Award. Notwithstanding the foregoing, if an amendment to the Plan would
affect the ability of Awards granted under the Plan to comply with any law,
rule or regulation (including any rule of a self-regulatory organization), and
if the Committee determines that it is necessary or desirable for any Awards
theretofore or thereafter granted that are intended to comply with any such
provision to so comply, the amendment shall be approved by the Company's
stockholders to the extent required for such Awards to continue to comply with
such law, rule or regulation.
Section 9. Effective Date of Plan
The Effective Date of this Plan shall be the date upon which it is approved
by the affirmative votes of the holders of a majority of the securities of the
Company present, or represented, and entitled to vote at the Company's annual
meeting of stockholders.
Section 10. Compliance with Other Laws and Regulations
The Plan, the grant and exercise of Awards thereunder, and the obligation of
the Company to sell and deliver shares under such Awards, shall be subject to
all applicable federal and state laws, rules and regulations and to such
approvals by any governmental or regulatory agency as may be required. The
Company shall not be required to issue or deliver any certificates for shares
of Common Stock prior to the completion of any registration or qualification
of such shares under any federal or state law or issuance of any ruling or
regulation of any government body which the Company shall, in its sole
discretion, determine to be necessary or advisable.
Section 11. No Right to Company Employment
Nothing in this Plan or as a result of any Award granted pursuant to this
Plan shall confer on any individual any right to continue in the employ of the
Company or interfere in any way with the right of the Company to terminate an
individual's employment at any time. The agreement evidencing an Award may
contain such provisions as the Committee may approve with respect to the
effect of approved leaves of absence.
VI-5
<PAGE>
Section 12. Liability of Company
The Company and any affiliate which is in existence or hereafter comes into
existence shall not be liable to an Eligible Person or other persons as to:
(a) The Non-Issuance of Shares. The non-issuance or sale of shares as to
which the Company has been unable to obtain from any regulatory body having
jurisdiction the authority deemed by the Company's counsel to be necessary to
the lawful issuance and sale of any shares hereunder; and
(b) Tax Consequences. Any tax consequence expected, but not realized, by any
Eligible Person or other person due to the issuance, exercise, settlement,
cancellation or other transaction involving any Award granted hereunder.
Section 13. Governing Law
This Plan and any Awards and agreements hereunder shall be interpreted and
construed in accordance with the laws of the State of Delaware and applicable
federal law.
IN WITNESS WHEREOF, and as conclusive evidence of the adoption of the
foregoing by directors of the Company, International Technology Corporation
has caused these presents to be duly executed in its name and behalf by its
proper officers thereunto duly authorized as of this day of November, 1996.
INTERNATIONAL TECHNOLOGY CORPORATION
By: _________________________________
ANTHONY J. DELUCA, PRESIDENT
ATTEST:
___________________________________
Secretary
VI-6
<PAGE>
P R O X Y
- - - --------------------------------------------------------------------------------
INTERNATIONAL TECHNOLOGY CORPORATION
ANNUAL MEETING OF STOCKHOLDERS
NOVEMBER 6, 1996
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned constitutes and appoints ANTHONY J. DELUCA and E. MARTIN
GIBSON and each of them, attorneys-in-fact and proxies of the undersigned, to
represent the undersigned and to vote all shares of Common Stock, $1.00 par
value, of International Technology Corporation (the "Company") which the
undersigned would be entitled to vote if personally present at the Annual
Meeting of Stockholders of the Company (the "1996 Annual Meeting") to be held
at 9:00 a.m. Pacific Standard Time, on Wednesday, November 6, 1996, at the
Holiday Inn Crowne Plaza, located at 300 North Harbor Drive, Redondo Beach,
California 90277-2552, and at any adjournment or postponement thereof. All
proxies shall be voted as directed, or, if no direction is given, for
Proposals 1, 3 and 4 listed on the reverse side and for the nominees named on
the reverse side.
- - - ----------------
SEE REVERSE SIDE
- - - ----------------
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
- - - -------------------------------------------------------------------------------
-- FOLD AND DETACH HERE --
<PAGE>
[X] PLEASE MARK
YOUR VOTES
AS IN THIS
EXAMPLE
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF INTERNATIONAL
TECHNOLOGY CORPORATION.
1. APPROVAL OF PROPOSED CARLYLE INVESTMENT INCLUDING ONE-FOR-FOUR REVERSE STOCK
SPLIT AND REDUCTION IN PAR VALUE OF COMMON STOCK
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
2. ELECTION OF DIRECTORS: Nominees: Kirby L. Cramer, James C. McGill and W.
Scott Martin
FOR WITHHELD
[ ] [ ]
[ ] _____________________
For all nominees
except as noted above
3. APPROVAL OF THE 1996 STOCK INCENTIVE PLAN
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
4. APPROVAL OF AMENDMENTS TO THE CERTIFICATE OF INCORPORATION ELIMINATING
CUMULATIVE VOTING AND ELIMINATING CLASSIFIED BOARD OF DIRECTORS
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
5. In the discretion of the proxyholders with respect to any other matter that
may properly come before the 1996 Annual Meeting and at any adjournment(s) or
postponement(s) thereof. The Board of Directors is not aware of any other
matters that will be presented at the meeting.
MARK HERE FOR ADDRESS
CHANGE AND NOTE AT LEFT [ ]
PLEASE COMPLETE, SIGN, DATE AND RETURN THIS PROXY PROMPTLY USING THE ENCLOSED
ENVELOPE.
Please date and sign exactly as your name or names appear hereon. If more than
one owner, all should sign. Executors, administrators, trustees, guardians,
attorneys and corporate officers should indicate their fiduciary capacity or
full title when signing.
Signature:_______________ Date: ______ Signature:________________ Date: ______
