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 December 27, 1996
OR
TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to __________________
Commission file number 1-9037
International Technology Corporation
(Exact name of registrant as specified in its charter)
Delaware 33-0001212
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
23456 Hawthorne Boulevard, Torrance, California 90505
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 378-9933
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes ..X.... No ........
At January 31, 1997 the registrant had issued and outstanding an aggregate
of 9,744,583 shares of its common stock.
1
<PAGE>
INTERNATIONAL TECHNOLOGY CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR QUARTER ENDED DECEMBER 27, 1996
PART I. FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets
as of December 27, 1996 (unaudited) and
March 29, 1996. 3
Condensed Consolidated Statements of Operations
for the Fiscal Quarter and Three Fiscal Quarters ended
December 27, 1996 and December 29, 1995 (unaudited). 4
Condensed Consolidated Statements of Cash Flows
for the Three Fiscal Quarters ended December 27, 1996
and December 29, 1995 (unaudited). 5
Notes to Condensed Consolidated Financial
Statements (unaudited). 6-8
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition. 9-18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 19
Item 4. Submission of Matter to a Vote of Security Holders. 19
Item 6. Exhibits and Reports on Form 8-K. 21
Signatures. 22
2
<PAGE>
PART I
Item 1. Financial Statements.
INTERNATIONAL TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
December 27, March 29,
1996 1996
------------ ---------
(Unaudited)
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 69,820 $24,493
Receivables, net 115,337 126,832
Prepaid expenses and other current assets 3,981 4,315
Deferred income taxes 12,149 12,149
------- -------
Total current assets 201,287 167,789
Property, plant and equipment, at cost:
Land and land improvements 1,330 1,783
Buildings and leasehold improvements 9,226 10,961
Machinery and equipment 143,058 144,218
------- -------
153,614 156,962
Less accumulated depreciation and
amortization 107,184 101,201
------- -------
Net property, plant and equipment 46,430 55,761
Investment in Quanterra 16,300 12,975
Other assets 40,533 37,084
Long-term assets of discontinued operations 40,048 41,705
------- -------
Total assets $344,598 $315,314
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 34,076 $ 27,091
Accrued liabilities 31,900 32,157
Billings in excess of revenues 3,219 2,044
Short-term debt, including current portion
of long-term debt 5,273 97
Net current liabilities of discontinued
operations 17,177 17,226
------- -------
Total current liabilities 91,645 78,615
Long-term debt 65,596 65,611
Long-term accrued liabilities of discontinued
operations 11,254 24,771
Other long-term accrued liabilities 7,257 5,452
Commitments and contingencies
Stockholders' equity:
Preferred stock, $100 par value;
180,000 shares authorized:
Cumulative convertible participating,
45,000 shares issued and outstanding 4,142 -
7% cumulative convertible exchangeable,
24,000 shares issued and outstanding 2,400 2,400
Common stock, $.01 par value; 50,000,000
shares authorized; 9,036,962 and 9,149,552
shares issued and outstanding, respectively 90 91
Treasury stock, at cost (6,953 shares) (84) (84)
Additional paid-in capital 243,764 206,465
Deficit (81,466) (68,007)
------- -------
Total stockholders' equity 168,846 140,865
------- -------
Total liabilities and stockholders' equity $344,598 $315,314
======= =======
See accompanying notes.
3
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INTERNATIONAL TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal quarter ended Three fiscal quarters ended
-------------------------- ---------------------------
December 27, December 29, December 27, December 29,
1996 1995 1996 1995
------------ ------------ ------------ ------------
(Unaudited)
<C> <S> <S> <S> <S>
Revenues $ 92,513 $104,912 $266,419 $311,463
Cost and expenses:
Cost of revenues 82,790 90,261 239,778 264,694
Selling, general and
administrative expenses 7,626 9,022 25,339 29,061
Restructuring charge - - 8,403 -
------- ------- ------- -------
Operating income (loss) 2,097 5,629 (7,101) 17,708
Equity in net loss of Quanterra - (24,595) - (26,416)
Other income - - - 1,090
Interest, net (1,446) (1,529) (4,105) (5,172)
------- ------- ------- -------
Income (loss) before
income taxes 651 (20,495) (11,206) (12,790)
(Provision) benefit for
income taxes (280) 15,808 1,146 12,803
------- ------- ------- -------
Net income (loss) 371 (4,687) (10,060) 13
Less preferred stock dividends (1,295) (1,050) (3,395) (3,150)
------- ------- ------- -------
Net loss applicable to
common stock $ (924) $ (5,737) $(13,455) $ (3,137)
======= ======= ======= =======
Net loss per share $ (.10) $ (.64) $ (1.48) $ (.35)
======= ======= ======= =======
</TABLE>
See accompanying notes.
4
<PAGE>
INTERNATIONAL TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three fiscal quarters ended
---------------------------
December 27, December 29,
1996 1995
------------ ------------
(Unaudited)
Cash flows from operating activities:
Net income (loss) $(10,060) $ 13
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Equity in net loss of Quanterra - 26,416
Gain from Motco settlement - (9,090)
Writedown of equipment - 8,000
Depreciation and amortization 11,208 10,433
Deferred income taxes (1,472) (13,981)
Changes in assets and liabilities, net of
effects from acquisitions and dispositions
of businesses:
Decrease (increase) in receivables, net 18,292 (2,135)
Decrease in prepaid expenses and other
current assets 697 1,539
Increase in accounts payable 5,410 6,281
Decrease in accrued liabilities (378) (10,045)
Increase (decrease) in billings in excess
of revenues 1,175 (691)
Increase (decrease) in other long-term
accrued liabilities 950 (196)
------- -------
Net cash provided by operating activities 25,822 16,544
Cash flows from investing activities:
Proceeds from Motco settlement - 41,100
Capital expenditures (2,602) (3,822)
Investment in Quanterra (3,325) (2,500)
Investment in Taiwan-based business, net
of cash acquired (1,455) -
Other, net 770 (1,374)
Investment activities of discontinued
operations (11,909) (8,777)
------- -------
Net cash (used for) provided by
investing activities (18,521) 24,627
Cash flows from financing activities:
Repayments of long-term borrowings (106) (110,629)
Long-term borrowings 281 90,023
Net proceeds from preferred stock and warrants
issued to Carlyle 41,000 -
Dividends paid on preferred stock (3,150) (3,150)
Repurchases of common stock - (740)
Issuances of common stock 1 905
------- -------
Net cash provided by (used for) financing
activities 38,026 (23,591)
------- -------
Net increase in cash and cash equivalents 45,327 17,580
Cash and cash equivalents at beginning of period 24,493 6,547
------- -------
Cash and cash equivalents at end of period $ 69,820 $ 24,127
======= =======
See accompanying notes.
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 fiscal quarter and three fiscal
quarters ended December 27, 1996, pursuant to the rules of the Securities
and Exchange Commission. The Company's fiscal year includes four
thirteen-week fiscal quarters with the fourth quarter ending on the last
Friday in March. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
such rules and regulations although the Company believes that the
disclosures in such financial statements are adequate to make the
information presented not misleading.
These condensed consolidated financial statements should be read in
conjunction with the Company's Annual Report on Form 10-K for the fiscal
year ended March 29, 1996. The results of operations for the fiscal
periods ended December 27, 1996 are not necessarily indicative of the
results for the full fiscal year.
2. The condensed consolidated financial statements for the first two
quarters of fiscal year 1997 and the prior fiscal year as well as all
footnote references to the Company's common shares have been restated to
reflect the one-for-four reverse split of IT common shares and the
reduction in par value of the Company's common stock which were approved
by the shareholders in connection with the investment by The Carlyle Group
at the Annual Meeting of Stockholders on November 20, 1996. See Note 3
and Note 9.
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:
Restated (see Note 2)
average common and common
Fiscal quarter ended equivalent shares outstanding
-------------------- -----------------------------
December 27, 1996 9,048,249
December 29, 1995 9,011,099
Restated (see Note 2)
average common and common
Three fiscal quarters ended equivalent shares outstanding
--------------------------- -----------------------------
December 27, 1996 9,099,992
December 29, 1995 8,982,975
Common stock equivalents relate to dilutive stock options using the
treasury stock method. For all periods presented, the computation of net
income (loss) per share, assuming conversion into common shares of the
Company's preferred stock, is antidilutive.
4. In conjunction with the corporate restructuring to position the
Company for growth and diversification which was initiated in the second
quarter of the current fiscal year, the Company incurred a pre-tax
restructuring charge of $8,403,000. The restructuring charge included
$3,400,000 of costs for severance, $4,100,000 of costs for closing and
reducing the size of a number of the Company's offices, and $900,000 of
costs for other related items. At December 27, 1996, $4,677,000 of the
charge remained to be paid.
6
<PAGE>
INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
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 December 27,
1996, two of the Company's inactive disposal sites have been formally
closed and the other two are in the process of closure. In connection
with the plan of divestiture, from December 1987 through March 31, 1996,
the Company recorded a provision for loss on disposition of transporta-
tion, treatment and disposal discontinued operations (including the
initial provision and three subsequent adjustments) in the amount of
$160,192,000, net of income tax benefit of $32,879,000. The adjustments
principally related to a writeoff of the contingent purchase price from
the earlier sale of certain assets, increased closure costs principally
due to delays in the regulatory approval process, and costs related to
certain waste disposal sites where IT has been named a potentially
responsible party (PRP). At December 27, 1996, the Company's condensed
consolidated balance sheet included accrued liabilities of $28,431,000 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 significant-
ly different from those used to estimate the provision for loss could
result in a material adverse effect on the consolidated financial
condition of the Company.
6. For information regarding legal proceedings of the Company's
continuing operations, please see the note "Commitments and contingencies"
in the Notes to Consolidated Financial Statements in the Company's Annual
Report on Form 10-K for the fiscal year ended March 29, 1996; current
developments regarding continuing operations' legal proceedings are
discussed in Part II of this filing. See Management's Discussion and
Analysis of Results of Operations and Financial Condition - Financial
Condition - Transportation, Treatment and Disposal Discontinued Operations
for information regarding the legal proceedings of the discontinued
operations of the Company.
7. Unbilled receivables of $18,402,000 at December 27, 1996 ($20,945,000
at March 29, 1996) are included in accounts receivable. Unbilled
receivables typically represent amounts earned under the Company's
contracts but not yet billable according to the contract terms, which
usually consider the passage of time, achievement of certain milestones,
negotiation of change orders or completion of the project.
Included in unbilled receivables at December 27 and March 29, 1996 is
approximately $8,500,000 of claims related to the federal
government-funded Helen Kramer project, which the government has recently
advised the Company is subject to a continuing investigation. Remedies
which the government could pursue include damages, penalties and forfei-
ture of all or part of the Company's claims. The Company is currently
engaged in settlement discussions concerning these allegations.
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.
7
<PAGE>
INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
9. At IT's Annual Meeting of Stockholders held on November 20, 1996, the
Company's shareholders voted to approve an investment in a new issue of
convertible preferred stock of IT by The Carlyle Group (Carlyle), a
merchant banking firm based in Washington, DC. The investment by Carlyle
(the Carlyle Investment) consists of 45,000 shares ($100 par value and
$1,000 liquidation preference) of Cumulative Convertible Participating
Preferred Stock (Convertible Preferred Stock) and warrants to purchase
1,250,000 shares of IT common stock. The $41,000,000 net proceeds to the
Company (after related offering costs of $4,000,000) will be used by IT to
finance business acquisitions, as well as for working capital and general
corporate purposes.
The Convertible Preferred Stock will pay zero dividends in year one,
a 3% preferred stock in-kind dividend in year two and a 6% annual cash
dividend thereafter. In addition, the Convertible Preferred Stock will
have the right to participate in any dividends paid with respect to IT's
common stock. There is no mandatory redemption provision for the
Convertible Preferred Stock; the Company has an option to redeem the
Convertible Preferred Stock beginning in the eighth year. The Convertible
Preferred Stock is convertible into 5,928,853 IT common shares at a
conversion price of $7.59 per share. The five-year warrants have an
exercise price of $11.39 per share. Such conversion price and exercise
price have been adjusted from their initial prices of $8.00 and $12.00,
respectively, due to the exercise of a special conversion right by some of
the holders of the Company's Depositary Shares (see below).
Assuming the conversion of all of the Convertible Preferred Stock
into IT common shares and exercise of all of the warrants, Carlyle would
own approximately 43% of the voting power of the Company. The terms of
the Convertible Preferred Stock provide that, for five years from November
20, 1996, the holders of the Convertible Preferred Stock have the right to
elect a majority of the Board of Directors of the Company, provided that
Carlyle continues to own at least 20% of the voting power of the Company.
The Carlyle Investment triggered a special conversion right of the
holders of the Company's outstanding Depositary Shares (each representing
1/100 of a share of the Company's 7% Convertible Exchangeable Preferred
Stock). Prior to the expiration of the special conversion right on
January 9, 1997, holders of 344,308 Depositary Shares elected to convert
such shares into 678,816 shares of IT common stock.
10. For the three fiscal quarters ended December 27, 1996, the Company
had an effective income tax benefit rate of 10%. The related income tax
benefit from the pre-tax loss for the current three fiscal quarters is net
of a $3,168,000 tax charge reflected in the second quarter resulting from
the increase in IT's deferred tax valuation allowance based on the
Company's assessment of the uncertainty as to when it will generate a
sufficient level of future earnings to realize the deferred tax asset
created by the current second fiscal quarter restructuring charge (see
Note 4). If the above tax charge had not been reflected in the second
fiscal quarter, the Company's effective income tax benefit rate would have
been 38.5%, which exceeds the 34% federal statutory rate primarily due to
state income taxes and nondeductible expenses.
For the three fiscal quarters ended December 29, 1995, the Company
had an effective income tax benefit rate of 100%. The related income tax
benefit on the $12,790,000 loss before income taxes included a $7,500,000
tax credit resulting from the adjustment of IT's deferred tax valuation
allowance. Excluding the impact of this tax credit, the Company's
effective income tax rate would have been 41%, which exceeds the 34%
federal statutory rate primarily due to state income taxes and nondeduct-
ible expenses.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition.
INTERNATIONAL TECHNOLOGY CORPORATION
FOR QUARTER ENDED DECEMBER 27, 1996
RESULTS OF OPERATIONS
- ---------------------
Overview
- --------
The Company's services are provided to a broad array of governmental and
commercial entities predominantly in the U.S. market. Additionally, the
Company pursues selected international business opportunities on a
project-specific basis and has made an investment in a Taiwan-based
company (see Revenues). 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 11.8% decrease in revenues from $104,912,000 in
the third quarter of fiscal year 1996 to $92,513,000 in the third quarter
of fiscal year 1997. Revenues for the first three quarters of fiscal year
1997 were $266,419,000, which were 14.5% lower than the $311,463,000 of
revenues for the corresponding period of the prior fiscal year. The
declines in revenues generally reflect weak demand in both the governmen-
tal and commercial markets the Company serves as well as a change in the
Company's approach to the market in de-emphasizing smaller lower-value
projects. Although revenues are expected to increase from third quarter
levels over time, the impact of the difficult industry-wide trends is
expected to restrict revenue growth in the near term, exclusive of the
revenue of acquired businesses. The Company is actively exploring such
acquisitions (see Financial Condition and Note 9 to the Condensed
Consolidated Financial Statements). The Company took an initial step in
this strategy by making a 50.1% majority investment in a Taiwan-based
wastewater treatment design/build firm in November 1996. The consolidated
revenues of the Company in the quarter ended December 27, 1996, include
approximately $1,900,000 of revenue from this firm.
The following table shows, for the third fiscal quarter and the three
fiscal quarters ended December 27, 1996 and December 29, 1995, the
Company's revenues attributable to federal, state and local governmental
contracts as a percentage of the Company's consolidated revenues:
<TABLE>
<CAPTION>
Fiscal quarter ended Three fiscal quarters ended
-------------------------- ---------------------------
December 27, December 29, December 27, December 29,
Source 1996 1995 1996 1995
------- ------------ ------------ ------------ ------------
<C> <S> <S> <S> <S>
Federal government:
U.S. Department of Defense (DOD) . . 41% 47% 43% 51%
U.S. Department of Energy (DOE). . . 14 10 14 10
Other federal agencies . . . . . . . 4 4 4 4
--- --- --- ---
59 61 61 65
State and local governments . . . . . . 8 6 7 4
--- --- --- ---
Total . . . . . . . . . . . . . . . . . 67% 67% 68% 69%
=== === === ===
</TABLE>
For the comparable first three quarters of fiscal years 1997 and 1996, the
portion of the Company's revenues derived from the DOD decreased from 51%
in the prior year to 43% in the current year primarily due to reduced
funding of the Company's major indefinite delivery order programs over the
past several quarters. This has resulted from a flattening of DOD
environmental restoration
9
<PAGE>
INTERNATIONAL TECHNOLOGY CORPORATION
RESULTS OF OPERATIONS (CONTINUED)
budgets; however, the Company expects to continue to derive a substantial
portion of its revenues from these contracts, which are primarily related
to remedial action work. Additionally, an expected transition by the DOE
over the next several years to emphasize remediation over studies is
expected to be positive for the Company based on the Company's favorable
experience in winning and executing similar work for the DOD, the
Company's experience with the DOE related to its past performance of DOE
studies and recent contract awards for such work. The Company believes
this trend is reflected in the increase in the Company's DOE revenues in
the first three quarters of this fiscal year.
The Company's revenues from commercial clients declined in both the third
quarter and the first three quarters of fiscal year 1997 compared to the
prior year periods. The Company believes this is partly due to commercial
clients delaying certain work until final Congressional action is taken on
the reauthorization of the Comprehensive Environmental Response, Compensa-
tion and Liability Act of 1980 (CERCLA). Funding authority under CERCLA
lapsed on December 31, 1995, and it is uncertain when reauthorization will
occur or what the details of the legislation, including retroactive
liability, cleanup standards, and remedy selection, may include.
Uncertainty regarding possible rollbacks of environmental regulation
and/or reduced enforcement have led commercial clients to delay projects
as well. 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, legislative or regulatory changes could
also result in increased demand for certain of the Company's services if
such changes decrease the cost of remediation projects or result in more
funds being spent for actual remediation. The ultimate impact of any such
changes will depend upon a number of factors, including the overall
strength of the U.S. economy and customers' views on the cost effective-
ness of the remedies available.
A significant portion of IT's revenues (approximately 9% and 10% in the
third quarter and first three quarters, respectively, of fiscal year 1997)
continue to be derived from large, complex thermal remediation contracts
utilizing the Company's Hybrid Thermal Treatment System (HTTS ) incinera-
tion technology. Incineration as a remedy under CERCLA continues to come
under legislative and regulatory pressures as well as commercial pressures
due to its relatively high cost. If the Company is unable to permit and
use thermal treatment on future remediation projects in the United States
due to either regulatory or market factors, the Company would have to find
alternative uses for its HTTS equipment, such as foreign installations.
The Company is currently seeking such alternative uses. If such opportu-
nities 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 $18,100,000 at December 27, 1996. This
backlog will be completed during the next six to nine months. At December
27, 1996, IT's HTTS equipment had a net book value of approximately
$12,000,000.
The Company's total contract backlog at December 27, 1996 was approximate-
ly $1,193,000,000, of which approximately $811,000,000 is future project
work the Company estimates it will receive (based on historical experi-
ence) under existing governmental indefinite delivery order (IDO) programs
which provide for a general undefined scope of work. Revenues from
backlog and IDO contracts are expected to be earned over the next one to
five years. Continued funding of existing backlog could be negatively
impacted in the future due to reductions in current and future federal
government environmental restoration budgets.
Gross Margin
- ------------
Gross margin percentage for the third quarter of fiscal year 1997 declined
to 10.5% of revenues from 14.0% of revenues for the corresponding period
of the prior fiscal year. In the current quarter, gross margin was
adversely impacted by lower pricing due to competitive industry conditions
and by a shift in revenue mix toward larger projects and programs which
involve more subcontracting and carry a lower margin on gross revenues.
Competitive pricing is expected to continue to adversely affect gross
margin in the near term. Gross margin percentage in the current third
fiscal quarter improved from the current second quarter level of 9.9% as
overhead costs were reduced due to organizational streamlining resulting
from the recent corporate restructuring (see Restructuring Charge).
For the first three quarters of fiscal year 1997, gross margin of 10.0% of
revenues declined from 15.0% of revenues in the corresponding period of
the prior fiscal year, generally for the same reasons noted above related
to the third fiscal quarter, as well as due to the lower level of the
10
<PAGE>
INTERNATIONAL TECHNOLOGY CORPORATION
RESULTS OF OPERATIONS (CONTINUED)
Company's revenues as certain overhead cost elements were fixed in the short
term prior to the September 1997 corporate restructuring.
Selling, General and Administrative Expenses
- --------------------------------------------
For the third fiscal quarter ended December 27, 1996, selling, general and
administrative expenses of $7,626,000 were $1,396,000 or 15.5% lower than
the third quarter of the prior fiscal year. Selling, general and
administrative expenses of $25,339,000 for the first three quarters of
fiscal year 1997 were $3,722,000 or 12.8% lower than the level for the
corresponding period of the prior fiscal year. Selling, general and
administrative expenses declined during the third quarter of fiscal year
1997 primarily due to the impact of the corporate restructuring (see
Restructuring Charge) initiated in the second quarter.
Restructuring Charge
- --------------------
In conjunction with the corporate restructuring to position the Company
for growth and diversification which was initiated in the second quarter
of the current fiscal year, the Company incurred a pre-tax restructuring
charge of $8,403,000. The restructuring charge included $3,400,000 of
costs for severance, $4,100,000 of costs for closing and reducing the size
of a number of the Company's offices, and $900,000 of costs for other
related items. At December 27, 1996, $4,677,000 of the charge remained to
be paid. The restructuring charge was taken in conjunction with an
organizational realignment which is expected to enable the Company to
operate more efficiently and cost-effectively on an ongoing basis.
Interest, Net
- -------------
For the third quarter and first three quarters of fiscal year 1997, net
interest expense represented 1.6% of revenues and 1.5% of revenues,
respectively, compared to the 1.5% of revenues and 1.7% of revenues,
respectively, reported in the third quarter and first three quarters of
fiscal year 1996. Net interest expense is expected to decrease in the
upcoming quarter due to interest income from an increased level of cash
and cash equivalents as a result of the proceeds from the Carlyle
Investment late in the third fiscal quarter (see Note 9 to Condensed
Consolidated Financial Statements).
Income Taxes
- ------------
For the three fiscal quarters ended December 27, 1996, the Company had an
effective income tax benefit rate of 10%. The related income tax benefit
from the pre-tax loss for the current three fiscal quarters is net of a
$3,168,000 tax charge reflected in the second quarter resulting from the
increase in IT's deferred tax valuation allowance based on the Company's
assessment of the uncertainty as to when it will generate a sufficient
level of future earnings to realize the deferred tax asset created by the
second fiscal quarter restructuring charge (see Restructuring Charge). If
the above tax charge had not been reflected in the current second fiscal
quarter, the Company's effective income tax benefit rate would have been
38.5%, which exceeds the 34% federal statutory rate primarily due to state
income taxes and nondeductible expenses.
For the three fiscal quarters ended December 29, 1995, the Company had an
effective income tax benefit rate of 100%. The related income tax
benefit on the $12,790,000 loss before income taxes included a $7,500,000
tax credit resulting from the adjustment of IT's deferred tax valuation
allowance. Excluding the impact of this tax credit, the Company's
effective income tax rate would have been 41%, which exceeds the 34%
federal statutory rate primarily due to state income taxes and nondeduct-
ible expenses.
The Company's future tax rate is subject to the full realization of its
deferred tax asset of $33,948,000 (net of a valuation allowance of
$9,113,000). Realization of the tax asset is expected by management to
occur principally as closure expenditures related to the Company's
inactive disposal sites (see Note 5 to Condensed Consolidated Financial
Statements) over the next several years are deductible in the year the
expenditures are made and upon the ultimate disposition of the Company's
19% interest in Quanterra (see Financial Condition), but is subject to the
Company having a sufficient level of future taxable income and taxable
capital gains. The Company evaluates the adequacy of the valuation
allowance and the realizability of the deferred tax asset on an ongoing
basis.
11
<PAGE>
INTERNATIONAL TECHNOLOGY CORPORATION
RESULTS OF OPERATIONS (CONTINUED)
Dividends
- ---------
Dividends for the quarter ended December 27, 1996 include a cash dividend
of $1,050,000 on the Company's outstanding depositary Shares (each
representing 1/100 of a share of the Company's 7% Convertible Exchangeable
Preferred Stock) and a non-cash imputed dividend of $245,000 on the
newly-issued $45,000,000 of 6% Convertible Preferred Stock purchased by
Carlyle. The $245,000 dividend is a pro rata amount covering the portion
of the quarter from November 20, 1996 when the Convertible Preferred Stock was
issued until the end of the quarter.
On January 9, 1997, holders of 344,308 Depositary Shares elected to
convert such shares to 678,816 shares of common stock pursuant to a
special conversion right (see Note 9 to the Condensed Consolidated
Financial Statements). As a result, the quarterly cash dividend of
$1,050,000 will be reduced to $900,000 in the quarter ending March 28,
1997 and thereafter.
12
<PAGE>
INTERNATIONAL TECHNOLOGY CORPORATION
FINANCIAL CONDITION
- -------------------
Working capital of $109,642,000 at December 27, 1996 increased by
$20,468,000 or 23.0% from $89,174,000 at March 29, 1996 due principally to
the investment in cash equivalents of the $41,000,000 net proceeds from
the Carlyle Investment (discussed below), partly offset by an $18,292,000
reduction in accounts receivable due to better receivables management.
Consequently, the current ratio at December 27, 1996 increased to 2.20:1
from 2.13:1 at March 29, 1996.
Cash provided by operating activities for the first three quarters of
fiscal year 1997 totaled $25,822,000 compared to $16,544,000 provided by
operating activities in the corresponding first three quarters of the
prior fiscal year. During the current period, the increase in cash
provided by operating activities is principally due to the improvement in
receivables management. Capital expenditures of $2,602,000 for the
current three fiscal quarters were $1,220,000 lower than the $3,822,000
reported for the corresponding period of the prior fiscal year principally
due to a lower level of capital requirements. Additionally, during the
current third fiscal quarter, the Company acquired a majority interest in
a Taiwan-based wastewater treatment design/build firm for approximately
$1,500,000 in cash.
The Company's shareholder agreements relating to Quanterra (an environmen-
tal 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 an
additional $2,500,000 to Quanterra, of which $475,000 was paid in each of
March, April and July 1996 and $1,075,000 was paid in December 1996,
completing the commitment. Additionally, in the third fiscal quarter, the
Company made a one-time $1,300,000 contribution to Quanterra in the form
of work performed related to the decommissioning/closure of a Quanterra
laboratory facility. IT is not committed to make, and does not presently
intend to make, additional contributions to Quanterra, but it has the
option to make future pro rata contributions to maintain its 19% interest.
Due to the operating losses which Quanterra has been incurring, the
Company will continue to evaluate the ultimate recoverability of its
investment in Quanterra (which is carried at $16,300,000 on the December
27, 1996 condensed consolidated balance sheet) 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, limita-
tions 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. The Company is
presently in compliance with its covenants. During the quarter ended
December 27, 1996, the Company negotiated amendments to its lending
arrangements to provide enhanced flexibility in the Company's operations
in conjunction with the Carlyle Investment (see below). Among other
things, the changes modify certain financial covenants, permit the Carlyle
Investment and the payment of dividends on such investment, increase the
Company's allowable debt and permit proceeds from borrowings to be used to
finance acquisitions in certain circumstances, and increase the cost of
the senior secured notes and credit line based upon certain leverage
thresholds.
In aggregate, at December 27, 1996, letters of credit totaling approxi-
mately $25,700,000 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 and the Company had approximately $3,000,000 of availability
under the line pursuant to its borrowing base. The Company had invested
cash of approximately $63,000,000 at December 27, 1996.
On February 6, 1996, the Company announced that it had retained an
investment banking firm and a consultant to advise it on ways to actively
participate in the current environmental management industry consolida-
tion, with the ultimate goal of maximizing shareholder value. As a result
of this effort, at the November 20, 1996 Annual Meeting of Stockholders,
IT's shareholders voted to approve the Carlyle Investment. The Company
issued to Carlyle 45,000 shares of Convertible Preferred Stock having a
13
<PAGE>
INTERNATIONAL TECHNOLOGY CORPORATION
FINANCIAL CONDITION (CONTINUED)
liquidation preference of $1,000 per share, and warrants to purchase
1,250,000 shares of IT common stock at $11.39 per share. The $41,000,000
net proceeds to the Company (after related offering costs of $4,000,000)
will be used by IT to finance business acquisitions, as well as for working
capital and general corporate purposes (see Note 9 to the Condensed Consolidated
Financial Statements for additional information regarding the Carlyle
Investment).
The Company continues to have significant cash requirements, including
working capital, capital expenditures, expenditures for the closure of its
inactive disposal sites and PRP matters (see Transportation, Treatment and
Disposal Discontinued Operations below), preferred dividend obligations
and contingent liabilities. As a result of the completion of the Carlyle
Investment, the Company's liquidity position is expected to be sufficient
to meet the foreseeable requirements, as well as to fund expansion and
diversification of the Company's business through both internal growth and
acquisitions.
Transportation, Treatment and Disposal Discontinued Operations
- --------------------------------------------------------------
With regard to the Company's transportation, treatment and disposal
discontinued operations, the Company has previously completed closure of
its Montezuma Hills and Benson Ridge facilities and is pursuing closure of
its inactive Panoche and Vine Hill Complex facilities. On November 17,
1995, the California EPA, Department of Toxic Substances Control (DTSC)
approved the final closure plan and post-closure plan for the Vine Hill
Complex facility. The approved final closure plan provides for solidifi-
cation and capping of waste sludges and installation of underground
barriers and groundwater control systems. Substantial remediation has
already been completed over both the past year since approval of the plan
and over the prior several years based upon interim approvals by DTSC, and
the final closure is scheduled to be completed in fiscal year 1998 or
early fiscal year 1999.
On June 28, 1996, DTSC released a Draft Environmental Impact Report (DEIR)
and Draft Closure Plan for public comment for the Panoche facility. The
DEIR evaluates the Company's preferred closure plan as well as several
alternative plans and states that the Company's preferred closure plan is
the environmentally superior alternative. The alternative plans involve
excavation and on-site relocation of substantial quantities of waste
materials in addition to landfill capping and groundwater controls which
are common to all alternatives. If selected, the alternative plans would
extend the closure construction schedule and increase the cost of closure.
The DEIR and Draft Closure Plan were subject to a 90-day comment period
which ended September 30, 1996, during which interested parties presented
comments including some supporting alternative plans. DTSC, after
considering all comments received, will approve a final closure plan and
certify the final EIR. The Company expects the plan and all necessary
permits to be approved early in fiscal year 1998. Closure construction
for the Company's preferred plan is scheduled to be completed within three
years of approval of the plan. If DTSC were to approve an alternative
plan or fail to timely approve any plan or if implementation of any plan
is delayed by litigation or appeals, the Company's cost to close the site
would increase, which could have a material adverse impact on the
consolidated financial condition of the Company.
Closure construction was completed for the Montezuma Hills and Benson
Ridge facilities in December 1991 and December 1992, respectively. Upon
completion of closure construction, the Company is required to perform
post-closure monitoring and maintenance of its disposal facilities for at
least 30 years. Operation of the facilities in the closure and
post-closure periods is subject to numerous federal, state and local
regulations. The Company may be required to perform unexpected
remediation work at the facilities in the future or to pay penalties for
alleged noncompliance with regulatory permit conditions.
Regulations of the DTSC and the United States Environmental Protection
Agency (USEPA) require that owners and operators of hazardous waste
treatment, storage and disposal facilities provide financial assurance for
closure and post-closure costs of those facilities. The Company has
provided such financial assurance equal to its estimate for closure costs
at March 1, 1996, which could be subject to increase at a later time as a
result of regulatory requirements, in the form of a corporate guarantee of
approximately $14,900,000, letters of credit totaling approximately
$6,700,000 and a trust fund containing approximately $12,200,000, and has
14
<PAGE>
INTERNATIONAL TECHNOLOGY CORPORATION
FINANCIAL CONDITION (CONTINUED)
purchased annuities which will ultimately mature over the next 30 years to
pay for its estimates of post-closure costs.
Closure and post-closure costs are incurred over a significant number of
years and are subject to a number of variables including, among others,
completion of negotiations regarding specific site closure and
post-closure plans with DTSC, USEPA, the California State Water Resources
Control Board, the California Air Resources Board, Regional Water Quality
Control Boards (RWQCBs), Air Quality Management Districts, various other
state authorities and certain applicable local regulatory agencies. Such
closure costs are comprised principally of engineering, design and
construction costs and of caretaker and monitoring costs during closure.
The Company has estimated the impact of closure and post-closure costs in
the provision for loss on disposition of transportation, treatment and
disposal discontinued operations; however, closure and post-closure costs
could be higher than estimated if regulatory agencies were to require
closure and/or post-closure procedures significantly different than those
in the plans developed by the Company or if there are additional delays in
the closure plan approval process. Certain revisions to the closure
procedures could also result in impairment of the residual land values
attributed to certain of the sites.
The carrying value of the long-term assets of transportation, treatment
and disposal discontinued operations of $40,048,000 at December 27, 1996
is principally comprised of residual land at the inactive disposal
facilities (a substantial component of which is adjacent to those
facilities and was never used for waste disposal) and assumes that sales
will occur at current market prices estimated by the Company based on
certain assumptions (entitlements, development agreements, etc.), taking
into account market value information provided by independent real estate
appraisers. The Company has an agreement with a real estate developer to
develop some of this property as part of a larger development in the local
area involving a group of developers. The entitlement process has been
delayed pending approval of the Company's closure plan for its adjacent
disposal facility and local community review of growth strategy. If the
developers' plans change or the developers are unable to obtain entitle-
ments as planned, the carrying value of this property could be signifi-
cantly 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. 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). (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. Pursuant to the settlement, the Company has
paid $5,400,000 to the USEPA, which amounts had been previously accrued by
the Company, in satisfaction of IT's payment obligations to the USEPA
under the settlement. While resolving the Company's alleged liability for
response costs incurred by the USEPA pursuant to the first three partial
consent decrees, the settlement does not include any costs for future or
final OII remedies. In September 1996, the USEPA released a final record
of decision selecting the final remedy for the site. Response costs for
the final remedy are estimated by USEPA to be approximately $161,800,000.
The Company believes that this estimate does not take into account the
benefits of certain work to be performed under the previous consent
decrees and therefore substantially overstates the remaining cost.
15
<PAGE>
INTERNATIONAL TECHNOLOGY CORPORATION
FINANCIAL CONDITION (CONTINUED)
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 has paid $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 volun-
tarily 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 Feasibil-
ity Study (RI/FS) reports which have been accepted by the DTSC. The
studies indicate that groundwater quality impact is not affecting drinking
water supplies and is not attributable solely to the portion of the site
previously operated by IT's predecessor.
In July 1993, the Company, along with the other PRPs at the site, was
issued a revised RAO and Imminent and Substantial Endangerment Order that,
although it appears primarily to restate previous RAOs, also directs all
previously named PRPs to undertake specific additional tasks including the
closure of the municipal landfill.
In November 1995, the DTSC, by letter, required the PRP group to submit
for public comment and DTSC approval a draft Remedial Action Plan (RAP)
describing a remedial alternative not supported by the PRP group. The PRP
group disputed the timing and content of the draft RAP as required by DTSC
as not justified by the RI/FS process, but in January 1996 submitted a
draft RAP discussing a number of remedial alternatives. In October 1996
the DTSC completed and released for public review and comment a draft RAP
selecting DTSC's preferred alternative of actively pumping and treating
groundwater from both the alleged source points of contamination and the
allegedly contaminated groundwater plume emanating from the site, which
DTSC estimated to cost between $18,300,000 to $32,600,000, depending upon
whether certain options for discharge of produced waters are available.
The PRP group continues to believe that its preferred alternative of
continued limited site monitoring, which was estimated to cost approxi-
mately $4,100,000, is appropriate. As part of the draft RAP, the DTSC
also advised the PRP group of its position that both the group and the
16
<PAGE>
INTERNATIONAL TECHNOLOGY CORPORATION
FINANCIAL CONDITION (CONTINUED)
current owner/operators are responsible for paying the future closure and
postclosure costs of the adjoining municipal landfill, which have been
estimated at approximately $4,200,000.
As a part of the draft RAP that the PRP group submitted in January 1996,
the group asserted that other PRPs at the site (principally, the current
and past owner/operators of the site) were responsible for approximately
85% of the site's remediation costs, and that the PRP group was responsi-
ble for no more than approximately 15% of such costs. The Company has
paid approximately 50% of the PRP group's costs to-date on an interim
basis. The current owner/operators claimed in response that the Company
and other members of the PRP group were responsible for at least 89% of
the site's remediation costs and that they were responsible for only a
small percentage of such costs. They also demanded indemnity from the
Company pursuant to the lease agreement under which IT Corporation's
predecessor operated the site, which demand the Company has rejected. In
the draft RAP released in October 1996 the DTSC released a draft
non-binding allocation suggesting that the Company is responsible for 15%
of the site's response costs, that the generators and others who are part
of the PRP group are responsible for 35% of such costs and that the
current owner/operators and others are responsible for 50% of such costs.
The Company expects that in the final RAP the DTSC will assign the Company
and the other members of the PRP group collective responsibility for
approximately 45% to 50% of the site's response costs. Although the
DTSC's allocation of responsibility is not binding except in very limited
circumstances, the PRP group continues to believe that the current
owner/operators should pay a larger portion of the site's response costs
and the Company is continuing to cooperate with the generators and other
members of the PRP group. The draft RAP was subject to public comment
and the DTSC has advised the PRP group that it will likely release a final
RAP before the end of fiscal year 1997. The PRP group is continuing to
attempt to persuade DTSC that the group's preferred remedial alternative
should be selected and is evaluating its potential remedies with respect
to the draft RAP.
The PRP group has initiated litigation against the current owner/operators
of the site and other non-cooperating PRPs to cause them to bear their
proportionate share of site remedial costs. The current owner/operators
of the site have not cooperated with the PRP group in its efforts to study
and characterize the site, except for limited cooperation which was
offered shortly after the September 1987 RAO. The current owner/operators
are vigorously defending 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 investiga-
tion 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.
17
<PAGE>
INTERNATIONAL TECHNOLOGY CORPORATION
FINANCIAL CONDITION (CONTINUED)
The provision for loss on disposition of transportation, treatment and
disposal discontinued operations is based on various assumptions and
estimates, including those discussed above. Management believes that the
provision, as adjusted, is reasonable; however, the ultimate effect of the
divestiture on the consolidated financial condition of the Company is
dependent upon future events, the outcome of which cannot be determined at
this time. Outcomes significantly different from those used to estimate
the provision for loss could result in a material adverse effect on the
consolidated financial condition of the Company.
FORWARD LOOKING STATEMENTS
- --------------------------
All statements in the preceding discussion that are not historical are
forward looking statements. Such statements are subject to certain risks
and uncertainties that could cause actual results to differ materially
from those expressed in any of the forward looking statements. Such risks
and uncertainties include, but are not limited to, additional delays in
federal budget authorization and in the funding of federal government
contracts, ongoing regulatory uncertainties which affect both governmental
and commercial clients, industrywide market factors, liabilities and
regulatory developments related to the Company's discontinued operations,
negotiations with lenders, the effects of the Company's restructuring and
financial and liquidity trends.
18
<PAGE>
PART II
INTERNATIONAL TECHNOLOGY CORPORATION
Item 1. Legal Proceedings.
The continuing operations litigation to which the Company is a
party is more fully discussed in the note "Commitments and contingencies"
in the Notes to Consolidated Financial Statements in the Company's Annual
Report on Form 10-K for the fiscal year ended March 29, 1996 and in the
Company's Quarterly Reports on Form 10-Q for the fiscal quarters ended
June 28, 1996 and September 27, 1996. For current developments in the
Helen Kramer matter, please see Note 7 to the Condensed Consolidated
Financial Statements in this report. See also Management's Discussion and
Analysis of Results of Operations and Financial Condition - Financial
Condition - Transportation, Treatment and Disposal Discontinued Operations
for information regarding litigation related to the discontinued
operations of the Company.
Item 4. Submission of Matter to a Vote of Security Holders.
In connection with the Company's Annual Meeting of Shareholders,
held November 20, 1996, the Company submitted the following four (4)
matters to a vote of the holders of its 36,251,130 (pre-reverse split)
shares of outstanding Common Stock:
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 1,250,000 (post-reverse split) shares of Common
Stock, $.01 par value per share, of the Company to certain limited
partnerships affiliated with Carlyle, at an aggregate price of $45,000,000
(the Carlyle 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 pursuant to which each four shares of
Common Stock will be exchanged for one share of Common Stock; (b) reduce
the number of authorized shares of Common Stock of the Company from
100,000,000 to 50,000,000 and; (c) reduce the par value of the Company's
Common Stock from $1.00 per share to $.01 per share.
Proposal 1 was approved by a majority of the outstanding shares
of Common Stock of the Company, as follows:
Broker
For Against Abstain Non-Vote
--- ------- ------- --------
21,346,213 835,224 122,029 9,433,059
Proposal 2: To elect three directors to hold the office until
the 1999 Annual Meeting of Stockholders and until their successors are
elected and qualified.
Each of the following directors were elected and received the
following votes:
Total Vote for Total Vote Withheld
Director Each Director From Each Director
-------- -------------- -------------------
Kirby L. Cramer 29,166,508 2,570,017
James C. McGill 29,132,458 2,604,067
W. Scott Martin 29,139,203 2,597,322
Upon consummation of the Carlyle Investment, Messrs. Donald S.
Burns, Kirby L. Cramer, Ralph S. Cunningham, W. Scott Martin, Henry E.
Riggs, and Jack O. Vance resigned from the Company's Board of Directors
and Carlyle elected Messrs. Daniel A. D'Aniello, Philip B. Dolan, Robert
F. Pugliese, and James David Watkins as Directors of the Company. Also
19
<PAGE>
INTERNATIONAL TECHNOLOGY CORPORATION
pursuant to the Carlyle Investment, the Board was reduced to seven members.
Accordingly, the Company's Board of Directors consists of the following persons:
Name Term to expire
---- --------------
Daniel A. D'Aniello, Chairman 1997*
Anthony J. DeLuca, President and Acting
Chief Executive Officer 1997
Philip B. Dolan 1997*
E. Martin Gibson 1998
James C. McGill 1999
Robert F. Pugliese 1997*
James David Watkins 1997*
* Pursuant to the terms of the Carlyle Investment, provided that
Carlyle continues to own at least 20% of the voting power of the Company,
holders of the Convertible Preferred Stock issued to Carlyle will be
entitled, for five years (ending November 20, 2001), to elect a majority
of the Company's Board of Directors. The individuals so indicated were
elected by Carlyle and will serve until the next annual meeting (1997) or
until their respective successors are elected and qualify and, during such
five year period may be elected, and removed with or without cause, only
by a vote or consent of the holders of a majority of the outstanding
shares of the Convertible Preferred Stock issued to Carlyle.
Proposal 3: To consider and vote upon the approval the Company's
1996 Stock Incentive Plan.
Proposal 3 was approved by a majority of the votes cast at the 1996
Annual Meeting, as follows:
Broker
For Against Abstain Non-Vote
--- ------- ------- --------
11,888,919 8,381,371 229,038 11,237,197
Proposal 4: To consider and vote upon an amendment of the Certifi-
cate 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.
Proposal 4, which required the affirmative vote of not less than
two-thirds of the Company's Common Stock outstanding as of the record date
(September 27, 1996), was not approved, as follows:
Broker
For Against Abstain Non-Vote
--- ------- ------- --------
15,946,132 4,271,085 282,111 11,237,197
20
<PAGE>
INTERNATIONAL TECHNOLOGY CORPORATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. These exhibits are numbered in accordance with
the Exhibit Table of Item 601 of Regulation S-K.
Exhibit No. Description
----------- ---------------------------------------------
10(i)(a) Amendment No. 1, dated November 20, 1996, to
Securities Purchase Agreement dated August 28,
1996, by and among the Company and certain
purchasers, identified herein. (1)
27 1. Financial Data Schedule for the quarter ended
December 27, 1996.
______________
(1) Previously filed as an exhibit to the Report on
Form 8-K referenced in item (b) below.
(b) Reports on Form 8-K.
Current report on Form 8-K, reporting under Items 1 and 5,
related to the closing and consummation on November 20,
1996, of the transactions contemplated by the Securities
Purchase Agreement dated August 28, 1996 by and between the
Company and certain Purchasers affiliated with The Carlyle
Group, and other matters.
21
<PAGE>
INTERNATIONAL TECHNOLOGY CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERNATIONAL TECHNOLOGY CORPORATION
(Registrant)
ANTHONY J. DELUCA February 10, 1997
-------------------------------------------- -----------------
Anthony J. DeLuca
President and Acting Chief Executive Officer
and Duly Authorized Officer
PHILIP H. OCKELMANN February 10, 1997
-------------------------------------------- -----------------
Philip H. Ockelmann
Vice President, Finance, Treasurer
and Principal Accounting Officer
22
<PAGE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM the Company's
Condensed Consolidated Balance Sheet as of December 27, 1996, and its
Condensed Consolidated Statement of Operations for the Third Fiscal Quarter
Ended December 27, 1996, which were filed with the SEC on February 10, 1997 on
Form 10-Q for the quarter ended December 27, 1996 (commission file number
1-9037) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> QTR-3
<FISCAL-YEAR-END> MAR-28-1997
<PERIOD-END> DEC-27-1996
<CASH> 69820
<SECURITIES> 0
<RECEIVABLES> 115337
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 201287
<PP&E> 153614
<DEPRECIATION> 107184
<TOTAL-ASSETS> 344598
<CURRENT-LIABILITIES> 91645
<BONDS> 65596
<COMMON> 90
0
6542
<OTHER-SE> 162214
<TOTAL-LIABILITY-AND-EQUITY> 344598
<SALES> 0
<TOTAL-REVENUES> 92513
<CGS> 0
<TOTAL-COSTS> 90416
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1446
<INCOME-PRETAX> 651
<INCOME-TAX> 280
<INCOME-CONTINUING> 371
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 371
<EPS-PRIMARY> (.10)
<EPS-DILUTED> 0
</TABLE>
